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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 September 30, 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 10, 2000 was:
COMMON STOCK, $.10 PAR VALUE 10,764,487 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 customer order rates; changes in third party
reimbursement rates; expenditures for research and development; growth in
revenue; taxation levels; and the effects of pricing decisions. When used in
this 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 acquired two businesses during the year ended June 30, 1999 and
a third in July 1999. Although integration of those businesses has been
substantially completed without significant problems, complete integration
may not be concluded as smoothly as anticipated and the Company may
discover 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. If it cannot collect an amount of receivables that
is consistent with historical collection rates, it might be required to
charge off a portion of uncollected receivables, significantly impacting
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.
- - In the United States, the Company's products and services are frequently
reimbursed by private and public insurers that impose limits on
reimbursement and strict rules on applications for reimbursement. Changes
in the rates, eligibility or requirements for reimbursement, or failure to
comply with reimbursement requirements, could cause a reduction in earnings
or fines or both.
- - The Company maintains significant amounts of inventory on consignment at
clinics 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.
- - 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 sales and earnings.
- - The Company formed a subsidiary in the United Kingdom in fiscal 1999 and
acquired a Swiss company in the first quarter of fiscal 2000. These
European operations may be more difficult to supervise, and may be subject
to different economic influences than United States operations, and may
subject the Company to significant 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 September 30, 2000 and
June 30, 2000
Consolidated Statements of Operations for the Three Months ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Three Months ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
2000 2000
------------------ ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,562,330 $ 2,227,352
Receivables, less reserve for uncollectible accounts of $6,542,635 17,876,319 19,268,252
and $6,575,715
Inventories -
Raw materials 1,828,888 1,283,791
Work in process 95,171 334,900
Finished goods 6,313,531 6,817,964
Deferred tax assets 3,351,294 3,351,294
Prepaid expenses 1,849,416 1,404,968
------------------ ----------------
Total current assets 33,112,074 34,688,521
------------------ ---------------
PROPERTY, PLANT AND EQUIPMENT: 13,127,256 11,877,772
Less accumulated depreciation (7,733,413) (6,281,597)
------------------ ----------------
Net property, plant and equipment 5,393,843 5,596,175
------------------ ----------------
Intangible assets, net 11,878,175 12,152,185
Deferred tax assets 196,769 223,923
Other assets 462,095 47,158
------------------ ----------------
$ 51,042,956 $ 52,707,962
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,164,723 $ 2,170,468
Note payable -- 1,200,000
Accounts payable 2,351,607 3,108,514
Medicare lawsuit payable 1,677,021 1,677,021
Accrued liabilities -
Payroll 484,465 327,856
Commissions 285,144 350,893
Income taxes 1,277,941 1,672,636
Other 2,413,481 2,684,301
------------------ -----------------
Total current liabilities 10,654,382 13,191,689
LONG-TERM LIABILITIES:
Long term-debt 13,128,395 13,662,792
Deferred tax liabilities 556,474 583,927
------------------ -----------------
Total liabilities 24,339,251 27,438,408
------------------ -----------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized; 1,076,448 1,055,871
issued and outstanding 10,764,487 and 10,558,710 shares,
respectively
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding ---- ----
Additional paid-in capital 21,367,816 20,873,737
Less note receivable from officer/stockholder (210,417) (210,417)
Accumulated other non-owner changes in equity (357,402) (154,719)
Retained earnings 4,827,260 3,705,082
------------------ ----------------
Total stockholders' equity 26,703,705 25,269,554
------------------ ----------------
$ 51,042,956 $ 52,707,962
================== ================
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30
------------------------------------
2000 1999
--------------- --------------
Net sales and rental revenue $ 15,067,647 $ 13,876,212
Cost of sales and rentals 4,749,840 4,598,806
--------------- --------------
Gross profit 10,317,807 9,277,406
Operating expenses:
Selling, general and administrative 7,685,140 7,327,144
Research and development 358,343 253,808
--------------- --------------
8,043,483 7,580,952
--------------- --------------
Income from operations 2,274,324 1,696,454
Other income (expense):
Interest expense (406,886) (345,581)
Other income 8,740 (3,124)
Minority interest --- 5,867
Gain on sale of building --- 1,075,680
--------------- --------------
Income before income taxes 1,876,178 2,429,296
Provision for income taxes 754,000 995,000
--------------- --------------
Net income $ 1,122,178 $ 1,434,296
=============== ==============
Net income per common and common
equivalent share
Basic $ 0.10 $ 0.14
=============== ==============
Diluted $ 0.10 $ 0.13
=============== ==============
Weighted average number of shares
outstanding
Basic 10,723,237 10,530,534
=============== ==============
Diluted 10,750,591 10,690,930
=============== ==============
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REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
September 30
------------------------------------------
2000 1999
--------------- ---------------
OPERATING ACTIVITIES:
Net income $ 1,122,178 $ 1,434,296
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 671,113 459,737
Change in long-term portion of deferred taxes --- (38,122)
Minority interest --- (5,867)
Change in current assets and liabilities, excluding effects of
business combinations
Receivables 1,391,933 621,183
Inventories 199,065 1,572,522
Prepaid expenses (1,017,073) (457,076)
Accounts payable (756,907) (1,432,110)
Accrued liabilities (594,141) (192,908)
--------------- ---------------
Net cash provided by operating activities 1,015,869 885,975
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of property and equipment (324,663) (884,099)
Cash paid in asset acquisition, net of cash received --- (10,747,967)
Proceeds from sale of building --- 1,726,930
Change in other assets, net 52,455 52,455
--------------- ---------------
Net cash used in investing activities (272,208) (9,905,136)
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from new financing --- 15,339,364
Principal payments on long-term obligations (540,166) (2,348,071)
Proceeds from (payments on) line of credit, net (1,200,000) (1,100,000)
Payment of capital lease obligation --- (1,261,733)
Proceeds from issuance of stock options and stock grants 455,000 33,231
Proceeds from issuance of employer stock purchase 59,656 43,097
--------------- ---------------
Net cash provided by (used in) financing activities (1,225,510) 10,705,888
--------------- ---------------
Effect of exchange on cash and cash equivalents (183,173) 44,329
Net increase (decrease) in cash and cash equivalents (665,022) 1,731,056
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,227,352 561,207
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,562,330 $ 2,292,263
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 378,886 $ 338,493
=============== ===============
Income taxes paid $ 846,500 $ 332,400
=============== ===============
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REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended September 30, 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, 2000, included in the Company's
Annual Report on Form 10-K.
2. BUSINESS COMBINATIONS
On July 16, 1999, the Company acquired substantially all the assets of Compex
SA, a Swiss-based medical products company for cash of approximately $11.0
million. The acquisition was financed principally with debt and provided for
additional contingent consideration of up to $2 million based on the performance
of Compex through December 31, 2000. In connection with the acquisition, the
purchase consideration and transaction costs were allocated as follows:
Net assets acquired $ 1,612,085
Goodwill 8,860,772
Developed technology 1,400,000
Existing workforce 1,400,000
Debt structuring costs 346,970
----------------
$ 13,619,827
================
Included in goodwill are contingent payments, made during fiscal 2000, to the
former Compex shareholders of $1.8 million.
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 9.18% at September 30, 2000.
There were no borrowings under the revolving line of credit as of September 30,
2000.
The Company was in compliance with all financial covenants in its credit
agreement as of September 30, 2000 and for the period then ended.
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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
sales from the United States and foreign sources (primarily Europe) are as
follows:
For the Three Months Ended September 30
---------------------------------------
2000 1999
-------------- ---------------
United States sales $ 10,779,192 $ 10,558,703
Foreign sales 4,288,455 3,317,509
-------------- ---------------
Total $ 15,067,647 $ 13,876,212
=============== ===============
Net sales by product line were as follows:
For the Three Months Ended
September 30
---------------------------------------
2000 1999
-------------- ---------------
Rehabilitation products $ 6,731,136 $ 5,692,987
Pain management 3,241,264 3,324,975
Accessories and supplies 5,095,247 4,858,250
-------------- --------------
$ 15,067,647 $ 13,876,212
============== ==============
During the first quarter of fiscal 2001, one customer accounted for
approximately 17% of total consolidated revenue. This customer represented
approximately 4% of total accounts receivable at September 30, 2000.
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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 electrotherapy products used
for pain management, rehabilitation and training. Its products are used in
clinical, home health care, sports medicine and occupational medicine
applications. It also distributes other medical products used in related
applications. The Company operates in one business segment, distributing its
products through sales to medical product dealers and distributors, sport shops
and, in the United States, through direct rental or sale to patients.
The direct rental or sale 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 extension of the rental period, 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.
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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
September 30
---------------------------
2000 1999
---------- ----------
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals (31.5) (33.1)
---------- ----------
Gross profit 68.5 66.8
Operating expenses -
Selling, general and administrative (51.0) (52.8)
Research and development (2.4) (1.8)
---------- ----------
Total operating expenses (53.4) (54.6)
---------- ----------
Income from operations 15.1 12.2
Other income (expense), net (2.5) (2.5)
Gain on sale of building --- 7.8
Income tax provision (5.0) (7.2)
---------- ----------
Net income 7.5 10.3
========== ==========
Revenue was $15,068,000 for the first quarter of fiscal 2001, a 9% increase from
$13,876,000 for the first quarter of fiscal 2000. The increase was primarily
attributable to the acquisition of Compex, which accounted for $4,033,000 of
revenue in the first quarter of fiscal 2001, compared to $2,976,000 in the first
quarter of fiscal 2000. U.S. revenue increased 2% in the first quarter of fiscal
2001 over the same period in fiscal 2000 as the Company continued its recovery
from the impact of a whistleblower lawsuit disclosed in the third quarter of
fiscal 2000.
Gross profit was $10,318,000 or 68.5% of revenue in the first quarter of fiscal
2001 compared with $9,277,000 or 66.9% of revenue in the first quarter of fiscal
2000. Cost of sales in fiscal 2000 included a one-time charge of $645,000
related to the step-up in basis of inventory recorded in connection with the
Compex acquisition. Without that charge, gross margin would have been 71.5% of
revenue. The current year reduction in gross margin resulted primarily from
increased focus on sales of Compex sport products through retail store outlets,
rather than direct to consumers, in order to expand market penetration.
Selling, general and administrative expenses increased 5% to $7,685,000 in the
first quarter of fiscal 2001 from $7,319,000 in fiscal 2000. As a percent of
revenue, those expenses decreased from 53% to 51%. Several factors contributed
to that decrease. The first quarter of fiscal 2000 included expenses related to
development of a compliance program and professional fees related to the
whistleblower lawsuit. The Company's Compex operations
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generally have lower selling expenses as a percentage of sales because Compex
distributes a portion of its products through retail store outlets. As Compex's
revenue has increased as a percent of the Company's overall consolidated
revenue, selling, general and administrative expenses as a percent of revenue
has decreased. The decrease was offset in the first quarter of 2001 by an
increase in the provision for uncollectible accounts receivable to reflect
actual collection experience.
Research and development expense increased 41% to $358,000 in the first quarter
of fiscal 2001, compared with $254,000 in fiscal 2000, but remained constant at
approximately 2% of revenue in both years. The fiscal 2001 expenses include
approximately $176,000 incurred by Compex compared with $98,000 in fiscal 2000.
The Company anticipates some minor increases in the current expenditure level to
fund new product development.
Interest expense increased slightly from $375,000 in the first quarter of fiscal
2000 to $407,000 in the current period. The increase resulted from higher
interest rates and having the acquisition debt related to Compex outstanding for
a full quarter in fiscal 2001.
Operating results for the first quarter of 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 both the purchase and the subsequent
sale on July 7, 1999.
The provision for income taxes is 40% of income before taxes in the first
quarter of fiscal 2001 compared with 41% in the prior year. 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 41% is
a reasonable estimate of the effective rate for fiscal 2000 based on expected
taxable earnings in the various jurisdictions.
As a result of all the above changes, net income decreased from $1,434,000 in
the first quarter of fiscal 2000 to $1,122,000 in the first quarter of fiscal
2001. Diluted earnings per share decreased from $.13 to $.10. Before the one
time gain related to the building sale and the one time charge related to the
Compex inventory step-up, net income was $1,180,000 or $.11 per share for the
first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended September 30, 2000, the Company's operations provided
cash of $1,016,000, mainly from net income and a $1,392,000 reduction in
accounts receivable . These amounts were offset by an increase in prepaid
expenses and decreases of $757,000 in accounts payable and $594,000 in accrued
liabilities.
The Company used $272,000 in investing activities in the first quarter of fiscal
2001 for net purchases of property and equipment.
The Company's financing activities used $1,225,000 of cash during the first
quarter of fiscal 2001, mainly for the repayment of debt on the $20,000,000
credit facility used to finance the Compex acquisition. Borrowings under the
credit facility incur interest at either the bank's reference rate or LIBOR. The
Company initially borrowed $15,000,000 under the credit facility to finance the
Compex purchase and to repay an outstanding note. At September 30, 2000,
$12,950,000 is outstanding under the facility.
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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. As discussed in the Form
10-Q for the third quarter ended March 31, 2000, the Medicare whistleblower suit
disclosed in early February 2000 adversely affected morale and productivity in
the Company's patient support operations. Careful evaluation of that situation
and the nature of remaining receivables at June 30, 2000 led management to
conclude that an additional $1,000.000 should be provided for uncollectible
accounts. The Company believes that the reserve at September 30, 2000 is
adequate to cover future losses on its receivables based on collection history
and trends. The provision for uncollectible accounts recorded in the income
statement may continue to fluctuate significantly from quarter to quarter as
such trends change. The reserve was 26.8% of receivables at September 30, 2000
compared to 25.4% at June 30, 2000. The Company believes that the ratio will be
favorably impacted in the future as a result of including receivables from
Compex SA and Rehabilicare (UK) Ltd. which are more traditional trade
receivables and not dependent on third party payors.
The Company has a commitment to finance the $1,588,000 settlement of the
Medicare whistleblower suit and anticipates paying such amount during the second
or third quarter of fiscal 2001. The Company has no material commitment for
capital expenditures. The Company believes that available cash and borrowings
under its credit line will be adequate to fund such payment and any cash
required by operations for the current fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in the interest
rates on certain of its outstanding debt. The outstanding loan balance
under the $20 million credit facility bears interest at a variable rate
based on the bank's prime rate or LIBOR. Based on the average
outstanding bank debt for the period ended September 30, 2000, a 100
basis point change in interest rates would not change interest expense
by a material amount.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 11, 2000, the Company announced that it had reached an
agreement with the United States Government to settle allegations of
improper Medicare billing that were asserted in a lawsuit filed by a
former employee. The Company has agreed to pay a total of $1,588,510 to
settle the lawsuit. The Company has denied allegations that it engaged
in fraudulent Medicare billing practices. Although the terms of the
settlement, including the amount to be paid by the Company, have been
agreed to in principle with the United States, the settlement remains
subject to final agency approvals, including review and approval by the
United States Department of Health and Human Services Office of Counsel
to the Inspector General with respect to necessary compliance
provisions.
Under the terms of the settlement, the Company will also be required to
enter into a Corporate Integrity Agreement ("CIA"). The specific terms
of the CIA have not yet been finalized. The CIA will, however, have a
duration of five years and provide for an independent audit of claims
submitted to federal health care programs to ensure, among other
things, proper filing of future Medicare claims. The Company previously
hired a corporate compliance officer and implemented a corporate
compliance program to ensure that the Company is in compliance with all
applicable laws and regulations.
The Company has also, from time to time, been a party to other claims,
legal actions and complaints arising in the ordinary course of
business. Management does not believe that the resolution of such
matters has had or will have a material impact on the Company's results
of operations or financial position.
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
None filed during the quarter ended September 30, 2000
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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.
November 14, 2000 /s/ David B. Kaysen
- --------------------------- ------------------------------------------------
Date David B. Kaysen
President and Chief Executive Officer
November 14, 2000 /s/ W. Glen Winchell
- --------------------------- ------------------------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
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