SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended March 31, 1998
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 small business issuer as specified in charter)
MINNESOTA 41-0985318
(State of Incorporation) (I.R.S. Employer Identification No.)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of Principal Executive Offices)
(612) 631-0590
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
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The number of shares outstanding for each of the Issuer's classes of common
stock as of March 31, 1998 was:
COMMON STOCK, $.10 PAR VALUE 10,406,591 SHARES
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes No X
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997
Consolidated Statements of Operations for the Three Months and Nine
Months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Nine Months ended March
31, 1998 and 1997
Notes to Consolidated Financial Statements
REHABILICARE INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1998 1997
--------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,504,789 $ 2,654,118
Receivables, less reserve for uncollectible accounts of
$3,963,014 and 2,687,151 12,093,333
11,384,063
Inventories, net
Raw materials 980,546 497,206
Work in process 351,192 --
Finished goods 5,001,310 6,621,484
Deferred income tax benefit 2,631,988 1,040,138
Income tax refund receivable -- 2,791
Prepaid expenses 234,745 439,529
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Total current assets 23,797,903 22,639,329
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PROPERTY AND EQUIPMENT 11,209,661 12,253,051
Less accumulated depreciation (7,860,770) (8,446,523)
------------ ------------
Total property and equipment 3,348,891 4,323,928
Intangible assets 639,979 1,099,004
Long-term deferred taxes 362,945 359,626
Other assets 39,265 49,460
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Total assets $ 28,188,983 $ 28,471,347
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 470,000 $ 340,000
Current maturities of long-term debt 394,359 373,878
Accounts payable 1,423,252 1,013,148
Accrued liabilities
Payroll 574,617 743,385
Commissions 462,909 370,210
Taxes 98,719 260,690
Other 1,338,118 442,478
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Total current liabilities 4,761,974 3,543,789
LONG-TERM DEBT 3,410,036 3,555,107
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Total liabilities 8,172,010 7,098,896
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STOCKHOLDERS' EQUITY
Common stock 1,040,659 1,037,470
Additional paid-in capital 20,582,069 20,491,929
Less notes receivable from officer/stockholder (162,500) (162,500)
Retained earnings (1,443,255) 5,552
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Total stockholders' equity 20,016,973 21,372,451
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Total liabilities and stockholders' equity $ 28,188,983 $ 28,471,347
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REHABILICARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -------------------------------
1998 1997 1998 1997
------------- -------------- --------------- --------------
Net sales and rental revenue $ 8,405,308 $ 8,061,482 $25,250,346 $23,580,786
Cost of sales and rentals 3,378,928 2,612,922 8,694,291 7,712,418
----------- ----------- ----------- -----------
Gross profit 5,026,380 5,448,560 16,556,055 15,868,368
Operating expenses
Selling, general and
administrative 5,033,096 4,829,920 15,011,919 14,004,661
Research and development 263,104 258,616 743,796 738,222
Merger expense 3,175,996 -- 3,175,996 --
----------- ----------- ----------- -----------
Total operating expenses 8,472,196 5,088,536 18,931,711 14,742,883
----------- ----------- ----------- -----------
Operating income (loss) (3,445,816) 360,024 (2,375,656) 1,125,485
Other income (expense)
Interest expense, net (177,374) (97,328) (409,706) (317,093)
Other income 34,348 42,986 95,788 121,203
----------- ----------- ----------- -----------
Income (loss) before income
taxes (3,588,842) 305,682 (2,689,574) 929,595
Provision (benefit) for income taxes (1,769,169) 63,000 (1,595,169) 229,000
----------- ----------- ----------- -----------
Net income (loss) $(1,819,673) $ 242,682 $(1,094,405) $ 700,595
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per common share
and common equivalent share
Basic $ (0.17) $ 0.02 $ (0.10) $ 0.07
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ (0.17) $ 0.02 $ (0.10) $ 0.07
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding
Basic 10,406,258 10,288,034 10,405,939 10,230,770
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 10,406,258 10,498,225 10,405,939 10,510,833
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REHABILICARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
-------------------------------------
1998 1997
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OPERATING ACTIVITIES
Net income (loss) $(1,094,405) $ 700,595
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 507,119 940,571
Non-recurring merger costs 3,175,996 --
Provision for bad debts 1,118,806 802,507
Change in long-term portion of deferred income taxes (3,319) --
Changes in current assets and liabilities
Receivables (1,828,076) (1,110,319)
Current deferred taxes (1,591,850) 509
Inventories 785,642 (124,706)
Prepaid expenses 216,850 (52,299)
Accounts payable 410,104 (454,902)
Accrued liabilities (1,132,331) (83,651)
Accrued income taxes (161,971) (27,464)
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Net cash provided by operating activities 402,565 695,439
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INVESTING ACTIVITIES
Purchase of property and equipment (296,231) (688,400)
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FINANCING ACTIVITIES
Proceeds from new financing 133,515 277,527
Principal payments on long-term obligations (258,103) (392,585)
Proceeds from (payments on) line of credit, net 130,000 (205,000)
Equity transactions, net 93,327 106,301
Adjustment for pooling (354,402)
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Net cash used in financing activities (255,663) (213,757)
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Net decrease in cash and cash equivalents (149,329) (186,718)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,654,118 2,381,602
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,504,789 $2,194,884
----------- ---------
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 232,898 $ 250,979
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Income taxes paid $ 9,103 $ 261,060
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REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as
of and for the periods ended March 31, 1998 and 1997, 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
financial statements and related notes included in the Company's Annual
Report on Form 10-KSB.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to
entities with publicly held common stock and is effective for financial
statements for both interim and annual periods ending after December 15,
1997. After the effective date, all prior-period earnings (loss) per share
data presented shall be restated to conform to the provisions of this
statement. Under SFAS No. 128, the presentation of primary earnings (loss)
per share is replaced with a presentation of basic earnings (loss) per share.
SFAS No. 128 requires dual presentation of basic and diluted earnings (loss)
per share for entities with complex capital structures. Basic earnings
(loss) per share includes no dilution and is computed by dividing net
earnings (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in
the earnings of an entity and is similar to the former fully diluted earnings
(loss) per share calculation. The Company has adopted SFAS No. 128 for the
quarter ended December 31, 1997 and all net earnings per share data presented
complies with this statement.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131), which will be effective for the company beginning July 1,
1998. SFAS No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet completed its analysis
and final determination of future reporting segments.
2. MERGER
On March 17, 1998, pursuant to an Agreement and Plan of Merger executed by
Rehabilicare on December 1, 1997 and approved by shareholders on March 17,
1998, a wholly-owned subsidiary of Rehabilicare was merged (the "Merger")
into Staodyn, Inc. ("Staodyn"). As a result of the Merger, each outstanding
share of common stock, $0.01 par value of Staodyn ("Staodyn Common Stock"),
became 0.829 of a share of Rehabilicare Common Stock (with cash paid in lieu
of fractional shares) and Staodyn became a wholly-owned subsidiary of
Rehabilicare. Rehabilicare issued a total of 5,521,111 shares of its common
stock and issued cash in lieu of 589 shares of common stock as a result of
the Merger. Holders of 500 shares of Staodyn Common Stock asserted
dissenters' rights. Rehabilicare also assumed the obligations to issue shares
under options to purchase 383,083 shares of Staodyn Common Stock
(approximately 317,575 shares of Rehabilicare common stock) and warrants to
purchase 130,000 shares (107,770 shares of Rehabilicare Common Stock).
The Merger was recorded using the pooling-of-interests method. Prior to the
Merger, Staodyn reported its financial results on a fiscal year ended
November 30, while Rehabilicare reported its financial results on a fiscal
year ended June 30. The balance sheet of Rehabilicare at June 30, 1997 on a
combined basis presents the historical financial position of Rehabilicare at
June 30, 1997 combined with the historical financial position of Staodyn at
November 30, 1997. The combined results of operations for the three and nine
months ended March 31, 1998 represent the historical results of operations of
Rehabilicare for such periods combined with the historical results of
operations of Staodyn for the same periods. The combined results of
operations for the three and nine months ended March 31, 1997 represent the
historical results of operations of Rehabilicare for such periods combined
with the historical results of operations of Staodyn for the three and nine
months ended August 31, 1997 (its third fiscal quarter).
Rehabilicare incurred pretax expenses of approximately $4,008,000 in
connection with the Merger during the three months ended March 31, 1998,
consisting of approximately $1,046,000 of employee severance costs;
approximately $496,000 of investment banking fees; $189,000 of professional
fees; a $2,102,000 adjustment for obsolete inventory, fixed and intangible
assets; and approximately $175,000 of miscellaneous employee costs and
expenses. Of those total expenses, $832,000 represented inventory write-offs
was charged to cost of sales and $3,176,000 was charged to operating expenses
in the quarter ended March 31, 1998. The Company anticipates that additional
charges of approximately $665,000 will be incurred during the three months
ending June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
On March 17, 1998, Rehabilicare merged with Staodyn, Inc. in a transaction
accounted for as a pooling-of-interests. As a result of that merger, the
financial statements and related notes, and this discussion, are based on the
combined financial position and results of operations as if the companies had
been combined throughout the three months and nine months ended March 31,
1998. Rehabilicare previously filed its individual Quarterly Report on Form
10-QSB for its quarter ended December 31, 1997, and Staodyn previously filed
its Annual Report on Form 10-KSB for its fiscal year ended November 30, 1997.
RESULTS OF OPERATIONS
The following table sets forth information from the statements of operations
as a percentage of revenue for the periods indicated:
NINE MONTHS ENDED MARCH 31 1998 1997
-------------------------- ---- ----
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 34.4 32.7
Gross profit 65.6 67.3
Operating expenses -
Selling, general and administrative 59.5 59.4
Research and development 2.9 3.1
Merger 12.6 0.0
Total operating expenses 75.0 62.5
Operating income (9.4) 4.8
Other expense (1.2) (.8)
Provision for income taxes (6.3) 1.0
Net income (4.3) 3.0
Revenue was $8,405,000 for the third quarter of fiscal 1998, a 4% increase
from $8,061,000 in the third quarter of fiscal 1997. Revenue for the nine
months ended March 31, 1998 increased 7% to $25,250,000 from $23,581,000 in
the first nine months of fiscal 1997. Net sales and rental revenue from
direct distribution to patients increased 14% to $7,271,000 from $6,378,000
and accounted for approximately 87% and 79% of total revenue, respectively,
for the third quarter. Direct revenue for the first nine months of fiscal
1998 increased 12% to $21,287,000 from $18,998,000 in the first nine months
of fiscal 1997. The increase was due primarily to growth in the number of new
patients.
Revenue from the Company's traditional dealer business, excluding
international, decreased by 12% to $1,128,000 in the third quarter of fiscal
1998 from $1,285,000. Revenue from domestic dealer business for the first
nine months of fiscal 1998 decreased 2% to $3,864,000 from $3,948,000 in the
first nine months of fiscal 1997. The decrease is due primarily to the
volume of purchases by certain Staodyn dealers. International sales were
$7,000 in the third quarter of fiscal 1998 compared to $398,000 in the third
quarter of fiscal 1997. International revenue for the nine months ended March
31, 1997 decreased to $99,000 from $635,000 in fiscal 1997. The primary
reason for the decrease was the fulfillment in fiscal 1997 of an order from
the Company's dealer in the United Kingdom for the BabiTENS-TM-product.
Fiscal 1998 sales reflect ongoing accessory sales to that distributor for use
with those units.
Gross profit decreased 8% to $5,026,000 or 60% of revenue in the third
quarter of fiscal 1998 compared with $5,449,000 or 68% of revenue in the
third quarter of fiscal 1997. As a result of the merger with Staodyn during
the third quarter of fiscal 1998, the company wrote off approximately
$833,000 of inventories related to Staodyn product lines which are being
discontinued. Before that write-off, gross profit increased to 69% of
revenue. Gross profit for the nine months ended March 31, 1998 increased 4%
to $16,556,000 or 66% of revenue compared with $15,868,000 or 67% of revenue
in fiscal 1997. Gross profit before the merger related write off was 69% of
revenue for the nine months ended March 31, 1998. The changes in gross
profit as a percent of revenue are primarily the result of the mix of sales
and rentals.
Selling, general and administrative expenses increased 4% to $5,033,000 in
the third quarter of fiscal 1998 from $4,830,000 in fiscal 1997. For the
nine months ended March 31, 1998, those expenses increased 7% to $15,012,000
from $14,005,000 in fiscal 1997. The only significant changes in selling,
general and administrative expenses were variable expenses including sales
commissions and marketing costs related to the CTDx-TM- and the new Ortho Dx
product lines and an increased provision for uncollectible retail
receivables. The Company also incurred operating costs of $3,176,000 in
fiscal 1998 for merger related expenses. That total included $1,270,000 for
the write-off of fixed and intangible assets related to Staodyn product lines
which are being discontinued.
The Company reported an operating loss of $3,446,000 in the third quarter of
fiscal 1998 compared with operating income of $360,000 in fiscal 1997. The
net loss was $1,820,000 in fiscal 1998 compared to net income of $243,000 for
the third quarter of fiscal 1997. For the nine month period ending March 31,
the operating loss was $2,376,000 in fiscal 1998 compared with operating
income of $1,125,000 in fiscal 1997. The net loss for that period was
$1,094,000 in fiscal 1998 compared with net income of $701,000 in fiscal
1997.
Rehabilicare recorded an income tax benefit for the three and nine months
ended March 31, 1998. The amount recorded includes a tax benefit on losses
reported for those periods and full reversal of valuation allowances in the
amount of $769,000 recorded by Staodyn as a separate company in previous
years. The allowances had been recorded against available tax loss carry
forwards and timing differences in the recognition of certain costs and
expenses. Based on the successful completion of the Merger and the
foundation created for future profitable operations, management believes that
it is more likely than not that Rehabilicare will ultimately realize the
available tax benefits.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $149,000 in operations during the first nine months
of fiscal 1998. The Company used $187,000 of cash in the first nine months
of fiscal 1997.
Operations have previously required significant amounts of cash to fund
increases in receivables. Cash was used to fund increases in net receivables
of $1,828,000 in fiscal 1998 and $1,110,000 in fiscal 1997. During fiscal
1998, the Company provided an additional $1,119,000 for uncollectible
receivables and wrote off $673,000 of accounts it considered uncollectible.
As a percent of receivables, the reserve increased from 19.1% in fiscal 1997
to 24.7% in fiscal 1998.
The reserve for uncollectible accounts is determined after considering
various factors including historical trends, relationship and experience with
insurance or other third party payors and patient responsibility for charges.
The Company believes that its current reserve for uncollectible accounts is
adequate. However, it will be necessary to continue maintaining a
significant reserve to cover instances where the extent of insurance coverage
cannot be verified prior to distributing home units to patients.
Cash of $296,000 was used in investing activities in fiscal 1998 compared
with $688,000 in fiscal 1997. Most of the usage related to the purchase of
new computer software and hardware for the Company's manufacturing and
accounting systems, which are now year 2000 compliant.
Financing activities used cash of $256,000 in fiscal 1998 and $214,000 in
fiscal 1997. The Company repaid approximately $258,000 of long-term debt in
fiscal 1998 and $393,000 in fiscal 1997. The Company maintains a line of
credit, which provides for borrowing up to $2,000,000, limited by eligible
accounts receivable. At March 31, 1998, the borrowing base limit was
approximately $2,000,000. Borrowings under the line were $470,000 on March
31, 1998 and $340,000 at June 30, 1997. The Company anticipates that cash
requirements during fiscal 1998 will be less than its available credit
facility.
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995.
This report contains "forward-looking statements" within the meaning of
Federal securities laws. The forward looking statements are subject to risks
and uncertainties, including, but not limited to: the risks related to
fluctuations in the Company's quarterly operating results; inventory and
receivables requirements for direct billed medical equipment sales;
volatility in the markets for electrotherapy; the effects of reimbursement
and other governmental or private agency actions on the Company's sales; and
competition and other risks that may be detailed in the Company's Form 10-KSB
for the year ending June 30, 1997 or in other filings with the Securities and
Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS ON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Rehabilicare was held at 10:00 a.m. on
Tuesday, March 17, 1998. Shareholders holding 4,827,399 shares, or
approximately 99% of outstanding shares, were represented at the meeting by
proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. The Merger
Shareholders approved and adopted the Agreement and Plan of Merger
dated as of December 1, 1997 between Rehabilicare and Staodyn by a
vote of 3,708,986 in favor, 14,515 opposed, 15,150 abstained,
and 1,008,748 shares not voted.
b. Election of Directors
The following nominees were elected to serve as members of the Board
of Directors until the annual meeting of shareholders in 1998 or
until such time as a successor may be elected:
IN FAVOR WITHHELD
------------- ------------
Frederick Ayers 4,812,374 15,025
W. Bayne Gibson 4,809,874 17,525
Richard Jahnke 4,810,874 16,525
David Kaysen 4,812,369 15,030
John Maley 4,810,874 16,525
Robert Wingrove 4,812,369 15,030
c. Amendment to Restated Articles of Incorporation
Shareholders approved an amendment to the Restated Articles of
Incorporation to increase the authorized common stock of
Rehabilicare to 30,000,000 shares by a vote of 4,749,424 in favor,
52,525 opposed, 22,950 abstained, and 2,500 shares not voted.
d) 1998 Stock Incentive Plan
Shareholders approved the adoption of the Rehabilicare 1998 Stock
Incentive Plan by a vote of 3,588,816 in favor, 121,255 opposed,
25,580 abstained, and 1,091,748 shares not voted.
No other matters were brought to a vote during the meeting.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
2.1 Agreement and Plan of Merger dated as of December 1, 1997
by and among Rehabilicare Inc., Hippocrates Acquisition, Inc.
and Staodyn, Inc. (incorporated by reference to Exhibit A
to the Proxy Statement/Prospectus that forms a part of
Amendment No. 1 to the Registration Statement on Form S-4
filed by the Company on February 10, 1998 (File no.
333-44139)).
3.1 Articles of Amendment to Articles of Incorporation
27.1 Financial Data Schedule for the period ended March 31, 1998
*27.2 Restated Financial Data Schedule for year ended June 30,
1997
b. Reports on Form 8-K
On April 10, 1998, Rehabilicare filed a current report on Form
8-K reporting the consummation of the Merger effective March 17,
1998. The Form 8-K incorporates by reference certain pro forma
financial information presented in the Company's Joint Proxy
Statement Prospectus for its annual meeting of shareholders held
March 17, 1998.
* To be filed by amendment
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.
/S/ DAVID B. KAYSEN
-------------------------------------
David B. Kaysen
President and Chief Executive Officer
/S/ W. GLEN WINCHELL
-------------------------------------
W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
Date: May 15, 1998