SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended March 31, 1999
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)
(651) 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
--- ---
The number of shares outstanding for each of the Issuer's classes of common
stock as of March 31, 1999 was:
COMMON STOCK, $.10 PAR VALUE 10,473,486 SHARES
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes No X
--- ---
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998
Consolidated Statements of Operations for the Three Months and
Nine Months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Months ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements
2
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1999 1998
--------------- ----------------
ASSETS
CURRENT ASSETS
Cash $ 299,888 $ 919,765
Receivables, less reserve for uncollectible accounts of $4,908,166 and $3,109,448 17,600,548 12,660,677
Inventories -
Raw materials 1,947,639 2,252,897
Work in process 329,884 249,277
Finished goods 5,954,311 4,292,870
Deferred income taxes 2,197,724 2,197,724
Prepaid expenses 724,194 300,827
--------------- --------------
Total current assets 29,054,188 22,874,037
PROPERTY AND EQUIPMENT 10,801,999 11,915,732
Less accumulated depreciation and amortization (6,638,572) (8,544,578)
-------------- -------------
Total property and equipment 4,163,427 3,371,154
Intangible assets, net of accumulated amortization of $2,165,894 and $1,983,764 295,080 477,210
Deferred income taxes 302,859 302,859
Other assets 16,161 35,098
--------------- ----------------
$ 33,831,715 $ 27,060,358
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,500,000 $ ---
Current maturities of long-term debt 903,519 404,172
Accounts payable 1,422,788 1,110,366
Accrued liabilities -
Payroll 681,854 699,123
Commissions 668,304 458,783
Taxes 61,512 ---
Other 866,238 996,979
--------------- --------------
Total current liabilities 7,104,215 3,669,423
LONG-TERM DEBT 4,455,184 3,299,705
--------------- --------------
Total liabilities 11,559,399 6,969,128
MINORITY INTEREST 24,107 ---
STOCKHOLDERS' EQUITY
Common stock 1,047,349 1,044,337
Additional paid-in capital 20,695,969 20,641,922
Less note receivable from officer/stockholder (237,500) (237,500)
Retained earnings 742,391 (1,357,529)
--------------- --------------
Total stockholders' equity 22,248,209 20,091,230
------------- -------------
$ 33,831,715 $ 27,060,358
--------------- --------------
--------------- --------------
3
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31 March 31
-------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ---------------- ------------------ -----------------
Net sales and rental revenue $ 10,919,706 $ 8,405,308 $ 30,886,253 $ 25,250,346
Cost of sales and rentals 3,107,808 3,378,928 8,770,646 8,694,291
------------ ------------ ------------- -------------
Gross profit 7,811,898 5,026,380 22,115,607 16,556,055
Operating expenses:
Selling, general and administrative 6,262,041 5,033,096 17,517,381 15,011,919
Research and development 268,158 263,104 713,461 743,796
Acquisition expense --- 3,175,996 79,107 3,175,996
------------ ------------ ------------- -------------
6,530,199 8,472,196 18,309,949 18,931,711
------------ ------------ ------------- -------------
Income (loss) from operations 1,281,699 (3,445,816) 3,805,658 (2,375,656)
Other income (expense):
Interest expense (148,945) (177,374) (405,109) (409,706)
Other income (expense) (1,913) 34,348 8,478 95,788
Minority interest (24,107) --- (24,107) ---
------------ ------------ ------------- -------------
Income (loss) before income taxes 1,106,734 (3,588,842) 3,384,920 (2,689,574)
Provision (benefit) for income taxes 420,000 (1,769,169) 1,285,000 (1,595,169)
------------ ------------ ------------- -------------
Net income (loss) $ 686,734 $ (1,819,673) $ 2,099,920 $ (1,094,405)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net income (loss) per common share and
common equivalent share
Basic $ 0.07 $ (0.17) $ 0.20 $ (0.10)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted $ 0.07 $ (0.17) $ 0.20 $ (0.10)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted average number of shares
outstanding
Basic 10,472,019 10,406,258 10,462,325 10,405,939
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted 10,532,783 10,406,258 10,501,956 10,405,939
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
4
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31
----------------------------------------
1999 1998
------------------ ---------------
OPERATING ACTIVITIES
Net income (loss) $ 2,099,920 $(1,094,405)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 611,111 507,119
Non-recurring merger costs --- 3,175,996
Change in long-term portion of deferred income taxes --- (3,319)
Changes in current assets and liabilities
Receivables (2,404,871) (709,270)
Current deferred taxes --- (1,591,850)
Inventories (855,906) 785,642
Prepaid expenses (423,367) 216,850
Accounts payable 112,422 410,104
Accrued liabilities (114,383) (1,132,331)
Accrued income taxes 61,512 (161,971)
------------- -----------
Net cash provided by (used in) operating activities (913,562) 402,565
------------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (268,201) (296,231)
Cash paid in asset acquisition (3,650,000) ---
------------- -----------
Net cash used in investing activities (3,918,201) (296,231)
------------- -----------
FINANCING ACTIVITIES
Proceeds from new financing 2,500,000 133,515
Principal payments on long-term obligations (845,173) (258,103)
Proceeds from line of credit, net 2,500,000 130,000
Equity transactions 57,059 93,327
Adjustment for pooling --- (354,402)
------------- -----------
Net cash provided by (used in) financing activities 4,211,886 (255,663)
------------- -----------
Net decrease in cash and cash equivalents (619,877) (149,329)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 919,765 2,654,118
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 299,888 $ 2,504,789
------------- -----------
------------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 293,915 $ 232,898
------------- -----------
------------- -----------
Income taxes paid $ 1,022,859 $ 9,103
------------- -----------
------------- -----------
5
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended March 31, 1999 and 1998 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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement, which must be adopted by
the company for the fiscal year ending June 30, 1999, establishes new standards
for reporting information about operating segments in annual and interim
financial statements. Under SFAS No. 131, operating segments are determined
consistent with the way management organizes and evaluates financial information
internally for making decisions and assessing performance. SFAS No. 131 also
requires related disclosures about products, geographic areas, and major
customers. Implementation of this disclosure standard will not affect the
company's results of operations, cash flows or financial position.
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. 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 as a result
of the Merger. Rehabilicare also assumed the obligations to issue shares under
options to purchase 383,083 shares of Staodyn Common Stock (317,575 shares of
Rehabilicare Common Stock) and warrants to purchase 130,000 shares (107,770
shares of Rehabilicare Common Stock). Options to purchase 239,410 shares of
Staodyn Common Stock (198,471 shares of Rehabilicare Common Stock) subsequently
expired without being exercised. The merger was recorded using the
pooling-of-interests method.
3. ASSET ACQUISITION
6
On August 6, 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.
4. NEW FOREIGN SUBSIDIARY
Effective February 1, 1999, the Company formed a subsidiary in the United
Kingdom, Rehabilicare (U.K.) Ltd. This subsidiary then acquired, for nominal
consideration, certain operating assets and substantially all of the
electrotherapy business of a distributor used by the company in the U.K. The
Company also assumed certain debts of the distributor. The former owners of the
distributor have a minority interest in the Company's new foreign subsidiary.
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, 1999.
On August 6, 1998, the Company acquired substantially all of the assets of the
Homecare business unit of Henley Healthcare. Accordingly, the Company's balance
sheet at March 31, 1999 includes the assets acquired and the indebtedness
incurred to finance this acquisition, and the results of operations include
those operations from August 6, 1998.
7
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
--------------------------- --------------------------
1999 1998 1999 1998
---------- -------- -------- --------
Net sales and rental revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales and rentals 28.5 40.2 28.4 34.4
Gross profit 71.5 59.8 71.6 65.6
Operating expenses -
Selling, general and administrative 57.3 59.9 56.7 59.5
Research and development 2.5 3.1 2.3 2.9
Acquisition expense --- 37.8 0.3 12.6
Total operating expenses 59.8 100.8 59.3 75.0
Operating income (loss) 11.7 (41.0) 12.3 (9.4)
Other expense 1.6 (1.7) 1.4 (1.2)
Provision (benefit) for income taxes 3.8 (21.0) 4.1 (6.3)
Net income (loss) 6.3 (21.7) 6.8 (4.3)
Revenue was $10.9 million for the third quarter of fiscal 1999, a 30% increase
from $8.4 million in the third quarter of fiscal 1998. Revenue for the nine
months ended March 31, 1999 increased 22% to $30.9 million from $25.3 million
during the same period of fiscal 1998. Net sales and rental revenue from direct
distribution to patients increased 31% to $9.6 million from $7.3 million and
accounted for approximately 87% and 84% of total revenue, respectively, for the
third quarter. Direct revenue for the nine months ended March 31, 1999 of fiscal
1999 increased 26% to $26.8 million from $21.3 million during the same period of
fiscal 1998. The increase was due primarily to growth in the number of new
patients.
Revenue from the Company's traditional dealer business, excluding international,
remained the same at $1.1 million for the third quarter of fiscal 1999 and
fiscal 1998. Revenue from domestic dealer business for the nine months ended
March 31, 1999 of fiscal 1999 decreased 4% to $3.7 million from $3.9 million in
the nine months ended March 31, 1998 of fiscal 1998. The decrease is due
primarily to the volume of purchases by certain Staodyn dealers. International
sales were insignificant in all periods.
Gross profit increased 55% to $7.8 million or 72% of revenue in the third
quarter of fiscal 1999 compared with $5.0 million or 60% of revenue in the third
quarter of fiscal 1998. Gross profit for the nine months ended March 31, 1999
increased 28% to $22.1 million or 72% of revenue compared with $16.6 million or
65% of revenue in fiscal 1998. As a result of the merger with Staodyn, the third
quarter of fiscal 1998 includes a charge of approximately $833,000 to write-off
inventories related to Staodyn product lines which were discontinued. Before the
write-off, gross profit for the third quarter of fiscal 1998 would have been
$5.9 million or 70% and $17.4 or 69% for the nine months ended March 31, 1998.
Changes in gross profit as a percent of revenue are primarily the result of the
mix of sales and rentals.
8
Selling, general and administrative expenses increased 24% to $6.3 million in
the third quarter of fiscal 1999 from $5.0 million in fiscal 1998, but decreased
as a percentage of revenue from 60% in fiscal 1998 to 57% in fiscal 1999. For
the nine months ended March 31, 1999, those expenses increased 17% to $17.5
million from $15.0 million in fiscal 1998, but decreased as a percentage of
revenue from 60% in fiscal 1998 to 57% in fiscal 1999. The only significant
changes in selling, general and administrative expenses were variable expenses
including sales commissions and marketing costs, and an increased provision for
uncollectible retail receivables.
The Company reported operating income of $1.3 million in the third quarter of
fiscal 1999 compared with an operating loss of $3.4 million in fiscal 1998. Net
income was $687,000 in fiscal 1999 compared to a net loss of $1.8 million for
the third quarter of fiscal 1998. For the nine-month period ending March 31, the
operating income was $3.8 million in fiscal 1999 compared with an operating loss
of $2.4 million in fiscal 1998. Net income for that period was $2.1 million in
fiscal 1999 compared with a net loss of $1.1 million in fiscal 1998. The fiscal
1998 loss for the three-month and nine-month period ended March 31, 1998
included approximately $4 million of merger related and restructuring costs.
Additionally, an income tax benefit was recorded related to those costs and the
reversal of valuation allowances previously recorded by Staodyn. Net merger
related and restructuring costs were $0.19 per share.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $620,000 in operations during the nine months ended
March 31, 1999. The Company used cash of $149,000 during the same period of
fiscal 1998. Cash was used during the fiscal 1999 quarter to fund an increase of
$2,405,000 in receivables (net of a $2,535,000 increase resulting from the
acquisition from Henley) and a $856,000 increase in inventories (net of a
$1,325,000 increase resulting from the acquisition from Henley) offset primarily
by net income of $2,100,000. Inventories increased substantially during the nine
months ended March 31, 1999 in order to assure continued availability of all
Staodyn and Rehabilicare products during the consolidation of all manufacturing
and distribution activities in the Company's New Brighton, Minnesota facility.
The Company acquired $3,650,000 of assets from Henley during the nine months
ended March 31, 1999, consisting primarily of finished goods inventory and
receivables. The cash paid for that acquisition is shown as an investment in the
statement of cash flows and the increases in receivables and inventories
reflected on such statement are net of the receivables and inventories acquired
from Henley. During the nine months ended March 31, 1999, the Company provided
an additional $3,221,000 for uncollectible receivables and wrote off $1,433,000
of accounts it considered uncollectible. As a percent of receivables, the
reserve increased to 22% for fiscal 1999.
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.
9
Financing activities provided cash of $4,212,000 in the nine months ended March
31, 1999 compared to $256,000 of funds used during the same period of fiscal
1998. The Company repaid $845,000 of long-term debt in the nine months ended
March 31, 1999 compared to $258,000 in fiscal 1998. Effective August 5, 1998,
the Company amended its Credit Agreement to increase the amount of credit under
its revolving line from $2,000,000 to $2,500,000 and to borrow $2,500,000 under
a term loan due in August 2001. Effective February 26, 1999, the Company amended
its Credit Agreement to increase the amount of credit under its revolving line
from $2,500,000 to $3,000,000. Borrowings under the line were $2,500,000 on
March 31, 1999. The Company anticipates that cash requirements during fiscal
1999 will be less than its available credit facility.
YEAR 2000 ISSUE
The Company has conducted an assessment of all its Year 2000 issues involving
its technology systems over the last two years. Currently, the Company has
successfully installed Year 2000 compliant versions of software from its two
major vendors. In addition, the Company is continuing to analyze and modify all
supporting software, bringing all software into compliance. The Company believes
that implementation will be complete and Year 2000 compliant by June 1999.
The Company has completed its assessment of the Year 2000 issue surrounding its
engineering and manufacturing product applications. The Company's electrotherapy
products are each controlled with electro-mechanical and microprocessor hardware
mechanisms which do not have any time-dating requirements that would be affected
by Year 2000. In addition, these devices do not interface with other devices and
therefore remain Year 2000 compliant.
The Company has substantially completed its study of its relationships with
third parties whose failure to become Year 2000 compliant in a timely manner, if
at all, could have an effect on the Company. The Company circulated
questionnaires to all of its significant vendors and customers with respect to
such companies' Year 2000 compliance programs and status. In addition, follow-up
conversations were conducted with key customers and vendors. The Company
currently is completing the process of evaluating this effort and expects to
request final detailed and updated information from its principal vendors and
customers during the next quarter.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. To date, those costs
have not been material. Based upon currently available information, the Company
does not expect the costs of addressing potential Year 2000 problems to have a
material adverse impact on the company's financial position, results of
operations or liquidity in future periods. The Company plans to devote the
necessary resources to resolve all significant Year 2000 issues in a timely
manner.
10
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; competition; the Company's
ability to effectively integrate the businesses that it has acquired and other
risks that may be detailed in the Company's Form 10-KSB for the year ending June
30, 1998 or in other filings with the Securities and Exchange Commission.
11
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, the Company received a subpoena for certain Medicare records to
be delivered to the Department of Health and Human Services. The objectives and
ramifications of the investigation involving those records are unclear. The
Company is complying with the subpoena and cooperating with the investigation.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS ON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits filed with this Form 10-QSB. The Company did not file any reports on
Form 8-K during the nine months ended March 31, 1999.
12
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 14, 1999
13