U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
Commission File Number 0-9407
REHABILICARE INC.
MINNESOTA 41-0985318
State of Incorporation IRS Employer Identification No.
1811 Old Highway Eight
New Brighton, Minnesota 55112-3493
(612) 631-0590
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such 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 _____
Check if disclosure of delinquent filers in response to Item 405 of Regulations
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenues for the Fiscal Year Ended June 30, 1996 totaled
$8,703,418.
The aggregate market value of voting stock held by non-affiliates of registrant
as of September 16, 1996 was approximately $12,751,012 (based upon the last sale
price of such stock on such date as reported by the NASDAQ National Market
System). The number of shares of the Company's $.10 par value common stock
outstanding as of September 16, 1996 was 4,673,788.
DOCUMENTS INCORPORATED BY REFERENCE. The response to Items 9, 10, 11, and 12 of
this Form 10-KSB are incorporated herein by reference to certain information
contained in the Company's Definitive Proxy Statement for its Annual Meeting of
Shareholders to be held November 19, 1996.
Transitional Small Business Disclosure Format (Check One):
Yes ____ No __X__
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Rehabilicare Inc. (the Company) was incorporated as Medical Devices,
Inc. pursuant to the laws of the State of Minnesota in 1972. Its name was
changed to Rehabilicare Inc. in November 1994. The Company is a leading
designer, manufacturer and provider of electromedical pain management and
rehabilitation products and services used for clinical, home health care and
occupational medicine applications.
BACKGROUND
Electrotherapy devices such as those marketed by the Company have broad
application in both the rehabilitation of injured and atrophied muscles and in
the relief of chronic and acute pain. Transcutaneous electrical nerve
stimulation (TENS) devices have been prescribed by physicians and used by
physical therapists, athletic trainers and other treating clinicians in pain
management for over twenty-five years. These devices have traditionally been
designed to be worn at home by patients with chronic pain problems. The
distribution of TENS products was, for many years, dominated by small, regional
home health care dealers who purchase products from manufacturers and resell
those products to treating clinicians or patients on prescription by physicians.
When portable neuromuscular stimulators (NMS) were introduced in the early
1980s, the same distribution techniques were employed.
During the late 1980s, amounts reimbursed for TENS rentals or purchases
was reduced by a number of insurance carriers and margins for manufacturers
began to erode. As a result, most TENS manufacturers began to market their
products directly to patients through various health care providers and to bill
the patients' insurance carriers directly. In such direct sales, the
manufacturer typically makes consignment inventory available at the clinic. When
a treating clinician determines that a specific device is beneficial to a
patient, he or she obtains a physician's prescription. The product is then taken
home by the patient for in-home therapy. The Company believes that patient
acceptance and profit margins are improved significantly through direct sales.
In addition to the change in distribution techniques utilized by the
electrotherapy device industry, the type of devices available for home use has
expanded in recent years. Physical therapists have long employed a number of
electromedical treatment modalities using large clinical units, including
interferential stimulation, pulsed galvanic and microcurrent. Traditionally,
patients were required to visit the clinic to use these machines because they
were expensive and not portable. With the introduction of the Company's compact
portable products, these clinical therapies became available for home
application. The Company believes that the acceptance and use of electrotherapy
devices in home therapy, particularly in rehabilitation, will continue to
increase as these devices are enhanced to provide additional modalities and
application systems to address a broader range of conditions and injuries.
BUSINESS STRATEGY
The Company has implemented several strategies designed to encourage
the growth of its business and enhance profitability:
* A division of the Company was established in 1991 to rent or
sell its rehabilitation and pain management devices directly
to patients through physicians, physical therapists and other
health care providers. These direct sales substantially
increased the Company's margins and now represent a majority
of the Company's revenue.
* The Company has expanded its product offerings beyond the
traditional TENS and muscle stimulation products offered by
other electrotherapy companies to include the additional
treatment modalities of interferential stimulation, pulsed
galvanic and microcurrent. The Company plans to continue to
evaluate and develop compact, portable versions of other
electrotherapy modalities that can extend the ability of
health care providers to offer home health care.
* The Company is developing diagnosis based products designed to
enhance the application of its electrotherapy products for
specific injuries and conditions. The Company currently sells
a TENS unit for use in controlling pain in child birth through
a distributor in the United Kingdom under the BabiTENS name.
* The Company began manufacturing many of its own electrodes and
its own microcurrent device during fiscal 1994 in order to
improve operating margins and provide additional quality
control.
* During the last half of fiscal 1996, the Company began
marketing an electrotherapy product designed for early
intervention and rehabilitation of cumulative trauma injuries
to the wrist. The Company received a patent on its CTDx(TM)
Electrostimulation System which includes a SmartBrace(TM)
wrist splint, SmartBrace electrodes and the CTDx electrical
stimulation device. This system can be used at the work site
or clinics which focus on occupational and industrial
medicine.
PRODUCTS
The Company offers a number of electrotherapy devices for
rehabilitation as well as several products for chronic and acute pain
management. These products consist of small, portable, battery-powered
electrical pulse generators which are connected by wires to electrodes placed on
the skin. Rehabilitation products accounted for approximately 47 percent of
total revenue in fiscal 1996 and 51 percent in fiscal 1995. Pain management
products accounted for approximately 24 percent, in both years. The balance of
the Company's revenue resulted from the sales of accessories used with treatment
modalities.
REHABILITATION PRODUCTS
The Company offers a variety of electrotherapy products for the
rehabilitation market, including neuromuscular stimulators, pulsed galvanic
devices and interferential stimulators. These products are offered separately as
portable, wearable devices or as modalities insertable in the Company's clinical
Plexus System. The Plexus System is designed to provide clinicians with a
convenient and portable unit with which they can offer a variety of treatment
options in the office, on the athletic playing field or at other locations.
Plexus Systems consist of a base station and a number of interchangeable
treatment modalities. It allows the clinician to test the efficacy of the
Company's home treatment modalities in rehabilitating patient injuries before
recommending the rental or purchase of the modality. The Plexus I (holding one
modality) and the Plexus III (holding three modalities) base stations can be
plugged into a wall outlet or run on a self-contained battery pack. The Company
believes that Plexus is the only system that offers clinicians such an extensive
selection of portable electrotherapy modalities previously available only as
large tabletop systems.
NEUROMUSCULAR STIMULATION DEVICES. NMS devices are designed to activate
muscles for rehabilitation purposes. Neuromuscular stimulation has proven
effective in producing controlled involuntary muscle contractions which assist
in maintaining the strength and mobility of a limb and preventing deterioration
of muscle tissue in patients who are unable to perform voluntary muscle
contraction. Physicians have also prescribed neuromuscular stimulation in a
variety of circumstances to improve muscle tone, increase joint mobility, and
accelerate recovery from traumatic injury. Common uses of NMS therapy include
muscle reeducation associated with common knee injuries; relaxation of muscle
spasms in the neck, shoulder and pelvic girdle; reduction of swelling (edema);
reduction of spasticity; and increase in range of motion when limitation in
joint rotation is due to soft tissue shortening.
PULSED GALVANIC DEVICES. The Company's pulsed galvanic device, the GV
II, provides paired electrical pulses instead of the single electrical pulses
provided by conventional NMS devices. Each pulse is much stronger and can
achieve higher voltages than NMS devices. Pulsed galvanic is a treatment
modality used by many physical therapists to reduce edema and pain associated
with sciatica, post-operative arthroscopic surgery, spinal fusion and
degenerative neck discs.
INTERFERENTIAL STIMULATION DEVICES. Interferential is another form of
electrical stimulation commonly used in physical therapy. The Company's IF II
interferential stimulator consists of two channels of fixed and variable
frequencies, and delivers a continuous, high energy output that provides deep
tissue penetration and creates a soothing, mild heating action to the affected
area. IF II is used for the treatment of pain and edema; to increase blood flow
and reduce muscle spasm associated with lower back problems, knee repairs,
shoulder pain and tennis elbow; and for podiatric applications.
PAIN MANAGEMENT PRODUCTS
Electrotherapy products for pain management, primarily TENS devices,
are also offered as portable wearable devices or as Plexus modalities. The
Company is continually enhancing such devices to incorporate new technology and
to enhance their usability.
TRANSCUTANEOUS ELECTRICAL NERVE STIMULATION DEVICES. TENS devices have
been used as a non-narcotic alternative or supplement to drug therapy for the
relief of chronic and acute pain for over twenty-five years. Although TENS is
not effective for every patient or every condition, medical professionals have
generally accepted TENS as an effective treatment for chronic or acute pain
resulting from a variety of medical conditions. These devices are most
frequently used to treat persistent conditions such as low back pain, joint
stiffness and muscle spasm. Physicians have also prescribed TENS for pain
resulting from a variety of other conditions including abdominal surgery,
post-operative pain, tendonitis, phantom limb pain and child birth. TENS devices
generally reduce pain during treatment and for a period of time following usage
but do not cure the cause of the pain.
Two theories have been advanced to explain the manner in which TENS
alleviates pain. The "gate control theory" postulates that the electrical
impulses from TENS devices block or interfere with the neurological transmission
of pain signals from the site of the injury to the brain. A second theory
suggests that the electrical impulses prompt the release of enkephalins or
endorphins, the body's natural pain suppressing agents. Neither theory has
conclusive support in scientific literature. Under either theory, TENS relieves
pain without the costs and risks associated with surgery or the undesirable side
effects and physiological problems of prolonged drug use, including addiction,
stupor, depression, disorientation, nausea and ulcers.
The Company's current TENS line consists of five different products.
The Company believes its Matrix(TM) is one of the most technologically advanced
TENS devices currently available. Incorporating five core treatments and eight
programmed modes, the Matrix I provides a comprehensive range of TENS options
for chronic, acute and post-surgical pain management. The UltraPac SX(TM) is a
full-featured TENS stimulator that offers a high degree of programming
flexibility. In addition to continuous stimulation and cycle burst, the UltraPac
SX incorporates three options through which pulse rate, pulse width or both are
fully modulated. The SMP(TM) offers a unique mode that alternates between high
rates of stimulation for pain control and low frequency stimulation to match the
slow firing rates of sympathetic nerve fibers, a conventional continuous
stimulation mode and a burst mode. All of these devices use integrated circuits
and incorporate surface mount technology to minimize size and weight.
In addition to its reusable TENS devices, the Company has developed and
markets FasTENS, a disposable acute pain management device for treatment of
post-operative pain. There are more than 500,000 orthopedic surgical procedures
done each year, virtually all of which require the use of narcotic pain
medication. FasTENS is a safe and effective adjunct therapy for post-operative
orthopedic pain control. The Company believes that the use of FasTENS can
decrease the amount of narcotic pain medication needed, providing significant
benefits to the patient and cost savings to all parties concerned. Powered by a
lithium battery activated by a pull tab, FasTENS provides five to seven days of
treatment in continuous use. Upon completion of the therapy, FasTENS can be
discarded or returned to the Company for recycling.
The Company has an OEM contract with a distributor in the United
Kingdom for the use of a modified TENS unit (BabiTENS) manufactured by the
Company for pain control during labor and child birth. That device is now being
distributed through a large pharmacy chain as a widely accepted alternative to
narcotic pain management.
MICROCURRENT DEVICES
Microcurrent is a low level form of electrical stimulation that is very
well respected by certain clinicians. Because microcurrent provides stimulation
below sensory nerve levels, there is no noticeable sensation during its use.
Many patients have claimed significant relief from pain and edema associated
with soft tissue injury using microcurrent where other treatment modalities have
failed. The Company began producing its own home microcurrent device (HMC) in
late 1994.
ACCESSORIES
Users of medical rehabilitation and pain management devices require
various accessories. The Company sells self-adhesive and reusable electrode
pads, disposable electrodes, electrode leadwires, disposable batteries,
rechargeable batteries, and a power pack which was introduced in fiscal 1992 to
eliminate the need for batteries in a number of the Company's devices. The
Company started manufacturing its own line of electrodes late in fiscal 1994 and
purchases other electrodes and accessories from outside suppliers. Accessories,
including those provided at clinics with initial product rentals, accounted for
approximately 29 percent of revenue in fiscal 1996 and 26 percent in fiscal
1995.
SALES AND MARKETING
The Company sells its products in a variety of markets and to a broad
range of customers. Key decision makers in recommending use of the Company's
products to patients include physical therapists, athletic trainers,
occupational therapists, podiatrists, chiropractors, neurologists, dentists and
orthopedic surgeons. The Company has historically approached these decision
makers through a network of home health care and specialty equipment dealers.
During the past five years, it has emphasized direct rentals and sales to
patients through health care providers.
DIRECT SALES
The Company offers referring clinicians a wide range of equipment for
their clinical and home electrotherapy needs. The cornerstone of this direct
marketing approach is the Plexus base station. The clinician uses the Plexus
base station and a variety of treatment modalities to determine which modality
provides the most effective therapy to the patient. The clinician then arranges
for the patient's physician to provide a prescription for use of the modality at
home. The home modality is identical to the clinical version, thus allowing a
continuity of care from clinic to home. The Company believes this approach to
clinical training before home use has many benefits for both the treating
clinician and patient:
* Valuable clinician time is not devoted to repeat therapies
over an extended time period, providing the clinician with
additional time for new patients.
* Patient compliance, or proper use of the modality, is enhanced
because the patient is trained in the use of the product at
the clinic and is allowed to experience the sensation
resulting from proper use.
* The patient's satisfaction is enhanced through contact with
the Company's patient care and clinical staff, ensuring
continued proper use of the product, adequacy of patient
supplies and product maintenance.
The Company uses a network of independent sales representatives to
contact and support clinics that provide its product to patients.
When a treating clinician chooses a modality for home use by a patient
and a prescription is written, the clinician notifies the Company that the
patient has received the equipment and provides information necessary for
Rehabilicare to bill the patient's insurance carrier directly. The billing
process begins with the new patient sales department making phone contact with
the patient to ensure that the product is working properly and that all of the
patient's questions are answered. The new patient sales department also verifies
coverage with the patient's insurance carrier and requests any other information
needed prior to generating an invoice to the carrier.
To supplement the assistance offered by the new patient sales
department, the Company employs clinicians who communicate with patients by
phone from a purely clinical perspective, responds to calls from patients to
ensure products are working and used properly. This department then reports to
the prescribing clinician, allowing the clinician to contact the patient to
alter therapy, as appropriate.
WHOLESALE AND INTERNATIONAL
The Company has worked to redirect its traditional wholesale
operations, including a change in its domestic distributor arrangements, to a
nonexclusive form. The Company sells its product to approximately 200 domestic
distributors in the home health care or durable medical equipment market who
sell or rent products on a nonexclusive basis to users referred by a physician,
clinician or other health care provider.
During fiscal 1996, the Company continued its efforts to expand
international sales through the use of foreign distributors. Beginning in fiscal
1995, the Company's distributor in the United Kingdom established a relationship
with a large pharmacy chain which utilizes the services of midwives and
specifically trained advisors to acquaint women with the advantages of
electrotherapy during labor and delivery. The result has been a significant
increase in sales of BabiTENS and related accesories. Sales of those products
grew by more than 80% in fiscal year 1996.
The Company is attempting to expand international sales in Western
Europe. In fiscal 1995, it entered into an exclusive agreement with a West
German company to distribute its products in Western Europe. That distributor
began a reorganization in fiscal 1996. As a result, Rehabilicare discontinued
the agreement and is evaluating other potential distributors to represent its
products in Western Europe. Certain products were subjected to the rigorous
tests required to market in Germany and, as a result, the Company is now allowed
to place the CE marking on such products.
NEW PRODUCT DEVELOPMENT
The Company's research and development efforts have been directed
primarily at developing new lines of electrotherapy products for rehabilitation
applications. Efforts are being focused on developing enhancements of existing
products for use with specific diagnosed medical problems. The Company's first
development effort in diagnosis based products is a product line designed for
cumulative trauma disorders, such as carpal tunnel syndrome. During fiscal 1996,
it received a patent on its new CTDx Electrostimulation System. That system
includes a SmartBrace wrist plint, SmartBrace electrodes and a CTDx electrical
stimulation device. It provides a non-narcotic, non-invasive and conservative
treatment for wrist pain. The system can be effectively used at the work site or
in a clinic specializing in occupational and industrial medicine. Similar
applications for other areas affected by repetitive stress are currently being
studied.
THIRD PARTY REIMBURSEMENT
Efforts by governmental agencies, insurance companies and others to
reduce health care spending have affected, and will continue to affect, the
Company's operating results. The cost of a significant portion of medical care
in the United States is funded by government, such as Medicare and Medicaid and
by health maintenance organizations and private insurers. Governmentally imposed
limits on reimbursement of hospitals and other health care providers have
significantly impacted their spending budgets. Under certain government
insurance programs, a health care provider is reimbursed a fixed sum for
services rendered in treating a patient, regardless of the actual charge for
such treatment. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling health care costs through
redesign of benefits and exploration of more cost effective methods of
delivering health care. In general, these government and private cost
containment measures have caused health care providers to be more selective in
the purchase of medical products.
Under most third-party reimbursement plans, the coverage of an item or
service and the amount of payment that will be made are separate decisions.
Efforts to reduce or control health care spending are likely to limit both the
coverage of certain medical devices, especially newly approved products and the
amount of payment that will be allowed. Restrictions on coverage and payment of
the Company's products by third-party payors could have an adverse impact on the
Company. Management is attempting to establish relationships with such payors to
assure coverage of its products and make the timing and extent of reimbursement
more predictable.
REGULATION
The medical devices manufactured and marketed by the Company are
subject to regulation by the Food and Drug Administration (the FDA) and, in some
instances, by foreign governments. Under the 1976 Amendments (the 1976
Amendments) to the Federal Food, Drug and Cosmetic Act (the Act), and
regulations promulgated thereunder, manufacturers of medical devices must comply
with certain controls that regulate the testing, manufacturing, packaging and
marketing of medical devices. The Act and regulations thereunder create three
classifications for medical devices, each of which is subject to different
levels of regulatory control, with Class I being the least stringent and Class
III being subject to the most control. Class III devices are generally subject
to a clinical evaluation program conducted before a device receives premarket
approval by the FDA for commercial distribution. Class II devices are subject in
some cases to performance standards that are typically developed through the
joint efforts of the FDA and manufacturers, but they do not require clinical
evaluation and premarket approval by the FDA. Performance standards for most
Class II devices, including the Company's products, have not been adopted, so
only Class I general controls apply to Class II devices that are lawfully in
commercial distribution. The Company believes that all of its currently marketed
products are Class II products under this classification system and that they
will not require clinical evaluation and premarket approval prior to commercial
distribution.
If a new device is substantially equivalent to a device that was in
commercial distribution prior to the effective date of the 1976 Amendments and
has been continuously marketed since that date, premarket approval requirements
are satisfied through a 510(k) premarket notification submission, under which
the applicant provides product information supporting its claim of substantial
equivalence. This process may take a year or longer. Because TENS and NMS
devices were marketed prior to 1976, all design enhancements since 1976
requiring regulatory approval have been marketed under this less burdensome form
of FDA procedure.
As a manufacturer of medical devices, the Company is also subject to
certain other FDA regulations, and its manufacturing processes and facilities
are subject to continuing review by the FDA to ensure compliance with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures substantially conform to the requirements of the
FDA regulations. New regulations have been adopted and now are very similar to
the international quality standards set forth in ISO 9000. The Company is
nearing completion of a project to revise its policies, procedures and work
instructions as appropriate to comply with the revised procedures and to achieve
compliance with ISO 9001, EN46001 and the Medical Device Directives.
MANUFACTURING AND SOURCES OF SUPPLY
Manufacturing operations consist primarily of installing electronic
components and materials onto printed circuit boards and assembling them into
the final product package. To decrease size and weight and maximize quality,
many of the Company's products incorporate surface mount technology and the
Company has purchased and utilizes machinery automating surface mount and
through-hole circuit board manufacturing. Many components are available off the
shelf from a number of different suppliers. Some, however, such as certain cases
and circuit boards used in its products, are custom manufactured for the Company
and are thus available from only one supplier. The Company believes that
alternative suppliers could be arranged, if needed, without a material
disruption of its operations. The Company manufactures its products on the basis
of firm purchase orders and to replenish inventory levels. The Company ships
most products within one or two days of order receipt. For this reason, the
Company typically has no significant order backlog.
PROPRIETARY RIGHTS
In July 1996, the Company received U.S. Patent approval of its new CTDx
Electrostimulation System which includes the SmartBrace wrist splint, SmartBrace
electrodes and CTDx electrical stimulation device. This is the Company's first
patent on an electrotherapy product. The Company believes that the United States
Patent and Trademark offices could conclude that many of its other products
utilize presently existing technology and that the cost of processing a patent
application for all products could not be justified by the limited protection it
would provide. The Company hopes to continue to keep its products competitive by
revising the technology that they utilize.
COMPETITION
Numerous other companies currently manufacture and distribute
electrotherapy rehabilitation and pain management devices. Some of these
competitors have greater resources and name recognition than the Company and may
be better able to respond to changing market and industry conditions. In
addition, these companies may have greater experience in employing a direct
sales method of distribution and may benefit from established relationships in
this distribution channel. The Company believes that its principal competitors
in the electrotherapy pain management market and in the NMS portion of the
electrotherapy rehabilitation market are Empi, Inc. and Staodyn, Inc. The
Company competes in these markets primarily on the basis of service and the
variety and quality of its product offerings. The electrotherapy rehabilitation
market for modalities other than NMS, such as interferential, pulsed galvanic
and microcurrent, is more fragmented and more difficult to define. The Company
believes that its ability to offer all of these modalities is in contrast to the
focus of its principal competitors. The Company further believes that there are
no dominant competitors for these other modalities and that the number of
modalities it offers, together with the distinctive features of its products,
allow it to compete favorably in this market.
EMPLOYEES
As of September 16, 1996, the Company had 90 full time employees,
including 25 in sales and marketing, 10 in research and development, 31 in
manufacturing, and 24 in finance and administration. The Company's employees are
not represented by any collective bargaining organization, and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters is located in New Brighton,
Minnesota, a suburb of St. Paul. The Company owns a 30,000 square foot facility
constructed during fiscal 1995. The facility includes 6,000 square feet of
expansion space. All operations other than field sales activities are conducted
in this building. In the opinion of management, the Company's properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
The Company has, from time to time, been a party in actions involving
current and former distributors and sales agents. Management does not believe
that any such actions have had or will have a material impact on the Company's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company is traded on The NASDAQ Stock Market
under the symbol REHB. The following table sets forth the high and low closing
sale prices of the Company's common stock for the periods indicated, as quoted
by NASDAQ:
Closing Sale Price
-------------------
High Low
---- ---
Fiscal year ending June 30, 1996
First Quarter 4 2 1/2
Second Quarter 4 2 1/4
Third Quarter 5 1/4 3 1/2
Fourth Quarter 4 3/4 3 3/8
Closing Sale Price
-------------------
High Low
---- ---
Fiscal year ending June 30, 1995
First Quarter 2 3/4 2 3/8
Second Quarter 2 7/8 2 3/8
Third Quarter 2 3/4 1 3/4
Fourth Quarter 2 3/4 2 1/4
The last sale price reported by NASDAQ on September 16, 1996 was
$3.125. As of September 16, 1996 there were approximately 406 shareholders of
record (not including beneficial holders).
The Company has never declared or paid a cash dividend on its Common
Stock. The Company currently intends to retain earnings for use in the operation
and expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company has designed, manufactured and distributed electrotherapy
products for clinical and home health care uses for over 24 years. Its product
line focused primarily on pain management until the late 1980s when it was
expanded to include a variety of rehabilitation products. Management believes
that the rehabilitation market, including occupational medicine applications, is
growing more rapidly than the pain management market, thus providing greater
potential for revenue growth.
Historically, the Company distributed its products primarily through
sales to regional home health care dealers which resold them to health care
providers or patients upon prescription by physician. In fiscal 1992, the
Company began selling directly to patients. Clinical versions of the Company's
electrotherapy modalities are placed with physicians, physical therapists and
other health care providers who refer the Company's home modalities to patients
after determining the most appropriate treatment. An inventory of home units is
left on consignment with each clinic.
The Company bills the patient or the patient's insurance carrier
directly upon notification that a unit has been prescribed and provided to the
patient. It also takes responsibility for patient follow-up, including the sale
of additional supplies and any service required for its products. The Company
believes that its shift to a direct sales approach has improved margins and its
ability to penetrate existing markets. It has also resulted in significant
increases in consignment inventory and receivables.
RESULTS OF OPERATIONS
The following table sets forth information from the statement of
operations as a percentage of revenue for the periods indicated:
Year Ended June 30
------------------
1996 1995
---- ----
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 26.8 30.1
Gross profit 73.2 69.9
Operating expenses -
Selling, general and administrative 59.9 55.0
Research and development 5.7 4.6
Total operating expenses 65.6 59.6
Operating income 7.6 10.3
Other expense 2.5 .9
Provision for income taxes 1.9 2.5
Net income 3.2 6.9
COMPARISON OF YEAR ENDED JUNE 30, 1996 TO YEAR ENDED JUNE 30, 1995
Revenue was $8,703,000 in fiscal 1996, a 6% decrease from $9,249,000 in
fiscal 1995. Net sales and rental revenue from direct sales decreased 6% to
$6,733,000 from $7,158,000 and accounted for approximately 77% of total revenue
in both fiscal 1996 and fiscal 1995. The decrease was due primarily to a change
in mix of business with fewer sales and more rentals. Revenue from the Company's
traditional dealer and international business decreased 6% to $1,970,000 from
$2,091,000 during fiscal 1995. The decrease resulted from a decline in the
number of domestic distributors for the Company's products as the health care
market continues to change and consolidate.
Gross profit was $6,370,000 or 73% of revenue in fiscal 1996 compared
with $6,466,000 or 70% of revenue in fiscal 1995. Margins on wholesale business
were 50% in fiscal 1996 and 47% in fiscal 1995. The variance is due primarily to
product mix as selling prices have not increased and production costs were
essentially the same in both years. Margins on direct sales and rentals were 80%
in fiscal 1996 and 77% in fiscal 1995. That improvement resulted largely from
reduced depreciation expense as much of the clinical equipment approached the
end of the estimated useful life originally adopted.
Selling, general and administrative expenses increased 2% to $5,210,000
in fiscal 1996 from $5,089,000 in fiscal 1995. As a percent of revenue, those
expenses increased from 55% to 60% of sales due primarily to additional
provision for uncollectible retail receivables recorded during the fourth
quarter. The Company also incurred additional expense to recruit and train an
expanded sales force.
Research and development expense was $495,000 or 6% of revenue in
fiscal 1996 compared with $423,000 or 5% of revenue in fiscal 1995. The
additional expense related to development of the new line of products to treat
cumulative trauma disorders.
Operating income was $665,000 in fiscal 1996 compared with $954,000 in
fiscal 1995 as a result of the decrease in revenue and the increase in operating
expenses. Net income was $282,000 in fiscal 1996 compared with $640,000 in
fiscal 1995. The effective income tax rate of 26% for fiscal 1995 was reduced by
the increase in valuation reserve for deferred tax assets and the utilization of
certain tax credits. There were no significant adjustments included in the 37%
effective rate for 1996.
The Company has recorded a deferred income tax benefit relating to the
excess of book over tax depreciation and bad debt expense. The Company believes
that the asset is realizable through future operations, based on its history of
profitable results since changing its focus to direct sales and rentals.
COMPARISON OF YEAR ENDED JUNE 30, 1995 TO YEAR ENDED JUNE 30, 1994
Revenue was $9,249,000 in fiscal 1995, a 12% increase from $8,296,000
in fiscal 1994. Most of the increase resulted from the continued growth of
direct sales and rentals. Net sales and rental revenue from direct sales
increased 12% to $7,158,000 from $6,363,000 and accounted for approximately 77%
of total revenue in both fiscal 1995 and fiscal 1994. That increase was
primarily attributable to volume as selling prices and rental rates were
essentially the same during both years. Revenue from the Company's traditional
dealer business increased 8% to $2,091,000 from $1,933,000 during fiscal 1994,
due primarily to an increase in international sales.
Gross profit increased 10% to $6,466,000 or 70% of revenue in fiscal
1995 from $5,862,000 or 71% of revenue in fiscal 1994. Margins on wholesale
business were 47% in both fiscal 1995 and fiscal 1994. Margins on direct
business were 77% in fiscal 1995 and 78% in fiscal 1994. The variance is due to
the mix of rentals and sales as prices and costs were essentially the same in
both years.
Selling, general and administrative expenses increased 8% to $5,089,000
in fiscal 1995 from $4,711,000 in fiscal 1994. As a percent of revenue, those
expenses declined 2% from 57% to 55%. Expansion of the direct sales business has
required increased levels of support and the Company expects these expenses to
continue increasing at a rate slightly lower than the rate of increase in
revenue.
Research and development expense was $423,000 in fiscal 1995 compared
with $377,000 in fiscal 1994. Those expenses were essentially unchanged as a
percent of revenue.
Operating income was $954,000 in fiscal 1995 compared with $773,000 in
fiscal 1994. The increase was the result of increased revenue and the decrease
in operating expenses as a percent of revenue. Net income was $640,000 or 7% of
revenue in fiscal 1995 compared with $512,000 or 6% or revenue in fiscal 1994.
The valuation reserve for deferred tax assets was reduced by $119,000 in fiscal
1995. That reduction was the primary reason for the decrease in effective income
tax rate from 33% in fiscal 1994 to 26% in fiscal 1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Operations have required significant amounts of cash since the Company
established its direct sales division in October 1991 and began offering its
products directly to patients. Cash was used to fund increases in net
receivables of $301,000 in 1996 and $1,326,000 in 1995. The increase in
receivables results from the long collection cycle associated with
reimbursements from insurance companies, workers' compensation carriers and
other third party payors. The Company is attempting to shorten collection cycles
by developing more contractual arrangements with payors and by establishing more
electronic billing capabilities.
During fiscal 1996, the Company increased its reserve for uncollectible
accounts by over $800,000. The reserve, as a percent of trade receivables,
increased from 12% to 26%. The reserve is determined after considering various
factors including historical trends, relationship and experience with insurance
companies 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 placing home units on patients.
The Company also used $730,000 of cash during fiscal 1996 to increase
inventories of clinical units and consignment units as it expanded its direct
sales business. A stable number of sales representatives and efforts to utilize
such inventories more efficiently resulted in a decrease of $130,000 in
inventories during fiscal 1995. To help finance the increase in inventory during
June 1996 the Company borrowed $600,000 pursuant to a new secured three-year
note. The Company anticipates that less cash will be needed for inventory growth
in fiscal 1997.
The cash needed to fund operations during 1996 over and above that
generated by operating activities was provided by the $600,000 term loan
described above and the Company's revolving bank line of credit. In June 1996,
the Company extended its revolving loan agreement through December 31, 1998. The
line provides for borrowings up to $2,000,000, limited by eligible accounts
receivable. The borrowing base limit was approximately $1,158,000 at June 30,
1996. Borrowings bear interest at the bank's prime rate, which was 8.25% at June
30, 1996. Borrowings under the lines were $555,000 at June 30, 1996 and $650,000
at June 30, 1995. The Company anticipates that cash requirements during fiscal
1997 will be less than its available credit facility.
In the second half of fiscal 1995, the Company completed construction
of a new 30,000 square foot building, which includes 6,000 square feet of
expansion space. All of the Company's offices, manufacturing and warehouse
operations are now located in that building. Financing for the land and building
was provided by grants from the City of New Brighton and loans from the State of
Minnesota, a commercial bank and the Small Business Administration. Aggregate
cost of the land and building was approximately $2,020,000. The difference
between that amount and total mortgage and other debt of approximately
$1,600,000 represents the value of grants and other financial assistance
provided by the City and the State. Most of the cash required to fund the
Company's investment in new facilities was generated from financing activities.
No significant capital expenditures were made in fiscal 1996 nor are planned for
fiscal 1997.
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 and other risks
that may be detailed in the Company's filings with the Securities and Exchange
Commission.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements and financial statement schedules
are attached as a separate section immediately following the signature page of
this Annual Report on Form 10-KSB:
Report of Independent Public Accountants
Balance Sheets as of June 30, 1996 and 1995
Statements of Operations for the years ended June 30, 1996 and 1995
Statement of Changes to Stockholder's Equity for the years ended
June 30, 1996 and 1995
Statements of Cash Flows for the years ended June 30, 1996 and 1995
Notes to Financial Statements
Supplemental Schedule for the years ended June 30, 1996 and 1995:
Schedule VII - Valuation and Qualifying Accounts
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information contained under the headings "Election of Directors"
and "Executive Officers" of the Company's definitive proxy statement for its
annual meeting of shareholders to be held November 19, 1996 (hereafter the
"Proxy Statement"), is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" of the Proxy
Statement is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement is hereby incorporated
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of
the Proxy Statement is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) INDEX OF EXHIBITS
Number Description
- ------ -----------
3 Restated Articles of Incorporation (c)
3.1 Articles of Amendment to Restated Articles of Incorporation (f)
4.1 Bylaws of the Company (c)
4.2 1988 Restated Stock Option Plan, as amended (b)
4.3 1994 Employee Stock Purchase Plan (d)
4.4 Form of Incentive Stock Option Agreement (b)
4.5 Form of Nonqualified Stock Option Agreement (a)
4.6 Investment Agreement dated October 22, 1987 between the Company and
Mentor (a)
10.1 Letter Agreement dated March 4, 1992 between the Company and
David B. Kaysen (d)
10.2 Construction Loan Agreement dated October 20, 1994 between the Company
and Norwest Bank Minnesota, N.A., together with related Real Estate
Note; Security Agreement; and Mortgage Security Agreement, Fixture
Financing Statement and Assignment of Leases and Rents (e)
10.3 Contract for Private Redevelopment dated October 20, 1994 between the
Company and the City of New Brighton, Minnesota (e)
10.4 First Amendment dated January 10, 1995 to Contract for Private
Redevelopment dated October 20, 1994 between the Company and the City
of New Brighton, Minnesota (f)
10.5 Agreement for the Loan of Economic Recovery Funds dated October 20,
1994 between the Company and the City of New Brighton, Minnesota,
together with $199,900 Note and Mortgage (e)
10.6 First Amendment dated December 19, 1994 to Agreement for the Loan of
Economic Recovery Funds dated October 20, 1994 between the Company and
the City of New Brighton, Minnesota, together with $199,900 Note and
Mortgage (f)
10.7 Subordination Agreement dated March 3, 1996 between the City of
New Brighton and Twin Cities-Metro Development Company, as
authorized representative of the U.S. Small Business Administration
(SBA)(f)
10.8 U.S. Small Business Administration Certified Development Company
Program "504" Note dated March 3, 1995 for $786,000 payable by the
Company to Twin Cities-Metro Development Company, together with related
Loan Agreement, Mortgage and Assignment of Mortgage to SBA (f)
10.9 Assessment Agreement dated April 26, 1994 between the Company and the
City of New Brighton and Certification by County Assessor of the
County of Ramsey, State of Minnesota (f)
10.10 $65,000 Limited Revenue Tax Increment Note payable to the Company by
the City of New Brighton (f)
10.11 Credit Agreement dated December 1, 1994 between the Company and Norwest
Bank Minnesota, N.A. (f)
*10.12 First Amendment dated June 27, 1996 to Credit Agreement dated
December 1, 1994 between the Company and Norwest Bank Minnesota, N.A.
*23 Consent of Independent Public Accountants
*99 Safe Harbor Statement pursuant to the Private Securities Litigation
Reform Act of 1995
(a) Incorporated by reference to the Company's Form 10 filed with the
Commission on June 27, 1988 (File Number 0-9407).
(b) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1988 (File Number 0-9407).
(c) Incorporated by reference to the Company's Form 10-Q for the quarter
ended December 31, 1992 (File Number 0-9407).
(d) Incorporated by reference to the Company's Registration Statement on Form
S-2 filed on June 24, 1993 (File Number 33-64884).
(e) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1994 (File Number 0-9407).
(f) Incorporated by reference to the Company's Form 10-KSB for the year ended
June 30, 1995 (File Number 0-9407).
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the quarter ended June 30, 1996.
- ----------------------------------
* Filed as part of this report
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
REHABILICARE INC.
Dated: September 26, 1996 By: /S/ DAVID B. KAYSEN
--------------------------------------
David B. Kaysen
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Chairman, Chief Technical
/S/ ROBERT C. WINGROVE Officer and Director September 26, 1996
- --------------------------------------
Robert C. Wingrove
/S/ DAVID B. KAYSEN President, Chief Executive Officer September 26, 1996
- --------------------------------------
David B. Kaysen
Vice President of Finance
(Principal Financial and
/S/ W. GLEN WINCHELL Accounting Officer) September 26, 1996
- --------------------------------------
W. Glen Winchell
/S/ DONN O. BERKELAND Director September 26, 1996
- --------------------------------------
Donn O. Berkeland
Director September 26, 1996
- --------------------------------------
Anthony R. Gette
/S/ WILLIAM R. HIBBS Director September 26, 1996
- --------------------------------------
William R. Hibbs
</TABLE>
REHABILICARE INC.
FINANCIAL STATEMENTS AS OF
JUNE 30, 1996 AND 1995 AND
SUPPLEMENTAL SCHEDULE
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rehabilicare Inc.:
We have audited the accompanying balance sheets of Rehabilicare Inc. (a
Minnesota corporation) as of June 30, 1996 and 1995, and the related statements
of operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rehabilicare Inc. as of June
30, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of valuation
and qualifying accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 9, 1996
<TABLE>
<CAPTION>
REHABILICARE INC.
Balance Sheets as of June 30
ASSETS 1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 32,553 $ 55,704
Receivables, less reserve for uncollectible accounts of
$1,410,000 and $599,000 5,506,121 5,205,285
Inventories, net-
Raw materials 542,439 408,154
Finished goods 2,056,868 1,528,101
Deferred income tax benefit (Note 5) 496,000 263,000
Income tax refund receivable 1,100 111,129
Prepaid expenses 259,649 172,682
------------ ------------
Total current assets 8,894,730 7,744,055
------------ ------------
PROPERTY AND EQUIPMENT:
Land 150,000 150,000
Building 1,607,885 1,494,286
Clinical and rental equipment 1,353,851 1,286,450
Manufacturing equipment 783,894 746,968
Office furniture, fixtures and equipment 993,135 931,784
------------ ------------
4,888,765 4,609,488
Less- Accumulated depreciation (2,470,155) (2,215,657)
------------ ------------
2,418,610 2,393,831
Construction in progress 8,470 110,455
------------ ------------
Total property and equipment 2,427,080 2,504,286
------------ ------------
$ 11,321,810 $ 10,248,341
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Note payable (Note 3) $ 555,000 $ 650,000
Current maturities of long-term obligations (Note 4) 293,890 88,489
Accounts payable 529,523 486,134
Accrued liabilities-
Payroll 87,954 110,806
Commissions 178,118 160,825
Taxes 145,120 --
Other 95,461 98,918
----------- -----------
Total current liabilities 1,885,066 1,595,172
LONG-TERM OBLIGATIONS (Note 4) 2,251,908 1,904,211
----------- -----------
Total liabilities 4,136,974 3,499,383
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, no par value; authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, $.10 par value; authorized 10,000,000
shares; issued and outstanding 4,670,288 in 1996
and 4,609,001 in 1995 467,029 460,900
Additional paid-in capital 5,264,448 5,116,962
Retained earnings 1,453,359 1,171,096
----------- -----------
Total stockholders' equity 7,184,836 6,748,958
----------- -----------
$11,321,810 $10,248,341
=========== ===========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
REHABILICARE INC.
Statements of Operations
For the Years Ended June 30
1996 1995
---- ----
NET SALES AND RENTAL REVENUE $ 8,703,418 $ 9,249,029
COST OF SALES AND RENTALS 2,333,704 2,783,433
----------- -----------
Gross profit 6,369,714 6,465,596
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 5,209,753 5,089,276
Research and development 495,398 422,789
----------- -----------
Total operating expenses 5,705,151 5,512,065
----------- -----------
Operating income 664,563 953,531
OTHER INCOME (EXPENSE):
Interest expense (231,632) (85,170)
Interest income -- 4,525
Other 14,332 (4,774)
----------- -----------
Income before income taxes 447,263 868,112
PROVISION FOR INCOME TAXES 165,000 228,000
----------- -----------
Net income $ 282,263 $ 640,112
=========== ===========
NET INCOME PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS $ .06 $ .14
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING 4,868,633 4,685,733
=========== ===========
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
REHABILICARE INC.
Statements of Changes in Stockholders' Equity
For the Years Ended June 30
Common Stock Additional
------------------------ Paid-In Retained
Shares Amount Capital Earnings Total
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 4,526,673 $ 452,667 $4,985,606 $ 530,984 $5,969,257
Exercise of stock options
67,000 6,700 106,925 -- 113,625
Common stock issued through
Employee Stock Purchase
Plan 15,328 1,533 24,431 -- 25,964
Net income -- -- -- 640,112 640,112
---------- ---------- ---------- ---------- ----------
BALANCE, June 30, 1995 4,609,001 460,900 5,116,962 1,171,096 6,748,958
Exercise of stock options and
related tax benefits
52,490 5,249 124,899 -- 130,148
Common stock issued through
Employee Stock Purchase
Plan 8,797 880 22,587 -- 23,467
Net income -- -- -- 282,263 282,263
---------- ---------- ---------- ---------- ----------
BALANCE, June 30, 1996 4,670,288 $ 467,029 $5,264,448 $1,453,359 $7,184,836
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
REHABILICARE INC.
Statements of Cash Flows
For the Years Ended June 30
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 282,263 $ 640,112
Adjustments to reconcile net income to net cash used in
operating activities-
Depreciation 252,020 541,148
Deferred income taxes (233,000) 9,000
Loss on disposition of property and equipment 2,478 17,370
Change in current assets and liabilities:
Receivables (300,836) (1,326,349)
Income tax refund receivable 110,029 (111,129)
Inventories (730,453) 130,173
Prepaid expenses (86,967) (120,063)
Accounts payable 43,389 242,986
Accrued liabilities 136,104 (311,332)
----------- -----------
Net cash used in operating activities (524,973) (288,084)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (109,891) (1,860,748)
----------- -----------
FINANCING ACTIVITIES:
Principal borrowings (repayments) on long-term obligations, net 553,098 (27,057)
Proceeds from (payments on) line of credit, net (95,000) 450,000
Proceeds from mortgage notes payable -- 1,597,875
Proceeds from exercise of stock options 130,148 113,625
Proceeds from purchases of stock by employees 23,467 25,964
----------- -----------
Net cash provided by financing activities 611,713 2,160,407
----------- -----------
Net increase (decrease) in cash (23,151) 11,575
CASH AT BEGINNING OF YEAR 55,704 44,129
----------- -----------
CASH AT END OF YEAR $ 32,553 $ 55,704
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for-
Interest $ 231,632 $ 71,910
=========== ===========
Income taxes $ 125,391 $ 490,512
=========== ===========
Capital lease obligations incurred for acquisition of equipment $ -- $ 383,938
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
REHABILICARE INC.
Notes to Financial Statements
June 30, 1996 and 1995
1. ORGANIZATION:
Rehabilicare Inc., formerly Medical Devices, Inc. (the Company), is a designer,
manufacturer and provider of electromedical pain management and rehabilitation
products and services for clinical home health care and occupational medicine
applications. The primary market for the Company's products is in the United
States, although a small percentage of its business is conducted in Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
The Company generates revenue from sales of its products to medical equipment
dealers and from rental or sales directly to patients and clinics or other
health care providers. Revenue is recognized at the time of shipment to dealers
or upon notification from a clinic or physician that equipment has been
prescribed and provided to a patient. All revenue is recognized net of estimated
sales allowances and returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Revenue from rental and sale of products directly to patients, clinics and other
health care providers accounted for approximately 77% of total revenue in both
fiscal 1996 and 1995. Receivables arising from these rentals and sales are not
collateralized. A significant portion of these receivables are from insurance
companies or other third-party reimbursing agents. The nature of these
receivables and this industry has typically resulted in long collection cycles.
The Company establishes a reserve for uncollectible accounts based upon factors
surrounding credit risk of specific insurance carriers, historical trends,
patient responsibility and other information. No single customer accounted for
more than 10% of the receivables at June 30, 1996.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market. Finished goods inventories include products held on consignment by
clinics, therapists or other third parties for rental or sale to patients.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method for financial reporting purposes and accelerated methods
for income tax reporting purposes. Estimated useful lives for financial
reporting purposes are as follows:
Building 39 years
Office furniture, fixtures and equipment 3-10 years
Shop equipment 3-5 years
Clinical and rental equipment 3 years
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding, including the
dilutive effects of stock options and warrants.
INCOME TAXES
Deferred income taxes represent the tax effects of timing differences in the
recognition of revenue and expenses for financial reporting and income tax
purposes. Federal tax credits are recorded as a reduction of income tax expense
in the year the credits are utilized.
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" (Statement No. 123), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company will adopt Statement
No. 123 in fiscal 1997. While the Company is still evaluating Statement No. 123,
it currently expects to elect to continue to measure compensation cost under APB
No. 25 and comply with the pro forma disclosure requirements. If the Company
makes this election, this statement will have no impact on the Company's results
of operations or financial position because the Company's plans are fixed stock
option plans. Options granted under such plans have no intrinsic value at the
grant date under APB No. 25.
3. NOTE PAYABLE:
The Company maintains a revolving line of credit with a bank which provides for
borrowings up to $2,000,000, limited by eligible accounts receivable, as
defined. The borrowing base limit and amounts outstanding at June 30, 1996 were
$1,157,500 and $500,000, respectively. Borrowings under this line bear interest,
payable monthly, at the bank's prime rate (8.25% at June 30, 1996). Amounts
outstanding are collateralized by receivables, inventories, furniture, fixtures,
machinery and equipment. The Company was in compliance with all financial
covenants contained in the credit agreement as of June 30, 1996.
Selected data on the Company's borrowings under its revolving line of credit is
shown below:
1996 1995
---- ----
Average balance outstanding $ 817,000 $496,000
Maximum balance outstanding $1,095,000 $775,000
Weighted average interest rate 8.5% 9.1%
4. LONG-TERM OBLIGATIONS:
Long-term obligations at June 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage note payable, principal and interest due in monthly installments
through May 2015, interest at 7.37%, collateralized by the Company's land
and building $ 762,418 $ 781,833
Mortgage note payable, principal and interest due in monthly installments
through May 2005 and a balloon payment at that date, interest at 9.56%,
collateralized by the Company's land and building 749,372 762,500
Note payable, principal and interest due in monthly installments through June
1999 and a balloon payment at that date, interest at prime (8.25% at June 30,
1996), collateralized by the Company's receivables, inventories, furniture,
fixtures and equipment
600,000 --
Capital lease obligations 384,634 398,992
Other 49,374 49,375
----------- -----------
2,545,798 1,992,700
Less- Current maturities (293,890) (88,489)
----------- -----------
$ 2,251,908 $ 1,904,211
=========== ===========
</TABLE>
Under terms of the various debt agreements, the Company must meet certain
financial covenants, including maintaining certain levels of net worth and
meeting or exceeding certain financial ratios. As of June 30, 1996, the Company
was in compliance with all such covenants relating to significant debt
agreements.
Future maturities due in each fiscal year with respect to long-term obligations,
excluding obligations under capital leases, are as follows:
1997 $ 234,252
1998 237,212
1999 240,433
2000 43,939
2001 47,753
Thereafter 1,357,575
----------
$2,161,164
==========
OBLIGATIONS UNDER CAPITAL LEASES
The Company has commitments under various capital leases which bear interest at
rates ranging from 6.15% to 14.1% and are payable in monthly installments
through May 2002. Aggregate principal payments due in each fiscal year with
respect to these obligations are as follows:
1997 $ 59,635
1998 58,846
1999 60,694
2000 66,088
2001 51,652
Thereafter 87,719
--------
$384,634
========
5. INCOME TAXES:
The following summarizes the components of income tax expense:
1996 1995
---- ----
Currently payable:
Federal $322,000 $176,000
State 76,000 43,000
Deferred (233,000) 9,000
-------- --------
$165,000 $228,000
======== ========
A reconciliation of the Company's reported income taxes as compared to those
using statutory federal rates follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory rate applied to pretax income $152,000 $295,000
State income taxes, net of federal tax benefit 19,000 39,000
Change in valuation reserve - (119,000)
Prior year alternative minimum tax and other
federal tax credits - (28,000)
Other (6,000) 41,000
-------- --------
$165,000 $228,000
======== ========
</TABLE>
A summary of deferred tax benefits as of June 30 is as follows:
1996 1995
---- ----
Deferred tax benefits arising from:
Bad debt reserve $384,000 $166,000
Accruals and other reserves 149,000 116,000
Depreciation (84,000) (48,000)
Uniform capitalization 47,000 29,000
Valuation reserve - -
-------- --------
$496,000 $263,000
======== ========
6. STOCKHOLDERS' EQUITY:
SECONDARY OFFERING OF COMMON STOCK
In August 1993, the Company completed the sale of 1,150,000 shares of common
stock at $1.875 per share. The Company also sold to the underwriter, for nominal
consideration, a five-year warrant to purchase up to 75,000 shares of common
stock at $2.25.
STOCK OPTIONS
The Company has 825,000 shares of its common stock reserved for issuance to key
employees, consultants, or other persons providing valuable services to the
Company under its 1988 Restated Stock Option Plan. Options are granted at prices
not less than the fair market value on the date of grant and are exercisable in
cumulative installments over a term of five years.
The following table summarizes information with respect to such plan:
<TABLE>
<CAPTION>
Option Price on Number of
Dates of Grants Shares
--------------- ---------
<S> <C> <C>
Balance outstanding, June 30, 1994 $0.625-$4.250 414,000
Granted 1.875- 2.375 125,000
Exercised 0.750- 2.375 (67,000)
Canceled 0.875- 2.875 (41,000)
------------ -------
Balance outstanding June 30, 1995 0.625- 3.125 431,000
Granted 2.625- 4.750 97,500
Exercised 0.625- 3.125 (52,500)
Canceled 2.375- 3.000 (30,500)
------------ -------
Balance outstanding, June 30, 1996 $0.750-$4.750 445,500
============= =======
Exercisable, June 30, 1996 $0.750-$4.750 301,000
============= =======
Available for grant, June 30, 1996 100,340
=======
</TABLE>
STOCK PURCHASE PLAN
The Company has reserved 200,000 authorized shares of common stock for issuance
under its Employee Stock Purchase Plan. All full-time employees are eligible to
participate in the plan by having amounts deducted from their earnings.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain claims, legal actions and complaints arising
in the ordinary course of business. In the opinion of management, the resolution
of these matters will not have a material impact on the financial position or
results of operations of the Company.
401(K) PLAN
The Company has a 401(k) plan in which substantially all employees are eligible
to participate. Participants may contribute up to 15% of eligible earnings to
the plan. Company contributions are 100% for the first 2% of participants'
contributions and 25% for the next 4% up to a maximum matching annual
contribution of $750 per participant. In addition, the Company may make
additional discretionary contributions to the plan as determined annually. The
Company contributed $27,288 and $13,000 to the plan for the years ended June 30,
1996 and 1995, respectively.
REHABILICARE INC.
Schedule II--Valuation and Qualifying Accounts
For the Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Balance at End
Year Expenses Deductions of Year
------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended June 30, 1995 $768,000 $285,000 $454,000 $ 599,000
Year ended June 30, 1996 599,000 812,000 1,000 1,410,000
RESERVES FOR WARRANTY REPAIRS:
Year ended June 30, 1995 86,900 - 25,000 61,900
Year ended June 30, 1996 61,900 - 16,900 45,000
RESERVES FOR INVENTORY OBSOLESCENCE:
Year ended June 30, 1995 208,000 17,000 12,000 213,000
Year ended June 30, 1996 213,000 65,000 - 278,000
</TABLE>
EXHIBIT 10.12
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT is made as of the 27 day of June, 1996, and is by and
between Rehabilicare, Inc. a Minnesota corporation (the "Borrower"), and Norwest
Bank Minnesota, National Association, a national banking association (the
"Bank").
REFERENCE IS HEREBY MADE to that certain Credit Agreement dated as of December
1, 1994 (the "Credit Agreement") made between the Borrower and the Bank.
Capitalized terms not otherwise defined herein shall have the respective
meanings ascribed to them in the Credit Agreement.
WHEREAS, the Borrower has requested the Bank (i) to renew the Credit to December
31, 1998, and (ii) to make a new term loan to the Borrower in the amount of
$600,000.00; and,
WHEREAS, the Bank is willing to grant the Borrower's requests, subject to the
provisions of this First Amendment;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:
1. Section 1.1 of the Credit Agreement is hereby amended by changing clause
(ii) of the definition of "Acceptable Accounts Receivable" so that, when
read in its entirety, it provides as follows:
(ii) not due from an account debtor of the Borrower's wholesale
division, 10% or more of whose account is more than 120 days past
the invoice date;
2. Section 1.1 of the Credit Agreement is hereby further amended by changing
the definition of "Maturity Date" so that, when read in its entirety, it
provides as follows:
"Maturity Date" shall mean December 31, 1998.
3. Section 1.1 of the Credit Agreement is hereby further amended by changing
clause (B) of the definition of "Permitted Liens," so that, when read in
its entirety, it provides as follows:
B. Existing liens as of the date of this Agreement and liens in
the Borrower's equipment in favor of the United States Small
Business Administration;
4. Section 1.1 of the Credit Agreement is hereby further amended by adding
the following new definitions:
"First Term Note" shall mean that certain Real Estate Note dated
October 20, 1994 made by the Borrower in the face amount of
$1,525,000.00.
"Notes" shall mean the Current Note, the First Term Note, and the
Second Term Note.
"Second Term Note" shall mean an installment promissory note dated
of even date with the First Amendment to this Agreement, and made by
the Borrower in the face amount of $600,000.00 payable to the Bank.
5. The Credit Agreement is hereby amended by adding the following as new
Section 2A immediately after Section 2:
2A The Second Term Loan
2A.1 Subject to the provisions of Section 3.3 hereof, the Bank
shall make a term loan to the Borrower on or before July 15,
1996 in one advance in the amount of $600,000.00. Said term
loan shall be non-revolving, and evidenced by the Second Term
Note.
2A.2 Interest on the Second Term Note shall be calculated at an
annual rate equal to the Base Rate in effect from time to
time, and shall be calculated on the basis of actual number of
days elapsed in a year of 360 days. The interest rate on the
Second Term Note shall change simultaneously with each change
in the Base Rate.
2A.3 Interest on the Second Term Note shall be payable ON DEMAND,
but until such demand is made, interest shall be payable
monthly, commencing July 31, 1996, and continuing on the last
day of each consecutive month thereafter, and upon maturity.
2A.4 The principal of the Second Term Note shall be repayable as
follows:
Thirty-five (35) installments, each in the amount of
$16,667.00, commencing July 31, 1996, and continuing on the
last day of each consecutive month thereafter through and
including May 31, 1999; plus, one (1) final installment in an
amount equal to the then-remaining outstanding principal
balance of the Second Term Note shall be due and payable on
June 30, 1999.
2A.5 The Borrower may prepay the Second Term Note in whole or from
time to time in part without premium or penalty. Partial
prepayments may be applied to scheduled installments of
principal in inverse order of their maturities.
2A.6 If, at any time and from time to time, the outstanding
principal balance of the Second Term Note exceeds 35% of the
value of the Borrower's finished goods inventory, the Borrower
shall immediately make a prepayment of principal in an amount
sufficient to eliminate such excess.
6. Section 3 of the Credit Agreement is hereby amended by adding the
following as new Section 3.3:
3.3 The Bank shall not fund the term loan contemplated by Section
2A hereof if, as of the date of funding, there exists any
Event of Default or any event which, with the giving of notice
or the passage of time (or both), could become an Event of
Default.
7. Section 4.1, 4.2 and 4.3 of the Credit Agreement are hereby amended by
inserting the following immediately after the term "the Current Note"
wherever that term appears in said Sections:
and the Second Term Note
8. Section 4.1 of the Credit Agreement is hereby further amended by adding
the following sentence to the end of said Section:
Notwithstanding the foregoing provisions, the Bank's security
interest in the Borrower's equipment shall be subordinate to a
security interest held by the United States Small Business
Association.
9. Section 6.3(B) of the Credit Agreement is hereby amended by changing the
period appearing at the end of said Section to a comma, and inserting the
following immediately after said comma:
(iii) a certification of the Borrower's inventory as of the end of
such quarter, and (iv) a detailed aging of the Borrower's
receivables as of the end of such quarter.
10. Section 7 of the Credit Agreement is hereby amended by changing the
preamble to said Section so that, when read in its entirety, it provides
as follows:
Without the Bank's written consent, for so long as any indebtedness
remains outstanding hereunder, the Borrower will not:
11. Section 7.7 of the Credit Agreement is hereby amended so that, when read
in its entirety, it provides as follows:
7.7 Minimum Tangible Net Worth. Permit its Tangible Net Worth to
be less than (i) $6,100,000.00 as of June 30, 1996, and (ii)
$7,100,000.00 as of June 30, 1997 and as of each fiscal year
end thereafter.
12. Section 8.1(A) of the Credit Agreement is hereby amended so that, when
read in its entirety, it provides as follows:
A. Payment. Default in any payment of interest or of principal on
the Current Note, the First Term Note, or the Second Term Note
when due, and continuance thereof for 10 calendar days;
13. Sections 8.1 and 8.2 of the Credit Agreement are hereby amended by
inserting the following immediately after the term "the Current Note"
wherever that term appears in the concluding paragraphs of said Sections:
and the Second Term Note
14. Section 9.3 of the Credit Agreement is hereby amended by inserting the
following immediately after the term "the Current Note" in the fourth line
of said Section:
and the Second Term Note
15. The Borrower and the Bank hereby agree that the terms and conditions
governing the First Term Note (and advances made thereunder) are set forth
in that certain Construction Loan Agreement dated October 20, 1994. Said
loan agreement remains in full force and effect.
16. Simultaneously with the execution of this First Amendment, the Borrower
shall execute and deliver to the Bank a new promissory note (which, for
purposes of this First Amendment only, shall hereinafter be referred to as
the "New Revolving Note"), substantially in the form of attached Exhibit
A. The New Revolving Note shall replace, but shall not be deemed payment
or satisfaction of, the Current Note. All references in the Credit
Agreement to the "Current Note" shall be deemed to mean the New Revolving
Note. Exhibit A to this First Amendment shall replace Exhibit A to the
Credit Agreement.
17. Simultaneously with the execution of this First Amendment, the Borrower
shall also execute and deliver to the Bank the Second Term Note.
18. The Borrower hereby represents and warrants to the Bank as follows:
A. As of the date of this First Amendment, the outstanding
principal balance of the Current Note is $1,020,000.00, and
accrued but unpaid interest thereon equals $ 6,580.53.
B. The Credit Agreement, the Current Note and the Security
Agreement constitute valid, legal and binding obligations owed
by the Borrower to the Bank, subject to no counterclaim,
defense, offset, abatement or recoupment.
C. As of the date of this First Amendment, (i) all of the
representations and warranties contained in Section 5.1, 5.4
and 5.5 of the Credit Agreement are true, and (ii) there
exists no Event of Default and no event which, with the giving
of notice or the passage of time, or both, could become an
Event of Default.
D. The execution, delivery and performance of this First
Amendment, the New Revolving Note and the Second Term Note by
the Borrower are within its corporate powers, have been duly
authorized, and are not in contravention of law or the terms
of the Borrower's Articles of Incorporation or By-laws, or of
any undertaking to which the Borrower is a party or by which
it is bound.
E. All financial statements delivered to the Bank by or on behalf
of the Borrower, including any schedules and notes pertaining
thereto, have been prepared in accordance with Generally
Accepted Accounting Principles consistently applied, and fully
and fairly present the financial condition of the Borrower at
the dates thereof and the results of operations for the
periods covered thereby, and there have been no material
adverse changes in the financial condition or business of the
Borrower from March 31, 1996 to the date hereof.
19. Upon request by the Bank, the Borrower shall deliver a Norwest Corporate
Certificate Of Authority to the Bank dated as of the date of this First
Amendment, and in form and content acceptable to the Bank.
20. Except as expressly modified by this First Amendment, the Credit Agreement
remains unchanged and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this First Amendment
as of the date first written above.
REHABILICARE, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: S/B DAVID B. KAYSEN By: S/B MICHAEL B. OLSON
------------------------------ ----------------------------------
Michael B. Olson,
Its: President & CEO Vice President
By: S/B W. GLEN WINCHELL
------------------------------
Its: Vice President of Finance
------------------------------
PROMISSORY NOTE
$2,000,000.00 June 27 , 1996
------
FOR VALUE RECEIVED, the undersigned, REHABILICARE, INC., a Minnesota
corporation with offices in New Brighton, Minnesota, promises to pay on December
31, 1998 to the order of Norwest Bank Minnesota, National Association (the
"Bank") at the Bank's Central Office or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America, the
principal sum of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00), or so much
thereof as is disbursed and remains outstanding hereunder as shown by the Bank's
liability record on the dates payments are due hereunder, together with interest
on the unpaid balance hereof from the date hereof until this Note is fully paid
at an annual rate equal to the rate of interest established from time to time by
the Bank as its Base Rate. The interest rate of this Note shall change
simultaneously with each change in the Base Rate. Interest shall be calculated
on the basis of actual number of days elapsed in a 360-day year.
Interest on this Note is payable ON DEMAND, but until such demand is made,
interest shall be payable monthly, commencing June 30, 1996, and continuing on
the last day of each succeeding month.
This Note constitutes the Current Note issued pursuant to the provisions
of that certain Credit Agreement dated December 1, 1994, as amended by a First
Amendment of even date herewith (as amended, the "Credit Agreement'), made
between the undersigned and the Bank. Reference is hereby made to the Credit
Agreement for statements of the terms pursuant to which the indebtedness
evidenced hereby was created, is secured, may be prepaid voluntarily, may be
subject to mandatory prepayment, may be reborrowed and may be accelerated.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred by
the holder hereof in the event this Note is not duly paid. The holder hereof may
change any terms of payment of this Note, including extensions of time and
renewals, and release any security for, or any party to, this Note, without
notifying or releasing any accommodation maker, endorser or guarantor from
liability in connection with this Note. Presentment or other demand for payment,
notice of dishonor and protest are hereby waived by the undersigned and each
endorser or guarantor. This Note shall be governed by the substantive laws of
the State of Minnesota.
REHABILICARE, INC.
By: S/B DAVID B. KAYSEN
------------------------------------
Its: President & CEO
------------------------------------
By: S/B W. GLEN WINCHELL
------------------------------------
Its: Vice President of Finance
------------------------------------
EXHIBIT A
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company`s previously filed
Registration Statement File Nos. 33-26053, 33-63962 and 33-63964.
S/B ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 25, 1996
EXHIBIT 99
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements regarding the future prospects of the Company must be
evaluated in the context of a number of factors that may materially affect its
financial condition and results of operations. Disclosure of these factors is
intended to permit the Company to take advantage of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Most of these factors
have been discussed in prior filings by the Company with the Securities and
Exchange Commission. Although the Company has attempted to list the factors that
it is currently aware may have an impact on its operations, other factors may in
the future prove to be important and the following list should not necessarily
be considered comprehensive.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has
experienced quarterly fluctuations in operating results and anticipates that
theses fluctuations will continue. These fluctuations have been caused by
various factors, including the buying patterns of the Company's target market;
the number and timing of new product introductions and enhancements by the
Company and its competitors; the effects of industry evaluations and publicity;
the timing of product orders and shipments; marketing and promotional programs;
and economic conditions in the regions in which the Company does business. A
significant portion of the Company's operating expenses is relatively fixed in
nature and planned expenditures are based primarily on sales forecasts. If
revenue does not meet the Company's expectations in any given quarter, operating
results may be adversely affected.
DISTRIBUTION SYSTEMS. The Company has consigned inventory to
approximately 2,200 clinics for prescription, rental and sale to patients.
Although the Company attempts to obligate such clinics to monitor the inventory,
it has experienced inventory losses in each year since it has commenced direct
sales and expects such losses to continue. Further, the Company generally
experiences increased inventory loss with dissatisfied or terminated sales
agents and there can be no assurances that its reserves for lost inventory are
adequate.
In addition, because private and government health care reimbursement
entities (health insurance carriers) require a substantial amount of time to
approve reimbursement for sale and rental of products, the Company's accounts
receivable have grown significantly in recent years. The Company has added
personnel to deal with collections and record keeping and has established
reserves, which it believes are adequate, for uncollectible receivables and lost
inventory. Nevertheless, there can be no assurances that the Company can
continue to generate increasing direct sales; that all the sales it generates
can be collected; that its reserves for uncollectible accounts will be adequate;
or that its relationships with clinics can be maintained.
VOLATILE MARKETS. The electrotherapy pain management market is a
relatively mature and competitive market, subject to significant fluctuations in
profitability caused by foreign competition, questions of therapeutic efficacy,
governmental regulation and private rates of reimbursement. The electrotherapy
rehabilitation market is an evolving and fragmented market with a number of
different companies offering competing treatments without any clear indication
of industry preference. There can be no assurance that the Company will ever be
able to capture a significant portion of the pain management market or that it
can establish a significant position in the electrotherapy rehabilitation
market.
NEW PRODUCTS. The Company recently introduced its CTDx
Electrostimulation System and is currently engaged in an intensified marketing
program with a number of potential industrial users of such product. Although
the Company has commissioned a clinical study that supports the efficacy of the
CTDx, the market for electrotherapy solutions to carpal tunnel syndrome is in
its infancy and the Company is faced with a considerable educational effort in
selling this product. Because of the youth of the market and this electrotherapy
application, the sales cycle has been longer than anticipated for the CTDx. The
Company anticipates that sales will require less effort and support once the
product is more widely used, but can give no assurances to such affect.
COMPETITION. Competition in the medical device industry from other
electrotherapy pain management and rehabilitation device companies, as well as
from pharmaceutical companies and biotechnology companies, is intense. The
market for the Company's products, and particularly its pain management
products, is extremely competitive. The electrotherapy pain management market is
dominated by three companies that control approximately 55 percent of sales in
the United States. These companies have significantly greater resources than the
Company and several have established direct sales organizations and have greater
experience in the marketing and sales of products through direct distribution.
Although the Company believes that the rehabilitation products it sells
distinguish it from such competitors, there can be no assurance that the Company
will be able to compete effectively in the direct sale of its products or
otherwise.
REIMBURSEMENT RATES. Most of the Company's products are sold or rented
on prescription and the sales or rental price is reimbursed to the Company or
its dealers by the patients' insurers. Both private insurers and the United
States Government as the administrator of Medicare and Medicaid will reimburse
patients for the cost of such products based on scheduled rates that they have
established. Generally the Company, and other providers of medical products,
attempt to sell and lease their products at prices approximating these
reimbursement rates. Nevertheless, private and government payers are
increasingly vigorous in their attempts to contain health care costs through
limitations on the level of reimbursement and scrutiny of items submitted for
reimbursement. In some instances, such payers have made determinations that a
form of electrotherapy is not an acceptable form of treatment and have refused
all reimbursement for that electrotherapy modality. To the extent such private
insurers or Medicare or Medicaid decrease the rate of reimbursement or refuse
reimbursement with respect to any product or line of products, the Company's
profit margins and revenues will be adversely effected.
CLINICAL EFFICACY. TENS sales were negatively affected several years
ago, and may continue to be affected, by publications questioning the efficacy
of TENS for pain relief. The mechanism through which a number of electrotherapy
modalities relieve pain is not precisely understood and although studies
generally indicate that TENS and other modalities offered by the Company are
effective in relieving chronic pain, there can be no assurance that contrary
studies or publicity will not negatively impact sales in the future. Such
studies have, and can be expected to continue to have, a negative impact on
reimbursement.
GOVERNMENTAL REGULATION. The Company's products are subject to changing
Federal regulation governing the use, marketing and sale of medical products.
Generally, medical products must be "substantially equivalent" to existing
medical products or will be subject to an extensive premarket approval process
that often requires clinical testing. The Company has received approval from the
Food and Drug Administration (FDA) for ability to market its existing products,
including its CTDx, based on substantial equivalence. Nevertheless, there can be
no assurance that approval to market such products for broader medical
applications, or other products the Company may introduce, will be granted on
such basis. The FDA also regulates the manufacture of medical devices under its
"good manufacturing practices" regulations and requires that the manufacturing
process follow certain pre-established procedures. The FDA and state regulatory
bodies also regulate the form of advertisement and methods used to sell and
distribute medical products. Although the Company believes that its
manufacturing processes comply with good manufacturing practices and that all of
its advertising and sales practices comply with applicable law, a contrary
finding by a regulatory body could have an adverse effect on its operations.
PRODUCT LIABILITY. Like most producers of medical products, the Company
faces the risk of product liability claims and unfavorable publicity in the
event that the use of its products causes injury or has other adverse effects.
Although the Company has product liability insurance for risks of up to
$2,000,000 and has not been subject to any material claims for products
liability, there can be no assurance that it will be able to avoid product
liability exposure.
LACK OF PROPRIETARY PROTECTION. The Company holds only one patent and
has not applied for protection on any of the technology incorporated into the
other products that it currently offers, although it may seek protection for
certain technology in the future. In the absence of proprietary protection, the
Company is vulnerable to competitors that may attempt to copy its products.
In addition, although the Company has never been the subject of a suit
for patent or trademark infringement and does not believe that the technology
incorporated into its products infringes upon the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertion will not result in
royalty payments or costly litigation.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon certain key personnel, including Mr. Kaysen, its
President and Chief Executive Officer. The loss of Mr. Kaysen, or other key
management or technical personnel, could adversely affect the Company's
business. In addition, the Company's success will depend on its ability to
attract and retain skilled personnel in all areas of its business. There can be
no assurance that the Company will be successful in attracting and retaining
such personnel.
LIMITED PUBLIC MARKET/POSSIBLE VOLATILITY OF STOCK PRICE. To date there
has been only a limited trading market in the Company's Common Stock. The
Company believes that factors such as new product announcements by the Company
and quarter-to-quarter variations in financial results could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
market in general has recently experienced significant price and volume
fluctuations unrelated to the performance of individual companies. Broad market
fluctuations as well as general economic or political conditions may adversely
affect the market price of the Common Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 32,553
<SECURITIES> 0
<RECEIVABLES> 6,788,333
<ALLOWANCES> 1,409,874
<INVENTORY> 2,599,307
<CURRENT-ASSETS> 8,894,730
<PP&E> 4,897,235
<DEPRECIATION> 2,470,155
<TOTAL-ASSETS> 11,321,810
<CURRENT-LIABILITIES> 1,885,067
<BONDS> 2,251,908
0
0
<COMMON> 467,029
<OTHER-SE> 5,264,448
<TOTAL-LIABILITY-AND-EQUITY> 11,321,810
<SALES> 8,703,418
<TOTAL-REVENUES> 8,703,418
<CGS> 2,333,704
<TOTAL-COSTS> 5,922,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 576,500
<INTEREST-EXPENSE> 231,632
<INCOME-PRETAX> 447,264
<INCOME-TAX> 165,000
<INCOME-CONTINUING> 447,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,264
<EPS-PRIMARY> 0.058
<EPS-DILUTED> 0.058
</TABLE>
