U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB A1
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 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 are detailed in Exhibit 99 to this Form 10-KSB.
SIGNATURE
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to it Form 10-KSB for the
fiscal year ended June 30, 1996 to be signed on its behalf by the undersigned,
hereunto duly authorized.
REHABILICARE INC.
Dated: October 10, 1996 By: /S/ W. GLEN WINCHELL
-----------------------------
W. Glen Winchell
Vice President of Finance
