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, 1997
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 revenue for the Fiscal Year Ended June 30, 1997 totaled
$10,991,105.
The aggregate market value of voting stock held by non-affiliates of registrant
as of September 16, 1997 was approximately $16,667,000 (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, 1997 was 4,870,002.
Transitional Small Business Disclosure Format (Check One):
Yes___ No_X_
<PAGE>
PART I
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 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 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 25 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 rent or resell those products to
treating clinicians or, upon receipt of a physician's prescription, directly to
patients. 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
were reduced by a number of insurance carriers and margins for manufacturers
began to erode. As a result, most TENS manufacturers began to distribute their
products directly to patients through various health care providers and to bill
the patients' insurance carriers directly. In such direct rentals and 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
distribution.
In addition to the change in distribution techniques utilized by the
electrotherapy device industry, the type of devices available for home use has
expanded. 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:
o 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 rentals and sales substantially
increased the Company's margins and now represent a majority of
the Company's revenue.
o 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.
<PAGE>
o 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.
o The Company began manufacturing many of its own electrodes during
fiscal 1994 in order to improve operating margins and provide
additional quality control.
o 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.
o During the latter part of fiscal 1997, the Company began
marketing another proprietary electromedical stimulator designed
for use on knees immediately after surgery. The Ortho Dx(TM)
Electrotherapy System combines a high-volt pulsed current to
increase local blood circulation and help deal with post-surgical
swelling with a neuromuscular stimulator to re-educate and
strengthen key muscle groups in the leg.
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 41% percent of
total revenue in fiscal 1997 and 47% in fiscal 1996. Pain management products
accounted for approximately 25% percent of total revenue in fiscal 1997 and 24%
in fiscal 1996. The balance of the Company's revenue resulted from the sale 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, such as the Company's
NM III(TM), 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 contractions. 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 re-education 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(TM), 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.
<PAGE>
INTERFERENTIAL STIMULATION DEVICES. Interferential is another form of
electrical stimulation commonly used in physical therapy. The Company's IF
II(TM) 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 in the affected
area. The 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 25 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(TM), 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.
<PAGE>
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(TM))
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 eliminates 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 34% of revenue
in fiscal 1997 and 29% in fiscal 1996.
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 DISTRIBUTION
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:
o Valuable clinician time is not devoted to repeat therapies over
an extended time period, providing the clinician with additional
time for new patients.
o 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.
o 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.
<PAGE>
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 and respond 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.
The Company continues 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. During fiscal 1997 the Company increased its sales to that
distributor by 32% as the program continued to expand. The Company is also
attempting to expand international sales in Western Europe.
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 was a product line designed for
cumulative trauma disorders, such as carpal tunnel syndrome. During fiscal 1996,
it received a patent on its CTDx Electrostimulation System. That system includes
a SmartBrace wrist splint, 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. Its second product in that area is the Ortho Dx Electrotheraphy System
designed to speed the recovery from knee-surgery and, at the same time, reduce
the costs of such procedures.
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
<PAGE>
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 has
received certification of its 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. During fiscal year 1997 the Company
submitted several more patent applications for approval. These applications are
pending. 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
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
<PAGE>
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, 1997, the Company had 92 full time employees,
including 26 in sales and marketing, 8 in research and development, 32 in
manufacturing, and 26 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 approximately 5,000 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 to certain claims,
legal actions and complaints arising in the ordinary course of business.
Management does not believe that the resolution of such matters has had or will
have a material impact on the Company's results of operations or financial
position.
ITEM 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 quarter ended June 30, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company trades 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, 1997
First Quarter 4 5/16 3
Second Quarter 4 1/4 2 3/8
Third Quarter 4 1/4 2 7/8
Fourth Quarter 3 3/4 2 3/4
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
The last sale price reported by Nasdaq on September 16, 1997 was
$3.6875. As of September 16, 1997, there were approximately 380 shareholders of
record (not including beneficial holders) and the Company estimates there were
approximately 1,000 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 25 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 physicians. In fiscal 1992, the
Company began distributing directly to patients. Clinical versions of the
Company's electrotherapy modalities are placed with physicians, physical
therapists and other health care providers who refer home versions of those
modalities to patients after determining the most appropriate treatment. An
inventory of home units is left on consignment with such providers.
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.
<PAGE>
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
------------------
1997 1996
---- ----
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 25.1 26.8
Gross profit 74.9 73.2
Operating expenses -
Selling, general and administrative 60.8 59.9
Research and development 4.8 5.7
Total operating expenses 65.6 65.6
Operating income 9.3 7.6
Other expense 1.8 2.5
Provision for income taxes 2.4 1.9
Net income 5.1 3.2
COMPARISON OF YEAR ENDED JUNE 30, 1997 TO YEAR ENDED JUNE 30, 1996
Revenue was $10,991,000 in fiscal 1997, a 26% increase from $8,703,000
in fiscal 1996. Net sales and rental revenue from direct distribution to
patients increased 31% to $8,835,000 from $6,733,000 and accounted for
approximately 80% of total revenue in fiscal 1997 and 77% in fiscal 1996. The
increase was due primarily to a 23% increase in the number of new patients
receiving the Company's products in fiscal 1997. Revenue from the Company's
traditional dealer business increased 9% to $2,156,000 from $1,970,000 during
fiscal 1997. That increase was equally spread between domestic and international
sales.
Gross profit was $8,231,000 or 75% of revenue in fiscal 1997 compared
with $6,370,000 or 73% of revenue in fiscal 1996. Margins on dealer business
were 48% in fiscal 1997 and 50% in fiscal 1996. The variance is due primarily to
product mix. Margins on direct sales and rentals were 80% in both fiscal 1997
and fiscal 1996.
Selling, general and administrative expenses increased 28% to
$6,683,000 in fiscal 1997 from $5,210,000 in fiscal 1996. As a percent of
revenue, those expenses increased from 60% to 61% of sales due primarily to
additional provision for uncollectible receivables recorded during the year. The
Company also incurred additional marketing expense in connection with the
introduction of its new CTDx product line.
Research and development expense was $528,000 or 5% of revenue in
fiscal 1997 compared with $495,000 or 6% of revenue in fiscal 1996. The
additional expense related to expansion of the CTDx product line and development
of the new Ortho Dx product.
Operating income was $1,021,000 in fiscal 1997 compared with $665,000
in fiscal 1996 as a result of the increase in revenues and careful management of
costs and expenses. Net income was $564,000 in fiscal 1997 compared with
$282,000 in fiscal 1996. The effective income tax rate of 32% for fiscal 1997
was lower than the 37% effective rate for fiscal 1996 due to creation of a tax
advantaged Foreign Sales Corporation (FSC) and a reduction of excess liability
recorded in previous years.
<PAGE>
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 distribution to patients
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 in revenue
was due primarily to a change in mix of business with fewer sales and more
rentals. Revenue from the Company's traditional dealer 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 continued 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 dealer business
were 50% in fiscal 1996 and 47% in fiscal 1995. The variance is due primarily to
product mix as selling prices were 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 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 CTDx product line.
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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash of $545,000 from operations in fiscal 1997
after using cash of $525,000 in fiscal 1996. The change was primarily
attributable to a decrease of $127,000 in inventories during fiscal 1997
compared with an increase of $760,000 in inventories during fiscal 1996. The
cash required to increase inventories in fiscal 1996 related to both clinical
units and consignment units required to expand the direct distribution business.
A more stable number of sales representatives and efforts to utilize inventories
more efficiently provided cash in fiscal 1997. The change in cash during fiscal
1997 was also attributable to the increase in net income, less the impact of a
decrease in depreciation from $252,000 to $149,000, plus a decrease in the
provisions for deferred income taxes from $233,000 to $79,000
Operations have previously required significant amounts of cash to fund
increases in receivables. Net receivables increased $345,000 in fiscal 1997 and
$301,000 in fiscal 1996. During fiscal 1997, the Company provided an additional
$1,362,000 for uncollectible receivables and wrote off $1,419,000 of accounts it
considered uncollectible, for a net decrease of $57,000 in the reserve for
uncollectible accounts. As a percent of receivables, the reserve therefore
decreased from 21% to 19%. During fiscal 1996, the Company had increased its net
reserve for uncollectible accounts by $811,000, from 12% to 21% of receivables.
The reserve for uncollectible accounts is determined after considering
various factors including historical trends, relationship and experience with
insurance or other third party payors and patient responsibility for charges.
The Company believes that its current reserve for uncollectible accounts is
adequate. However, it will be necessary to continue maintaining a significant
reserve to cover instances where the extent of insurance coverage cannot be
verified prior to distributing home units to patients.
Cash of $162,000 was used in investing activities in fiscal 1997
compared with $110,000 in fiscal 1996. Most of the usage related to purchases of
property and equipment and expenses related to new patents.
<PAGE>
Financing activities used cash of $369,000 in fiscal 1997 compared with
providing $612,000 of cash in fiscal 1996. The Company entered into a $600,000
term loan agreement in fiscal 1996, primarily to finance its increase in
inventories. In fiscal 1997, the Company repaid $292,000 of long-term debt,
including that term loan, and also paid $215,000 on its revolving bank line of
credit compared with payments of $95,000 in fiscal 1996. The line of credit
provides for borrowings up to $2,000,000, limited by eligible accounts
receivable. At June 30, 1997, the borrowing base limit was approximately
$1,519,000 Borrowings under the line were $340,000 at June 30, 1997 and $555,000
at June 30, 1996. The Company anticipates that cash requirements during fiscal
1998 will be less than its available credit facility.
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of
Federal securities laws. The forward looking statements are subject to risks and
uncertainties, including, but not limited to, the risks related to fluctuations
in the Company's quarterly operating results; inventory and receivables
requirements for direct billed medical equipment sales; volatility in the
markets for electrotherapy; the effects of reimbursement and other governmental
or private agency actions on the Company's sales; 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 Accountants
Balance Sheets as of June 30, 1997 and 1996
Statements of Operations for the years ended June 30, 1997 and 1996
Statement of Changes in Stockholders' Equity for the years ended June
30, 1997 and 1996
Statements of Cash Flows for the years ended June 30, 1997 and 1996
Notes to Financial Statements
Supplemental Schedule for the years ended June 30, 1997 and 1996:
Schedule II - Valuation and Qualifying Accounts
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A)OF THE EXCHANGE ACT.
DIRECTORS
Director Principal occupation and business
Name Age since experience for past five years
- ------------------- ----- ---------- ----------------------------------
Robert C. Wingrove 65 June 1972 Chairman of the Board of the Company
since 1984; Chief Technical Officer of
the Company since 1990.
William R. Hibbs 54 August 1989 Partner with the Dorsey & Whitney law
firm (counsel to the Company) since
1974.
David B. Kaysen 48 March 1992 President and Chief Executive Officer
of the Company since March 1992.
Donn O. Berkeland 39 June 1992 Founder, President and Chief Executive
Officer of Two Rivers Center, Inc. (an
outpatient physical therapy and sports
medicine clinic located in Coon Rapids,
Minnesota) since 1981.
John H. P. Maley 62 December 1996 Chairman of Magister Corporation (a
developer and marketer of consumer
healthcare products) since July 1995;
from March 1976 to December 1994,
Chairman and CEO of Chattanooga Group
(a manufacturer of physical therapy
products).
Richard E. Jahnke 49 January 1997 President and Chief Operating Officer
of CNS, Inc. (a manufacturer of
consumer products, including the
Breathe Right nasal strip) since 1993;
from 1991 to 1993, Executive Vice
President and Chief Operating Officer
of Lemna Corporation (a manufacturer
of waste water treatment systems).
EXECUTIVE OFFICERS
Name Age Position
- -------------------- ----- ------------------------------------------------
Robert C. Wingrove 65 Chairman and Chief Technical Officer
David B. Kaysen 48 President and Chief Executive Officer
W. Glen Winchell 50 Vice President of Finance and
Chief Financial Officer
William J. Sweeney 54 Vice President of Sales and Marketing
See the biographical information on Messrs. Wingrove and Kaysen under Directors.
W. Glen Winchell started with the Company as Vice President of Finance and Chief
Financial Officer in September 1993. From December 1990 to September 1993, he
was self-employed as a financial consultant and owner/operator of several small
retail businesses.
William J. Sweeney started with the Company as Vice President of Sales and
Marketing in April 1996. From June 1993 to April 1996, he was employed by CIRCON
and Surgitek, Inc., a company acquired by CIRCON, both manufacturers of surgical
products, most recently as Corporate Business Development Manger. From May 1992
to May 1993, he was Director of Sales for Applied Medical Resources, a
distributor of vascular, urology and surgical products.
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors and persons who beneficially own more than 10 percent (10%) of the
Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (SEC).
Executive officers, directors and greater than ten percent (10%) beneficial
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Mr. Wingrove, an officer of the Company, filed late a report on Form 4 reporting
exercise of an option to purchase 30,000 shares of the Company's common stock
and his related surrender of 19,535 shares of such stock as consideration for
the exercise price. The Company believes that, except with respect to the
foregoing report, its executive officers and directors complied with all
applicable Section 16(a) filing requirements during and with respect to the
fiscal year ended June 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the cash and noncash compensation awarded to or
earned by the Chief Executive Officer of the Company and each executive officer
of the Company who earned salary and bonus in excess of $100,000 during the
fiscal year ended June 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- (2) All
------------ Other
Name and Other Compensation
Principal Position Year Salary Bonus Compensation Options (3) (4)
------------------ ---- ------ ----- ------------ ----------- ---
<S> <C> <C> <C> <C> <C> <C>
David B. Kaysen 1997 $163,125 $28,260 - 15,000 $750
President and Chief 1996 155,531 - - 15,000 904
Executive Officer 1995 141,659 - - 15,000 420
Robert C. Wingrove 1997 $125,800 $19,042 - 10,000 $753
Chief Technical 1996 121,500 - - 10,000 842
Officer 1995 115,500 - - 15,000 524
W. Glen Winchell 1997 $ 97,692 $16,302 - 5,000 $759
Vice President of 1996 91,875 - - 10,000 788
Finance and Chief 1995 79,000 1,280 - 20,000 500
Financial Officer
William J. Sweeney 1997 $ 90,599 $16,325 20,000 (1) 10,000 $763
Vice President of Sales 1996 20,249 - - 30,000 -
and Marketing (5)
- ----------
<FN>
(1) Represents relocation expense allowance.
(2) The Company did not award any restricted stock or make any
long-term incentive payments to executives.
(3) Represents the number of shares of Company common stock that can be
purchased upon the exercise of stock options granted during the year.
(4) Represents Company contributions to a 401 (k) plan.
(5) Mr. Sweeney was employed as Vice President of Sales and Marketing
in April 1996.
</FN>
</TABLE>
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table sets forth information relating to options granted during
the twelve months ended June 30, 1997 to the executive officers listed in the
Summary Compensation Table.
<TABLE>
<CAPTION>
Number of % of Total Options
Shares Granted to
Underlying Employees in
Name Options Fiscal Year Exercise Price Expiration Date
- -------------- ------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Mr. Kaysen 15,000 23.1% $3.3125 9/9/01
Mr. Wingrove 10,000 15.4% $3.3125 9/9/01
Mr. Winchell 5,000 7.7% $3.3125 9/9/01
Mr. Sweeney 10,000 15.4% $3.3125 9/9/01
</TABLE>
OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table summarizes the value of options held at the end of fiscal
1997 by the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at End of Fiscal 1997 at End of Fiscal 1997 (2)
Acquired Value ----------------------------- -------------------------
on Realized
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Kaysen 100,000 $162,500 30,000 30,000 $34,688 $20,625
Mr. Wingrove 80,000 $111,250 23,000 22,000 $28,000 $17,000
Mr. Winchell - - 41,000 24,000 $54,688 $25,000
Mr. Sweeney - - 14,000 26,000 $ 375 $ 1,500
--------
<FN>
(1) Represents the difference between fair market value at date of exercise
and the exercise price.
(2) Represents the difference between $3.50 (the last sales price at June 30, 1997) and the exercise
price multiplied by the number of shares
(3) The Company loaned Mr. Kaysen $162,500 for the acquisition of these
shares pursuant to a promissory note secured by 85,729 shares of
Company common stock owned by Mr. Kaysen and bearing interest at
the prime rate.
</FN>
</TABLE>
SEVERANCE AGREEMENTS
The Company has entered into Severance Pay Agreements with Mr. Kaysen, Mr.
Winchell and Mr. Sweeney which provide for certain payments in the event of a
change in control of the Company and the subsequent termination of the executive
by the Company without cause or voluntarily by the executive for good reason,
all as defined in the agreements. The terms of the agreement are two years. The
payments to be made in such event would be (i) the base salary earned and unpaid
through the date of termination; (ii) any earned and unpaid bonus with respect
to the fiscal year preceding the termination; (iii) a pro rata portion of any
bonus that would have been earned in the current fiscal year based on
annualizing the Company's financial and business performance through the date of
termination; (iv) any accrued vacation not taken; and (v) an amount equal to two
times Mr. Kaysen's and one times Mr. Winchell's and Mr. Sweeney's average
annualized cash compensation for the most recent five taxable years ending
before the date of change in control, or such portion of such period during
which such executive performed services for the Company. The agreements provide
<PAGE>
that no amounts be paid which would constitute "excess parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986 as
amended, or any successor provision or regulations promulgated thereunder.
COMPENSATION OF DIRECTORS
Directors who are not also officers or employees of the Company receive fees of
$1,000 per quarter; an option to purchase 2,500 shares of the Company's common
stock under its 1988 Restated Stock Option Plan on July 1 of each year; and are
reimbursed for their expenses in attending board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of September 16, 1997, certain information
with respect to beneficial ownership of the Company's Common Stock as to (i)
each person or entity known by the Company to own beneficially more than 5% of
the Company's Common Stock; (ii) each director of the Company; (iii) each
executive officer of the Company named in the Summary Compensation Table; and
(iv) all executive officers and directors as a group. Except as indicated by
footnote, the persons named in the table below have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.
Shares Beneficially
Owned (1) Percent Owned
---------------------- -------------------
Woodland Partners LLC 865,200 (2) 17.8
60 South Sixth Street
Minneapolis, MN 55402
U.S. Bancorp 424,450 (3) 8.7
601 Second Avenue South
Minneapolis, MN 55402
Heartland Advisors, Inc. 400,000 8.2
790 North Milwaukee Street
Milwaukee, WI 53202
Robert K. Anderson 360,660 7.4
8070 No. Coconino
Paradise Valley, AZ 85253
Robert E. Buuck 272,500 (4) 5.6
9900 Bren Road East, Suite 421
Minneapolis, MN 55343
Robert C. Wingrove 209,684 4.3
David B. Kaysen 128,010 2.6
W. Glen Winchell 63,012 1.3
William J. Sweeney 20,000 *
William R. Hibbs 81,499 1.7
Donn O. Berkeland 25,000 *
John H. P. Maley 4,500 *
Richard E. Jahnke 4,500 *
All Directors and Officers 536,205 10.6
as a group (8 persons)
*Less than 1%
<PAGE>
(1) Includes for Mr. Wingrove, Mr. Kaysen, Mr. Winchell, Mr. Sweeney,
Mr. Hibbs, Mr. Berkeland, Mr. Maley, Mr. Jahnke and all directors and
officers as a group, 32,000 shares; 42,000 shares; 58,000 shares; 20,000
shares; 12,500 shares; 12,500 shares; 4,500 shares; 4,500 shares;and
186,000 shares, respectively, which can be purchased by exercise of
options which become exercisable within 60 days.
(2) Woodland Partners LLP has sole voting power for 732,100 of these shares.
(3) Includes 3,750 shares for which First Bank System, Inc. has shared
dispositive power.
(4) Includes 187,500 shares held by the Buuck Family Partnership of which
Mr. Buuck is the trustee.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
William R. Hibbs, a director of the Company, is a partner of Dorsey & Whitney
LLP. Dorsey & Whitney LLP provides legal services to the Company.
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)
<PAGE>
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.(g)
10.13 Form of Severance Pay Agreement (h)
10.14 Stock Pledge Agreement and Promissory Note dated March 11, 1997
between the Company and David B. Kaysen
23.1 Consent of Independent Public Accountants - Price Waterhouse LLP
23.2 Consent of Independent Public Accountants - Arthur Andersen LLP
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 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)
(g) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1996 (File Number 0-9407)
(h) Management contract
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended June 30, 1997.
<PAGE>
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 25, 1997 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 25, 1997
- ---------------------------------------------
Robert C. Wingrove
/s/ David B. Kaysen President, Chief Executive Officer September 25, 1997
- ---------------------------------------------
David B. Kaysen
Vice President of Finance
(Principal Financial and
/s/ W. Glen Winchell Accounting Officer) September 25, 1997
- ---------------------------------------------
W. Glen Winchell
/s/ Donn O. Berkeland Director September 25, 1997
- ---------------------------------------------
Donn O. Berkeland
Director September 25, 1997
- ---------------------------------------------
William R. Hibbs
/s/ Richard E. Jahnke Director September 25, 1997
- ---------------------------------------------
Richard E. Jahnke
/s/ John H.P. Maley Director September 25, 1997
- ---------------------------------------------
John H.P. Maley
</TABLE>
<PAGE>
Rehabilicare Inc.
Financial Statements as of
June 30, 1997 and 1996 and
Supplemental Schedule
Together With Report of
Independent Public Accountants
<PAGE>
Report of Independent Accountants
August 8, 1997
To the Board of Directors and
Shareholders of Rehabilicare, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Rehabilicare,
Inc. at June 30, 1997 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above. The financial
statements of the Company for the year ended June 30, 1996 were audited by
other independent accountants whose report dated August 9, 1996 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
<PAGE>
REHABILICARE INC.
BALANCE SHEETS AS OF JUNE 30
<TABLE>
<CAPTION>
ASSETS 1997 1996 LIABILITIES AND STOCKHOLDERS' 1997 1996
----------- ----------- EQUITY ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 46,529 $ 32,553 Note payable $ 340,000 $ 555,000
Receivables, less reserve for Current maturities of
uncollectible accounts of long-term debt 296,250 293,890
$1,353,000 and $1,410,000 5,850,686 5,506,121 Accounts payable 472,674 529,523
Accrued liabilities -
Payroll 213,296 87,954
Inventories - Commissions 185,015 178,118
Raw materials 497,206 542,439 Taxes 197,573 145,120
Finished goods 2,032,210 2,056,868 Other 52,693 95,461
--------- --------- ------ ------
Deferred income tax benefit 575,000 496,000
Prepaid expenses 216,998 260,749 Total current liabilities 1,757,501 1,885,066
------- -------
LONG-TERM DEBT 1,957,834 2,251,908
Total current assets 9,218,629 8,894,730
COMMITMENTS AND CONTINGENCIES
(Note 7)
PROPERTY AND EQUIPMENT:
Land 150,000 150,000 STOCKHOLDERS' EQUITY:
Building 1,615,431 1,607,885 Preferred stock, not par value;
Clinical and rental equipment 1,296,295 1,353,851 authorized 5,000,000 shares;
Production equipment 822,026 783,894 none issued and outstanding - -
Office furniture and equipment 1,052,711 1,001,605 Common stock, $.10 par value;
--------- --------- authorized 10,000,000 shares;
4,936,463 4,897,235 issued and outstanding 4,853,590
Less accumulated depreciation and 4,670,288 shares 485,359 467,029
and amortization (2,618,667) (2,470,155) Additional paid-in capital 5,546,759 5,264,448
---------- ---------- Less note receivable from
Total property and equipment 2,317,796 2,427,080 officer/stockholder (162,500) -
Retained earnings 2,017,101 1,453,359
Intangible assets 28,129 - --------- ---------
Other assets 37,500 - Total stockholders' equity 7,886,719 7,184,836
----------- ----------- --------- ---------
$11,602,054 $11,321,810 $11,602,054 $11,321,810
=========== =========== =========== ===========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
REHABILICARE INC.
STATEMENTS OF OPERATIONS
For the Years Ended June 30
1997 1996
------------ ------------
NET SALES AND RENTAL REVENUE $ 10,991,105 $ 8,703,418
COST OF SALES AND RENTALS 2,759,633 2,333,704
--------- ---------
Gross profit 8,231,472 6,369,714
OPERATING EXPENSES:
Selling, general and administrative 6,682,899 5,209,753
Research and development 527,845 495,398
------- -------
7,210,744 5,705,151
--------- ---------
Income From Operations 1,020,728 664,563
OTHER INCOME (EXPENSE):
Interest expense (249,233) (231,632)
Other income 57,247 14,332
------ ------
(191,986) (217,300)
-------- --------
Income before income taxes 828,742 447,263
PROVISION FOR INCOME TAXES 265,000 165,000
------- -------
Net income $ 563,742 $ 282,263
============ ===========
NET INCOME PER COMMON SHARE AND COMMON SHARE $ 0.12 $ 0.06
EQUIVALENTS ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON 4,886,714 4,868,633
SHARE EQUIVALENTS OUTSTANDING ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
REHABILICARE INC
Statements of Changes in Stockholders' Equity
For the Years Ended June 30
<TABLE>
<CAPTION>
Note
Additional Receivable
Common Stock Paid-In From Officer/ Retained
Shares Amount Capital Stockholder Earnings Total
---------------------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options and related
tax benefits 181,965 18,196 277,618 (162,500) - 133,314
Common stock issued through Employee
Stock Purchase Plan 1,337 134 4,693 - - 4,827
Net income - - - - 563,742 563,742
------------ ------------- ------------- ------------- ----------- -----------
BALANCE, June 30, 1997 4,853,590 $ 485,359 $5,546,759 $ (162,500) $2,017,101 $7,886,719
========= =========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
REHABILICARE INC.
STATEMENTS OF CASH FLOWS
For the Years Ended June 30
1997 1996
------------ ------------
OPERATING ACTIVITIES
Net income $ 563,742 $ 282,263
Adjustments to reconcile net income
to net cash generated by or used in
operating activities:
Depreciation 148,512 252,020
Deferred income taxes (79,000) (233,000)
Loss on disposition of property
and equipment 2,478
Changes in current assets and liabilities:
Receivables (344,565) (300,836)
Inventories 127,447 (730,453)
Prepaid expenses 43,751 23,062
Accounts payable (56,849) 43,389
Accrued liabilities 141,924 136,104
------- -------
Net cash generated by or used in
operating activities 544,962 (524,973)
------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net (96,784) (109,891)
Increase in intangible assets (28,129) -
Increase in other assets (37,500) -
-------- ---------
Net cash used in investing activities (162,413) (109,891)
-------- --------
FINANCING ACTIVITIES
Principal borrowings (repayments) on
long-term debt, net (291,714) 553,098
Proceeds from (payments on) line of credit, net (215,000) (95,000)
Proceeds from exercise of stock options 133,314 130,148
Proceeds from purchases of stock by employees 4,827 23,467
----- ------
Net cash provided or used in financing
activities (368,573) 611,713
-------- -------
Net increase (decrease) in cash 13,976 (23,151)
CASH AT BEGINNING OF YEAR 32,553 55,704
------ ------
CASH AT END OF YEAR $ 46,529 $ 32,553
========= ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 249,233 $ 231,632
========= ==========
Income taxes $ 284,183 $ 125,391
========= ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
REHABILICARE INC.
Notes to Financial Statements
June 30, 1997 and 1996
1. ORGANIZATION:
Rehabilicare Inc. (the Company), is a designer, manufacturer and provider of
electromedical pain management and rehabilitation products and services used for
clinical, home health care and occupational medicine applications. The primary
market for the Company's products is in the United States.
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 health care providers.
Revenue is recognized at the time of shipment to dealers and health care
providers or upon notification from a health care provider that equipment has
been prescribed and provided to a patient. All revenue is recognized net of
estimated sales allowances and returns.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Revenue from rental and sale of products directly to patients and health care
providers accounted for approximately 80 percent of total revenue in fiscal 1997
and 77 percent in fiscal 1996. A significant portion of the related receivables
are from insurance companies or other third-party reimbursing agents. The nature
of these receivables within 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.
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 revenue and expenses during the reporting period.
Ultimate results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market. Finished goods includes products held on consignment by health care
providers or other third parties for rental or sale to patients.
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method for financial reporting proposes and accelerated methods
for income tax reporting purposes. Estimated useful lives for financial
reporting purposes are as follows:
Building 39 years
Office furniture and equipment 3-10 years
Production equipment 3-5 years
Clinical and rental equipment 5 years
INTANGIBLE ASSETS
Intangible assets consist primarily of patents. These assets are being
amortized using the straight-line method over estimated useful lives of 14
years.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments primarily consist of cash, receivables and
payables for which current carrying amounts approximate fair market value.
Additionally, interest rates on outstanding borrowings are at rates which
approximate market rates for borrowings with similar terms and average
maturities
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128 "Earnings per Share." SFAS No. 128
requires dual presentation of basic earnings per share and diluted earnings per
share and is required to be adopted by the Company during fiscal 1998.
Implementation of SFAS No. 128 is not expected to have a material effect on
reported earnings per share.
3. Notes Payable:
The Company maintains a revolving line of credit with a bank which provides for
borrowings up to $2,000,000, limited by eligible receivables, as defined. The
borrowing base limit and amounts outstanding at June 30, 1997 were $1,518,800
and $340,000, respectively. Borrowings under this line bear interest, payable
monthly, at the bank's prime rate (8.5% at June 30, 1997). Amounts outstanding
are collateralized by receivables, inventories, furniture and equipment. The
Company was in compliance with all financial covenants contained in the credit
agreement as of June 30, 1997.
<PAGE>
Selected data on the Company's borrowings under its revolving line of credit is
shown below:
1997 1996
---------- ----------
Average balance outstanding $ 534,000 $ 817,000
Maximum balance outstanding $ 845,000 $1,095,000
Weighted average interest rate 8.3% 8.5%
4. Long-Term Debt:
Long-term obligations at June 30 consisted of the following:
1997 1996
----------- ------------
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 $ 742,942 $ 762,418
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 734,596 749,372
Notes payable, principal and interest due in
monthly installments through June 1999,
interest at prime (8.5% at June 30, 1997),
collateralized by the Company's receivables,
inventories, furniture and equipment 399,996 600,000
Capital lease obligations 327,175 384,634
Other 49,375 49,374
------ ------
2,254,084 2,545,798
Less-Current maturities (296,250) (293,890)
-------- --------
$1,957,834 $2,251,908
========== ==========
Under terms of the various loan agreements, the Company must meet certain
financial covenants, including maintaining certain levels of stockholders'
equity and meeting or exceeding certain financial ratios. As of June 30, 1997,
the Company was in compliance with all such covenants relating to significant
loan agreements.
Future maturities due in each fiscal year with respect to long-term debt,
excluding obligations under capital leases, are as follows:
1998 $ 237,216
1999 240,429
2000 43,939
2001 47,753
2002 51,905
Thereafter 1,305,667
---------
$ 1,926,909
===========
<PAGE>
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:
1998 $ 59,034
1999 61,235
2000 66,468
2001 52,042
2002 47,248
Thereafter 41,148
------
$ 327,175
=========
5. 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.
The following summarizes the components of the provision for taxes:
1997 1996
----------------- -------------------
Currently payable:
Federal $311,000 $322,000
State 33,000 76,000
Deferred (79,000) (233,000)
------- --------
$265,000 $165,000
======== ========
A reconciliation of the Company's reported provision for income taxes as
compared to that using statutory federal rates follows:
1997 1996
------------------- -------------------
Statutory rate applied to
income before taxes $282,000 $152,000
State income taxes, net of
federal tax benefit 30,000 19,000
Other (47,000) (6,000)
------- ------
$265,000 $165,000
======== ========
A summary of deferred income tax benefits as of June 30 is as follows:
1997 1996
--------------- ----------------
Deferred tax benefits arising from:
Reserve for uncollectible accounts $472,000 $384,000
Accruals and other reserves 132,000 149,000
Depreciation (76,000) (84,000)
Uniform capitalization 47,000 47,000
------ ------
$575,000 $496,000
======== ========
<PAGE>
6. Stockholders' Equity:
Stock Options
The Company has 925,000 shares of its common stock reserved under its 1988
Restated Stock Option Plan for issuance to key employees, consultants, or other
persons providing valuable services to the Company. 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:
Option Price on Dates
of Grants Number of Shares
--------------------- ----------------
Balance outstanding at 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 at June 30, 1996 $0.750 -$4.750 445,500
Granted 3.3125 - 4.313 92,500
Exercised 0.750 - 2.109 (201,500)
Canceled 1.875 - 4.313 (6,000)
----- ----- ------
Balance outstanding at June 30, 1997 $0.750 - 4.750 330,500
=======
Exercisable at June 30, 1997 $0.875 - 4.750 173,000
=======
Available for grant at June 30, 1997 113,840
=======
In fiscal year 1997, the Company adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the Company's stock plans. Had compensation expense
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1997 1996
-------------- ---------------
Net Income As reported $563,742 $282,263
Pro forma 511,041 247,943
Net income per share
As reported $ .12 $ .06
Pro forma .10 .05
Pro forma net income reflects only options and other stock based awards granted
in 1997 and 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented because compensation cost is reflected over the
options' vesting periods, which are normally five years, and compensation cost
for options granted prior to fiscal year 1996 is not considered.
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: dividend yield of 0%; expected
volatility of 61.95%; risk-free interest rate of 6.2% and 6.0%; and expected
lives of 4.5 years.
The weighted-average fair value per option at the date of grant for options
granted in 1997 and 1996 was $2.01 and $1.95, respectively.
In March 1997, the Company loaned $162,500 to an officer for the exercise of
certain stock options. This loan is secured by a promissory note and a pledge of
85,729 shares of Company common stock and bears interest at the bank's prime
rate (8.5% on June 30, 1997). Payments are due quarterly, including accrued
interest, commencing in fiscal 1998 and ending in fiscal 2001.
At June 30, 1997 the Company had 75,000 warrants outstanding to purchase shares
of its common stock at $2.25 per share. The warrants expire in August 1998.
Stock Purchase Plan
The Company has reserved 200,000 authorized shares of its 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. Fair value disclosures under SFAS No. 123 have not been made for
shares acquired under this plan as such values are immaterial.
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 $34,399 and $27,288 to the plan for the years ended June 30,
1997 and 1996, respectively. No discretionary contributions were made for fiscal
1997 or fiscal 1996.
<PAGE>
REHABILICARE INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Balance at Balance
Beginning Net at End of
of Year Additions Deductions Year
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
RESERVE FOR UNCOLLECTIBLE ACCOUNTS:
Year ended June 30, 1996 $ 599,000 $ 812,000 $ 1,000 $1,410,000
Year ended June 30, 1997 1,410,000 1,362,000 1,419,000 1,353,000
RESERVE FOR WARRANTY REPAIRS:
Year ended June 30, 1996 61,900 -- 16,900 45,000
Year ended June 30, 1997 45,000 -- 15,000 30,000
RESERVE FOR INVENTORY OBSOLESCENCE:
Year ended June 30, 1996 213,000 65,000 -- 278,000
Year ended June 30, 1997 278,000 66,020 118,920 225,100
</TABLE>
<PAGE>
Exhibit 10.13
SEVERANCE PAY AGREEMENT
This Agreement is made as of the ____th day of May, 1997,
between Rehabilicare Inc., a Minnesota corporation (the "Company")and
_________________________("Executive").
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the
financial arrangements that the Company will provide to the Executive upon
Executive's separation from employment with the Company or with a subsidiary of
the Company or one of its subsidiaries under the circumstances described herein;
and
WHEREAS, this Agreement is adopted in the belief that it is in
the best interests of the Company and its shareholders to provide stable
conditions of employment for Executive, thereby minimizing personnel turnover
and enhancing the Company's and its subsidiaries' ability to recruit highly
qualified people.
NOW, THEREFORE, to assure the Company that it will have the
continued dedication of Executive notwithstanding the possibility, threat or
occurrence of a bid to take over control of the Company, and to induce Executive
to remain in the employ of the Company, and for other good and valuable
consideration, the Company and Executive agree as follows:
1. Term of Agreement.
This Agreement shall be for a two-year term commencing on the
date hereof. This Agreement may be renewed for additional one-year terms
thereafter upon written agreement of Executive and the Company; provided that
this Agreement shall continue for at least two years after a Change of Control
that occurs during the term of this Agreement.
2. Termination of Employment.
(i) If a Change in Control (as defined in Section 3(i) hereof)
occurs during the term of this Agreement and any of the following events occur
within two years after such Change of Control, the terminated Executive shall be
entitled to receive the cash payment provided in Section 4 hereof:
(a) the Company shall have exercised its right to
terminate the Executive without cause; or
(b) the Executive shall have voluntarily exercised
his option to terminate his employment for Good Reason (as
defined in Section 3(ii) hereof). Notice of election of this
option must identify the Executive who desires to terminate
his employment and set forth in reasonable detail the facts
and circumstances claimed to constitute Good Reason.
(ii) From and after the date of a Change in Control, the
Company shall have the right to terminate Executive from employment at any time
during the term of this Agreement for Cause (as defined in Section 3(iii)
hereof), by written notice to the Executive, specifying the particulars of the
conduct of Executive forming the basis for such termination, and Executive shall
not be entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during
the term of this Agreement, Executive shall not be removed from employment with
the Company except as provided in Section 2(i) or (ii) hereof or as a result of
Executive's Disability (as defined in Section 3(iv) hereof) or his death.
<PAGE>
Executive's rights upon termination of employment prior to a Change in Control
or after the expiration of the term of this Agreement shall be governed by the
standard employment termination policy applicable to Executive in effect at the
time of termination.
Any notice given by Executive pursuant to this Section 2 shall
be effective five (5) business days after the date it is given by Executive.
3. Definitions
(i) A "Change in Control" shall mean the occurrence of
any of the following events as a result of a transaction or series of
transactions:
(a) a change in control of the Company of a nature
required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), whether or
not the Company is then subject to such reporting requirement;
(b) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of securities of
the Company representing 50% or more of the combined voting
power of the Company's then outstanding securities;
(c) individuals who at the date hereof constitute the
Board of Directors of the Company cease to constitute a
majority thereof, provided that such change is the direct or
indirect result of a proxy fight and contested election for
positions on the Board; or
(d) the Board of Directors of the Company determines,
in its sole and absolute discretion, that there has been a
change in control of the Company.
Provided, however, that a Change of Control that results from any acquisition,
combination, merger or similar transaction under active consideration by the
Board of Directors on the date of this Agreement shall not be considered a
Change of Control as defined herein.
(ii) "Good Reason" shall mean the occurrence of any of
the following events:
(a) the assignment to Executive of employment
responsibilities which are not of comparable responsibility
and status as the employment responsibilities held by
Executive immediately prior to a Change in Control;
(b) a reduction by the Company in Executive's
compensation (including a change in the form of the bonus
compensation plan that makes less likely the achievement of a
targeted bonus) as in effect immediately prior to a Change in
Control;
(c) except to the extent otherwise required by
applicable law, the failure by the Company, or the entity that
acquires the Company, to continue in effect a material benefit
or compensation plan, stock ownership plan, stock purchase
plan, bonus plan, life insurance plan, health-and-accident
plan or disability plan in which Executive is participating
immediately prior to a Change in Control (or plans providing
Executive with substantially similar benefits), the taking of
any action by the Company which would adversely affect
Executive's participation in, or materially reduce Executive's
benefits under, any of such plans or deprive Executive of any
material fringe benefit enjoyed by Executive immediately prior
to such Change in Control, or the failure by the Company to
provide Executive with the number of paid vacation days to
which Executive is entitled immediately prior to such Change
in Control in accordance with the Company's vacation policy as
then in effect; or
<PAGE>
(d) the failure by the Company to obtain, as
specified in Section 6(i) hereof an assumption of the
obligations of the Company to perform this Agreement by any
successor to the Company.
For purposes of the foregoing, Executive shall not be considered to have been
assigned employment of lesser responsibility if Executive manages, has control
over, or serves in a similar position with a subsidiary, division or operating
unit of an acquiring entity that generates revenues of comparable amounts to the
revenues generated by the Company before such Change in Control. Notwithstanding
the foregoing, none of the forgoing events shall be considered "Good Reason" if
it occurs in connection with the Executive's death or disability.
(iii) "Cause" shall mean termination by the Company of
Executive's employment based upon (a) the willful and continued failure by
Executive substantially to perform his duties and obligations (other than any
such failure resulting from his incapacity due to physical or mental illness) or
(b) the willful engaging by Executive in misconduct which is materially
injurious to the Company or any of its subsidiaries, monetarily or otherwise.
For purposes of this paragraph, no act, or failure to act, on Executive's part
shall be considered "willful" unless done, or omitted to be done, by Executive
in bad faith and without reasonable belief that his action or omission was in
the best interests of the Company and its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition
which would qualify Executive for a disability benefit under the long-term
disability plan of the Company or the Subsidiary.
4. Benefits Upon Termination Under Section 2(i)
Upon the termination of the employment of Executive pursuant
to Section 2(i) hereof, Executive shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Executive under subparagraphs
(a) and (b) of this Section 4 shall be paid to Executive not later than one
business day prior to the date that the termination of Executive's employment
becomes effective.
(a) The Company shall pay to Executive (i) the full base
salary earned by him and unpaid through the date that the termination of
Executive's employment becomes effective, at the rate in effect at the time
written notice of termination (voluntary or involuntary) was given, (ii) any
amount earned by Executive as a bonus with respect to the fiscal year of the
Company preceding the termination of his employment if such bonus has not
theretofore been paid to Executive, (iii) an amount equal to a pro rata portion,
based on number of days elapsed, of the bonus Executive would have earned for
the year in which termination is effective, assuming for purposes or calculating
such bonus against any bonus or incentive plan, that the Company's financial and
business performance for the current compensation year through the date of such
termination is annualized, and (iii) an amount representing credit for any
vacation earned or accrued by him but not taken;
(b) In lieu of any further base salary payments to Executive
for periods subsequent to the date that the termination of Executive's
employment becomes effective, the Company shall pay as severance pay to
Executive a lump-sum cash amount equal to [one(1)/two (2)] times Executive's
average annualized cash compensation for the period consisting of the
Executive's most recent five taxable years ending before the date on which a
Change in Control occurs (or such portion of such period during which Executive
performed services for the Company); subject, however, to the restriction that
(i) Executive shall not be entitled under this Section 4(b) to receive more than
the amount that would be owed Executive had the Company paid Executive at the
rate of compensation in effect on the date of his termination for employment
from the date of termination to the date of Executive's 65th birthday, and (ii)
the Executive shall not be entitled to receive any amount pursuant to this
Agreement which constitutes an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended, or any successor
provision or regulations promulgated thereunder. In case of uncertainty as to
whether some portion of a payment might constitute an excess parachute payment,
the Company shall initially make the payment to the Executive and Executive
agrees to refund to the Company any amounts ultimately determined to be excess
parachute payments; and
<PAGE>
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise.
The amount of any payment or benefit provided in this Section 4 shall not be
reduced by any compensation earned by Executive as a result of any employment by
another employer.
5. Successors; Binding Agreement; Assignment.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may
not assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Modification; Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. Notice. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55112
If to Executive, to:
David B. Kaysen
c/o Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55112
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
<PAGE>
9. Severability. If any term or provision of this Agreement or
the application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
10. Headings. The headings in this Agreement are
inserted for convenience or reference only and shall not be a part of or control
or affect the meaning of this Agreement.
11. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
12. Governing Law/Arbitration. This Agreement has been
executed and delivered in the State of Minnesota and shall in all respects be
governed by, and construed and enforced in accordance with, the laws of the
State of Minnesota, including all matters of construction, validity and
performance. Notwithstanding the foregoing, any dispute as to the occurrence of
a "Change of Control," or as to "Good Reason," shall be settled by final and
binding arbitration in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes in effect as of the date of
this Agreement by a sole arbitrator. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. ss. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. Entire Agreement. This Agreement supersedes any and all
other oral or written agreements or policies made relating to the subject matter
hereof; provided that, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.
Rehabilicare Inc.
By _______________________________________
Its _____________________________________
------------------------------------------
Executive
<PAGE>
Exhibit 10.14
STOCK PLEDGE AGREEMENT
AGREEMENT, made this 11th day of March, 1997 by and between
David B. Kaysen, a resident of Bloomington, Minnesota ("Pledgor"), and
Rehabilicare, a Minnesota corporation ("Company").
WHEREAS, as of the eleventh day of March, 1997, Pledgor
exercised that certain stock option to purchase from Company, and Company sold
to Pledgor, One Hundred Thousand Shares (100,000) shares of Company's common
stock, by payment to the Company of one hundred and sixty two thousand five
hundred dollars ($162,500), the exercise price of such option (the "Exercise
Price");
WHEREAS, Pledgor has delivered to Company a promissory note
(the "Promissory Note") in an amount equal to, and as payment of, the Exercise
Price; and
WHEREAS, Company has required that Pledgor grant to Company,
and Pledgor is willing to grant to Company, a security interest in Eighty Five
Thousand Seven Hundred Twenty Nine (85,729) shares of such common stock (the
"Pledged Shares") pursuant to this agreement as security for the payment by
Pledgor of his obligations under the Promissory Note.
NOW THEREFORE, in consideration of the premises, the
respective covenants of Company and Pledgor set forth below and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Pledgor and Company agree as follows:
1. Pledge of Stock.
1.1 Pledge. As security for the prompt payment of any amount
at any time due, whether or not by acceleration, to Company from Pledgor
pursuant to the Promissory Note, Pledgor hereby grants a security interest to
Company in the Pledged Shares.
1.2 Delivery. Immediately upon execution of this agreement,
Pledgor will deliver to Company the certificates representing all of the Pledged
Shares, which certificates shall be endorsed in blank or with executed stock
powers attached.
2. Rights and Benefits of Pledged Shares.
2.1 General. Except as provided in section 2.2, Company shall
receive and hold (by Company or by an agent of Company) the Pledged Shares and
any property (including without limitation monies or securities) distributed or
issued with respect to the Pledged Shares, whether as a dividend, in partial or
complete liquidation, pursuant to a merger or reorganization plan or otherwise.
<PAGE>
Pledgor shall cause any securities distributed or issued with respect to the
Pledged Shares to be assigned and transferred to Company and delivered to
Company in the manner provided in section 1.2, and such securities shall be
subject to the terms and conditions of this agreement.
2.2 Voting. Unless and until a default is declared by
Company pursuant to section 5, Pledgor shall be entitled to vote the Pledged
Shares.
2.3 Assignment, Etc. Except as provided or specifically
permitted herein, Pledgor shall not pledge, sell, assign, transfer or otherwise
dispose of the Pledged Shares without the prior written approval of Company.
Pledgor may sell the Pledged Shares at any time, provided that all of the
proceeds from any such sale are applied to the Note. Company shall take such
actions as are necessary to facilitate such sale, including the delivery of a
certificate or certificates to a broker for Pledgor, subject to assignment of
all proceeds from such sale to Company.
3. Legend.
The certificates representing the Pledged Shares shall bear an
endorsement in substantially the following form:
"The shares of stock represented by this certificate are
pledged under, and are subject to the terms and conditions of
a Stock Pledge Agreement, dated March 11, 1997, between
Rehabilicare Inc. and the registered owner of this certificate
as security for the performance of the registered owner's
obligations under a promissory note to Rehabilicare Inc.. Such
shares cannot be sold, assigned, transferred, pledged or
disposed of except as provided in such Stock Pledge
Agreement."
4. Appointment of Company as Attorney-in-Fact.
Pledgor hereby appoints and constitutes Company as Pledgor's
true and lawful attorney-in-fact and with full power of substitution in the
premises to execute such assignments and/or endorsements of the Pledged Shares
as may be necessary to effect the rights and remedies which Company has under
this agreement in the event of a default under this agreement.
5. Event of Default.
The occurrence of an event of default under the Promissory
Note constitutes a default under this agreement.
Upon the occurrence of an event of default, Company shall have
the option to declare this agreement in default and thereupon Company is
authorized to exercise and shall have, in addition to the rights and remedies
provided in this agreement and all other applicable rights and remedies, the
<PAGE>
rights and remedies of a secured party under the Uniform Commercial Code of the
state of Minnesota and any other applicable laws. In particular, and without
limitation, Company is authorized at its option and without further notice or
demand, to cause the Pledged Shares to be transferred of record to Company or
its agent or nominee and shall be entitled to exercise all rights of ownership
in respect to the Pledged Shares and all property received with respect to the
Pledged Shares. Company shall also have the right to hold and vote the Pledged
Shares and, at its option and upon twenty (20) days' notice in writing to
Pledgor of such default, shall have the right to sell and transfer the Pledged
Shares and the property received with respect to the Pledged Shares or any
portion thereof at any public or private sale, including private placement based
upon investment representations, and for cash or such other consideration as
Company shall, in its sole discretion, determine to be reasonable, and Pledgor
shall have no right or equity of redemption in connection with any such sale;
provided, however, that during such twenty (20) day period Pledgor shall have
the right to cure any default by paying all obligations under the Promissory
Note, together with all expenses incurred by Company including, without
limitation, reasonable attorneys' fees and expenses in obtaining, holding and
preparing for sale the Pledged Shares and the property received with respect to
the Pledged Shares and in arranging for the sale. After deducting the expenses
of such sale, including reasonable attorneys' fees, the proceeds therefrom shall
be applied to the payment of Pledgor's obligations under the Promissory Note and
the surplus, if any, shall be paid to Pledgor.
6. Release of Collateral.
At such time as the Promissory Note has been paid in full,
Company shall deliver the Pledged Shares and any property distributed with
respect to the Pledged Shares to Pledgor in accordance with Pledgor's written
directions, and Pledgor shall thereafter be discharged in full from any and all
obligations under this agreement.
7. Delay; Waiver.
All rights and remedies of Company under this agreement are
cumulative and are in addition to, but not in limitation of, any rights or
remedies which it may have under applicable law. No delay on the part of Company
in the exercise of any right or remedy under this agreement shall operate as a
waiver thereof, and no single or partial exercise by Company of any right or
remedy under this agreement shall preclude other or further exercise thereof or
the exercise of any other right or remedy. No waiver by Company of any right or
remedy under this agreement shall be deemed to be or construed as a further or
continuing waiver of such right or remedy or as a waiver of any other right or
remedy.
8. Cooperation.
Upon the execution of this agreement and at any time or from
time to time thereafter, Pledgor and Company agree to cooperate in carrying out
the terms of this agreement, including the execution and delivery of such
further instruments and documents as may be reasonably requested in order to
more effectively carry out the terms and conditions of this agreement.
<PAGE>
9. Miscellaneous.
This agreement shall be binding upon, and inure to the benefit
of and be enforceable by Pledgor and Company and their respective successors and
assigns, but this agreement shall not be assignable without written permission
of the other party. The section headings are for reference purposes only and
shall not in any way affect the meaning or interpretation of this agreement.
This agreement shall be governed by, and, construed and enforced in accordance
with, the laws of the state of ____________.
IN WITNESS WHEREOF, Pledgor and Company have executed this
agreement as of the date set forth in the first paragraph.
REHABILICARE INC.
By _________________________________
W. Glen Winchell, Chief Financial Officer
----------------------------------
David Kaysen
<PAGE>
PROMISSORY NOTE
$162,500 Minneapolis, Minnesota
March 11, 1997
FOR VALUE RECEIVED, David B. Kaysen ("Maker") hereby promises
to pay to the order of Rehabilicare Inc., or its successors or assigns, as the
case may be ("Payee"), at 1811 Old Highway 8, New Brighton, MN 55112, or such
other place as may be specified in writing by Payee, the principal sum of One
Hundred Sixty Two Thousand, Five Hundred Dollars ($162,500.00) with simple
interest on the outstanding principal balance at an annual rate equal to the
rate of interest publicly announced by Norwest Bank Minnesota ("Bank") as its
prime rate ("Prime Rate"), calculated on the basis of a 360 day year and actual
days elapsed. The interest rate shall change when such Prime Rate changes and
shall be effective at the beginning of the first business day of the Bank
following each change in the Prime Rate.
The principal amount of this promissory note shall be paid in
Twelve (12) equal installments of Thirteen Thousand, Five Hundred and Forty One
Dollars and Sixty Six Cents ($13,541.66) each, the first of which shall be due
and payable on March 11, 1998 and the remaining eleven (11) of which shall be
payable quarterly thereafter on the last day of each calendar quarter commencing
on June 30, 1998, until December 31, 2000, when all remaining principal and
interest shall be payable. Accrued interest from the date hereof through March
11, 1998 shall be paid on March 11, 1998. Thereafter accrued interest shall be
payable quarterly on the last day of each calendar quarter commencing on June
30, 1998 until the maturity date, when all accrued interest shall be due and
payable.
Maker shall have the right to prepay all or any part of this
promissory note at any time without penalty or premium, but any such prepayment
shall be applied first to the payment of accrued interest then to the
installments of principal due hereunder in the inverse order of maturity.
Upon the occurrence of an event of default, Payee may, at
Payee's option, declare the unpaid principal amount of this promissory note and
any accrued interest thereon immediately due and payable. The following shall
constitute events of default for purposes of this promissory note:
(a) Failure by Maker to make timely payments of any of
the installments of principal or interest due
hereunder, which is not cured within fifteen (15)
days after written notice of such nonpayment is
delivered to Maker; or
(b) There shall have been filed or commenced against
Maker an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or
hereafter in effect or an action shall have been
commenced to appoint a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or
similar official) of Maker or for any substantial
part of Maker's property or for the winding-up or
<PAGE>
liquidation of Maker's affairs and such action or
proceeding shall not have been dismissed within sixty
(60) days; or
(c) Maker shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar
law now or hereafter in effect; or shall consent to
the entry of an order for relief in an involuntary
case under any such law; or shall consent to the
appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of Maker or
of any substantial part of Maker's property; or shall
make any general assignment for the benefit of
creditors; or shall take any action in furtherance of
any of the foregoing; or
(c) Default by Maker in the performance by Maker of any
of its covenants or commitments under a stock pledge
agreement, dated as of the date hereof, between Maker
and Payee, which default is not cured by Maker within
fifteen (15) days after written notice of default is
delivered to Maker.
This promissory note is secured by a security interest granted
to Payee in Eighty Five Thousand Seven Hundred and Twenty Nine (85,729) shares
of the Common Stock of Payee owned by Maker pursuant to a stock pledge
agreement, dated as of the date hereof, between Maker and Payee. Nothing in such
stock pledge agreement shall be deemed to diminish the Payee's rights to collect
this Note from Maker without foreclosing such stock pledge and Payee shall have
all rights at law and in equity necessary to enforce this note independent of
the stock pledge.
Maker hereby waives presentment for payment, notice of
dishonor, protest and notice of protest and, in the event of default hereunder,
Maker agrees to pay all costs of collection, including reasonable attorneys'
fees.
This promissory note shall be governed by the laws of the
state of Minnesota.
IN WITNESS WHEREOF, Maker has executed this promissory note as
of the date first above written.
------------------------------------
David B. Kaysen
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each Registration
Statement on Form S-8 (No. 33-26053, 33-63962 and 33-63964) of Rehabilicare,
Inc. of our report dated August 8, 1997 appearing in this Form 10-KSB.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
September 22, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated August 9, 1996 in the Rehabilicare Inc. Form 10-KSB for the year
ended June 30, 1997. It should be noted that we have not audited any financial
statements of Rehabilicare Inc. subsequent to June 30, 1996 or performed any
audit procedures subsequent to August 9, 1996, the date of our report.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 22, 1997
<PAGE>
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
these 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 direct distribution 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
distribution 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 revenue; that all the revenue 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. Although the Company believes that the
rehabilitation products it sells distinguish it from its competitors, there can
be no assurance that the Company will be able to compete effectively in the sale
or rental of its products.
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
<PAGE>
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 and Ortho Dx, 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 product
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 filed one other application but 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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 46,529
<SECURITIES> 0
<RECEIVABLES> 7,203,686
<ALLOWANCES> 1,353,000
<INVENTORY> 2,529,416
<CURRENT-ASSETS> 9,218,629
<PP&E> 4,936,463
<DEPRECIATION> 2,618,667
<TOTAL-ASSETS> 11,602,054
<CURRENT-LIABILITIES> 1,757,501
<BONDS> 1,957,834
0
0
<COMMON> 485,359
<OTHER-SE> 5,384,259
<TOTAL-LIABILITY-AND-EQUITY> 11,602,054
<SALES> 10,991,105
<TOTAL-REVENUES> 10,991,105
<CGS> 2,759,633
<TOTAL-COSTS> 7,402,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,177,200
<INTEREST-EXPENSE> 249,233
<INCOME-PRETAX> 828,742
<INCOME-TAX> 265,000
<INCOME-CONTINUING> 828,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 563,742
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</TABLE>
