<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to
______________.
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of small business issuer as specified in charter)
MINNESOTA 41-0985318
(State of Incorporation) (I.R.S. Employer Identification No.)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of Principal Executive Offices)
(651) 631-0590
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months or for
such shorter period that the registrant was required to file such reports and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding for each of the Issuer's classes of common
stock as of September 30, 1998 was:
COMMON STOCK, $.10 PAR VALUE 10,461,691 SHARES
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes No X
--- ---
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of September 30, 1998 and June 30, 1998
Consolidated Statements of Operations for the Three Months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Three Months ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 329,158 $ 919,765
Receivables, less reserve for uncollectible accounts
of $3,737,024 and $3,109,448 15,473,836 12,660,677
Inventories -
Raw materials 1,519,086 2,252,897
Work in process 202,047 249,277
Finished goods 7,435,363 4,292,870
Deferred income taxes 2,197,724 2,197,724
Prepaid expenses 237,861 300,827
------------ ------------
Total current assets 27,395,075 22,874,037
------------ ------------
PROPERTY AND EQUIPMENT 9,566,268 11,915,732
Less accumulated depreciation and amortization (6,168,322) (8,544,578)
------------ ------------
Total property and equipment 3,397,946 3,371,154
------------ ------------
Intangible assets, net of accumulated amortization
of $1,984,265 and $1,983,764 476,709 477,210
Deferred income taxes 302,859 302,859
Other assets 30,773 35,098
------------ ------------
$ 31,603,362 $ 27,060,358
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 1,100,000 $ --
Current maturities of long-term debt 903,519 404,172
Accounts payable 1,776,185 1,110,366
Accrued liabilities -
Payroll 333,438 699,123
Commissions 832,681 458,783
Taxes 187,358 --
Other 736,172 996,979
------------ ------------
Total current liabilities 5,869,353 3,669,423
LONG-TERM DEBT 4,980,987 3,299,705
------------ ------------
Total liabilities 10,850,340 6,969,128
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 1,045,340 1,044,337
Additional paid-in capital 20,663,562 20,641,922
Less note receivable from officer/stockholder (237,500) (237,500)
Retained earnings (718,380) (1,357,529)
------------ ------------
Total stockholders' equity 20,753,022 20,091,230
------------ ------------
$ 31,603,362 $ 27,060,358
------------ ------------
------------ ------------
</TABLE>
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------
1998 1997
------------- ----------------
<S> <C> <C>
Net sales and rental revenue $ 9,084,333 $ 8,256,520
Cost of sales and rentals 2,445,647 2,538,467
------------ ------------
Gross profit 6,638,686 5,718,053
Operating expenses:
Selling, general and administrative 5,180,099 4,953,468
Research and development 234,373 235,471
Acquisition expense 79,107 ---
------------ ------------
5,493,579 5,188,939
------------ ------------
Income from operations 1,145,107 529,114
Other income (expense):
Interest expense (116,583) (97,789)
Other income 2,624 31,587
------------ ------------
Income before income taxes 1,031,148 462,912
Provision for Income Taxes 392,000 83,000
------------ ------------
Net income $ 639,148 $ 379,912
------------ ------------
------------ ------------
Net income per common share and common
equivalent share
Basic $ 0.06 $ 0.04
------------ ------------
------------ ------------
Diluted $ 0.06 $ 0.04
------------ ------------
------------ ------------
Weighted average number of shares outstanding
Basic
10,450,111 10,388,781
------------ ------------
------------ ------------
Diluted
10,477,163 10,461,531
------------ ------------
------------ ------------
</TABLE>
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
--------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 639,148 $ 379,912
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 65,684 299,719
Changes in current assets and liabilities
Receivables (278,159) (322,912)
Inventories (1,246,452) (65,352)
Prepaid expenses 62,966 240,211
Accounts payable 665,819 (26,188)
Accrued liabilities (65,237) 45,814
-------------- ------------
Net cash provided by (used in) operating activities (156,231) 551,204
-------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment (87,649) (477,840)
Cash paid in asset acquisition (3,650,000) ---
-------------- ------------
Net cash used in investing activities (3,737,649) (477,840)
-------------- ------------
FINANCING ACTIVITIES
Proceeds from new financing 2,500,000 277,527
Principal payments on long-term obligations (319,370) (142,182)
Proceeds from (payments on) line of credit, net 1,100,000 305,000
Equity transactions 22,643 24,729
Adjustment for pooling --- (767,191)
-------------- ------------
Net cash provided by (used in) financing activities 3,303,273 (302,117)
-------------- ------------
Net decrease in cash and cash equivalents (590,607) (228,753)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 919,765 2,654,118
-------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 329,158 $ 2,425,365
-------------- ------------
-------------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 116,583 $ 97,789
-------------- ------------
-------------- ------------
Income taxes paid $ 30,150 $ 170
-------------- ------------
-------------- ------------
</TABLE>
<PAGE>
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited
as of and for the periods ended September 30, 1998 and 1997, but in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the results for
the periods presented. Such results are not necessarily indicative of
results for the full year. The significant accounting policies and certain
financial information which are normally included in financial statements
prepared in accordance with generally accepted accounting principles, but
which are not required for interim reporting purposes, have been omitted.
The accompanying financial statements of the Company should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-KSB.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information." This statement, which must be adopted
by the company for the fiscal year ending June 30, 1999, establishes new
standards for reporting information about operating segments in annual and
interim financial statements. Under SFAS No. 131, operating segments are
determined consistent with the way management organizes and evaluates
financial information internally for making decisions and assessing
performance. SFAS No. 131 also requires related disclosures about products,
geographic areas, and major customers. Implementation of this disclosure
standard will not affect the company's results of operations, cash flows or
financial position.
2. MERGER
On March 17, 1998, pursuant to an Agreement and Plan of Merger executed by
Rehabilicare on December 1, 1997 and approved by shareholders on March 17,
1998, a wholly-owned subsidiary of Rehabilicare was merged (the "Merger")
into Staodyn, Inc. ("Staodyn"). As a result of the Merger, each outstanding
share of common stock, $0.01 par value of Staodyn ("Staodyn Common Stock")
became 0.829 of a share of Rehabilicare Common Stock (with cash paid in
lieu of fractional shares) and Staodyn became a wholly-owned subsidiary of
Rehabilicare. Rehabilicare issued a total of 5,521,111 shares of its common
stock as a result of the Merger. Rehabilicare also assumed the obligations
to issue shares under options to purchase 383,083 shares of Staodyn Common
Stock (317,575 shares of Rehabilicare Common Stock) and warrants to
purchase 130,000 shares (107,770 shares of Rehabilicare Common Stock).
Options to purchase 239,410 shares of Staodyn Common Stock (198,471 shares
of Rehabilicare Common Stock) subsequently expired without being exercised.
The merger was recorded using the pooling-of-interests method.
3. ASSET ACQUISITION
On August 6, 1998, the Company acquired substantially all of the assets
(consisting primarily of finished goods inventory and receivables) of the
Homecare business unit of Henley Healthcare, Inc. ("Henley") for a purchase
price of $3,650,000 paid in cash at closing. The cash paid was obtained
from existing funds and borrowings under the Company's bank line of credit,
including a $2,500,000 term loan payable over three years.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
On March 17, 1998, Rehabilicare merged with Staodyn, Inc. in a transaction
accounted for as a pooling-of-interests. As a result of that merger, the
financial statements and related notes, and this discussion, are based on
the combined financial position and results of operations as if the
companies had been combined throughout the three months ended September 30,
1997.
On August 6, 1998, the Company acquired substantially all of the assets of
the Homecare business unit of Henley Healthcare. Accordingly, the Company's
balance sheet at September 30, 1998 includes the assets acquired and the
indebtedness incurred to finance this acquisition, and the results of
operations include those operations from August 6, 1998.
RESULTS OF OPERATIONS
The following table sets forth information from the statements of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------
1998 1997
-------- -------
<S> <C> <C>
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 26.9 30.7
Gross profit 73.1 69.3
Operating expenses -
Selling, general and administrative 57.0 60.0
Research and development 2.6 2.9
Acquisition expense 0.9 --
Total operating expenses 60.5 62.9
Operating income 12.6 6.4
Other expense 1.3 0.8
Provision for income taxes 4.3 1.0
Net income 7.0 4.6
</TABLE>
Revenue was $9,084,000 for the first quarter of fiscal 1999, a 10% increase
from $8,257,000 in the first quarter of fiscal 1998. Net sales and rental
revenue from direct distribution to patients increased 14% to $7,797,000
from $6,831,000 and accounted for approximately 86% of total revenue for
the first quarter in both fiscal years. Approximately $686,000 of the
additional revenue in the first quarter of fiscal 1999 represented sales by
the Homecare business unit of Henley after its acquisition by the Company
on August 6, 1998. The remainder of the increase was due to the continuing
growth in the number of new patients. Revenue from the Company's
traditional dealer business, excluding international, decreased by 10% in
the first quarter of fiscal 1999 from the first quarter of fiscal 1998 due
primarily to decreased purchases by several key dealers. International
sales were minimal in the first quarter of both fiscal years.
<PAGE>
Gross profit increased 16% to $6,639,000 or 73% of revenue in the first
quarter of fiscal 1999 compared with $5,718,000 or 69% of revenue in the
first quarter of fiscal 1998. Margins on dealer business were 58% compared
with 52% in the first quarter of fiscal 1998, reflecting an increase in
sales of more profitable products. Margins on direct sales and rentals were
75% for the first quarter of fiscal 1999 compared with 74% in fiscal 1998.
This improvement resulted from an increased volume of higher margin
accessory sales.
Selling, general and administrative expenses increased 5% to $5,180,000 in
the first quarter of fiscal 1999 from $4,953,000 in fiscal 1998. As a
percent of revenue, those expenses decreased from 60% to 57%. The decrease
resulted primarily from a decrease in labor costs due to the consolidation
of facilities in June 1998.
Operating income was $1,145,000 in fiscal 1999 compared with $529,000 in
fiscal 1998. Net income was $639,000 in fiscal 1999 compared with $380,000
for the first quarter of fiscal 1998. The effective tax rate of 38% for
fiscal 1999 was higher than the 18% effective rate for fiscal 1998 due to
the release of the valuation allowance during the first quarter of fiscal
1998.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $591,000 in operations during the first quarter of
fiscal 1999. The Company used $229,000 of cash in the same quarter of
fiscal 1998. Cash was used during the fiscal 1999 quarter to fund an
increase of $278,000 in receivables (net of a $2,535,000 increase resulting
from the acquisition from Henley) and a $1,246,000 increase in inventories
(net of a $1,325,000 increase resulting from the acquisition from Henley)
offset primarily by net income of $639,000 and an increase in accounts
payable of $666,000. Inventories increased substantially during the first
quarter of fiscal 1999 in order to assure continued availability of all
Staodyn and Rehabilicare products during the consolidation of all
manufacturing and distribution activities in the Company's New Brighton,
Minnesota facility.
The Company acquired $3,650,000 of assets from Henley during the quarter
ended September 30, 1998, consisting primarily of finished goods inventory
and receivables. The cash paid for that acquisition is shown as an
investment in the statement of cash flows and the increases in receivables
and inventories reflected on such statement are net of the receivables and
inventories acquired from Henley. During the first quarter of fiscal 1998,
the Company provided an additional $1,168,000 for uncollectible receivables
and wrote off $454,000 of accounts it considered uncollectible. As a
percent of receivables, the reserve decreased from 20% in fiscal 1998 to
19% in fiscal 1999.
The reserve for uncollectible accounts is determined after considering
various factors including historical trends, relationship and experience
with insurance or other third party payors and patient responsibility for
charges. The Company believes that its current reserve for uncollectible
accounts is adequate. However, it will be necessary to continue maintaining
a significant reserve to cover instances where the extent of insurance
coverage cannot be verified prior to distributing home units to patients.
Financing activities provided cash of $3,303,000 in fiscal 1999 compared to
a use of cash of $302,000 in fiscal 1998. The Company repaid $319,000 of
long-term debt in the first quarter of fiscal 1999 compared to $142,000 in
fiscal 1998. Effective August 5, 1998, the Company amended its Credit
Agreement to increase the amount of credit under its revolving line from
$2,000,000 to $2,500,000 and to borrow $2,500,000 under a term loan due in
August 2001. Borrowings under the line were $1,100,000 on September 30,
1998. The Company anticipates that cash requirements during fiscal 1999
will be less than its available credit facility.
<PAGE>
YEAR 2000 ISSUE
The Company has conducted an assessment of all its Year 2000 issues
involving its technology systems over the last two years. Currently, the
Company has successfully installed Year 2000 compliant versions of software
from its two major vendors. In addition, the Company is continuing to
analyze and modify all supporting software, bringing all software into
compliance. The Company believes that implementation will be complete and
Year 2000 compliant by June 1999.
The Company has completed its assessment of the Year 2000 issue surrounding
its engineering and manufacturing product applications. The Company's
electrotherapy products are each controlled with electro-mechanical and
microprocessor hardware mechanisms which do not have any time-dating
requirements that would be affected by Year 2000. In addition, these
devices do not interface with other devices and therefore remain Year 2000
compliant.
The Company is continuing to examine its relationship with third parties
whose failure to become Year 2000 compliant in a timely manner, if at all,
could have an effect on the Company. The Company will circulate
questionnaires to all of its significant vendors and customers with respect
to such companies' Year 2000 compliance programs and status. In addition,
follow-up conversations will be conducted with key customers and vendors.
The Company currently is in the process of evaluating this effort and
expects to request more detailed and updated information from its principal
vendors and customers during the next two quarters.
External and internal costs specifically associated with modifying internal
use software for Year 2000 compliance are expensed as incurred. To date,
those costs have not been material. Based upon currently available
information, the Company does not expect the costs of addressing potential
Year 2000 problems to have a material adverse impact on the company's
financial position, results of operations or liquidity in future periods.
The Company plans to devote the necessary resources to resolve all
significant Year 2000 issues in a timely manner.
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
This report contains "forward-looking statements" within the meaning of
Federal securities laws. The forward looking statements are subject to
risks and uncertainties, including, but not limited to: the risks related
to fluctuations in the Company's quarterly operating results; inventory and
receivables requirements for direct billed medical equipment sales;
volatility in the markets for electrotherapy; the effects of reimbursement
and other governmental or private agency actions on the Company's sales;
competition; the Company's ability to effectively integrate the businesses
that it has acquired and other risks that may be detailed in the Company's
Form 10-KSB for the year ending June 30, 1998 or in other filings with the
Securities and Exchange Commission.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS ON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits filed with this Form 10-QSB. The Company did not file any
reports on Form 8-K during the quarter ended September 30, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REHABILICARE INC.
/s/ DAVID B. KAYSEN
---------------------------------------------
David B. Kaysen
President and Chief Executive Officer
/s/ W. GLEN WINCHELL
---------------------------------------------
W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
Date: November 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 329,158
<SECURITIES> 0
<RECEIVABLES> 19,210,860
<ALLOWANCES> 3,737,024
<INVENTORY> 9,156,496
<CURRENT-ASSETS> 27,395,075
<PP&E> 9,566,268
<DEPRECIATION> 6,168,322
<TOTAL-ASSETS> 31,603,362
<CURRENT-LIABILITIES> 5,869,353
<BONDS> 4,980,987
0
0
<COMMON> 1,045,340
<OTHER-SE> 19,707,682
<TOTAL-LIABILITY-AND-EQUITY> 31,603,362
<SALES> 9,084,333
<TOTAL-REVENUES> 9,084,333
<CGS> 2,445,647
<TOTAL-COSTS> 7,939,226
<OTHER-EXPENSES> 113,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,583
<INCOME-PRETAX> 1,145,107
<INCOME-TAX> 392,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 639,148
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
