<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0985318
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of principal executive offices)
(651) 631-0590
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 11, 1999 was:
COMMON STOCK, $.10 PAR VALUE 10,546,130 SHARES
<PAGE> 2
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Quarterly Report on Form 10-Q contains various "forward
looking statements" within the meaning of Federal securities laws. These forward
looking statements represent management's expectations or beliefs concerning
future events, including statements regarding anticipated product introductions;
changes in markets, customers and product pricing; expenditures for research and
development; growth in revenue; and taxation levels. When used in this 10-Q, the
words "anticipate," "believe," "expect," "estimate" and similar expressions are
generally intended to identify forward-looking statements. These and other
forward looking statements made by the Company must be evaluated in the context
of a number of factors that may affect the Company's financial condition and
results of operations, including, but not limited to, the following:
- - The Company acquired two businesses during the two previous fiscal years
and a third in July 1999. It may not be able to integrate acquired
businesses as smoothly as it anticipated and may find issues with respect
to acquired businesses of which it was unaware.
- - Like many medical device companies, the Company has a large balance of
uncollected receivables against which it maintains a reserve for doubtful
accounts. The size of the reserve is judgmental and depends upon a number
of factors, including historical experience in collecting receivables. If
the Company cannot collect an amount of receivables that is consistent with
historical collections, it might be required to charge off a portion of
uncollected receivables, significantly impacting earnings.
- - The Company has incurred a significant amount of indebtedness to finance
acquired businesses. The interest expense on such indebtedness reduces
earnings and could cause the Company to be short of cash if its operations
do not meet expectations.
- - The Company's products are subject to reimbursement by private and public
healthcare reimbursement agencies that impose limits on reimbursement and
strict rules on applications for reimbursement. Changes in the rates,
eligibility or requirements for reimbursement, or failure to comply with
reimbursement requirements, could cause a reduction in earnings or fines or
both.
- - The Company maintains significant amounts of inventory on consignment at
clinics and for distribution to patients. It may not be able to completely
control losses of this inventory and if inventory losses are not consistent
with historical experience, it might be required to write off a portion of
the carrying value of inventory.
- - The clinical effectiveness of the Company's electrotherapy products has
periodically been challenged. Publicity about the effectiveness of
electrotherapy for pain relief or other clinical applications could
negatively impact revenue and earnings.
- - The Company formed a United Kingdom subsidiary in fiscal 1999 and acquired
a Swiss company in the first quarter of fiscal 2000. These European
operations may be more difficult to supervise, and may be subject to
different economic influences than United States operations, and may
subject the Company to more exposure from currency fluctuations.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited condensed financial information:
Consolidated Balance Sheets as of September 30, 1999 and June 30, 1999
Consolidated Statements of Operations for the Three Months ended
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Three Months ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
3
<PAGE> 4
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
--------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,292,263 $ 561,207
Receivables, less reserve for uncollectible accounts of $5,010,651
and $4,913,635 18,789,210 17,233,469
Inventories -
Raw materials 1,644,893 1,825,487
Work in process 419,025 377,771
Finished goods 6,813,694 6,709,525
Deferred tax assets 2,587,686 2,587,686
Prepaid expenses 1,148,338 584,330
------------ ------------
Total current assets 33,695,109 29,879,475
------------ ------------
PROPERTY, PLANT AND EQUIPMENT: 12,040,883 11,548,678
Less accumulated depreciation (6,602,844) (6,930,564)
------------ ------------
Net property, plant and equipment 5,438,039 4,618,114
------------ ------------
Intangible assets, net 11,008,151 1,150,009
Deferred tax assets 106,353 40,121
Other assets 39,388 11,995
------------ ------------
$ 50,287,040 $ 35,699,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable $ 1,300,000 $ 2,400,000
Current maturities of long-term debt 3,032,457 1,241,037
Accounts payable 2,271,131 2,038,732
Accrued liabilities -
Payroll 409,162 575,426
Commissions 215,692 491,990
Other 2,724,208 1,560,297
Minority interest 18,814 24,681
------------ ------------
Total current liabilities 9,971,464 8,332,163
LONG-TERM LIABILITIES:
Long term-debt 14,338,668 4,066,914
Deferred tax liabilities 1,310,282 247,328
------------ ------------
Total liabilities 25,620,414 12,646,405
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized;
issued and outstanding 10,546,130 and 10,494,908 shares,
respectively 1,054,613 1,049,491
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Additional paid-in capital 20,811,856 20,740,650
Less note receivable from officer/stockholder (223,958) (237,500)
Accumulated other non-owner changes in equity 87,514 (1,637)
Retained earnings 2,936,601 1,502,305
------------ ------------
Total stockholders' equity 24,666,626 23,053,309
------------ ------------
$ 50,287,040 $ 35,699,714
============ ============
</TABLE>
4
<PAGE> 5
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net sales and rental revenue $ 13,876,212 $ 9,084,333
Cost of sales and rentals 4,598,806 2,445,647
------------- -----------
Gross profit 9,277,406 6,638,686
Operating expenses:
Selling, general and administrative 7,327,144 5,180,099
Research and development 253,808 234,373
Acquisition expense --- 79,107
------------- -----------
7,580,952 5,493,579
------------- -----------
Income from operations 1,696,454 1,145,107
Other income (expense):
Interest expense (345,581) (116,583)
Other income (3,124) 2,624
Minority interest 5,867 ---
Gain on sale of building 1,075,680 ---
------------- -----------
Income before income taxes 2,429,296 1,031,148
Provision for income taxes 995,000 392,000
------------- -----------
Net income $ 1,434,296 $ 639,148
============= ===========
Net income per common and common
equivalent share
Basic $ 0.14 $ 0.06
============= ===========
Diluted $ 0.13 $ 0.06
============= ===========
Weighted average number of shares
outstanding
Basic 10,530,534 10,450,111
============= ===========
Diluted 10,690,930 10,477,163
============= ===========
</TABLE>
5
<PAGE> 6
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-------------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,434,296 $ 639,148
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities
Gain on sale of building (1,075,680) --
Depreciation and amortization 459,737 65,684
Change in long-term portion of deferred taxes (38,122) --
Minority interest (5,867) --
Changes in current assets and liabilities, excluding
effects of business combinations
Receivables 621,183 (278,159)
Inventories 1,572,522 (1,246,452)
Prepaid expenses (457,076) 62,966
Accounts payable (1,432,110) 665,819
Accrued liabilities (192,908) (65,237)
----------- -----------
Net cash provided by (used in) operating activities 885,975 (156,231)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (884,099) (87,649)
Cash paid in asset acquisition, net of cash received (10,747,967) (3,650,000)
Proceeds from sale of building 1,726,930 --
----------- -----------
Net cash used in investing activities (9,905,136) (3,737,649)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from new financing 15,339,364 2,500,000
Principal payments on long-term obligations (2,348,071) (319,370)
Proceeds from (payments on) line of credit, net (1,100,000) 1,100,000
Payment of capital lease obligation (1,261,733) --
Proceeds from issuance of stock options 33,231 22,643
Proceeds from issuance of employer stock purchase 43,097 --
------------ ------------
Net cash provided by financing activities 10,705,888 3,303,273
------------ ------------
Effect of exchange on cash and cash equivalents 44,329 --
Net increase (decrease) in cash and cash equivalents 1,731,056 (590,607)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 561,207 919,765
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,292,263 $ 329,158
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 338,493 $ 116,583
============ ============
Income taxes paid $ 332,400 $ 30,150
============ ============
</TABLE>
6
<PAGE> 7
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999
The Company used a term loan and a credit line to finance certain business
combinations accounted for under the purchase method during the first quarter of
fiscal 2000 and 1999. The fair value of the assets and liabilities of acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30
---------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Accounts receivable $ 2,176,925 $ 1,710,651
Inventories 1,537,352 1,179,280
Prepaid expenses 514,493 ---
Property and equipment 828,728 623,814
Intangible assets 9,721,566 1,000,000
Other long-term assets 203,224 ---
Accounts payable (1,666,687) (606,971)
Accrued liabilities (1,707,466) (17,633)
Long-term liabilities (860,168) (239,141)
----------- -----------
Net assets acquired $10,747,967 $ 3,650,000
=========== ===========
</TABLE>
7
<PAGE> 8
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended September 30, 1999 and 1998 but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the periods
presented. Such results are not necessarily indicative of results for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not required for interim
reporting purposes, have been omitted. The accompanying financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1999, included in the Company's
Annual Report on Form 10-KSB.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be recognized at fair value in the
balance sheet and all changes in fair value be recognized currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
The Company does not believe that the implementation of this statement will have
an effect on the Company's results of operations, cash flows or financial
position.
2. BUSINESS COMBINATIONS
On July 19, 1999, the Company acquired all of the outstanding capital stock of
Compex SA, a Swiss-based medical products company, for cash of $10,747,967. The
acquisition was financed principally with debt and provides for additional
contingent consideration of up to $2,000,000 based on performance over the
calendar years 1999 and 2000. The purchase consideration exceeded the net fair
value of tangible assets by $9,721,566 of which $1,400,000 represented the value
of Compex's technology, $1,400,000 represented the value of its workforce and
the remaining $6,921,566 of which was assigned to goodwill. The value of these
intangible assets will be amortized over various periods from five to twenty
years. The allocations are preliminary, pending the outcome of certain
pre-acquisition tax contingencies.
Proforma operating results as if Compex SA had been acquired at the beginning of
fiscal 1999 are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1998
--------------------------------------
<S> <C>
Net sales $ 12,845,000
Income before taxes 854,000
Net Income 499,500
Earnings per share -
Basic $ .05
Diluted .05
</TABLE>
8
<PAGE> 9
On August 7, 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.
3. NOTE PAYABLE AND LONG TERM DEBT
In conjunction with its acquisition of Compex SA, the Company entered into a new
$20,000,000 credit facility which provides for both term and revolving
borrowings at varying rates based either on the bank's prime rate or LIBOR. The
initial term loan of $15,000,000 was used to fund the acquisition and repay the
balance of a mortgage note and a revolving loan provided under a credit facility
with another bank.
Borrowings under the new facility are secured by substantially all assets of the
Company other than those pledged as collateral on existing lease or mortgage
obligations. The interest rate on the term loan was 8.14% at September 30, 1999
and the weighted average rate on borrowings under the revolving line of credit
was 8.19%.
The Company was in compliance with all financial covenants in its credit
agreement as of September 30, 1999 and for the period then ended.
4. SEGMENT INFORMATION
Rehabilicare and its consolidated subsidiaries operate their business in one
reportable segment, the manufacture and distribution of electromedical pain
management and rehabilitation products. The Company's chief operating decision
makers use consolidated results to make operating and strategic decisions. Net
sales from the United States and foreign sources (primarily Europe) are as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30
-----------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
<S> <C> <C>
U.S. sales $ 10,558,703 $ 8,977,220
Foreign sales 3,317,509 107,113
---------------- -------------
Total $ 13,876,212 $ 9,084,333
</TABLE>
Net sales by product line were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30
-----------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
<S> <C> <C>
Rehabilitation products $ 5,775,000 $ 2,451,000
Pain management 4,075,000 3,388,000
Accessories and supplies 4,026,000 3,245,000
-------------- -------------
$ 13,876,000 $ 9,084,000
============== =============
</TABLE>
No single customer represents over 10% of the Company's consolidated sales
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, manufactures and distributes electromedical pain management
and rehabilitation products used for clinical, home health care, sports medicine
and occupational medicine applications. The Company operates in one business
segment, distributing its products through sales to medical products dealers and
distributors and through direct rental or sale to patients. The latter approach
involves placing electrotherapy units with physicians, physical therapists and
other health care providers who then refer those units to patients after
determining an appropriate treatment regimen. Units are left on consignment with
the health care providers for such referral. The Company then bills the patient
or the patient's insurance carrier directly after being notified that a unit has
been prescribed and provided to the patient. The Company takes responsibility
for subsequent patient follow-up, including additional months rental; sale of
the unit, if appropriate; and sale of additional supplies required for continued
use of the electrotherapy units. This distribution approach requires the Company
to maintain significant investments in inventories and receivables.
In the fiscal year ended June 30, 1998, the Company began implementation of a
strategy to increase its business through consolidation with other companies in
the pain management and rehabilitation markets. The strategy began with the
merger with Staodyn, Inc. on March 17, 1998 in a transaction accounted for as a
pooling-of-interests. On August 7, 1998, the Company acquired certain assets of
the Homecare division of Henley Healthcare, Inc. and the operations of that
business are included in the consolidated financial statements from that date
forward. In January 1999, the Company established a majority-owned subsidiary,
Rehabilicare UK, Ltd., near London, England. Rehabilicare UK subsequently
acquired substantially all of the assets of the Company's former distributor in
the United Kingdom, effective February 1, 1999. Its operations are included from
that date forward. Sales to the distributor prior to that date are included in
net revenue. Finally, on July 19, 1999, the Company acquired all of the
outstanding capital stock of Compex SA based in Lausanne, Switzerland. Its
operations are included in the consolidated financial statements for the quarter
ended September 30, 1999 from the date of acquisition.
10
<PAGE> 11
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
---------------------------
1999 1998
----------- --------
<S> <C> <C>
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals (33.1) (26.9)
Gross profit 66.8 73.1
Operating expenses -
Selling, general and administrative (52.8) (57.0)
Research and development (1.8) (2.6)
Non-recurring merger items -- (.9)
----- -----
Total operating expenses (54.6) (60.5)
Income from operations 12.2 12.6
Other income (expense), net (2.5) (1.3)
Gain on sale of building 7.8 --
Income tax provision (7.2) (4.3)
Net income 10.3 7.0
</TABLE>
Revenue was $13,876,000 for the first quarter of fiscal 2000, a 53% increase
from $9,084,000 in the first quarter of fiscal 1999. Compex accounted for
$2,976,000 of the fiscal 2000 revenue. Fiscal 2000 revenue also included a full
quarter contribution by the business acquired from Henley Healthcare in August
1998 compared to slightly less than two months in the comparable prior year
period. That business has been integrated with the Company's other direct
distribution business and it is therefore not practicable to quantify the exact
impact of that acquisition for the quarters. The primary reason for the
remainder of the increase was the full integration of the former Staodyn and
Rehabilicare sales organizations, a process which started immediately after
approval of the merger on March 17, 1998.
In general, increases in revenue are a result of increases in the number of
patient referrals combined with changes in the mix among rentals of
electrotherapy units to patients and sales of units and accessories to patients
or to dealers and distributors. Reimbursement rates by third party payors for
all products and services provided by the Company have gradually declined for
several years and the impact of those changes has been offset by increases in
volume and changes in mix.
11
<PAGE> 12
International business other than Compex increased from about 1% of revenue in
the first quarter of fiscal 1999 to 2% in the first quarter of fiscal 2000 as a
result of the acquisition, through Rehabilicare UK, of the rental business
previously conducted by one of the Company's distributors.
Gross profit was $9,277,000 or 67% of revenue in the first quarter of fiscal
2000 compared with $6,639,000 or 73% of revenue in the first quarter of fiscal
1999. Cost of sales included a one-time charge of $645,000 in fiscal 2000
related to the step-up in basis of inventory recorded in connection with the
Compex acquisition. Its inventory turns rapidly so the entire step-up flowed
through the first quarter. Without that charge, gross margin would have been
71.5% of revenue. That rate is essentially unchanged from the rate for the
fiscal year ended June 30, 1999 and is consistent with the Company's
expectations.
The fiscal 1999 gross profit rate was positively impacted by an extensive build
up of inventory by both Staodyn and Rehabilicare in the fourth quarter of fiscal
1998 in anticipation of the physical combination of the two manufacturing
facilities beginning in the first quarter of fiscal 1999. Quarterly fluctuations
in the rate are primarily impacted by the changes in mix described above. The
Company has also focused on improving its manufacturing processes which has
helped to control the increases in costs of sales and services. That trend is
expected to continue.
Selling, general and administrative expenses increased 41% to $7,327,000 in the
first quarter of fiscal 2000 from $5,180,000 in fiscal 1999. As a percent of
revenue, those expenses decreased from 57% to 53%. Several factors contributed
to that decrease. The first quarter of fiscal 1999 included expenses of carrying
the former Staodyn building in Longmont, Colorado which was sold in July 1999
and the costs of continuing operations in facilities formerly operated by Henley
Healthcare which were closed during fiscal 1999. The decrease also reflects the
elimination of virtually all administrative costs associated with the former
operations of Staodyn and Henley Healthcare and various economies of scale
resulting from the Company's acquisition activity.
Research and development expense was virtually unchanged from year to year. The
fiscal 2000 expenses includes $98,000 incurred by Compex so, without that
acquisition, those expenses would have decreased. As a percent of revenue,
research and development expense decreased from 2.5% to 2%. The Company
substantially completed development of a new family of TENS products during
fiscal 1999 and believes that the current expenditure level will be adequate to
fund current product enhancement and development programs.
Interest expense increased from $116,000 to $346,000 as a result of the
acquisitions of the Henley Healthcare business in August 1998 and Compex in July
1999, both of which were financed with debt. Interest expense will increase in
subsequent quarters as the debt is outstanding for the entire quarter and will
then begin to gradually decline as debt is repaid.
Operating results for the first quarter of fiscal 2000 operating results include
a gain on the sale of the former Staodyn building in Longmont, Colorado in the
amount of $1,076,000. The Company exercised its option to purchase that building
in the first quarter of fiscal 1999 and closed the purchase and immediate sale
on July 7, 1999. Lease payments and operating costs associated with that
building were expensed as incurred throughout fiscal 1999.
The provision for income taxes is 41% of income before taxes in the first
quarter of fiscal 2000 compared with 38% in the prior year. The Company now
operates in various countries in Europe as well as the United States. Some
countries have higher tax rates than the United States as well as different
rules on the deductibility of certain expenses and the availability of certain
credits for taxes paid to other
12
<PAGE> 13
jurisdictions. The Company believes that 41% is a reasonable estimate of the
effective rate for fiscal 2000 based on expected sources of revenue and
expenses.
As a result of all the above changes, net income increased from $639,000 in the
first quarter of fiscal 1999 to $1,434,000 in the first quarter of fiscal 2000.
Diluted earnings per share increased from $.06 to $.13. Before the one time gain
related to the building sale and the one time charge related to the Compex
inventory step-up are eliminated, net income was $1,180,000 or $.11 per share.
Compex accounted for just over $.01 of that amount after deducting good will
amortization and interest expense on acquisition debt from it's operating
income.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company generated cash of $1,731,000 in the first quarter of fiscal 2000
after using cash of $591,000 during the first quarter of fiscal 1999. The most
significant cash transaction during the quarter was the acquisition of Compex
for $10,748,000, all of which was financed by additional bank borrowings. As a
part of that transaction, the Company consolidated its other bank debt into a
new $20 million credit facility which provides for both term and revolving
loans. Net additional proceeds from borrowings related to the acquisition and
other operating expenses was $11,891,000. The purchase price for Compex may be
increased by as much as $2,000,000 based on certain operating results of Compex
for the calendar years 1999 and 2000. Such payments would be made in March 2000
and March 2001 and the credit facility was designed to cover those amounts in
the event cash flow from operations is not sufficient to fund them.
The only other significant investing activity during the first quarter was the
purchase of $884,000 of property and equipment in the normal course of
operation.
As previously mentioned, the Company also generated net cash of $465,000 from
the sale of a building, net of payment of the capitalized lease obligations.
Cash was used to fund an increase in receivables of $1,556,000 during the
quarter. Compex receivables at the end of the quarter were $1,815,000 so without
that acquisition, receivables would actually have decreased by $259,000.
Managing receivables represents one of the biggest business challenges to the
Company. The process of determining what products will be reimbursed by third
party payors and the amounts to be paid for those products is very complex and
the reimbursement environment is constantly changing. That risk is spread across
many payors throughout the United States. The determination of an appropriate
reserve for uncollectible accounts at the end of each reporting period includes
various factors including historical trends and relationships and experience
with insurance companies or other third party payors. The Company believes that
the reserve at September 30, 1999 is adequate to cover future losses on its
receivables based primarily on collection history and trends. The provision for
uncollectible accounts recorded in the income statement may fluctuate
significantly from quarter to quarter as such trends change. The reserve was
19.9% of receivables at September 30, 1999 compared to 22.2% at June 30, 1999.
That ratio will be favorably impacted in the future as a result of including
receivables from Compex and Rehabilicare UK which are more traditional trade
receivables and not dependent on third party payors.
13
<PAGE> 14
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 December 1999.
The Company has completed its assessment of the Year 2000 issue surrounding its
engineering and manufacturing product applications. The Company's electrotherapy
products are each controlled with electro-mechanical and microprocessor hardware
mechanisms which do not have any time-dating requirements that would be affected
by Year 2000. In addition, these devices do not interface with other devices and
therefore remain Year 2000 compliant.
The Company has substantially completed its study of its relationships with
third parties whose failure to become Year 2000 compliant in a timely manner, if
at all, could have an effect on the Company. The Company circulated
questionnaires to all of its significant vendors and customers with respect to
such companies' Year 2000 compliance programs and status. In addition, follow-up
conversations were conducted with key customers and vendors. The Company has
substantially completed that process.
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 has devoted the necessary
resources to resolve all significant Year 2000 issues.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 26, 1999, the Company received a subpoena from the Federal District
Court for the Middle District of Florida for certain Medicare records. The
Company complied with the subpoena. The Company has completed a limited
audit of some of the Medicare records that were provided to the United States
Attorney's office. Many of the files reviewed through this limited audit were
incomplete or incorrectly completed and raised a question as to whether the
Company had adequate basis upon which to request reimbursement of the audited
files.
In the event that the Company does not have adequate basis to have received
reimbursement on these Medicare files, it has a statutory obligation to refund
the reimbursements. Because the Company believes that the United States
Attorney's office may have more complete records, including electronic files no
longer available to the Company, the Company is attempting, through it's outside
legal counsel, to contact the United States Attorney's office to determine the
aggregate amount of reimbursements that should be returned. The aggregate amount
of Medicare reimbursements received by the Company during the period under
investigation was approximately $630,000. The Company does not believe, however,
that all reimbursements during the period being investigated are inadequately
documented. It is also possible that the United States Attorney's office may
seek payment of fines and penalties.
Prior to receipt of the subpoena on January 26, 1999, the Company had begun to
develop and implement a Compliance Program to ensure that its operations met or
exceeded all appropriate regulations. A Corporate Compliance Officer has been
appointed, and completion of the full Compliance Program is expected by the end
of the first quarter of calendar year 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.7 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K, dated August 3, 1999, was filed during the quarter
ended September 30, 1999 to report the acquisition of all the
outstanding capital stock of Compex SA.
A Form 8-K/A, dated September 28, 1999, was filed during the
quarter ended September 30, 1999 amending the previously filed
Form 8-K to include historical and proforma financial statements
related to the acquisition of Compex SA.
16
<PAGE> 17
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.
November 15, 1999 /s/ David B. Kaysen
- ------------------------ --------------------------------------------
Date David B. Kaysen
President and Chief Executive Officer
November 15, 1999 /s/ W. Glen Winchell
- ------------------------ --------------------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
17
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