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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, 1999
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
(651) 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
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Check if disclosure of delinquent filers in response to Item 405 of Regulations
S-KB 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, 1999 totaled
$41,795,373.
The aggregate market value of voting stock held by non-affiliates of registrant
as of September 20, 1999 was approximately $38,801,000 (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 20, 1999 was 10,522,434.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Annual Report on Form 10-KSB 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 customer order rates; expenditures in research
and development; growth in revenue; taxation levels; the effects of pricing; and
the ability to continue to price foreign transactions in United States currency.
When used in this 10-KSB, 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 year ended June 30, 1999 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. If it 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 sales and earnings.
- - The Company formed a U.K. 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, may be subject to different economic
influences than our United States operations, and may subject us to more
exposure from currency fluctuations.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Rehabilicare Inc. (the "Company") was incorporated as Medical Devices,
Inc., a Minnesota corporation, in 1972. The name was changed to Rehabilicare
Inc. in 1994. The Company is a manufacturer and provider of rehabilitation and
electromedical pain management products and services used in clinical, home
healthcare, and occupational medicine applications.
On March 17, 1998, the Company merged with Staodyn, Inc. in a transaction
accounted for as a pooling-of-interests. The shares of Rehabilicare common stock
issued in the transaction were valued at about $16.5 million. On August 7, 1998,
the Company acquired the Homecare division of Henley Healthcare, Inc. for cash
of $3.65 million. Both of those businesses were similar to the previous business
of Rehabilicare.
BACKGROUND
Electrotherapy devices such as those marketed by the Company have broad
application in both the rehabilitation of injured or diseased muscle or other
soft tissue 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 healthcare
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, the major TENS manufacturers began to distribute
their products directly to patients through direct sales representatives and
various healthcare providers, and to bill the patients and their insurance
carriers directly. In such direct rentals and sales, the manufacturer typically
makes consignment inventory available at treating clinics and other dispensing
locations. When a treating clinician determines that a specific device is
beneficial to a patient, a physician's prescription is obtained, and the patient
is trained in the use of the device. 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 (direct current), 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 simpler, 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.
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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 26 percent of total revenue in fiscal 1999 and 24
percent in fiscal 1998. Pain management products accounted for approximately 34
percent of total revenue in fiscal 1999 and 37 percent in fiscal 1998. The
balance of the Company's revenue resulted from the sale of accessories and
supplies used with treatment modalities.
REHABILITATION PRODUCTS
The Company offers a variety of electrotherapy products for the
rehabilitation market, including neuromuscular stimulators, pulsed direct
current devices, and interferential stimulators.
NEUROMUSCULAR STIMULATION DEVICES. NMS devices are designed to facilitate
faster recovery of normal function in muscle and other soft tissue affected by
disease or trauma. 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 edema (swelling); reduction of
spasticity; and increase in range of motion when limitation in joint rotation is
due to soft tissue shortening. The Company's NMS products include the
Rehabilicare NM III-TM-, which features 16 preset programs covering the most
common applications, and the Staodyn EMS+2-TM-, which includes a pulsed direct
current channel. Both devices are suitable for clinical or hoME use.
PULSED DIRECT CURRENT DEVICES. PDC devices utilize direct current to reduce
pain and swelling, influence local blood circulation, reduce muscle spasm, and
increase range of motion. PDC is typically used post-operatively, and for
sports-related injuries, either acute or chronic. The Company's products include
the Rehabilicare GV II-TM-, a high voltage device used primarily for joint
sprains, muscular strains, hand and ankle injuries, and the Staodyn SporTX-TM-,
which features both a PDC and TENS channel, and is used extensively in sports
medicine, particularly by professional, college, and other organized athletic
teams.
INTERFERENTIAL STIMULATION DEVICES. Interferential is another form of
electrical stimulation commonly used in physical therapy. The Company's IF
II-TM- interferential stimulator 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,
joint injuries, contusions, bursitis, tendonitis; and for podiatric
applications.
PAIN MANAGEMENT PRODUCTS
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
localized conditions including abdominal surgery, postoperative pain,
tendonitis, phantom limb pain, and childbirth. TENS devices generally reduce
pain during treatment, and for a period of time following usage, but do not cure
the cause of the pain.
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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 eight different products. The
Company's Matrix-TM- is one OF the most technologically advanced TENS devices
currently available. Incorporating five core treatments and eight programmed
modes, the Matrix provides a comprehensive range of TENS options for chronic,
acute, and postsurgical pain management. The UltraPac SX-TM- is a full-featured
TENS stimulator with a high degree of programming flexibility. The SMP-TM-
offers a unique 12-second modulated stimulation cycle which helps normalize the
sympathetic nervous system. While the product was designed specifically to treat
reflex sympathetic dystrophy (RSD) patients, it may also be used effectively for
most other types of chronic and acute pain. 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
postoperative pain. There are more than 500,000 orthopedic surgical procedures
performed each year, virtually all of which require the use of narcotic pain
medication. FasTENS is a safe and effective adjunct therapy for postoperative
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
"pull tab" activated lithium battery, 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.
Rehabilicare also distributes through a majority-owned subsidiary in the
United Kingdom a modified TENS unit (BabiTENS) manufactured by the Company for
pain control during labor and childbirth. That device is now being distributed
through a large pharmacy chain and is a widely accepted alternative to narcotic
pain management. The use of a TENS device in the European Union does not require
a doctor's prescription, although a medical referral is normally required for
third-party reimbursement.
The Staodyn TENS product line includes the Maxima-Registered Trademark- II
and III products, which are similar in features and use to the Matrix device,
and the Staodyn Nuwave-Registered Trademark-, which does not have the
adjustable parameters of the Matrix or Maxima TENS. The Nuwave is easy for a
patient to use and has a waveform and electrode which have been optimized for
chronic lower back pain. The Nuwave also was the subject of a clinical trial
conducted by the Pain Treatment Center of the University of Tennessee in
1990, which concluded that Nuwave TENS often proves to be beneficial in
patients with post-laminectomy or peripheral neuralgic pain, even if they
have not responded to other TENS therapy. The results of this study have been
used to differentiate this product as well as to provide justification for
higher reimbursement levels in certain instances.
IONTOPHORETIC DRUG DELIVERY SYSTEM. The Company markets the Iomed-TM-
Iontophoretic Drug Delivery System, which is marketed to physicians, physical
therapists, and other healthcare specialists treating acute and chronic pain.
Iontophoretic delivery involves the use of mild electrical stimulation to
enhance the delivery of a medication onto or into the skin. Iontophoretic drug
delivery is noninvasive and does not require the use of a needle or ingestion of
a capsule or tablet.
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MICROCURRENT DEVICES
Microcurrent is a low level form of electrical stimulation that is well
respected by certain clinicians. Since 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.
CERVICAL AND LUMBAR TRACTION DEVICES
The Company markets "The Saunders Cervical Hometrac" and "The Saunders
Lumbar Traction" devices, which are marketed to physicians, physical
therapists, and other healthcare specialists treating acute and chronic back
pain. These traction devices use a handheld pump to produce varying pounds of
traction to the cervical and lumbar areas of the spine. These devices provide
easy at home traction and offer a cost-effective option to continuing
clinical traction treatments.
ACCESSORIES AND SUPPLIES
Users of medical rehabilitation and pain management devices require various
accessories and supplies. 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 certain of the Company's devices. The Company purchases all of its electrodes
and accessories from outside suppliers. Accessories and supplies, including
those provided separately to clinics with initial product rentals, accounted for
approximately 42 percent of revenue in fiscal 1999 and 36 percent in fiscal
1998.
SALES AND MARKETING
The Company distributes its products both on a direct basis to healthcare
providers and their patients and on a wholesale basis to home healthcare
dealers. 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. Historically, the Company had approached these decision makers through
a network of home healthcare and specialty equipment dealers. Since the early
1990s, the Company, along with most of the rest of the industry, have emphasized
direct rentals and sales to patients through healthcare providers and
third-party payors, rather than through dealers. For fiscal 1999, direct sales
and rentals represented 87 percent of total Company revenue.
DIRECT DISTRIBUTION
The Company's direct distribution activity offers the Company's products
through a nationwide network of independent sales representatives who devote the
major portion of their time to the sale of Rehabilicare and Staodyn products. As
of June 30, 1999, the direct sales force consisted of approximately 116
representatives, compared to about 100 one year earlier. The combined retail
sales force calls on about 9,000 active accounts, including physical and
occupational therapy clinics, orthopedic groups, sports medicine practices, and
other providers of the Company's and competitor's products. In direct
distribution, the Company's products generally are placed in clinics on a
consignment basis, and subsequently used, rented, and/or sold to patients as
needed with the appropriate physician prescription and supervision.
The direct distribution internal operations are located in Tampa, Florida,
and are focused on supporting the field sales activity through (1) a
full-service distribution capability, providing next day service of products and
supplies to providers and patients; (2) a trained staff who work with
physicians, rehabilitation clinics and other providers and insurance carrier
payors to provide billing, collection, and reimbursement services for providers
and their patients; and (3) a telemarketing sales staff which follows up with
patients to ensure that their product, supplies, and paperwork needs are met, as
well as assisting them in the purchase and reimbursement process.
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To supplement the assistance offered by the Tampa sales support operation,
the Company also employs clinicians who communicate with patients by phone from
a 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's products are also sold on a nonexclusive basis to
approximately 200 home healthcare and durable medical equipment (DME) dealers.
These dealers sell or rent the products to individual users who are referred by
a physician, physical therapist, or other medical professional. Wholesale sales
amounted to 12% of the Company's sales in fiscal 1999.
On February 1, 1999, the Company formed a subsidiary in the United Kingdom,
Rehabilicare (U.K.) Ltd. This subsidiary then acquired, for nominal
consideration, certain operating assets and substantially all of the
electrotherapy business of its distributor in the U.K. The Company also assumed
certain debts of the distributor. The former owners of the distributor have a
minority interest in the subsidiary.
The Company markets its products internationally through the use of foreign
distributors and its majority-owned subsidiary, Rehabilicare (UK) Ltd. Beginning
in fiscal 1995, the Company's former 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 for pain relief during labor and delivery. The
Company's BabiTENS product was developed for this market. Revenue from BabiTENS
accounted for the major portion of the Company's international sales in fiscal
1999.
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. Successful examples
of these development efforts are the Company's CTDx-TM- Electrostimulation
System and the Ortho Dx-TM- Electrotherapy System.
CTDX-TM- ELECTROSTIMULATION SYSTEM
The CTDx system was designed specifically to treat repetitive stress
injuries (RSIs) of the wrist and elbow, including carpal tunnel syndrome. These
cumulative trauma disorders represent a multibillion dollar annual workers'
compensation cost to U.S. industry. The CTDx system includes the SmartBrace
(wrist) or SmartWrap (elbow), application-specific electrodes and a CTDx
electrical stimulation device. It provides a non-narcotic, noninvasive and
conservative treatment for wrist pain. The system is applicable to multiple
industries and can be effectively used at the work site or in a clinic
specializing in occupational and industrial medicine. The Company also completed
a double-blind study demonstrating the effectiveness of the CTDx versus placebo
treatment which was published in the May issue of the "Journal of the American
Association of Occupational Health Nurses." U.S. patent protection on the CTDx
Electrostimulation System, SmartBrace wrist splint, and electrodes was received
in July 1996. Similar applications for other areas affected by repetitive stress
are currently being studied.
ORTHO DX-TM- ELECTROTHERAPY SYSTEM
Introduced in 1998, the Ortho Dx Electrotherapy System is designed for
post-surgical knee rehabilitation and is comprised of a unique proprietary new
electromedical stimulator and electrode configuration. It combines both the PDC
and NMS waveforms into one stimulator, allowing physicians and therapists to
increase local blood circulation to help deal with post-surgical swelling of the
knee
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while simultaneously re-educating and strengthening key muscle groups in the
leg. This innovative system reduces the post-surgical treatment time and
therefore reduces costs while speeding the recovery time for the patient. The
Ortho Dx is designed for ease of application and use in hospital settings,
clinics, at home, or work.
COMPETITION
Several other companies currently manufacture and distribute electrotherapy
rehabilitation and pain management devices. Certain of these competitors may
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 competitor in the
electrotherapy rehabilitation and pain management market is Empi, Inc. The
Company competes in these markets primarily on the basis of the variety and
quality of product offerings, marketing and distribution presence, and service.
The merger with Staodyn and the acquisition of Henley's Homecare division more
than doubled the Company's size, and substantially expands its product offerings
and sales and distribution capabilities. 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 competitors. The Company further believes that there are no
dominant competitors for these other modalities and that the number of
modalities it offers, together with the distinctive features of its products,
allow it to compete favorably in this market.
MANUFACTURING AND SOURCES OF SUPPLY
All of the Company's electrotherapy devices are manufactured at its
headquarters and manufacturing facility in New Brighton, Minnesota.
Manufacturing operations consist primarily of installing electronic components
and materials onto printed circuit boards and assembling them into the final
product package. To maximize quality and reliability, and decrease size and
weight, most of the Company's products incorporate surface mount technology and
the Company utilizes machinery automating surface mount and through-hole circuit
board manufacturing.
The Company's electronic devices involve electromechanical assemblies and
proprietary electronic circuitry. Most of the raw materials and manufactured
components used in the Company's products are available from a number of
different suppliers. The Company maintains multiple sources of supply for most
significant items and believes that alternative sources could be developed, if
required, for present single supply sources without a material disruption of its
operations.
PATENTS AND TRADEMARKS
Rehabilicare generally has not pursued patent protection on its products,
believing that patent protection did not offer a significant competitive
advantage in the marketplace for electrotherapy devices. However, that policy
changed with the Company's CTDx Electrostimulation System, which the Company
believes represents a major new application for electrical stimulation. As a
result, the Company applied for, and in 1996 was issued, patents for the CTDx
system, including the SmartBrace wrist splint, SmartBrace electrodes, and CTDx
electrical stimulation device. This was the Company's first patent on an
electrotherapy product. During the past two fiscal years, the Company submitted
several more patent applications for approval. These applications are pending.
Staodyn historically maintained a more aggressive approach to patent protection
than the Company, and the majority of Staodyn products are covered by more than
25 U.S. and Canadian patents. Both the Company and Staodyn maintain trademark
registration for all of their branded product names.
The Company believes that it owns or has the right to use all proprietary
technology necessary to manufacture and market its current products and those
under development. The
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Company has no knowledge that it is infringing upon any patents held by others.
The Company may decide for business reasons to retain a patentable invention as
a trade secret. In such event, or if patent protection is not available, the
Company must rely on trade secrets, know-how, and continuing technological
innovation to develop and maintain its competitive position.
GOVERNMENT 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 to the Federal Food, Drug and
Cosmetic Act (the Act), and regulations promulgated thereunder, manufacturers of
medical devices must comply with certain controls which 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, which are life supporting or life sustaining, or are of substantial
importance in preventing impairment of human health, are generally subject to a
clinical evaluation program before receiving premarket approval from the FDA for
commercial distribution. Class II devices are subject in some cases to
performance standards which 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
controls apply. Class I devices are subject only to general controls, such as
compliance with labeling and record-keeping regulations. The Company believes
that all of its currently marketed products are Class II products under this
classification system and that they do 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 regulatory review typically takes from three to twelve months.
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 its Good
Manufacturing Practices (GMP) 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 which are
now 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 European Medical Devices Directive.
REIMBURSEMENT
Governmental and other efforts to reduce healthcare 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
and private insurance programs, such as Medicare, Medicaid, health maintenance
organizations, and private insurers, including Blue Cross/Blue Shield plans.
Government imposed limits on reimbursement of hospitals and other healthcare
providers have significantly curtailed their spending budgets. Under certain
government insurance programs, a healthcare provider is reimbursed a fixed sum
for services rendered in treating a patient, regardless of the actual charge for
such treatment. Private and third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling healthcare costs through
redesign of benefits and exploration of more cost-effective methods of
delivering healthcare. In general, these government and private cost-containment
measures have caused healthcare providers to be more selective in the purchase
of medical products.
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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 healthcare 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 attempts to establish relationships with such payors to
assure coverage of its products and make the timing and extent of reimbursement
more predictable.
EMPLOYEES
As of June 30, 1999, the Company had 280 full-time employees, including 156
in sales and marketing, 9 in research and development, 50 in manufacturing, and
65 in finance and administration. Geographically, the Company had 96 employees
in its New Brighton facility, 126 employees in Tampa, and 58 employees in
various regional U.S. field sales offices. 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 are located in a 30,000 square foot
owned building in New Brighton, Minnesota, a suburb of St. Paul. This facility
houses all of the Company's corporate activities including administration,
finance, sales and marketing, research and development, and manufacturing.
The Company entered into a new 10 year lease effective June 1, 1999 to
lease 26,000 square feet of office space in Tampa, Florida for its direct sales,
customer service, patient support and billing and collection activities. The
Company's previously leased space in Tampa, Florida is still under lease thru
May 2001. The Company is currently attempting to sublease this space.
The Company also leased the former Staodyn headquarters building in
Longmont, Colorado. The Company exercised its option to purchase that facility
and subsequently sold it to a real estate developer in a transaction that closed
on July 7, 1999.
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.
On 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 and is cooperating with the
investigation. The United States Attorney's office has not advised the Company
of the objectives or potential consequences of the investigation.
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, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Rehabilicare Inc. shares are traded on The Nasdaq Stock Market under the
symbol REHB. The table below sets forth the high and low closing sale prices of
the Company's common stock for the periods indicated, as quoted by Nasdaq:
<TABLE>
<CAPTION>
Closing Sale Price
------------------
High Low
---- ---
<S> <C> <C>
Fiscal year ended June 30, 1999
First Quarter $ 2 3/4 $ 1 7/8
Second Quarter 3 5/8 1 13/16
Third Quarter 3 1/2 2 7/16
Fourth Quarter 3 3/8 2 1/2
</TABLE>
<TABLE>
<CAPTION>
Closing Sale Price
------------------
High Low
---- ---
<S> <C> <C>
Fiscal year ended June 30, 1998
First Quarter $ 3 7/8 $ 2 7/8
Second Quarter 4 9/16 2 15/16
Third Quarter 3 5/8 2 3/4
Fourth Quarter 3 2 1/2
</TABLE>
The last sale price reported by Nasdaq on September 20, 1999 was $3 11/16.
As of September 20, 1999, there were approximately 800 shareholders of record
(not including beneficial holders) and the Company estimates there were
approximately 3,600 beneficial holders.
The Company has never declared or paid a cash dividend on its Common Stock.
The Board of Directors presently intends to retain all earnings for use in the
operation and expansion of the Company's 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.
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 periods. Prior to the merger,
Staodyn reported its financial results on a fiscal year ended November 30,
while Rehabilicare reported its financial results on a fiscal year ended June
30. On August 7, 1998, Rehabilicare acquired certain assets of the Homecare
division of Henley Healthcare, Inc. and the operations of that business are
included in the consolidated financial statement from that date forward.
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.
Page 11
<PAGE>
The Company bills the patient or the patient's insurance carrier directly
upon notification that a unit has been prescribed and provided to the patient.
It also takes responsibility for patient follow-up, including the sale of
additional supplies and any service required for its products. The Company
believes that its shift to a direct sales approach has improved margins and its
ability to penetrate existing markets. It has also resulted in significant
increases in consignment inventory and receivables.
RESULTS OF OPERATIONS
The following table sets forth information from the statement of operations
as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30
------------------
1999 1998
---- ----
<S> <C> <C>
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 28.6 32.9
Gross profit 71.4 67.1
Operating expenses
Selling, general and administrative 57.3 59.8
Research and development 2.1 2.9
Non-recurring merger items (0.3) 10.6
------- -----
Total operating expenses 59.1 73.3
Income (loss) from operations 12.3 (6.2)
Other expense 1.2 1.1
Income tax benefit 4.2 4.4
Net income (loss) 6.9 (2.9)
</TABLE>
COMPARISON OF YEAR ENDED JUNE 30, 1999 TO YEAR ENDED JUNE 30, 1998
Revenue was $41,795,000 in fiscal 1999, a 24% increase from $33,812,000 in
fiscal 1998. Net sales and rental revenue from direct distribution to patients
increased 28% to $36,333,000 from $28,377,000 and accounted for approximately
87% and 84% of total revenue, respectively. The increase was due to the increase
in revenue from the Henley Homecare division acquisition and to the growth in
the number of new patients.
Revenue from the Company's traditional dealer business, excluding
international, decreased by 8% to $4,870,000 in fiscal 1999 from $5,269,000.
International sales were $592,000 in fiscal 1999 compared to $166,000 in fiscal
1998. The primary reason for the decrease in the dealer business was the
acquisition of the Company's U.K. distributor in February 1999 by a newly-formed
majority-owned subsidiary of the Company.
Gross profit increased 32% to $29,847,000 or 71% of revenue in fiscal 1999
compared with $22,677,000 or 67% of revenue in fiscal 1998. Fiscal 1998 gross
profit was after a write-off of approximately $832,000 of inventories related to
discontinued Staodyn product lines. Before that write-off, gross profit was 70%
of revenue. The changes in gross profit as a percent of revenue are primarily
the result of the mix of sales and rentals.
Selling, general and administrative expenses increased 18% to $23,962,000
in fiscal 1999 from $20,227,000 in fiscal 1998. The significant increase in
selling, general and administrative expenses were variable expenses including
sales commissions and provision for uncollectible retail receivables, both of
which were related to the increase in retail revenue. The Company also incurred
operating costs of
Page 12
<PAGE>
$3,589,000 in fiscal 1998 for merger related expenses. In fiscal 1999 the
Company completed the integration of Staodyn and Rehabilicare operations and
incurred an additional $157,000 of costs. Such costs were offset by $266,000 of
the 1998 merger reserves which were reversed to income in 1999 since the
contemplated severance and related activities were completed during the year.
Research and development expense was $867,000 or 2% of revenue in fiscal
1999 compared with $986,000 or 3% of revenue in fiscal 1998.
The Company reported operating income of $5,127,000 in fiscal 1999 compared
with an operating loss of $2,125,000 in fiscal 1998. The loss in fiscal 1998 was
primarily a result of the merger related expenses discussed above. The net
income was $2,860,000 in fiscal 1999 compared to a net loss of $1,009,000 for
fiscal 1998.
The effective income tax rate for fiscal 1999 was 38 percent. For fiscal
1998, Rehabilicare recorded an income tax benefit. The amount recorded includes
a tax benefit on losses reported for the year and full reversal of valuation
allowances in the amount of $769,000 recorded by Staodyn as a separate company
in previous years. The allowances had been recorded against available tax loss
carry forwards and timing differences. Based on the successful completion of the
merger and the foundation created for future profitable operations, management
believes that it is more likely than not that Rehabilicare will ultimately
realize the available tax benefits.
COMPARISON OF YEAR ENDED JUNE 30, 1998 TO YEAR ENDED JUNE 30, 1997
Revenue was $33,812,000 in fiscal 1998, a 5% increase from $32,134,000 in
fiscal 1997. Net sales and rental revenue from direct distribution to patients
increased 9% to $28,377,000 from $26,124,000 and accounted for approximately 84%
and 81% of total revenue, respectively. The increase was due primarily to growth
in the number of new patients.
Revenue from the Company's traditional dealer business, excluding
international, decreased by 1% to $5,269,000 in fiscal 1998 from $5,323,000.
International sales were $166,000 in fiscal 1998 compared to $687,000 in fiscal
1997. The primary reason for the decrease was the fulfillment in fiscal 1997 of
an order from the Company's dealer in the United Kingdom for the BabiTENS-TM-
product. Fiscal 1998 sales reflect ongoing accessoRy sales to that distributor
for use with those units.
Gross profit increased 4% to $22,677,000 or 67% of revenue in fiscal 1998
compared with $21,898,000 or 68% of revenue in fiscal 1997. As a result of the
merger with Staodyn, the company wrote-off approximately $832,000 of inventories
related to Staodyn product lines which have been discontinued. Before that
write-off, gross profit increased to 70% of revenue. The changes in gross profit
as a percent of revenue are primarily the result of the mix of sales and
rentals.
Selling, general and administrative expenses increased 5% to $20,227,000 in
fiscal 1998 from $19,316,000 in fiscal 1997. The only significant changes in
selling, general and administrative expenses were variable expenses including
sales commissions and marketing costs related to the CTDx-TM- and the new Ortho
Dx product linEs and an increased provision for uncollectible retail
receivables.
Research and development expense was $986,000 or 3% of revenue in fiscal
1998 compared with $984,000 or 3% of revenue in fiscal 1997.
Rehabilicare incurred pretax expenses of approximately $4,421,000 in
connection with the merger during the year ended June 30, 1998, consisting of
approximately $1,165,000 of employee severance costs; approximately $496,000 of
investment banking fees; $250,000 of professional fees; a $2,200,000 adjustment
for obsolete inventory, fixed and tangible assets; and approximately $310,000 of
miscellaneous employee costs and expenses. Of those total expenses, $832,000
representing inventory write-offs was charged to cost of sales and $3,589,000
was charged to operating expenses in the period ended June 30, 1998. See Note 3
to the Consolidated Financial Statements.
Page 13
<PAGE>
The Company reported an operating loss of $2,125,000 in fiscal 1998
compared with operating income of $1,599,000 in fiscal 1997. Such loss was
primarily a result of the merger related expenses discussed above. The net loss
was $1,009,000 in fiscal 1998 compared to net income of $1,794,000 for fiscal
1997.
Rehabilicare recorded an income tax benefit for fiscal 1998. The amount
recorded includes a tax benefit on losses reported for the year and full
reversal of valuation allowances in the amount of $769,000 recorded by Staodyn
as a separate company in previous years. The allowances had been recorded
against available tax loss carry forwards and timing differences in the
recognition of certain costs and expenses. Based on the successful completion of
the merger and the foundation created for future profitable operations,
management believes that it is more likely than not that Rehabilicare will
ultimately realize the available tax benefits.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $359,000 in fiscal 1999 and used $1,734,000 of
cash in fiscal 1998.
Operations have previously required significant amounts of cash to fund
increases in receivables. Cash was used to fund increases in net receivables of
$2,839,000 in fiscal 1999 and $1,277,000 in fiscal 1998. During fiscal 1999, the
Company provided an additional $4,938,000 for uncollectible receivables and
wrote off $3,192,000 of accounts it considered uncollectible. As a percent of
receivables, the reserve increased from 19.7% in fiscal 1998 to 22.2% 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.
Cash of $4,495,000 was used in investing activities in fiscal 1999 compared
with $626,000 in fiscal 1998. Most of the usage related to the purchase of
certain assets of Henley Healthcare, Inc. for total consideration of $3,650,000.
The balance was primarily normal replacements of and additions to data
processing and manufacturing equipment.
Financing activities provided cash of $3,869,000 in fiscal 1999 and used
cash of $838,000 in fiscal 1998. In August 1998, the Company applied $3,300,000
of borrowings under the credit facility (a portion as a term loan) to the
purchase of the Homecare division of Henley Healthcare, Inc. The Company repaid
approximately $1,135,000 of long-term debt in fiscal 1999 and $359,000 in fiscal
1998. The Company maintains a credit facility which provides for borrowing up to
$5,500,000, limited by eligible accounts receivable. At June 30, 1999, the
borrowing base limit was approximately $5,500,000. Borrowings under the line
were $2,400,000 on June 30, 1999 and there were no borrowings under the line on
June 30, 1998.
Subsequent to year-end, the Company acquired substantially all of the
assets of Compex SA, a Swiss-based medical products Company for cash of
approximately $11.0 million. The acquisition was financed with a new credit
facility that fully funded the purchase of this entity. The Company does not
have any material commitments for other acquisitions or for capital
expenditures and believes that cash requirements during fiscal 2000 will be
less than the total of cash provided from operations and its available
credit facility.
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.
Page 14
<PAGE>
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
currently is completing the process of evaluating this effort and expects to
request final detailed and updated information from its principal vendors and
customers during the next quarter.
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 and rentals; volatility
in the markets for electrotherapy; the effects of reimbursement and other
governmental or private agency actions on the Company's sales; and competition
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.
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
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Operations for the years ended June 30, 1999
and 1998
Consolidated Statement of Changes in Stockholders' Equity for the years
ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended June 30, 1999
and 1998
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Page 15
<PAGE>
The information contained under the headings "Election of Directors" and
"Executive Officers" of the Company's definitive proxy statement for its annual
meeting of shareholders to be held December 15, 1998 (hereafter the "Proxy
Statement"), is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" of the Proxy
Statement is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of the
Proxy Statement is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of December 1, 1997 by and among
Rehabilicare Inc., Hippocrates Acquisition, Inc. and Staodyn, Inc.
(incorporated by reference to Exhibit A to the Proxy Statement/
Prospectus that forms a part of Amendment No. 1 to the Registration
Statement on Form S-4 filed by the Company on February 10, 1998
(File Number 333-44139))(g)
2.2 Asset Purchase Agreement dated August 6, 1998 between the Company and
Henley Healthcare, Inc.(h)
3 Restated Articles of Incorporation (b)
3.1 Articles of Amendment to Articles of Incorporation (i)
4.1 Bylaws of the Company (b)
4.2 1988 Restated Stock Option Plan, as amended (a)
4.3 1994 Employee Stock Purchase Plan (c)
4.4 Rehabilicare Inc. 1998 Stock Incentive Plan (i)
10.1 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 (d)
10.2 Contract for Private Redevelopment dated October 20, 1994 between the
Company and the City of New Brighton, Minnesota (d)
Page 16
<PAGE>
10.3 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 (e)
10.4 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 (d)
10.5 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 (e)
10.6 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) (e)
10.7 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 (e)
10.8 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 (e)
10.9 $65,000 Limited Revenue Tax Increment Note payable to the Company by
the City of New Brighton (e)
10.10 Form of Severance Pay Agreement (f)
10.11 Stock Pledge Agreement and Promissory Note dated March 11, 1997
between the Company and David B. Kaysen (h)
10.12 Purchase and Sale Agreement dated May 6, 1999 between the Company and
Snow Goose Investments, LLC. *
10.13 Credit Agreement dated July 14, 1999 between Rehabilicare Inc. and
U.S. Bank National Association. (j)
10.14 Security Agreement dated July 14, 1999 between Rehabilicare Inc. and
U.S. Bank National Association. (j)
10.15 Stock Pledge Agreement dated July 19, 1999 between Rehabilicare
Inc. and U.S. Bank National Association covering all shares of
capital stock in Compex SA owned by Rehabilicare Inc. (j)
10.16 Guarantee dated July 19, 1999 executed by Compex SA in favor of
U.S. Bank National Association. (j)
10.17 Letter dated July 10, 1998 to 1225 Building, LLC and Pendelton
Construction Co. exercising options to purchase premises at 1225 Ken
Pratt Boulevard in Longmont, Colorado. (h)
23.1 Consent of Independent Public Accountants - PricewaterhouseCoopers LLP
27.1 Financial Data Schedule for the period ended June 30, 1999*
99 Safe Harbor Statement pursuant to the Private Securities Litigation
Reform Act of 1995
- -------------------------------------------------------------------------------
</TABLE>
(a) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1988 (File Number 0-9407)
(b) Incorporated by reference to the Company's Form 10-Q for the quarter
ended December 31, 1992 (File Number 0-9407)
(c) Incorporated by reference to the Company's Registration Statement on
Form S-2 filed on June 24, 1993 (File Number 33-64884)
Page 17
<PAGE>
(d) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1994 (File Number 0-9407)
(e) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1995 (File Number 0-9407)
(f) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1997 (File Number 0-9407)
(g) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1998 (File Number 0-9407)
(h) Incorporated by reference to the Company's Form 10KSB for the year
ended June 30, 1998 (File Number 0-9407)
(i) Incorporated by reference to Appendix E to the final prospectus
included in Amendment No. 1 to the Company's Registration Statement
on Form S-4 filed February 2, 1998 (file no. 333-44139)
(j) Incorporated by reference to the Company's Current Report on Form
8-K filed August 2, 1999 (File No. 0-9407)
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
quarter ended June 30, 1999.
* Filed as part of this report
Page 18
<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 28, 1999 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>
/s/ DAVID B. KAYSEN President, Chief Executive Officer September 28, 1999
- -----------------------------------------------
David B. Kaysen
Vice President of Finance
(Principal Financial and
/s/ W. GLEN WINCHELL Accounting Officer) September 28, 1999
- -----------------------------------------------
W. Glen Winchell
Chairman, Chief Technical
/s/ ROBERT C. WINGROVE Officer and Director September 28, 1999
- -----------------------------------------------
Robert C. Wingrove
/s/ FREDERICK H. AYERS Director September 28, 1999
- -----------------------------------------------
Frederick H. Ayers
/s/ W. BAYNE GIBSON Director September 28, 1999
- -----------------------------------------------
W. Bayne Gibson
/s/ RICHARD E. JAHNKE Director September 28, 1999
- -----------------------------------------------
Richard E. Jahnke
/s/ JOHN H.P. MALEY Director September 28, 1999
- -----------------------------------------------
John H.P. Maley
</TABLE>
Page 19
<PAGE>
REHABILICARE INC.
Financial Statements as of
June 30, 1999 and 1998 and
Supplemental Schedule
Together With Report of
Independent Public Accountants
Page 20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Rehabilicare Inc.
In our opinion, the accompanying consolidated balance sheet and the related
statements of consolidated operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Rehabilicare Inc. and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1999, 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 2, 1999
Page 21
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 561,207 $ 919,765
Receivables, less reserve for uncollectible accounts of $4,913,635
and $3,109,448 17,233,469 12,660,667
Inventories -
Raw materials 1,825,487 2,252,897
Work in process 377,771 249,277
Finished goods 6,709,525 4,292,870
Deferred tax assets 2,587,686 2,197,724
Prepaid expenses 584,330 300,827
------------ ------------
Total current assets 29,879,475 22,874,037
------------ ------------
PROPERTY, PLANT AND EQUIPMENT: 11,548,678 11,915,732
Less accumulated depreciation (6,930,564) (8,544,578)
------------ ------------
Total property, plant and equipment 4,618,114 3,371,154
------------ ------------
Intangible assets, net 1,150,009 477,210
Deferred tax assets 40,121 302,859
Other assets 11,995 35,098
------------ ------------
$ 35,699,714 $ 27,060,358
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 2,400,000 $ --
Current maturities of long-term debt 1,241,037 404,172
Accounts payable 2,038,732 1,110,366
Accrued liabilities
Payroll 575,426 699,123
Commissions 491,990 458,783
Other 1,560,297 996,979
Minority interest 24,681 --
------------ ------------
Total current liabilities 8,332,163 3,669,423
LONG-TERM LIABILITIES:
Long term-debt 4,066,914 3,299,705
Deferred tax liabilities 247,328 --
------------ ------------
Total liabilities 12,646,405 6,969,128
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized;
issued and outstanding shares 10,494,908 and 10,443,369,
respectively 1,049,491 1,044,337
Preferred stock, no par value; 5,000,000 shares authorized; none
Issued and outstanding -- --
Additional paid-in capital 20,740,650 20,641,922
Less note receivable from officer/stockholder (237,500) (237,500)
Accumulated other non-owner changes in equity (1,637) --
Retained earnings 1,502,305 (1,357,529)
------------ ------------
Total stockholders' equity 23,053,309 20,091,230
------------ ------------
$ 35,699,714 $ 27,060,358
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 22
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales and rental revenue $ 41,795,373 $ 33,812,453
Cost of sales and rentals 11,948,304 11,135,933
------------ ------------
Gross profit 29,847,069 22,676,520
Operating expenses:
Selling, general and administrative 23,961,728 20,226,837
Research and development 866,698 986,203
Non-recurring-merger items (108,619) 3,588,890
------------ ------------
Total operating expenses 24,719,807 24,801,930
------------ ------------
Income (loss) from operations 5,127,262 (2,125,410)
Other income (expense):
Interest expense (499,297) (391,677)
Other income 6,550 13,235
Minority interest (24,681) --
------------ ------------
Income (loss) before income
Taxes 4,609,834 (2,503,852)
Income tax provision (benefit) 1,750,000 (1,495,169)
------------ ------------
Net income (loss) $ 2,859,834 $ (1,008,683)
------------ ------------
------------ ------------
Net income (loss) per common share and common
equivalent share
Basic $ 0.27 $ (0.10)
------------ ------------
------------ ------------
Diluted $ 0.27 $ (0.10)
------------ ------------
------------ ------------
Weighted average number of shares outstanding
Basic 10,471,807 10,398,346
------------ ------------
------------ ------------
Diluted 10,529,422 10,398,346
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 23
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
Note Receivable
Common Stock Additional From Officer /
Shares Amount Paid-In Capital Stockholder
------ ------ ----------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1997 10,374,701 $ 1,037,470 $ 20,491,929 $ (162,500)
Net loss, comprehensive loss -- -- -- --
Adjustment to conform the year-end of -- -- -- --
Staodyn, Inc.
Exercise of stock options and related
tax benefits 58,778 5,878 124,080 (75,000)
Common stock issued through Employee
Stock Purchase Plan 9,890 989 25,913 --
--------------- ----------------- ------------------ ---------------
BALANCE, June 30, 1998 10,443,369 1,044,337 20,641,922 (237,500)
Net income -- -- -- --
Translation adjustments -- -- -- --
Total comprehensive income
Exercise of stock options and related
tax benefits 27,901 2,790 47,898 --
Common stock issued through Employee
Stock Purchase Plan 23,638 2,364 50,830 --
--------------- ----------------- ---------------- ------------------
BALANCE, June 30, 1999 10,494,908 $ 1,049,491 $ 20,740,650 $ (237,500)
--------------- ----------------- ---------------- ------------------
--------------- ----------------- ---------------- ------------------
<CAPTION>
Accumulated
Other
Non-Owner Total
Changes in Retained Stockholders'
Equity Earnings Equity
--------------- ---------------- ------------------
<S> <C> <C> <C>
BALANCE, June 30, 1997 -- $ 5,552 $ 21,372,451
Net loss, comprehensive loss -- (1,008,683) (1,008,683)
Adjustment to conform the year-end of -- (354,398) (354,398)
Staodyn, Inc.
Exercise of stock options and related
tax benefits -- -- 54,958
Common stock issued through Employee
Stock Purchase Plan -- -- 26,902
---------------- ---------------- ---------------
BALANCE, June 30, 1998 -- (1,357,529) 20,091,230
Net income -- 2,859,834 2,859,834
Translation adjustments (1,637) -- (1,637)
--------------
Total comprehensive income 2,858,197
--------------
Exercise of stock options and related
tax benefits -- -- 50,688
Common stock issued through Employee
Stock Purchase Plan -- -- 53,194
---------------- --------------- -----------------
BALANCE, June 30, 1999 $ (1,637) $ 1,502,305 $ 23,053,309
---------------- --------------- -----------------
---------------- --------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 24
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1999 1998
------------------ ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,859,834 $ (1,008,683)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities
Depreciation and amortization 809,247 840,879
Non-recurring merger items (266,156) 1,374,550
Change in long-term portion of deferred tax asset 262,738 25,023
Change in long-term portion of deferred tax liability 247,328 --
Minority interest 24,681 --
Changes in current assets and liabilities
Receivables (2,839,037) (1,276,614)
Current deferred taxes (389,962) (1,125,842)
Inventories (938,459) 323,646
Prepaid expenses (283,503) 141,493
Accounts payable 319,758 97,218
Accrued liabilities 461,209 338,122
-------------- -------------
Net cash provided by (used in) operating activities 267,678 (270,208)
-------------- -------------
INVESTING ACTIVITIES
Purchase of property and equipment (786,802) (612,137)
Cash paid in asset acquisitions (3,699,763) --
Purchase of intangible assets (8,487) (28,129)
Increase (decrease) in other assets -- 13,767
-------------- -------------
Net cash used in investing activities (4,495,052) (626,499)
-------------- -------------
FINANCING ACTIVITIES
Proceeds from new financing 2,500,000 133,515
Principal payments on long-term obligations (1,135,066) (358,623)
Proceeds from (payments on) line of credit, net 2,400,000 (340,000)
Equity transactions 103,882 81,860
Adjustment for pooling -- (354,398)
-------------- -------------
Net cash provided by (used in) financing activities 3,868,816 (837,646)
-------------- -------------
Net decrease in cash and cash equivalents (358,558) (1,734,353)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 919,765 2,654,118
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 561,207 $ 919,765
-------------- -------------
-------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 423,978 $ 389,468
-------------- -------------
-------------- -------------
Income taxes paid $ 1,670,897 $ 9,611
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 25
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
The Company used a new term loan and existing credit line to finance
certain business combinations accounted for under the purchase method during
1999. The fair value of the assets and liabilities of acquired companies at the
dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
Year Ended
June 30, 1999
----------------
<S> <C>
Accounts receivable $ 1,710,651
Inventories 1,179,280
Property and equipment 623,814
Intangible assets 1,043,748
Accounts payable (606,971)
Accrued liabilities (11,618)
Long-term liabilities (239,141)
-----------
Net assets acquired $ 3,699,763
-----------
-----------
</TABLE>
Page 26
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rehabilicare Inc. (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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Rehabilicare,
Inc., and its subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Revenue from rental and sale of products directly to patients and health
care providers accounted for approximately 84 percent of total revenue in fiscal
1999 and 81 percent in fiscal 1998. 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
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. The most significant
management estimates used in the preparation of the financial statements are
associated with the reserves established for sales returns and uncollectible
accounts and reserves for product obsolescence.
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.
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:
<TABLE>
<CAPTION>
<S> <C>
Building 39 years
Office furniture and equipment 3-10 years
Production equipment 3-5 years
Clinical and rental equipment 5 years
</TABLE>
Page 27
<PAGE>
INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists from business
acquisitions and patents. These assets are being amortized using the
straight-line method over estimated lives of 10 years for customer lists and 14
years for patents. The Company periodically reviews intangible assets for
indications of impairment in accordance with SFAS No. 121.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which disclosures are presented in Note 7. Accordingly, the
company continues to account for stock-based compensation using the intrinsic
value method as prescribed under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related Interpretations.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of common shares outstanding, while diluted earnings per share is computed based
on the weighted average number of common shares outstanding adjusted by the
number of additional shares that would have been outstanding had the potential
dilutive common shares been issued. Potential dilutive shares of common stock
include stock options and other stock-based awards granted under stock-based
compensation plans.
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.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated to U.S. dollars at year-end exchange
rates, while elements of the income statement are translated at average exchange
rates in effect during the year. Foreign currency transaction gains and losses
are included in the statement of consolidated operations as selling, general,
and administrative expense. Adjustments arising from the translation of most net
assets located outside the United States (gains and losses) are recorded as a
component of accumulated other non-owner changes in equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement which is required to be
adopted for annual periods beginning after June 15, 2000, establishes standards
for recognition and measurement of derivatives and hedging activities. The
Company will be required to implement this statement in fiscal year 2001. The
impact of adopting this standard is not expected to have a material affect on
the Company's financial position or results of operations.
Page 28
<PAGE>
SELECTED FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
As of June 30
--------------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Property, Plant and Equipment $ 306,553 $ 306,553
Land 2,658,752 3,152,323
Buildings 1,250,953 340,534
Clinical and Rental Equipment 2,534,580 3,174,596
Production Equipment 4,797,840 4,941,726
Office Furniture and Equipment ------------ ------------
11,548,678 11,915,732
Less Accumulated Depreciation (6,930,564) (8,544,578)
------------ ------------
Total Property, Plant and Equipment $ 4,618,114 $ 3,371,154
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Intangible Assets 1999 1998
------------ ------------
<S> <C> <C>
Customer lists $ 1,043,748 $ 1,145,975
Patents 285,614 277,127
Start-up -- 137,873
------------ ------------
1,329,362 1,560,975
Less accumulated amortization (179,353) (1,083,765)
------------ ------------
$ 1,150,009 $ 477,210
------------ ------------
------------ ------------
</TABLE>
2. BUSINESS COMBINATIONS
1998 ACQUISITION OF THE ASSETS OF HENLEY HEALTHCARE
On August 7, 1998, the Company acquired certain assets of Henley
Healthcare, Inc. for total consideration of approximately $3.7 million. The
acquisition was financed using a new term loan and the existing credit line.
The acquisition was accounted for using the purchase method of accounting
with the purchase price allocated to the fair value of the net assets
acquired. The excess of the purchase price over the fair value of the
underlying assets acquired of $1,000,000 has been allocated to customer lists
and is being amortized over a ten-year period. Proforma information related
to this acquisition is not included as the impact is not deemed to be
material.
1997 MERGER WITH STAODYN
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 (approximately
317,575 shares of Rehabilicare Common Stock) and warrants to purchase 130,000
shares (107,770 shares of Rehabilicare Common Stock).
The Merger was recorded using the pooling-of-interests method. Prior to the
Merger, Staodyn reported its financial results on a fiscal year ended November
30, while Rehabilicare reported its financial results on a fiscal year ended
June 30. The balance sheet of Rehabilicare at June 30, 1997 on a combined basis
presents the historical financial position of Rehabilicare at June 30, 1997
combined with the historical financial position of Staodyn at November 30, 1997.
The combined results of operations for the fiscal year ended June 30, 1997
represent the historical results of operations of Rehabilicare for such period
combined with the historical results of operations of
Page 29
<PAGE>
Staodyn for the fiscal year ended November 30, 1997. The combined results of
operations for the fiscal year ended June 30, 1998 represent the historical
results of operations of Rehabilicare for such period combined with the
historical results of operations of Staodyn for the same period. Staodyn's
revenue and costs and expenses of $10,813,033 and $10,458,635, respectively, for
the period July 1, 1997 through November 30, 1997 are included in the combined
results of operations for the fiscal year ended June 30, 1998 and 1997,
resulting in an adjustment to retained earnings of $354,398 during fiscal 1998.
3. NON-RECURRING MERGER ITEMS
In fiscal 1998, Rehabilicare incurred pretax expenses of approximately
$4,421,000 in connection with the merger with Staodyn consisting of
approximately $1,165,000 of employee severance costs, approximately $496,000 of
investment banking fees; $250,000 in professional fees; a $2.2 million
adjustment for obsolete inventory, fixed intangible assets; and approximately
$310,000 in miscellaneous employee costs and expenses. Of these total expenses,
$832,000 representing inventory write-offs was charged to costs of sales and
$3,589,000 was charged to operating expenses in the period ended June 30, 1998.
The severance of employees resulted in the elimination of 67 jobs and all
employee layoffs were completed during fiscal 1999. Of the $4,421,000 of
nonrecurring charges, actual cash cost was approximately $2,221,000 and total
non-cash cost was $1,934,000. In fiscal 1999, the Company completed the
integration of Staodyn and incurred an additional $157,000 of merger costs. Such
costs were offset by $266,000 of the 1998 merger reserves that were restored to
income in 1999 since the contemplated severance and related activities were
completed during the year.
4. NOTES PAYABLE:
The Company maintains a revolving line of credit with a bank which provides
for borrowings up to $3,000,000, limited by eligible receivables, as defined.
There was $2,400,000 outstanding on the line of credit at June 30, 1999.
Borrowings under this line bear interest, payable monthly, at the bank's prime
rate (8.5% at June 30, 1998). 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,
1999.
Selected data on the Company's borrowings under its revolving line of
credit is shown below:
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Average balance outstanding $ 1,885,000 $ 471,000
Maximum balance outstanding $ 2,800,000 $ 740,000
Weighted average interest rate 8.5% 8.5%
</TABLE>
Page 30
<PAGE>
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term obligations at June 30 consisted of the following 1999 1998
------------------ -------------------
<S> <C> <C>
Mortgage note payable, principal and interest due in monthly
installments through August 2001, interest at 8.05% for the first year,
with the final two years at a fixed annual rate equal to 2.75% in excess
of the treasury rate, collateralized by the Company's receivables. $ 1,805,550 --
Financing obligation, lease payments are due in annual installments
through July 2003, interest at prime (8.5% at June 30, 1999),
collateralized by the Company's building in Longmont, Colorado. Option
to purchase the building was filed on July 2, 1998. (See Note 9.) $ 1,261,773 $ 1,258,500
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 699,424 721,982
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 700,468 718,344
Notes payable, principal and interest due in monthly
installments through June 1999, interest at prime (8.5% at
June 30, 1998), collateralized by the Company's
receivables, inventories, furniture and equipment -- 199,992
Capital lease obligations 594,453 755,684
Other 246,283 49,375
------------------ -------------------
5,307,951 3,703,877
Less-Current maturities (1,241,037) (404,172)
------------------ -------------------
$ 4,066,914 $ 3,299,705
------------------ -------------------
------------------ -------------------
</TABLE>
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, 1999,
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:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,074,186
2001 881,093
2002 190,775
2003 56,424
2004 61,345
Thereafter 2,449,675
-------------
$ 4,713,498
-------------
-------------
</TABLE>
Page 31
<PAGE>
LEASES
The Company has commitments under various operating and capital leases
which bear interest at rates ranging from 6.15% to 14.1% and are payable in
monthly installments through various dates. Future minimum lease payments
under non-cancelable operating and capital leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C>
2000 $ 217,577 $ 387,803
2001 197,849 366,760
2002 187,983 239,984
2003 95,293 247,184
2004 -- 254,599
THEREAFTER -- 1,072,569
---------- -----------
Total future minimum lease payments 698,702 $ 2,568,899
Less amount representing interest (104,249) -----------
---------- -----------
Present value of net minimum lease payments 594,453
Less current portion (166,851)
----------
Long-term capital lease obligation $ 427,602
----------
----------
Rent expense for operating leases for fiscal 1999 and 1998 was $156,381 and $158,841, respectively.
</TABLE>
6. 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:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Currently payable: $1,458,000 $ (374,632)
Federal 172,000 (19,718)
State 120,000 (1,100,819)
---------- -----------
Deferred $1,750,000 $ (1,495,169)
---------- -----------
---------- -----------
</TABLE>
A reconciliation of the Company's reported provision for income taxes as
compared to that using statutory federal rates follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Statutory rate applied to income before taxes $ 1,567,344 $ (851,300)
State income taxes, net of federal tax benefit 170,564 87,650
Release of valuation allowance -- (780,765)
Nondeductible merger costs -- 279,860
Other 12,092 (55,314)
----------- ------------
$ 1,750,000 $ (1,495,169)
----------- ------------
----------- ------------
Deferred tax benefits (liabilities) arising from:
Reserve for uncollectible accounts $ 1,253,191 $ 557,218
Accruals and other reserves 310,862 159,122
Accrued merger costs -- 506,733
Depreciation (247,328) 75,037
Inventory 687,950 576,440
Sale and leaseback 335,683 336,871
Intangible assets 40,121 46,255
Net operating loss carryforwards -- 61,340
General business credits -- 181,567
----------- ------------
$ 2,380,479 $2,500,583
----------- ------------
----------- ------------
</TABLE>
Page 32
<PAGE>
The tax provision in fiscal 1998 includes the impact of the release of all
remaining valuation allowances. In management's opinion, the sustained
profitability of operations, excluding the impact of the costs associated with
the merger with Staodyn, make it more likely than not that all potential
deferred tax assets will be fully utilized by the Company.
7. STOCKHOLDERS' EQUITY:
STOCK OPTIONS
The Company has 925,000 shares of its common stock reserved under its 1988
Restated Stock Option Plan, and 400,000 shares of its common stock reserved
under its 1998 Stock Incentive 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 plans as of
June 30, 1999 and has been restated to reflect the converted stock options from
the Staodyn merger:
<TABLE>
<CAPTION>
Option Price on Dates
Of Grants Number of Shares
------------------------- -----------------------
<S> <C> <C>
Balance outstanding at June 30, 1997 $ 0.075-$4.750 709,509
Granted 1.6586 - 3.5625 183,277
Exercised 0.875 - 2.625 (58,778)
Canceled 0.875 - 1.875 (1,500)
--------------- ---------
Balance outstanding at June 30, 1998 $0.750-$4.750 832,508
Granted 2.25 - 3.25 193,500
Exercised 1.5078 - 2.2618 (27,901)
Canceled 1.5078 - 6.3329 (364,584)
--------------- ---------
Balance outstanding at June 30, 1999 $0.750 - 4.750 633,523
---------
---------
Exercisable at June 30, 1999 $0.875 - 4.750 272,023
---------
---------
Available for grant at June 30, 1999 294,340
---------
---------
</TABLE>
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted Weighted
Average Average
Weighted Average Exercise Exercise
Range of Remaining Price Price
Exercise Price Shares Contractual Life Per Share Shares Per Share
- -------------- ------ ---------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$1.51 to $2.19 72,212 1.8 Years $ 1.83 72,212 $ 1.83
$2.25 to $3.06 349,264 3.0 Years 2.75 87,764 2.95
$3.25 to $4.00 164,974 3.1 Years 3.36 74,974 3.41
$4.25 to $5.88 47,073 3.2 Years 4.65 37,073 4.67
------- -------
633,523 272,023
------- -------
------- -------
</TABLE>
Page 33
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
-------------------- ------------------
<S> <C> <C>
Net Income (loss) As reported $2,859,834 $ (1,008,683)
Pro forma 2,689,542 (1,118,476)
Basic earnings (loss) per share As reported $ .27 $ (.10)
Pro forma .26 (.11)
</TABLE>
Pro forma net income reflects only options and other stock based awards
granted since 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.
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 1999 and 1998: dividend yield of 0%; expected
volatility of 54.20% and 42.53%; risk-free interest rate of 5.31% and 5.41%; and
expected lives of 5 years.
The weighted-average fair value per option at the date of grant for options
granted in 1999 and 1998 was $1.35 and $1.34, respectively.
The Company loaned a total of $237,500 to an officer for the exercise of
certain stock options. This loan is secured by a promissory note and a pledge of
the stock purchased and bears interest at the bank's prime rate (8.5% on June
30, 1999). Payments are due quarterly, including accrued interest, commencing in
fiscal 2000 and ending in fiscal 2001.
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.
8. 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.
On January 26, 1999, the Company received a subpoena from the Federal
District Court for the Middle District of Florida for certain Midicare records
in connection with an investigation apparently being conducted by the United
States Attorney's office. The Company complied with the subpoena and is
cooperating with the investigation. The United States Attorney's office has not
advised the Company of the objectives or potential consequences of the
investigation.
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
Page 34
<PAGE>
additional discretionary contributions to the plan as determined annually. The
Company contributed $98,059 and $49,570 to the plan for the years ended June 30,
1999 and 1998, respectively. No discretionary contributions were made for fiscal
1998 or fiscal 1997.
9. SUBSEQUENT EVENTS
BUSINESS ACQUISITION
On July 16, 1999, the Company acquired substantially all the assets of
Compex SA, a Swiss-based medical products company for cash of approximately
$11.0 million. The acquisition was financed principally with dept and
provides for additional contingent consideration of up to $2 million based on
performance over the next two years. The purchase consideration exceeds the
net fair value of tangible assets by approximately $7.2 million.
Proforma operating results as if the Company had been acquired at the
beginning of fiscal 1998 are as follows (unaudited):
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Net sales $ 51,378,000 41,633,000
Income (loss) before taxes $ 3,416,000 (3,584,000)
Net income (loss) $ 1,998,000 (1,752,000)
Earnings (loss) per share
Basic $ 0.19 (0.17)
Diluted $ 0.19 (0.17)
</TABLE>
SALE OF LONGMONT FACILITY
On July 7, 1999, the Company completed the sale of its facility in
Longmont, Colorado. The sale resulted in a gain of approximately $1.1 million
which will be reflected in the first quarter of fiscal 2000. At June 30, 1999
the carrying value of the facility was $651,000 and is classified within
Property, Plant and Equipment.
10. SEGMENT INFORMATION
The Company operates its business in one reportable segment, the
manufacture and sale of rehabilitation and electromedical pain management
products. Rehabilicare's chief operating decision makers use consolidated
results to make operating and strategic decisions. Net sales are primarily
derived in the United States. Net sales by product line were as follows:
<TABLE>
<CAPTION>
Year ended June 30
--------------------------------------------
1999 1998
------------------ --------------------
<S> <C> <C>
Rehabilitation products $ 10,946,000 $ 9,123,000
Pain management 15,103,000 12,610,000
Accessories and supplies 15,746,000 12,079,000
---------------- ----------------
$ 41,795,000 $ 33,812,000
---------------- ----------------
---------------- ----------------
</TABLE>
No single customer represents over 10% of the Company's consolidated sales.
Page 35
<PAGE>
3434 47th STREET COLORADO
SUITE 220 GROUP [LOGO]
BOULDER, CO 80301
(303) 449-2131
FAX (303) 449-8250
- -----------------------------------------------------------------------------
THIS FORM HAS IMPORTANT LEGAL CONSEQUENCES AND THE PARTIES SHOULD CONSULT
LEGAL AND TAX OR OTHER COUNSEL BEFORE SIGNING.
COMMERCIAL
CONTRACT TO BUY AND SELL REAL ESTATE
[FINANCING SECTIONS OMITTED]
May 06, 1999
1. PARTIES AND PROPERTY.
Snow Goose Investments, LLC and/or assigns (Buyer may assign this
contact with Snow Goose Investments and/or John R. Cohagen as a
principal)
buyer(s) [Buyer], (as tenants in common) agrees to buy, and the undersigned
seller(s) [Seller], agrees to sell, on the terms and conditions set forth in
this contract, the following described real estate in the County of Boulder,
Colorado, to wit:
Parcel A:
Lots 1 and 3, Block 1, Longmont Industrial Park Unit no. 2 Replat C
Parcel B:
Lot 2, Longmont Industrial Park Replat of Lot 4 Unit No. 2 Replat D.
Parcel C:
Lot 2, Block 1, Longmont Industrial Park Unit No. 2 Replat C, County of
Boulder, State of Colorado.
(as outlined on A.L.T.A. Survey Plat prepared for Staodyne, Inc. by RMC,
Peter A. Bryant, Registered Surveyor No. 20673)
known as No. 1201, 1215, and 1225 Ken Pratt Blvd. Longmont Colorado n/a
------------------------------------ -------- -------- ------
Street Address City State Zip
together with all interest of Seller in vacated streets and alleys adjacent
thereto, all easements and other appurtenances thereto, all improvements
thereon and all attached fixtures thereon, except as herein excluded
(collectively the Property).
2. INCLUSIONS/EXCLUSIONS. The purchase price includes the
following items (a) if attached to the Property on the date of this contract:
lighting, heating, plumbing, ventilating, and air conditioning fixtures,
TV antennas, water softeners, smoke/fire/burglar alarms, security devices,
inside telephone wiring and connecting blocks/jacks, plants, mirrors, floor
coverings, intercom systems, built-in kitchen appliances, sprinkler systems and
controls; (b) if on the Property whether attached or not on the date of this
contract: storm windows, storm doors, window and porch shades, awnings,
blinds, screens, curtain rods, drapery rods, all keys and (c)
n/a
- -----------------------------------------
The above-described included items (Inclusions) are to be conveyed to Buyer
by Seller by bill of sale at the closing, free and clear of all taxes, liens
and encumbrances, except as provided in Section 12. The following attached
fixtures are excluded from this sale:
Property is being sold "As Is Where Is" with no expressed or implied
warranties nor representations from or by Seller. Buyer is buying the
property at Buyers risk.
3. PURCHASE PRICE AND TERMS. The purchase price shall be
$3,000,000.00, payable in U.S. dollars by Buyer as follows: (Complete the
applicable terms below.)
(a) EARNEST MONEY
$450,000.00 in the form of checks see #21, as earnest money deposit and part
payment of the purchase price, payable to and held by Land Title Guarantee
Co., 2425 Canyon Blvd. #110, Boulder CO., 80302.
The balance of $2,550,000.00 (purchase price less earnest money)
shall be paid as follows:
(b) CASH AT CLOSING
$2,550,000.00, plus closing costs, to be paid by Buyer at closing in funds
which comply with all applicable Colorado laws, which include cash,
electronic transfer funds, certified check, savings and loan teller's check,
and cashier's check (Good Funds). Subject to the provisions
- -----------------------------------------------------------------------------
THE PRINTED PORTIONS OF THIS FORM HAVE BEEN APPROVED BY THE COLORADO REAL
ESTATE COMMISSION. (CBS2-7-96)
CBS2-7-96. COMMERCIAL CONTRACT TO BUY AND SELL REAL ESTATE [FINANCING SECTIONS
OMITTED]
RealFAST-Registered Trademark- Forms, Box 4700, Frisco, CO 80443, Version 5.52
- -C-RealFAST-Registered Trademark-. 1999; Reg#LCOCOL223550
Completed by -Gary A. Aboussie, Broker Associate, The Colorado Group, Inc.
Buyer(s) [Illegible] 05/06/99 14:49:51 PAGE 1 of 6
------------ Seller(s) [Illegible]
-----------
<PAGE>
- -----------------------------------------------------------------------------
of Section 4, if the existing loan balance at the time of closing shall be
different from the loan balance in Section 3, the adjustment shall be made in
Good Funds at closing or paid as follows:
n/a
- --------------------
(c) NEW LOAN [OMITTED - INAPPLICABLE]
(d) ASSUMPTION. [OMITTED - INAPPLICABLE]
(e) SELLER OR PRIVATE THIRD-PARTY FINANCING. [OMITTED - INAPPLICABLE]
4. FINANCING CONDITIONS AND OBLIGATIONS. [OMITTED - INAPPLICABLE]
5. APPRAISAL PROVISION. (Check one box only.) This Section 5
/ / shall /X/ shall not apply.
If this Section 5 applies, as indicated above, Buyer shall have the sole
option and election to terminate this contract if the purchase price exceeds
the Property's valuation determined by an appraiser engaged by Snow Goose
Investments, LLC. The contract shall terminate by the Buyer causing the
Seller to receive written notice of termination and a copy of such appraisal
or written notice from lender which confirms the Property's valuation is less
than the purchase price, on or before accept of inspection period (Appraisal
deadline). If seller does not receive such written notice of termination on
or before the appraisal deadline, Buyer waives any right to terminate under
this section.
6. COST OF APPRAISAL. Cost of any appraisal to be obtained after
the date of this contract shall be timely paid by Snow Goose Investments, LLC.
7. NOT ASSIGNABLE. This contract shall not be assignable by Buyer
without Seller's prior written consent. Except as so restricted, this
contract shall inure to the benefit of and be binding upon the heirs,
personal representatives, successors and assigns of the parties.
8. EVIDENCE OF TITLE. Seller shall furnish to Buyer, at Seller's
expense, either a current commitment for owner's title insurance policy in an
amount equal to the purchase price or at Seller's choice, an abstract of
title certified to a current date, on or before May 13, 1999 (Title
Deadline). If a title insurance commitment is furnished, Buyer may require of
Seller that copies of instruments (or abstracts of instruments) listed in the
schedule of exceptions (Exceptions) in the title insurance commitment also be
furnished to Buyer at Seller's expense. This requirement shall pertain only
to instruments shown of record in the office of the clerk and recorder of the
designated county or counties. The title insurance commitment, together with
any copies or abstracts of instruments furnished pursuant to this Section 8,
constitute the title documents (Title Documents). Buyer, or Buyer's
designee, must request Seller, in writing, to furnish copies or abstracts of
instruments listed in the schedule of exceptions no later than 7 calendar
days after Title Deadline. If Seller furnishes a title insurance commitment,
Seller will pay the premium at closing and have the title insurance policy
delivered to Buyer as soon as practicable after closing.
9. TITLE.
(a) TITLE REVIEW. Buyer shall have the right to inspect the Title
Documents or abstract. Written notice by Buyer of unmerchantability of title
or of any other unsatisfactory title condition shown by the Title Documents
or abstract shall be signed by or on behalf of Buyer and given to Seller on
or before 10 calendar days after Title Deadline, or within five (5) calendar
days after receipt by Buyer of any Title Document(s) or endorsement(s) adding
new Exception(s) to the title commitment together with a copy of the Title
Document adding new Exception(s) to title. If Seller does not receive Buyer's
notice by the date(s) specified above, Buyer accepts the condition of title
as disclosed by the Title Documents as satisfactory.
(b) MATTERS NOT SHOWN BY THE PUBLIC RECORDS. Seller shall deliver
to Buyer, on or before the Title Deadline set forth in Section 8, true copies
of all lease(s) and survey(s) in Seller's possession pertaining to the
Property and shall disclose to Buyer all easements, liens or other title
matters not shown by the public records of which Seller has actual knowledge.
Buyer shall have the right to inspect the Property to determine if any third
party(s) has any right in the Property not shown by the public records (such
as an unrecorded easement, unrecorded lease, or boundary line discrepancy).
Written notice of any unsatisfactory condition(s) disclosed by Seller or
revealed by such inspection shall be signed by or on behalf of Buyer and
given to Seller on or before See par. # 21 Add. Provis. If Seller does not
receive Buyer's notice by said date, Buyer accepts title subject to such
rights, if any, of third parties of which Buyer has actual knowledge.
(c) SPECIAL TAXING DISTRICTS. SPECIAL TAXING DISTRICTS MAY BE
SUBJECT TO GENERAL OBLIGATION INDEBTEDNESS THAT IS PAID BY REVENUES PRODUCED
FROM ANNUAL TAX LEVIES ON THE TAXABLE PROPERTY WITHIN SUCH DISTRICTS.
PROPERTY OWNERS IN SUCH DISTRICTS MAY BE PLACED AT RISK FOR INCREASED MILL
LEVIES AND EXCESSIVE TAX BURDENS TO SUPPORT THE SERVICING OF SUCH DEBT WHERE
CIRCUMSTANCES ARISE RESULTING IN THE INABILITY OF SUCH A DISTRICT TO
DISCHARGE SUCH INDEBTEDNESS WITHOUT SUCH AN INCREASE IN MILL LEVIES. BUYERS
SHOULD INVESTIGATE THE DEBT FINANCING REQUIREMENTS OF THE AUTHORIZED GENERAL
OBLIGATION INDEBTEDNESS OF SUCH DISTRICTS, EXISTING MILL LEVIES OF SUCH
DISTRICT SERVICING SUCH INDEBTEDNESS, AND THE POTENTIAL FOR AN INCREASE IN SUCH
MILL LEVIES.
In the event the Property is located within a special taxing
district and Buyer desires to terminate this contract as a result, if written
notice is given to Seller on or before the date set forth in subsection 9 (b),
this contract shall then terminate. If Seller does not receive Buyer's
notice by the date specified above, Buyer accepts the effect of the
Property's inclusion in such special taxing district(s) and waives the right
to so terminate.
(d) RIGHT TO CURE. If Seller receives notice of unmmerchantability
of title or any other unsatisfactory title condition(s) as provided in
subsection (a) or (b) above, Seller shall use reasonable effort to correct
said unsatisfactory title condition(s) prior to the date of closing. If
Seller fails to correct said unsatisfactory title condition(s) on or before
the date of closing, this contract shall then terminate; provided, however,
Buyer may, by written notice received by Seller, on or before closing, waive
objection to said unsatisfactory title condition(s).
10. INSPECTION. See Par. #21 Add. Provis. See Par. #21 Add. Provis.
- -------------------------------------------------------------------------------
The printed portions of this form have been approved by the Colorado Real
Estate Commission. (CBS2-7-96)
CBS2-7-96. COMMERCIAL CONTRACT TO BUY AND SELL REAL ESTATE [FINANCING SECTIONS
OMITTED]
RealFAST-Registered Trademark- Forms, Box 4700, Frisco, CO 80443, Version 5.52
- -C-RealFAST-Registered Trademark- 1999; Reg#LCOCOL223550
Completed by - Gary A. Aboussie, Broker Associate, The Colorado Group, Inc.
Buyer(s) [Illegible] 05/06/99 14:49:51 Page 2 of 6
------------ Seller(s) [Illegible]
-----------
<PAGE>
11. DATE OF CLOSING. The date of closing shall be July 07, 1999,
or by mutual agreement at an earlier date. The hour and place of closing shall
be designated by mutual agreement between Buyer and Seller.
12. TRANSFER OF TITLE. Subject to tender or payment at closing as
required herein and compliance by Buyer with the other terms and provisions
hereof, Seller shall execute and deliver a good and sufficient Special
Warranty Deed deed to Buyer, on closing, conveying the Property free and
clear of all taxes except the general taxes for the year of closing, and
except n/a Title shall be conveyed free and clear of all liens for special
improvements installed as of the date of Buyer's signature hereon, whether
assessed or not; except (i) distribution utility easements (including cable
TV), (ii) those matters reflected by the Title Documents accepted by Buyer in
accordance with subsection 9(a), (iii) those rights, if any, of third parties
in the Property not shown by the public records in accordance with subsection
9(b), (iv) inclusion of the Property within any special taxing district, (v)
subject to building and zoning regulations.
13. PAYMENTS OF ENCUMBRANCES. Any encumbrance required to be paid
shall be paid at or before closing from the proceeds of this transaction or
from any other source.
14. CLOSING COSTS, DOCUMENTS AND SERVICES. Buyer and Seller shall
pay in Good Funds, their respective closing costs and all other items
required to be paid at closing, except as otherwise provided herein. Buyer
and Seller shall sign and complete all customary or required documents at or
before closing. Fees for real estate closing services shall not exceed
$1,000.00 and shall be paid at closing by splitting equally between Buyer and
Seller. The local transfer tax of .001% of the purchase price shall be paid
at closing by Buyer. Any sales and use tax that may accrue because of this
transaction shall be paid when due by n/a.
15. PRORATIONS. General taxes for the year of closing, based on the
taxes for the calendar year immediately preceding closing, rents, water and
sewer charges, owner's association dues, and interest on continuing loans), if
any, and special assessments, if any shall be prorated to date of closing.
16. POSSESSION. Possession of the Property shall be delivered to
Buyer as follows: Upon the Close of Escrow. subject to the following lease(s)
or tenancy(s): n/a If Seller, after closing, fails to deliver possession on
the date herein specified, Seller shall be subject to eviction and shall be
additionally liable to Buyer for payment of $250.00 per day from the date of
agreed possession until possession is delivered.
17. CONDITION OF AND DAMAGE TO PROPERTY. Except as otherwise
provided in this contract, the Property and Inclusions shall be delivered in
the condition existing as of the date of this contract, ordinary wear and
tear excepted. In the event the Property shall be damaged by fire or other
casualty prior to time of closing, in an amount of not more than ten percent
of the total purchase price, Seller shall be obligated to repair the same
before the date of closing. In the event such damage is not repaired within
said time or if the damages exceed such sum, this contract may be terminated
at the option of Buyer. Should Buyer elect to carry out this contract despite
such damage, Buyer shall be entitled to credit for all the insurance proceeds
resulting from such damage to the Property and Inclusions, not exceeding,
however, the total purchase price. Should any Inclusion(s) or service(s) fail
or be damaged between the date of this contract and the date of closing or
the date of possession, whichever shall be earlier, then Seller shall be
liable for the repair or replacement of such Inclusion(s) or service(s) with
a unit of similar size, age and quality, or an equivalent credit, less any
insurance proceeds received by Buyer covering such repair or replacement.
18. TIME OF ESSENCE/REMEDIES. Time is of the essence hereof. If any
note or check received as earnest money hereunder or any other payment due
hereunder is not paid, honored or tendered when due, or if any other
obligation hereunder is not performed or waived as herein provided, there shall
be the following remedies:
(a) IF BUYER IS IN DEFAULT: (CHECK ONE BOX ONLY.)
/X/ (1) SPECIFIC PERFORMANCE. Seller may elect to treat this
contract as cancelled, in which case all payments and things of
value received hereunder shall be forfeited and retained on behalf
of Seller, or Seller may elect to treat this contract as being in
full force and effect and Seller shall have the right to specific
performance or damages, or both.
/ / (2) LIQUIDATED DAMAGES. All payments and things of value received
hereunder shall be forfeited by Buyer and retained on behalf of
Seller and both parties shall thereafter be released from all
obligations hereunder. It is agreed that such payments and
things of value are LIQUIDATED DAMAGES and (except as provided
in subsection (c)) are SELLERS SOLE AND ONLY REMEDY for Buyer's
failure to perform the obligations of this contract. Seller
expressly waives the remedies of specific performance and
additional damages.
(b) IF SELLER IS IN DEFAULT: Buyer may elect to treat this contract
as cancelled, in which case all payments and things of value
received hereunder shall be returned, or Buyer may elect to
treat this contract as being in full force and effect and Buyer
shall have the right to specific performance or damages, or
both.
(c) COSTS AND EXPENSES. Anything to the contrary herein
notwithstanding, in the event of any arbitration or litigation
arising out of this contract, the arbitrator or court shall
award to the prevailing party all reasonable costs and
expenses, including attorney fees.
19. EARNEST MONEY DISPUTE. Notwithstanding any termination of this
contract, Buyer and Seller agree that, in the event of any
PAGE 3 OF 6
Buyers(s) [Illegible] Seller(s) [Illegible]
----------- -----------
<PAGE>
controversy regarding the earnest money and things of value held by broker
or closing agent, unless mutual written instructions are received by the
holder of the earnest money and things of value, broker or closing agent
shall not be required to take any action but may await any proceeding, or at
broker's or closing agent's option and sole discretion, may interplead all
parties and deposit any moneys or things of value into a court of competent
jurisdiction and shall recover court costs and reasonable attorney fees.
20. ALTERNATIVE DISPUTE RESOLUTION: MEDIATION. If a dispute arises
between the parties relating to this contract, and is not resolved, the
parties and broker(s) involved in such dispute (Disputants) shall first
proceed in good faith to submit the matter to mediation. The Disputants will
jointly appoint an acceptable mediator and will share equally in the cost of
such mediation. In the event the entire dispute is not resolved within thirty
(30) calendar days from the date written notice requesting mediation is sent
by one Disputant to the other(s), the mediation, unless otherwise agreed,
shall terminate. This section shall not alter any date in this contract,
unless otherwise agreed.
21. ADDITIONAL PROVISIONS: (The language of these additional
provisions has not been approved by the Colorado Real Estate Commission).
1. Earnest Money, paragraph 3 (a) shall be modified as follows:
$450,000.00 Total Earnest Moneys of shall be paid as follows:
$100,000.00 Upon Execution of the Contract to Buy and Sell Real Estate
$200,000.00 Within 14 days of mutual execution of the Contract to
Buy and Sell Real Estate by Buyer and Seller.
$150,000.00 On or before the expiration of the Inspection period June
25, 1999, as outlined in paragraph 10.
All Earnest Money deposited by Land Title Guarantee Co., 2425 Canyon Blvd.
Suite 110, Boulder Colorado, 80302, shall be placed in an interest bearing
account (at the discretion of the Buyer) with all interest accrued in favor
of the Buyer.
2. Matters Not Shown by the Public Records, paragraph 9 (b) shall be
modified as follows: "Seller shall deliver to Buyer, on or before the
Title Deadline set forth in Section 8, true copies of all current lease(s)
and the survey dated 8/30/98 prepared by Rocky Mountain Consultants (RMC) in
Sellers possession pertaining to the Property and shall disclose to Buyer all
easements, liens or other title matters not shown by the public records of
which Seller has actual knowledge. Buyer shall have the right to inspect the
property to determine if any third party(s) has any right in the Property not
shown by the public records (such as an unrecorded easement, unrecorded
lease, or boundary line discrepancy). Written notice of any unsatisfactory
conditions(s) disclosed by the Seller or revealed by such inspection shall be
signed by or on behalf of Buyer and given to Seller on or before, June 25,
1999. If Seller does not receive Buyer's notice by said date, Buyer accepts
title subject to such rights if any, of third parties of which Buyer has
actual knowledge."
3. INSPECTION, paragraph 10 shall be modified as follows:
Buyer or any designee shall have the right to inspection(s) of physical
condition of the Property and Inclusions at Buyer's expense. If written
notice of any unsatisfactory condition, signed by or on behalf of Buyer, is
not received by Seller or Seller's Agent on or before June 25, 1999
(Objection Deadline), the physical condition of the Property and inclusions
shall be deemed to be satisfactory to Buyer. If such notice is received by
Seller as set forth above, and if Buyer and Seller have not agreed, in
writing, to a settlement there on or before Five (5) days after receipt of
Buyers written notice (Resolution Deadline), this contract shall terminate
three calendar days following the Resolution Deadline; unless, within three
calendar days, Seller receives written notice from Buyer waving objection to
any unsatisfactory condition. Buyer is responsible for and shall pay for any
damage which occurs to the Property and Inclusions as a result of such
inspection."
4. INSPECTION.
If during the Inspection period, (from the acceptance date until 5:00 pm
(MST) June 25, 1999) the Buyer deems the property is unsatisfactory (for any
reason whatsoever) for the Buyer's intended use, the Buyer shall provide
Seller or Seller's Agent with written notice of cancellation of this of this
contract which shall have no further force or effect and Escrow Officer is
hereby directed to return Buyers Escrow Money and any interest there on to
the Buyer.
PAGE 4 OF 6
Buyers(s) [Illegible] Seller(s) [Illegible]
----------- -----------
<PAGE>
- ------------------------------------------------------------------------------
5. Commission/Brokerage Fee.
Seller hereby agrees to pay a commission/brokerage fee at the Close of
Escrow, a commission and/or brokerage fee equal to Six (6%) percent of the
gross sales price to be shared 50/50 between Mile High Properties LLC
(Listing Broker for the Seller) and The Colorado Group Inc. (Exclusive Agent
for the Buyer).
6. Disclosure.
Seller hereby understands that John R. Cohagen, Principal of Snow Goose
Investments, is a licensed real estate Broker, licensed to do business in the
State of Colorado. John R. Cohagen is acting as a principal in this
transaction and NOT as a licensed real estate broker. John R. Cohagen will
not be participating in or taking any part of the commission paid by the
Seller to the real estate companies listed above.
22. RECOMMENDATION OF LEGAL COUNSEL. By signing this document, Buyer and
Seller acknowledge that the Selling Company or the Listing Company has
advised that this document has important legal consequences and has
recommended the examination of title and consultation with legal and tax or
other counsel before signing this contract.
23. TERMINATION. In the event this contract is terminated, all payments
and things of value received hereunder shall be returned and the parties
shall be relieved of all obligations hereunder, subject to Section 19.
24. SELLING COMPANY BROKER RELATIONSHIP. The selling broker,
The Colorado Group, Inc. and its salespersons have been engaged as Exclusive
Agent for the Buyer. Selling Company has previously disclosed in writing to
the Buyer that different relationships are available which include buyer
agency, seller agency, subagency, or transaction-broker.
25. NOTICE TO BUYER. Any notice to Buyer shall be effective when received
by Buyer, or, if this box is checked / / when received by Selling Company.
26. NOTICE TO SELLER. Any notice to Seller shall be effective when
received by Seller or Listing Company.
27. MODIFICATION OF THIS CONTRACT. No subsequent modification of any of
the terms of this contract shall be valid, binding upon the parties, or
enforceable unless made in writing and signed by the parties.
28. ENTIRE AGREEMENT. This contract constitutes the entire contract
between the parties relating to the subject hereof, and any prior agreements
pertaining thereto, whether oral or written, have been merged and integrated
into this contract.
29. NOTICE OF ACCEPTANCE: COUNTERPARTS. This proposal shall expire unless
accepted in writing, by Buyer and Seller, as evidenced by their signatures
below, and the offering party receives notice of such acceptance on or before
May 07, 1999 5:00pm MST (Acceptance Deadline). If accepted, this document
shall become a contract between Seller and Buyer. A copy of this document
may be executed by each party, separately, and when each party has executed a
copy thereof, such copies taken together shall be deemed to be a full and
complete contract between the parties.
Snow Goose Investments, LLC and/or assigns (Buyer may assign this contact
with Snow Goose Investments and/or John R. Cohagen as a principal)
3939 North 95th Street, Boulder, CO 80301-4942
Bus. #: 303-661-0822 Fax #: 303-661-0831
BUYER /s/ John R. Cohagen DATE May 7, 1999
-------------------------------------------------------- -----------
By: John R. Cohagen, President
- ------------------------------------------------------------------------------
THE PRINTED PORTIONS OF THIS FORM HAVE BEEN APPROVED BY THE COLORADO REAL
ESTATE COMMISSION. (CBS2-7-96)
CBS2-7-96. COMMERCIAL CONTRACT TO BUY AND SELL REAL ESTATE [FINANCING
SECTIONS OMITTED]
RealFA$T-Registration Trademark- Forms, Box 4700, Frisco, CO 80443, Version
5.52, -C-RealFA$T-Registration Trademark-. 1999: Reg# LCOCOL223550
Completed by - Gary A. Aboussie, Broker Associate, The Colorado Group, Inc.
PAGE 5 of 6
Seller(s) [ILLEGIBLE]
------------
<PAGE>
- ------------------------------------------------------------------------------
STAYODYNE Inc, a Delaware Corporation,
and it's successor REHABILICARE Inc., a Minnesota Corporation
SELLER /s/ W. Glen Winchell, Vice President DATE 5/10/99
---------------------------------------------------- --------------
By: STAYODYNE Inc, a Delaware Corporation,
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The undersigned Broker(s) acknowledges receipt of the earnest money deposit
specified in section 3, and Selling Company confirms its Broker Relationship
as set forth in Section 24.
Selling Company
The Colorado Group, Inc.
3434 47th Street, Suite 220
Boulder, CO 80301
Phone: (303) 449-2131, Fax: (303) 449-8250
By: /s/ Gary A. Aboussie 5/7/99
------------------------------------------------------------
Signature Gary A. Aboussie Date
Listing Company Mile High Properties LLC
--------------------------------------------------------------
By -----------------------------------------------------------------------
Signature Date
Address 1700 Broadway, Denver, Colorado
---------------------------------------------------------------------
Phone 303-832-0817 or 303-837-3478
------------------------------------------------
Fax 303-830-7930
------------------------------------------------
--------------------------------------------------------------------------
NOTE: CLOSING INSTRUCTIONS SHOULD BE SIGNED AT THE TIME THIS CONTRACT IS
SIGNED.
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THE PRINTED PORTIONS OF THIS FORM HAVE BEEN APPROVED BY THE COLORADO REAL
ESTATE COMMISSION. (CBS2-7-96)
CBS2-7-96. COMMERCIAL CONTRACT TO BUY AND SELL REAL ESTATE [FINANCING
SECTIONS OMITTED]
RealFA$T-Registration Trademark- Forms, Box 4700, Frisco, CO 80443, Version
5.52, -C-RealFA$T-Registration Trademark-. 1999: Reg# LCOCOL223550
Completed by - Gary A. Aboussie, Broker Associate, The Colorado Group, Inc.
Buyer(s) [ILLEGIBLE] PAGE 6 of 6
-----------
<PAGE>
ADDENDUM
THIS ADDENDUM TO THE COMMERCIAL CONTRACT TO BUY AND SELL REAL ESTATE
("CONTRACT") is made and entered into as of this 7 day of May, 1999 between
STAODYN, INC., a Delaware corporation ("SELLER"), and SNOW GOOSE INVESTMENTS,
LLC and/or assigns ("BUYER").
RECITALS:
A. Seller has exercised the options ("OPTIONS") to acquire certain
land, buildings and other improvements located at 1225 Ken Pratt Boulevard
(formerly known as 1225 Florida Avenue), City of Longmont, County of Boulder,
State of Colorado and as legally described in Paragraph 1 of the contract
(collectively, the "PROPERTY") pursuant to the terms of the Leases (each of
which is referred to as a "LEASE" and collectively "LEASES") between Staodyn,
Inc., as lessee, and 1225 Building LLC, as lessor, dated July 16, 1993, as
amended, and between Staodyn, as lessee, and Pendleton Construction Co.,
Inc., as lessor, dated July 16, 1993, as amended (1226 Building LLC and
Pendleton Construction Co., Inc., are each individually referred to as a
"GROUND OWNER" and collectively "GROUND OWNERS").
B. Seller desire to sell the Property to Buyer and Buyer desires to
purchase the Property, upon the terms and provisions of said Contract.
AGREEMENT:
CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE. The obligations of Seller
to convey the Property to Buyer, and Buyer's right to purchase the Property,
are subject to the satisfaction of the following condition precedent on or
before the time set forth below. If the condition is not so satisfied, the
condition may be waived by Seller in writing designated as a waiver or
amendment to this Agreement, or Seller may terminate this Agreement by
written notice to Buyer given within ten (10) business days of the applicable
satisfaction date set forth in which event (unless otherwise specifically set
forth to the contrary) the Earnest Money shall be returned to Buyer and the
parties shall be released from all obligations hereunder.
On or before the Closing Date, the Ground Owners shall have performed
their obligations under the Options including, without limitation, Ground
Owners' obligation to convey title to the Property to Seller or Buyer (as
Seller may direct). If Seller gives Buyer notice of termination due to
Ground Owners' default in their obligation to sell the Property to Seller,
then at Buyer's election made in writing to Seller within five (5) business
days following receipt of such notice of Seller's termination ("PURCHASER'S
ELECTION NOTICE"), either (a) Seller will assign to Buyer all claims it may
have against Ground Owners or either of them upon Buyer's payment of the
Purchase Price, adjusted pursuant to the terms of the Contract, to Seller,
which payment shall be made within ten days of Buyer's Election Notice, or
(b) this Agreement shall be terminated, in which event the Earnest Money
shall be returned to Buyer.
BUYER: SELLER:
SNOW GOOSE INVESTMENTS, LLC. STAODYN, INC.
By: /s/ John R. Cohagen By: /s/ W. Glen Winchell
--------------------------- ---------------------------
John R. Cohagen, President It's Vice President
-------------------
<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, 33-63964 and 333-48155) of
Rehabilicare Inc. of our report dated September 2, 1999 relating to the
financial statements, which appears in this Form 10-KSB.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 27, 1999
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 561,207
<SECURITIES> 0
<RECEIVABLES> 22,147,104
<ALLOWANCES> 4,913,635
<INVENTORY> 8,912,783
<CURRENT-ASSETS> 29,879,475
<PP&E> 11,548,678
<DEPRECIATION> 6,930,564
<TOTAL-ASSETS> 35,699,714
<CURRENT-LIABILITIES> 8,332,163
<BONDS> 4,066,914
0
0
<COMMON> 1,049,491
<OTHER-SE> 22,003,818
<TOTAL-LIABILITY-AND-EQUITY> 35,699,714
<SALES> 41,795,373
<TOTAL-REVENUES> 41,795,373
<CGS> 11,948,304
<TOTAL-COSTS> 36,668,111
<OTHER-EXPENSES> 517,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 499,297
<INCOME-PRETAX> 4,609,834
<INCOME-TAX> 1,750,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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<EPS-BASIC> 0.27
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<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.
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 its
dealers by the patients' insurers. Both private insurers and the United States
Government as the administrator of Medicare and
<PAGE>
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
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 various patents and plans
to seek protection for certain technology in the future. However, the Company
has not applied for protection on the technology incorporated into other
products that it currently offers. 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.
<PAGE>
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 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.
