<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________.
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of small business issuer as specified in charter)
MINNESOTA 41-0985318
(State of Incorporation) (I.R.S. Employer Identification No.)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of Principal Executive Offices)
(651) 631-0590
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months or for
such shorter period that the registrant was required to file such reports and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding for each of the Issuer's classes of common
stock as of December 31, 1998 was:
COMMON STOCK, $.10 PAR VALUE 10,469,486 SHARES
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes No X
---- ----
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998
Consolidated Statements of Operations for the Three Months and Six
Months ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Six Months ended
December 31, 1998 and 1997
Notes to Consolidated Financial Statements
2
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 84,582 $ 919,765
Receivables, less reserve for uncollectible accounts of $4,324,215 and $3,109,448 17,430,020 12,660,677
Inventories -
Raw materials 1,512,629 2,252,897
Work in process 267,773 249,277
Finished goods 5,906,400 4,292,870
Deferred income taxes 2,197,724 2,197,724
Prepaid expenses 345,309 300,827
----------- -----------
Total current assets 27,744,437 22,874,037
----------- -----------
PROPERTY AND EQUIPMENT 9,962,434 11,915,732
Less accumulated depreciation and amortization (6,421,615) (8,544,578)
----------- -----------
Total property and equipment 3,540,819 3,371,154
----------- -----------
Intangible assets, net of accumulated amortization of $2,059,950 and $1,983,764 401,024 477,210
Deferred income taxes 302,859 302,859
Other assets 19,286 35,098
----------- -----------
$32,008,425 $27,060,358
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,100,000 $ ---
Current maturities of long-term debt 903,519 404,172
Accounts payable 592,426 1,110,366
Accrued liabilities -
Payroll 525,403 699,123
Commissions 656,451 458,783
Taxes 198,658 ---
Other 733,838 996,979
----------- -----------
Total current liabilities 5,710,295 3,669,423
LONG-TERM DEBT 4,744,157 3,299,705
----------- -----------
Total liabilities 10,454,452 6,969,128
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 1,046,949 1,044,337
Additional paid-in capital 20,688,869 20,641,922
Less note receivable from officer/stockholder (237,500) (237,500)
Retained earnings 55,655 (1,357,529)
----------- -----------
Total stockholders' equity 21,553,973 20,091,230
----------- -----------
$32,008,425 $27,060,358
----------- -----------
----------- -----------
</TABLE>
3
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales and rental revenue $ 10,882,214 $ 8,588,518 $ 19,966,547 $ 16,845,038
Cost of sales and rentals 3,217,192 2,776,896 5,662,839 5,315,363
------------ ------------ ------------ ------------
Gross profit 7,665,022 5,811,622 14,303,708 11,529,675
Operating expenses:
Selling, general and administrative 6,075,240 5,025,355 11,255,339 9,978,823
Research and development 210,930 245,221 445,303 480,692
Acquisition expense --- --- 79,107 ---
------------ ------------ ------------ ------------
6,286,170 5,270,576 11,779,749 10,459,515
------------ ------------ ------------ ------------
Income from operations 1,378,852 541,046 2,523,959 1,070,160
Other income (expense):
Interest expense (139,581) (100,212) (256,164) (198,001)
Other income (expense) 7,766 (4,478) 10,390 27,109
------------ ------------ ------------ ------------
Income before income taxes 1,247,037 436,356 2,278,185 899,268
Provision for Income Taxes 473,000 91,000 865,000 174,000
------------ ------------ ------------ ------------
Net income $ 774,037 $ 345,356 $ 1,413,185 $ 725,268
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common share and
common equivalent share
Basic $ 0.07 $ 0.03 $ 0.13 $ 0.07
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ 0.07 $ 0.03 $ 0.13 $ 0.07
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding
Basic 10,465,145 10,389,182 10,457,583 10,388,982
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 10,549,600 10,461,932 10,528,477 10,461,732
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
4
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,413,185 $ 725,268
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 292,860 612,552
Changes in current assets and liabilities
Receivables (2,234,344) (966,607)
Inventories (368,570) 260,359
Prepaid expenses (44,482) 28,167
Accounts payable (209,511) (100,551)
Accrued liabilities (40,535) 217,172
------------ -----------
Net cash provided by (used in) operating activities (1,191,397) 776,360
------------ -----------
INVESTING ACTIVITIES
Purchase of property and equipment (87,144) (795,636)
Cash paid in asset acquisition (3,650,000) ---
------------ -----------
Net cash used in investing activities (3,737,144) (795,636)
------------ -----------
FINANCING ACTIVITIES
Proceeds from new financing 2,500,000 566,410
Principal payments on long-term obligations (556,201) (257,603)
Proceeds from line of credit, net 2,100,000 340,000
Equity transactions 49,559 17,337
Adjustment for pooling --- (767,191)
------------ -----------
Net cash provided by (used in) financing activities 4,093,358 (101,047)
------------ -----------
Net decrease in cash and cash equivalents (835,183) (120,323)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 919,765 2,654,118
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 84,582 $ 2,533,795
------------ -----------
------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 164,275 $ 115,374
------------ -----------
------------ -----------
Income taxes paid $ 492,150 $ 95,570
------------ -----------
------------ -----------
</TABLE>
5
<PAGE>
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended December 31, 1998 and 1997, but in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the periods
presented. Such results are not necessarily indicative of results for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not required for interim
reporting purposes, have been omitted. The accompanying financial statements of
the Company should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-KSB.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information." This statement, which must be adopted by
the company for the fiscal year ending June 30, 1999, establishes new standards
for reporting information about operating segments in annual and interim
financial statements. Under SFAS No. 131, operating segments are determined
consistent with the way management organizes and evaluates financial information
internally for making decisions and assessing performance. SFAS No. 131 also
requires related disclosures about products, geographic areas, and major
customers. Implementation of this disclosure standard will not affect the
company's results of operations, cash flows or financial position.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133 - Accounting for Derivative Instruments and Hedging Activities.
This statement requires that all derivatives be recognized at fair value in the
balance sheet and all changes in fair value be recognized currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
The Company does not believe that the implementation of this statement will have
an affect on the Company's results of operations, cash flows or financial
position.
2. MERGER
On March 17, 1998, pursuant to an Agreement and Plan of Merger executed by
Rehabilicare on December 1, 1997 and approved by shareholders on March 17, 1998,
a wholly-owned subsidiary of Rehabilicare was merged (the "Merger") into
Staodyn, Inc. ("Staodyn"). As a result of the Merger, each outstanding share of
common stock, $0.01 par value of Staodyn ("Staodyn Common Stock") became 0.829
of a share of Rehabilicare Common Stock (with cash paid in lieu of fractional
shares) and Staodyn became a wholly-owned subsidiary of Rehabilicare.
Rehabilicare issued a total of 5,521,111 shares of its common stock as a result
of the Merger. Rehabilicare also assumed the obligations to issue shares under
options to purchase 383,083 shares of Staodyn Common Stock (317,575 shares of
Rehabilicare Common Stock) and warrants to purchase 130,000 shares (107,770
shares of Rehabilicare Common Stock). Options to purchase 239,410 shares of
Staodyn Common Stock (198,471 shares of Rehabilicare Common Stock) subsequently
expired without being exercised. The merger was recorded using the
pooling-of-interests method.
6
<PAGE>
3. ASSET ACQUISITION
On August 6, 1998, the Company acquired substantially all of the assets
(consisting primarily of finished goods inventory and receivables) of the
Homecare business unit of Henley Healthcare, Inc. ("Henley") for a purchase
price of $3,650,000 paid in cash at closing. The cash paid was obtained from
existing funds and borrowings under the Company's bank line of credit, including
a $2,500,000 term loan payable over three years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On March 17, 1998, Rehabilicare merged with Staodyn, Inc. in a transaction
accounted for as a pooling-of-interests. As a result of that merger, the
financial statements and related notes, and this discussion, are based on the
combined financial position and results of operations as if the companies had
been combined throughout the three months and six months ended December 31,
1997.
On August 6, 1998, the Company acquired substantially all of the assets of the
Homecare business unit of Henley Healthcare. Accordingly, the Company's balance
sheet at December 31, 1998 includes the assets acquired and the indebtedness
incurred to finance this acquisition, and the results of operations include
those operations from August 6, 1998.
RESULTS OF OPERATIONS
The following table sets forth information from the statements of operations as
a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales and rental revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales and rentals 29.6 32.3 28.4 31.6
Gross profit 70.4 67.7 71.6 68.4
Operating expenses -
Selling, general and administrative 55.8 58.5 56.4 59.2
Research and development 1.9 2.9 2.2 2.9
Acquisition expense --- --- 0.4 ---
Total operating expenses 57.7 61.4 59.0 62.1
Operating income 12.7 6.3 12.6 6.3
Other expense 1.2 1.2 1.2 1.0
Provision for income taxes 4.4 1.1 4.3 1.0
Net income 7.1 4.0 7.1 4.3
</TABLE>
7
<PAGE>
Revenue was $10.9 million for the second quarter of fiscal 1999, a 27% increase
from $8.6 million in the second quarter of fiscal 1998. Revenue for the six
months ended December 31, 1998 increased 19% to $20.0 million from $16.8 million
in the first six months of fiscal 1998. Net sales and rental revenue from
direct distribution to patients increased 31% to $9.4 million from $7.2 million
and accounted for approximately 87% and 84% of total revenue, respectively, for
the second quarter. Direct revenue for the first six months of fiscal 1999
increased 23% to $17.3 million from $14.0 million in the first six months of
fiscal 1998. The increase was due primarily to growth in the number of new
patients.
Revenue from the Company's traditional dealer business, excluding international,
increased by 6% to $1.4 million in the second quarter of fiscal 1999 from $1.3
million. Revenue from domestic dealer business for the first six months of
fiscal 1999 decreased 5% to $2.6 million from $2.7 million in the first six
months of fiscal 1998. The decrease is due primarily to the volume of purchases
by certain Staodyn dealers. International sales were insignificant in all
periods.
Gross profit increased 32% to $7.7 million or 70% of revenue in the second
quarter of fiscal 1999 compared with $5.8 million or 68% of revenue in the
second quarter of fiscal 1998. Gross profit for the six months ended December
31, 1998 increased 24% to $14.3 million or 72% of revenue compared with $11.5
million or 68% of revenue in fiscal 1998. 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 21% to $6.1 million in
the second quarter of fiscal 1999 from $5.0 million in fiscal 1998, but
decreased as a percentage of revenue from 58.5% in fiscal 1998 to 55.8% in
fiscal 1999. For the six months ended December 31, 1998, those expenses
increased 13% to $11.3 million from $10.0 million in fiscal 1998, but decreased
as a percentage of revenue from 59.2% in fiscal 1998 to 56.4% in fiscal 1999.
The only significant changes in selling, general and administrative expenses
were variable expenses including sales commissions and marketing costs, and an
increased provision for uncollectible retail receivables.
The Company reported operating income of $1.4 million in the second quarter of
fiscal 1999 compared with operating income of $541,000 in fiscal 1998. Net
income was $774,000 in fiscal 1999 compared to net income of $345,000 for the
second quarter of fiscal 1998. For the six-month period ending December 31, the
operating income was $2.5 million in fiscal 1999 compared with operating income
of $1.1 million in fiscal 1998. Net income for that period was $1.4 million in
fiscal 1999 compared with net income of $725,000 in fiscal 1998.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $835,000 in operations during the first six months of
fiscal 1999. The Company provided cash of $647,000 during the same period of
fiscal 1998. Cash was used during the fiscal 1999 quarter to fund an increase
of $2,234,000 in receivables (net of a $2,535,000 increase resulting from the
acquisition from Henley) and a $369,000 increase in inventories (net of a
$1,325,000 increase resulting from the acquisition from Henley) offset primarily
by net income of $1,413,000. Inventories increased substantially during the
first six months of fiscal 1999 in order to assure continued availability of all
Staodyn and Rehabilicare products during the consolidation of all manufacturing
and distribution activities in the Company's New Brighton, Minnesota facility.
8
<PAGE>
The Company acquired $3,650,000 of assets from Henley during the six months
ended December 31, 1998, consisting primarily of finished goods inventory and
receivables. The cash paid for that acquisition is shown as an investment in
the statement of cash flows and the increases in receivables and inventories
reflected on such statement are net of the receivables and inventories acquired
from Henley. During the first six months of fiscal 1999, the Company provided
an additional $2,115,000 for uncollectible receivables and wrote off $900,000 of
accounts it considered uncollectible. As a percent of receivables, the reserve
remained constant at 20% for fiscal 1999.
The reserve for uncollectible accounts is determined after considering various
factors including historical trends, relationship and experience with insurance
or other third party payors and patient responsibility for charges. The Company
believes that its current reserve for uncollectible accounts is adequate.
However, it will be necessary to continue maintaining a significant reserve to
cover instances where the extent of insurance coverage cannot be verified prior
to distributing home units to patients.
Financing activities provided cash of $4,093,000 in the first six months of
fiscal 1999 compared to $101,000 of funds used during the same period of fiscal
1998. The Company repaid $556,000 of long-term debt in the first six months of
fiscal 1999 compared to $258,000 in fiscal 1998. Effective August 5, 1998, the
Company amended its Credit Agreement to increase the amount of credit under its
revolving line from $2,000,000 to $2,500,000 and to borrow $2,500,000 under a
term loan due in August 2001. Borrowings under the line were $2,100,000 on
December 31, 1998. The Company anticipates that cash requirements during fiscal
1999 will be less than 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 June
1999.
The Company has completed its assessment of the Year 2000 issue surrounding its
engineering and manufacturing product applications. The Company's
electrotherapy products are each controlled with electro-mechanical and
microprocessor hardware mechanisms which do not have any time-dating
requirements that would be affected by Year 2000. In addition, these devices do
not interface with other devices and therefore remain Year 2000 compliant.
The Company is continuing to examine its relationship with third parties whose
failure to become Year 2000 compliant in a timely manner, if at all, could have
an effect on the Company. The Company will circulate questionnaires to all of
its significant vendors and customers with respect to such companies' Year 2000
compliance programs and status. In addition, follow-up conversations will be
conducted with key customers and vendors. The Company currently is in the
process of evaluating this effort and expects to request more detailed and
updated information from its principal vendors and customers during the next two
quarters.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. To date, those
costs have not been material. Based upon currently available information, the
Company does not expect the costs of addressing potential Year 2000 problems to
have a material adverse impact on the company's financial position, results of
operations or liquidity in future periods. The Company plans to devote the
necessary resources to resolve all significant Year 2000 issues in a timely
manner.
9
<PAGE>
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
This report contains "forward-looking statements" within the meaning of Federal
securities laws. The forward looking statements are subject to risks and
uncertainties, including, but not limited to: the risks related to fluctuations
in the Company's quarterly operating results; inventory and receivables
requirements for direct billed medical equipment sales; volatility in the
markets for electrotherapy; the effects of reimbursement and other governmental
or private agency actions on the Company's sales; competition; the Company's
ability to effectively integrate the businesses that it has acquired and other
risks that may be detailed in the Company's Form 10-KSB for the year ending June
30, 1998 or in other filings with the Securities and Exchange Commission.
10
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, the Company received a subpoena for certain Medicare records to
be delivered to the Department of Health and Human Services. The objectives and
ramifications of the investigation involving those records are unclear. The
Company is complying with the subpoena and cooperating with the investigation.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS ON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Rehabilicare was held at 10:00 a.m. on
Tuesday, December 15, 1998. Shareholders holding 9,138,736 shares, or
approximately 87% of outstanding shares, were represented at the meeting by
proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board
of Directors until the annual meeting of shareholders in 1999 or until
such time as a successor may be elected:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
------------ -----------
<S> <C> <C>
Frederick H. Ayers 9,069,448 69,287
W. Bayne Gibson 9,020,401 118,334
Richard E. Jahnke 9,102,295 36,441
David B. Kaysen 9,092,768 45,967
John H.P. Maley 9,105,241 33,495
Robert C. Wingrove 9,082,957 55,779
</TABLE>
11
<PAGE>
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits filed with this Form 10-QSB. The Company did not file any reports
on Form 8-K during the six months ended December 31, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REHABILICARE INC.
/s/ DAVID B. KAYSEN
---------------------------------------------
David B. Kaysen
President and Chief Executive Officer
/s/ W. GLEN WINCHELL
---------------------------------------------
W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
Date: February 15, 1999
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 84,582
<SECURITIES> 0
<RECEIVABLES> 21,754,235
<ALLOWANCES> 4,324,215
<INVENTORY> 7,686,802
<CURRENT-ASSETS> 27,744,437
<PP&E> 9,962,434
<DEPRECIATION> 6,421,615
<TOTAL-ASSETS> 32,008,425
<CURRENT-LIABILITIES> 5,710,295
<BONDS> 4,744,157
0
0
<COMMON> 1,046,949
<OTHER-SE> 20,688,869
<TOTAL-LIABILITY-AND-EQUITY> 32,008,425
<SALES> 19,966,547
<TOTAL-REVENUES> 19,966,547
<CGS> 5,662,839
<TOTAL-COSTS> 17,442,588
<OTHER-EXPENSES> 245,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,164
<INCOME-PRETAX> 2,278,185
<INCOME-TAX> 865,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,413,185
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
