<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________.
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0985318
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of principal executive offices)
(651) 631-0590
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 9, 2000 was:
COMMON STOCK, $.10 PAR VALUE 10,569,630 SHARES
<PAGE> 2
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Quarterly Report on Form 10-Q contains various "forward
looking statements" within the meaning of Federal securities laws. These
forward looking statements represent management's expectations or beliefs
concerning future events, including statements regarding anticipated
product introductions; changes in markets, customers and product pricing;
expenditures for research and development; growth in revenue; and taxation
levels. When used in this Form 10-Q, the words "anticipate," "believe,"
"expect," "estimate" and similar expressions are generally intended to
identify forward-looking statements. These and other forward looking
statements made by the Company must be evaluated in the context of a
number of factors that may affect the Company's financial condition and
results of operations, including, but not limited to, the following:
o 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.
The Company is the subject of a whistleblower suit initiated by a
former employee alleging improper filing of approximately 500,000
Medicare claims, resulting in overpayments of more than $120,000,000.
The Company has not yet been served with the complaint and has
therefore submitted no response. Resolution of that matter as well
as changes in the rates, eligibility or requirements for
reimbursement, or failure to comply with reimbursement requirements,
could significantly impact earnings and financial condition.
o The Company acquired two businesses during the two previous fiscal
years and a third in July 1999. The Company 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.
o Like many medical device companies, the Company has a large
balance of uncollected receivables against which it maintains a
reserve for doubtful accounts. The size of the reserve is judgmental
and depends upon a number of factors, including historical experience
in collecting receivables. If the Company cannot collect an amount
of receivables that is consistent with historical collections, it
might be required to charge off a portion of uncollected receivables
in a single quarter, which could significantly impact earnings.
o 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.
o 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, which could significantly impact earnings.
o The clinical effectiveness of the Company's electrotherapy
products has periodically been challenged. Publicity about the
effectiveness of electrotherapy for pain relief or other clinical
applications could negatively impact revenue and earnings.
o The Company formed a United Kingdom subsidiary in fiscal 1999 and
acquired a Swiss company in the first quarter of fiscal 2000. These
operations may be more difficult to supervise, and may be subject to
different economic influences than United States operations and they
do subject the Company to more exposure from currency fluctuations.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited condensed financial
information:
Consolidated Balance Sheets as of December 31, 1999 and June 30,
1999
Consolidated Statements of Operations for the three months and six
months ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the six months ended
December 31, 1999 and 1998
Notes to Consolidated Financial Statements
3
<PAGE> 4
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,987,279 $ 561,207
Receivables, less reserve for uncollectible accounts of $4,584,317
and $4,913,635 19,641,226 17,233,469
Inventories -
Raw materials 1,589,380 1,825,487
Work in process 634,060 377,771
Finished goods 6,441,986 6,709,525
Deferred tax assets 2,587,686 2,587,686
Prepaid expenses 1,152,484 584,330
------------ ------------
Total current assets 34,034,101 29,879,475
PROPERTY, PLANT AND EQUIPMENT: 11,539,947 11,548,678
Less accumulated depreciation (6,239,114) (6,930,564)
------------ ------------
Net property, plant and equipment 5,300,833 4,618,114
Intangible assets, net 12,608,304 1,150,009
Deferred tax assets 231,927 40,121
Other assets 44,703 11,995
------------ ------------
$ 52,219,868 $ 35,699,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 1,950,000 $ 2,400,000
Current maturities of long-term debt 2,043,281 1,241,037
Accounts payable 2,001,682 2,038,732
Payable to former Compex shareholders 1,800,000 - -
Accrued liabilities -
Payroll 362,537 575,426
Commissions 196,086 491,990
Other 1,876,435 1,560,297
Minority interest 6,883 24,681
------------ ------------
Total current liabilities 10,236,904 8,332,163
LONG-TERM LIABILITIES:
Long-term debt 14,801,110 4,066,914
Deferred tax liabilities 1,402,720 247,328
------------ ------------
Total liabilities 26,440,734 12,646,405
STOCKHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized;
issued and outstanding 10,547,380 and 10,494,908 shares,
respectively 1,054,738 1,049,491
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding - - - -
Additional paid-in capital 20,815,559 20,740,650
Less note receivable from officer/stockholder (223,958) (237,500)
Accumulated other non-owner changes in equity (35,634) (1,637)
Retained earnings 4,168,429 1,502,305
------------ ------------
Total stockholders' equity 25,779,134 23,053,309
------------ ------------
$ 52,219,868 $ 35,699,714
============ ============
</TABLE>
4
<PAGE> 5
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales and rental revenue $ 14,778,144 $ 10,882,214 $ 28,654,356 $ 19,966,547
Cost of sales and rentals 4,107,485 3,217,192 8,706,291 5,662,839
------------ ------------ ------------ ------------
Gross profit 10,670,659 7,665,022 19,948,065 14,303,708
Operating expenses:
Selling, general and administrative 7,677,079 6,075,240 15,004,223 11,255,339
Research and development 353,071 210,930 606,879 445,303
Acquisition expense -- -- -- 79,107
------------ ------------ ------------ ------------
8,030,150 6,286,170 15,611,102 11,779,749
------------ ------------ ------------ ------------
Income from operations 2,640,509 1,378,852 4,336,963 2,523,959
Other income (expense):
Interest expense (404,281) (139,581) (749,862) (256,164)
Other income (expense) (84,331) 7,766 (87,455) 10,390
Minority interest 11,931 -- 17,798 --
Gain on sale of building -- -- 1,075,680 --
------------ ------------ ------------ ------------
Income before income taxes 2,163,828 1,247,037 4,593,124 2,278,185
Provision for income taxes 932,000 473,000 1,927,000 865,000
------------ ------------ ------------ ------------
Net income $ 1,231,828 $ 774,037 $ 2,666,124 $ 1,413,185
============ ============ ============ ============
Net income per common and
common equivalent share
Basic $ 0.12 $ 0.07 $ 0.25 $ 0.13
============ ============ ============ ============
Diluted $ 0.12 $ 0.07 $ 0.25 $ 0.13
============ ============ ============ ============
Weighted average number of shares
outstanding
Basic 10,546,701 10,465,145 10,538,617 10,457,583
============ ============ ============ ============
Diluted 10,705,843 10,549,600 10,698,821 10,528,477
============ ============ ============ ============
</TABLE>
5
<PAGE> 6
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,666,124 $ 1,413,185
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Gain on sale of building (1,075,680) --
Depreciation and amortization 940,925 292,860
Change in long-term portion of deferred taxes 92,389 --
Minority interest (17,798) --
Change in current assets and liabilities, excluding effects
of business combinations
Receivables (230,833) (2,234,344)
Inventories 1,784,709 (368,570)
Prepaid expenses (461,222) (44,482)
Accounts payable 88,050 (209,511)
Accrued liabilities (1,313,203) (40,535)
------------ ------------
Net cash provided by (used in) operating activities 2,473,461 (1,191,397)
INVESTING ACTIVITIES:
Purchases of property and equipment (983,394) (87,144)
Cash paid in asset acquisition, net of cash received (12,598,117) (3,650,000)
Proceeds from sale of building 1,726,930 --
------------ ------------
Net cash used in investing activities (11,854,581) (3,737,144)
FINANCING ACTIVITIES:
Proceeds from new financing 15,339,364 2,500,000
Principal payments on long-term obligations (2,874,804) (556,201)
Proceeds from (payments on) line of credit, net (450,000) 2,100,000
Payment of capital lease obligation (1,261,733) --
Proceeds from exercise of stock options 37,059 49,559
Proceeds from employee stock purchase plan 43,097 --
------------ ------------
Net cash provided by financing activities 10,832,983 4,093,358
Effect of exchange on cash and cash equivalents (25,791) --
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,426,072 (835,183)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 561,207 919,765
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,987,279 $ 84,582
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 715,247 $ 164,275
============ ============
Income taxes paid $ 1,382,418 $ 492,150
============ ============
</TABLE>
6
<PAGE> 7
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1999
The Company used a term loan and a credit line to finance certain
business combinations accounted for under the purchase method during the first
six months of fiscal 2000 and 1999. The fair value of the assets and
liabilities of acquired companies at the dates of the acquisitions are presented
as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accounts receivable $ 2,176,925 $1,710,651
Inventories 1,537,352 1,179,280
Prepaid expenses 514,493 ---
Property and equipment 828,728 623,814
Intangible assets 11,571,716 1,000,000
Other long-term assets 203,224 ---
Accounts payable (1,666,687) (606,971)
Accrued liabilities (1,707,466) (17,633)
Long-term liabilities (860,168) (239,141)
----------- ----------
Net assets acquired $12,598,117 $3,650,000
=========== ==========
</TABLE>
7
<PAGE> 8
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ACCOUNTING POLICIES
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended December 31, 1999 and 1998 but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the periods
presented. Such results are not necessarily indicative of results for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not required for interim
reporting purposes, have been omitted. The accompanying financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1999, included in the Company's
Annual Report on Form 10-KSB.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be recognized at fair value in the
balance sheet and all changes in fair value be recognized currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
The Company does not believe that the implementation of this statement will have
an effect on the Company's results of operations, cash flows or financial
position.
2. BUSINESS COMBINATIONS
On July 19, 1999, the Company acquired all of the outstanding capital stock of
Compex SA, a Swiss-based medical products company, for cash of $10,747,967. The
acquisition was financed principally with debt and provides for additional
contingent consideration of up to $2,000,000 based on performance over the
calendar years 1999 and 2000. The purchase consideration exceeded the net fair
value of tangible assets by $9,721,566, of which $1,400,000 represented the
value of Compex's technology, $1,400,000 represented the value of its workforce
and the remaining $6,921,566 of which was assigned to goodwill. The value of
these intangible assets will be amortized over various periods from five to
twenty years. The allocations are preliminary, pending the outcome of certain
pre-acquisition tax contingencies. Additional consideration of approximately
$1,800,000 was earned for performance in 1999 and will be paid in March 2000.
That amount is included in goodwill as of December 31, 1999 and, effective
January 1, 2000, will be amortized accordingly.
Proforma operating results as if Compex SA had been acquired at the
beginning of fiscal 1999 are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31, 1998 December 31, 1998
-------------------------- ------------------------
<S> <C> <C>
Net sales $14,644,000 $27,489,000
Income before taxes 1,070,000 1,924,000
Net Income 634,500 1,134,000
Earnings per share -
Basic $ .06 $ .11
Diluted .06 .11
</TABLE>
8
<PAGE> 9
On August 7, 1998, the Company acquired substantially all of the assets
(consisting primarily of finished goods inventory and receivables) of the
Homecare business unit of Henley Healthcare, Inc. ("Henley") for a purchase
price of $3,650,000 paid in cash at closing. The cash paid was obtained from
existing funds and borrowings under the Company's bank line of credit, including
a $2,500,000 term loan payable over three years.
3. NOTE PAYABLE AND LONG TERM DEBT
In conjunction with its acquisition of Compex SA, the Company entered into a new
$20,000,000 credit facility which provides for both term and revolving
borrowings at varying rates based either on the bank's prime rate or LIBOR. The
initial term loan of $15,000,000 was used to fund the acquisition and repay the
balance of a mortgage note and a revolving loan provided under a credit facility
with another bank.
Borrowings under the new facility are secured by substantially all assets of the
Company other than those pledged as collateral on existing lease or mortgage
obligations. The interest rate on the term loan was 8.36% at December 31, 1999
and the weighted average rate on borrowings under the revolving line of credit
was 8.70%.
The Company was in compliance with all financial covenants in its credit
agreement as of December 31, 1999 and for the period then ended.
4. SEGMENT INFORMATION
Rehabilicare and its consolidated subsidiaries operate their business in one
reportable segment, the manufacture and distribution of electromedical pain
management and rehabilitation products. The Company's chief operating decision
makers use consolidated results to make operating and strategic decisions. Net
sales from the United States and foreign sources (primarily Europe) are as
follows:
<TABLE>
<CAPTION>
For the Six Months Ended December 31
------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
U.S. sales $21,023,638 $19,673,856
Foreign sales 7,630,718 292,691
----------- -----------
Total $28,654,356 $19,966,547
=========== ===========
</TABLE>
Net sales by product line were as follows:
<TABLE>
<CAPTION>
For the Six Months Ended December 31
------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Rehabilitation products $12,419,278 $ 5,236,253
Pain management 7,382,617 7,234,391
Accessories and supplies 8,852,461 7,495,903
----------- -----------
$28,654,356 $19,966,547
=========== ===========
</TABLE>
No single customer represents over 10% of the Company's consolidated sales.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, manufactures and distributes electromedical pain management
and rehabilitation products used for clinical, home health care, sports medicine
and occupational medicine applications. The Company operates in one business
segment, distributing its products through sales to medical product dealers and
distributors and, in the United States, through direct rental or sale to
patients. The latter approach involves placing electrotherapy units with
physicians, physical therapists and other health care providers who then refer
those units to patients after determining an appropriate treatment regimen.
Units are left on consignment with the health care providers for such referral.
The Company then bills the patient or the patient's insurance carrier directly
after being notified that a unit has been prescribed and provided to the
patient. The Company takes responsibility for subsequent patient follow-up,
including additional months rental; sale of the unit, if appropriate; and sale
of additional supplies required for continued use of the electrotherapy units.
This distribution approach requires the Company to maintain significant
investments in inventories and receivables.
In the fiscal year ended June 30, 1998, the Company began implementation of a
strategy to increase its business through consolidation with other companies in
the pain management and rehabilitation markets. The strategy began with the
merger with Staodyn, Inc. on March 17, 1998 in a transaction accounted for as a
pooling-of-interests. On August 7, 1998, the Company acquired certain assets of
the Homecare division of Henley Healthcare, Inc. and the operations of that
business are included in the consolidated financial statements from that date
forward. In January 1999, the Company established a majority-owned subsidiary,
Rehabilicare (UK), Ltd., near London, England. Rehabilicare (UK) subsequently
acquired substantially all of the assets of the Company's former distributor in
the United Kingdom, effective February 1, 1999. Its operations are included
from that date forward. Sales to the distributor prior to that date are
included in net revenue. Finally, on July 19, 1999, the Company acquired all of
the outstanding capital stock of Compex SA based in Lausanne, Switzerland. Its
operations are included in the consolidated financial statements from the date
of acquisition.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth information from the statements of operations as
a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales and rental revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales and rentals (27.8) (29.6) (30.4) (28.4)
Gross profit 72.2 70.4 69.6 71.6
Operating expenses -
Selling, general and administrative (51.9) (55.8) (52.4) (56.4)
Research and development (2.4) (1.9) (2.1) (2.2)
Non-recurring merger items -- -- -- (0.4)
-------- -------- -------- ---------
Total operating expenses (54.3) (57.7) (54.5) (59.0)
Income from operations 17.9 12.7 15.1 12.6
Other income (expense), net (3.3) (1.2) (2.8) (1.2)
Gain on sale of building -- -- 3.8 --
Income tax provision (6.0) (4.4) (6.6) (4.3)
Net income 8.6 7.1 9.5 7.1
</TABLE>
Revenue was $14,778,000 for the second quarter of fiscal 2000, a 36% increase
from $10,882,000 in the second quarter of fiscal 1999. Revenue for the six
months ended December 31, 1999 increased 44% to $28,654,000 from $19,967,000 in
the first six months of fiscal 1999. Compex accounted for $4,043,000 of revenue
for the second quarter and $7,019,000 for the first six months of fiscal 2000.
Other revenue for the second quarter of fiscal 2000 was essentially unchanged
from the second quarter of fiscal 1999 as the growth in patient referrals slowed
after several quarters of substantial growth reflecting the Company's
acquisition and consolidation strategy. The primary reason for the increase in
such revenue for the six months ended December 31, 1999 was the full integration
of the former Staodyn and Rehabilicare sales organizations, a process which
started immediately after approval of the merger on March 17, 1998.
International business other than Compex was not significant as a percent of
total revenue in the second quarter and six month periods in both years.
11
<PAGE> 12
Gross profit was $10,671,000 or 72% of revenue in the second quarter of fiscal
2000 and $19,948,000 or 70% of revenue for the first six months compared with
$7,665,000 or 70% of revenue and $14,304,000 or 72%, respectively, in the
comparable periods of fiscal 1999. Cost of sales included a one-time charge
of $645,000 in the first quarter of fiscal 2000 related to the step-up in
basis of inventory recorded in connection with the Compex acquisition. Its
inventory turns rapidly so the entire step-up flowed through the first
quarter. Without that charge, gross margin would have been 72% of revenue for
the six months. That rate is essentially unchanged from the rate for the
fiscal year ended June 30, 1999 and is consistent with the Company's
expectations.
Selling, general and administrative expenses increased 26% to $7,677,000
in the second quarter of fiscal 2000 from $6,075,000 in fiscal 1999 but
decreased as a percentage of revenue from 56% to 52%. For the six months
ended December 31, 1999, those expenses increased 33% to $15,004,000 from
$11,255,000 in fiscal 1999 but decreased as a percentage of revenue from
56% to 52%. Several factors contributed to those decreases. Fiscal 1999
included expenses of carrying the former Staodyn building in Longmont,
Colorado which was sold in July 1999 and the costs of continuing
operations in facilities formerly operated by Henley Healthcare which were
closed during fiscal 1999. The decrease also reflects the elimination of
virtually all administrative costs associated with the former operations
of Staodyn and Henley Healthcare and various economies of scale resulting
from the Company's acquisition activity.
Research and development expense increased about 67% for the second
quarter and 33% for the six months but remained at approximately 2% of
revenue from year to year. The fiscal 2000 expenses include $98,000 and
$185,000, respectively, incurred by Compex and, without that acquisition,
those expenses would have decreased. The Company substantially completed
development of a new family of TENS products during fiscal 1999 and
believes that the current expenditure level will be adequate to fund
current product enhancement and development programs.
Interest expense increased from $116,000 to $346,000 as a result of the
acquisitions of the Henley Healthcare business in August 1998 and Compex
in July 1999, both of which were financed with debt.
Operating results for fiscal 2000 include a gain on the sale of the former
Staodyn building in Longmont, Colorado in the amount of $1,076,000. The
Company exercised its option to purchase that building in the first
quarter of fiscal 1999 and closed the purchase and immediate sale on July
7, 1999. Lease payments and operating costs associated with that building
were expensed as incurred throughout fiscal 1999.
The provision for income taxes was increased from 41% of income before
taxes in the first quarter of fiscal 2000 to 42% for the six months ended
December 31, 1999, compared with 38% and 41%, respectively, in the prior
year. The Company now operates in various countries in Europe as well as
the United States. Some countries have higher tax rates than the United
States as well as different rules on the deductibility of certain expenses
and the availability of certain credits for taxes paid to other
jurisdictions. The Company believes that 42% is a reasonable estimate of
the effective rate for fiscal 2000 based on most recent estimates expected
sources of revenue and expenses for entire year.
As a result of all the above changes, net income increased from $774,000
in the first quarter and $1,413,000 in the first six months of fiscal 1999
to $1,232,000 and $2,666,000, respectively, in fiscal 2000.
Diluted earnings per share increased from $.07 and $.12 to $.13 and $.25.
Before the one time gain related to the building sale and the one time
charge related to the Compex inventory step-up are eliminated, net income
for the six months was $2,462,000 or $.23 per share. Compex accounted for
just over $.02 of that amount after deducting goodwill amortization and
interest expense on acquisition debt from it's operating income.
12
<PAGE> 13
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company generated cash of $1,426,000 in the first six months of fiscal
2000 after using cash of $835,000 during the first six months of fiscal
1999. The most significant cash transaction during the period was the
acquisition of Compex for $10,748,000, all of which was financed by
additional bank borrowings. As a part of that transaction, the Company
consolidated its other bank debt into a new $20 million credit facility
which provides for both term and revolving loans. Net additional proceeds
from borrowings related to the acquisition and other operating expenses
was $11,891,000. The purchase price for Compex will be increased by
$1,800,000 based on certain operating results of Compex for the calendar
year 1999. Such payments will be made in March 2000. An additional
$200,000 could be paid in March 2001 based on certain operating results
for calendar 2000. The credit facility was designed to cover those
amounts in the event cash flow from operations is not sufficient to fund
them.
The only other significant investing activity during the period was the
purchase of $983,000 of property and equipment in the normal course of
operation.
As previously mentioned, the Company also generated net cash of $465,000
from the sale of a building, net of payment of the capitalized lease
obligations.
Cash was used to fund an increase in receivables of $2,408,000 during the
first six months of fiscal 2000. Compex receivables at the end of the
quarter were $1,847,000 so without that acquisition, receivables would
actually have increased by $561,000. Managing receivables represents one
of the biggest business challenges to the Company. The process of
determining what products will be reimbursed by third party payors and the
amounts to be paid for those products is very complex and the
reimbursement environment is constantly changing. That risk is spread
across many payors throughout the United States. The determination of an
appropriate reserve for uncollectible accounts at the end of each
reporting period includes various factors including historical trends and
relationships and experience with insurance companies or other third party
payors. The Company believes that the reserve at December 31, 1999 is
adequate to cover future losses on its receivables based primarily on
collection history and trends. The provision for uncollectible accounts
recorded in the income statement may fluctuate significantly from quarter
to quarter as such trends change. The reserve was 18.6% of receivables at
December 31, 1999 compared to 22.2% at June 30, 1999. That ratio will be
favorably impacted in the future as a result of including receivables from
Compex and Rehabilicare UK which are more traditional trade receivables
and not dependent on third party payors.
YEAR 2000 ISSUE
The Company conducted an assessment of all its Year 2000 issues involving
its technology systems over the last two years and successfully installed
Year 2000 compliant versions of software from its two major vendors. In
addition, the Company analyzed and modified all supporting software,
bringing all software into compliance. Implementation was complete and
Year 2000 compliant by December 31, 1999.
The Company also 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.
13
<PAGE> 14
The Company also completed its study of its relationships with third
parties whose failure to become Year 2000 compliant in a timely manner, if
at all, could have an effect on the Company. The Company circulated
questionnaires to all of its significant vendors and customers with
respect to such companies' Year 2000 compliance programs and status. In
addition, follow-up conversations were conducted with key customers and
vendors. The Company has completed that process
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance were expensed as incurred.
Those costs were not material. No significant, unexpected year 2000
issues were encountered and additionally we do not anticipate any material
adverse impact on future operations as a result of Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 7, 2000, the Company reported that it had been advised by
a reporter for The Tampa Tribune that it was the subject of a
whistleblower suit filed in Tampa, Florida. The Company still has
not been served with the complaint but has obtained a copy of the
suit from the United States District Court of the Middle District of
Florida. The suit was initiated by Elizabeth Mies, a former employee
of Rehabilicare, on December 31, 1998, and the United States
Government intervened as a coplaintiff under the False Claims Act on
November 8, 1999. It was under seal until January 21, 2000.
The suit alleges that Rehabilicare, Staodyn, Inc. (a corporation
acquired through a subsidiary of Rehabilicare in 1998), and Henley
Healthcare, Inc. (from which Rehabilicare acquired certain assets of
a division in 1998), improperly filed approximately 500,000 Medicare
claims, that they were overpaid more than $120,000,000 on such claims
and that the total statutory amount recoverable under the suit could
be $15.4 billion. The suit is based primarily on an allegation that
all three companies submitted claims to the government on the basis
of certificates of medical necessity faxed from physicians, rather
than on signed originals, but also alleges that the companies altered
those certificates and overbilled for accessories contained in a
"standard medicare kit."
Rehabilicare continues to be confused by the number of reimbursement
payments the complaint alleges were received, noting that Medicare
reimbursement constitutes only a small portion of the Company's
revenues.
As previously reported, the Company had completed a limited audit of
Medicare files during the summer of 1999 and determined that many of
the files were incomplete or incorrectly completed. The audit found
no evidence that the Company had submitted claims for which it did
not provide product or services and no evidence of intentional
wrongdoing. The Company, through its outside legal counsel, had
attempted several times to contact the United States Attorney's
office in Florida, as well as the Durable Medical Equipment Regional
Carriers that administer the Medicare reimbursement program, to
discuss whether return of any of the reimbursements for the
incomplete files was required. There was no response to such
requests.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Rehabilicare was held at
10:00 a.m. on Tuesday, December 14, 1999. Shareholders holding
9,505,207 shares, or approximately 90% 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 2000 or until such time as a successor may
be elected:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
--------- --------
<S> <C> <C>
Frederick H. Ayers 9,427,625 77,582
W. Bayne Gibson 9,425,807 79,400
Richard E. Jahnke 9,438,578 66,629
David B. Kaysen 9,435,115 70,092
John H.P. Maley 9,439,193 66,014
Robert C. Wingrove 9,439,095 66,112
</TABLE>
b. To approve an amendment to the 1998 Stock
Incentive Plan to increase the number of shares of the
company's common stock available for issuance thereunder
by 500,000 shares.
<TABLE>
<CAPTION>
IN FAVOR AGAINST ABSTAIN
-------- ------- -------
<S> <C> <C>
8,784,441 652,364 68,402
</TABLE>
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.7 Financial Data Schedule
(b) Reports on Form 8-K
None filed during the quarter ended December 31, 1999
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REHABILICARE INC.
February 14, 2000 /s/ David B. Kaysen
- ----------------------------------- -----------------------------------
Date David B. Kaysen
President and Chief Executive Officer
February 14, 2000 /s/ W. Glen Winchell
- ----------------------------------- -----------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting
Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,987,279
<SECURITIES> 0
<RECEIVABLES> 24,225,543
<ALLOWANCES> 4,584,317
<INVENTORY> 8,665,426
<CURRENT-ASSETS> 34,034,101
<PP&E> 11,539,947
<DEPRECIATION> 6,239,114
<TOTAL-ASSETS> 52,219,868
<CURRENT-LIABILITIES> 10,236,904
<BONDS> 0
0
0
<COMMON> 1,054,738
<OTHER-SE> 24,724,396
<TOTAL-LIABILITY-AND-EQUITY> 52,219,868
<SALES> 28,654,356
<TOTAL-REVENUES> 28,654,356
<CGS> 8,706,291
<TOTAL-COSTS> 24,317,393
<OTHER-EXPENSES> 87,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 749,862
<INCOME-PRETAX> 4,593,124
<INCOME-TAX> 1,927,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,666,124
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
