<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
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(b) of the Exchange Act: None
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 Securities Exchange Act of 1934 during the preceding 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
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K
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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of Registrant
as of September 20, 2000 was approximately $30,444,054 (based upon the last sale
price of such stock on such date as reported by the NASDAQ National Market
System).
The number of shares outstanding of each of the Company's classes of common
stock, as of September 20, 2000, was: Common Stock, $.10 par value, 10,584,487
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the Company's definitive proxy statement for the
annual meeting of shareholders to be held December 12, 2000 are incorporated by
reference in response to Part III.
<PAGE> 2
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Annual Report on Form 10-K 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-K, 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. Although integration of those businesses has
been substantially completed without significant problems, complete
integration may not be concluded as smoothly as anticipated and the
Company may discover 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 U.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, and may be subject to
different economic influences than our United States operations, and
may subject us to significant exposure from currency fluctuations.
Page 2
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Rehabilicare Inc. (the "Company") was incorporated as Medical Devices,
Inc., a Minnesota corporation, in 1972. The Company's name was changed to
Rehabilicare Inc. in 1994. Through its U.S. operations, the Company
manufactures, sells and rents rehabilitation and electromedical pain management
products and services used in clinical, home healthcare, and occupational
medicine applications. Through its Swiss subsidiary, Compex S.A., the Company
provides similar clinical products, but also manufactures and sells products
designed for athletic training in most European countries.
Through the late 1980s, most of the Company's activities related to the
sale of Transcutaneous Nerve Stimulation (TENS) and related devices through
dealers. 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 Company began in 1991 to distribute its
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 Company 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.
In addition to the change in distribution techniques, the Company expanded
during the late 1980s and early 1990s the types of electromedical devices it
offered to include interferential stimulation, pulsed galvanic (direct current),
and microcurrent.
Since 1998, the Company has expanded the scope of its operations
through acquisition. On March 17, 1998, the Company merged with Staodyn, Inc., a
corporation headquartered in Longmont, Colorado that was in the same business
but had more than twice the annual sales of the Company. In this transaction,
accounted for as a pooling-of-interests, the Company issued shares of its common
stock valued at about $16.5 million. On August 7, 1998, the Company acquired the
Homecare division of Henley Healthcare, Inc., another electromedical stimulation
products division, for cash of $3.65 million.
On July 16, 1999, the Company acquired substantially all the assets of
Compex SA, a Swiss-based medical products and athletic training products company
for cash of approximately $11.0 million. The acquisition was financed
principally with debt and provides for additional contingent consideration of up
to $2 million based on the performance of Compex through June 30, 2001.
The Company's operations during the year ended June 30, 2000 were
favorably impacted by these acquisitions, but adversely affected by publicity
surrounding, and a one-time charge related to, a Qui Tam suit brought by a
former employee under the False Claims Act, and in which the United States
Government intervened. Although publicity surrounding the suit caused
significant distraction of personnel, the Company has now reached verbal
agreement to settle the suit for $1,588,510.
PRODUCTS
The Company offers a number of electrotherapy devices for
rehabilitation, products for chronic and acute pain management and through its
Swiss subsidiary, products for athletic training. 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 43 percent, 26 percent and 24 percent of revenue for
fiscal 2000, 1999 and 1998,
Page 3
<PAGE> 4
respectively. Pain management products accounted for approximately 24 percent,
34 percent and 37 percent of revenue for fiscal 2000, 1999 and 1998,
respectively. 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 Electrical Stimulation (NMES) Devices. NMES devices are
designed to facilitate faster recovery of normal function in diseased or injured
muscles and other soft tissues. NMES has proven effective in producing
controlled muscle contractions which assist in increasing or maintaining the
strength and mobility of a limb and preventing deterioration of muscle tissue.
Common uses of NMES therapy include muscle re-education associated with knee
injuries; relaxation of muscle spasms in the neck and back, reduction of
swelling; reduction of spasticity in children; and increase in range of motion.
The Company's NMES products include the NM III(TM), which features 16 preset
programs covering the most common applications, and the EMS+2(TM), which
includes a unique pulsed direct current waveform. Both devices are ideal for
clinical or home use.
Pulsed Direct Current Devices (PDC). PDC devices utilize pulsed direct
current to reduce pain and swelling, influence local blood circulation and
increase range of motion. PDC is typically used post-operatively and for
traumatic injuries. The Company's products include the GV II(TM), a high voltage
device used primarily for sprains and strains. The SPORTX(R) features both a PDC
and TENS channel, and is used extensively in sports medicine, particularly by
orthopedic surgeons, 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 directly into the affected area. The IF II is
used to reduce pain associated with back problems, joint injuries, overuse
injuires as well as many podiatric applications.
CTDX(TM) Electrostimulation System The CTD(X) 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(TM) (wrist) or SmartWrap(TM) (elbow),
application-specific electrodes and a CTD(X) stimulation device. It provides a
non-narcotic, noninvasive and conservative treatment for wrist pain. The system
can be effectively used at the work site or in a clinic specializing in
occupational and industrial medicine.
Ortho D(X)(TM) Electrotherapy System. Introduced in 1998, the Ortho
D(X) 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
address post-surgical swelling of the knee 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 D(X) is designed for ease of
application and use in hospital settings, in clinics or at home.
Pain Management Products
Transcutaneous Electrical Nerve Stimulation Devices(TENS). TENS devices
have been used as a non-narcotic alternative to drug therapy for the relief of
chronic and acute pain for over 25 years. These devices are most frequently used
to treat persistent conditions such as neck and low back pain. TENS has also
been used in treating pain resulting from a variety of other conditions
including postoperative pain, tendonitis, phantom limb pain, and childbirth.
TENS devices generally reduce pain during treatment, and can continue for an
extended period of time after use.
Page 4
<PAGE> 5
There are two theories that explain how TENS alleviates pain. The "gate
control theory" states that the electrical impulses from TENS devices block or
interrupt the neurological transmission of pain signals from the site of the
trauma to the brain. A second theory suggests that the electrical impulses
stimulate the production of enkephalins or endorphins, the body's natural pain
suppressing agents. Under either theory, TENS relieves pain without 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 five different products.
The Company's SMP-plus(TM) digital TENS is a state-of-the-art, digital device
that offers a unique modulation stimulation cycle which helps normalize a
disruption in the sympathetic nervous system. The SX-plus(TM) is also a digital
device(TM) and is a full-featured TENS stimulator with a high degree of
programming flexibility. The Nuwave(R) is an easy-to-use TENS device designed
for low back pain. A clinical trial conducted by the Pain Treatment Center of
the University of Tennessee in 1990, concluded that the Nuwave often proved
beneficial in patients with post-laminectomy or peripheral neuralgic pain, even
if they had not responded to other TENS therapy. The Maxima(R)II is similar to
the SX-plus in its programming flexibility. The Maxima(R)III is the largest
selling TENS in the Rehabilicare line of TENS devices. It offers a unique
stimulation modulation that follows the "strength duration curve", a key element
in controlling many types of pain.
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.
The Company also distributes a modified TENS unit, the BabiTENS(R). It
is manufactured by the Company for pain control during labor and childbirth. It
is 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.
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 through the electrode into tissue.
Iontophoretic drug delivery is noninvasive and does not require the use of a
needle or ingestion of a capsule or tablet.
Cervical and Lumbar Traction Devices
The Company markets "The Saunders Cervical Hometrac(R)" and "The
Saunders Lumbar Hometrac" devices, which are marketed to physicians, physical
therapists, and other healthcare specialists treating neck and 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,
Page 5
<PAGE> 6
disposable electrodes, leadwires, batteries, and a power pack that eliminates
the need for batteries in some 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 37 percent, 42 percent and 36 percent of
revenue in fiscal 2000, 1999 and 1998, respectively.
COMPEX S.A.
On July 16, 1999, the Company acquired Compex S.A., a designer,
developer and marketer of home use electrotherapy products for the medical,
sports and fitness markets in Europe. Compex, headquartered in Lausanne,
Switzerland, was established in 1986 and had revenues of approximately $8
million in 1998. Compex accounted for $15.7 million or 27% of the Company's
overall sales in the year ended June 30, 2000.
Compex sells a line of clinical products in Europe designed to perform
many of the same rehabilitation and pain management functions as the products
marketed directly by the Company. These products accounted for sales of $3.1
million or 20% of Compex's overall sales during the year ended June 30, 2000.
Although Compex sells to medical markets in Switzerland, France and Italy, most
of its products do not require prescriptions.
In addition to its products for clinical applications, Compex provides
a line of products for the sports and fitness markets. Unlike the United States,
where such muscle stimulation products would require a prescription, Compex
markets and sells these products directly to consumers in Europe without
prescription. Compex's most popular product, the Compex Sport, is a
high-precision muscle stimulator designed to improve the performance of
world-class and high-level amateur athletes. Compex Sport both strengthens
muscles and encourages muscle recovery after strenuous workouts. A lower cost,
less powerful muscle stimulator, the Compex Fitness, is targeted at "weekend
athletes" for use in their workout programs.
The Compex line is sold directly to athletes for strength training and
for assisting in muscle recovery after strenuous workouts. The products are
customized for both elite athletes and "weekend warriors"; and are sold at
specialty sporting goods shops. In France, Switzerland, Germany and Spain,
Compex sells its products directly or through subsidiary corporations. In Italy,
which accounted for 54% of Compex's sales, products are offered through an
exclusive distribution arrangement.
Compex markets its products through attendance and demonstrations at
the major athletic meets across Europe and through product endorsements by
Olympic athletes and teams. Compex Sport is also marketed directly to consumers
through sports magazine promotions, at sporting events and through high-end
sports shops.
SALES AND MARKETING
The Company distributes its products in the United States 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,
physiatrists, general practictioners 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, has emphasized direct rentals and
sales to patients through healthcare providers and third-party payors, rather
than through dealers. For fiscal 2000, direct sales and rentals represented 63
percent of total Company revenue, compared with 87 percent in fiscal 1999 and
Page 6
<PAGE> 7
84 percent in fiscal 1998. The decrease in the percentage for fiscal 2000 is the
result of increased sales growth from Compex SA.
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 products. As
of June 30, 2000, the direct sales force consisted of 120 representatives. 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 Company's billing and support operations for its direct
distribution channel are located in Tampa, Florida. These operations include (1)
distribution support staff that provides next day service of products and
supplies to providers and patients; (2) billing and collecting staff that work
with physicians, clinicians and reimbursement agencies to ensure prompt and
accurate billing and collection (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.
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 9% of the Company's revenue in fiscal 2000.
In addition to its sales through Compex, the Company markets its
products internationally through the use of foreign distributors and its
majority-owned subsidiary, Rehabilicare (UK) Ltd., a subsidiary formed in
February 1999 that acquired the business of one of the Company's distributors.
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.
NEW PRODUCT DEVELOPMENT
The Company's research and development efforts during the past year
have been directed primarily at developing pain management devices using digital
solid state electronics and that may be manufactured at a reduced cost. The
SMP-plus and the SX-plus are two digital, TENS devices that were introduced into
the market in October of 1999. In addition, that Company has focused on
developing enhancements of existing products for use with specific diagnosed
medical problems. Successful examples of these development efforts are the
Company's CTD(X)(TM) Electrostimulation System and the Ortho D(X)(TM)
Electrotherapy System.
Page 7
<PAGE> 8
COMPETITION
Several other companies in the U.S. currently manufacture and
distribute electrotherapy rehabilitation and pain management devices. The
Company believes that its principal competitor in the electrotherapy
rehabilitation and pain management market in the U.S. 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 expanded its product offerings and sales
and distribution capabilities within the U.S. 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. With the acquisition of Compex SA
and the forming of Rehabilicare (UK) Ltd, the Company has now expanded into many
European markets. Though Compex's products are well known and marketed currently
in six European countries, the Company competes with numerous smaller
competitors that vary considerable by each individual country. The Company also
competes with a number of other suppliers, including foreign manufacturers, who
offer products for similar applications but at lower costs, and the Company
believes, of lower quality.
MANUFACTURING AND SOURCES OF SUPPLY
The Company's U.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.
Products distributed by Compex SA utilize offshore manufactured
components that are shipped to a Swiss contracted engineering company. This
engineering company is required to assemble Compex SA products using the
Company's strict quality requirements, and technology specifications supplied by
the Company.
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. The Company
did apply for, however, and in 1996 was issued, patents for the CTDx system,
including the SmartBrace wrist splint, SmartBrace electrodes, and CTDx
electrical stimulation device. During the past two fiscal years, the Company
submitted several more patent applications for approval. These applications are
pending. Historically some of the companies that Rehabilicare had acquired,
maintained a more aggressive approach to patent protection than the Company, and
the majority of their products are covered by more than 25 U.S. and Canadian
patents. Both the Company and its subsidiaries 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 Company has no knowledge that it is infringing
upon any patents held by others. The Company may
Page 8
<PAGE> 9
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 the FDA's
QSR requirements (formerly Good Manufacturing Practices) and other applicable
regulations. These regulations require that the Company manufacture its products
and maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. The Company believes that its manufacturing and
quality control procedures substantially conform to the requirements of the FDA
regulations.
The Company's products are also subject to laws and regulation in
foreign countries.
The Act and various state agencies also regulate the labeling of the
medical devices, including any promotional activities sponsored or marketing
materials distributed by or on behalf of the manufacturer or seller. While the
FDA cannot prohibit a licensed health care professional from using a device for
purposes other than indicated in its labeling (i.e., an "off-label" use), if the
FDA determines that a manufacturer or seller is engaged in off-label marketing
of a product subject to FDA regulations, the FDA may take administrative, civil
or criminal actions against the manufacturer or seller. The regulations of state
agencies with respect to the advertisement and promotion of medical devices may
be even more restrictive.
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
Page 9
<PAGE> 10
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.
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.
The Health Care Financing Administration ("HCFA"), the federal agency
which determines Medicare reimbursement levels, recently announced a reduction
in the amounts patients will be reimbursed for use of TENS devices. Medicare
reimbursement has historically constituted only a small portion of the Company's
revenue. However, certain private insurance programs may follow HCFA in reducing
reimbursement rates. Accordingly, their can be no assurances that current levels
of reimbursement will be maintained.
In addition to establishing the rates of reimbursement, HCFA and the
agencies that administer Medicare reimbursement require compliance with a
detailed set of regulations and forms as a prerequisite to reimbursement.
Failure, or alleged failure, to comply with these regulations can result in
administrative action and civil action under "whistle-blower" statutes such as
the action recently settled by the Company. The Company will, to the extent it
continues to obtain Medicare reimbursement in the future, be obligated to comply
with a detailed Corporate Integrity Agreement, under which its operations will
be subject to audit and close scrutiny by federal regulatory agencies.
EMPLOYEES
As of June 30, 2000, the Company has 278 full-time employees in the
U.S. This includes 140 employees in sales and marketing, 9 in research and
development, 48 in manufacturing, and 81 in finance and administration.
Geographically, the Company had 93 employees in its New Brighton facility, 159
employees in Tampa, and 26 employees in various regional U.S. field sales
offices.
As of June 30, 2000, the Company has 93 full-time international
employees. This includes 40 in sales and marketing, 7 in research and
development, 3 in production, and 43 in finance and administration.
Geographically, the Company's international employees include 40 in Switzerland,
37 in France, 7 in Germany, 4 in Spain and 5 in the United Kingdom.
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. PROPERTIES
The Company's corporate headquarters are located in a 30,000 square
foot facility 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 owns this facility.
Page 10
<PAGE> 11
The Company entered into a 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 through
May 2001. The Company is currently attempting to sublease this space.
The Company currently leases 4 facilities in Europe that total
approximately 7,400 square feet of leased space. These leases range in duration
from one to three years and are all renewable.
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 on July 7, 1999.
ITEM 3. LEGAL PROCEEDINGS.
On September 11, 2000, the Company announced that it had reached an
agreement with the United States Government to settle allegations of improper
Medicare billing that were asserted in a lawsuit filed by a former employee. The
Company has agreed to pay a total of $1,588,510 to settle the lawsuit. The
Company has denied allegations that it engaged in fraudulent Medicare billing
practices. Although the terms of the settlement, including the amount to be paid
by the Company, have been agreed to in principle with the United States, the
settlement remains subject to final agency approvals, including review and
approval by the United States Department of Health and Human Services Office of
Counsel to the Inspector General with respect to necessary compliance
provisions.
The lawsuit was originally brought by a former employee, Elizabeth
Mies, on December 31, 1998, and filed under seal as required by the Civil False
Claims Act. The employee alleged that the Company improperly submitted
approximately 500,000 Medicare claims and received more than $120 million in
overpayments from the Medicare program. The United States Government intervened
in the action on November 8, 1999. The Complaint was not unsealed until January
21, 2000 and the Company did not obtain a copy of the Complaint until February
7, 2000.
Under the terms of the settlement, the Company will also be required to
enter into a Corporate Integrity Agreement ("CIA"). The specific terms of the
CIA have not yet been finalized. The CIA will, however, have a duration of five
years and provide for an independent audit of claims submitted to federal health
care programs to ensure, among other things, proper filing of future Medicare
claims. The Company previously hired a corporate compliance officer and
implemented a corporate compliance program to ensure that the Company is in
compliance with all applicable laws and regulations.
The Company has also, from time to time, been a party to other 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.
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, 2000.
Page 11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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>
High Low
---- ---
Fiscal year ended June 30, 2000
<S> <C> <C>
First Quarter $ 4 1/8 $ 2 7/8
Second Quarter 4 15/32 3 7/16
Third Quarter 4 3/8 2 3/8
Fourth Quarter 2 13/16 2
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal year ended June 30, 1999
<S> <C> <C>
First Quarter $ 2 3/4 $ 1 7/8
Second Quarter 3 5/8 1 13/16
Third Quarter 4 3/8 2 7/16
Fourth Quarter 3 1/2 2 1/2
</TABLE>
The last sale price reported by Nasdaq on September 20, 2000 was $3 per
share. As of September 20, 2000, there were approximately 760 shareholders of
record (not including beneficial holders) and the Company estimates there were
approximately 3000 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. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results -
Revenue $ 58,814,672 $ 41,795,373 $ 33,812,453 $ 32,133,707 $ 27,646,937
Gross profit 40,851,971 29,847,069 22,676,520 21,897,751 18,681,162
Net income (loss) 2,202,777 2,859,834 (1,008,683) 1,793,328 441,488
----------------------------------------------------------------------------------------------------------------------
Per common share -
Net income (loss) $ .21 $ .27 $ (.10) $ .17 $ .04
----------------------------------------------------------------------------------------------------------------------
Financial data/other -
Cash $ 2,227,352 $ 561,207 $ 919,765 $ 2,654,118 $ 1,093,253
Working capital 21,495,832 21,547,312 19,204,614 19,127,284 16,936,388
Total assets 52,707,962 35,699,714 27,060,358 28,471,347 26,710,065
Shareholders' Equity 25,269,554 23,053,309 20,091,230 21,372,451 19,390,574
Long-term obligations 13,662,792 4,066,914 3,299,705 3,555,107 3,549,142
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company designs, manufactures and distributes electrotherapy
products used for pain management, rehabilitation and training. Its products are
used in clinical, home health care, sports medicine and occupational medicine
applications. It also distributes other medical products used in related
applications. The Company operates in one business segment, distributing its
products through sales to medical product dealers and distributors, sport shops
and, in the United States, through direct rental or sale to patients.
The direct rental or sale 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 extension of the rental period, 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 similar 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) Ltd.
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. Its primary business is the rental of pain
management products used by women during labor and child birth. The units are
rented directly to patients, through mail or phone order or through a large
chain of pharmacies.
On July 19, 1999, the Company acquired all of the outstanding capital
stock of Compex SA, a Swiss-based designer, developer and marketer of home use
electrotherapy products for the medical, sports and fitness markets in Europe,
for cash of approximately $11.0 million. The acquisition was financed
principally with debt and provides for additional contingent consideration of up
to $2 million based on the performance of Compex through June 30, 2001. In
connection with the acquisition, the purchase consideration and transaction
costs were allocated as follows:
<TABLE>
<S> <C>
Net assets acquired $ 1,612,085
Goodwill 8,860,772
Developed technology 1,400,000
Existing workforce 1,400,000
Debt structuring costs 346,970
--------------------
$ 13,619,827
====================
</TABLE>
Included in goodwill, are contingent payments, made during fiscal 2000, to the
former Compex shareholders of $1.8 million.
Page 13
<PAGE> 14
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>
Year Ended June 30,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales and rental revenue 100.0% 100.0% 100.0%
Cost of sales and rentals 30.5 28.6 32.9
----- ----- -----
Gross profit 69.5 71.4 67.1
Operating expenses
Selling, general and administrative 55.3 57.3 59.8
Research and development 2.2 2.1 2.9
Medicare settlement expense 3.6 -- --
Non-recurring merger items -- (0.3) 10.6
----- ----- -----
Total operating expenses 61.1 59.1 73.3
----- ----- -----
Income (loss) from operations 8.4 12.3 (6.2)
Other expense, net 1.1 1.2 1.1
Income tax provision (benefit) 3.6 4.2 (4.4)
----- ----- -----
Net income (loss) 3.7% 6.9% (2.9)%
===== ===== =====
</TABLE>
COMPARISON OF YEAR ENDED JUNE 30, 2000 TO YEAR ENDED JUNE 30, 1999
The Company's revenue increased $17,020,000 or 41% to $58,815,000 in
fiscal 2000, from $41,795,000 in fiscal 1999. The increase was primarily
attributable to the acquisition of Compex, which accounted for $15,703,000 of
revenue in fiscal 2000. U.S. revenue increased 3% in fiscal 2000, primarily as a
result of an increase in the number of patient referrals. International business
other than Compex was not significant as a percent of total revenue in either
year.
Gross profit was $40,852,000 or 69.5% of revenue in fiscal 2000
compared with $29,847,000 or 71.4% of revenue in 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. Without that charge, gross margin would have been 70.6% of
revenue for fiscal 2000. The slight reductions in gross margin as a percentage
of revenue are due primarily to minor changes in the mix of product sales and
rentals.
Selling, general and administrative expenses increased 36% to
$32,501,000 in fiscal 2000 from $23,962,000 in fiscal 1999. As a percentage of
revenue, selling, general and administrative expenses declined to 55% in fiscal
2000 from 57% in fiscal 1999. Several factors contributed to that decrease.
Fiscal 1999 included expenses of maintaining 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. Decreases were also realized with the elimination of
many of the administrative costs associated with the former operations of
Staodyn and Henley Healthcare and various economies of scale resulting from the
Company's acquisition activity. The impact of those factors was partially offset
by incremental marketing and selling expenses incurred by Compex in connection
with its aggressive growth plan and by an additional $1,000,000 provision for
uncollectible accounts receivable recorded in the fourth quarter of fiscal 2000.
Page 14
<PAGE> 15
Research and development expense increased $443,996 or 51% to
$1,310,694 in fiscal 2000 from $866,698 in fiscal 1999, but remained relatively
constant at approximately 2% of revenue in both years. The fiscal 2000 expenses
include approximately $364,000 incurred by Compex. The Company substantially
completed development of a new family of TENS products during fiscal 1999 and
anticipates relatively minor increases in the current expenditure level to fund
current product enhancement and development programs.
Results of operations in fiscal 2000 include a $2,093,537 charge for
the $1,588,510 of settlement costs, and related legal expenses incurred in
connection with the whistleblower suit described above under "legal
proceedings.". The settlement was accrued as of June 30, 2000 and will be paid
upon completion of all documentation, including a Corporate Integrity Agreement.
Payment is anticipated to occur in the second quarter of fiscal 2001 and will be
made from available funds and, if necessary, borrowing under the Company's
revolving credit agreement.
Interest expense increased from $499,000 to $1,600,000 in fiscal 2000
as a result of the addition of debt to finance the acquisition of Compex in July
1999, and higher interest rates.
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 increased from 38% of income before
taxes in fiscal 1999, to 49% in fiscal 2000. The effective rate before the
impact of the Medicare lawsuit settlement expenses was 42%. The increment
resulted from the nondeductible portion of such expenses. In addition, 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 of the expected sources of revenue and expenses for entire
year.
Net income decreased from $2,860,000 in fiscal 1999 to $2,203,000 in
fiscal 2000. Diluted earnings per share decreased from $.27 to $.21. Before the
one time gain related to the building sale and the one time charges related to
the Medicare settlement and the Compex inventory step-up net income for fiscal
2000 was $3,482,000 or $.33 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.
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.
Page 15
<PAGE> 16
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 $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. 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 %. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended June 30, 2000, the Company's operations
provided cash of $5,300,000 mainly from net income, a $2,014,000 reduction in
inventory levels and an increase in accrued liabilities and accounts payable of
$2,127,000. These amounts were offset by an increase in prepaid assets and the
$1,076,000 gain the Company realized on the sale of its Colorado facility.
The Company used $13 million in investing activities in fiscal 2000,
representing the cost of the acquisition of Compex S.A. Included in this amount
are contingent payments made to the former Compex shareholders of $1,800,000
and transaction costs of $347,000. The Company also used cash of $1,233,000 for
the purchase of property and equipment and generated cash of $1,696,000 from
the disposal of fixed assets.
The Company's financing activities contributed $9,941,000 of cash
during fiscal 2000, primarily through a new credit facility with a financial
institution that allows it to borrow up to $20,000,000 and that was used to
refinance existing credit facilities and to finance the Compex acquisition.
Borrowings under the credit facility incur interest at either the bank's
reference rate or LIBOR. The Company initially borrowed $15,000,000 under the
credit facility to finance the Compex purchase and to repay an outstanding
note. At June 30, 2000, $13,400,000 is outstanding under the facility.
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. As
discussed in the Form 10-QSB for the third quarter ended March 31, 2000, the
Medicare whistleblower suit disclosed in early February 2000 adversely affected
morale and productivity in the Company's patient support operations. Careful
evaluation of that situation and the nature of remaining receivables at June 30,
2000 led management to conclude that an additional $1,000,000 should be provided
for uncollectible accounts. The Company believes that the reserve at June 30,
2000 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 continue to fluctuate
Page 16
<PAGE> 17
significantly from quarter to quarter as such trends change. The reserve was
25.4% of receivables at June 30, 2000 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) Ltd. which are more traditional
trade receivables and not dependent on third party payors.
The Company has a capital commitment to finance the $1,588,000 of
settlement costs of the Medicare whistleblower suit and anticipates paying such
amount during the second quarter of fiscal 2001. Except with respect to such
payment, the Company does not have any material commitment for capital
expenditures. The Company believes that available cash and borrowings under its
credit line will be adequate to fund such payment and any cash required by
operations for the next twelve months.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in the interest
rates on certain of its outstanding debt. The outstanding loan balance under our
$20 million credit facility bears interest at a variable rate based on the
bank's prime rate or LIBOR. Based on the average outstanding bank debt for the
year ended June 30, 2000, a 100 basis point change in interest rates would not
change interest expense by a material amount.
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and the
Reports of Independent Auditors listed in the accompanying index to consolidated
financial statements are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 16, 2000, Rehabilicare Inc. (the "Company") received
notice from PricewaterhouseCoopers LLP ("PWC"), its independent accountants,
that PWC was resigning the client-auditor relationship between the Company and
PWC. Such resignation was effective on March 16, 2000.
The reports of PWC on the financial statements of the Company for its
fiscal years ended June 30, 1999 and June 30, 1998 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim period through March 16, 2000, (i) there were no disagreements between
the Company and PWC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of PWC, would have caused PWC to make reference to
the subject matter of the disagreement in connection with its reports on the
financial statements for such years (a "Disagreement") and (ii) there were no
reportable events (a "Reportable Event"), as defined in Item 304(a)(1)(v) of
Regulation S-K of the Securities and Exchange Commission (the "Commission").
The Company has not, during the Company's two most recent fiscal years
or the subsequent interim period through March 16, 2000, consulted with any
other accounting firm from which it is seeking proposals regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, and no written report was provided to the
Company or oral advice was provided that any such accounting firm concluded was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue.
Page 17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information contained under the headings "Election of
Directors", "Executive Officers" and "Security Ownership of Certain Beneficial
Owners and Management-Compliance with section 16(a) of the Securities Exchange
Act of 1934" of the Company's definitive proxy statement for its annual meeting
of shareholders to be held December 12, 2000 (hereafter the "Proxy Statement"),
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" of the
Proxy Statement is incorporated herein by reference.
ITEM 12. 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 incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions"
of the Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The consolidated financial statements of the Company required by
this item are listed in the Index to Consolidated Financial Statements set forth
on page 22.
2. Financial Statement Schedules
All other schedules have been omitted because they are not
applicable or not required, or because the required information is included in
the financial statements or the notes thereto.
3. Exhibits
Number Description
2.1 Share Purchase Agreement dated July 19, 1999, between the
Shareholders of Compex SA and Rehabilicare Inc. (j)
3 Restated Articles of Incorporation (b)
3.1 Articles of Amendment to Articles of Incorporation (i)
4.1 Bylaws of the Company (b)
Page 18
<PAGE> 19
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)
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. (k)
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)
21 Subsidiaries of the Company*
23.1 Consent of Independent Auditors - Ernst & Young LLP*
Page 19
<PAGE> 20
23.2 Consent of Independent Public Accountants -
PricewaterhouseCoopers LLP*
27.1 Financial Data Schedule for the period ended June 30, 2000*
99 Safe Harbor Statement pursuant to the Private Securities
Litigation Reform Act of 1995*
--------------------------------------------------------------------------------
(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)
(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)
(k) Incorporated by reference to the Company's Form 10-KSB for the
Year Ended June 30, 1999 (File No. 0-9407)
(b) Reports on Form 8-K. A Form 8-K, dated April 24, 2000, was
filed to report the engagement of Ernst & Young LLP as the
Company's new independent auditors.
* Filed as part of this report
Page 20
<PAGE> 21
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, 2000 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, 2000
-----------------------------------------------
David B. Kaysen
Vice President of Finance
(Principal Financial and
/s/ W. Glen Winchell Accounting Officer) September 28, 2000
-----------------------------------------------
W. Glen Winchell
Chairman, Chief Technical
/s/ Robert C. Wingrove Officer and Director September 28, 2000
-----------------------------------------------
Robert C. Wingrove
/s/ Frederick H. Ayers Director September 28, 2000
-----------------------------------------------
Frederick H. Ayers
/s/ W. Bayne Gibson Director September 28, 2000
-----------------------------------------------
W. Bayne Gibson
/s/ Richard E. Jahnke Director September 28, 2000
-----------------------------------------------
Richard E. Jahnke
/s/ John H.P. Maley Director September 28, 2000
-----------------------------------------------
John H.P. Maley
</TABLE>
Page 21
<PAGE> 22
FINANCIAL STATEMENT INDEX
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Report of Ernst & Young LLP 23
Report of PricewaterhouseCoopers LLP 24
Consolidated Balance Sheets as of June 30, 2000 and 1999 25
Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998 26
Consolidated Statement of Changes in Stockholders' Equity for the years ended June 30, 2000,
1999 and 1998 27
Consolidated Statement of Cash Flows for the years ended June 30, 2000, 1999 and 1998 28&29
Notes to Consolidated Financial Statements 30-39
</TABLE>
Page 22
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of Rehabilicare Inc.
We have audited the accompanying consolidated balance sheet of Rehabilicare Inc.
as of June 30, 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rehabilicare Inc.
at June 30, 2000, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Minneapolis, Minnesota
August 24, 2000
Page 23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Rehabilicare Inc.
In our opinion, the consolidated balance sheet as of June 30, 1999 and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows for each of the two years in the period ended June 30,
1999 present fairly, in all material respects, the financial position, results
of operations and cash flows of Rehabilicare Inc. and its subsidiary at June 30,
1999 and for each of the two years in the period ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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. We have not audited the consolidated financial
statements of Rehabilicare Inc. for any period subsequent to June 30, 1999.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 2, 1999
Page 24
<PAGE> 25
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
<TABLE>
<CAPTION>
2000 1999
------------- ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,227,352 $ 561,207
Receivables, less reserve for uncollectible accounts of $6,575,715 19,268,252 17,233,469
and $4,913,635
Inventories -
Raw materials 1,283,791 1,825,487
Work in process 334,900 377,771
Finished goods 6,817,964 6,709,525
Deferred tax assets 3,351,294 2,587,686
Prepaid expenses 1,404,968 584,330
------------ ------------
Total current assets 34,688,521 29,879,475
------------ ------------
PROPERTY, PLANT AND EQUIPMENT: 11,877,772 11,548,678
Less accumulated depreciation (6,281,597) (6,930,564)
------------ ------------
Total property, plant and equipment 5,596,175 4,618,114
------------ ------------
Intangible assets, net 12,152,185 1,150,009
Deferred tax assets 223,923 40,121
Other assets 47,158 11,995
------------ ------------
$ 52,707,962 $ 35,699,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable $ 1,200,000 $ 2,400,000
Current maturities of long-term debt 2,170,468 1,241,037
Accounts payable 3,108,514 2,038,732
Medicare lawsuit payable 1,677,021 --
Accrued liabilities
Payroll 327,856 575,426
Commissions 350,893 491,990
Income taxes 1,672,636 --
Other 2,684,301 1,584,978
------------ ------------
Total current liabilities 13,191,689 8,332,163
LONG-TERM LIABILITIES:
Long term-debt 13,662,792 4,066,914
Deferred tax liabilities 583,927 247,328
------------ ------------
Total liabilities 27,438,408 12,646,405
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized; 1,055,871 1,049,491
issued and outstanding shares 10,558,710 and 10,494,908,
respectively
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Additional paid-in capital 20,873,737 20,740,650
Less note receivable from officer/stockholder (210,417) (237,500)
Accumulated other non-owner changes in equity (154,719) (1,637)
Retained earnings 3,705,082 1,502,305
------------ ------------
Total stockholders' equity 25,269,554 23,053,309
------------ ------------
$ 52,707,962 $ 35,699,714
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 25
<PAGE> 26
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Net sales and rental revenue $ 58,814,672 $ 41,795,373 $ 33,812,453
Cost of sales and rentals 17,962,701 11,948,304 11,135,933
------------ ------------ ------------
Gross profit 40,851,971 29,847,069 22,676,520
Operating expenses:
Selling, general and administrative 32,500,805 23,961,728 20,226,837
Research and development 1,310,694 866,698 986,203
Medicare lawsuit expenses 2,093,537 -- --
Non-recurring-merger items -- (108,619) 3,588,890
------------ ------------ ------------
Total operating expenses 35,905,036 24,719,807 24,801,930
------------ ------------ ------------
Income (loss) from operations 4,946,935 5,127,262 (2,125,410)
Other income (expense):
Interest expense (1,599,642) (499,297) (391,677)
Gain on sale of building 1,075,680 -- --
Other (81,196) (18,131) 13,235
------------ ------------ ------------
Income (loss) before income taxes 4,341,777 4,609,834 (2,503,852)
Income tax provision (benefit) 2,139,000 1,750,000 (1,495,169)
------------ ------------ ------------
Net income (loss) $ 2,202,777 $ 2,859,834 $ (1,008,683)
============ ============ ============
Net income (loss) per common share and common
equivalent share
Basic $ 0.21 $ 0.27 $ (0.10)
============ ============ ============
Diluted $ 0.21 $ 0.27 $ (0.10)
============ ============ ============
Weighted average number of shares outstanding
Basic
10,543,978 10,471,807 10,398,346
============ ============ ============
Diluted
10,615,142 10,529,422 10,398,346
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 26
<PAGE> 27
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
Accumulated
Note Other Non-
Additional Receivable Owner
Common Stock Paid-In From Officer / Changes in
Shares Amount Capital Stockholder Equity
------------ ------------ ------------ ------------- ------------
<S> <C> <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 loss, comprehensive loss -- -- -- -- --
Translation adjustments -- -- -- -- (1,637)
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) (1,637)
Net income -- -- -- -- --
Translation adjustments -- -- -- -- (153,082)
Total comprehensive income -- -- -- -- --
Exercise of stock options and related
tax benefits 26,766 2,677 33,500 -- --
Common stock issued through Employee
Stock Purchase Plan 37,036 3,703 99,587 -- --
Note Receivable -- -- -- 27,083 --
------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2000 10,558,710 $ 1,055,871 $ 20,873,737 $ (210,417) $ (154,719)
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Total
Retained Stockholders'
Earnings Equity
------------- -------------
<S> <C> <C>
BALANCE, June 30, 1997 $ 5,552 $ 21,377,451
Net loss, comprehensive loss (1,008,683) (1,008,683)
Adjustment to conform the year-end of
Staodyn, Inc. (354,398) (354,398)
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 loss, comprehensive loss 2,859,834 2,859,834
Translation adjustments -- (1,637)
------------
Total comprehensive income -- 2,858,199
Exercise of stock options and related
tax benefits -- 50,688
Common stock issued through Employee
Stock Purchase Plan -- 53,194
------------ ------------
BALANCE, June 30, 1999 1,502,305 23,053,309
Net income 2,202,777 2,202,777
Translation adjustments -- (153,082)
------------
Total comprehensive income -- 2,049,695
Exercise of stock options and related
tax benefits -- 36,177
Common stock issued through Employee
Stock Purchase Plan -- 103,290
Note Receivable -- 27,083
------------ ------------
BALANCE, June 30, 2000 $ 3,705,082 $ 25,269,554
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 27
<PAGE> 28
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,202,777 $ 2,859,834 $ (1,008,683)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Gain on sale of building (1,075,680) -- --
Depreciation and amortization 1,979,343 809,247 840,879
Non-recurring merger items --- (266,156) 1,374,550
Change in deferred taxes (1,302,656) 120,104 (1,100,819)
Minority interest (24,681) 24,681 --
Changes in current assets and liabilities
Receivables 142,142 (2,839,037) (1,276,614)
Inventories 2,013,480 (938,459) 323,646
Prepaid expenses (713,706) (283,503) 141,493
Accounts payable (596,905) 319,758 97,218
Accrued liabilities 2,723,964 461,209 338,122
------------ ----------- ------------
Net cash provided by (used in) operating activities 5,348,078 267,678 (270,208)
------------ ----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment (1,233,028) (786,802) (612,137)
Cash paid in asset acquisitions, net of cash received (13,034,143) (3,699,763 --
Disposal of assets, net 1,696,429 -- --
Decrease in other assets -- (8,487) (14,362)
------------ ------------ ------------
Net cash used in investing activities (12,570,742) (4,495,052) (626,499)
------------ ----------- ------------
FINANCING ACTIVITIES
Proceeds from new financing 15,000,000 2,500,000 133,515
Principal payments on long-term obligations (4,958,677) (1,135,066) (358,623)
Proceeds from (payments on) line of credit, net (1,200,000) 2,400,000 (340,000)
Proceeds from exercise of stock options 36,177 50,688 81,860
Proceeds from employee stock purchase plan 103,290 53,194 (354,398)
------------ ----------- ------------
Net cash provided by (used in) financing activities 8,980,790 3,868,816 (837,646)
Effect of exchange rates on cash and cash equivalents (91,981) -- --
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents 1,666,145 (358,558) (1,734,353)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 561,207 919,765 2,654,118
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,227,352 $ 561,207 $ 919,765
============ =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,512,613 $ 423,978 $ 389,468
============ =========== ============
Income taxes paid $ 2,093,488 $ 1,670,897 $ 9,611
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 28
<PAGE> 29
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
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 Year Ended
June 30, 2000 June 30, 1999
---------------------- ----------------------
<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 12,007,742 1,043,748
Other long-term assets 203,224 --
Accounts payable (1,666,687) (606,971)
Accrued liabilities (1,707,466) (11,618)
Long-term liabilities (860,168) (239,141)
------------ -----------
Net assets acquired $ 13,034,143 $ 3,699,763
============ ===========
</TABLE>
Page 29
<PAGE> 30
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 63 percent of total revenue in
fiscal 2000 and 87 percent in fiscal 1999. 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:
Building 39 years
Office furniture and equipment 3-10 years
Production equipment 3-5 years
Clinical and rental equipment 5 years
Page 30
<PAGE> 31
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, customer lists,
acquired workforce and developed technology. These assets are being amortized
using the straight-line method over estimated useful lives ranging from 5 to 20
years. The Company periodically reviews intangible assets for indications of
impairment in accordance with SFAS 121. The amount of any impairment loss
recorded will be measured as the amount by which the carrying value of the
assets exceeds the fair value of the assets.
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 31
<PAGE> 32
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the
current year presentation.
SELECTED FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
As of June 30
--------------------------------------------
2000 1999
------------------ --------------------
<S> <C> <C>
Property, Plant and Equipment
Land $ 150,000 $ 306,553
Buildings 1,683,614 2,658,752
Clinical and Rental Equipment 1,356,347 1,250,953
Production Equipment 2,658,929 2,534,580
Office Furniture and Equipment 6,028,882 4,797,840
------------ -----------
11,877,772 11,548,678
Less Accumulated Depreciation (6,281,597) (6,930,564)
------------ -----------
Total Property, Plant and Equipment $ 5,596,175 $ 4,618,114
============ ===========
<CAPTION>
2000 1999
------------------ --------------------
<S> <C> <C>
Intangible Assets
Goodwill $ 8,860,772 $ --
Technology 1,400,000 --
Workforce 1,400,000 --
Debt structuring costs 346,970 --
Customer lists 1,043,748 1,043,748
Patents 36,716 285,614
------------ -----------
13,938,206 1,329,362
Less Accumulated Amortization (936,021) (179,353)
------------ -----------
$ 12,152,185 $ 1,150,009
============ ===========
</TABLE>
2. BUSINESS COMBINATIONS:
Acquisition of Compex
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 debt and provides
for additional contingent consideration of up to $2 million based on the
performance of Compex though June 30, 2001. In connection with the acquisition,
the purchase consideration and transaction costs were allocated as follows:
<TABLE>
<S> <C>
Net assets acquired $ 1,612,085
Goodwill 8,860,772
Developed technology 1,400,000
Existing workforce 1,400,000
Debt structuring costs 346,970
------------
$ 13,619,827
============
</TABLE>
Included in goodwill, are contingent payments, made during fiscal 2000,
to the former Compex shareholders of $1.8 million.
Pro forma operating results for fiscal 2000 are not separately
presented due to the short time frame that Compex's results are not included in
the Company's consolidated results. Pro forma operating results as if Compex had
been acquired at the beginning of fiscal 1999 are as follows (unaudited):
Page 32
<PAGE> 33
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Net sales $ 51,378,000
Income (loss) before taxes 3,416,000
Net income (loss) 1,998,000
Earnings (loss) per share
Basic $ 0.19
Diluted 0.19
</TABLE>
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. Pro forma information related to this
acquisition is not included as the impact is not deemed to be material.
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 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.
In fiscal 2000, the Company recorded a gain on the sale of the former
Staodyn building in the amount of $1,075,680. The company exercised its option
to purchase that building in the first quarter of fiscal 1999 and closed the
purchase and immediate sale in July 1999.
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.
Page 33
<PAGE> 34
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 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 9.36% at June
30, 2000 and the weighted average rate on borrowings under the revolving line of
credit was 9.43%.
The Company was in compliance with all financial covenants in its
credit agreement as of June 30, 2000 and for the period then ended.
Selected data on the Company's borrowings under its revolving line of
credit is shown below:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Average balance outstanding $ 1,306,000 $ 1,885,000
Maximum balance outstanding $ 3,000,000 $ 2,800,000
Weighted average interest rate 8.63% 8.5%
</TABLE>
Page 34
<PAGE> 35
5. LONG-TERM DEBT:
Long-term obligations at June 30 consisted of the following
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Term loan, principal payments on a quarterly basis and interest due in monthly
installments through June 2004, interest at the prime rate or LIBOR (9.36% at
June 30, 2000), collateralized by substantially all assets of the Company other
than those pledged as collateral on existing lease or mortgage obligations. $ 13,400,000 $ --
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
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. 675,148 699,424
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. 680,806 700,468
Capital lease obligations 1,027,931 594,453
Other 49,375 246,283
------------ -----------
15,833,260 5,307,951
Less-Current maturities (2,170,468) (1,241,037)
------------ -----------
$ 13,662,792 $ 4,066,914
============ ===========
</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, 2000, 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>
<S> <C> <C>
2001 $ 1,847,754
2002 2,051,905
2003 2,256,424
2004 7,461,345
2005 66,701
Thereafter 1,121,200
-------------
$ 14,805,329
=============
</TABLE>
Page 35
<PAGE> 36
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> <C>
2001 $ 389,121 $ 366,760
2002 379,256 239,984
2003 270,350 247,184
2004 113,284 254,599
2005 -- 262,237
Thereafter -- 810,332
---------- -----------
Total future minimum lease payments 1,152,011 $ 2,181,096
===========
Less amount representing interest (124,081)
----------
Present value of net minimum lease payments 1,027,930
Less current portion (322,714)
----------
Long-term capital lease obligation $ 705,216
==========
</TABLE>
Rent expense for operating leases for fiscal 2000, 1999 and 1998 was
$454,130, $156,381 and $138,841, respectively.
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>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Currently payable:
Federal $ 1,950,488 $ 1,458,000 $ (374,632)
State 329,793 172,000 (19,718)
Foreign 1,161,375 -- --
Deferred (1,302,656) 120,000 (1,100,819)
----------- --------- ----------
$ 2,139,000 $ 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>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate $ 1,476,204 $ 1,567,344 $ (851,300)
State taxes 232,697 170,564 87,650
Nondeductible payment 255,000 -- --
Foreign 87,873 -- --
Release of valuation allowance -- -- (780,765)
Nondeductible merger costs -- -- 279,860
Other 87,226 12,092 (55,314)
----------- ----------- -----------
$ 2,139,000 $ 1,750,000 $(1,495,169)
=========== =========== ===========
</TABLE>
Page 36
<PAGE> 37
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Deferred tax benefits (liabilities) arising from:
Reserve for uncollectible accounts $ 2,630,286 $ 1,253,191
Accruals and other reserves (370,148) 310,862
Depreciation 67,600 (247,328)
Inventory 439,344 687,950
Sale and leaseback -- 335,683
Intangible assets -- 40,121
Other 224,208 --
----------- -----------
$ 2,991,290 $ 2,380,479
=========== ===========
</TABLE>
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, 2000 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 $ 0.8750 - $ 5.8806 709,509
Granted 1.6586 - 3.5625 183,277
Exercised 0.8750 - 2.6250 (58,778)
Canceled 0.8750 - 1.8750 (1,500)
------------------- --------
Balance outstanding at June 30, 1998 $ 1.5078 - $ 5.8806 832,508
Granted 2.2500 - 3.2500 193,500
Exercised 1.5078 - 2.2618 (27,901)
Canceled 1.5078 - 6.3329 (364,584)
------------------- --------
Balance outstanding at June 30, 1999 $ 1.5078 - $ 5.8806 633,523
Granted
Exercised 2.1875 - 3.5000 162,500
Canceled
1.8750 - 3.0625 (61,199)
1.8094 - 3.0157 (14,132)
------------------- --------
Balance outstanding at June 30, 2000 $ 1.5838 - $ 5.8806 720,693
===========
Exercisable at June 30, 2000 $ 1.5838 - $ 5.8806 330,193
===========
Available for grant at June 30, 2000 545,972
===========
</TABLE>
Page 37
<PAGE> 38
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
-------------------------------- -------------------------
Weighted Weighted
Weighted Average Average
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 39,896 2.5 Years $ 1.97 19,896 $ 1.75
$2.25 to $3.06 347,079 4.2 Years 2.76 160,329 2.88
$3.25 to $4.00 286,645 4.1 Years 3.41 104,895 3.38
$4.25 to $5.88 47,073 1.3 Years 4.65 45,073 4.66
------- -------
720,693 330,193
======= =======
</TABLE>
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>
2000 1999 1998
----------- ----------- -------------
<S> <C> <C> <C> <C>
Net Income (loss) As reported $ 2,202,777 $ 2,859,834 $ (1,008,683)
Pro forma 2,036,184 2,689,542 (1,118,476)
Basic earnings (loss) per As reported $ .21 $ .27 $ (.10)
share Pro forma .19 .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 2000, 1999 and 1998: dividend yield of 0%;
expected volatility of 62.0%, 54.20% and 42.53%; risk-free interest rate of
6.2%, 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 2000, 1999 and 1998 was $1.35, $1.35 and $1.34, respectively.
The Company loaned a total of $237,500 to an officer, $210,417 which
was outstanding as of June 30, 2000, 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 (9.5% on June 30, 2000). 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
On September 11, 2000, the Company announced that it had reached an
agreement with the United States Government to settle allegations of improper
Medicare billing that were asserted in a
Page 38
<PAGE> 39
lawsuit filed by a former employee. Rehabilicare has agreed to pay a total of
$1,588,510 to settle the lawsuit. As the terms of the settlement make clear, the
Company has denied allegations that it fraudulently billed Medicare. Although
the terms of the settlement, including the amount to be paid by the Company,
have been agreed to in principle with the United States Government, the
settlement remains subject to final agency approvals, including review and
approval by the United States Department of Health and Human Services Office of
Counsel to the Inspector General with respect to necessary compliance
provisions.
The Company is a party to other 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.
401(K) PLAN
The Company has a 401(k) plan in which substantially all employees are
eligible to participate. Participants may contribute from 1% to 20% of eligible
earnings to the plan. Company contributions are 50% of the first 6% contributed
by the employee. In addition, the Company may make additional discretionary
contributions to the plan as determined annually. The Company contributed
$176,577, $98,059 and $49,570 to the plan for the years ended June 30, 2000,
1999 and 1998, respectively. No discretionary contributions were made for fiscal
1998.
9. 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 revenue from United States and foreign sources (primarily Europe)
was as follows:
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. revenue $ 41,893,749 $ 40,867,574 $ 33,646,384
Foreign revenue 16,920,923 927,799 166,069
---------------- ---------------- ----------------
Total $ 58,814,672 $ 41,795,373 $ 33,812,453
================ ================ ================
</TABLE>
Net revenue by product line was as follows:
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------------------------------
2000 1999 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
Rehabilitation products $ 25,253,970 $ 10,946,399 $ 9,122,910
Pain management 14,052,488 15,103,020 12,610,536
Accessories and supplies 19,508,214 15,745,954 12,079,007
--------------- --------------- ----------------
Total $ 58,814,672 $ 41,795,373 $ 33,812,453
================ ================ ================
</TABLE>
No single customer represents over 10% of the Company's consolidated revenue.
Page 39
