SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-9407
REHABILICARE INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0985318
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 OLD HIGHWAY 8
NEW BRIGHTON, MINNESOTA 55112
(Address of principal executive offices)
(651) 631-0590
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 8, 2002 was:
COMMON STOCK, $.10 PAR VALUE 10,969,718 SHARES
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains a number of
"forward-looking statements" where we indicate that we "anticipate," "believe,"
"expect" or "estimate" or use similar words to indicate what might happen in the
future. These forward looking statements represent our expectations about future
events, including anticipated product introductions; changes in markets,
customers and customer order rates; changes in third party reimbursement rates;
expenditures for research and development; growth in revenue; taxation levels;
and the effects of pricing decisions. When used in this 10-Q, the words
"anticipate," "believe," "expect," "estimate" and similar expressions are
generally intended to identify forward-looking statements. You should evaluate
these forward-looking statements in the context of a number of factors that may
affect our financial condition and results of operations, including the
following:
o Like many medical device companies that rely on third party
reimbursement entities for payment, we have a large balance of
uncollected accounts receivable. We also have a reserve for the portion
of those receivables that we estimate will not be collected based on
our historical experience. The uncollectible portion of receivables
includes both sales allowances for contracted or negotiated selling
prices and rental rates and bad debts. If we cannot collect an amount
of receivables that is consistent with historical collection rates, we
might be required to increase our reserve and charge off the portion of
receivables we cannot collect. This additional "provision" for
uncollectible accounts could significantly impact our operating
results.
o In the United States, our products are subject to reimbursement by
private and public healthcare reimbursement entities that generally
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 our income from operations.
o We maintain significant amounts of finished goods inventory on
consignment at clinics for distribution to patients. We may not be able
to completely control losses of this inventory and, if inventory losses
are not consistent with historical experience, we might be required to
write off a portion of the carrying value of inventory.
o The clinical effectiveness of our electrotherapy products has
periodically been challenged and the effectiveness of electrotherapy
products such as those offered by Compex for fitness and health
applications has sometimes been questioned. Publicity about the
effectiveness of electrotherapy for pain relief or other clinical
applications and continued questions about the effectiveness of
electrotherapy for conditioning could negatively impact revenue and
income from operations.
o We have periodically been the subject of litigation that has caused
additional expense, including a Medicare whistleblower suit settled in
2000 for approximately $1.6 million. The costs of these actions have
negatively affected, and the resolution of other actions that may arise
may continue to negatively affect, our operating results.
o Approximately 33% of our revenue for the quarter ended September 30,
2002 was generated by Compex SA, a subsidiary headquartered in
Switzerland that does business primarily in Europe. There are risks in
doing business in international markets which could adversely affect
our business, including:
o regulatory requirements;
o export restrictions and controls, tariffs and other
trade barriers;
o difficulties in staffing and managing international
operations;
o fluctuations in currency exchange rates;
o reduced protection for intellectual property rights;
o seasonal reductions in business activity; and
o potentially adverse tax assessments.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited condensed financial
information:
Consolidated Balance Sheets as of September 30, 2002 and June
30, 2002
Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the three months
ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements
3
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2002 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,181,898 $ 2,086,650
Receivables, less reserve of $12,830,753 22,251,506 23,629,117
and $12,891,864
Inventories -
Raw materials 2,299,770 2,368,203
Work in process 64,012 80,265
Finished goods 6,447,349 6,522,790
Deferred tax assets 4,655,631 4,655,631
Prepaid expenses 682,281 1,641,378
------------ ------------
Total current assets 38,582,447 40,984,034
Property, plant and equipment, net 4,916,354 4,679,778
Goodwill, net 9,833,090 9,833,090
Other intangible assets, net 1,083,898 1,150,652
Deferred tax assets 703,733 702,567
Other assets 140,666 127,615
------------ ------------
$ 55,260,188 $ 57,477,736
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 2,522,184 $ 2,512,446
Note payable 1,000,000 --
Accounts payable 2,906,925 3,312,767
Accrued liabilities -
Payroll 249,342 607,409
Commissions 377,247 437,530
Income taxes 1,844,461 2,670,766
Other 3,506,256 5,656,988
------------ ------------
Total current liabilities 12,406,415 15,197,906
Long-Term Liabilities:
Long-term debt 5,822,579 6,463,538
Deferred tax liabilities 536,147 535,102
------------ ------------
Total liabilities 18,765,141 22,196,546
Stockholders' Equity:
Common stock, $.10 par value; 30,000,000 shares authorized; 1,096,774 1,092,262
issued and outstanding 10,967,743 and 10,922,618 shares,
respectively
Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Additional paid-in capital 21,695,468 21,564,096
Unearned compensation on restricted stock (50,625) (77,813)
Accumulated other non-owner changes in equity 799,342 735,564
Retained earnings 12,954,088 11,967,081
------------ ------------
Total stockholders' equity 36,495,047 35,281,190
------------ ------------
$ 55,260,188 $ 57,477,736
============ ============
4
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30
--------------------------------
2002 2001
------------ ------------
Net sales and rental revenue $ 17,737,740 $ 16,498,504
Cost of sales and rentals 5,447,427 5,292,823
------------ ------------
Gross profit 12,290,313 11,205,681
Operating expenses:
Selling, general and administrative 9,949,975 8,278,712
Research and development 524,073 642,306
------------ ------------
Total operating expenses 10,474,048 8,921,018
------------ ------------
Income from operations 1,816,265 2,284,663
Other income (expense):
Interest expense (112,468) (235,151)
Other (2,790) 4,511
------------ ------------
Income before income taxes 1,701,007 2,054,023
Income tax provision 714,000 863,000
------------ ------------
Net income $ 987,007 $ 1,191,023
============ ============
Net income per common and
common equivalent share
Basic $ 0.09 $ 0.11
============ ============
Diluted $ 0.09 $ 0.11
============ ============
Weighted average number of shares
outstanding
Basic 10,940,243 10,815,945
============ ============
Diluted 11,063,557 10,865,319
============ ============
5
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30
--------------------------------
2002 2001
------------ ------------
Operating Activities:
Net income $ 987,007 $ 1,191,023
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 399,508 403,092
Amortization of unearned compensation 27,188 27,188
Change in deferred taxes (32) 10,952
Change in current assets and liabilities -
Receivables 1,402,515 1,205,160
Inventories 170,073 (639,823)
Prepaid expenses 960,739 102,396
Accounts payable (410,088) (690,893)
Accrued liabilities (3,406,599) (846,794)
------------ ------------
Net cash provided by operating activities 130,311 762,301
Investing Activities:
Purchases of property and equipment (557,403) (129,539)
Change in other assets, net (12,793) 840
------------ ------------
Net cash used in investing activities (570,196) (128,699)
Financing Activities:
Principal payments on long-term obligations (631,221) (594,951)
Proceeds from line of credit, net 1,000,000 2,050,000
Proceeds from exercise of stock options 114,975
Proceeds from employee stock purchase plan 20,909 50,875
------------ ------------
Net cash provided by financing activities 504,663 1,505,924
Effect of exchange rates on cash and cash equivalents 30,470 46,403
------------ ------------
Net increase in cash and cash equivalents 95,248 2,185,929
Cash and Cash Equivalents at Beginning of Period 2,086,650 759,611
------------ ------------
Cash and Cash Equivalents at End of Period $ 2,181,898 $ 2,945,540
============ ============
Supplemental Cash Flow Information:
Interest paid $ 107,788 $ 235,151
============ ============
Income taxes paid $ 1,240,000 $ 603,000
============ ============
6
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. Accounting Policies
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended September 30, 2002 and 2001 but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the periods
presented. Such results are not necessarily indicative of results for the full
year. The accompanying financial statements of the Company should be read in
conjunction with the audited consolidated financial statements for the year
ended June 30, 2002 included in the Company's Annual Report on Form 10-K.
Certain previously reported amounts have been reclassified to conform to
classifications adopted in fiscal year 2002. These reclassifications had no
effect on net income, cash flows or stockholders' equity.
2. Goodwill and Intangibles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001, with early adoption permitted for companies with fiscal years
beginning after March 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets effective July 1, 2001. Amounts previously recorded as
separately identifiable intangibles for acquired work force and customer list
have been subsumed to goodwill in accordance with FAS 141, increasing goodwill
by $1.6 million as of the date of adoption. Effective with the adoption of FAS
142, goodwill is no longer amortized but is instead subject to an annual
impairment test. The transitional and annual impairment tests conducted in
connection with the adoption of FAS 142 resulted in no required provision for
impairment.
Goodwill and other intangible assets resulting from acquisitions of business and
the formation of the Company consist of the following:
September 30, 2002 June 30, 2002
------------------ ------------------
Goodwill $ 11,504,520 $ 11,504,520
Less accumulated amortization 1,671,430 1,671,430
------------------ ------------------
Net goodwill 9,833,090 9,833,090
Other intangible assets: 1,783,686 1,783,686
Less accumulated amortization 699,788 633,034
------------------ ------------------
Net other intangible assets 1,083,898 1,150,652
------------------ ------------------
Total intangible assets, net $ 10,916,988 $ 10,983,742
================== ==================
7
3. Note Payable and Long Term Debt
The Company has a $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. As of September 30, 2002, there were borrowings outstanding of $6,747,000
on the long-term note and $1,000,000 on the revolving credit line.
Borrowings under the credit 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 3.875% at September 30, 2002
and the weighted average rate on borrowings under the revolving line of credit
was 4.75%.
The Company was in compliance with all financial covenants in its credit
agreement as of September 30, 2002 and for the period then ended.
4. Segment Information
Rehabilicare and its consolidated subsidiaries operate 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
the United States and foreign sources (primarily Europe) are as follows:
For the Three Months Ended
September 30
-------------------------------
2002 2001
------------ ------------
U.S. revenue $ 11,768,035 $ 11,098,280
Foreign revenue 5,969,705 5,000,448
------------ ------------
$ 17,737,740 $ 16,098,728
------------ ------------
Net revenue by product line was as follows:
For the Three Months Ended
September 30
-------------------------------
2002 2001
------------ ------------
Rehabilitation products $ 3,488,619 $ 3,292,010
Pain management 3,740,930 3,375,808
Consumer Products 4,332,369 3,750,920
Accessories and supplies 6,175,822 5,679,990
------------ ------------
$ 17,737,740 $ 16,098,728
============ ============
During the first three months of fiscal 2003 and 2002, one customer accounted
for approximately 9% and 16%, respectively, of consolidated revenue. This
customer represented approximately 10% of total accounts receivable at September
30, 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We discuss the factors that significantly affected our financial
results and our financial condition in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. For a more complete
understanding of these factors, you should also review our consolidated balance
sheets at June 30, 2001 and June 30, 2002, our consolidated statements of
operations, statements of shareholders' equity and statement of cash flows for
the three years ended June 30, 2002, and the notes to those financial
statements. These financial statements and the report of Ernst & Young LLP on
our financial statements are included at Item 8 of our Form 10-K for the year
ended June 30, 2002.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with generally
accepted accounting principles as in effect in the United States. The
preparation of these financial statements requires that we make estimates and
judgments that affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base these estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. It is our policy to
evaluate and update these estimates on an ongoing basis. The judgments and
policies that we believe would have the most significant impact on the
presentation of our financial position and results are as follows:
Revenue Recognition and Provisions for Credit Allowances and Returns.
In our U.S. direct distribution electrotherapy business, we recognize revenue
upon notification from a health care provider that equipment has been prescribed
and provided to a patient and approved by the patient or his/her insurance
provider. Many providers reimburse at rates which differ from our invoice rate
based on contracts, buying agreements or negotiated rate adjustments. In
addition, patients sometimes return units after initial acceptance when they
determine that their responsibilities for co-payments, deductibles or other
charges are more than expected. We provide for these credit allowances and
returns by reducing gross revenue by a portion of the invoiced amount and by
recording such amount as part of the reserve for uncollectible accounts
receivable. We estimate the amount of this provision for credit allowances and
returns based on our historical experience with the various reimbursement
entities, any recent notifications of changes in reimbursement rates and our
historic rates of product returns. Possible changes in the number of units
returned by patients or the rates of reimbursement could cause this provision
for credit allowances and the reserve for uncollectible accounts to be
inadequate.
Reserve for Uncollectible Accounts Receivable. Managing our accounts
receivable represents one of our biggest business challenges. The process of
determining what products will be reimbursed by third party payors and the
amounts that they will reimburse is very complex and the reimbursement
environment is constantly changing. We maintain a reserve for uncollectible
receivables and provide for additions to the reserve to account for the risk of
nonpayment. We set the amount of the reserve and adjust the reserve at the end
of each reporting period based on a number of factors, including historical
rates of collection, trends in the historical rates of collection and current
relationships and experience with insurance companies or other third party
payors. If the rates of collection of past-due receivables recorded for previous
fiscal periods changes, or if there is a trend in the rates of collection on
those receivables, we may be required to change the rate at which we provide for
additions to the reserve. Such a change can significantly affect operating
results in current periods. A change in the rates of our collection can result
from a number of factors, including turnover in personnel, changes in the
reimbursement policies or practices of payors, or changes in industry rates of
reimbursement. Further, the reserve may be affected by significant charge-offs
if a related group of receivables become doubtful. Accordingly, the provision
for uncollectible accounts recorded in the income statement has fluctuated and
may continue to fluctuate significantly from quarter to quarter as such trends
change.
9
Carrying Value of Inventory. We maintain a large balance of
electrotherapy products on consignment at clinics and other health care
providers that are not under our control. In the course of our business, some of
this product is lost. Although we have the right in most cases to seek
reimbursement for the lost product from our sales representatives or the health
care providers, in many instances we forgo that right in order to maintain
favorable relationships. We maintain a reserve for the amount of consignment
inventory that may be lost based on our experience as developed through periodic
field audits. We cannot be certain that future rates of product loss will be
consistent with our historical experience and we could be required to increase
the rate at which we provide for such lost inventory, thus adversely affecting
our operating results.
Carrying Value of Intangible Assets. We had a balance of intangible
assets of approximately $11 million at September 30, 2002, most of which
constituted goodwill and the value of acquired technology from several
acquisitions. We are required to charge-off the carrying value of identifiable
intangibles, long-lived assets and related goodwill to the extent it may not be
recoverable. We annually assess the impairment of identifiable intangibles, long
lived assets and related goodwill or whenever events or changes in circumstances
indicate the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment provision include the following:
o significant under-performance relative to expected historical or
projected future operating results;
o significant changes in the manner of use of the acquired assets or our
overall business strategy;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period and our
market capitalization relative to net book value.
If we determine that the carrying value of intangibles, long-lived
assets and related goodwill might not be recoverable based upon the existence of
one or more of the above indicators of impairment, we would measure any
impairment based on a projected discounted cash flow method using a discount
rate we determine to be commensurate with the risk inherent in our current
business model.
10
RESULTS OF OPERATIONS
The following table sets forth information from the statements of
operations as a percentage of revenue for the periods indicated:
Three Months Ended
September 30,
--------------------------------
2002 2001
------------ ------------
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 30.7 32.1
------------ ------------
Gross profit 69.3 67.9
Operating expenses
Selling, general and administrative 56.1 50.1
Research and development 3.0 4.0
------------ ------------
Total operating expenses 59.1 54.1
------------ ------------
Income from operations 10.2 13.8
Other expense, net 0.6 1.4
Income tax provision 4.0 5.2
------------ ------------
Net income 5.6% 7.2%
============ ============
Revenue was $17,738,000 for the first quarter of fiscal 2003, an 8% increase
from $16,499,000 for the first quarter of fiscal 2002. About half of that
increase was attributable to our Compex operation where revenue increased 12%
from $5,118,000 in the first quarter of fiscal 2002 to $5,731,000 in the first
quarter of fiscal 2003. Declines in sales volumes and revenue attributable to
Compex's Italian distributor were substantially offset by increases in all other
markets. Sales levels in Italy are expected to increase during the balance of
the fiscal year. Compex revenue continues to be favorably impacted by
improvements in the exchange ratio of the euro versus the dollar. That accounted
for about 10% of the increase in Compex revenue while volume increases accounted
for the other two percent.
Revenue from U.S. operations increased 6% in the first quarter of fiscal 2003
compared to the same period in fiscal 2002 and accounted for the other half of
the increase in net revenue. Increases in revenue from direct rentals or sales
to patients of 8% resulted primarily from increased rental revenue and supply
sales. Those increases were offset somewhat by declines in sales to medical
product dealers and distributors as many of them continued to convert some of
their purchases to lower priced, generally imported units.
Gross profit was $12,290,000 or 69% of revenue in the first quarter of fiscal
2003 compared with $11,206,000 or 68% of revenue in the first quarter of fiscal
2002. In general, sales of Compex's consumer products carry lower margins than
the sale of products for medical applications. However, the increase in gross
margin percentage resulted from an increase in Compex's gross margin percentage
as a result of changes in product mix toward higher price sport and fitness
products. We expect overall margins to stabilize and continue in the mid to
upper 60% range.
11
Selling general and administrative expenses increased 20% to $9,950,000 in the
first quarter of fiscal 2003 from $8,279,000 in the first quarter of fiscal
2002. As a percent of revenue, those expenses increased to 56% in the first
quarter of fiscal 2003 from 50% in fiscal 2002. Several factors contributed to
the increase. During the first quarter of fiscal 2003, we began hiring more
employee sales representatives in our direct distribution business to reduce our
dependence on independent representatives. Revenue from the sales territories
involved is in early stages of growth. Also during the quarter, that business
incurred the cost of a national sales meeting and increased staffing in our
patient support operation. Selling, general and administrative expenses at
Compex increased $783,000 over the previous period due to staffing increases in
all departments during much of fiscal 2002 designed to assure continued rapid
growth and as a result of the stronger euro.
Research and development expenses decreased 18% to $524,000 in the first quarter
of fiscal 2003 compared to $642,000 during the same period in fiscal 2002. This
decrease is the result of fewer new products than in the prior year. New product
development activities last year, included the ProMax product, introduced in
October 2001 and three new products in Europe during the fourth quarter of
fiscal 2001 and the first quarter of fiscal 2002. We anticipate that research
and development expenses will remain relatively constant as a percentage of
revenue in future periods.
Interest expense decreased 52% from $235,000 in the first quarter of fiscal
2002, to $112,000 during the same period of fiscal 2003. The decrease resulted
from lower interest rates and overall lower borrowings under our credit
facility. We expect interest expense to continue to decline with the lower
overall balance of our indebtedness and lower interest rates in future periods.
The provision for income taxes was 42% of pre-tax income for the first quarter
of fiscal 2003 and 2002. We operate 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 expenses and the availability
of credits for taxes paid to other jurisdictions. We believe that 42% is a
reasonable estimate of the effective rate for fiscal 2003 based on most recent
estimates of tax liabilities in the U.S. and in the various European tax
authorities for the entire fiscal year. The Internal Revenue Service has
recently completed an examination of our federal income tax returns for the
years ended June 30, 1997 and 1998 and has proposed adjustments pursuant to such
audit, most of which relate to the timing of revenue or expense recognition. We
have filed a formal appeal of certain proposed adjustments and believe the
provision for income taxes and related reserves are adequate.
As a result of the above activity, net income decreased from $1,191,000 in the
first quarter of fiscal 2002 to $987,000 in the first quarter of fiscal 2003.
Diluted earnings per share decreased from $.11 in the first quarter of fiscal
2002 to $.09 in the first quarter of fiscal 2003.
12
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended September 30, 2002, our operations provided cash of
$95,000, mainly from net income of $987,000 plus depreciation and amortization.
Prepaid expenses declined due to lower value added tax prepayments by Compex.
Accounts receivable decreased $1,403,000, as a result of higher collections by
Compex from its major customer and in the U.S. for retail sales. The decrease in
accounts payable and accrued liabilities relates to timing differences and the
payment of estimated income taxes and year-end accruals.
We used $570,000 in investing activities in the first quarter of fiscal 2003 for
net purchases of property and equipment, including clinical and rental
equipment.
Our financing activities provided $505,000 of cash during fiscal 2002, mainly
the borrowing of $1,000,000 under our credit line less the repayment of $631,000
of long-term debt under our $20,000,000 credit facility. At September 30, 2002,
a total of $7,747,000 is outstanding under this facility. This credit facility
has a maturity date of June 30, 2004, at which time all outstanding borrowings
are to be repaid. We expect that all or substantially all of the borrowings
under this credit facility will be repaid prior to the maturity date. If any
borrowings remain outstanding at maturity, we believe that the agreement could
be extended with the current financial institution or that another facility
could be put in place on favorable terms.
We currently have no material commitment for capital expenditures. We expect,
however, to invest in sales and marketing, and in inventory and infrastructure,
over the following twelve months to introduce Compex sport products to the
United States markets. We intend to start this process in a single state and to
invest more based on experience in that market. We may also apply cash to
acquisitions during this period.
We believe that available cash and borrowings under our credit line will be
adequate to fund cash requirements for the current fiscal year and the
foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the quarter ended September 30, 2002, our revenue originating outside the
U.S. was 33% of total revenue, substantially all of which was denominated in the
local functional currency. Currently, we do not employ currency hedging
strategies to reduce the risks associated with the fluctuation of foreign
currency exchange rates.
Our international business is subject to risks typical of an international
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
We are exposed to market risk from changes in the interest rates on certain
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 fiscal 2002, a 100 basis
point change in interest rates would not change interest expense by a material
amount.
13
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule [13A-14(c)/15D-14(c)] under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late January 2001, we were served with documents in connection with
a product liability case brought in the California Superior Court for Solano
County. Although we had no record of the proceedings, the action had progressed
to the entry of a default judgment on January 11, 2001. We appealed the default
judgment to the California Court of Appeals in March 2001. On May 10, 2002, the
appeals court overturned the default judgment holding that there was no valid
complaint against us. The case has been remanded to district court and we have
filed a motion to dismiss based on failure to file an amended complaint.
From time to time, we have also been a party to other claims, legal
actions and complaints arising in the ordinary course of our business. We do not
believe that the resolution of such matters has had or will have a material
impact on our results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION
AUDIT COMMITTEE INDEPENDENCE. For the five months ended August 30,
2002, the Company had only four directors, one of whom was not independent. Upon
the resignation of the Company's previous Chief Executive Officer on March 31,
2002, the Board of Directors appointed John Maley, its Chairman of the Board, to
become acting Chief Executive Officer until the Board could complete the search
process for a new Chief Executive Officer. Because Mr. Maley technically became
an "officer" by virtue of such appointment, and received compensation not
related to his services as a director for serving as an officer, he no longer
technically qualified as an independent director under the rules of the Nasdaq.
Because there were no other disinterested directors and because of his long
history as an audit committee member, the Board nevertheless determined that it
was in the best interest of the Company and its shareholders for Mr. Maley to
continue to serve on the Audit Committee during this period.
Effective September 1, 2002, Dan Gladney was appointed Chief Executive
Officer and Mr. Maley resigned his acting position as CEO and retained his
position as Chairman of the Board. On November 12, 2002, and because of the
potential issues regarding independence, Mr. Maley resigned from the audit
committee and Richard Nigon, a new independent director, was appointed to the
Company's audit committee.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certificate of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None filed during the quarter ended September 30, 2002
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REHABILICARE INC.
November 14, 2002 /s/ Dan W. Gladney
---------------------- -----------------------------------------
Date Dan W. Gladney
President and Chief Executive Officer
November 14, 2002 /s/ W. Glen Winchell
---------------------- -----------------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
17
CERTIFICATION
I, Dan W. Gladney, Chief Executive Officer of Rehabilicare Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rehabilicare Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations and cash
flows of Rehabilicare Inc. as of, and for, the periods presented in this
quarterly report;
4. The other certifying officers of Rehabilicare Inc. and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Rehabilicare Inc. and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Rehabilicare Inc., including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of Rehabilicare Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The other certifying officers of Rehabilicare Inc. and I have disclosed,
based on our most recent evaluation, to the auditors and the audit
committee of the board of directors of Rehabilicare Inc. (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the ability of
Rehabilicare Inc. to record, process, summarize and report
financial data and have identified for the auditors of
Rehabilicare Inc. any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the internal
controls of Rehabilicare Inc.; and
6. Other certifying officers of Rehabilicare Inc. and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002
/s/ Dan W. Gladney
----------------------------
Dan W. Gladney
18
CERTIFICATION
I, W. Glen Winchell, Chief Executive Officer of Rehabilicare Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rehabilicare Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects, the financial condition, results of operations and cash
flows of Rehabilicare Inc. as of, and for, the periods presented in this
quarterly report;
4. The other certifying officers of Rehabilicare Inc. and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Rehabilicare Inc. and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Rehabilicare Inc.,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of Rehabilicare Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The other certifying officers of Rehabilicare Inc. and I have disclosed,
based on our most recent evaluation, to the auditors and the audit
committee of the board of directors of Rehabilicare Inc. (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the ability of
Rehabilicare Inc. to record, process, summarize and report
financial data and have identified for the auditors of
Rehabilicare Inc. any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the internal
controls of Rehabilicare Inc.; and
6. Other certifying officers of Rehabilicare Inc. and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002
/s/ W. Glen Winchell
----------------------------
W. Glen Winchell
19