SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended September 30, 2001
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 9, 2001 was:
COMMON STOCK, $.10 PAR VALUE 10,815,945 SHARES
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Quarterly Report on Form 10-Q contains various "forward looking
statements" within the meaning of federal securities laws. These forward looking
statements represent management's expectations or beliefs concerning future
events, including statements regarding anticipated product introductions;
changes in markets, customers and 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. These
and other forward looking statements made by the Company must be evaluated in
the context of a number of factors that may affect the Company's financial
condition and results of operations, including, but not limited to, the
following:
o 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.
o In the United States the Company's products are subject to reimbursement by
private and public healthcare reimbursement agencies that impose limits on
reimbursement and strict rules on applications for reimbursement. Changes
in the rates, eligibility or requirements for reimbursement, or failure to
comply with reimbursement requirements, could cause a reduction in earnings
or fines or both.
o The Company maintains significant amounts of inventory on consignment at
clinics and for distribution to patients. It may not be able to completely
control losses of this inventory and if inventory losses are not consistent
with historical experience, it might be required to write off a portion of
the carrying value of inventory.
o The clinical effectiveness of the Company's electrotherapy products has
periodically been challenged. Publicity about the effectiveness of
electrotherapy for pain relief or other clinical applications could
negatively impact sales and earnings.
o The Company formed a U.K. subsidiary in fiscal 1999 and acquired a Swiss
company in the first quarter of fiscal 2000. These European operations may
be more difficult to supervise, may be subject to different economic
influences than United States operations, and may subject us to significant
exposure from currency fluctuations.
o The Company has periodically been the subject of litigation that has caused
it additional expense, including a Medicare whistleblower suit settled in
2000 for approximately $1.6 million and, currently, a $2.3 million product
liability suit that proceeded to a default judgment without the Company's
knowledge. The costs of these actions, and other actions that may arise,
have negatively affected, and may continue to negatively affect, the
Company operating results.
o Portions of the Company's operations, and particularly its European
operations directed to the sports consumer markets, are subject to
competition on the basis of price and customer loyalty. As these consumer
products become more widely used, the margins commanded by the products may
decline.
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, 2001 and June 30, 2001
Consolidated Statements of Operations for the three months ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the three months ended
September 30, 2001 and 2000
Notes to Consolidated Financial Statements
3
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
2001 2001
------------- -----------
ASSETS
---------
Current Assets:
Cash and cash equivalents $ 2,945,540 $ 759,611
Receivables, less reserve for
uncollectible accounts of
$8,319,351 and $8,062,378 18,118,791 18,998,132
Inventories -
Raw materials 2,386,354 2,039,665
Work in process 96,624 55,895
Finished goods 7,059,892 6,552,155
Deferred tax assets 4,075,317 4,075,317
Prepaid expenses 2,220,083 2,156,646
----------- -----------
Total current assets 36,902,601 34,637,421
Property, plant and equipment, net 4,909,072 5,025,969
Intangible assets, net 11,184,006 11,250,761
Deferred tax assets 487,358 460,985
Other assets 132,622 120,735
----------- -----------
$53,615,659 $51,495,871
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
Current Liabilities:
Note payable $ 2,050,000 $ --
Current maturities of long-term debt 2,420,606 2,430,173
Accounts payable 3,596,252 3,977,308
Accrued liabilities -
Payroll 246,927 787,314
Commissions 294,345 338,491
Income taxes 1,923,718 1,631,710
Other 2,684,959 3,080,551
----------- -----------
Total current liabilities 13,216,807 12,245,547
Long-Term Liabilities:
Long term-debt 9,848,158 10,433,542
Deferred tax liabilities 394,898 357,566
----------- -----------
Total liabilities 23,459,863 23,036,655
Stockholders' Equity:
Common stock, $.10 par value:
25,000,000 shares authorized;
issued and outstanding 10,815,945
and 10,792,060 shares, respectively 1,081,594 1,079,206
Preferred stock, no par value; 5,000,000
shares authorized; none issued and
outstanding -- --
Additional paid-in capital 21,468,865 21,420,378
Less note receivable from officer/stockholder (189,417) (189,417)
Unearned compensation on restricted stock (159,375) (186,563)
Accumulated other non-owner changes in equity (261,965) (689,459)
Retained earnings 8,216,094 7,025,071
----------- -----------
Total stockholders' equity 30,155,796 28,459,216
----------- -----------
$53,615,659 $51,495,871
=========== ===========
4
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------------
2001 2000
----------- -----------
Net sales and rental revenue $16,098,728 $15,067,647
Cost of sales and rentals 5,147,475 4,749,840
----------- -----------
Gross profit 10,951,253 10,317,807
Operating expenses:
Selling, general and administrative 8,024,284 7,685,140
Research and development 642,306 358,343
----------- -----------
Total operating expenses 8,666,590 8,043,483
----------- -----------
Income from operations 2,284,663 2,274,324
Other income (expense):
Interest expense (235,151) (406,886)
Other 4,511 8,740
----------- -----------
Income before income taxes 2,054,023 1,876,178
Income tax provision 863,000 754,000
----------- -----------
Net income $ 1,191,023 $ 1,122,178
=========== ===========
Net income per common and
common equivalent share
Basic $ 0.11 $ 0.10
======== ========
Diluted $ 0.11 $ 0.10
======== ========
Weighted average number of shares
outstanding
Basic 10,815,945 10,723,237
========== ==========
Diluted 10,865,319 10,750,591
========== ==========
5
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
---------------------------
2001 2000
---------- -----------
Operating Activities:
Net income $1,191,023 $ 1,122,178
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 403,092 671,113
Amortization of unearned compensation 27,188 --
Change in long-term portion of deferred taxes 10,952 (299)
Change in current assets and liabilities -
Receivables 1,205,160 1,391,933
Inventories (639,823) 199,065
Prepaid expenses 102,396 (1,017,073)
Accounts payable (690,893) (756,907)
Accrued liabilities (846,794) (594,141)
---------- -----------
Net cash provided by operating activities 762,301 1,015,869
Investing Activities:
Purchases of property and equipment (129,539) (324,663)
Change in other assets, net 840 52,455
---------- -----------
Net cash used in investing activities (128,699) (272,208)
Financing Activities:
Principal payments on long-term obligations (594,951) (540,166)
Proceeds from (payments on) line of credit, net 2,050,000 (1,200,000)
Proceeds from exercise of stock options -- 455,000
Proceeds from employee stock purchase plan 50,875 59,656
---------- -----------
Net cash provided by (used in) financing
activities 1,505,924 (1,225,510)
Effect of exchange rates on cash and cash
equivalents 46,403 (183,173)
---------- -----------
Net increase (decrease) in cash and
cash equivalents 2,185,929 (665,022)
Cash and Cash Equivalents at Beginning of Period 759,611 2,227,352
---------- -----------
Cash and Cash Equivalents at End of Period $2,945,540 $ 1,562,330
========== ===========
Supplemental Cash Flow Information:
Interest paid $ 235,151 $ 378,886
========== ===========
Income taxes paid $ 603,000 $ 846,500
========== ===========
6
REHABILICARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. Accounting Policies
The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended September 30, 2001 and 2000 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, 2001 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 2001. These reclassifications had no
effect on net income, cash flows or shareholders' equity.
2. Recently Issued Accounting Standards
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets". These standards change the accounting for business combinations by,
among other things, prohibiting the prospective use of pooling-of-interests
accounting and requiring companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life created by business
combinations accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. The Company adopted the standards in
the first quarter of 2002. The impact of adopting the standards and stopping the
amortization of goodwill resulted in a decrease of amortization expense of
approximately $210,000 in the first quarter of fiscal 2002.
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, 2001, there were borrowings outstanding of
$10,297,000 on the long-term note and $2,050,000 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 5.81% at September 30, 2001
and the weighted average rate on borrowings under the revolving line of credit
was 6.54%.
The Company was in compliance with all financial covenants in its credit
agreement as of September 30, 2001 and for the period then ended.
7
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
----------------------------------
2001 2000
----------- -----------
U.S. revenue $11,098,280 $10,779,192
Foreign revenue 5,000,448 4,288,455
----------- -----------
$16,098,728 $15,067,647
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Net revenue by product line was as follows:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30
---------------------------------
2001 2000
----------- -----------
Rehabilitation products $ 3,292,010 $ 3,259,563
Pain management 3,375,808 3,241,264
Consumer Products 3,750,920 3,158,687
Accessories and supplies 5,679,990 5,408,133
----------- -----------
$16,098,728 $15,067,647
=========== ===========
During the first quarter of fiscal 2002, one customer accounted for
approximately 16% of total consolidated revenue. This customer represented
approximately 1% of total accounts receivable at September 30, 2001.
8
ITEM 2. 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 sports 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.
9
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
-----------------------
2001 2000
------ ------
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 32.0 31.5
Gross profit 68.0 68.5
Operating expenses -
Selling, general and administrative 49.8 51.0
Research and development 4.0 2.4
----- -----
Total operating expenses 53.8 53.4
----- -----
Income from operations 14.2 15.1
Other expense, net 1.4 2.7
Gain on sale of building -- --
Income tax provision 5.4 5.0
----- -----
Net income 7.4 7.4
===== =====
Revenue was $16,099,000 for the first quarter of fiscal 2002, a 7% increase from
$15,068,000 for the first quarter of fiscal 2001. The increase was primarily
attributable to the Company's Compex operation where revenue increased 17% from
$4,033,000 in the first quarter of fiscal 2001, to $4,718,000 in the first
quarter of fiscal 2002. Compex's revenue increase resulted from the
strengthening of European currencies against the U.S. dollar and higher orders
for a new product that was released in the fourth quarter of fiscal 2001. Compex
sales quarter to quarter were down slightly due to the usual slow down in
European business during the summer months. Revenue from U.S. operations was up
slightly from increased volume in its direct distribution business.
Gross profit was $10,951,000 or 68.0% of revenue in the first quarter of fiscal
2002 compared with $10,318,000 or 68.5% of revenue in the first quarter of
fiscal 2001. The slight drop in the gross margin percentage resulted primarily
from the continued focus on sales of Compex sport products at wholesale prices
to retail store outlets rather than direct to consumers at retail prices. This
change in strategy is expected to expand market penetration, but will also
likely result in lower overall consolidated margins in fiscal 2002.
Selling general and administrative expenses increased 4% to $8,024,000 in the
first quarter of fiscal 2002 from $7,685,000 in the first quarter of fiscal
2001. As a percent of revenue, those expenses declined to
10
50% in the first quarter of fiscal 2002 from 51% in fiscal 2001. Several factors
contributed to the decrease. The first quarter of fiscal 2002 does not include
approximately $210,000 of goodwill amortization due to the adoption of the
previously discussed Financial Accounting Standards. Also, reductions as a
percent of revenue reflect lower selling expenses related to the Compex retail
sales strategy and certain economies of scale.
Research and development expenses increased 79% to $642,000 in the first quarter
of fiscal 2002 compared to $358,000 during the same period in fiscal 2001. This
increase reflects expanded new product development activities both in the U.S.,
particularly related to the ProMax product which started production in October
2001, and in Europe where three new products have been introduced in the last
six months and a fourth new product will be introduced later in fiscal 2002. The
Company anticipates that research and development expenses will remain
relatively constant as a percentage of revenue in future periods.
Interest expense decreased 42% from $407,000 in the first quarter of fiscal
2001, to $235,000 during the same period of fiscal 2002. The decrease resulted
from lower interest rates and overall lower borrowings on the Company's credit
facility. The Company expects interest expense to continue to decline with the
lower overall balance of its indebtedness and lower interest rates in future
periods.
The provision for income taxes is 42% of income before taxes in the first
quarter of fiscal 2002 compared to 40% during the same period of fiscal 2001.
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 2002 based on most
recent estimates of expected sources of revenue and expenses for the entire
year. The Company's federal income taxes for the years ended June 30, 1997 and
1998 were recently audited. The Internal Revenue Service has proposed
adjustments pursuant to such audit, most of which relate to the timing of
revenue or expense recognition. The Company is contesting these adjustments and
believes its provision for income taxes and related reserves are adequate.
As a result of the above activity, net income increased from $1,122,000 in the
first quarter of fiscal 2001 to $1,191, 000 in the first quarter of fiscal 2002.
Diluted earnings per share increased from $.10 in the first quarter of fiscal
2001 to $.11 in the first quarter of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended September 30, 2001, the Company's operations provided
cash of $762,000, mainly from net income of $1,191,000 and a reduction in
accounts receivable of $1,205,000, offset by an increase in inventories of
$640,000 and decreases of $691,000 in accounts payable and $847,000 in accrued
liabilities.
The Company used $129,000 in investing activities in the first quarter of fiscal
2002 for net purchases of property and equipment.
The Company's financing activities provided $1,506,000 of cash during the first
quarter of fiscal 2002, mainly from borrowings under its $20,000,000 credit
facility less $595,000 that was used for repayment of
11
debt. Borrowings were used primarily to build inventories in connection with new
product introductions. At September 30, 2001, a total of $12,850,000 is
outstanding under this facility, which includes $10,297,000 under a long-term
note and $2,050,000 on the revolving line of credit.
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 uncollectable accounts at the end of each reporting period includes
various factors including historical trends and relationships and experience
with insurance companies or other third party payors. The Company believes that
the reserve at September 30, 2001 is adequate to cover future losses on its
receivables based on collection history and trends. The provision for
uncollectable accounts recorded in the income statement may continue to
fluctuate significantly from quarter to quarter as such trends change. The
reserve was 31.4% of receivables at September 30, 2001 compared to 29.8% at June
30, 2001.
The Company has no material commitment for capital expenditures. The Company
believes that available cash and borrowings under its credit line will be
adequate to fund cash requirements for the current fiscal year.
ITEM 3. QUANTITATIVE 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 the $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 period
ended September 30, 2001, a 100 basis point change in interest rates would not
change interest expense by a material amount.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late January 2001, Rehabilicare was served with documents in connection with
a products liability case brought in the California Superior Court for Solano
County. Until receipt of these documents, Rehabilicare had no record of the
proceedings. The case involved a product liability claim for burns allegedly
suffered by plaintiff through the use of a stimulation unit that was allegedly
manufactured by Rehabilicare. The action alleged damages for medical expenses of
approximately $1,000, for future medical expenses of approximately $270,000 and
for punitive damages and pain and suffering of approximately $2.0 million. The
action apparently progressed to the entry of a default judgment on January 11,
2001 against Rehabilicare for failing to respond to pleadings.
In March 2001, Rehabilicare moved in Solano County court to set aside the
default judgment on various grounds, including irregularities in the filings and
other matters. Because the appeal period with respect to the default judgment
would have lapsed prior to the hearing on its motion in Solano County,
Rehabilicare also appealed the judgment to the California Court of Appeals. The
Solano County Court refused to act on Rehabilicare's motion because of the
pendency of the appeal. Rehabilicare believes the judgment is void or otherwise
improper, has obtained a stay of execution of the judgment in both California
and Minnesota and intends to vigorously pursue available actions, including its
appeal, to set aside the judgment.
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 - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None filed during the quarter ended September 30, 2001
13
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, 2001 /s/ David B. Kaysen
------------------------- ----------------------------------------------
Date David B. Kaysen
President and Chief Executive Officer
November 14, 2001 /s/ W. Glen Winchell
------------------------- ----------------------------------------------
Date W. Glen Winchell
Vice President of Finance
(Principal Financial and Accounting Officer)
14