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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28566
HENLEY HEALTHCARE, INC.
(Name of small business issuer in its charter)
TEXAS 76-0335587
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
120 Industrial Boulevard, Sugar Land, Texas 77478-3128
(Address of principal executive offices) (Zip code)
Issuer's telephone number: 281-276-7000
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year are $24,257,014.
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 25, 1998, based upon the average bid and ask price as
reported on the Nasdaq SmallCap Market, was $23,259,534. The number of shares of
the issuer's common stock, $.01 par value, outstanding as of March 25, 1998 was
5,383,205.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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THIS REPORT INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS REPORT ARE FORWARD LOOKING
STATEMENTS. SUCH FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS UNDER (a) "BUSINESS" REGARDING THE COMPANY'S EXPECTATIONS FOR FUTURE
PRODUCT DEVELOPMENT AND RELATED EXPENDITURES, AND (b) "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND
CAPITAL RESOURCES" REGARDING THE COMPANY'S ESTIMATE OF SUFFICIENCY OF EXISTING
CAPITAL RESOURCES AND ITS ABILITY TO RAISE ADDITIONAL CAPITAL TO FUND CASH
REQUIREMENTS FOR FUTURE OPERATIONS AND ACQUISITIONS. ALTHOUGH THE COMPANY
BELIEVES THE EXPECTATIONS REFLECTED IN SUCH FORWARD LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS REFLECTED IN SUCH
FORWARD LOOKING STATEMENTS WILL PROVE TO HAVE BEEN CORRECT. THE ABILITY TO
ACHIEVE THE COMPANY'S EXPECTATIONS IS CONTINGENT UPON A NUMBER OF FACTORS WHICH
INCLUDE (i) ONGOING COST OF RESEARCH AND DEVELOPMENT ACTIVITIES, (ii) TIMELY
APPROVAL OF THE COMPANY'S PRODUCT CANDIDATES BY APPROPRIATE GOVERNMENTAL AND
REGULATORY AGENCIES, (iii) EFFECT OF ANY CURRENT OR FUTURE COMPETITIVE PRODUCTS,
(iv) THE COMPANY'S ABILITY TO MANUFACTURE AND MARKET ITS PRODUCTS COMMERCIALLY,
(v) THE RETENTION OF KEY PERSONNEL AND (vi) CAPITAL MARKET CONDITIONS. THIS
REPORT MAY CONTAIN TRADEMARKS AND SERVICE MARKS OF OTHER COMPANIES.
PART I
ITEM 1. BUSINESS
GENERAL
Henley Healthcare, Inc., formerly Lasermedics, Inc. (the "Company" or
"Henley"), was incorporated in November 1990 as a Texas corporation, and is a
manufacturer, provider and marketer of diversified products and services in the
pain management industry. The Company provides high quality products and
services to healthcare professionals and aims to become an industry leader by
consolidating the otherwise largely-fragmented pain management industry. The
Company has operating units which are categorized by the type of service
provided and type of product manufactured or distributed. The pain management
unit comprises the Clinical, Homecare and Microlight operations. The Clinical
operations manufacture and market a diversified line of pain management products
used in clinical settings for both physical therapy and rehabilitation as well
as other applications. The Homecare operations manufacture and market products
used for patient care in the home setting. The Microlight operations are
involved in the development and application of portable, hand-held,
battery-operated, low-energy laser devices used to treat soft tissue. The
training unit, Health Career Learning Systems ("HCLS"), provides training,
safety products and technical support necessary to meet federal Occupational
Safety and Health Act ("OSHA") compliance standards and also coordinates the
training of medical professionals in the use of various other products offered
by the Company.
The Company's long-term strategic objectives are to (i) expand
distribution channels and explore new markets, (ii) consolidate the
highly-fragmented physical therapy and rehabilitation industry by pursuing
strategic acquisitions that complement existing product lines and increase
market share, (iii) maximize the utilization of existing facilities for
increased productivity, (iv) improve profitability, (v) reduce long-term
indebtedness, and (vi) obtain market clearance from the United States Food and
Drug Administration ("FDA") for the Microlight 830(TM).
ACQUISITIONS
Prior to April 30, 1996, the Company was primarily engaged in the
development and application for marketing clearance of the Microlight830(TM). On
April 30, 1996, the Company acquired substantially all of the assets of (and
assumed certain
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liabilities associated with) the Henley Healthcare Division (the "Henley
Division") of Maxxim Medical, Inc. ("Maxxim") a Delaware corporation, as more
fully described in the Notes to the Financial Statements. This acquisition
provided the Company with an expanded and stable base of products and customers
as well as manufacturing and marketing infrastructure. Beginning with the
acquisition of Maxxim's Henley Division, the Company has pursued a strategy of
consolidating the highly-fragmented physical therapy and rehabilitation
industry. Since that time, the Company has grown significantly as a result of
the acquisitions discussed below.
On November 12, 1996, the Company acquired substantially all of the assets
of MJH Medical Equipment, Inc., a privately-held medical supplies and equipment
distributor, which added distribution channels to the Company's then existing
marketing outlets. On November 27, 1996, the Company acquired all of the issued
and outstanding common stock of Health Career Learning Systems, Inc., ("HCLSI"),
which provides training, safety products and technical support necessary to meet
OSHA compliance standards. The Company's HCLS training unit includes the
operations of HCLSI, which continues to expand its products and service
offerings to fully integrate all of the Company's training activities.
During 1997, the Company continued to broaden and diversify its products
offering through acquisitions. In January 1997, the Company completed the
acquisitions of (i) all of the issued and outstanding common stock of Texas
T.E.N.S., Inc. ("Tens"), and (ii) the inventory, distribution systems and
customers associated with the Homecare (third-party billing) division of Gatti
Medical Supply, Inc. ("Gatti"). Both Tens and Gatti are engaged in the marketing
and distribution of medical supplies and devices.
In May 1997, the Company acquired all of the issued and outstanding shares
of common stock of Med-Quip, Inc. ("Medquip"), a privately-owned Georgia
corporation, engaged in the marketing and distribution of physical therapy and
rehabilitation products.
In October 1997, the Company acquired all of the ownership interests in
Summer Medical ("SM"), an unincorporated Florida sole proprietorship engaged in
the marketing and distribution of pain management and rehabilitation products.
In September 1997, the Company entered into an agreement with Cybex
International, Inc., a New York corporation ("Cybex"), whereby it purchased
certain assets of (and assumed certain liabilities associated with) the
isokinetic rehabilitation product line of Cybex.
In December 1997, the Company acquired all of the issued and outstanding
common stock of NCI, Inc., a Michigan corporation engaged in the training of
medical professionals.
In January 1998, the Company acquired all of the outstanding shares of
common stock of Garvey Company, a Minnesota corporation engaged in the marketing
and distribution of pain management and rehabilitation products.
In February 1998, the Company purchased substantially all of the assets
and assumed certain liabilities associated with AMC Acquisition Corp., a Texas
corporation engaged in the marketing and distribution of durable medical
equipment and devices.
On March 6, 1998, the Company entered into a definitive purchase agreement
with Delft Instruments N.V., an international conglomerate with headquarters in
The Netherlands and key operations in medical, defense, aerospace, industrial
and scientific industries, to acquire its Enraf-Nonius, B.V. ("Enraf")
wholly-owned subsidiary. Enraf specializes in the development, manufacture and
sale of medical products, including ultra-sound and electrical stimulation, used
in pain management, physical therapy and rehabilitation. The proposed
acquisition is subject to various conditions including obtaining sufficient
financing by the Company and approvals of the Boards of Directors of both
companies. However, there can be no assurance that the Company will obtain the
necessary financing for the acquisition or that the acquisition will be
completed under its current terms, if at all.
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OPERATIONS
CLINICAL. The Company's Clinical operations market a line of physical
therapy and rehabilitation products, and develop, manufacture, distribute and
market various products and related accessories used for control of acute or
chronic pain delivered by non-invasive methods to facilitate the healing of
wounds. Physical therapy involves the treatment of disabilities or injuries with
therapeutic exercise and the application of various heat, hydrotherapy,
traction, ultrasound or other modalities. The Clinical products are marketed
principally through national and international sales forces consisting of
dedicated sales persons, dealers and sales representatives.
HOMECARE. Henley's Homecare operations market and distribute a variety of
pain management and wound care products that are designed for patient care at
home. The Homecare products include a full range of nerve and muscle
stimulators, portable therapy units as well as drug delivery gels and pads.
Muscle stimulators are portable stimulators used to retard disuse atrophy and
enhance patient rehabilitation. Transcutaneous electrical nerve stimulation
therapy involves the transmission of electrical impulses on a localized basis as
a treatment for pain. The Homecare products are marketed principally through the
Company's distribution outlet in Ohio.
MICROLIGHT. The Company's Microlight operations are engaged in the
development and application of the Microlight 830(TM) to treat soft tissue. The
Company is currently seeking approval from the FDA to sell the Microlight
830(TM) in commercial quantities for human application. See "Business-Government
Regulation." Based upon the results of recent studies, including those by
General Motors Corporation ("GM") and the Mayo Clinic, the Company believes,
although no assurances can be given, that the Microlight 830(TM) is an effective
treatment for carpal tunnel syndrome ("CTS"). See "Business-Research and
Development."
The Microlight 830(TM) is manufactured by CB Svendsen a/s ("CBS"), a
Danish company, which has sold its low level laser devices in more than 20
foreign countries to physicians, physical therapists, dermatologists and
veterinarians, for use in connection with wound healing, pain reduction and
anti-inflammatory indications. The Company has worked on the development and
marketing of the Microlight 830(TM) with CBS since June 1991. In March 1997, the
Company and CBS entered into new agreements pursuant to which the Company paid
$100,000 to CBS and obtained unto perpetuity the sole and exclusive world-wide
distribution rights to all low level laser devices manufactured by or for CBS.
Also pursuant to the agreements, the Company obtained unto perpetuity the
exclusive world-wide manufacturing rights to all low level laser devices
manufactured by or for CBS subject to the payment to CBS of $175,000 by June 15,
1998.
HEALTH CAREER LEARNING SYSTEMS. The Company's HCLS training unit provides
training, safety products and technical support necessary to meet OSHA
compliance standards. The HCLS system is designed to ease the task of
implementing OSHA requirements in the workplace by providing a simple,
thoroughly planned training program. The system consists of all needed
information relevant to Bloodborne Pathogens Standard, Hazard Communication
Standards, Safety Regulations and State-Specific Regulations. It is the
Company's intention that the Group will continue to expand its training
activities to include various other products offered by the Company.
PRINCIPAL PRODUCTS
The Company develops, manufactures and markets a variety of products and
related accessories used for the control of acute or chronic pain by
non-invasive methods, to facilitate healing of wounds, for physical therapy and
in the treatment of disabilities or injuries with therapeutic exercise and the
application of various hydrotherapy, heat, traction, ultrasound or other
modalities. The Company also licenses products developed or manufactured by
other companies which are implemented into its existing and expanding
distribution system.
FLUIDOTHERAPY UNITS. Fluidotherapy is a patented dry heat treatment
that uses finely divided cellulose
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particles suspended and circulated in a heated air stream to apply heat,
stimulation and pressure to a specific area of the body. Patients receive such
therapy by placing the area to be treated (e.g., hand, ankle or knee) into the
unit in which the cellulose particles circulate at the appropriate temperature,
speed and density. Fluidotherapy enables physical therapists to provide their
patients with a combination of heat, stimulation, pressure and other therapies
designed to treat the symptoms of various ailments and conditions including
arthritis, circulatory disorders and certain sports-related injuries. The
Company currently manufactures, markets and distributes several models of
Fluidotherapy units.
TRU-TRAC TRACTION MACHINES AND TABLES. The Company develops, manufactures,
markets and distributes its Tru-Trac line of intermittent traction machines,
currently consisting of four models, including a clinical model and three
portable models. The Company also manufactures, markets and distributes a
proprietary line of Tru-Trac traction and therapy tables used in a variety of
physical therapy applications.
HYDRA-FITNESS EXERCISE AND REHABILITATION EQUIPMENT. Through its
Hydra-Fitness line of products, the Company develops, manufactures and sells
hydraulic exercise and rehabilitation systems. Hydraulic resistance is provided
by manipulating the size of the aperture in a patented, fluid-filled hydraulic
cylinder. Such hydraulic resistance provided by the machine is totally
accommodating throughout the full range of motion for each individual user and
the resistance stops when force is no longer applied. This contrasts with free
weight or weight stack equipment that must return to the starting point before
the resistance is zero. For this reason, Hydra-Fitness products can be utilized
for both medical and exercise purposes. The majority of the Company's sales of
Hydra-Fitness products is for medical use by handicapped and rehabilitating
patients and in geriatrics. The Company manufactures numerous models of
Hydra-Fitness machines.
NORM(TM) TESTING AND REHABILITATION SYSTEM. In September 1997, the Company
acquired the manufacturing, marketing and distribution rights to the
multi-joint, isokinetic NORM(TM) testing and rehabilitation system, a
state-of-the-art extremity testing and rehabilitation system, from Cybex. The
Company began manufacturing, marketing and distributing this product shortly
thereafter. The system utilizes isokinetic resistance to provide accurate and
reproducible measurement of dynamic performance and functional capability.
Isokinetic resistance is an automatically accommodating resistance which varies
in opposition to the amount of force applied against it. NORM(TM), which stands
for Normative Outcomes for Rehabilitation Management, provides clinicians with
instant access to the world's largest on-line isokinetic normative database
which provides immediate objective documentation to assess patient needs. The
NORM(TM) and the other products acquired from Cybex are well established in the
market place. The Company makes available to customers extensive literature
including published results by accredited researchers attesting to the accuracy,
effectiveness, validity and reproducibility of the results of these products.
ISOKINETIC ERGOMETERS. The Company began manufacturing, marketing and
distributing the Fitron isokinetic cycle ergometer ("Fitron") and the Upper Body
Ergometer ("UBE") in October 1997. Both the Fitron and UBE are designed with a
wide range of exercise speeds, work rates and anatomical range of motion for
physical therapy, athletic rehabilitation, performance training and
cardiovascular conditioning. The Fitron is principally a versatile lower-limb
cycle ergometer while the UBE incorporates all of the proven benefits of the
Fitron into a versatile ergometer for the upper body.
KINETRON TRAINING SYSTEM. The Kinetron closed kinetic chain training
system ("Kinetron") is an exercise system for the treatment of patients
requiring gradual, stabilized and counterbalanced weight bearing exercise
treatment. Kinetron is designed to provide a safe, non-threatening exercise
environment for patients at any level. Speed and weight bearing conditions are
controlled by the clinician in order to allow rehabilitation to begin earlier
than with other body treatment systems. It is used to treat orthopedic,
neurological, acute care and sports medicine patients and can progress patients
in speed, force, range-of-motion, timing and coordination while building their
confidence. The Company began manufacturing, marketing and distributing the
Kinetron in October 1997.
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NERVE STIMULATORS. The Company markets and distributes nerve stimulators
that provide transcutaneous electrical nerve stimulation therapy, sometimes
known as "TENS" therapy. This treatment involves the continuous or intermittent
transmission of low voltage electrical impulses in different wave forms, on a
localized basis, as a treatment for chronic or acute pain resulting from a
variety of medical conditions. The therapy is provided through a small,
portable, battery-powered stimulator (resembling a paging device) connected by
wires to two or more small electrode pads placed at or near the site of the
patient's pain. For most patients, use of this therapy creates an analgesic
effect that assists in the reduction or elimination of localized pain. To the
extent this therapy is effective for a patient, it offers greater patient
comfort and mobility than competing remedies and elimination or reduction of
medications, and results in increased patient alertness, fewer side effects and
lower overall costs than prolonged medication. The Company currently sells
several different models of TENS devices and believes that the potential market
for these devices is growing. The Company purchases these nerve stimulators from
various suppliers.
JELTRODE ELECTRODES. The Company manufactures, markets and distributes its
proprietary Jeltrode electrodes for use with the Company's nerve stimulators in
a variety of nerve and muscle stimulation and electrotherapy applications. The
Company believes that traditional electrodes used in these therapies often
irritate the skin, are messy to apply and painful to remove. A Jeltrode
electrode uses a unique adhesive gel, is hypoallergenic, virtually painless to
apply and remove and can be re-hydrated, cleaned and re-used. Since the adhesive
gel is water-based, electrical resistance between the electrode and skin is
reduced, resulting in enhanced product performance and prolonged battery life.
IOTRODE IONTOPHORESIS ELECTRODES. Iontophoresis is a process which uses
electric current to assist drug transfer through the skin. The Company
manufactures, markets and distributes its Iotrode iontophoresis electrode for
use with its Dynaphor iontophoresis device. Using the electrodes, clinicians are
able to deliver small molecule drugs that can be ionized for the treatment of
pain and inflammation through the skin. For many applications, the use of
iontophoresis is superior because it is non-invasive, allows medications to be
dispersed over a wider range of tissue and avoids many of the systemic and
localized side effects associated with oral medications and injections.
MEDIPADS/MEDIGELS. The Company's Medipads and Medigels are manufactured at
the Company's Sugar Land, Texas, facilities. These products are marketed and
distributed as drug-impregnated, water-based gels and gel pads used for delivery
of drugs directly through the skin on a localized basis. The Medipads and
Medigels can be used topically with various non-prescription dosages of drugs
such as hydrocortisone and lidocaine.
WOUND CARE PRODUCTS. The Company recently obtained FDA market clearance
for the manufacture and sale of two sterile wound care products - Dermaheal gel
and Dermaheal impregnated gauze. These products are PVP/aloe vera-based,
ultrasound transparent and electrically conductive. The Company has not yet
begun to commercially manufacture these wound care products.
THE MICROLIGHT 830(TM). The Microlight 830(TM) is a portable, hand-held,
battery-operated low energy laser with an output which does not exceed 100
milliwatts. The Company currently distributes the Microlight 830(TM) to various
clinicians participating in the Company's current research program under its
Investigational Device Exemption ("IDE") as allowed by FDA regulations. Lasers
that do not exceed 100 milliwatts have no thermal effect on living tissue.
However, depending on the wavelength, the low level laser light will penetrate
and act on the tissue underlying the skin. The specific wavelength of the laser
incorporated within the Microlight 830(TM) penetrates the dermis, epidermis and
subcutaneous layers of the skin entering surrounding tissue. Along its path, the
laser deposits photons into the cells, which is believed to stimulate nerve
regeneration, reduce swelling and improve micro-circulation by bringing
increased oxygen and blood flow to the problem area.
The Company believes, although no assurances can be given, that the
Microlight 830(TM) is an effective
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treatment for CTS, which is the tendon and nerve damage that results from the
fast, forceful wrist and hand motions that are repeated in production and
manufacturing workplaces many times in each day, such as operating a computer,
cutting meat, cutting or plucking poultry or assembling automobiles.
Conventional surgical and non-surgical treatments for CTS and other repetitive
stress injuries have been for the most part unsuccessful in allowing CTS
sufferers to continue with or return to productive employment. As a result of
the limited success of these treatments, CTS frequently results in temporary or
permanent disability at substantial economic costs. The Company believes that
the potential market for the Microlight 830(TM) could exceed two billion dollars
worldwide and encompasses hospitals, clinics, medical doctors, chiropractors,
physical therapists, dentists, veterinarians and, ultimately, individuals.
However, the Company has not yet received clearance from the FDA to sell the
Microlight 830(TM) in commercial quantities for human application.
DISTRIBUTION AND MARKETING
The Company's products are marketed through a network of national and
international independent dealers and distributors, direct salespersons and
commissioned sales representatives to physicians, physical therapists,
chiropractors and their patients as well as to clinics and healthcare networks.
In conjunction with sales, marketing and manufacturing, the Company also has a
network for direct billing to insurance claims offices, Medicare carriers and
managed healthcare programs. The Company believes that its approach to sales and
marketing is supported by the desire of its customers to identify with
individual account managers and product specialists. This enables the Company to
provide better customer service and to maintain specialized expertise in each
product line. As medical products are increasingly being purchased on a national
account or centralized basis by healthcare networks, Company salespersons must
also maintain relationships with purchasing managers within these networks.
The Company has product distribution centers in Ohio, Minnesota, Georgia
and Texas and approximately 160 dealers and distributors, 30 sales
representatives and 25 direct salespersons representing its product within the
United States. The Company has both telemarketing and direct-mail programs for
its HCLS-related products and services and for the marketing and distribution of
medical supplies related to its TENS, wound-healing and other products.
Additionally, the Company sells many of its products to over 140
distributors and representatives in various countries around the world. The
products manufactured or sold by the Company in Europe are subject to the
European Community regulations for medical devices, including product
certification ("CE Marking"). The European Community has imposed a deadline of
June 1998, after which products without a CE Marking may not be sold in Europe.
The Company has obtained CE Marking on all of its traction machines and
anticipates obtaining the CE Marking prior to the deadline, on the remainder of
its products that are sold in the European Community. The Company believes that
its network of international distributors will enhance its marketing and
distribution efforts as it seeks to extend its market share of the international
marketplace.
The Company began marketing the LASERMEDICS VMD 830(TM) laser for
veterinary application in November 1993. Sales are made to veterinarians through
a network of distributors and sales representatives for use in wound healing and
the treatment of muscle afflictions on horses and other animals. Research
studies have demonstrated the positive photobiostimulation effects of the
LASERMEDICS VMD 830(TM) cold laser technology on animal muscle ailments such as
bowed tendon, check ligament and plantar desmitis. Clinical results also show
that soft tissue healing on horses is accelerated with repeated applications of
the LASERMEDICS VMD 830(TM).
MANUFACTURING
The Company operates two manufacturing facilities in Belton and Sugar
Land, Texas. Most of the Company's Clinical products are manufactured at the
Belton, Texas facility while the manufacturing operations for some of the
Company's Homecare products are located at the Sugar Land, Texas facility.
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COMPETITION
Competition in the medical device and physical medicine markets is
intense. The Company's products compete with the products of many other
companies in the business of developing, manufacturing, distributing and
marketing physical therapy and rehabilitation products. Many of these companies
may have substantially greater financial and other resources than the Company,
and may have established reputations for success in the development, sale and
service of their products. The Company believes that the principal competitive
factors in each of its markets are product features and benefits, customer
service and pricing. Although the Company's products are not the lowest-priced
in its markets, the Company endeavors to maintain a competitive edge by
emphasizing overall value through a combination of competitive pricing, product
quality and customer service.
There are several foreign as well as U.S. manufacturers of low energy
lasers using similar technology to the Microlight 830(TM). However, these
competitive lasers may emit light of a different wavelength, are not generally
portable and may be more expensive than the Company's product. Consequently, the
Company anticipates future competition relating to the Microlight 830(TM).
Furthermore, there may be no effective barrier to competitors using other
wavelengths of low-level laser light inasmuch as the manufacture of the
Microlight 830(TM) does not incorporate any patented inventions, and qualified
companies could reverse engineer such product and market it, subject to
obtaining the requisite FDA pre-marketing approval ("PMA"), for human use.
Although there may be no absolute barriers to entry for competitive lasers, the
Company believes that, pursuant to specific FDA regulations, the safety and
efficacy data submitted to the FDA by one entity supporting such entity's PMA
application cannot be used by another entity in its PMA application. Generally,
this means that another entity desiring to submit a PMA application for a laser
similar to the Microlight 830(TM) cannot rely on the Company's clinical trial
results to support such entity's PMA application, but must conduct its own
trials and gather its own data. Although no assurances can be given, this
provision could increase the length of time for a competitor of the Company to
obtain FDA approval to commercially sell a similar product in the United States
for human application.
PATENTS AND PROPRIETARY RIGHTS
The Company actively pursues a policy of seeking patent protection both in
the U.S and abroad for its proprietary technology. The Company owns several U.S.
issued patents and various foreign counterparts. The Company also has one patent
application pending in the U.S. The Company also relies on trade secrets and
un-patented know-how in connection with the use of the Microlight 830(TM), but
the Company may be vulnerable to competitors who attempt to copy the laser
technology used in such product or to gain access to the Company's trade secrets
and know-how. Although the Company has conducted a search to discover any
patents which the Microlight 830(TM) or its use may infringe, the Company is not
aware of any patents which may be infringed by this product.
Litigation, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce any patent issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the scope and validity of the proprietary rights of others. Adverse
findings in any proceeding could subject the Company to significant liabilities
to third parties, require the Company to seek licenses from third parties and
adversely affect the Company's ability to sell its product.
GOVERNMENT REGULATION
All medical devices are subject to FDA regulation under the Medical Device
Amendments of the Food, Drug and Cosmetic Act, as amended ("FDCA".) Pursuant to
the FDCA, a medical device is ultimately classified as either a Class I, Class
II or Class III device. Class I devices are subject only to general controls
which are applicable to all devices. Such controls include regulations regarding
FDA inspections of facilities, Quality Systems Regulations (formerly known as
Good Manufacturing Practices), labeling, maintenance of
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records and filings with the FDA. Class II devices must meet general performance
standards established by the FDA. Class III devices are subjected to a more
stringent PMA process by the FDA before they can be commercially marketed and
must adhere to such standards once on the market. Such PMA can involve extensive
testing to prove safety and efficacy of the devices. Most of the Company's
products are Class II devices. FDA marketing clearance of these devices is
obtained under Section 510 (k) of the FDCA, which provides for FDA clearance for
products that can be shown to be substantially equivalent to devices in commerce
prior to May 1976 (the month and year of enactment of the FDCA) or which have
subsequently been granted market clearance. Most of the Company's remaining
products are Class I devices (i.e., treatment tables and fitness and exercise
equipment.)
Currently, all of the Company's products and manufacturing facilities are
subject to pervasive and continuing regulation by the FDA. All phases of the
manufacturing and distribution process are governed by FDA regulation. Products
must be produced in registered establishments and be manufactured in accordance
with Quality Systems Regulations, as such term is defined under the Code of
Federal Regulations. In addition, all such devices must be periodically listed
with the FDA. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The export of
devices is also subject to regulation in certain instances. The FDA conducts
inspections periodically to ensure compliance with these regulations.
The FDA's mandatory Medical Device Reporting ("MDR") regulation obligates
the Company to provide information to the FDA on injuries alleged to have been
associated with the use of a product or in connection with certain product
failures which could cause serious injury or death. If as a result of FDA
inspections, MDR reports or other information, the FDA believes that the Company
is not in compliance with regulations, the FDA can institute proceedings to
detain or seize products, enjoin future violations, or assess civil or criminal
penalties against the Company, its officers or employees. Although the Company
and its products have not been the subject of such FDA enforcement action, any
such action by the FDA could result in a disruption of the Company's operations
for an undetermined time.
In addition to the foregoing, foreign countries in which the Company's
products may be sold, as well as state governments and other federal and local
agencies within the U.S., may impose additional regulatory requirements on the
Company, and such actions could have a material adverse effect on the Company's
ability to do business.
There can be no assurance that the FDA will grant PMA clearance for the
MicroLight 830(TM) for the treatment of CTS on a timely basis, if at all. Until
it obtains FDA market clearance, the Company is unable to sell the product in
commercial quantities for human application in the U.S. market.
The Company is not required to notify or obtain approval from the FDA
regarding any of its devices sold for veterinarian applications. However, the
Company is required to obtain, prior to commencing any sales activities, a
radiological health registration number and to file an Initial Report for all
models of its devices. With no objection from the FDA to the introduction of the
LASERMEDICS VMD 830(TM) into commerce, the Company continues to market this
product in the veterinary market, although much of the Company's efforts is
focused on the marketing and distribution of its many other products.
THIRD-PARTY REIMBURSEMENT AND HEALTHCARE REFORM
Healthcare providers, such as hospitals and physicians, that purchase
medical products for use on patients generally rely on third party payors,
principally Medicare, Medicaid and private health insurance plans, to reimburse
all or part of the costs and fees associated with the products used, procedures
performed or services provided. The Company's products are purchased by
hospitals, corporations, clinics and private physicians. These customers then
bill various third-party payors for the healthcare services provided to their
patients with use of the Company's products. These payors include Medicare,
Medicaid and private insurance payors. Generally, government agencies reimburse
hospitals and other healthcare providers for patient medical care at a fixed
rate according to diagnosis-related groups (DRGs) as mandated by Congress.
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Reimbursements are dependent on many factors which may include the payor's
determination that a service or procedure was not experimental and was used for
an approved indication.
During the 3rd quarter of 1997, the Company commenced an extensive
analysis of its accounts with particular emphasis on its accounts receivable
which relate to the Company's third-party billing operations. In conjunction
with the analysis, the Company intensified its collection efforts. The third
party billing business, by its nature, demands longer-than-average time to bill
and much longer-than-average time to collect. Upon further scrutiny in the
fourth quarter and on the basis of the analysis, management revised its
estimates of collectibility of the Company's accounts receivable for the third
party billing operations and increased its reserve for doubtful accounts by
approximately $2,000,000. The Company has also changed certain procedures in the
collection process in order to improve the future collectibility of the accounts
receivable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company believes that the nature of the non-intrusive utilization of
its products in patient care and the advantages of their relative cost and ease
of use may be positive factors in reducing health care costs. However, the
Company cannot predict the ultimate effect of the current governmental focus on
healthcare reform on the sale of its products. Although the market for some of
the Company's products could be adversely affected by changes in governmental
and private third-party payors' policies, the Company believes that healthcare
legislation may have some beneficial effect on its business by increasing the
availability of healthcare, emphasizing less invasive surgery and increasing the
need for efficiency by healthcare personnel.
RESEARCH AND DEVELOPMENT
GENERAL. The Company is continually conducting, researching and developing
new products by utilizing a team approach involving the engineering,
manufacturing and marketing resources. These research and development efforts
are designed primarily to apply state-of-the-art technology and the Company's
expertise to the treatment of wide-ranging medical conditions. Although the
Company has developed a number of its products, such as the original
Fluidotherapy device, Medipads and others, most of its research and development
efforts are directed towards product improvement and enhancement of previously
developed or acquired products. Such enhancement may involve updating and
redesigning existing products to improve features, performance and reliability.
The Company is also involved in the development and application of various
new products many of which are in early stages of development and will require
additional development work, FDA approval, clinical or other testing or market
research and development efforts prior to commercial introduction. In this
regard, the Company is continuing its clinical research and investigation using
the Microlight 830(TM) under its IDE. Expenses incurred in connection with
research and development in 1997 and 1996 amounted to approximately $395,000 and
$314,000, respectively.
The Company also estimates that it will incur expenditures approximating
$500,000 for research and development, in the event it obtains FDA approval for
human application of the Microlight 830(TM), for which no assurance can be
given. Such research and development effort will primarily emphasize additional
photobiostimulation applications for the Microlight 830(TM), such as pain
suppression, wound healing and sports injuries, in various medical disciplines
including general medicine, dentistry, veterinary medicine, physical therapy,
orthopedic surgery, dermatology and re-constructive and cosmetic surgery.
CLINICAL TRIALS FOR THE MICROLIGHT 830(TM). The Microlight 830(TM), a
Class III medical device, has been defined by the FDA as a "non-significant
risk" device. The Company is allowed to conduct clinical trials under an
approved IDE using the Microlight 830(TM). In August 1997, the FDA accepted the
Company's Pre-IDE Clinical Investigation Plan for a multi-center, double-blind,
randomized, clinical study to evaluate the efficacy of the Microlight 830(TM) in
the treatment of CTS. These clinical trials are subject to IDE regulations,
including record keeping, adverse event reporting and other clinical study
requirements. Pursuant to IDE regulations the Company's clinical researchers are
required to be reviewed and approved by an Institutional
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Review Board (IRB) to treat human patients for research purposes. The objective
of these clinical trials is to evaluate the therapeutic effects of low-level
laser energy in pain management, soft tissue trauma (including RSI) and dental
applications. The Company is sponsoring independent research studies on the
effects of the Microlight 830(TM) at various clinical sites in the U.S.
No assurance can be given that (i) the results of the various research
studies that are being or have been conducted using the Microlight 830(TM), will
demonstrate to the FDA's satisfaction the safety and effectiveness of the
Microlight 830(TM) in treating CTS, (ii) the FDA will agree that the design of
the studies is satisfactory, (iii) the FDA will not require additional clinical
studies, or (iv) the Company can obtain the necessary FDA marketing clearance
for the Microlight 830(TM) on a timely basis, if at all. The FDA's rejection of
the clinical design or the data generated could lead to rejection of the
application for commercial marketing of the Microlight 830(TM) and/or the need
to conduct additional clinical trials.
PRODUCT LIABILITY AND INSURANCE
The Company's business includes the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
currently maintains product liability insurance covering up to $3,000,000 in
liability claims, but does not intend to seek additional coverage until after
such time, if ever, as it obtains marketing approval from the FDA for human
application of the Microlight 830(TM).
EMPLOYEES
As of March 16, 1998, the Company had approximately 376 full-time and 5
part-time employees. None of the Company's employees are represented by a union,
and management believes that its relations with its employees are good. The
Company believes that the success of its business will depend, in part, on its
ability to attract and retain qualified personnel.
ITEM 2. PROPERTIES
The Company owns three buildings of which two are located in Sugar Land,
Texas, and the other in Belton, Texas. The addresses of these owned facilities
are 120 Industrial Boulevard, Sugar Land, Texas 77478, 140 Industrial Boulevard,
Sugar Land, Texas 77478 and 2121 Industrial Park Road, Belton, Texas 76513. The
Company's principal executive and administrative offices are located at the 120
Industrial Boulevard, Sugar Land, facility consisting of approximately 25,000
square feet. Electronics manufacturing and warehouse operations for the
Company's pain management products and certain administrative functions are
located at the 140 Industrial Boulevard, Sugar Land, facility consisting of
approximately 50,000 square feet. The manufacturing and warehouse facilities for
much of the Company's physical therapy and fitness products are located at the
Belton facility consisting of approximately 59,000 square feet.
The Company also leases three regional warehouse and distribution
facilities in Akron, Ohio, St. Paul, Minnesota and Atlanta, Georgia, of
approximately 15,000, 5000 and 5,550 square feet, respectively. The Company also
leases approximately 4,900 and 4,500 square feet of office space in Plymouth,
Michigan, and Happauge, New York, respectively, as principal operations center
for its HCLS training unit and customer service operations for the recently
acquired Cybex products, respectively.
The Company believes that its facilities, whether leased or owned, are
adequate to meet its current needs and should continue to be adequate for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is party or
of which any of its property is the subject other than ordinary, routine claims
incidental to the Company's business.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades in and is quoted on The Nasdaq
SmallCap Market under the symbol "HENL." The following table sets forth the
range of high and low bid prices on the Company's Common Stock for calendar
years 1997 and 1996 on The Nasdaq SmallCap Market:
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
1997:
First Quarter $6.500 $ 4.125
Second Quarter 7.750 4.375
Third Quarter 7.500 4.937
Fourth Quarter 9.000 5.187
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
1996:
First Quarter 8.750 4.250
Second Quarter 8.875 6.000
Third Quarter 8.125 4.750
Fourth Quarter $6.875 $5.750
The Company has authorized 20,000,000 shares of common stock, par value
$.01 per share. As of March 16, 1998, there were 5,383,205 shares issued and
outstanding and 303 shareholders of record, although the Company believes that
there are other persons who are beneficial owners of the Company's securities
held in "street" names. All shares of Common Stock currently outstanding are
validly issued, fully paid and non-assessable.
The Company has neither declared nor paid any dividends on common stock
since its inception and presently anticipates that no dividends will be declared
in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, debt obligation agreements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.
RECENT SALES OF UNREGISTERED SECURITIES
The following sales of unregistered securities occurred during the year
ended December 31, 1997, in private transactions in which the Company, unless
otherwise indicated, relied on the exemption from registration available under
Section 4(2) of the Securities Act of 1993, as amended (the "Securities Act"):
In January 1997, the Company acquired substantially all of the inventory,
distribution systems and customers associated with the Homecare (third-party
billing) division of Gatti Medical Supply, Inc. In connection with the
acquisition, the Company issued to the sellers a total of 51,117 shares of the
Company's common stock.
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In connection with a non-compete agreement entered in September 1997 with
a former employee, the Company issued to the former employee 10,000 shares of
the Company's common stock.
In October 1997, the Company entered into an agreement with the sole owner
of Summer Medical ("SM"), an unincorporated sole proprietorship, pursuant to
which the Company acquired all of the owner's interests in SM and assumed
certain business-related liabilities associated with SM. In connection with the
acquisition, the Company issued to the owner 10,000 shares of the Company's
common stock.
In December 1997, the Company acquired all of the issued and outstanding
common stock of NCI, Inc., a Michigan corporation. In connection with the
acquisition, the Company issued to the seller 188,847 shares of the Company's
common stock.
In October 1997, the Company offered to exchange Amended and Restated
Class J Warrants with the holders of the then outstanding Class J Warrants in a
transaction exempt from registration under Section 3(a)(9) of the Securities
Act. Of the 104,941 Class J Warrants then outstanding, the holders of an
aggregate of 65,341 agreed to exchange their original Class J Warrants for
Amended and Restated Class J Warrants. In December 1997, the Company undertook
to redeem the Amended and Restated Class J Warrants pursuant to the terms
thereof. Upon receipt of the Notice of Redemption, certain holders of the
Company's Amended and Restated Class J Warrants exercised their rights under the
Warrants and purchased shares of the Company's common stock. In connection with
this transaction, the Company issued an aggregate of 61,341 shares of its common
stock and redeemed 4,000 Amended and Restated Class J Warrants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal business strategies are to (i) expand distribution
channels and explore new markets, (ii) consolidated the highly-fragmented
physical therapy and rehabilitation industry by pursuing strategic acquisitions
that complement existing product lines and increase market share, (iii) maximize
the utilization of existing manufacturing facilities for increased productivity,
(iv) improve profitability, (v) reduce long-term indebtedness, and (vi) obtain
market clearance from the FDA for the Microlight 830(TM).
Prior to April 30, 1996, the Company was primarily engaged in the
development and application for marketing clearance of the Microlight 830(TM).
Beginning with the acquisition of Maxxim's Henley Division, the Company has
pursued a strategy of consolidating the highly-fragmented physical therapy and
rehabilitation industry. Since that time, the Company has grown significantly as
a result of additional acquisitions. See "Business --Acquisitions." All
acquisitions were accounted for under the purchase method of accounting for
business combinations and accordingly, the results of operations for such
acquisitions are included in the Company's financial statements only from the
applicable date of acquisition. As a result, the Company believes that its
historical results of operations for the periods presented may not be directly
comparable. The Company believes the historical results of operations do not
fully reflect the operating efficiencies and improvements that are expected to
be achieved by integrating the acquired businesses and product lines.
The Company intends to continue its evaluation of acquisitions, and a
period of rapid growth could place a significant strain on the Company's
management, operations and other resources. There can be no assurance that the
Company will continue to be able to identify attractive or willing acquisition
candidates, or that the Company will be able to acquires such candidates on
economically acceptable terms. The Company's ability to grow through
acquisitions and manage such growth will require the Company to continue to
invest in its operational, financial and management information systems and to
attract, retain, motivate and effectively manage its employees. The inability of
the Company's management to
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manage growth effectively would have a material adverse effect on the financial
condition, results of operations and business of the Company. As the Company
pursues its acquisition strategy in the future, its financial position and
results of operations may fluctuate significantly from period to period.
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO 1996
The Company achieved record sales in fiscal 1997, with total revenue of
approximately $24,257,000 reflecting an increase of approximately $11,771,000 or
94% over the amount reported for fiscal year 1996. The increase was primarily
due to increased sales from the acquired operations. Net loss for fiscal 1997
amounted to approximately $2,124,000 compared to a net loss of approximately
$879,000 in fiscal 1996. The increase in net loss resulted primarily from the
effect of the one-time adjustment to the allowance for doubtful accounts.
The Company's gross profit for fiscal 1997 was approximately $12,530,000
compared to approximately $6,770,000 for fiscal 1996. Gross margin as a
percentage of sales in 1997 decreased to 52% from 54% in 1996. The decrease in
the 1997 gross margin percentage compared with 1996 was primarily the result of
lower margin products representing a larger portion of sales in 1997.
Operating expenses in 1997 increased approximately $6,618,000 over the
amount of approximately $6,727,000 reported for 1996. As a percent of sales,
operating expenses in 1997 increased to approximately 55% compared to
approximately 54% a year earlier. The increase in operating expenses was due to
increased relative costs of operating the acquired businesses. Also contributing
to the increase in operating expenses in 1997, was the effect of the Company's
fourth quarter revision of its estimates of collectibility of the accounts
receivable, which increased operating expenses (and the reserve for
uncollectible accounts) by approximately $2,000,000. Excluding the effect of
this one-time adjustment, operating expenses in 1997, as a percent of sales,
decreased to approximately 47% reflecting the effects of larger overall sales
from the acquired businesses and product lines. The Company will continue to
face the challenge of managing expense growth as it seeks to expand distribution
channels and explore new markets while moving towards the consolidation of the
highly-fragmented physical therapy and rehabilitation industry.
Interest expense for 1997 amounted to approximately $1,148,000 compared to
approximately $815,000 in 1996. The increase in interest expense was primarily
due to the interest-bearing notes issued to finance the Company's acquisitions.
As of December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes of approximately $6,324,000 available to offset future
taxable income. The carryforwards will begin to expire in 2005. A valuation
allowance was provided to fully reserve the net deferred tax asset due to
realization uncertainties regarding future operating results.
FISCAL 1996 COMPARED TO 1995
Total revenue for fiscal year 1996 amounted to approximately $12,486,000
reflecting an increase of approximately $11,959,000 over the amount reported for
fiscal year 1995. The increase is primarily due to increased sales from the
acquired operations acquired from Maxxim Medical, Inc. Net loss decreased about
38% from approximately $1,420,000 in fiscal 1995 to approximately $879,000 in
fiscal 1996. The decrease in net loss is due to achievement of more profitable
operations during the second six-month period of fiscal 1996.
The Company's gross profit for fiscal 1996 was approximately $6,770,000
compared to approximately $183,000 for fiscal 1995. Product gross margin as a
percentage of sales in 1996 increased to
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54% from 35% in 1995. The increase in the 1996 gross margin percentage compared
with 1995 resulted primarily from sales of many high margin products acquired
from Henley.
Operating expenses in 1996 increased approximately $5,196,000 over the
amount of approximately $1,530,000 reported for 1995. However, as a percent of
sales, operating expenses in 1996 decreased to 54% compared to 290% a year
earlier. The increase in operating expenses is due to increased relative costs
of operating the acquired businesses. However, the decreased operating expenses
as a percent of sales reflects the effects of larger overall sales from the
acquired products and certain cost containment measures undertaken following the
Henley acquisition. The Company will continue to face the challenge of managing
expense growth as it seeks to expand distribution channels and explore new
markets while moving towards the consolidation of the highly-fragmented physical
therapy and rehabilitation industry.
Interest expense for 1996 amounted to approximately $815,000 compared to
approximately $84,000 in 1995. The increase in interest expense was primarily
due to the interest-bearing notes issued to finance the Company's acquisition of
the Henley Division, which was partially offset by the effects of the conversion
of certain interest-bearing notes into shares of the Company's common stock.
For the year ended December 31, 1996, the amount of other income and
expense, net included certain non-recurring employee relocation and severance
costs which were not incurred in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents in the
amount of $123,620 as compared to $507,892 at December 31, 1996. The decrease in
cash and cash equivalents resulted primarily from expenses incurred in pursuing
the Company's overall growth strategy.
In March 1998, the Company sold 1,825 shares of its Series A Convertible
Preferred Stock (the "Preferred Stock") at $1000 per share in a private
offering, resulting in net proceeds of approximately $1.8 million. The Preferred
Stock is convertible into the Company's common stock at the lesser of (i) 75% of
the average closing bid price for the Company's common stock as reported on The
Nasdaq SmallCap Market for the 5 trading days prior to conversion, or (ii) $6.50
per share. In connection with the transaction, the Company also issued to the
investors a 5-year warrant to purchase up to 146,000 shares of the Company's
common stock at exercise prices ranging from $7.125 per share to $9.619 per
share. The Company has agreed to file a registration statement covering the
resale of the shares of Common Stock issuable upon the conversion of the
Preferred Stock and exercise of the warrants sold to the investors described
above. As a result of the Securities and Exchange Commission's position
regarding the accounting for preferred stock with a floating conversion rate,
the Company will incur a dividend expense in the future for the conversion of
the Preferred Stock. Such dividend expense is calculated as the discount over
fair market value as of the date the Preferred Stock was sold to the investors.
This discount amount of $456,250 will be treated as a dividend to the holders of
the Preferred Stock and will be ratably charged to operations upon each
conversion of the Preferred Stock.
The Company's current sources of liquidity consist primarily of (i) funds
from operations, (ii) proceeds from the sale of the Preferred Stock, (iii) funds
held at the end of fiscal year 1997 and (iv) the amounts, if any, available
under the Amended Loan Agreement with Comerica. The Amended Loan Agreement with
Comerica provides for (i) a one-year revolving loan ("Line of Credit"), which
permits borrowings up to $8,000,000 through January 1999 and (ii) three term
loans in the amounts of $1,430,000 ("Term Note A"), $1,616,000 ("Term Note B")
and $1,260,000 ("Term Note C"). Term Note A, Term Note B and Term Note C are
payable in monthly installments of $23,833, $8,978 and $7,000, respectively,
plus interest through September 2002, May 2011 and February 2013, respectively.
The Line of Credit also includes a $250,000 letter of credit facility. Interest
on the Line of Credit and the three term loans is payable monthly and is
calculated at a rate equal to the Prime Rate plus one-half of one percent per
annum. Term Note B is callable by Comerica beginning on the fifth anniversary of
the Amended Loan Agreement. All of the borrowings from Comerica are secured by
substantially all of the assets of the Company. As of December 31,
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1997, the Company had approximately $894,000 available for borrowing under the
Line of Credit. The total amount available for borrowing under the Line of
Credit is the lesser of (i) $8,000,000 and (ii) a variable borrowing base
calculated based on the amount and type of outstanding accounts receivable and
the value of certain items of inventory. At December 31, 1997, the Company had
working capital of approximately $2,637,000 and its current ratio was 1.2 to 1
as compared to $5,592,000 and 2.2 to 1 at December 31, 1996. This decrease in
the current ratio is primarily due to the increase in the amount of outstanding
line of credit, consistent with the Company's growth strategy. At December 31,
1997, the Company had no material capital expenditure commitment.
In connection with an agreement entered into in April 1996 with Maxxim
Medical, Inc. ("Maxxim"), the Company issued to Maxxim a convertible
subordinated promissory note in the principal amount of $7 million (the "Note").
The Note is due and payable on March 1, 2003 with interest payable semi-annually
on November 1 and May 1 of each calendar year and calculated at a rate equal to
2% per annum and increasing annually 2% per annum. The Company may redeem all or
any portion of the outstanding principal amount of the Note at redemption prices
ranging from 104% to 110% of the principal amount being redeemed, depending on
when the redemption occurs as set forth in the Note. In addition, the Note is
subject to mandatory redemption in annual installments of $1.4 million
commencing on March 1, 1999 at premiums starting at 7% and decreasing 1% each
year. The Company is also required to redeem 40% of the Note upon the completion
of a public offering. The Note is convertible into common stock at an initial
conversion price of $2 per share, provided that upon the occurrence of any
default under the Note, the conversion price will be automatically adjusted to
an amount equal to the lesser of the conversion price then in effect or 80% of
the average market price for the Company's common stock for the 30 trading days
immediately preceding the event of default. The conversion price is also subject
to adjustment upon the occurrence of certain events (including certain issuances
of common stock for less than the conversion price) to provide anti-dilution
protection.
In February and March 1998, the Company entered into agreements with
Maxxim pursuant to which Maxxim converted an aggregate of $4,000,000 of the Note
into an aggregate of 2,000,000 shares of the Company's common stock, par value
$.01 per share. The conversions were based on the current conversion price of
$2.00 per share under the Note. The agreements also provide that the entire $4
million of the Note so converted reduces the principal amount of the Note and
such sum shall be applied to the Company's full redemption obligation due in the
year 2003 and partially to the Company's redemption obligation due in the year
2002 as provided in the Note. The Company has agreed to file a registration
statement covering the resale of the shares of Common Stock issued to Maxxim as
a result of the conversions described above.
The Company is currently assessing the potential impact of the present
computer technology issue generally referred to as the "Year 2000 Problem." The
year 2000 Problem, which is common to most corporations, relates to the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information related to the year
2000 and beyond. The Company is currently evaluating the expected costs to be
incurred in connection with the Year 2000 Problem, and expects that such costs
will not be material.
Management believes that the funds generated from operations, along with
the Company's current working capital position and bank credit will be
sufficient to satisfy the Company's capital requirements for the Company's
existing operations for the foreseeable future. However, the Company will need
to obtain significant additional capital to finance its acquisition strategy,
including the Enraf-Nonius acquisition. See "Business -- Acquisitions." If the
Company's operating cash flows are inadequate or if the Company is unable to
raise sufficient financing, there can be no assurance that the Company will be
able to successfully fund its current operations or implement its acquisition
strategy. The Company believes that its success in obtaining the necessary
financing will depend upon, among other factors, successfully operating the
recently acquired businesses. Sources of additional financing may include
additional bank debt or the public or private sale of equity or debt securities.
There can be no assurance that the Company will be successful in arranging such
financing at all or on terms commercially acceptable to the Company.
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ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements."
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Public Accountants 18-19
Consolidated Balance Sheet 20
Consolidated Statements of Operations 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-38
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Henley Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of Henley
Healthcare, Inc., a Texas corporation, and Subsidiaries as of December 31,
1997, 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 generally accepted auditing
standards. 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 financial position of Henley Healthcare,
Inc. and Subsidiaries as of December, 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 13, 1998
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Henley Healthcare, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Henley Healthcare, Inc. and
Subsidiary (formerly Lasermedics, Inc.) for the year ended December 31,
1996 (prior to the effects on such financial statements of the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share,
and the resultant restatement of the Company's earnings per share for the
year ended December 31, 1996 as discussed in Note 1). 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 generally accepted auditing
standards. 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 results of operations and cash flows of
Henley Healthcare, Inc. and Subsidiary for the year ended December, 31,
1996 (prior to the effects on such financial statements of the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share,
and the resultant restatement of the Company's earnings per share for the
year ended December 31, 1996 as discussed in Note 1) in conformity with
generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 23, 1997
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HENLEY HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 123,620
Accounts receivable, net of allowance for doubtful
accounts of $2,165,124 6,675,800
Inventory 8,147,357
Prepaid expenses 228,165
Other current assets 71,960
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,246,902
PROPERTY, PLANT AND EQUIPMENT, net 3,994,231
GOODWILL AND OTHER INTANGIBLES, net 5,670,004
OTHER ASSETS, net 1,244,580
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 26,155,717
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 7,105,868
Current maturities of long-term debt 433,763
Accounts payable 3,970,270
Accrued expenses and other current liabilities 1,099,572
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,609,473
INTEREST PAYABLE 536,667
LONG-TERM DEBT, net of current maturities 9,466,179
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 22,612,319
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.10 par value; authorized
2,500,000 shares; none issued and outstanding --
Common stock - $.01 par value; authorized
20,000,000 shares; issued 3,473,897 shares 34,738
Additional paid-in-capital 14,117,079
Accumulated deficit (10,382,240)
- --------------------------------------------------------------------------------
3,769,577
Treasury stock, at cost, 279,000 common shares (226,179)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,543,398
TOTAL LIABILITIES AND STOCKOLDERS' EQUITY $ 26,155,717
================================================================================
The accompanying notes are an integral part of this
consolidated financial statement.
20
<PAGE>
HENLEY HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
NET SALES $ 24,257,014 $ 12,485,961
COST OF SALES 11,726,802 5,716,156
- --------------------------------------------------------------------------------
GROSS PROFIT 12,530,212 6,769,805
OPERATING EXPENSES 10,173,362 5,306,174
PROVISION FOR DOUBTFUL ACCOUNTS 3,171,163 1,420,518
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (814,313) 43,113
INTEREST EXPENSE (1,147,842) (814,636)
OTHER INCOME (EXPENSE), net (162,278) (107,814)
- --------------------------------------------------------------------------------
NET LOSS $ (2,124,433) $ (879,337)
================================================================================
NET LOSS PER COMMON SHARE - basic and diluted $ (0.71) $ (0.44)
================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 3,000,119 1,995,388
================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
21
<PAGE>
HENLEY HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TREASURY STOCK
COMMON STOCK ADDITIONAL --------------------- STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED ACQUISITION EQUITY
SHARES PAR VALUE CAPITAL DEFICIT SHARES COST (DEFICIT)
--------- ------- ----------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 1,761,225 $17,612 $ 7,232,691 $ (7,378,470) (281,000) $(227,800) $ (355,967)
Issuance of common stock for services
in February 1996 -- -- 6,379 -- 2,000 1,621 8,000
Subscriptions for common stock at $3.00
per share in January through June 1996 644,670 6,447 1,927,577 -- -- -- 1,934,024
Issuance of common stock for services 33,333 333 99,667 -- -- -- 100,000
Issuance of common stock on conversion
of Bridge Notes 176,773 1,768 528,552 -- -- -- 530,320
Issuance of common stock on the
exercise of warrants 75,000 750 6,750 -- -- -- 7,500
Issuance of common stock for
equipment 4,000 40 11,960 -- -- -- 12,000
Issuance of common stock for
acquisitions 121,170 1,211 748,789 -- -- -- 750,000
Issuance of common stock related to
employment agreement 205,268 2,053 97,947 -- -- -- 100,000
Net loss -- -- -- (879,337) -- -- (879,337)
--------- ------- ----------- ------------ -------- --------- -----------
BALANCE AT DECEMBER 31, 1996 3,021,439 30,214 10,660,312 (8,257,807) (279,000) (226,179) 2,206,540
Issuance of common stock for acquisitions 361,117 3,611 2,907,229 -- -- -- 2,910,840
Issuance of common stock for non-compete
agreement 10,000 100 53,025 -- -- -- 53,125
Exercise of common stock options 20,000 200 159,800 -- -- -- 160,000
Exercise of common stock warrants 61,341 613 336,713 -- -- -- 337,326
Net loss -- -- -- (2,124,433) -- -- (2,124,433)
--------- ------- ----------- ------------ -------- --------- -----------
BALANCE AT DECEMBER 31, 1997 3,473,897 $34,738 $14,117,079 $(10,382,240) (279,000) $(226,179) $ 3,543,398
========= ======= =========== ============ ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
22
<PAGE>
HENLEY HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,124,433) $ (879,337)
- --------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization expense 716,264 283,746
Amortization of discount on notes payable -- 151,667
Interest expense imputed on notes payable 284,667 294,820
Provision for doubtful accounts 3,171,163 1,420,518
Shares issued for public relations agreement -- 8,000
Shares issued for equipment -- 12,000
Shares issued for services/with employment agreement -- 200,000
Shares issued for compensation 160,000 --
Shares issued for non-compete agreement 53,125 --
Changes in operating assets and liabilities:
Increase in accounts receivable (4,289,785) (2,623,498)
(Increase) decrease in inventory (367,533) 1,381,689
(Increase) decrease in prepaid expenses and other current assets 88,115 (149,693)
Increase in other assets (290,209) (16,447)
Increase in accounts payable and accrued liabilities 2,464,591 500,785
- --------------------------------------------------------------------------------------------------------
Total adjustments 1,990,398 1,463,587
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (134,035) 584,250
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired of $68,600 and $46,270, respectively (4,862,371) (6,603,046)
Capital expenditures (356,533) (140,570)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,218,904) (6,743,616)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 1,941,524
Net proceeds from exercise of common stock warrants 337,326 --
Proceeds from line of credit 13,891,049 2,187,071
Payments on line of credit (8,972,251) --
Proceeds from long-term debt 1,430,000 2,509,000
Principal payments on long-term debt (1,717,457) (173,701)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,968,667 6,463,894
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (384,272) 304,528
Cash and cash equivalents at beginning of period 507,892 203,364
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 123,620 $ 507,892
========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 796,643 $ 325,136
========================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
23
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
NATURE OF OPERATIONS:
Henley Healthcare, Inc. (formerly Lasermedics, Inc.) and Subsidiaries
(collectively, the "Company") is a manufacturer, provider and marketer of
diversified products and services in the physical therapy and
rehabilitation industry. Substantially all of the Company's customers are
located throughout the United States. The Company, organized in November
1990, was in the development stage through April 30, 1996, and for the
years ended December 31, 1997 and 1996, is considered an operating
company.
The Company achieved substantial growth over the last 18 months through
acquisition of businesses and product lines. Consequently, the Company
continues to face the challenge of successfully integrating the operations
of the acquired businesses and implementing the acquired product lines
into its overall marketing strategy. The Company's future success is
dependent on many factors which include, among others, generating
sufficient sales volume to achieve and maintain profitability, obtaining
sufficient financing to fund its stated business objectives, competition
and technological changes. The Company will continue to seek to expand the
market for its products. However, markets for the Company's current and
future products are highly competitive and subject to continuing
technological change and development. Future sales growth will depend to
some extent upon the ability of the Company to successfully market its
current and future products in this competitive environment. Additionally,
some of the Company's products are regulated by the FDA, and the Company
is required to secure clearance from the FDA prior to marketing certain
new products. Lack of clearance or delays in securing such clearance could
have a negative impact on sales of such new products.
Following is a summary of the Company's significant accounting policies:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Henley
Healthcare, Inc. and its wholly-owned subsidiaries. Inter-company
transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION:
Revenue is recognized when title passes to the buyer, typically when the
product is shipped or services have been rendered. Service revenues are
not presented separately in the financial statements because they are not
material. The Company sells a wide range of products to a diversified base
of customers around the world. The Company has agreements with third-party
payors that provide payment at varying rates, and net revenue is reported
at the estimated net realizable amount from customers and third-party
payors.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company maintains cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses on
these accounts.
INVENTORY:
Inventory is stated at the lower of cost, determined by the first-in,
first-out (FIFO) valuation method, or market. Cost includes the
acquisition of raw materials and components, direct labor and overhead.
24
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT AND EQUIPMENT:
The amount of property, plant and equipment is stated at cost less
accumulated depreciation. Depreciation and amortization of property, plant
and equipment is provided using the straight-line method over the
estimated useful lives of the assets. Maintenance, repairs and minor
replacements are charged to expense as incurred; significant renewals and
betterments are capitalized.
RECLASSIFICATION:
Certain reclassifications have been made to prior year data in the
consolidated financial statements to conform to the current year's
presentation.
INCOME TAXES:
The Company employs the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
under which method recorded deferred income taxes reflect the tax
consequences on future years of temporary differences (differences between
the tax basis of assets and liabilities and their financial amounts at
year-end). The Company provides a valuation allowance that reduces
deferred tax assets to their estimated net realizable value based on an
evaluation of the likelihood of the realization of those tax benefits.
LOSS PER SHARE:
The Company adopted SFAS No. 128, Earnings Per Share, in the 4th quarter
of 1997, and has retroactively revised the presentation of net loss per
share in historical financial statements to present both basic and diluted
net loss per share as required by SFAS No. 128. Basic net loss per common
share is based on the weighted average number of shares outstanding during
the period, while diluted net loss per common share considers the dilutive
effect of stock options and warrants reflected under the treasury stock
method. The Company's net loss per share presented in the accompanying
financial statements, calculated under SFAS No. 128, is the same as net
loss per share calculated under the provisions of APB Opinion No. 15. Both
basic net loss per share and diluted net loss per share are the same since
the Company's outstanding stock options and warrants have not been
included in the calculation because their effect would have been
anti-dilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions by management affecting the reported amounts of assets and
liabilities and revenue and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
STOCK OPTIONS:
The Company measures compensation cost using APB Opinion No. 25 ("APB 25")
as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation."
Pursuant to APB 25, the Company records deferred compensation expense for
stock-based compensation arrangements based on the excess of the market
value of the common stock on the measurement date over the exercise price
of the common stock option/warrant granted. The deferred compensation is
amortized over the vesting period of each unit of stock-based
compensation. No compensation expense is recorded if the exercise price of
the stock-based compensation grant is equal to the market price of the
Company's common stock on the date of grant.
RESEARCH AND DEVELOPMENT:
Expenditures relating to research and development are expensed as
incurred. The amount charged to operations was approximately $395,000 and
$314,000 for the years ended December 31, 1997 and 1996, respectively.
25
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND INTANGIBLES:
Goodwill represents the excess of the aggregate purchase price paid by the
Company over the fair market value of the tangible and identifiable
intangible net assets acquired, arising from business acquisitions
accounted for under the purchase method. Goodwill and intangibles are
amortized on a straight-line basis over their estimated useful lives of 15
years for goodwill and for periods ranging from 2 to 7 years for
identifiable intangibles. Accumulated amortization at December 31, 1997
was $374,092.
OTHER ASSETS:
Other assets consists principally of acquired trade name rights, which are
being amortized over the shorter of the life of the rights or 7 years.
Accumulated amortization at December 31, 1997 was $38,000.
LICENSE AGREEMENTS:
The Company has executed licensing agreements under which it has secured
the rights provided under certain patents and trade names. License fees
and royalties, payable under the terms of these agreements, are expensed
as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company has adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires that long-lived assets and certain identifiable intangibles held
and used by a company be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company periodically assesses the
realizability of its long-lived assets pursuant to the provisions of SFAS
No. 121.
2. INVENTORY:
Inventory at December 31, 1997, included the following:
Raw material $3,599,132
Work-in-process 28,875
Finished goods 4,519,350
----------
$8,147,357
==========
Substantially all of the Company's inventory is pledged as collateral for
the Company's long-term debt.
3. PROPERTY, PLANT AND EQUIPMENT:
At December 31, 1997, property, plant and equipment consisted of the
following:
ESTIMATED
USEFUL LIFE
-----------
Land $ 190,000
Buildings 1,932,311 25 years
Machinery and equipment 2,231,435 3 to 7 years
Office furniture and fixtures 238,016 5 years
Automobile 6,000 5 years
----------
4,597,762
Less accumulated depreciation (603,531)
Property, plant and equipment, net $3,994,231
==========
26
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Substantially all of the Company's property, plant and equipment is
pledged as collateral for the Company's long-term debt.
4. GOODWILL AND OTHER INTANGIBLES:
At December 31, 1997, goodwill and other intangibles consisted of the
following:
ESTIMATED
USEFUL LIFE
-----------
Goodwill $5,647,297 15 years
Patents 203,674 7 years
Covenant not to compete 193,125 2 years
6,044,096
Less accumulated amortization (374,092)
----------
Goodwill and other intangibles, net $5,670,004
==========
5. ACQUISITIONS:
BUSINESSES:
On April 30, 1996 the Company entered into an agreement with Maxxim,
whereby the Company purchased certain assets of (and assumed certain
liabilities associated with) the Henley Division of Maxxim for an
estimated purchase price of approximately $13.5 million including related
acquisition costs of approximately $650,000. The assets acquired consist
of real property; tangible personal property including machinery,
equipment, furniture and fixtures; general intangibles; contracts;
business licenses; accounts receivable; inventory; and prepaid expenses.
The purchase price was paid by the issuance of the Company's convertible
subordinated promissory note in the principal amount of $7,000,000 (the
"Note") with the balance of the purchase price paid in cash
The Company obtained the cash portion of the purchase price pursuant to
financing arrangements entered into with Comerica Bank - Texas, a Texas
banking corporation ("Comerica"), which financing is secured by
substantially all of the assets of the Company including the Henley assets
acquired from Maxxim.
On November 12, 1996, the Company purchased substantially all of the
assets of (and assumed certain liabilities associated with) MJH Medical
Equipment, Inc. ("MJH") for an estimated purchase price of approximately
$435,000 including related acquisition costs of approximately $45,000. The
assets acquired consist of tangible personal property including equipment,
furniture and fixtures; contracts; business licenses; accounts receivable;
inventory; and prepaid expenses. The purchase price was paid by the
issuance of the Company's promissory note in the principal amount of
approximately $120,000 and 39,063 shares of common stock, with the balance
of the purchase price paid in cash.
On November 27, 1996, the Company, through a wholly-owned subsidiary,
acquired all of the outstanding shares of common stock of Health Career
Learning Systems, Inc., a Michigan corporation, for an estimated purchase
price of approximately $680,000 including related acquisition costs of
approximately $80,000. The purchase price was paid by the issuance of
82,107 shares of common stock with the balance of the purchase price paid
in cash.
27
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These 1996 acquisitions have been accounted for as purchases for
accounting purposes, and the results of operations of the acquisitions
have been included in the consolidated statement of operations from the
dates of acquisition. The estimated purchase price in excess of the
estimated fair value of the net assets acquired, aggregated approximately
$2,261,000 for all of the acquisitions. Assuming these acquisitions had
occurred on January 1, 1996, pro forma net sales, net loss and net loss
per common share for the year ended December 31, 1996 would amount to
$20,120,000, $(1,462,000) and $(.73), respectively. These amounts reflect
adjustments for interest on the Note and the financing arrangements with
Comerica, amortization of goodwill, compensation related to an employment
agreement and depreciation on re-valued property, plant and equipment.
In January 1997, the Company entered into an agreement pursuant to which
it acquired all of the issued and outstanding common stock of Texas
T.E.N.S., Inc., a privately-owned Texas corporation, for an estimated
purchase price of approximately $850,000 plus related acquisition costs of
approximately $65,000. The purchase price was paid by the Company's
issuance of a subordinated promissory note in the principal amount of
$400,000 (the "Tens Note") with the balance of the purchase price paid in
cash. In August 1997, the principal balance on the Tens Note plus all
accrued and unpaid interest due on the Note was paid.
In May 1997, the Company entered into an agreement pursuant to which it
acquired all of the issued and outstanding shares of common stock of
Med-Quip, Inc. ("Medquip"), a privately-owned Georgia corporation, for an
estimated purchase price of approximately $1,418,000 plus related
acquisition costs of approximately $56,000. The purchase price was paid by
the issuance of an aggregate of 300,000 shares of the Company's common
stock and the payment of approximately $40,000 in cash.
In October 1997, the Company entered into an agreement with the sole owner
of Summer Medical ("SM"), an unincorporated sole proprietorship, pursuant
to which the Company acquired all of the owner's interests in SM and
assumed certain business-related liabilities associated with SM. Under the
agreement, the Company issued to the owner 10,000 shares of common stock
and agreed to issue an additional 20,000 shares by the second anniversary
of the agreement. The estimated fair market value of the additional 20,000
shares is being recorded as compensation expense over the term until the
second anniversary.
In December 1997, the Company acquired all of the issued and outstanding
common stock of NCI, Inc., a Michigan corporation, for an estimated
purchase price of $1,190,000 plus estimated acquisition costs of $5,000.
The purchase price was paid by the issuance to the seller of 188,847
shares of the Company's common stock.
These 1997 acquisitions of businesses have been accounted for as purchases
for accounting purposes, and the results of operations of the acquired
companies have been included in the consolidated statement of operations
from the respective dates of acquisition to December 31, 1997. Pro forma
financial information is not provided because the amounts are not
materially different from 1997 and 1996 results. The estimated purchase
price in excess of the estimated fair value ("FV") of the net assets
acquired aggregates approximately $3,047,000 for the acquisitions as shown
below:
28
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TENS MEDQUIP SM NCI TOTAL
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Purchase price $ 850,000 $1,417,500 $ 56,625 $1,189,736 $3,507,861
Acquisition costs 65,000 56,000 15,000 5,000 141,000
---------- ---------- ----------- ---------- ----------
915,000 1,473,500 71,625 1,194,736 3,648,861
---------- ---------- ----------- ---------- ----------
FV of assets acquired 613,095 637,216 72,019 -0- 1,322,330
FV of liabilities assumed 114,355 504,619 101,908 -0- 720,882
---------- ---------- ----------- ----------
Net assets (liabilities) acquired 498,740 132,597 (29,889) -0- 601,448
---------- ---------- ----------- ----------
Excess of cost over
fair value of net assets
acquired (goodwill) $ 416,260 $1,340,903 $ 101,514 $1,194,736 $3,047,413
---------- ---------- ----------- ---------- ----------
</TABLE>
OTHER ACQUISITIONS:
In January 1997, the Company also purchased substantially all of the
inventory, distribution systems and customers associated with the Homecare
(third-party billing) division of Gatti Medical Supply, Inc., a
privately-owned Pennsylvania corporation, for a purchase price of
approximately $302,000 plus related acquisition costs of approximately
$28,000. The Company paid the purchase price by issuing to the sellers a
total of 51,117 shares of common stock. The Company also agreed to issue
up to an aggregate of 50,117 additional shares of common stock subject to
the achievement of specific terms and conditions in the agreement. Such
additional shares will be recorded as compensation expense based on the
market value of the shares, if and when they are probable of being issued.
In March 1997, the Company entered into new agreements with CB Svendsen
a/s ("CBS"), the Danish company with whom the Company has worked on the
development and marketing of the Microlight 830(TM) since June 1991.
Pursuant to the new agreements, the Company paid $100,000 to CBS and
obtained unto perpetuity the sole and exclusive world-wide distribution
rights to all low level laser devices manufactured by or for CBS. . In
connection with these agreements, the Company is required to pay a 3
percent royalty on revenue generated by the Company on sales of the
applicable products. Also pursuant to the agreements, the Company obtained
unto perpetuity the exclusive world-wide manufacturing rights to all low
level laser devices manufactured by or for CBS subject to the payment to
CBS by June 15, 1998, of $175,000.
In September 1997, the Company entered into an agreement with Cybex
International, Inc., a New York corporation ("Cybex"), whereby it
purchased certain assets of (and assumed certain liabilities associated
with) the isokinetic rehabilitation product line (the "Product Line") of
Cybex for an estimated purchase price of approximately $3.2 million. The
assets acquired consist of tangible personal property including machinery,
equipment, furniture and fixtures; specific intangibles; contracts;
intellectual property; business licenses; inventory; and prepaid expenses.
The purchase price was allocated as follows: approximately $2,700,000 to
inventory, $500,000 to property, plant and equipment, and $1,000,000 to
patents and trade names.
29
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT:
The following table summarizes the Company's long-term debt at December
31, 1997, which is described below:
Note payable - Maxxim (a) $7,000,000
Term Note A - Comerica (b) 1,382,334
Term Note B - Comerica (b) 1,445,422
Note payable - MJH (c) 72,186
----------
9,899,942
Less: Current maturities 433,763
----------
$9,466,179
==========
(a) The Note which the Company issued to Maxxim in connection with the
acquisition of the Henley Division in April 1996, is due and payable on
March 1, 2003 with interest payable semi-annually on November 1 and May 1
of each calendar year and payable at a rate equal to 2% per annum and
increasing 2% annually on May 1. However, the Company accrues interest
related to the Note on a straight-line basis at an average rate of 7.4%
per annum. Accordingly, $536,667 of accrued interest has been classified
as long-term in the accompanying balance sheet. The Company may redeem all
or any portion of the outstanding principal amount of the Note at
redemption prices ranging from 104% to 110% of the principal amount being
redeemed, depending on when the redemption occurs as set forth in the
Note. In addition, the Note is subject to mandatory redemption in annual
installments of $1.4 million commencing on March 1, 1999 at premiums
starting at 7% and decreasing 1% each year. These installment premiums are
recognized as interest expense on a straight line basis over the term of
the Note. The Company is also required to redeem 40% of the Note upon the
completion of a public offering.
(b) In connection with the acquisition of the Henley Division from Maxxim,
the financing arrangements ("Loan Agreement") with Comerica provided for
(i) a two-year revolving loan arrangement which permitted borrowings up to
$4,000,000 through April 1998, pursuant to a monthly borrowing base
calculation derived from the Company's accounts receivable and inventory
and (ii) two term loans in the amount of $893,000 ("Term Note A") and
$1,616,000 ("Term Note B"), respectively. Term Note A and Term Note B are
payable in monthly installments plus interest. The revolving loan also
includes a $250,000 letter of credit facility. Interest on the revolving
loan and the two term loans is payable monthly at a rate equal to the
Prime Rate (8.50% at December 31, 1997) plus one-half of one percent per
annum. Term Note B is callable by Comerica beginning on its fifth
anniversary. In June 1997, the Company entered into an Amended and
Restated Loan Agreement with Comerica which, among other things, permitted
borrowings up to $5,000,000 on the revolving loan arrangement.
30
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) In connection with the acquisition of the Product Line from Cybex in
September 1997, the Company obtained the cash purchase price pursuant to
an amendment to its Amended and Restated Loan Agreement (the "Amended Loan
Agreement") entered into with Comerica. The Amended Loan Agreement
provides for a revolving loan which permits borrowings up to $8,000,000
pursuant to a borrowing base calculation derived from the Company's
accounts receivable and inventory. The revolving loan had an outstanding
balance of $7,105,868 at December 31, 1997, and is subject to interest at
the Prime Rate (8.50% at December 31, 1997) plus one-half of one percent
per annum, payable monthly. In connection with the Amended Loan Agreement,
the Company paid off its Term Note A with Comerica in the amount of
$893,000 and issued a substitute Term Note A in the amount of $1,430,000.
The revolving loan's maturity date is February 1, 1999, while the
$1,430,000 Term Note A is due on September 30, 2002. All of the borrowings
from Comerica are secured by substantially all of the assets of the
Company. The Amended Loan Agreement also contains a number of affirmative
covenants, negative covenants and financial covenants with which the
Company must comply including a minimum tangible net worth, leverage
ratio, working capital ratio, fixed charge ratio and interest coverage
ratio. The Company, among other provisions, is also limited in the amount
of its capital expenditures, research and development expenditures and
dividends and all future acquisitions and major corporate transactions
require approval of Comerica, as do offerings of securities by the
Company.
(c) In connection with the acquisition of MJH Equipment, Inc. in November
1996, the Company issued a note payable to the seller, in the amount of
approximately $120,000. The note is payable in monthly principal
installments of $3,336 plus interest at a bank's prime lending rate plus
2% per annum through November 1999.
The estimated fair value of the Maxxim Note amounted to $7,000,000
pursuant to a valuation by an investment banking firm. Based on borrowing
rates currently available to the Company for loans with similar terms and
average maturities the fair value of the Company's other long-term debt
approximates the carrying amount.
Aggregate maturities of long-term debt are as follows:
For the year ending December 31, 1998 $ 433,763
1999 1,825,883
2000 1,793,729
2001 1,793,729
2002 1,746,083
2003 and thereafter 2,306,755
---------
$ 9,899,942
=========
7. RELATED PARTY TRANSACTIONS:
In May 1996, the Company entered into an agreement with Mezzanine
Financial Relations, Inc., ("Mezzanine") a financial relations company,
which agreement the parties amended in November 1996, whereby Mezzanine
agreed to provide financial consulting services with regard to potential
31
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
mergers and acquisitions in consideration for a monthly fee of $10,000.
The agreement terminated on January 31, 1997. The Executive Vice
President, Chief Financial Officer and a director of the Company is a
shareholder of Mezzanine and its Chairman of the Board.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
The following are included in accrued expenses and other current
liabilities at December 31, 1997:
Property taxes $ 169,716
Sales taxes 61,761
Payroll and commissions 344,140
Interest payable 148,420
Accrued acquisition costs 19,771
Accrued professional and other fees 88,749
Other 267,015
-----------
$1,099,572
===========
9. INCOME TAXES:
The following is an analysis of the Company's deferred tax assets at
December 31, 1997:
Deferred tax assets:
Accrued expenses and other $ 34,000
Allowance for doubtful accounts 699,000
Deferred compensation 494,000
Net operating loss carryforwards 2,150,000
----------
3,377,000
Deferred tax liability:
Depreciation and amortization (49,000)
Net deferred tax asset before
valuation allowance 3,328,000
Valuation allowance (3,328,000)
Net deferred tax asset $ -0-
===========
The components of the Company's income tax provision for the years ended
December 31, 1997 and 1996 were as follows:
1997 1996
---------- ----------
Current $ (666,000) $ (132,000)
Deferred 666,000 132,000
---------- ----------
Provision for income taxes $ -0- $ -0-
========== ==========
Differences between the Company's effective income tax rate and the
statutory federal rate for the years ended December 31, 1997 and 1996 are
as follows:
32
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
---------- ----------
Provision at the statutory rate $ (722,000) $ (132,000)
Permanent differences and other 71,000 56,000
Increase in valuation allowance 651,000 76,000
---------- ----------
Total tax provision $ -0- $ -0-
========== ==========
As of December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes of approximately $6,324,000 available to offset
future taxable income. The carryforwards will begin to expire in 2005.
Between January 1993 and December 1997, the Company completed an initial
public offering, had warrants exercised, completed private offerings of
securities and made acquisitions of established businesses or product
lines. Under the Internal Revenue Code Section 382 these activities
effected an ownership change and thus severely limit on an annual basis,
the Company's ability to utilize its net operating loss carryforwards. A
valuation allowance was provided to fully reserve the net deferred tax
asset due to realization uncertainties regarding future operating results.
10. STOCKHOLDERS' EQUITY:
In connection with an agreement the Company entered into with a public
relations firm, the Company issued to the firm, in February 1996, 2,000
shares of its treasury common stock as compensation for services. The
Company recognized $8,000 in related compensation expense at December 31,
1996, based on the market price of the common stock on the date of the
agreement. During the year ended December 31, 1996, the Company issued
33,333 shares of common stock to a director of the Company for his
services in connection with the Company's pre-market approval application
submission to the FDA. The Company recognized approximately $100,000 in
related expense based on the market price of the common stock on the date
of the related agreement.
In connection with the Gatti acquisition in January 1997, the Company
issued 51,117 shares of its common stock as consideration for the
acquisition. In May 1997, the Company issued 300,000 shares of its common
stock as consideration for the acquisition of Med-Quip; and in October
1997, the Company issued 10,000 shares of its common stock for the
acquisition of Summer Medical.
The Company issued to a former employee, in October 1997, 10,000 shares of
its common stock as partial consideration for a non-compete agreement. The
Company has capitalized $53,125 in related costs based on the market price
of the common stock on the date of the agreement.
Also, in October 1997, the Company issued to a former employee, 20,000
shares of its common stock pursuant to the exercise of stock options and
in connection with the settlement of a contract dispute. In connection
with the settlement, the Company has recognized $160,000 in related
compensation expense based on the market price of the common stock on the
date of the settlement.
In connection with the Amended Loan Agreement with Comerica relating to
the acquisition of the Product Line from Cybex, the Company entered into
an amendment to a Subordination Agreement (the "Subordination Amendment")
by and among Maxxim, Comerica and the Company. Pursuant to the
Subordination Amendment, the maximum amount of the Company's debt with
Comerica that can be issued senior to the Note was increased from
$10,000,000 to $12,000,000. In exchange for Maxxim's execution of the
Subordination Amendment, the Company entered into a note modification
agreement with Maxxim in which the Conversion Price (as defined in the
Note) was reduced from $3.00 to $2.00. The modification of the Note
increased the number of shares of the Company's common stock, par value
$.01 per share ("Common Stock"), beneficially owned by Maxxim from
2,333,333 (approximately 43%) to 3,500,000 (approximately 53%). (See Note
16 below). The Note is convertible into Common Stock at any time at
Maxxim's option. The conversion price is also subject to adjustment upon
the occurrence of certain events (including certain issuances of common
stock for less than the conversion price) to provide anti-dilution
protection. Such conversion could, depending on the fair market value of
the Company's common stock at the time of conversion, result in
substantial dilution to holders of the Company's common stock. The
Company's common stock issuable upon conversion of the Note is subject to
the terms of a registration rights agreement entered into by the Company
and Maxxim whereby Maxxim (and certain subsequent holders) shall retain
certain demand and piggyback registration rights with respect to those
shares of common stock.
In December 1997, the Company acquired all of the issued and outstanding
common stock of NCI, Inc., a Michigan corporation. As consideration for
the acquisition, the Company issued to the seller 188,847 shares of the
Company's common stock.
11. STOCK OPTIONS AND WARRANTS:
Pursuant to the provisions of the 1996 Non-Employee Director Stock Option
Plan (the "Director Stock Plan") and the 1996 Incentive Stock Plan (the
"Incentive Plan"), certain of the Company's directors were granted stock
options during fiscal 1997 as discussed below. At December 31, 1997,
33
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
there were 95,000 and 1,180,000 shares available for issuance under the
Director Stock Plan and the Incentive Plan, respectively. A summary of the
Company's options and warrants as of December 31, 1997 and 1996 and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ -------------------------
WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,811,502 $5.24 962,726 $3.81
Canceled/expired (91,385) 5.53 (50,000) 0.10
Granted 60,000 5.83 973,776 6.02
Exercised (91,341) 4.57 (75,000) 0.10
--------- ----- --------- -----
Outstanding at end of year 1,688,776 $5.24 1,811,502 $5.24
========= =========
Options and warrants exercisable
at year-end 1,688,776 $5.24 1,811,502 $5.24
========= =========
Weighted-average fair value
of options and warrants
granted during the year $4.31 $1.26
==================================================================================
</TABLE>
The following table summarizes the information about stock options and
warrants outstanding at December 31, 1997:
OPTIONS AND WARRANTS OUTSTANDING AND EXERCISABLE
------------------------------------------------
WEIGHTED
NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED
EXERCISE AT DECEMBER 31, CONTRACTUAL AVERAGE
PRICES 1997 LIFE EXERCISE PRICE
---------------------------------------------------------------
$1.00-$3.00 205,000 2.0 $ 3.00
$4.00-$5.50 515,000 4.4 $ 4.49
$6.00-$7.88 968,776 3.4 $ 6.11
---------
1,688,776 3.7 $ 5.24
=========
The Company has elected. in accordance with the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123") to apply APB
Opinion No. 25 and related interpretations in accounting for stock options
granted to employees, and accordingly, has presented the disclosure-only
information as required by SFAS No. 123. If the Company had elected to
recognize compensation cost based on the fair value of the options granted
at the grant date as prescribed by SFAS No. 123, the Company's net loss
and net loss per common share for the years ended December 31, 1997 and
1996 would approximate the pro forma amounts shown in the table below.
34
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1997 1996
----------- -----------
Net loss - as reported $(2,124,433) $ (879,337)
Net loss - pro forma $(2,286,913) $(1,023,837)
Net loss per common share - as reported $ (.71) $ (.44)
Net loss per common share - pro forma $ (.76) $ (.51)
======================================================================
For the year ended December 31, 1997, the pro forma values were calculated
using the Black-Scholes option pricing model and included the following
weighted average assumptions: zero dividends, expected stock price
volatility of 80.7 percent, risk-free interest rate of 6.4 percent and an
expected life of 7.3 years. For the year ended December 31, 1996, the fair
value of each option grant on the date of grant was valued by an
investment banking firm taking into account as of the grant date the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the expected term of the option
as prescribed by SFAS No. 123.
In connection with their re-election to the Board of Directors in June
1997, four non-employee directors were each granted a stock option under
the Director Plan to purchase 10,000 shares of the Company's common stock
at a price of $4.81 per share. Also, in November 1997, two employee
directors were each granted options under the Incentive Stock Plan to
purchase 10,000 shares of the Company's common stock at a price of $7.88
per share, such options to become vested over a three year period
contingent upon the continued employment of the directors.
In December 1997, certain holders of the Company's Amended and Restated J
Warrants exercised their rights under the Warrants and purchased an
aggregate of 61,341 shares of the Company's common stock at a price of
$5.50 per share. In connection with the exercise of these Warrants, the
Company received cash proceeds of approximately $337,000. Holders of an
aggregate of 43,600 Warrants elected not to exercise their rights and
their Warrants expired or were redeemed.
12. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into various employment and consulting agreements
with various key personnel, directors and certain shareholders aggregating
$802,000 which expire at various dates through November 1999. Certain of
these agreements provide for incentive bonuses and or commissions, as
defined in the agreements. In connection with the SM acquisition, the
Company entered into an employment agreement with the seller that provides
for the issuance of 20,000 shares of the Company's common stock over a
two-year period if the employee meets certain criteria as specified in the
agreement. The Company will recognize a charge to operations upon the
issuance of such shares based on the fair market value of the shares as of
the issuance date.
EXCLUSIVE RIGHTS AGREEMENT
In March 1997, the Company entered into new agreements with CB Svendsen
a/s ("CBS"), the Danish company with whom the Company has worked on the
development and marketing of the Microlight 830(TM) since June 1991.
Pursuant to the new agreements, the Company paid $100,000 to CBS and
obtained unto perpetuity the sole and exclusive world-wide distribution
rights to all low level laser devices manufactured by or for CBS. In
connection with these agreements, the Company is required to pay a 3
percent royalty on revenue generated by the Company on sales of the
applicable
35
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products. Also pursuant to the agreements, the Company obtained unto
perpetuity the exclusive world-wide manufacturing rights to all low level
laser devices manufactured by or for CBS subject to the payment to CBS by
June 15, 1998, of $175,000.
LEASES
The Company is obligated under various non-cancelable operating leases
(including certain related-party leases aggregating approximately $14,150
per month) for warehouse and office space expiring through June 2001,
which are subject to increase for real estate taxes and operating expense
escalation. Rent expense charged to operations under these operating
leases amounted to approximately $243,000 and $45,000 for the years ended
December 31, 1997 and 1996, respectively.
Minimum future rental payments are as follows:
FISCAL YEARS
------------
1998 $182,383
1999 174,234
2000 140,009
2001 26,652
--------
$523,278
========
LITIGATION AND CLAIMS
The Company is subject to legal proceedings and claims arising in the
ordinary course of its business. In the opinion of management, the
ultimate outcome of all legal actions and claims will not have a material
adverse effect upon the consolidated financial position and results of
operations of the Company.
13. EMPLOYEE BENEFIT PLANS:
The Company's 401(k) savings plan (the "Plan") adopted in fiscal 1996,
covers all qualified employees. The Plan permits participants to
contribute up to 15% of their base compensation (as defined) each year.
The Company will match at least 25% of the participant's contribution up
to a maximum of 6% of gross pay. The Company's matching percentage may be
adjusted as Company profitability dictates. Two officers of the Company
serve as trustees of the Plan. Matching contributions to the Plan for the
years ended December 31, 1997 and 1996, amounted to approximately $44,141
and $25,000, respectively.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing transactions during the years ended
December 31, 1997 and 1996 were as follows:
1997 1996
---------- ---------
Common shares issued in connection
with acquisitions $2,910,840 $ 750,000
Common shares issued in connection
with conversion of bridge notes - 530,320
Common shares issued for
equipment - 12,000
Common shares issued for employment
agreement and/non-compete 53,125 208,000
Accrued amounts relating to acquisitions - 92,253
Compensation related to common stock
options in legal settlement 160,000 -
36
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. NON-RECURRING FOURTH QUARTER ADJUSTMENT:
During the fourth quarter of 1997 the Company revised its estimates of
collectibility of its accounts receivable, and accordingly, increased its
reserve for uncollectible accounts by approximately $2,000,000. During the
3rd quarter of 1997, the Company commenced an extensive analysis of its
accounts with particular emphasis on its accounts receivable which relate
to the Company's third-party billing operations. In conjunction with the
analysis, the Company intensified its collection efforts. The third party
billing business, by its nature, demands longer-than-average time to bill
and much longer-than-average time to collect. Upon further scrutiny in the
fourth quarter and on the basis of the analysis, management revised its
estimates of collectibility of the Company's accounts receivable for the
third party billing operations. The Company has also changed certain
procedures in the collection process in order to improve the future
collectibility of the accounts receivable.
The effect of this revision on the Company's results of operation is to
increase net loss by approximately $2,000,000, the amount of the increase
in reserve for accounts receivable.
16. SUBSEQUENT EVENTS - UNAUDITED:
ACQUISITIONS
On January 6, 1998, the Company, through a wholly-owned subsidiary,
acquired all of the outstanding shares of common stock of Garvey Company,
a Minnesota corporation, as a wholly-owned subsidiary for an estimated
purchase price of approximately $880,000 plus related acquisition costs of
approximately $40,000. The purchase price was paid by the issuance of
120,308 shares of common stock, with a market price of approximately
$7.315 per share.
On February 9, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities associated with AMC Acquisition Corp., a
Texas corporation, for an estimated purchase price of approximately
$450,000 plus related acquisition costs of approximately $30,000. The
purchase price was paid by the issuance of 68,000 shares of common stock,
with a market price of approximately $6.618 per share.
On February 12, 1998, the Company entered into an agreement with Maxxim
whereby it acquired from Maxxim an office/warehouse building located at
140 Industrial Boulevard, Sugar Land, Texas, for an estimated purchase
price of approximately $1.2 million. The purchase price was paid in cash
which the Company obtained pursuant to a second amendment of its Amended
Loan Agreement (the "Second Amendment") with Comerica. In connection with
the Second Amendment with Comerica, the Company obtained a Term Note C in
the principal amount of $1,260,000 with a maturity date of February 12,
2013. Term Note C bears interest at the Prime Rate plus one-half of one
percent per annum, is payable in monthly principal installments of $7,000
plus all accrued interest thereon and subject to the terms and conditions
of the Amended Loan Agreement with Comerica. All of the borrowings from
Comerica are secured by substantially all of the assets of the Company.
EQUITY TRANSACTIONS
On February 20, 1998 and March 13, 1998, the Company entered into
agreements with Maxxim pursuant to which Maxxim converted an aggregate of
$4,000,000 of the Note into an aggregate of 2,000,000 shares of the
Company's common stock, par value $.01 per share. The conversions were
based on the current conversion price of $2.00 per share under the Note.
The agreements also provide that the entire $4 million conversion shall be
applied to the Company's full redemption obligation due in the year 2003
and partially to the Company's redemption obligation due in the year 2002
as provided in the Note. The Company has agreed to file a registration
statement covering the
37
<PAGE>
HENLEY HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
resale of the shares of Common Stock issued to Maxxim as a result of the
conversions described above.
On March 13, 1998, the Company entered into an agreement with some private
institutional investors pursuant to which the Company issued to the
investors $1,825,000 of its Series A Convertible Preferred Stock (the
"Preferred Stock") for cash. The Preferred Stock is convertible into
Henley's Common Stock at the lesser of (i) 75% of the average closing bid
price for Henley's Common Stock as reported by Nasdaq for the 5 trading
days prior to conversion or $6.50. In connection with the agreement, the
Company also issued to the investors a 5-year warrant to purchase 146,000
shares of the Company's Common Stock at exercise prices ranging from
$7.125 to $9.619. The Company has agreed to file a registration statement
covering the resale of the shares of Common Stock issuable upon the
conversion of the Preferred Stock and exercise of the warrants sold to the
investors described above.
PRO FORMA FINANCIAL INFORMATION
The following summarized pro forma (unaudited) information assumes these
acquisition and equity transactions were completed at December 31, 1997:
Current assets $16,126,497
Goodwill 6,458,840
Total assets 27,912,682
Line of credit 5,450,868
Long-term debt 5,513,816
Stockholders' equity $10,847,064
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 20, 1997, the Company informed Goldstein Golub Kessler &
Company, P.C. ("GGK"), its former principal accountants, of the decision of its
Board of Directors to appoint Arthur Andersen LLP as its principal accountants
in place of GGK whom the Board voted to dismiss. The Board's decision in no way
reflects any dissatisfaction with the services of GGK, but is based on the
Company's desire to engage the services of a bigger firm consistent with its
growth strategy.
In connection with the audits of the two most recent fiscal years ended
December 31, 1996 and the subsequent interim periods through October 20, 1997,
the Company had no disagreements with GGK on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of GGK, would have
caused them to make reference to the subject matter of the disagreements in
connection with their opinion.
The accountant's reports of GGK on the financial statements of the Company
as of and for the fiscal year ended December 31, 1996 did not contain any
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. The accountant's report of
GGK on the financial statements of the Company as of and for the fiscal year
ended December 31, 1995 did not contain any adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to audit scope or accounting
principles, but contained an explanatory paragraph as to uncertainty about the
Company's ability to continue as a going concern relating to substantial
cumulative losses incurred as a development stage company from inception through
that date.
38
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information concerning each executive officer
and director of the Company as of the date hereof:
<TABLE>
<CAPTION>
AGE TITLE
--- -----
<S> <C> <C>
Michael M. Barbour 53 President, Chief Executive Officer, Director
Dan D. Sudduth 56 Executive Vice President, Chief Financial Officer, Director
Chike J. Ogboenyiya 46 Vice President -Finance, Secretary
Theron L. Morrow 43 Vice President - Sales and Marketing
Chadwick F. Smith, MD 64 Medical Director, Director, Chairman of Board
Pedro A. Rubio, MD, Ph.D. 53 Director
Kenneth W. Davidson 50 Director
Ernest J. Henley, Ph.D. 71 Director
</TABLE>
Michael M. Barbour has been President, Chief Executive Officer and
Director of the Company since May 1991. He has over 13 years experience in the
field of laser products. Prior to forming Lasermedics, he was President of
Medical Training Centers of America (formerly The Houston Laser Institute) from
January 1987 to April 1991, which he founded in order to train and inform
doctors in the medical and surgical use of lasers. From April 1984 to January
1987, he was President of Surgimedics, a Houston, Texas, manufacturer and
distributor of medical products. Mr. Barbour graduated from the University of
Houston in 1967 with a B.B.A. in marketing.
Dan D. Sudduth joined the Company as Executive Vice President and Chief
Financial Officer in February 1997. He has been a Director of the Company since
January 1996. Mr. Sudduth was Chief Financial Officer for Mezzanine Telecom,
Inc., a Houston-based telecommunications company ("MTI"), from 1994 to January
1997 and currently serves as a Director of MTI. During 1995 and 1996, Mr.
Sudduth was President and Director of AMC Home Healthcare, Inc., a respiratory
therapy company in Houston, Chairman of Mezzanine Financial Relations, Inc., a
merchant banking firm in Houston, and Chief Financial Officer and Director of
Creative Communications International, Inc., a Houston telecommunications
company. From 1992 to 1994, Mr. Sudduth served as Chairman and Chief Executive
Officer of Heart Labs of America, Inc. From 1988 to 1992, he was President and
Chief Financial Officer of American Biomed, Inc. Mr. Sudduth received a B.B.A.
in 1964 from Lamar University.
Chike J. Ogboenyiya has been Vice President-Finance of the Company since
January 1994 and Secretary since August 1994. He has over 20 years of extensive
industry experience in accounting, corporate finance and business management.
From 1990 to 1993, he was president and owner of a small accounting firm which
offered business consulting and financial services to various clients. Prior to
that time, he was a Director and Chief Financial Officer for Kaulimax
International Corporation, a privately-held exporter of apparel located in
Houston, Texas, from 1984 to 1990. Mr. Ogboenyiya is a Certified Public
Accountant, graduated with an M.S. from the University of Houston in 1979, and
graduated cum laude from Texas Southern University in 1977 with a B.B.A. in
Accounting.
Theron L. Morrow has been Vice President-Sales and Marketing of the
Company since November 1997. He has over 12 years of experience in the medical
devices industry. From 1991 to 1996, Mr. Morrow
39
<PAGE>
was divisional Vice President of Marketing for Maxxim Medical, Inc. Mr. Morrow
holds a B.S. degree in sports medical sciences from Texas Christian University.
Chadwick F. Smith, MD has been a Director of the Company since May 1991
and Chairman of the Board of Directors since June 1993. He is also a Consultant
to the Company. See "Certain Relationships and Related Transactions." Dr. Smith
is a Clinical Professor of Orthopedic Surgery at the University of Southern
California School of Medicine, a position he has held since 1981. He has also
been a member of the Medical Staff of Orthopedic Hospital, Los Angeles,
California, since 1966. Dr. Smith graduated with a B.A. from Southern Methodist
University in 1954, graduated from the University of Texas medical school in
1958, and has been a diplomate of the American Board of Orthopedic Surgery since
1968.
Pedro A. Rubio, MD., Ph.D. has been a Director of the Company since
January 1996. He is currently a Clinical Associate Professor of Surgery at the
University of Texas Health Science Center in Houston. He was Director of
Education of the Laser Training Institute of Houston, from November 1993 until
January 1996. He served as World President of the International College of
Surgeons in Chicago in 1995, and was Chairman of the Department of Surgery at
the Columbia/HCA Medical Center Hospital in Houston from 1976 to 1994, when he
became Chairman Emeritus. Dr. Rubio holds the degrees of Bachelor of Science,
Master of Science in Surgical Technology, Doctor of Philosophy in Biomedical
Technology and Doctor of Medicine and Surgery. Dr. Rubio is a Diplomate of the
American Boards of Surgery, Laser Surgery, Abdominal Surgery, Forensic Medicine,
Quality Assurance and Utilization Review, Forensic Examiners and Pain
Management.
Kenneth W. Davidson has been a Director of the Company since April 1996.
He has also been President, Chief Executive Officer and Chairman of the Board of
Directors of Maxxim Medical, Inc. since November 1986, and a Director since
1982. Prior to that time, Mr. Davidson was the Corporate Director of Business
Development at Intermedics, Inc., which is principally a manufacturer of
implantable devices such as pacemakers. Mr. Davidson is also a Director of
Encore Orthopedics, Inc., a designer and manufacturer of implantable orthopedic
devices.
Ernest J. Henley, Ph.D., has been a Director of the Company since April
1996, and is also a consultant to the Company. He has been a Director of Maxxim
since 1976. See "Certain Relationships and Related Transactions." Dr. Henley's
principal employment for more than fifteen years has been as a Professor of
Chemical Engineering at the University of Houston.
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. All
non-employee directors of the Company are reimbursed for expenses incurred for
attendance at meetings of the Board of Directors and any Board committee and are
eligible to receive stock options pursuant to the 1996 Non-Employee Director
Stock Option Plan. See "Item 10. Executive Compensation."
Each officer of the Company serves at the discretion of the Board of
Directors, subject to the terms of his employment agreement, if any, and is
eligible to receive stock options pursuant to the 1996 Incentive Stock Plan. See
"Item 10. Executive Compensation" below, for a discussion of the Company's
employment agreement with Mr. Barbour. Each member of management devotes his
full time to the Company's affairs.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires a company's directors and
executive officers, and persons who own more than 10% of the equity securities
of the Company to file initial reports of ownership and reports of changes in
ownership of the Common Stock with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required to furnish
the Company with copies of all Section 16(a) reports they file.
40
<PAGE>
Based solely on a review of the forms the Company has received or prepared,
the Company believes that during the year ended December 31, 1997, all filing
requirements applicable to the Company's directors, officers and greater than
10% shareholders were met except Dr. Chadwick F. Smith who failed to file a Form
4 on a timely basis in connection with the shares of Common Stock he pledged as
security for a loan from a financial institution.
SCIENTIFIC ADVISORY BOARD
The Company established a Scientific Advisory Board of distinguished
physicians and scientists with a wide range of experience in the medical field.
The Board meets formally or by teleconference at the Company's expense every six
months to discuss research data regarding the Company's products.
By selection, the medical and scientific advisors are geographically
diverse and have varied experience within the laser field, including hospital
work, teaching at universities, and working within different industries or types
of private practice. All of the advisors are in private practice, employed by
hospitals, universities or other organizations, none of which in the future is
expected by the Company to compete with the Company. These advisors are expected
to devote only a small portion of their time to the Company, and they are not
expected to participate actively in the Company's affairs. Certain of the
institutions with which the Scientific Advisors are affiliated may adopt new
regulations or policies that limit the ability of the advisors to consult with
the Company; however, the loss of the services of any of the Scientific Advisors
is unlikely to adversely affect the Company. The Scientific Advisory Board is
comprised of the following individuals:
JACK ANSTANDIG, MD. - Neurologist, Acupuncture and Pain Management Specialist;
Member, American Academy of Neurology, American Academy of Medical Acupuncture
and International Association.
CHADWICK F. SMITH, MD. - Clinical Professor of Orthopedic Surgery, University of
Southern California School of Medicine; Medical Director, International
Children's Program, Orthopedic Hospital, Los Angeles. Dr. Smith is also a
Director of the Company.
C. THOMAS VANGSNESS, MD. - Assistant Professor, Orthopedic Surgery and Chief of
Sports Medicine, University of Southern California. Dr. Vangsness owns 22,833
shares of the Company's common stock.
PEDRO A. RUBIO, MD., PH.D. - Past World President of the International College
of Surgeons (Chicago); Clinical Associate Professor of Surgery, University of
Texas Health Science Center, Houston; Diplomate, American Boards of Surgery,
Laser Surgery, Forensic Medicine, Quality Assurance and Pain Management. Dr.
Rubio is also a Director of the Company.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION. The following table provides information
concerning compensation paid or accrued during the fiscal years ended December
31, 1997, 1996 and 1995 to the Company's President and Chief Executive Officer,
Michael M. Barbour and Chief Financial Officer, Dan D. Sudduth. During 1997,
1996 and 1995, no other executive officers received compensation which exceeded
$100,000:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
---------------------------- -------
ANNUAL COMPENSATION SECURITIES
-------------------------------------- UNDERLYING ALL
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS (#) PAYOUTS COMPENSATION
----------------- ---- ------ ----- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $160,000 40,000 -- -- 3,333 -- --
Michael M. Barbour 1996 $171,657 -- -- -- -- -- --
CEO 1995 $110,000 -- $9,000 -- -- -- --
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
---------------------------- -------
ANNUAL COMPENSATION SECURITIES
-------------------------------------- UNDERLYING ALL
OTHER ANNUAL RESTRICTED OPTIONS/ LTIP OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS (#) PAYOUTS COMPENSATION
----------------- ---- ------ ----- ------------ ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $134,811 -- -- -- 3,333 -- --
Dan D. Sudduth (1) 1996 -- -- -- -- -- -- --
CFO 1995 -- -- -- -- -- -- --
</TABLE>
- ------------
(1) Mr. Sudduth was a consultant to the Company prior to February 1997 when he
became an employee.
OPTION/SAR GRANTS. The following table provides certain information with
respect to common stock options granted during the fiscal year ended December
31, 1997 by the Company's Chief Executive Officer and Chief
Financial Officer:
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS EXERCISE
NAME AND OPTION/SARS /SARS GRANTED PRICE EXPIRATION
POSITION GRANTED TO EMPLOYEES ($/SHARE) DATE
- -------- ----------- ------------ --------- ----------
Michael M. Barbour 10,000 50% $7.88/share 11/07/00
CEO
Dan D. Sudduth 10,000 50% $7.88/share 11/07/00
CFO
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR ENDED OPTION
VALUES. The following table provides certain information with respect to option
exercises during the fiscal year ended December 31, 1997 by the Company's Chief
Executive Officer and Chief Financial Officer:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS AT
ACQUIRED ON VALUE AT FISCAL YEAR END (#) FISCAL YEAR END ($) (1)
NAME EXERCISE REALIZED DECEMBER 31, 1997 REALIZED
---- -------- -------- ------------------------------ ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Michael M. Barbour -- -- 225,000 3,333 $ 712,500 --
Dan D. Sudduth -- -- -- 3,333 -- --
</TABLE>
(1) Calculated by multiplying the number of shares underlying outstanding
in-the-money options by the difference between the last sales price of the
Common Stock on December 31, 1997 ($7.00 per share) and the exercise
prices, which range between $3.00 and $4.50 per share. Options are
in-the-money if the fair market value of the underlying Common Stock
exceeds the exercise price of the option.
COMPENSATION OF DIRECTORS
Effective January 15, 1996, the Board of Directors of the Company (the
"BOD") adopted the following plans which were approved by the Company's
shareholders in July 1996: (i) a 1996 Incentive Stock Plan under which the
Company can issue up to 1.2 million shares of the Company's common stock to
eligible officers, employees, and consultants of the Company and (ii) a 1996
Non-Employee Directors Stock Option Plan (the "Outside Director Plan") under
which the Company can issue up 250,000 shares of common stock to its outside
directors. On February 17, 1998, the Company filed a registration statement on
Form S-8 covering all of the shares issuable under both plans with the
Securities and Exchange Commission.
In connection with their re-election to the BOD in June 1997, Drs.
Rubio, Smith, and Henley and Mr. Davidson were each granted a stock option
under the Outside Director Plan to purchase 10,000 shares of the
42
<PAGE>
Company's common stock at a price of $4.81 per share. Also, in connection with
their membership in the BOD in 1997, each of Messrs. Sudduth and Barbour was
granted an option under the 1996 Incentive Stock Plan to purchase 10,000 shares
of the Company's common stock at a price of $7.88 per share. The options granted
to Messrs. Barbour and Sudduth vest over a three-year period.
The Outside Director Plan also provides that at the discretion of the BOD,
the Company may pay a cash fee to non-employee directors from time to time for
serving on and for attendance at meetings of, the BOD or any committee thereof
(as such fees are set by the BOD from time to time.) During the year ended
December 31, 1997, the Company paid the non-employee directors $500 per person
for attendance at each meeting of the Board of Directors.
EMPLOYMENT CONTRACTS
In November 1996, the Company entered into an agreement with Michael M.
Barbour, effective as of May 1, 1996, employing him as its Chief Executive
Officer at a base annual salary of $160,000. The agreement also provides for an
annual bonus amount payable to Mr. Barbour based on specific formula as provided
in the agreement. The agreement terminates on December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the number
and percentage of shares of Common Stock beneficially owned as of March 16,
1998, by any person (including any group of affiliated persons) known by the
Company to own 5% or more of the outstanding shares of the Company's Common
Stock, each named executive officer and director, and all executive officers and
directors of the Company as a group. Unless otherwise indicated, the Company has
been advised that all holders listed have the power to vote and dispose of the
number of shares set forth as beneficially owned by them.
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER (1) OWNERSHIP (2) CLASS
----------------------- ------------- -----
Ernest J. Henley, Ph.D. ........ 3,545,000(3) 51.17%
Kenneth W. Davidson............. 3,520,000(3) 50.99%
10300 49th Street North
Clearwater, FL 33762
Maxxim Medical, Inc. ........... 3,500,000(4) 50.85%
10300 49th Street North
Clearwater, FL 33762
Chadwick F. Smith, MD. ......... 430,666(5) 7.67%
1127 Wilshire Blvd.
Los Angeles, California 90017
Michael M. Barbour.............. 421,748(6) 7.52%
Pedro A. Rubio, MD, Ph.D. ...... 129,128(7) 2.36%
Dan D. Sudduth.................. 70,000(8) 1.28%
All Executive Officers and
Directors as a Group (8 persons) 4,667,042(9) 61.38%
- ------------
(1) Unless otherwise specified, the address of each beneficial owner is c/o
Henley Healthcare, Inc. 120 Industrial Boulevard, Sugar Land, Texas 77478.
43
<PAGE>
(2) Except as otherwise indicated, all shares are beneficially owned, and the
sole investment and voting power is held, by the person named. This table
is based on information supplied by the officers, directors and principal
shareholders and reporting forms, if any, filed with the Securities and
Exchange Commission on behalf of such persons. A person is deemed to
beneficially own shares of common stock underlying options, warrants or
other convertible securities if the stock can be acquired by such person
within sixty days of the date hereof.
(3) Includes 1,500,000 shares issuable upon the conversion of the Company's
convertible subordinated promissory note, as amended, in the principal
amount of $3 million issued to Maxxim (the "Maxxim Note"), and 2,000,000
shares currently owned by Maxxim, as to which Dr. Henley and Mr. Davidson,
who are directors of both the Company and Maxxim, may be deemed the
beneficial owners by virtue of their affiliation with Maxxim. See "Certain
Relationships and Related Transactions." The additional 45,000 and 20,000
shares listed for each of Dr. Henley and Mr. Davidson, respectively,
consist entirely of warrants and/or options exercisable as of the date
hereof.
(4) In addition to holding 2,000,000 shares of common stock, Maxxim is the
holder of the Maxxim Note, which is convertible into 1,500,000 shares of
Common Stock. See "Certain Relationships and Related Transactions."
(5) Includes 235,000 shares issuable upon exercise of currently exercisable
options.
(6) Includes 228,333 shares issuable upon exercise of currently exercisable
options.
(7) Includes 78,333 shares issuable upon exercise of currently exercisable
options.
(8) Includes 63,333 shares issuable upon exercise of currently exercisable
options or warrants.
(9) In addition to the 1,500,000 shares issuable upon conversion of the Maxxim
Note and the currently exercisable options and warrants listed above, this
amount includes (i) 500 shares and 50,000 currently exercisable options
owned by Chike J. Ogboenyiya, the Company's Vice President-Finance and
Secretary.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 1996, the Company entered into a consulting agreement with
Chadwick F. Smith, MD, one of its Directors. The agreement includes an annual
compensation of $90,000 and terminates on December 31, 1998.
In May 1996, the Company entered into an agreement with Mezzanine Financial
Relations, Inc., a financial relations company ("Mezzanine"), pursuant to which
Mezzanine agreed to provide financial consulting services with regard to
potential mergers and acquisitions in consideration for a monthly fee of
$10,000. Mr. Sudduth, Executive Vice President, Chief Financial Officer and a
Director of the Company, is a shareholder of Mezzanine and its Chairman of the
Board. The agreement terminated on January 31, 1997.
On April 30, 1996, the Company entered into an agreement with Maxxim,
whereby the Company purchased certain assets (and assumed certain liabilities)
associated with for an estimated purchase price of approximately $13.5 million.
The purchase price was paid by the issuance of the Company's convertible
subordinated promissory note in the principal amount of $7 million, with the
balance of the purchase price paid in cash provided through a financing with a
bank. Mr. Davidson and Dr. Henley are currently employed by Maxxim, with Mr.
Davidson serving in the capacities of Chairman of the Board, Chief Executive
Officer and President and Dr. Henley serving as a Director and consultant. Dr.
Henley's consulting agreement, which was entered into between Dr. Henley and
Maxxim in 1987, was acquired in the transaction with Maxxim. The agreement
included a monthly consulting fee in the amount of $5,833 and terminated on
October 31, 1997. The Company currently uses Dr. Henley's services on as-needed
basis for a monthly consulting fee of $1,750.
44
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
See "Index of Exhibits" below which lists the documents filed as exhibits
herewith.
REPORTS ON FORM 8-K
On October 15, 1997, the Company filed a Current Report on Form 8-K in
which it reported its agreement with Cybex pursuant to which it purchased
certain assets of (and assumed certain liabilities associated with) the
isokinetic rehabilitation product line of Cybex.
On October 20, 1997, the Company filed a Current Report on Form 8-K in
which it reported the dismissal of Goldstein Golub Kessler & Company, P.C.
("GGK"), the Company's former principal accountants, and the engagement of
Arthur Andersen LLP as its principal accountants to replace GGK.
45
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, ON THE 30TH DAY OF MARCH, 1998.
HENLEY HEALTHCARE, INC.
(Registrant)
By: MICHAEL M. BARBOUR
-----------------------------
Michael M. Barbour
(President and Chief Executive Officer)
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
MICHAEL M. BARBOUR President and Chief Executive Officer March 30, 1998
- -------------------- and Director (Principal Executive Officer)
(Michael M. Barbour)
DAN D. SUDDUTH Executive Vice President and Director March 30, 1998
- -------------------- (Principal Financial Officer)
(Dan D. Sudduth)
CHIKE J. OGBOENYIYA Vice President-Finance & Secretary March 30, 1998
- -------------------- (Principal Accounting Officer)
(Chike J. Ogboenyiya)
CHADWICK F. SMITH, MD. Chairman and Director March 30, 1998
- --------------------
(Chadwick F. Smith, MD.)
PEDRO A. RUBIO, MD, Ph.D. Director March 30, 1998
- --------------------
(Pedro A. Rubio, MD, Ph.D.)
ERNEST J. HENLEY, Ph.D. Director March 30, 1998
- --------------------
(Ernest J. Henley, Ph.D.)
KENNETH W. DAVIDSON Director March 30, 1998
- --------------------
(Kenneth W. Davidson)
</TABLE>
46
<PAGE>
HENLEY HEALTHCARE, INC.
EXHIBITS TO FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX OF EXHIBITS
Exhibits incorporated by reference to a prior filing are designated by an
asterisk (*); all exhibits not so designated are documents filed herewith:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1* Amended and Restated Articles of Incorporation (Exhibit 3.1 to the
Company's Periodic Report on Form 10-QSB for the quarter ended June 30,
1997 (File No. 0-28556)).
3.2 Amended and Restated By-Laws
3.3 Statement of Designation of Series A Preferred Stock
4.1* Specimen Stock Certificate. (This exhibit to the Company's
Registration Statement on Form S-18 (No. 33-49972) dated July 22,
1992).
4.2* Specimen Form of Warrant Certificate. (Exhibit 4.2 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 (File No.
0-28566)).
4.3* Form of Underwriter's Warrant. (Exhibit 4C to the Company's Registration
Statement on Form S-18 (No. 33-49972) dated July 22, 1992).
10.1* 1996 Amended and Restated Non-Employee Director Stock Option Plan.
(Exhibit C to the Company's Proxy Statement on Schedule 14A dated June 24,
1996 (File No. 0-28566)).
10.2* 1996 Incentive Stock Plan. (Exhibit B to the Company's Proxy Statement on
Schedule 14A dated June 24, 1996 (File No. 0-28566)).
10.3* Employment Agreement with Michael Barbour dated November 22, 1996.
(Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (File No. 0-28566)).
10.4* Consulting Agreement with Chadwick F. Smith, MD dated November 22, 1996.
(Exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (File No. 0-28566)).
10.5* Asset Purchase Agreement dated November 12, 1996 with MJH Medical
Equipment and Michael J. Houska. (Exhibit 10.6 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996 (File No.
0-28566)).
10.6* Employment Agreement with Michael J. Houska dated November 12, 1996.
(Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (File No. 0-28566)).
10.7* Plan and Agreement of Merger with Health Career Learning Systems, Inc.
dated November 27, 1996. (Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996 (File No. 0-28566)).
47
<PAGE>
INDEX OF EXHIBITS, CONTINUED
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.8* Stock Purchase Agreement with Paula L. Buhr dated January 24, 1996.
(Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (File No. 0-28566)).
10.9* Asset Purchase Agreement with Gatti Medical Supply dated January 24, 1996.
(Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 (File No. 0-28566)).
10.10*Master Agreement and Manufacturing Agreement with CB Svendsen, a/s dated
March 12, 1997. (Exhibit 10.11 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996 (File No. 0-28566)).
10.11 Asset Purchase Agreement with Cybex International, Inc. dated September
30, 1997.
10.12 Plan and Agreement of Merger with Garvey Company dated January 9, 1998.
10.13 Asset Purchase Agreement with AMC Acquisition Corp., Dan D. Sudduth,
Britton D. Sudduth and Roger W. Dartt dated February 12, 1998.
10.14 Asset Purchase Agreement with August Schild d/b/a Summer Medical dated
October 6, 1997.
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Goldstein Golub Kessler & Company, P.C.
27.1 Financial Data Schedule
48
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
HENLEY HEALTHCARE, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
SHAREHOLDERS
<S> <C> <C>
Section 1. Annual Meetings...............................................................1
Section 2. Special Meetings..............................................................1
Section 3. Time of Notice; Waiver of Notice..............................................1
Section 4. Contents of Notice............................................................1
Section 5. Voting List...................................................................1
Section 6. Quorum........................................................................2
Section 7. Voting........................................................................2
Section 8. Consent and Telephone Meetings................................................2
Section 9. Organization..................................................................2
Section 10. Director Nominees.............................................................3
Section 11. Shareholder Proposals.........................................................4
ARTICLE II
BOARD OF DIRECTORS
Section 1. Management; Number; Election and Term of Office...............................4
Section 2. Removal; Vacancies............................................................5
Section 3. Meetings of Directors.........................................................5
Section 4. Quorum; Vote Required for Action..............................................5
Section 5. Voting of Shares in Other Corporations........................................6
Section 6. Compensation..................................................................6
Section 7. Organization..................................................................6
Section 8. Action by Written Consent.....................................................6
Section 9. Presumption of Assent.........................................................6
Section 10. Committees. .................................................................6
Section 11. Committee Rules...............................................................7
Section 12. Interested Officers and Directors.............................................7
Section 13. Election Not to be Governed by Part Thirteen of the TBCA......................7
ARTICLE III
OFFICERS
Section 1.Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal;
Vacancies............................................................................7
Section 2. Powers and Duties of the Chairman of the Board................................8
Section 3. Powers and Duties of the President............................................8
Section 4. Powers and Duties of the Chief Executive Officer..............................8
Section 5. Powers and Duties of the Vice President.......................................8
Section 6. Powers and Duties of the Secretary............................................8
Section 7. Powers and Duties of the Treasurer............................................9
Section 8. Compensation..................................................................9
i
<PAGE>
TABLE OF CONTENTS
(Continued)
PAGE
----
ARTICLE IV
CAPITAL STOCK
Section 1. Certificates of Shares........................................................9
Section 2. Preemptive Rights............................................................10
Section 3. Cumulative Voting............................................................10
Section 4. Transfer of Shares...........................................................10
Section 5. Transfer of Lost or Destroyed Certificates...................................10
Section 6. Replacement of Lost or Destroyed Certificates................................10
Section 7. Dividends....................................................................10
Section 8. Reserves.....................................................................10
Section 9. Record Dates.................................................................11
Section 10. Registered Shareholders......................................................12
Section 11. Corporate Seal...............................................................12
ARTICLE V
INDEMNIFICATION
Section 1. Corporate Indemnification....................................................13
Section 2. Indemnity Insurance..........................................................14
ARTICLE VI
MISCELLANEOUS
Section 1. Amendments...................................................................14
Section 2. Severability.................................................................14
</TABLE>
ii
<PAGE>
HENLEY HEALTHCARE, INC.
AMENDED AND RESTATED
BYLAWS
ARTICLE I
SHAREHOLDERS
SECTION 1. ANNUAL MEETINGS. The annual meeting of the shareholders of the
Corporation shall be held for the purpose of electing directors at such date,
time and place, either within or without the State of Texas, as may be
designated by resolution of the Board of Directors from time to time. Failure to
designate a time for the annual meeting or to hold the annual meeting at the
designated time shall not work a dissolution of the Corporation. Any other
proper business may be transacted at the annual meeting, except as otherwise
provided by law or these Bylaws.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time by the Board of Directors or the President, alone or upon the
request in writing of not less than ten percent of the outstanding shares
entitled to vote at such meeting. Only such business as is stated or indicated
in the notice of the special meeting shall be transacted at such meeting.
SECTION 3. TIME OF NOTICE; WAIVER OF NOTICE. Notice of any meeting of
shareholders shall be sent to each shareholder entitled thereto not less than
ten nor more than sixty days before the meeting. If mailed, such notice shall be
deemed to be given when deposited in the mail, postage prepaid, directed to the
shareholder at his or her address as it appears on the records of the
Corporation. Notice need not be given to any shareholder who submits a written
waiver of notice, signed by such shareholder, whether before or after the time
stated therein. Attendance of a person at a meeting of the shareholders shall
constitute a waiver of notice of such meeting, except when the shareholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose of
any regular or special meeting of the shareholders need be specified in any
written waiver of notice.
SECTION 4. CONTENTS OF NOTICE. Notice of any meeting of shareholders shall
specify the place, date, and hour of the meeting. The notice shall also specify
the purpose of the meeting if it is a special meeting.
SECTION 5. VOTING LIST. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept on
file at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any shareholder during the entire time of
the meeting.
1
<PAGE>
SECTION 6. QUORUM. At any meeting of the shareholders duly convened and
held, the holders of the majority of the voting capital stock of the Corporation
issued and outstanding and then entitled to vote, present in person or
represented by proxy, shall constitute a quorum of the shareholders for all
purposes except in those instances where a larger number shall be required by
law, the Articles of Incorporation, or these Bylaws, and in that case the
representation in person or by proxy of the number so required shall constitute
a quorum. If at any meeting a quorum of the shareholders, as herein provided, is
not present, such meeting may be adjourned by a majority of those present at the
meeting, such meeting to reconvene at the same or some other place, and notice
need not be given of any such adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. At the adjourned
and reconvened meeting, the Corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
SECTION 7. VOTING. Unless otherwise provided by law, the Articles of
Incorporation, or these Bylaws, at all meetings of the shareholders, each
shareholder shall be entitled to cast one vote for each share of voting stock
standing in his name as shown by the records of the Corporation at the time the
meeting is called to order, and each such shareholder shall be entitled to vote
in person or by proxy appointed by instrument in writing subscribed by such
shareholder or his duly authorized attorney and delivered to the Secretary of
the Corporation prior to the start of the meeting. No proxy shall be valid after
eleven months from the date of its execution unless otherwise provided in the
proxy. If a quorum is present, the affirmative vote of the holders of a majority
of the stock then entitled to vote thereon, represented in person or by proxy,
and that voted for or against or expressly abstained on any such question, shall
decide any question brought before such meeting, unless otherwise provided by
law, the Articles of Incorporation, or these Bylaws.
SECTION 8. CONSENT AND TELEPHONE MEETINGS. Any action required or
permitted to be taken at any annual or special meeting of shareholders of the
Corporation may be taken without a meeting, without prior notice, and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of all outstanding stock entitled to vote with respect to
the subject matter thereof. Pursuant to proper notice, any regular or special
meeting of the shareholders may be held by conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
SECTION 9. ORGANIZATION. Meetings of shareholders shall be presided over
by the Chairman of the Board, if any, or in his absence by the Vice Chairman of
the Board, if any, or in his absence by the President, or in his absence by a
vice president, or in the absence of the foregoing persons by a chairman
designated by the Board of Directors, or in the absence of such designation by a
chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
2
<PAGE>
SECTION 10. DIRECTOR NOMINEES. Only persons who are nominated in
accordance with the procedures set forth in this paragraph shall be eligible for
election as directors of the Corporation. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
shareholders (a) by or at the direction of the Board of Directors or (b) by any
shareholder of the Corporation entitled to vote for the election of directors at
such meeting who complies with the procedures set forth in this paragraph. All
nominations by shareholders shall be made pursuant to timely notice in proper
written form to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to, or mailed and received at, the principal executive
offices of the Corporation not less than seventy-five days nor more than 120
days prior to the anniversary date of the immediately preceding annual meeting
of shareholders (the "Anniversary Date"); provided, however, that in the event
the annual meeting is scheduled to be held on a date more than thirty days
before the Anniversary Date or more than sixty days after the Anniversary Date,
notice by the shareholder to be timely must be delivered not later than the
close of business on the later of (a) the seventy-fifth day prior to the
scheduled date of such annual meeting or (b) the fifteenth day following the day
on which public announcement of the date of such annual meeting is first made by
the Corporation. In no event shall the public announcement of an adjournment of
an annual meeting commence a new time period for the giving of a shareholder's
notice under these Bylaws. Notwithstanding anything to the contrary in this
paragraph, in the event that the number of directors to be elected to the Board
of Directors of the Corporation is increased and there is no public announcement
by the Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least seventy-five days prior to the
Anniversary date, a shareholder's notice required by this paragraph shall also
be considered timely, but only with respect to nominees for any new position
created by such increase, if such notice shall be delivered to, or mailed to and
received by the Corporation at its principal executive office not later than the
close of business on the fifteenth day following the day on which such public
announcement is first made by the Corporation. To be in proper written form,
such shareholder's notice to the Secretary shall set forth in writing (a) as to
each person whom such shareholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principle occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, including, without
limitation, such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected; and (b) as to such
shareholder giving notice, (i) his or her name and address, as they appear on
the Corporation's books, (ii) the class and number of shares of stock of the
Corporation which are beneficially owned by such shareholder, and (iii) a
description of all arrangements or understandings between such shareholder and
each nominee and any other person or persons pursuant to which the nomination or
nominations are to be made by such shareholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in the Bylaws of the
Corporation. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Bylaws of the
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Corporation, and if he shall so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
SECTION 11. SHAREHOLDER PROPOSALS. At any annual meeting of the
shareholders, only such business shall be conducted as shall have been brought
before the meeting (a) by or at the direction of the Board of Directors or (b)
by any shareholder who complies with the procedures set forth in this paragraph.
For business properly to be brought before an annual meeting by a shareholder,
the shareholder must have given timely notice thereof in proper written form to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than seventy-five days nor more than 120 days prior to the
Anniversary Date; provided, however, that in the event the annual meeting is
scheduled to be held on a date more than thirty days before the Anniversary Date
or more than sixty days after the Anniversary Date, timely notice by the
shareholder must be delivered not later than the close of business on the later
of (a) the seventy-fifth day prior to the scheduled date of such annual meeting
or (b) the fifteenth day following the day on which the public announcement of
the date of such annual meeting is first made by the Corporation. In no event
shall the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a shareholder's notice under these Bylaws. To
be in proper written form, such shareholder's notice to the Secretary shall set
forth in writing as to each matter such shareholder proposes to bring before the
annual meeting (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) his or her name and address, as they appear on the
Corporation's books, (c) the class and number of shares of stock of the
Corporation which are beneficially owned by such shareholder, (d) the names and
addresses of other shareholders known by the shareholder proposing such business
to support such proposal, and the class and number of shares of the
Corporation's capital stock beneficially owned by such other shareholders, and
(e) any material interest on such shareholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
paragraph. The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this paragraph, and, if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. MANAGEMENT; NUMBER; ELECTION AND TERM OF OFFICE. The property,
affairs and business of the Corporation shall be managed by or under the
direction of a Board of Directors consisting of six members, or such number as
shall be determined by a resolution of the Board of Directors from time to time;
provided, that no decrease in the number of directors shall shorten the term of
any incumbent director. The directors shall be elected by the shareholders at
each annual meeting of shareholders and shall hold office until the next
succeeding annual meeting and thereafter until their respective successors shall
have been elected and qualified, unless removed in accordance with these Bylaws.
The directors need not be shareholders of the Corporation or residents of Texas.
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SECTION 2. REMOVAL; VACANCIES. At any regular meeting or special meeting
of shareholders called expressly for that purpose, any director may be removed
with or without cause and a successor or successors appointed by vote of the
holders of a majority of the shares present in person or by proxy, then entitled
to vote at any election of directors. Whenever any vacancy shall have occurred
in the Board of Directors by reason of death, resignation, removal or otherwise,
a majority of the remaining directors may elect a successor to hold office for
the unexpired portion of the term of the director whose office is vacant and
until a successor shall be elected and have qualified; provided, that the number
of such remaining directors shall be greater than or equal to a majority of the
directors immediately prior to the creation of the vacancy. If by reason of
vacancies occurring on the Board of Directors, there should not be a majority
remaining, then such vacancies shall be filled at a special meeting of the
shareholders called for that purpose. Any directorship to be filled by reason of
an increase in the number of directors may be filled by a majority vote of the
Board of Directors or at a special meeting of shareholders called for that
purpose; provided, if such vacancy resulting from an increase in the number of
directors is filled by the vote of directors, then such board positions must
stand for reelection at the next annual meeting of the shareholders and,
provided further, that no more than two such newly-created vacancies may be
filled by the directors in any interim period between meetings of shareholders.
SECTION 3. MEETINGS OF DIRECTORS. Regular meetings of the Board of
Directors shall be held in any manner permitted by law or these Bylaws and at
such times and places, within or without the State of Texas, as shall be
designated from time to time by resolution of the Board of Directors. Notice of
such regular meetings shall not be required. Special meetings of the Board of
Directors shall be held in such place or places, within or without the State of
Texas, as the Board of Directors may from time to time determine and in any
manner permitted by law or these Bylaws, and whenever called by the President of
the Corporation, or by any two members of the Board of Directors. Unless notice
is waived, the Secretary shall give notice in writing of each special meeting by
mailing a notice at least two days before the meeting, addressed to each
director, or, if by personal delivery, telegram, telex, cablegram, telecopy or
similar transmission, at least one day before the meeting is scheduled to
commence. Neither the business to be transacted at, nor the purpose of, any
special meeting of the Board of Directors need be specified in the notice,
unless required by statute. The attendance of a director at any meeting or the
participation by a director in a conference meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting or
participates in a conference meeting for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is not lawfully
called or convened. Whenever any notice is required to be given to any director,
a waiver thereof in writing signed by such person(s) entitled thereto (whether
signed before or after the time required for such notice) shall be equivalent to
the giving of such notice. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting. The purpose of the
meeting need not be stated in any such notice. Any regular or special meeting of
the Board of Directors may be held by conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Minutes of each meeting of the Board of Directors
shall be recorded and retained in the records of the Corporation.
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SECTION 4. QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board
of Directors, a majority of the Board of Directors shall constitute a quorum for
the transaction of business. Except as otherwise provided by law, the Articles
of Incorporation or these Bylaws, the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. In the absence of a quorum, a majority of the directors
present may adjourn any meeting from time to time until a quorum is present.
Each director shall have one vote at all meetings of the Board of Directors.
SECTION 5. VOTING OF SHARES IN OTHER CORPORATIONS. Shares of other
companies owned by the Corporation shall be voted by the President of the
Corporation in the manner directed by the Board of Directors of the Corporation.
SECTION 6. COMPENSATION. The Directors may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors; provided, that nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity, and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for their
services and expenses.
SECTION 7. ORGANIZATION. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a vice president, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 8. ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken by the Board of Directors or any committee, under applicable law, the
Articles of Incorporation or these Bylaws, may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all the
members of the Board of Directors or committee thereof, as the case may be.
SECTION 9. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action unless his
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered or certified mail, return receipt requested, to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
SECTION 10. COMMITTEES. The Board of Directors, by resolution adopted by a
majority of the number of directors fixed by these Bylaws, may designate one or
more directors to constitute an audit and a compensation committee. The
designation of a committee of the Board of Directors and the delegation thereto
of authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law. Each committee of
the Board of
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Directors shall keep regular minutes of its proceedings and report the same to
the Board of Directors when required.
SECTION 11. COMMITTEE RULES. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may make, alter
and repeal rules for the conduct of its business. In the absence of such rules,
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
SECTION 12. INTERESTED OFFICERS AND DIRECTORS.
A. No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers or have a financial
interest, shall be void or voidable solely for this reason, solely because the
director or officer is present at or participates in the meeting of the Board of
Directors which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if:
(i) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors, and the Board of Directors in good faith authorizes the
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less
than a quorum; or
(ii) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or
(iii) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved, or ratified by the Board of
Directors or the shareholders.
B. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors which authorizes the
contract or transaction.
C. The foregoing provisions shall not be construed to invalidate a
contract or transaction which would be valid in the absence of these provisions.
SECTION 13. ELECTION NOT TO BE GOVERNED BY PART THIRTEEN OF THE TBCA. The
Corporation expressly elects not to be governed by the provisions of Part
Thirteen of the TBCA.
ARTICLE III
OFFICERS
SECTION 1. EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF OFFICE;
RESIGNATION; REMOVAL; VACANCIES. The officers of the Corporation shall consist
of a President, a Vice President, a Secretary, a Treasurer and such other
officers as the Board of Directors may from time to time elect
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or appoint, including, without limitation, a Chairman of the Board, Chief
Executive Officer, Chief Financial Officer, Chief Operating Officer, and one or
more Vice Presidents. Unless otherwise provided in the resolution of election or
appointment, each such officer shall hold office until his successor is elected
and qualified or until his earlier resignation or removal. Except as may be
explicitly provide for in these Bylaws, each duly elected or appointed officer
of the Corporation shall have such powers and duties as may from time to time be
prescribed by duly adopted resolutions of the Board of Directors. Any officer
may resign at any time upon written notice to the Corporation. The Board of
Directors may remove any officer with or without cause at any time, but such
removal shall be without prejudice to the contractual rights of such officer, if
any, with the Corporation. Any number of offices may be held by the same person.
Any vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise may be filled for the unexpired portion of the term by the
Board of Directors at any regular or special meeting.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of
the Board shall preside at all meetings of the shareholders and the Board of
Directors. The Chairman of the Board shall perform such other duties as from
time to time may be assigned to him by the Board.
SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. The President shall preside
at all meetings of the shareholders and of the Board of Directors in the absence
of the Chairman of the Board, and according to the provisions of Article I,
Section 9 and Article III, Section 7 of these Bylaws. Subject to direction by
the Board of Directors, he shall have general charge of the business and
property of the Corporation. He shall keep the Board of Directors fully informed
and shall freely consult them concerning the business of the Corporation in his
charge. He may sign and execute in the name of the Corporation all bonds,
contracts or other obligations authorized by the Board of Directors and, with
the Secretary, he shall sign all certificates of the shares of the capital stock
of the Corporation. He shall have power to employ and discharge such employees
as may be required for the conduct of business, and to buy or authorize the
purchase of such merchandise, equipment, and supplies as may be deemed essential
to the conduct of the business of the Corporation. The President shall have such
duties and possess such powers as may be further prescribed by these Bylaws or
by the Board of Directors.
SECTION 4. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief
Executive Officer shall be elected by the Board of Directors and shall in
general supervise and control the business, affairs, and property of the
Corporation, shall perform such duties and possess such powers as usually
pertain to the position of Chief Executive Officer and shall have such duties
and possess such powers as may be further prescribed by these Bylaws or by the
Board of Directors.
SECTION 5. POWERS AND DUTIES OF THE VICE PRESIDENT. The Vice President of
the Corporation, in the absence of the President and Chairman of the Board,
shall preside at all meetings of the shareholders and of the Board of Directors
and shall have such powers and perform such other duties as are vested in the
President. The Vice President shall at all times assist the President in the
management of the business of the Corporation and shall have such duties and
possess such powers as may be further prescribed by these Bylaws or by the Board
of Directors.
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SECTION 6. POWERS AND DUTIES OF THE SECRETARY. The Secretary of the
Corporation shall keep the minutes of all meetings of the shareholders and of
the Board of Directors, and he shall attend to the giving and serving of all
notices, and shall have the custody and keeping of the common seal of the
Corporation; he may sign with the President in the name of the Corporation all
contracts authorized by the Board of Directors, and when it is required by law
and when authorized by the Board of Directors, he shall affix the seal of the
Corporation to any such contracts, deeds or other instruments executed by the
Corporation; he shall have charge of the certificate books, transfer books, and
stock ledgers, and such other books and papers as the Board of Directors may
direct, all of which shall be open at all reasonable times to examination by any
director upon application at the office of the Corporation during business
hours; he shall, with the President, execute certificates of stock issued by the
Corporation and affix thereon the seal of the Corporation; and he shall in
general perform all the duties incident to the office of Secretary, subject to
the control of the Board of Directors.
SECTION 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have
custody of all funds and securities of the Corporation which may come into his
hands. On behalf of the Corporation he shall endorse or cause to be endorsed for
collection, checks, notes and other obligations and shall deposit the same or
cause them to be deposited to the credit of the Corporation in such bank or
banks of depository as the Board of Directors may designate; he shall sign all
receipts and vouchers for payments made to the Corporation; he shall be
authorized to sign checks made by the Corporation and pay out and disburse funds
of the Corporation under the direction and upon the authority of the Board of
Directors; he shall enter or cause to be entered regularly in the books of the
Corporation, to be kept by him or under his discretion for that purpose, full
and accurate accounts of all moneys received and paid on account of the
Corporation; he shall at all reasonable times exhibit the books and accounts to
any directors of the Corporation upon application at the office of the
Corporation during business hours; when required by the Board of Directors, he
shall render a statement of his cash account and an account of the financial
condition of the Corporation; and he shall perform all acts incident to the
position of Treasurer, subject to the control of the Board of Directors.
SECTION 8. COMPENSATION. The officers of the Corporation shall receive
such compensation as may be fixed by the Board of Directors. The salaries of
employees of the Corporation may be fixed by the President of the Corporation.
ARTICLE IV
CAPITAL STOCK
SECTION 1. CERTIFICATES OF SHARES. Certificates of the capital stock of
the Corporation shall be signed by the President and attested by the Secretary
or Assistant Secretary and shall have affixed thereto the common seal of the
Corporation. The certificates shall bear in a conspicuous manner all legends
required by applicable law, including without limitation, conspicuous legends
concerning any restrictions on securities transfers. Anyone subscribing for
shares of the capital stock of the Corporation shall pay for same at such time
and in such manner as may be required by the Board of Directors. All shares of
stock are non-assessable and any action of the Corporation to the contrary
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is expressly prohibited. Neither shares nor certificates representing such
shares may be issued by the Corporation until the full amount of the
consideration therefor has been paid. When such consideration has been paid to
the Corporation, the shares shall be deemed to have been issued and the
certificate representing such shares shall be issued to the shareholder. The
consideration paid for the issuance of shares shall consist of money paid, labor
done, or property actually received and neither promissory notes nor the promise
of future services shall constitute payment or part payment for shares of the
Corporation. In the absence of fraud in the transaction, the judgment of the
Board of Directors as to the value of consideration received shall be
conclusive.
SECTION 2. PREEMPTIVE RIGHTS. No shareholder, by reason of his ownership
of shares of stock of the Corporation, shall have a preemptive or other right to
subscribe for, purchase, or receive any proportionate or other part of any
shares of stock of any class, whether now or hereafter authorized, or any bonds,
debentures, or other securities convertible into or carrying options or warrants
to purchase stock of the Corporation of any class issued, optioned, sold or
disposed of by it after its incorporation; all such stock and other securities
may at all time be lawfully issued, sold or disposed of by the Corporation,
pursuant to resolution of the Board of Directors, to such persons and upon such
terms as the Board may deem proper without first offering such securities or any
part thereof to its existing shareholders.
SECTION 3. CUMULATIVE VOTING. Cumulative voting of shares of the
Corporation shall be expressly denied.
SECTION 4. TRANSFER OF SHARES. The transfer of shares of the capital stock
of the Corporation shall be made only by endorsement and delivery of the
certificates by the shareholder or his duly authorized attorney-in-fact or
personal representative and upon surrender and cancellation of the certificates
evidencing such shares subject to the transfer restrictions contained in Article
IV hereof. The Board of Directors shall have the power and authority to make all
such lawful rules and regulations as it may deem expedient concerning the issue
and transfer of the shares of the capital stock of this Corporation.
SECTION 5. TRANSFER OF LOST OR DESTROYED CERTIFICATES. Where a share
certificate has been lost, destroyed, or wrongfully taken and the owner fails to
notify the Corporation of that fact within a reasonable time after he has notice
of it, and the Corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the owner is precluded from
asserting against the Corporation any claim for registering the transfer or any
claim to a new certificate.
SECTION 6. REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. No new
certificates shall be issued until the former certificate for the shares
represented thereby shall have been surrendered and canceled, except in the case
of lost or destroyed certificates for which the Board of Directors may order new
certificates to be issued upon such terms, conditions, and guarantees as the
Board may see fit to impose, including the filing of sufficient indemnity.
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SECTION 7. DIVIDENDS. The Board of Directors from time to time may declare
and order paid from funds of the Corporation such dividends as may be authorized
by law and as, in the judgment of the directors, may be deemed expedient.
SECTION 8. RESERVES. The Board of Directors by resolution may create a
reserve or reserves out of its surplus or designate or allocate any part of
surplus in any manner for any proper purpose or purposes, and may increase,
decrease or abolish any such reserve, designation, or allocation in the same
manner. The Board of Directors may create such reserve(s) in their absolute
discretion (i) at any time(s), including prior to the authorization of, or
making or paying any distribution or share dividend, and (ii) for any purpose(s)
they deem proper and conducive to the Corporation's interest, including, without
limitation, meeting contingencies, equalizing distributions or share dividends,
and repairing or maintaining the Corporation's property.
SECTION 9. RECORD DATES.
A. MEETINGS. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders, or any adjournment thereof,
or entitled to receive a distribution by the Corporation (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or a share dividend, or in order to make a determination of
shareholders for any other proper purpose (other than determining shareholders
entitled to consent to action by shareholders proposed to be taken without a
meeting of shareholders), the Board of Directors of the Corporation may provide
that the share transfer records shall be closed for a stated period but not to
exceed, in any case, sixty days. If the share transfer records shall be closed
for the purpose of determining shareholders entitled to notice of or to vote at
a meeting of shareholders, such books shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the share transfer
records, the Board of Directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than sixty days and, in case of a meeting of shareholders, not less than ten
days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If the share transfer records are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive a distribution by the Corporation (other than a distribution
involving a purchase or redemption by the Corporation of any of its own shares)
or a share dividend, the date on which the notice of the meeting is mailed or
the date on which the resolution of the Board of Directors declaring such
distribution or share dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
herein provided, such determination shall apply to any adjournment thereof
except where the determination has been made through the closing of share
transfer records and the stated period of closing has expired.
B. ACTION BY WRITTEN CONSENT. In order that the Corporation may
determine the shareholders entitled to consent to corporate action in writing
without a meeting, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which date shall not be more than ten
days after the date upon which the resolution fixing the record date is adopted
by the
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Board of Directors. Any shareholder of record seeking to have the shareholders
authorize or take corporate action by written consent shall, by written notice
to the Secretary, request the Board of Directors to fix a record date. The Board
of Directors shall promptly, but in all events within ten days after the date on
which such a request is received, adopt a resolution fixing the record date
(unless a record date has previously been fixed by the Board of Directors
pursuant to the first sentence of this Section 9(b)). If no record date has been
fixed by the Board of Directors pursuant to the first sentence of this Section
9(b) or otherwise within ten days of the date on which such a request is
received, the record date for determining shareholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in Delaware,
its principal place of business, or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of shareholders are
recorded. Delivery shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board of Directors
and prior action by the Board of Directors is required by applicable law, the
record date for determining shareholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the Board of Directors adopts the resolution taking such prior action.
C. INSPECTORS OF WRITTEN CONSENT. In the event of the delivery, in the
manner provided by Section 9(b), to the Corporation of the requisite written
consent or consents to take corporate action and/or any related revocation or
revocations, the Corporation may engage independent inspectors of elections for
the purpose of performing promptly a ministerial review of the validity of the
consents and revocations. For the purpose of permitting the inspectors to
perform such review, no action by written consent without a meeting shall be
effective until such date as the independent inspectors certify to the
Corporation that the consents delivered to the Corporation in accordance with
Section 9(b) represent at least the minimum number of votes that would be
necessary to take the corporate action. Nothing contained in this Section 9(c)
shall in any way be construed to suggest or imply that the Board of Directors or
any shareholder shall not be entitled to contest the validity of any consent or
revocation thereof, whether before or after such certification by the
independent inspectors, or to take any other action (including, without
limitation, the commencement, prosecution, or defense of any litigation with
respect thereto, and the seeking of injunctive relief in such litigation).
D. EFFECTIVENESS OF WRITTEN CONSENT.. Every written consent shall bear
the date of signature of each shareholder who signs the consent and no written
consent shall be effective to take the corporate action referred to therein
unless, within sixty days of the earliest dated written consent received in
accordance with Section 9(b), a written consent or consents signed by a
sufficient number of holders to take such action are delivered to the
Corporation in the manner prescribed in Section 9(b).
SECTION 10. REGISTERED SHAREHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of the share to receive distributions or share dividends, and to vote as such
owner, and for all other purposes as such owner; and the Corporation shall not
be bound to recognize any equitable or other claim to or interest in such share
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or shares on the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Texas.
SECTION 11. CORPORATE SEAL. The corporate seal of the Corporation shall
have the name of the Corporation inscribed thereon and shall be in such form as
may be approved from time to time by the Board of Directors.
ARTICLE V
INDEMNIFICATION
SECTION 1. CORPORATE INDEMNIFICATION. Each person who at any time is or
was a director or officer of the Corporation, and who was, is or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative (a "Proceeding," which shall include any appeal in such a
Proceedings, and any inquiry or investigation that could lead to such a
Proceeding), by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was a director or officer of the
Corporation serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic Corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise shall be
indemnified by the Corporation to the fullest extent authorized by the Texas
Business Corporation Act as the same exists or may hereafter be amended from
time to time, or any other applicable law as may from time to time be in effect
(but, in the case of any such amendment or enactment, only to the extent that
such amendment or law permits the Corporation to provide broader indemnification
rights than such law prior to such amendment or enactment permitted the
Corporation to provide), against judgments, penalties (including excise and
similar taxes), fines, settlements and reasonable expenses (including court
costs and attorneys' fees) actually incurred by such person in connection with
such Proceeding. The Corporation's obligations under this Section 1 include, but
are not limited to, the convening of any meeting, and the consideration of any
matter thereby, required by statute in order to determine the eligibility of any
person for indemnification. Expenses incurred by a person in defending a
Proceeding shall be paid by the Corporation in advance of the final disposition
of such Proceeding to the fullest extent permitted, and only in compliance with,
the TBCA or any other applicable laws as may from time to time be in effect. The
Corporation's obligation to indemnify or to prepay expenses under this Section 1
shall arise, and all rights granted hereunder shall vest, at the time of the
occurrence of the transaction or event to which such proceeding relates, or at
the time that the action or conduct to which such proceeding relates was first
taken or engaged in (or omitted to be taken or engaged in), regardless of when
such proceeding is first threatened, commenced or completed. Notwithstanding any
other provision of the Articles of Incorporation or these Bylaws, no action
taken by the Corporation, either by amendment of the Articles of Incorporation
or these Bylaws or otherwise, shall diminish or adversely affect any rights to
indemnification or prepayment of expenses granted under this Section 1 which
shall have become vested as aforesaid prior to the date that such amendment or
other corporate action is taken. The rights to indemnification and prepayment of
expenses which are conferred to the Corporation's directors and officers by this
Section 1 may be conferred upon any employee or agent of the Corporation if, and
to the extent, authorized by the Board of Directors. The indemnification
provided hereunder shall not be exclusive
13
<PAGE>
of any other rights to which a person may be entitled by law, the Articles of
Incorporation, these Bylaws, agreement, vote of the shareholders or otherwise.
The provisions hereof shall continue as to a person who has ceased to hold a
position named in Section 1 and shall inure to his heirs and personal
representatives. Any indemnification or advance of expenses in accordance with
this Section 1 shall be reported in writing to the shareholders with or before
the notice or waiver of notice of the next shareholders' meeting or with or
before the next submission to shareholders of a consent to action without a
meeting and, in any case, within the twelve-month period immediately following
the date of the indemnification or advance.
SECTION 2. INDEMNITY INSURANCE. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
Corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the TBCA. Without limiting the power of
the Corporation to procure or maintain any kind of insurance or other
arrangement, the Corporation may, for the benefit of persons indemnified by the
Corporation (1) create a trust fund, (2) establish any form of self-insurance,
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation, or (4) establish a letter of credit,
guaranty or surety arrangement.
ARTICLE VI
MISCELLANEOUS
SECTION 1. AMENDMENTS. Bylaws of the Corporation may be adopted, amended
or repealed, and new Bylaws made, by the Board of Directors at any regular
meeting of the Board of Directors without prior notice, or at any special
meeting of the Board of Directors if notice of such alteration or repeal be
contained in the notice of such special meeting, except as provided in the
Articles of Incorporation.
SECTION 2. SEVERABILITY. If any part of these Bylaws shall be held invalid
or inoperative for any reason, the remaining parts, so far as it is possible and
reasonable, shall remain valid and operative.
* * * * * * * * * *
I, the undersigned Secretary of Henley Healthcare, Inc., hereby certify
that the foregoing is a true and correct copy of the Amended and Restated Bylaws
of said Corporation, adopted by the Board of Directors of the Corporation
effective this 31st day of December, 1997.
14
<PAGE>
/s/ CHIKE J. OGBOENYIYA
-----------------------
Chike J. Ogboenyiya
Secretary
15
EXHIBIT 3.3
EXHIBIT A
STATEMENT OF DESIGNATION
OF RIGHTS AND PREFERENCES OF THE
SERIES A CONVERTIBLE PREFERRED STOCK OF
HENLEY HEALTHCARE, INC.
We, being respectively the President and Secretary of Henley Healthcare,
Inc. a corporation organized and existing under and by virtue of the Texas
Business Corporation Act of the State of Texas (hereinafter the "Corporation"),
DO HEREBY CERTIFY:
FIRST:
That pursuant to authority expressly granted and vested in the Board of
Directors of said Corporation by Article 213 of the Texas Business Corporation
Act and the provisions of the Articles of Incorporation, said Board of
Directors, on March 13th, 1998, adopted the following resolution setting forth
the designations, powers, preferences and rights of its Series A Convertible
Preferred Stock (the "Statement of Designation").
RESOLVED: That the designations, powers, preferences and rights of the Series A
Convertible Preferred Stock be, and they hereby are, as set forth below:
1. NUMBER OF SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK.
The Corporation hereby authorizes the issuance of up to 5,000 (five
thousand) shares of Series A Convertible Preferred Stock par value $.10 per
share (the "Preferred Stock"). This Preferred Stock shall pay an annual dividend
of 4%, payable quarterly on each subsequent March 31st, June 30th, September
30th and December 31st, and shall be payable in cash or shares of Common Stock
at the Corporation's option.
Any outstanding Preferred Stock shall be converted automatically on the
terms pursuant to Section 5(a) of this Statement of Designation, three (3) years
from the date of issue.
<PAGE>
2. VOTING.
(a) Except as provided by law, by the provisions of Subparagraph 2(b) below,
holders of Preferred Stock (the "Holders") shall not have the right to vote on
any matter affecting the Corporation.
(b) The Corporation shall not amend, alter or repeal the preferences, special
rights or other powers of the Preferred Stock so as to affect adversely the
Preferred Stock, without the written consent or affirmative vote of the Holders
of at least a two thirds majority of the then outstanding shares of Preferred
Stock to be affected by amendment, alteration or repeal, given in writing or by
vote at a meeting, consenting or voting (as the case may be,) separately as a
class. For this purpose, without limiting the generality of the foregoing, the
authorization or issuance of any series of preferred stock with preference or
priority over or on a parity with the Preferred Stock as to the right to receive
either dividends or amounts distributable upon liquidation, dissolution or
winding up of the Corporation shall not be deemed to affect adversely the
designated class of Preferred Stock.
3. LIQUIDATION.
In the event of a voluntary or involuntary dissolution, liquidation, or winding
up of the Corporation, the Holders of Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available for distribution
to holders of its capital stock, before any payment or distribution shall be
made to holders of Common Stock or any other class of stock ranking junior to
the Preferred Stock, an amount per share of Preferred Stock equal to $1,000 (the
"Stated Value") plus any accrued and unpaid dividends. If upon such liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the assets to be distributed among the Holders of Preferred Stock shall be
insufficient to permit payment to the Holders of Preferred Stock of the amount
distributable as aforesaid, then the entire assets of the Corporation to be so
distributed shall be distributed ratably among the Holders of Preferred Stock.
Upon any such liquidation, dissolution or winding up of the Corporation, after
the Holders of Preferred Stock shall have been paid in full the amounts to which
they shall be entitled, the remaining net assets of the Corporation may be
distributed to the Holders of stock ranking on liquidation junior to the
Preferred Stock. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the liquidation payments and the place
where said liquidation payments shall be payable, shall be given by mail,
postage prepaid or by telex or facsimile to non-U.S. residents, not less than 10
days prior to the payment date stated therein, to the Holders of record of
Preferred Stock, such notice to be addressed to each such Holder at its address
as shown by the records of the
<PAGE>
Corporation. For purposes hereof the Common Stock, shall rank on liquidation
junior to the Preferred Stock.
4. RESTRICTIONS.
The Corporation will not modify the terms of the Preferred Stock at any time
when shares of Preferred Stock are outstanding, without the approval of the
Holders of at least a two thirds majority of the then outstanding shares of
Preferred Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, except where the vote or written
consent of the Holders of a greater number of shares of the Corporation is
required by law or by the Corporation's Articles of Incorporation, as amended,
provided, however, that pursuant to the power granted to them in the
Corporation's Articles of Incorporation, the Corporation's Board of Directors
may, without approval of any of the Holders of the Preferred Stock, resolve to:
(i) increase the number of shares of the Preferred Stock issuable under this
Statement of Designation, or (ii) decrease the number of shares of Preferred
Stock issuable under this Statement of Designation to the number of shares of
Preferred Stock then outstanding.
5. OPTIONAL CONVERSION.
The Holders of shares of Preferred Stock shall have the following conversion
rights:
(a) RIGHT TO CONVERT: CONVERSION PRICE, Subject to the terms, conditions, and
restrictions of this Section 5, the Holder of any share or shares of Preferred
Stock shall have the right to convert each such share of Preferred Stock into a
number of shares of Common Stock equal to the Stated Value of the Preferred
Stock plus all accrued but unpaid dividends of such share or shares of Preferred
Stock divided by the "Conversion Price" which shall be equal to the lesser of
(i) 75% of the average closing bid price of the Common Stock (the "Average
Closing Price"), during the period of five trading days immediately preceding
the date of conversion (the "Conversion Date"), or (ii) 100% of the closing bid
price of the Common Stock on the original issuance date of such share of shares
of Preferred Stock (the "Issuance Date"). Notwithstanding the above, the
Conversion Price shall not be lower than $2.90 (the "Conversion Floor"). If at
any time the Company's Common Stock is not listed for trading on The Nasdaq
SmallCap Market, The Nasdaq National Market, the American Stock Exchange or the
New York Stock Exchange, the Conversion Price requirement in alternative (i)
above shall be reduced to 65% of the Average Closing Price and the Conversion
Floor shall not apply. All such bid price information referred to herein shall
be as reported by the Nasdaq SmallCap Market or any other such exchange or
quotation system on which the Common Stock is then listed for trading.
If at any time the Preferred is outstanding, the closing bid price of the
Company's Common Stock for ten (10) consecutive trading days is lower than
$2.90, the Company
<PAGE>
shall pay to the Holders of the Preferred Stock a cash penalty of 2% per month
of the outstanding Stated Value of the Preferred. The cash penalty shall
commence on the eleventh (11) day the Common Stock trades lower than $2.90, and
shall continue until such time the Common Stock trades at a closing bid of no
lower than $3.89 for ten (10) consecutive days. The cash penalty shall be paid
on the thirtieth (30th) day following the day the penalty commences, and on each
thirty (30) days thereafter. For purposes of receipt of the penalty, the Holders
of the Preferred stock shall be creditors of the Corporation.
(b) CONVERSION DATES, The Holder of any share or shares of Preferred Stock may
convert cumulatively any of such shares as follows: on the earlier of the date
on which a registration statement covering the resale of the Common Stock
issuable upon conversion of the Preferred Stock is declared effective by the
Commission or, 100 days following the Issuance Date. The 4% dividend shall be
waived by the Holder for any conversion by such Holder prior to 6 months after
the Issuance Date.
(c) CONVERSION NOTICE. The right of conversion shall be exercised by the Holder
thereof by telecopying or faxing an executed and completed written notice (the
"Conversion Notice") to the Corporation that the Holder elects to convert a
specified number of shares of Preferred Stock representing a specified Stated
Value thereof into Common Stock and by delivering by express courier the
original Conversion Notice and a certificate or certificates of Preferred Stock
being converted to the Corporation at its principal office (or such other office
or agency of the Corporation as the Corporation may designate by notice in
writing to the Holders of the Preferred Stock), together with a statement of the
name or names (with address) in which the certificate or certificates for shares
of Common Stock shall be issued. The business date indicated on a Conversion
Notice which is telecopied to and received by the Corporation in accordance with
the provisions hereof shall be deemed a Conversion Date. The Conversion Notice
shall include therein the Stated Value of shares of Preferred Stock to be
converted, and a calculation (a) of the Average Closing Bid Price, (b) the
Conversion Price, and (c) the number of shares of Common Stock to be issued in
connection with such conversion. The Corporation shall have the right to review
the calculations included in the Conversion Notice, and shall provide notice of
any discrepancy or dispute therewith within three (3) business days of the
receipt thereof. The Holder shall deliver to the Corporation an original Notice
of Conversion and the original Preferred to be converted within three (3)
business days from the date of the Notice of Conversion.
(d) ISSUANCE OF CERTIFICATES - TIME CONVERSION EFFECTED. Promptly, but in no
event more than five (5) business days, after the receipt of the Conversion
Notice referred to in Subparagraph (5)(c) and surrender of the certificate or
certificates for the share or shares of Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered, to the
Holder, registered in such name or names as such Holder may
<PAGE>
direct, a certificate or certificates for the number of whole shares of Common
Stock into which such shares of Preferred Stock are converted. Such conversion
shall be deemed to have been effected as of the close of business on the date on
which such Conversion Notice shall have been received by the Corporation, and
the rights of the Holder of such share or shares of Preferred Stock shall cease,
at such time, and the person or persons in whose name or names any certificate
or certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become the Holder or Holders of record of the
shares represented thereby. Issuance of shares of Common Stock issuable upon
conversion which are requested to be registered in a name other than that of the
registered Holder shall be subject to compliance with all applicable federal and
state securities laws. The Company shall pay a penalty of $10.00 per $1,000.00
stated value of Preferred Stock for every day subsequent to five (5) business
days after the latter of (i) the receipt of an original Conversion Notice and
(ii) the receipt of the original certificate or certificates representing the
share or shares of Preferred Stock that the Company fails to send the Common
Stock to the Holder by overnight courier.
(e) FRACTIONAL SHARES. No fractional shares shall be issued upon conversion of
any Preferred Stock into Common Stock. All fractional shares shall be aggregated
and then rounded down to the nearest whole share. In case the number of shares
of Preferred Stock represented by the certificate or certificates surrendered
pursuant to Subparagraph 5(a) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the Holder, at
the expense of the Corporation, a new certificate or certificates for the number
of shares of Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted.
(f) REORGANIZATION OR RECLASSIFICATION. If any capital reorganization or
reclassification of the capital stock of the Corporation shall be effected in
such a way that Holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each Holder of a share or shares of Preferred
Stock shall thereupon have the right to receive, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Preferred Stock, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore receivable upon such conversion had such reorganization or
reclassification not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of such Holder to the end
that the provisions hereof (including without limitation provisions for
adjustments of the conversion rights) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights.
<PAGE>
(g) ADJUSTMENTS FOR SPLITS, COMBINATIONS, ETC., The Conversion Price and the
number of shares of Common Stock into which the Preferred Stock shall be
convertible shall be adjusted for stock splits, combinations, or other similar
events. Additionally, an adjustment will be made in the case of an exchange of
Common Stock, consolidation or merger of the Corporation with or into another
corporation or sale of all or substantially all of the assets of the Corporation
in order to enable the Holder of Preferred Stock to acquire the kind and the
number of shares of stock or other securities or property receivable in such
event by a Holder of the Preferred Stock of the number of shares that might
otherwise have been issued upon the conversion of the Preferred Stock. No
adjustment to the Conversion Price will be made for dividends (other than stock
dividends), if any, paid on the Common Stock or for securities issued for fair
value.
6. REDEMPTION OF PREFERRED STOCK.
(a) RIGHT TO REDEEM PREFERRED STOCK. At any time, prior to receiving a
Conversion Notice, the Corporation may redeem, in whole or in part, if the
Company's share price is less than the closing bid price on the Issuance Date of
such shares, in whole or in part, the then issued and outstanding shares of
Preferred Stock, by paying to the Holder an amount (the "Redemption Price")
equal to 130% of the Stated Value of the Preferred Stock plus all accrued but
unpaid dividends of the Preferred Stock redeemed. The Corporation may not in any
circumstance redeem the Preferred Stock after receiving a Conversion Notice.
(b) NOTICE OF REDEMPTION. The Corporation shall provide each Holder of record of
the Preferred Stock with written notice of redemption, not less than five (5)
days, prior to the redemption of the Preferred Stock (the "Redemption Date").
The Redemption Notice shall contain (i) the Redemption Date, (ii) the number of
shares of Preferred Stock to be redeemed from the Holder to whom the Redemption
Notice is delivered, (iii) instructions for surrender to the Corporation of the
certificate or certificates representing the shares of Preferred Stock to be
redeemed, (iv) specification by the Corporation of the total number of shares of
Preferred Stock to be redeemed as provided in this Section 6, and (v) the
Redemption Price. In no case may the Redemption Date be more than five (5)
business days after the Redemption Notice. If the Company fails to pay to the
Holder the required amount in cash no later than the Redemption Date, the
Redemption shall for all purposes be null and void and the Holder may convert
the Preferred Stock pursuant to Section 5, and all future rights of Redemption,
as provided in this Section 6 shall be forfeited by the Company.
(c) SURRENDER OF CERTIFICATES: PAYMENT OF REDEMPTION PRICE. On or before the
Redemption Date, each Holder of the shares of Preferred Stock to be redeemed
shall surrender the required certificate or certificates representing such
shares to the Corporation, in the manner and at the place designated in the
Redemption Notice, and
<PAGE>
upon such surrender, the Redemption Price for such shares shall be paid by the
Corporation on the Redemption Date via wire transfer to the order of the person
whose name appears on such certificate or certificates as the owner thereof, and
each such surrendered certificate shall be canceled and retired. If a
certificate is surrendered and all the shares evidenced thereby are not being
redeemed, the Corporation shall issue new certificates to be registered in the
names of the person(s) whose name(s) appear(s) as the owners on the respective
surrendered certificates and deliver such certificate to such person(s).
7. ASSIGNMENT.
Subject to all applicable restrictions on transfer, the rights and obligations
of the Corporation and the Holder of the Preferred Stock shall be binding upon
and benefit the successors, assigns, heirs, administrators, and transferees of
the parties.
8. SHARES TO BE RESERVED.
The Corporation, upon the effective date of this Statement of Designation, has a
sufficient number of shares of Common Stock available to reserve for issuance
upon the conversion of all outstanding shares of Preferred Stock, pursuant to
the terms and conditions set forth in Paragraph 5. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be duly
and validly issued, fully paid and non assessable. The Corporation will take all
such action as may be required, if the total number of shares of Common Stock
issued and issuable after such action upon conversion of the Preferred Stock
would exceed the total number of shares of Common Stock then authorized by the
Corporation's Articles of Incorporation, as amended, in order to increase the
number of authorized shares of Common Stock to a number sufficient to permit
conversion of the Preferred Stock.
9. NO REISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK.
Shares of Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
10. CLOSING OF BOOKS.
The Corporation will at no time close its transfer books against the transfer of
any Preferred Stock or of any shares of Common Stock issued or issuable upon the
conversion of any shares of Preferred Stock in any manner which interferes with
the timely
<PAGE>
conversion of such Preferred Stock, except as may otherwise be required to
comply with applicable securities laws.
11. DEFINITION OF COMMON STOCK.
As used in this Statement of Designation, the term "Common Stock" shall mean and
include the Corporation's authorized Common Stock, as constituted on the date of
filing of these terms of the Preferred Stock, and shall also include any capital
stock of any class of the Corporation thereafter authorized which shall neither
be limited to a fixed sum or percentage of par value in respect of the rights of
the Holders thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Preferred Stock shall include only
shares designated as Common Stock of the Corporation on the date of filing of
this instrument, or in case of any reorganization, reclassification, or stock
split of the outstanding shares thereof, the stock, securities or assets
provided for hereof.
The said determination of the designation, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, relating to the Preferred Stock was duly made by the Board
of Directors pursuant to the provisions of the Corporation's Articles of
Incorporation and in accordance with the provisions of the Business Corporation
Act of the State of Texas.
IN WITNESS HEREOF, this Statement of Designation has been signed by:
Michael M. Barbour, President on this 13th day of March, 1998.
/s/ MICHAEL M. BARBOUR
- -----------------------------------
President, Henley Healthcare, Inc.
EXHIBIT 10.13
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
BY AND AMONG
HENLEY HEALTHCARE, INC.,
AMC ACQUISITION CORP.,
DAN D. SUDDUTH, BRITTON D. SUDDUTH
AND
ROGER W. DARTT
DATED FEBRUARY 9, 1998
- --------------------------------------------------------------------------------
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT is entered into on this 9th day of
February, 1998 by and among Henley Healthcare, Inc., a Texas corporation (the
"Buyer"), AMC Acquisition Corp., a Texas corporation (the "Seller"), and Dan D.
Sudduth, Britton D. Sudduth and Roger W. Dartt (each referred to individually as
a "Shareholder" and collectively as the "Shareholders").
WITNESSETH :
WHEREAS, Seller is principally engaged in the business of distributing
durable medical equipment and devices to Medicare and Medicaid patients (the
"Business");
WHEREAS, the Shareholders collectively own all of the issued and
outstanding capital stock of the Seller; and
WHEREAS, the Seller desires to sell to Buyer, and Buyer desires to
purchase from Seller the Business and all of the assets of Seller on the terms
and conditions herein set forth.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each parenthetically
capitalized term in the introduction, recitals and other Sections of this
Agreement has the meaning so ascribed to it, and other capitalized terms have
the meaning given them in Section 5.1.
1.2 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions set
forth in this Agreement, Seller hereby agrees to sell, convey, transfer, assign
and deliver to Buyer all of the assets of Seller existing on the date hereof
other than the Excluded Assets (defined below), whether real, personal, tangible
or intangible, including without limitation the following assets of Seller
relating to or used or useful in the operation of the Business (all such assets
being sold hereunder are referred to collectively herein as the "Assets"):
1.2.1 all real property of Seller as more fully described on
SCHEDULE 1.2.1 attached hereto (collectively, the "Real Property");
1.2.2 all tangible personal property of Seller (such as
machinery, equipment, leasehold improvements, furniture and fixtures,
and vehicles), including, without limitation, that which is more fully
described on SCHEDULE 1.2.2 attached hereto but excluding the Inventory
(as defined in Section 1.2.3 hereof) (collectively, the "Tangible
Personal Property");
1
<PAGE>
1.2.3 all of Seller's inventory, including, without limitation,
that which is more fully described on SCHEDULE 1.2.3 attached hereto
(the "Inventory");
1.2.4 all of Seller's accounts receivable and all other rights of
Seller to payment for goods sold or leased or for services rendered,
including, without limitation, that which is more fully described in
SCHEDULE 1.2.4 attached hereto (the "Accounts Receivable");
1.2.5 all of Seller's intangible assets, including, without
limitation, (i) all of Seller's rights to the names "AMC Home
Healthcare," "AMC Healthcare," "AMC," "AMC Acquisition Corp." and any
similar names used by Seller (ii) all of Seller's rights to any patents,
patent applications, copyrights, trademarks and service marks (including
registrations and applications therefor), trade names, copyrights,
licenses or sublicenses and written know-how, trade secrets and all
other similar proprietary data and the goodwill associated therewith
(collectively, the "Intellectual Property") used or held in connection
with the Business, including without limitation, that which is more
fully described on SCHEDULE 1.2.5 attached hereto (collectively, the
"Seller's Intellectual Property") and (iii) any and all rights Seller
may have in Seller's phone numbers and all of its account ledgers, sales
and promotional literature, computer software, books, records, files and
data (including customer and supplier lists), copies of contracts and
documents evidencing accounts and contracts receivable and payable, and
all other records of Seller relating to the Assets or the Business,
excluding the corporate minute books of Seller (items (i), (ii) and
(iii) collectively, the "Intangibles");
1.2.6 all leases, subleases, contracts, contract rights, and
agreements relating to the Assets or the operation of the Business,
including, but not limited to, that which is more fully described on
SCHEDULE 1.2.6 attached hereto (collectively, the "Contracts");
1.2.7 all of Seller's franchises, approvals, permits, licenses,
orders, registrations, certificates, variances, and similar rights
obtained from governments and governmental agencies relating principally
to all or any of the Assets or to the operation of the Business,
including, but not limited to, that which is more fully described on
SCHEDULE 1.2.7 attached hereto (collectively, the "Business Licenses");
1.2.8 the goodwill and going concern value of the Business;
1.2.9 all of Seller's backlog of orders for products manufactured
or sold by Seller relating to the Business, which were accepted by
Seller in the Ordinary Course of Business prior to the date hereof and
not invoiced or shipped (or canceled) prior to the date hereof
(collectively, the "Backlog Orders");
1.2.10 all right, title and interest of Seller in and to all
prepaid rentals, other prepaid expenses, bonds, deposits and financial
assurance requirements, and other current assets relating to any of the
Assets or the Business;
1.2.11 all cash of Seller kept on hand for use in the Business;
and
1.2.12 all other or additional privileges, rights, interests,
properties and assets of Seller of every kind and description and
wherever located that are used in the Business or
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intended for use in the Business in connection with, or that are
necessary for the continued conduct of, the Business as conducted by
Seller prior to the date hereof.
The Assets shall not include the following (collectively, the "Excluded
Assets"): (i) all assets in possession of Seller but owned by third parties;
(ii) the corporate charter, related organizational documents and minute books of
Seller; and (iii) the cash or other consideration paid or payable by Buyer to
Seller pursuant to Section 1.3 hereof.
1.3 CONSIDERATION FOR ASSETS; ASSUMPTION OF LIABILITIES. As
consideration for the sale of the Assets to Buyer and for the other covenants
and agreements of Seller and Shareholders contained herein, Buyer agrees to (i)
issue, in accordance with the restrictions set forth below, to Seller an
aggregate of 68,000 shares (the "Buyer Shares") of Buyer's common stock, par
value $.01 per share (the "Common Stock"), such number to be determined by
dividing $450,000 by the Market Price, and (ii) assume certain liabilities of
Seller related to and necessary for the operation of the Business, as disclosed
on SCHEDULE 1.3 (collectively, the "Assumed Liabilities"). Except as listed on
SCHEDULE 1.3 with respect to the Assumed Liabilities, Buyer shall not assume or
be obligated to pay, perform, or discharge any debt, obligation, expense or
liability of Seller, whether absolute or contingent, and whether known or
unknown (the "Retained Liabilities").
1.4 ALLOCATION OF CONSIDERATION. The total consideration for the Assets,
including the Assumed Liabilities, shall be allocated among the Assets in
accordance with SCHEDULE 1.4. The Buyer, Seller and Shareholders affirm that
said allocation is fair and equitable and that the parties shall adhere to such
allocation for the purposes of all tax returns filed by them on or after the
Closing Date.
1.5 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of counsel to Buyer,
Porter & Hedges, L.L.P., 700 Louisiana, Houston, Texas 77002-2764 at 3:30 p.m.
on February 9, 1998 (the "Closing Date"), unless another time, place or date is
agreed to by the Shareholders and the Buyer.
1.6 BUYER'S CLOSING DELIVERIES. At the Closing, Buyer shall deliver to
the Seller: (i) the Buyer Shares described in Section 1.3; (ii) a duly executed
copy of the Consulting Agreement (as defined in Section 1.8); (iii) a duly
executed copy of an assignment and assumption agreement pertaining to the
Assumed Liabilities; and (iv) a favorable opinion of counsel, dated the Closing
Date, from Porter & Hedges, L.L.P., counsel to the Buyer, in form and substance
satisfactory to the Seller and the Shareholders, to the effect that (a) the
Buyer has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its state of organization; (b) this Agreement
and the Ancillary Agreements have been duly authorized, executed and delivered
by, and are the legal, valid and binding obligation of the Buyer and are
enforceable against the Buyer in accordance with their terms, except as
enforceability may be limited by (1) equitable principles of general
applicability or (2) bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws affecting the rights of creditors generally; (c) the
execution, delivery and performance of this Agreement and the Ancillary
Agreements by the Buyer, and the consummation of the transactions contemplated
in the Agreement, will not constitute a breach or violation of, or default
under, the Articles of Incorporation or Bylaws of the Buyer or any Laws
applicable to the Buyer, or violate or conflict with or result in breach of, or
constitute a default under (or an event which with notice or lapse of time or
both, would constitute and default under), any contract, indenture, loan
agreement, order, decree or instrument to which the Buyer is a party or by which
it or its assets are bound; and
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(d) the Buyer Shares, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable by the Buyer
and will not be subject to any preemptive rights to purchase such shares. In
rendering such opinion, such counsel may rely upon (1) certificates of public
officials and of officers of the Buyer as to matters of fact and (2) the opinion
or opinions of other counsel, which opinions shall be reasonably satisfactory to
the Shareholders, as to matters other than federal or Texas law.
1.7 SELLER'S AND SHAREHOLDERS' CLOSING DELIVERIES. At the Closing Seller
and Shareholders shall deliver to the Buyer: (i) a duly executed copy of the
Consulting Agreement (as defined in Section 1.8); (ii) a duly executed bill of
sale relating to the Assets, reasonably satisfactory in form and substance to
Buyer; (iii) a duly executed assignment relating to the Contracts, reasonably
satisfactory in form and substance to Buyer; (iv) a duly executed copy of an
assignment and assumption agreement pertaining to the Assumed Liabilities; (v)
any consents necessary pursuant to SCHEDULE 1.2.6; (vi) all such other
instruments as shall be reasonably requested by the Buyer to vest fully in the
Buyer good and indefeasible title to the Assets; and (vii) a favorable opinion
of counsel, dated the Closing Date, from Page, Murphree, Byerly & Hansen,
P.L.L.C., counsel to Seller, in form and substance satisfactory to Henley, to
the effect that (a) Seller has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Texas and is
qualified to transact business in every jurisdiction in which the nature of
Seller's contacts requires such qualification, (b) this Agreement and the
Ancillary Agreements have been duly authorized, executed and delivered by, and
are the legal, valid and binding obligation of the Seller and Shareholders and
are enforceable against the Seller and Shareholders in accordance with their
terms, except as enforceability may be limited by (1) equitable principles of
general applicability or (2) bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws affecting the rights of creditors generally; (c) the
execution, delivery and performance of this Agreement and the Ancillary
Agreements by the Seller, and the consummation of the transactions contemplated
in the Agreement, will not constitute a breach or violation of, or default
under, the Articles of Incorporation or Bylaws of the Sellers or any Laws
applicable to the Seller, or violate or conflict with or result in breach of, or
constitute a default under (or an event which with notice or lapse of time or
both, would constitute and default under), any of the Contracts (as defined
herein) to which the Seller is a party or by which Seller or its assets are
bound; and (d) AMC owns all of its assets free and clear of any Encumbrances
other than those Encumbrances listed on the Balance Sheet or Schedules hereto.
In rendering such opinion, such counsel may rely upon (1) certificates of public
officials and of officers of AMC or the Shareholders as to matters of fact and
(2) on the opinion or opinions of other counsel, which opinions shall be
reasonably satisfactory to Henley, as to matters other than federal or Texas
law.
1.8 CONSULTING AGREEMENT. At the Closing, the Buyer will enter into an
Consulting Agreement with Roger W. Dartt in the form attached hereto as EXHIBIT
A (the "Consulting Agreement").
1.9 FEDERAL INCOME TAX TREATMENT. The purchase of the Assets pursuant to
this Agreement is intended to qualify as a tax-free reorganization under ss.
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code").
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1.10 FURTHER ASSURANCES. From time to time, as and when requested by any
party hereto, any other party hereto shall execute and deliver, or cause to be
executed and delivered, such documents and instruments and shall take, or cause
to be taken, such further or other actions as may be reasonably necessary to
effectuate the transactions contemplated hereby, including, without limitation,
the transfer to Buyer of all of the Assets, free and clear of all Encumbrances.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS
As material inducements to the execution, delivery and performance of
this Agreement by Buyer, Seller and each Shareholder hereby jointly and
severally represent and warrant to Buyer as follows except as otherwise
described in the attached Exception Schedule attached hereto. The Exception
Schedule shall identify each exception by the section number(s) of this Article
2 to which it relates.
2.1 ORGANIZATION AND STANDING. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Texas.
Seller has all necessary corporate power and authority to own, operate, and
lease its properties and to carry on its business as now owned or leased and
operated by it. Seller neither is, nor is required to be, qualified to do
business under the laws of any jurisdiction other than Texas. Seller does not
own, directly or indirectly, any interest or investment (whether debt or equity)
in any other Person. True, correct and complete copies of Seller's Articles of
Incorporation and Bylaws, as each may have been amended, are attached to the
Exception Schedule.
2.2 AUTHORITY AND CONSENT. Seller and each of the Shareholders has the
absolute and unrestricted right, power, legal capacity, and authority to enter
into, and perform such Seller and Shareholder obligations under this Agreement
and the Ancillary Agreements, and no approval or consent of any Person is
necessary in connection therewith.
2.3 AGREEMENT AUTHORIZED AND ENFORCEABLE. The execution and delivery of
this Agreement and the Ancillary Agreements and the consummation of the
transactions contemplated hereby and thereby has been duly and validly
authorized by all necessary corporate or shareholder action on the part of the
Seller, and this Agreement and the Ancillary Agreements constitute valid and
binding obligations of Seller and Shareholders, enforceable against each of them
in accordance with their terms, except as may be limited by applicable
bankruptcy laws, insolvency laws and other similar laws affecting the rights of
creditors generally.
2.4 NO VIOLATIONS OR CONFLICTS. Except as set forth in Schedule 2.4,
neither the execution and delivery of this Agreement and the Ancillary
Agreements by Seller and Shareholders nor the consummation of the transactions
contemplated hereby and thereby will: (a) violate or conflict with any provision
of Seller's Articles of Incorporation or Bylaws, as amended to date; (b) violate
or conflict with any provision of any Laws applicable to any of Shareholders,
Seller, or their respective business or assets; (c) result in a breach of, or
constitute a default (or with notice or lapse of time or both result in a breach
of or constitute a default) under or otherwise give any Person the right to
terminate or accelerate payment under or performance of any note, bond, loan
agreement, contract, lease, license, franchise, permit, trust agreement or
declaration of trust, or other agreement or instrument to which any of
Shareholders or Seller is a party or to which their respective assets are
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subject; (d) result in the creation or imposition of any Encumbrance of any
nature upon or with respect to any of the assets of Shareholders or Seller; or
(e) be an event that would permit any party to terminate any Contract.
2.5 FINANCIAL INFORMATION. Including as described in Schedule 2.5, the
Seller and Shareholders have delivered to Buyer unaudited financial statements
of Seller, consisting of an income statement for the twelve months ended
December 31, 1997, and a balance sheet as of December 31, 1997 (the "Balance
Sheet Date"), true and correct copies of which will be attached to the Exception
Schedule (such financial statements referenced above are herein collectively
referred to as the "Financial Information"). Except for customary year-end
adjustments to unaudited statements, the Financial Information (a) is in
accordance with Seller's books and records, (b) has been prepared in accordance
with generally accepted accounting principals consistently applied with prior
periods, except that all such financial statements exclude footnotes, (c) fairly
presents and is a true and complete statement of the financial position of
Seller as of and for the periods indicated, and (d) does not include or omit any
material asset or liability (whether fixed, accrued, contingent or other) the
inclusion or omission of which renders such financial statements misleading or
incomplete. Since the Balance Sheet Date, Seller has not changed any accounting
method or practice, or experienced any material adverse change in its financial
condition, operations, assets, liabilities (fixed, accrued, contingent, or
other), revenues, expenses, or business prospects, or experienced any event or
condition that has resulted or is likely to result in such a material adverse
change in its business or assets..
2.6 TAXES. Except as set forth on Schedule 2.6: (i) Seller has timely
filed all federal, state, county, local and other excise, franchise, property,
severance, payroll, income, capital stock, sales and use, fuel and other tax
returns for all fiscal years ended on or before December 31, 1996, and for any
periods thereafter for which returns are due, and all such returns are true and
correct in all material respects, (ii) Seller has not filed an extension for any
tax return otherwise due, (iii) Seller has timely paid all taxes which are shown
on such returns to be due or have been assessed against it and all taxes,
penalties and interest which any Governmental Authority has proposed or asserted
to be owing (except for those being contested in good faith as set forth on the
Exception Schedule), (iv) Seller has made all withholding payments of tax
required to be made under all tax Laws, (v) provisions and accruals for income
taxes, payroll taxes payable, ad valorem property taxes, sales taxes and all
other taxes and governmental charges required to be paid by Seller as of the
Balance Sheet Date have been set forth in the Financial Information and conform
in all material respects with federal income tax principles and are adequate to
cover Seller's liability for all periods before the Closing Date, (vi) there is
no pending audit of Seller, and Seller has not received any oral or written
notice of any proposed audit, by any Governmental Authority, (vii) all tax
liabilities to which the properties of Seller may have been subjected have been
discharged, except for taxes assessed but not yet payable, (viii) there are no
tax Claims presently being asserted against Seller, and to the knowledge of
Seller and the Shareholders, there is no basis for any such Claim, (ix) Seller
has not granted any extension to any taxing authority of the limitation period
during which any tax liability may be asserted thereby, and (x) neither Seller
nor Shareholders have received notice or have knowledge of any proposal for
increasing the assessed value of any of Seller's properties for tax purposes, or
of any pending proceedings or public improvements which would result in the levy
of any special tax or assessment against any of Seller's properties.
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2.7 LIABILITIES. Except as set forth in Schedule 2.7, the Seller has no
liabilities or obligations, whether absolute, accrued, contingent or otherwise,
and neither Seller nor Shareholders have any knowledge of any potential
liabilities or obligations of Seller except (a) as reflected or reserved against
in Seller's unaudited December 31, 1997 balance sheet referred in Section 2.5
above, (b) obligations to perform services or deliver merchandise in the
Ordinary Course of Business that are not delinquent, and (c) liabilities accrued
or to be accrued through the Closing Date and set forth on SCHEDULE 1.3 or on
the Exception Schedule. Without limiting the generality of the foregoing, Seller
has no liability as a guarantor, endorser, co-maker, surety, accommodation maker
or in any other capacity for any indebtedness, liability, obligation or
commitment of any other Person.
2.8 ABSENCE OF CERTAIN CHANGES AND EVENTS. Other than as a result of the
transactions contemplated by this Agreement, since the Balance Sheet Date, there
has not been:
2.8.1 FINANCIAL CHANGE. Any adverse change in the Assets, the
Business or the financial condition, operations, or liabilities or
prospects of Seller;
2.8.2 PROPERTY DAMAGE. Any damage, destruction, or loss to the
Assets or the Business (whether or not covered by insurance);
2.8.3 WAIVER. Any waiver or release of a material right of or
claim held by Seller;
2.8.4 CHANGE IN ASSETS. Any acquisition, disposition, transfer,
encumbrance, mortgage, pledge or other encumbrance of any asset of
Seller other than in the Ordinary Course of Business;
2.8.5 LABOR DISPUTES. Any labor dispute between Seller and the
Employees; or
2.8.6 OTHER CHANGES. Any other event or condition that, to the
knowledge of the Seller and Shareholders, is likely to have an adverse
effect on the Assets, the operations of the Business or the financial
condition or prospects of Seller.
2.9 TITLE TO ASSETS. Seller has and will convey to Buyer good and
marketable title to the Assets, free and clear of any Encumbrance except liens
for current taxes not yet due and payable and except as set forth in SCHEDULE
2.9 of the Exception Schedule attached hereto. Seller is in possession of all
property leased to it from others. The Assets constitute all of the material
property, whether real, personal, mixed, tangible or intangible, that is used in
the Business by Seller and that is necessary for the continued conduct of the
Business as conducted by Seller prior to the date hereof. SCHEDULE 2.9 of the
Exception Schedule attached hereto contains a description of all of the personal
property leased pursuant to the Contracts, which are the only assets used in the
conduct of the Business which are not owned by Seller.
2.10 REAL PROPERTY. SCHEDULE 1.2.1 attached hereto constitutes an
accurate list of all of the Real Property owned by the Seller as of the Closing
Date. The Seller has delivered to Buyer a true and correct legal description of
each parcel of Real Property. Except as disclosed on SCHEDULE 2.9 of the
Exception Schedule attached hereto, their are no liens on or exceptions to the
Seller's title to any of the Real Property. There are no pending or threatened
condemnation
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proceedings, lawsuits or administrative actions, relating to any Real Property,
which may adversely affect the current use occupancy or value thereof.
2.11 TANGIBLE PERSONAL PROPERTY AND INVENTORY. SCHEDULES 1.2.2 AND 1.2.3
attached hereto constitute accurate lists of all of the material personal
property and Inventory, respectively, as of the Balance Sheet Date prepared by
Seller based on perpetual records and cycle counts which is owned by, leased by,
in the lawful possession of, or used by Seller in connection with the ownership
and operation of the Business. Except as disclosed on SCHEDULE 2.9 of the
Exception Schedule attached hereto, no material Tangible Personal Property (i)
is held under any lease, security agreement, conditional sales contract, or
other title retention or security arrangement, or (ii) is located other than in
the possession of Seller. The Seller's Tangible Personal Property, including,
without limitation, its premises, office equipment, machinery, vehicles,
furnishings and fixtures are in good operating condition and repair consistent
with the Seller's normal practices subject only to ordinary wear and tear. There
are no outstanding requirements or recommendations by the Seller's insurers
requiring or recommending any repairs or work be done with respect to the
Seller's Assets. To Seller's or Shareholders' knowledge, all items of raw
materials, work in process and finished goods included in the Inventory, consist
of items of a quality and quantity useable and saleable in the Ordinary Course
of Business by Seller, except for obsolete and slow moving items and items below
standard quality, all of which have been written down on the books of Seller to
net realizable market value or have been provided for by adequate reserves in
the Financial Information. No material items included in the Inventory have been
pledged as collateral or are held by Seller on consignment from others. The
Inventory is valued at the lower of cost (determined on a first-in, first-out
basis) or market value and on a basis consistent with that of prior years.
2.12 ACCOUNTS RECEIVABLE. SCHEDULE 1.2.4 attached hereto constitutes an
accurate list of all of the Accounts Receivable owned by Seller. Except to the
extent since collected, all Accounts Receivable listed on the SCHEDULE 1.2.4 are
evidenced by valid and enforceable written invoices, contracts or other
agreements. All amounts paid or collected under such contracts or agreements
which are required by applicable Laws to be deposited in trust or deposit
accounts have been so deposited on a timely basis in accordance with such Laws.
All such trust and deposit accounts have been established, funded and maintained
in accordance with all applicable Laws. Except as set forth in the Exception
Schedule, the Seller's accounts receivable are fully collectible without resort
to legal proceedings or collection agencies, and are not subject to any refunds
or other adjustments, or any defenses, rights of set-off, assignments,
Encumbrances, or conditions enforceable by third parties, except to the extent
reserved against in the Financial Information.
2.13 INTELLECTUAL PROPERTY. SCHEDULE 1.2.5 attached hereto constitutes
an accurate list of all of the material Intellectual Property owned by Seller.
Seller owns or possesses licenses to use all Intellectual Property that is
necessary for the continued conduct of the Business. The Intellectual Property
is owned or licensed by Seller free and clear of any Encumbrance. Seller has not
granted to any other Person any license to use any of the Seller's Intellectual
Property. The use of the Seller's Intellectual Property will not, and the
conduct of the Business prior to the date hereof did not, infringe,
misappropriate or conflict with the intellectual property rights of others.
Neither Seller nor Shareholders have received any notice of infringement,
misappropriation, or conflict with the intellectual property rights of others in
connection with the use by Seller of the Seller's Intellectual Property.
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2.14 CONTRACTS. SCHEDULE 1.2.6 attached hereto and incorporated herein
by reference lists all of the material contracts, agreements, and other written
arrangements to which Seller is a party, or by which Seller or the Assets are
bound pertaining to the Business. Each of the Contracts is valid and in full
force and effect. There has not been any default by Seller, or to Seller's or
Shareholders' knowledge, any other party to any of the Contracts, or any event
that with notice or lapse of time or both, would constitute a default by Seller,
or to Seller's or Shareholders' knowledge, any other party to any of the
Contracts. Neither Seller nor Shareholders have received notice that any party
to any of the Contracts intends to cancel or terminate any of the Contracts or
exercise or not exercise any options that they might have under any of the
Contracts. Except as provided in SCHEDULE 2.4 attached hereto, all Contracts are
assignable in full to Buyer without the consent of any of the other parties
thereto.
2.15 BUSINESS LICENSES. SCHEDULE 1.2.7 attached hereto, is a schedule of
all material Business Licenses owned by Seller or in which Seller has any rights
or licenses in connection with the Business, together with a brief description
of each. Seller owns or holds adequate licenses or other rights to use all
licenses necessary for the Business as now conducted by Seller. Seller is in
compliance in all material respects with the terms of the Business Licenses.
None of the Business Licenses have been, or to the knowledge of Seller or
Shareholders, are threatened to be, revoked, canceled, suspended or modified.
2.16 LITIGATION. There is no suit, action, or legal, administrative,
arbitration, or other proceeding or governmental investigation pending or
threatened to which Seller is a party or, to the knowledge of Seller or
Shareholders, might become a party or which particularly affects Seller, the
Assets or the Business. There are no changes in the zoning or building
ordinances directly affecting the leasehold interests of Seller, pending or
threatened.
2.17 ENVIRONMENTAL MATTERS. None of the current or past operations of
the Business or the Assets is being or has been conducted or used in such a
manner as to constitute a violation of any Applicable Environmental Laws.
Neither Seller nor Shareholders have received any notice (whether formal or
informal, written or oral) from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or inquiry related
to violations of any Applicable Environmental Laws or regarding any claims for
remedial obligations or contribution for removal costs or damages under any
Applicable Environmental Laws. There are no writs, injunction decrees, orders or
judgments outstanding, or lawsuits, claims, proceedings or investigations
pending or, to the knowledge of Seller or Shareholders, threatened relating to
the ownership, use, maintenance or operation of the Assets or the conduct of the
Business, nor is there any basis for any of the foregoing. Buyer is not required
to obtain any permits, licenses or similar authorizations pursuant to any
Applicable Environmental Laws in effect as of the date hereof to operate and use
any of the Assets for their current or proposed purposes and uses or to
otherwise conduct the Business. The Assets include all environmental and
pollution control equipment necessary for compliance with all Applicable
Environmental Laws. No Hazardous Substances have been or are currently being
used by Seller in its operations except in compliance with Applicable
Environmental Laws, and no Hazardous Substances are or have ever been situated
on or under Seller's properties, whether owned or leased, or incorporated into
any of the Assets. There are no, nor to the knowledge of the Seller or
Shareholders have there ever been any, underground storage tanks (as defined
under Applicable Environmental Laws) located under Seller's properties, whether
owned or leased.
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2.18 COMPLIANCE WITH OTHER LAWS. The Seller is not in violation of or in
default with respect to, or in alleged violation of or alleged default with
respect to, any other applicable Law, and Seller is not delinquent with respect
to any report required to be filed with any Governmental Authority.
2.19 NECESSARY CONSENTS. Seller and Shareholders have obtained and
delivered to Buyer all consents to assignment or waivers thereof required to be
obtained from any Governmental Authority or from any other third party in order
to validly transfer the Assets hereunder, including without limitation, the
assignment of the Contracts and Business Licenses and the transfer of the
Intangibles.
2.20 SOLVENCY. Neither the Seller nor the Shareholders are now
Insolvent, nor will the Seller or Shareholders be rendered Insolvent by the
occurrence of the transactions contemplated by this Agreement.
2.21 CUSTOMERS. SCHEDULE 2.21 attached hereto constitutes a complete and
accurate list of the names of substantially all customers of the Business.
2.22 EMPLOYEES. SCHEDULE 2.22 attached hereto, designates a list of all
employees of Seller as of the date hereof (the "Employees"), and their current
salary or wage rate, last raise date and amount, current bonus arrangements,
last bonus date and amount, and any other compensation arrangements with such
Employees.
2.23 ERISA PLANS, LABOR ISSUES AND AFFILIATE PAYMENTS.
2.23.1 The Seller does not currently sponsor, maintain or
contribute to, and has not at any time sponsored, maintained or
contributed to any employee benefit plan (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
(ERISA")) in which any of its employees are or were participants
(whether or not on an active or frozen basis) other than those
identified on SCHEDULE 2.23 (the "Employee Plans"). Each of the Employee
Plans can be terminated or amended at will by the Seller. The Seller has
no collective bargaining agreements with any labor union or other
representative of employees. The Seller has not engaged in any unfair
labor practices which could have a material adverse effect. The Seller
has no pending or, to the knowledge of the Seller or the Shareholders,
threatened, dispute with any of its existing or former employees. Since
the Balance Sheet Date, the Seller has not made any payments to any of
its Affiliates, and has not granted or agreed to grant any bonus to any
current employee, any general increase in the rates of salaries or
compensation of its employees or any specific increase to any current
employee, except in accordance with regularly scheduled periodic bonuses
and increases identified on SCHEDULE 2.23, and has not provided for any
new pension, retirement or other employee benefits to any of its current
employees or any increases in any existing benefits.
2.23.2 Each Employee Plan has been administered and maintained in
compliance with all applicable laws, rules and regulations, except where
the failure to be in compliance would not, individually or in the
aggregate, result in a material adverse effect.
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2.23.3 The Seller has not received any notice that any Employee
Plan is currently the subject of an audit, investigation, enforcement
action or other similar proceeding conducted by any state or federal
agency.
2.23.4 No pending or, to the knowledge of the Seller or the
Shareholders, threatened, claims, suits or other proceedings exist with
respect to an Employee Plan, other than normal benefit claims filed by
participants or beneficiaries.
2.23.5 The Seller has no obligation or commitment to provide
medical, dental or life insurance benefits to or on behalf of any of its
employees who may retire or any of its former employees who have
retired, except as may be required pursuant to the continuation of
coverage provisions of Section 4980B of the Code and the applicable
provisions of ERISA.
2.23.6 The Seller has been and is in compliance with all
applicable Laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, except for any such
failures to be in compliance that, individually or in the aggregate,
would not result in a material adverse effect, and the Seller is not
liable for any arrears of wages or penalties for failure to comply with
any of the foregoing. The Seller has not engaged in any unfair labor
practice or discriminated on the basis of race, color, religion, sex,
national origin, age, disability or handicap in its employment
conditions or practices, and there are no complaints or racial, color,
religious, sex, national origin, age, disability or handicap
discrimination charges or complaints pending or, to the knowledge of the
Seller or the Shareholders, threatened against the Seller before any
federal, state or local court, board, department, commission or agency
(nor, to the knowledge of the Seller or the Shareholders, does any valid
basis therefor exist).
2.23.7 The Seller has never been a party to any agreement with
any union, labor organization or collective bargaining unit. No
employees of the Seller are represented by any union, labor organization
or collective bargaining unit. To the knowledge of the Sellers or the
Shareholders, none of the employees of the Seller has threatened or
organize or join in union, labor organization or collective bargaining
unit.
2.23.8 All employees of the Seller are citizens of, or are
authorized in accordance with federal immigration laws to be employed
in, the United States.
2.24 INVESTMENT REPRESENTATIONS. The Seller and each of Shareholders
acknowledge, represent and agree that:
2.24.1 the Buyer Shares have not been and will not be registered
under the Securities Act or registered or qualified under any applicable
state securities Laws, and will be "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act;
2.24.2 the Buyer Shares will be issued in reliance upon
exemptions from such registration or qualification requirements, and the
availability of such exemptions depends in part upon the Seller's and
Shareholders' bona fide investment intent with respect to the Buyer
Shares;
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2.24.3 the Seller's and Shareholders' acquisition of the Buyer
Shares will be solely for its or their own account for investment, and
it or they are not acquiring the Buyer Shares for the account of any
other Person or with a view toward resale, assignment,
fractionalization, or distribution thereof;
2.24.4 the Seller and Shareholders shall not offer for sale,
sell, transfer, pledge, hypothecate or otherwise dispose of any of the
Buyer Shares except in accordance with the restrictions set forth herein
and the requirements of Rule 144 promulgated under the Securities Act,
or pursuant to a valid registration statement under the Securities Act
or other rules, laws, regulations or statutory exceptions under federal
or state securities law;
2.24.5 the Seller and Shareholders have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of an investment in the Shares, and to
make an informed investment decision;
2.24.6 the Seller and Shareholders have received from Buyer its
Disclosure Documents and related materials regarding the Buyer; it and
they have had the opportunity to ask questions of, and receive answers
from Buyer's officers and directors concerning the acquisition of the
Buyer Shares and to obtain such other information concerning Buyer and
the Buyer Shares, to the extent they possessed the same or could acquire
it without unreasonable effort or expense, as it and they deemed
necessary in connection with making an informed investment decision;
2.24.7 since the Buyer Shares have not been registered under the
Securities Act or applicable state securities Laws, the Seller and
Shareholders must bear the economic risk of holding the Buyer Shares for
an indefinite period of time, and are capable of bearing such risk; and
2.24.8 each certificate evidencing the Buyer Shares will bear a
conspicuous restrictive legend substantially as follows:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS, AND THEY CANNOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE HYPOTHECATED EXCEPT
IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE ACT AND
SUCH OTHER STATE LAWS OR UPON DELIVERY TO THIS CORPORATION OF AN
OPINION OF LEGAL COUNSEL SATISFACTORY TO THE CORPORATION THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
2.25 TAX-FREE REORGANIZATION.
2.25.1 CONTINUITY OF INTEREST. There is no plan or intention on
the part of the Shareholders to sell, exchange or otherwise dispose of a
number of the Buyer Shares, received by the Seller pursuant to this
Agreement and distributed to the Shareholders, that would reduce the
Shareholders' ownership of the Buyer Shares to a number of shares having
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a value, as of the Closing Date, of less than 50% of the value of all
shares of the Seller's capital stock issued and outstanding immediately
prior to the Closing Date. For the purposes of this representation,
shares of the Seller's capital stock and shares of the Buyer's Common
Stock held by the Shareholders and otherwise sold, redeemed or disposed
of prior or subsequent to the Closing Date will be considered in making
this representation.
2.25.2 SUBSTANTIALLY ALL OF ASSETS. The Assets constitute at
least 90% of the fair market value of the net assets of the Seller and
at least 70% of the gross assets held by the Seller immediately prior to
the Closing Date. For purposes of this representation, amounts paid by
the Seller to the Shareholders who receive cash or other property,
amounts used by the Seller to pay its reorganization expenses and all
redemptions and distributions (except for
regular, normal dividends) made by the Seller immediately preceding the
Closing Date will be included as assets of the Seller held immediately
prior to the Closing Date.
2.26 BROKERS. Neither the Shareholders nor Seller or any of their
respective Affiliates have employed any broker, agent or finder, or incurred by
any liability for any brokerage fees, agent's fees, commissions or finder's fees
in connection with the transactions contemplated by this Agreement.
2.27 UNTRUE STATEMENTS. This Agreement and all schedules, documents and
information furnished by the Seller and Shareholders or any of their respective
representatives to Buyer and its representatives pursuant hereto or in
connection with the transactions contemplated by this Agreement do not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements made herein and therein not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
As material inducements for the execution, delivery and performance of
this Agreement by the Seller and Shareholders, Buyer hereby represents and
warrants to the Seller and Shareholders that as of the Closing Date:
3.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of Texas. Buyer has all the
necessary corporate power and authority to own, operate, and lease its
properties and to carry on its business as now owned or leased and operated by
it. Buyer is duly qualified or licensed to do business and is in good standing
as a foreign corporation authorized to do business in all jurisdictions in which
the character of the properties owned or the nature of the business conducted by
it would make such qualification or licensing necessary.
3.2 AGREEMENTS AUTHORIZED AND ENFORCEABLE. The execution and delivery of
this Agreement and the Ancillary Agreements and the consummation of the
transactions contemplated hereby and thereby, including without limitation, the
issuance of the Buyer Shares (a) are within the corporate power and authority of
the Buyer, and (b) have been duly and validly authorized by all necessary
corporate action on the part of Buyer. This Agreement and the Ancillary
Agreements constitute valid and binding obligations of Buyer, enforceable
against Buyer in accordance with their
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terms, except as may be limited by applicable bankruptcy laws, insolvency laws
and other similar laws affecting the rights of creditors generally.
3.3 NO VIOLATION OR CONFLICTS. Neither the execution and delivery of
this Agreement and the Ancillary Agreements by the Buyer nor the consummation of
the transactions contemplated hereby will: (a) violate or conflict with any
provision of Buyer's Articles of Incorporation or Bylaws, as amended to date;
(b) violate or conflict with any provision of any Laws applicable to the Buyer,
its Affiliates, or their respective businesses or assets; (c) result in a breach
of, or constitute a default (or with notice or lapse of time or both result in a
breach of or constitute a default) under or otherwise give any Person the right
to terminate or accelerate payment under performance of any note, bond, loan
agreement, contract, lease, license, franchise, permit, trust agreement or
declaration of trust or other agreement or instrument to which Buyer or any of
its Affiliates is a party or to which their respective assets are subject; or
(d) be an event that would permit any party to terminate any material contract
of Buyer or any of its Affiliates.
3.4 DISCLOSURE DOCUMENTS; FINANCIAL INFORMATION. Henley has made all
filings with the United States Securities and Exchange Commission (the "SEC")
that it has been required to make under the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Henley has attached to
the Exception Schedule as SCHEDULE 3.4 its Proxy Statement dated May 5, 1997,
its Form 10-KSB/A filed for the year ended December 31, 1996, its Form 10-QSB
filed for the period ended September 30, 1997, and its Forms 8-K dated October
15, 1997 and October 24, 1997 (collectively, the "Disclosure Documents"). As of
their respective filing dates, the Disclosure Documents complied in all material
respects with the requirements of the Securities Act and the Exchange Act and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which it was made, not misleading.
To Buyer's knowledge, the financial information included in the SEC Documents
are true and accurate in all material respects and were prepared in all material
respects in accordance with generally accepted accounting principles ("GAAP")
(except in the case of unaudited financial statements for the omission of
footnotes and year-end audit adjustments). Except as disclosed on SCHEDULE 3.4
or as otherwise specifically contemplated by the terms and provisions of this
Agreement, since September 30, 1996, (i) there has been no material adverse
change in the consolidated net worth of the Buyer, (ii) there has been no
physical damage, destruction or loss suffered by Buyer that would, after taking
into account any insurance recoveries payable in respect thereof, have a
material adverse effect on the Buyer, and (iii) no event has occurred and no
condition exists which, individually or in the aggregate, would have a material
adverse effect on this Agreement, the Buyer, or the transactions contemplated by
this Agreement.
3.5 BROKERS. Neither the Buyer nor any of its Affiliates have employed
any broker, agent, or finder, or incurred any liability for any brokerage fees,
agent's fees, commissions or finder's fees in connection with the transactions
contemplated herein.
3.6 UNTRUE STATEMENTS. This Agreement and all schedules, documents and
information furnished by the Buyer or its representatives to the Seller and
Shareholders and any of their respective representatives pursuant hereto or in
connection with the transactions contemplated by this Agreement do not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements made herein and therein not misleading.
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ARTICLE 4
INDEMNIFICATION
4.1 INDEMNIFICATION BY SELLER AND SHAREHOLDERS. Seller and each of the
Shareholders shall jointly and severally indemnify, defend and hold harmless
Buyer against any and all Claims that Buyer shall incur or suffer, which arise,
result from or relate to (i) any breach of, or failure by the Seller or
Shareholders to perform, any of Seller's or Shareholders' representations,
warranties, covenants or agreements in this Agreement or in any schedule,
certificate, exhibit or any of the Ancillary Agreements furnished to Buyer by
Seller or Shareholders under this Agreement, (ii) the operation of the Business
or ownership of the Assets prior to the Closing Date, and (iii) the Retained
Liabilities.
4.2 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold
harmless the Seller and Shareholders against and with respect to any and all
Claims that Seller or Shareholder shall incur or suffer, which arise, result
from or relate to any breach of, or failure by Buyer to perform, any of its
representations, warranties, covenants or agreements in this Agreement or in any
schedule, certificate, exhibit or any of the Ancillary Agreements furnished to
Seller or Shareholders by Buyer under this Agreement and any Claims arising from
the operation of the Business or ownership of the Assets subsequent to the
Closing Date.
4.3 INDEMNIFICATION PROCEDURE.
4.3.1 Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding by a
third party (i.e., one who is not a party to this Agreement) with
respect to which a Claim for indemnification may be made pursuant to
this Article 4, such indemnified party shall, if a Claim in respect
thereof is to be made against any indemnifying party, give written
notice to the latter of the commencement of such third party action;
PROVIDED, HOWEVER, that the failure of any indemnified party to give
notice as provided herein shall not relieve the indemnifying party of
any obligations hereunder, to the extent the indemnifying party is not
materially prejudiced thereby. In case any such third party action is
brought against an indemnified party and indemnification is sought under
this Article 4, the indemnifying party shall be entitled to participate
in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and
after such notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party
shall not be liable to such indemnified party for any legal or other
expenses subsequently incurred by the latter in connection with the
defense thereof unless the indemnifying party has failed to assume the
defense of such Claim and to employ counsel reasonably satisfactory to
such indemnified person. An indemnifying party who elects not to assume
the defense of a Claim shall not be liable for the fees and expenses of
more than one counsel in any single jurisdiction for all parties
indemnified by such indemnifying party with respect to such Claim or
with respect to claims separate but similar or related in the same
jurisdiction arising out of the same general allegations.
Notwithstanding any of the foregoing to the contrary, the indemnified
party will be entitled to select its own counsel and assume the defense
of any action brought against it if the indemnifying party fails to
select counsel reasonably satisfactory to the indemnified party, the
expenses of such defense to be paid by the indemnifying party. No
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indemnifying party shall consent to entry of any judgment or enter into
any settlement with respect to a third party Claim without the consent
of the indemnified party, which consent shall not be unreasonably
withheld, or unless such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to
such indemnified party of a release from all liability with respect to
such third party Claim. No indemnified party shall consent to entry of
any judgment or enter into any settlement of any such third party
action, the defense of which has been assumed by an indemnifying party,
without the consent of such indemnifying party, which consent shall not
be unreasonably withheld.
4.3.2 If any party becomes aware of a fact, circumstance, claim,
situation, demand or other matter (other than a third-party Claim) for
which it or any other indemnified party has been indemnified under this
Article 4 and which has resulted or could result in a Claim being owed
to the indemnified party by the indemnifying party, the indemnified
party shall give prompt written notice of the Claim to the indemnifying
party, stating the nature and basis of the Claim and the amount claimed
thereunder, together with supporting information to the Claim, if any.
If the indemnifying party does not notify the indemnified party within
30 days from the date such Claim notice is given that it disputes the
Claim, the amount of the Claim shall conclusively be deemed to be a
liability of the indemnifying party hereunder.
4.3.3 If an indemnified party and an indemnifying party cannot
reach agreement with respect to the validity and amount of any Claim
within 30 days after notice thereof is first given, the validity and
amount thereof, as the case may be, shall be finally settled pursuant to
the dispute resolution procedure set forth in Section 5.9 below.
4.3.4 Payments of all amounts owing hereunder with respect to any
Claim shall be made immediately after (i) the settlement between the
parties of the third party Claim, or (ii) the final resolution of the
dispute pursuant to Section 5.9 below.
4.4 INDEMNIFICATION THRESHOLD AND LIMITATION. Notwithstanding any
provision to the contrary contained in this Agreement, neither Buyer, nor Seller
or Shareholders shall make any Claim against the other party for any breach of
representation, warranty, covenant or agreement under this Agreement until the
dollar amount of all loss to such other party for such breaches suffered after
the Closing, shall exceed in the aggregate the amount of $5,000, and, if such
amount is exceeded, Buyer, Seller or Shareholders, as the case may be, shall be
required to pay Claims to the extent such Claims exceed $5,000; PROVIDED,
HOWEVER, that such threshold shall not apply to Claims relating to the Retained
Liabilities.
ARTICLE 5
MISCELLANEOUS
5.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the
following terms has the meaning ascribed to it in this Section 5.1:
5.1.1 "AFFILIATE" when used to indicate a relationship with any
Person, means: (i) any corporation or organization of which such Person
is an officer, director or partner or is directly or indirectly the
beneficial owner of at least 10% of the outstanding shares of any class
of equity securities or financial interest therein; (ii) any trust or
other estate in which
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such Person has a beneficial interest or as to which such Person serves
as trustee or in any similar fiduciary capacity; or (iii) any Person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, or is
acting as agent on behalf of, or as an officer or director of, such
Person. As used in the definition of Affiliate, the term "control"
(including the terms "controlling," "controlled by" or "under common
control with") means the possession, direct or indirect, of the power to
direct, cause the direction of or influence the management and policies
of a Person, whether through the ownership of voting securities, by
contract, through the holding of a position as a director or officer of
such Person, or otherwise.
5.1.2 "AGREEMENT" means and includes this Agreement and the
schedules and exhibits hereto.
5.1.3 "ANCILLARY AGREEMENTS" means the Consulting Agreement
between the Buyer and Roger W. Dartt all of even date herewith, and any
and all other ancillary documents or agreements entered into among or
executed by the parties hereto in order to effect the consummation of
the transactions contemplated herein.
5.1.4 "APPLICABLE ENVIRONMENTAL LAWS" mean all Laws relating to
protection of the environment, including, without limitation, land use,
zoning, health, chemical use, safety and sanitation Laws, and Laws
governing the on or off-site use, storage, treatment, recycling,
generation, transportation, processing, handling, production or disposal
of Hazardous Substances or sanitary (non-hazardous) substances or waste,
including, without limitation, garbage, refuse or other similar
substances, including, without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. ss.ss. 9601 ET SEQ.), as amended from time to time, including,
without limitation, as amended pursuant to the Superfund Amendments and
Reauthorization Act of 1986 ("CERCLA"), and regulations promulgated
thereunder, (ii) the Resources Conservation and Recovery Act of 1976 (42
U.S.C. ss.ss. 6901 ET SEQ.), as amended from time to time ("RCRA"), and
regulations promulgated thereunder, (iii) the Federal Water Pollution
Control Act (U.S.C.A. ss. 9601 ET SEQ.), as amended, and regulations
promulgated thereunder, and (iv) any applicable state laws or
regulations relating to the environment.
5.1.5 "CLAIMS" mean any claims, demands, actions, costs, damages,
losses, expenses, obligations, liabilities, recoveries, judgments,
settlements, suits, proceedings, or causes of action, including
interest, penalties (including civil and criminal penalties) and
attorneys' fees.
5.1.6 "COMPETING BUSINESS" means any Person who engages in the
Business in the geographic area in which Seller conducts operations as
of the date of this Agreement.
5.1.7 "ENCUMBRANCE" means and includes (i) any security interest,
mortgage, deed of trust, pledge, lien (including unpaid debts for which
a lien arising under Laws may be asserted if such debts remain unpaid),
encumbrance, charge, defect, option, right of first refusal,
preferential purchase right, proxy or voting trust or agreement,
preemptive right, adverse Claim, equity, power of attorney, equitable
interest or servitude, other right or interest of any other Person, or
restriction of any kind, including but not limited to, any restriction
or servitude on the use, transfer, receipt of income, or other exercise
of any
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attributes of ownership; and (ii) any Uniform Commercial Code financing
statement or other public filing, notice, or record that by its terms
purports to evidence or notify interested parties of any of the matters
referred to in clause (i) that has not been terminated or released by
another proper public filing, notice, or record.
5.1.8 "GOVERNMENTAL AUTHORITY" means any federal, state, county,
municipal, or other local governmental body, legislature, agency,
commission, board, department, court or other authority, or any
subdivision thereof, or private body exercising any regulatory, judicial
or taxing authority, and includes, without limitation, the Federal Trade
Commission, the Food and Drug Administration, the Environmental
Protection Agency, the Occupational Safety and Health Administration,
and the Internal Revenue Service.
5.1.9 "HAZARDOUS SUBSTANCE" means, without limitation, (i) any
flammable explosives, radon, radioactive materials, asbestos, urea
formaldehyde foam insulations, polychlorinated biphenyls, benzene,
petroleum and petroleum products, methane, or (ii) hazardous materials,
hazardous wastes, biomedical wastes, hazardous or toxic substances or
related materials defined as such in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601 ET SEQ.), the Resource Conservation and Recovery Act, as
amended (42 U.S.C. Sections 6901 ET SEQ.), or any other Applicable
Environmental Laws.
5.1.10 "INSOLVENT" means, for any Person or entity, that the sum
of the present fair saleable value of its assets does not and/or will
not exceed its debts and other probable liabilities, and the term
"debts" includes any legal liability, whether matured or unmatured,
liquidated or unliquidated, absolute, fixed or contingent, disputed or
undisputed or secured or unsecured.
5.1.11 "LAWS" mean any statute, law, code, ordinance, rule,
regulation, policy, guideline interpretation, order, permit, license,
certificate, writ, judgment, injunction, decree, determination, award or
other decision or directive of, or promulgated, issued or declared by
any Governmental Authority.
5.1.12 "MARKET PRICE" means the average of the closing bid and
asked prices of the Henley Common Stock on The Nasdaq SmallCap Market
for the thirty consecutive trading days ending three days prior to the
Closing Date, as furnished by any NASD member firm selected from time to
time by the Company for such purpose; PROVIDED, HOWEVER, that if such
average is lower than $4.50, the Market Price shall be $4.50, and if
such average is higher than $7.50, the Market Price shall be $7.50.
5.1.13 "ORDINARY COURSE OF BUSINESS" means any action taken by a
Person if: (i) such action is consistent with the past practices of such
Person and is taken in the ordinary course of the normal day-to-day
operations of such Person, (ii) such action is not required to be
authorized by the board of directors of such Person (or by any Person or
group of Persons exercising similar authority), and (iii) such action is
similar in nature and magnitude to actions customarily taken, without
any authorization by the board of directors (or by any Person or group
of Persons exercising similar authority), in the ordinary course of the
normal day-to-day operations of other Persons that are in the same line
of business as such Person.
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5.1.14 "PERSON" means an individual, corporation, limited
liability company, partnership, limited partnership, joint venture,
joint stock company, firm, company, syndicate, trust, estate,
association, Governmental Authority, business, organization or any other
incorporated or unincorporated entity.
5.2 PUBLIC ANNOUNCEMENTS. Except as mutually agreed, neither Buyer,
Seller, Shareholders nor any of their respective Affiliates or agents shall
issue any press release or public announcement regarding the execution of this
Agreement or the transactions contemplated thereby.
5.3 EXPENSES. Except as otherwise explicitly provided in this Agreement,
each of Seller, Shareholders and Buyer shall bear their own respective legal and
accounting fees, and other costs and expenses with respect to the negotiation,
execution and delivery of this Agreement, and consummation of the transactions
contemplated hereby.
5.4 NOTICES AND WAIVERS. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement, or
at such other address and number as a party shall have previously designated by
written notice given to the other parties in the manner hereinabove set forth.
Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
5.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement shall survive the Closing indefinitely
regardless of any investigation made by a party hereto.
5.6 KNOWLEDGE, GENDER AND CERTAIN REFERENCES. Unless otherwise provided
for herein, a representation or statement made herein to the knowledge of Seller
or Shareholders shall mean the actual knowledge of Seller or Shareholders.
Unless otherwise specified, all references herein to days, weeks, months or
years shall be to calendar days, weeks, months or years. Capitalized terms
defined in this Agreement are equally applicable to both their singular and
plural forms. Whenever the context requires, the gender of all words used herein
shall include the masculine, feminine and neuter. References to Articles or
Sections shall be to Articles or Sections of this Agreement unless otherwise
specified. The headings and captions used in this Agreement are solely for
convenient reference and shall not affect the meaning or interpretation of any
article, section or paragraph herein, or this Agreement. The terms "hereof,"
"herein" or "hereunder" shall refer to this Agreement as a whole and not to any
particular article, section or paragraph. The terms "including" or "include" are
used herein in an illustrative sense and not to limit a more general statement.
When computing time periods described by a number of days before or after a
stated date or event, the stated date or date on which the specified event
occurs shall not be counted and the last day of the period shall be counted.
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5.7 SUCCESSOR AND ASSIGNS. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder shall
not be assignable or delegable by any party; provided, however, that Buyer shall
be entitled to assign its rights and delegate its duties hereunder to any
corporate Affiliate, but any such assignment shall not have the effect of
terminating Buyer's duties or obligations as provided herein.
5.8 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and of the United States
applicable in Texas, excluding, however, (i) any provision of such laws that
would render invalid any provision of this Agreement, and (ii) any rule of
conflict-of-laws that would direct or refer the resolution of any issue to the
laws of any other jurisdiction. Each party hereto hereby acknowledges and agrees
that it has consulted legal counsel in connection with the negotiation of this
Agreement and that it has bargaining power equal to that of the other parties
hereto in connection with the negotiation and execution of this Agreement.
Accordingly, the parties hereto agree that the rule that an agreement shall be
construed against the draftsman shall have no application in the construction or
interpretation of this Agreement.
5.9 DISPUTE RESOLUTION. Any dispute or controversy between the parties
hereto arising from or relating to this Agreement or the construction, validity,
interpretation, meaning, performance, non-performance, enforcement, operation or
breach of this Agreement shall be submitted to mediation, and if such mediation
is unsuccessful then to mandatory, final and binding arbitration. Any mediation
or arbitration under this Agreement shall take place pursuant to the following
procedures:
5.9.1 If a dispute or controversy arises either party may request
that Judicial Arbitration and Mediation Service ("JAMS") (or similar
mediation service of a similar national scope if JAMS no longer then
exists) appoint an independent mediator, who shall serve as mediator for
all purposes hereof. Each party shall pay an equal proportion of the
cost of the mediator's services, in advance upon request by the mediator
or any party.
5.9.2 Within 10 days after appointment of the mediator, the
mediator shall schedule a meeting among the parties and the mediator for
the purpose of mediating the dispute. If the parties do not resolve the
dispute within 30 days after appointment of the mediator, the dispute
shall be resolved in arbitration.
5.9.3 Within 15 days after the mediation or after the 30 day
period referenced in Section 6.9.2, whichever is earlier, the parties
shall each name and appoint their own arbitrator. If either party fails
to name and appoint an arbitrator timely, then an arbitrator shall be
appointed for that party by the Senior United States District Judge for
the United States District Court in Houston, Texas. The two arbitrators
so appointed shall appoint a third arbitrator within 15 days, and if
they cannot agree, the appointment of the third arbitrator will he made
by the Senior United States District Judge for the United States
District Court in Houston, Texas.
5.9.4 Each party shall bear its own arbitration fees, costs and
expenses. The arbitration hearing shall be held in Houston, Texas within
15 days of the appointment of the third arbitrator at a location
designated by a majority of the arbitrators within 10 days of the
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appointment of the third arbitrator. The Commercial Arbitration Rules of
the American Arbitration Association, as supplemented hereby, shall
apply to the arbitration. The substantive laws of the State of Texas
(excluding conflict of laws provisions) shall also apply to the
arbitration.
5.9.5 The arbitration hearing shall be concluded within 10 days
unless otherwise ordered by a majority of the arbitrators, and the award
thereon shall be made within 15 days after the closing of submission of
evidence. An award rendered by a majority of the arbitrators shall be
final and binding on all parties to the proceeding and non-appealable,
and judgment on the award may be entered by any court of competent
jurisdiction.
5.9.6 The parties stipulate that the provisions of this Section
5.9 shall be a complete defense to any suit, action or proceeding
instituted in any federal, state or local court or before any
administrative tribunal with respect to any controversy or dispute
arising out of this Agreement between the parties, and the parties waive
any right to have the award of the arbitrators appealed. The arbitration
provisions of this Agreement shall, with respect to such controversy or
dispute, survive the termination or expiration of this Agreement. Should
any party institute judicial proceedings seeking to avoid the mediation
or arbitration provisions of this Agreement, or should any party in
judicial proceedings successfully contest an arbitration award rendered
under this Section 5.9, the other parties shall be entitled to recover
reasonable attorney's fees, costs and expenses associated with the
judicial proceedings, with the amount of attorney's fees, costs and
expenses to be determined by the court. If a party fails to comply with
the terms of an arbitration award made under this Agreement, the other
parties shall be entitled to recover reasonable attorney's fees, costs
and expenses incurred in seeking judicial confirmation of the award,
with the amount of attorney's fees, costs and expenses to be determined
by the court. Failure to comply with the terms of an arbitration award
shall include without limitation the failure to pay the full amount due
under an arbitration award within the time specified in the arbitration
award.
5.9.7 In determining any award under this Section 5.9, the
arbitrators may award amounts for special damages, consequential
damages, incidental damages, lost profits, damages for lost business
opportunity punitive damages or exemplary damages.
5.9.8 Neither any party hereto nor the arbitrators may disclose
the existence or results of any arbitration hereunder without the prior
written consent of the other parties; nor may any party hereto disclose
to any party any confidential information disclosed by any other party
hereto in the course of an arbitration hereunder without the prior
written consent of such other party.
5.10 SEVERABILITY; JUDICIAL MODIFICATION. If any term, provision,
covenant, or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions shall remain in full force and effect and
shall in no way be affected, impaired or invalidated. It is hereby stipulated
and declared to be the intention of the parties that they would have executed
this Agreement had the terms, provisions, covenants and restrictions which may
be hereafter declared invalid, void, or unenforceable not initially been
included herein.
21
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5.11 AMENDMENT AND ENTIRETY. This Agreement, the Ancillary Agreements,
and any exhibits hereto or thereto, may be amended, modified, or superseded only
by written instrument executed by all parties hereto. This Agreement sets forth
the entire agreement and understanding of the parties with respect to the
transactions contemplated hereby and supersedes all prior agreements,
arrangements, and understandings relating to the subject matter hereof. In the
event of any conflict or inconsistency between the provisions of this Agreement
and the contents or provisions of any schedule or exhibit hereto, the provisions
of this Agreement shall control.
5.12 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
5.13 TIME OF ESSENCE. Time is of the essence in the performance of this
Agreement.
5.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by facsimile signature, each of which shall be deemed an
original and all which together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
22
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IN WITNESS WHEREOF, this Asset Purchase Agreement is executed and
delivered on and as of the day first above written.
BUYER: SELLER:
HENLEY HEALTHCARE, INC. AMC ACQUISITION CORP.
/s/ MICHAEL M. BARBOUR /s/ ROGER W. DARTT
- ---------------------------------------- ------------------------------------
Michael M. Barbour, Roger W. Dartt,
PRESIDENT AND CHIEF EXECUTIVE OFFICER PRESIDENT
Address: 120 Industrial Boulevard Address: 6001 Stonington, Suite 110
Sugar Land, Texas 77478 Houston, Texas 77040
Telecopier No.:281/276-7047 Telecopier No.:
SHAREHOLDERS:
/s/ DAN D. SUDDUTH /s/ BRITTON D. SUDDUTH
- ---------------------------------------- ------------------------------------
Dan D. Sudduth Britton D. Sudduth
Address: 2170 Dryden Address: 2264 Northwest Parkway,
Houston, Texas 91730 Suite A
Marietta, Georgia 30067
Telecopier No.: Telecopier No.:
/s/ ROGER W. DARTT
----------------------------------
Roger W. Dartt
Address: 10919 Meadowlake
Houston, Texas 77042
Telecopier No.:
23
EXHIBIT 10.14
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
BY AND AMONG
HENLEY HEALTHCARE, INC.,
GARVEY ACQUISITION CORP.,
GARVEY COMPANY
AND
CHARLES R. OASE
DATED JANUARY 9, 1998
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
ARTICLE 1
<S> <C>
THE MERGER AND CLOSING........................................................2
1.1 Certain Definitions....................................................2
1.2 Effective Date.........................................................2
1.3 Name and Continued Corporate Existence of the Surviving Corporation....2
1.4 Governing Law and Articles of Incorporation of the Surviving
Corporation ...........................................................2
1.5 Bylaws of the Surviving Corporation....................................2
1.6 Directors of the Surviving Corporation.................................2
1.7 Officers of the Surviving Corporation..................................3
1.8 Vacancies..............................................................3
1.9 Capital Stock of the Surviving Corporation.............................3
1.10 Conversion of Securities Upon Merger...................................3
1.10.1 Conversion of Garvey Common Stock........................3
1.10.2 Surrender of Garvey Certificates.........................3
1.10.3 Conversion of Acquisition Sub Common Stock...............3
1.11 Acquisition Sub's Transfer Books Closed................................4
1.12 Assets and Liabilities of Merging Corporations Become Those of the
Surviving Corporation..................................................4
1.13 Conveyances to the Surviving Corporation...............................4
1.14 Accounting Treatment...................................................4
1.15 Federal Income Tax Treatment...........................................4
1.16 Closing................................................................4
1.17 Closing Deliveries.....................................................5
1.17.1 Opinion of Henley's Counsel..............................5
1.17.2 Opinion of Shareholder's and Garvey's Counsel............5
1.18 Employment Agreements..................................................6
1.19 Lockup Agreement.......................................................6
1.20 Revolving Promissory Note..............................................6
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF GARVEY AND THE SHAREHOLDER.................................................6
2.1 Organization and Standing..............................................6
2.2 Authority and Consent..................................................6
2.3 No Violations or Conflicts.............................................7
2.4 Capitalization.........................................................7
2.5 Title to Stock.........................................................7
2.6 Financial Information..................................................8
2.7 Taxes..................................................................8
2.7.1 General..................................................8
2.7.2 Subchapter S Matters.....................................9
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2.8 Liabilities............................................................9
2.9 Defaults...............................................................9
2.10 Litigation.............................................................9
2.11 Additional Garvey Information.........................................10
2.11.1 Real Property [Schedule ]...............................10
2.11.2 Furniture, Machinery and Equipment [Schedule ]..........10
2.11.3 Inventory [Schedule ]...................................10
2.11.4 Intellectual Property [Schedule ].......................10
2.11.5 Licenses and Permits [Schedule ]........................10
2.11.6 Contracts [Schedule ]...................................10
2.11.7 Receivables [Schedule ].................................10
2.11.8 Payables [Schedule ]....................................11
2.11.9 Indebtedness [Schedule ]................................11
2.11.10 Insurance [Schedule ].................................11
2.11.11 Personnel [Schedule ].................................11
2.11.12 Employee Plans [Schedule ]............................11
2.11.13 Bank Accounts [Schedule ].............................11
2.11.14 Employee Agreements [Schedule ].......................11
2.11.15 Guaranties [Schedule ]................................11
2.11.16 Reserves and Accruals [Schedule ].....................12
2.11.17 Environmental [Schedule ].............................12
2.12 Absence of Certain Changes and Events [Schedule ].....................12
2.12.1 Financial Change........................................12
2.12.2 Property Damage.........................................12
2.12.3 Capitalization Change...................................12
2.12.4 Labor Disputes..........................................12
2.12.5 Other Material Changes..................................12
2.13 Title to and Quiet Possession of Assets...............................12
2.14 Intellectual Property.................................................12
2.15 Condition of Assets...................................................13
2.16 Hazardous Substances..................................................14
2.17 Operation of Business.................................................14
2.18 ERISA Plans, Labor Issues and Affiliate Payments......................14
2.19 Insurance.............................................................15
2.20 Related-Party Transactions............................................16
2.21 Investment Representations............................................16
2.22 Continuity of Interest................................................17
2.23 Brokers...............................................................17
2.24 Untrue Statements.....................................................17
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
HENLEY AND ACQUISITION SUB...................................................18
3.1 Organization and Standing.............................................18
3.2 Agreement Authorized and its Effect on Other Obligations..............18
3.3 SEC Documents.........................................................18
3.4 Financial Information.................................................18
3.5 Capitalization........................................................19
ii
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3.6 Brokers...............................................................19
3.7 Untrue Statements.....................................................19
ARTICLE 4
INDEMNIFICATION..............................................................19
4.1 Indemnification by the Shareholder; Release...........................19
4.2 Indemnification by Henley and Surviving Corporation...................20
4.3 Indemnification Procedure.............................................20
4.4 Indemnification Threshold.............................................21
4.5 Sales Tax Claims......................................................21
4.6 Survival of Representations and Warranties............................21
ARTICLE 5
MISCELLANEOUS................................................................21
5.1 Certain Definitions...................................................21
5.2 Further Assurances....................................................24
5.3 Public Announcements..................................................24
5.4 Expenses..............................................................24
5.5 Notices and Waivers...................................................24
5.6 Gender and Certain References.........................................24
5.7 Successor and Assigns.................................................25
5.8 Applicable Law........................................................25
5.9 Dispute Resolution....................................................25
5.10 Severability; Judicial Modification...................................26
5.11 Amendment and Entirety................................................27
5.12 Rights of Parties.....................................................27
5.13 Time of Essence.......................................................27
5.14 Counterparts..........................................................27
</TABLE>
iii
<PAGE>
PLAN AND AGREEMENT OF MERGER
THIS PLAN AND AGREEMENT OF MERGER (this "Agreement") is entered into on
this 9th day of January, 1998 by and among Henley Healthcare, Inc., a Texas
corporation ("Henley"), Garvey Acquisition Corp., a Minnesota corporation and
wholly-owned subsidiary of Henley ("Acquisition Sub"), Garvey Company, a
Minnesota corporation ("Garvey"), and Charles R. Oase, the sole shareholder of
Garvey (the "Shareholder"). Acquisition Sub and Garvey are sometimes referred to
collectively herein as the "Merging Corporations."
WITNESSETH :
WHEREAS, Henley is a corporation duly organized and validly existing
under the laws of the State of Texas, with its principal executive offices at
120 Industrial Boulevard, Sugar Land, Texas 77478;
WHEREAS, Acquisition Sub is a corporation duly organized and validly
existing under the laws of the State of Minnesota, with its principal executive
offices at 120 Industrial Boulevard, Sugar Land, Texas 77478;
WHEREAS, Henley owns 1,000 shares of the common stock, par value $.01
per share, of Acquisition Sub (the "Acquisition Sub Common Stock"), which
constitute all of the issued and outstanding shares of capital stock of
Acquisition Sub;
WHEREAS, Garvey is a corporation duly organized and validly existing
under the laws of the State of Minnesota, with its principal executive offices
at 816 Transfer Rd., St. Paul, Minnesota 55114-1455;
WHEREAS, Garvey is principally engaged in the business of distributing
health care and rehabilitation equipment to hospitals, private practice clinics,
long-term health care facilities and educational facilities in Minnesota and the
surrounding states as well as providing technical support on equipment sold (the
"Business");
WHEREAS, the Shareholder owns 10,000 shares of the Class A Common Stock,
par value $1.00 per share, of Garvey (the "Garvey Common Stock"), which
constitute all of the issued and outstanding shares of capital stock of Garvey;
and
WHEREAS, (i) the Board of Directors of Henley, (ii) Henley (in its
capacity as sole shareholder of the Acquisition Sub) and the Board of Directors
of Acquisition Sub, and (iii) the Shareholder and the directors of Garvey desire
to merge Acquisition Sub with and into Garvey in accordance with the provisions
of Section 302A.601, ET SEQ. of the Minnesota Business Corporation Act (the
"MBCA") and pursuant to the terms and provisions of this Agreement, and have
approved such merger (the "Merger") and the other terms and provisions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and to prescribe the terms and
conditions of the Merger contemplated hereby, the mode of carrying the same into
effect, the manner and basis of converting the presently
1
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outstanding shares of Garvey Common Stock into the right to receive the Merger
Consideration described in Section 1.10.1 hereof, and such other details and
provisions as are deemed necessary or proper, the parties hereto hereby agree as
follows:
ARTICLE 1
THE MERGER AND CLOSING
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each parenthetically
capitalized term in the introduction, recitals and other sections of this
Agreement has the meaning so ascribed to it, and other capitalized terms have
the meaning given them in Section 5.1.
1.2 EFFECTIVE DATE. The Merger shall become effective upon the filing of
the Articles of Merger with the Secretary of State of Minnesota following its
execution in accordance with Section 302A.615 of the MBCA. This filing shall be
made concurrently on the date hereof or as soon as practicable thereafter, with
the date on which such filing is made being referred to elsewhere herein as the
"Effective Date."
1.3 NAME AND CONTINUED CORPORATE EXISTENCE OF THE SURVIVING CORPORATION.
On the Effective Date, the identity, existence, purposes, powers, objects,
franchises, rights, and immunities of Garvey, the surviving corporation of the
Merger, shall continue unaffected and unimpaired by the Merger, and the
corporate identity, existence, purposes, powers, objects, franchises, rights,
and immunities of Acquisition Sub shall be wholly merged into Garvey, the
surviving corporation, and Garvey shall be fully vested therewith. Accordingly,
on the Effective Date, the separate existence of Acquisition Sub, except insofar
as continued by statute, shall cease.
1.4 GOVERNING LAW AND ARTICLES OF INCORPORATION OF THE SURVIVING
CORPORATION. The laws of Minnesota shall continue to govern the Surviving
Corporation. On the Effective Date, the Articles of Incorporation of Acquisition
Sub shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended in the manner provided by law.
1.5 BYLAWS OF THE SURVIVING CORPORATION. On the Effective Date, the
Bylaws of Acquisition Sub shall be the Bylaws of the Surviving Corporation until
altered, amended, or repealed in accordance with applicable law.
1.6 DIRECTORS OF THE SURVIVING CORPORATION. On the Effective Date,
pursuant to the Articles of Incorporation and Bylaws of the Surviving
Corporation, the number of directors constituting the entire Board of Directors
shall be fixed at 2. The names of the persons who, on the Effective Date, shall
become the members of the Board of Directors of the Surviving Corporation, and
shall hold office until the first annual meeting of shareholders of the
Surviving Corporation next following the Effective Date, are as follows:
NAME
-------------------
Michael M. Barbour
-------------------
Dan D. Sudduth
-------------------
2
<PAGE>
1.7 OFFICERS OF THE SURVIVING CORPORATION. The names of the persons who,
on the Effective Date, shall constitute the officers of the Surviving
Corporation, and who shall hold office, subject to the Bylaws of the Surviving
Corporation, until the first meeting of directors following the next annual
meeting of shareholders thereof, are as follows:
NAME OFFICE
- ------------------------------ ------------------------------------------------
Michael M. Barbour............ President and Chief Executive Officer
Dan D. Sudduth................ Senior Vice President, Chief Financial Officer
and Assistant Secretary
Chike J. Ogboenyiya........... Vice President-Finance and Secretary
1.8 VACANCIES. If on or after the Effective Date, a vacancy shall for
any reason exist in the Board of Directors or in any of the offices of the
Surviving Corporation, such vacancy shall be filled in the manner provided in
the Articles of Incorporation and Bylaws of the Surviving Corporation.
1.9 CAPITAL STOCK OF THE SURVIVING CORPORATION. The authorized number of
shares of capital stock of the Surviving Corporation, and the par value,
designations, preferences, rights, and limitations thereof, and the express
terms thereof, shall be as set forth in the Articles of Incorporation of the
Surviving Corporation.
1.10 CONVERSION OF SECURITIES UPON MERGER.
1.10.1 CONVERSION OF GARVEY COMMON STOCK. On the Effective Date,
the 10,000 shares of Garvey Common Stock issued and outstanding on the
date hereof, all of which are held by the Shareholder (the "Garvey
Shares"), without any action on the part of the Shareholder, shall
automatically become and be converted into the right to receive as
consideration from Henley (collectively, the "Merger Consideration"),
120,308 shares of the common stock, par value $.01 per share, of Henley
("Henley Common Stock") to be issued to the Shareholder on the Effective
Date, such number of Henley Shares to be determined by dividing $880,000
by the Market Price (the "Henley Shares").
1.10.2 SURRENDER OF GARVEY CERTIFICATES. The Shareholder has
surrendered (and Henley acknowledges its receipt of) the certificate(s)
representing the Garvey Shares (the "Garvey Certificate(s)"). On the
Effective Date, Henley will cancel the Garvey Certificate(s), and the
Shareholder will become entitled to receive the Merger Consideration.
1.10.3 CONVERSION OF ACQUISITION SUB COMMON STOCK. On the
Effective Date, each share of Acquisition Sub Common Stock then issued
and outstanding, without any action on the part of Henley, shall
automatically become and be converted into the right to receive one
fully paid and nonassessable share of Garvey Common Stock from Garvey
upon surrender and cancellation of the certificate theretofore
evidencing shares of Acquisition Sub Common Stock.
3
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1.11 ACQUISITION SUB'S TRANSFER BOOKS CLOSED. Upon the Effective Date,
the stock transfer books of Acquisition Sub shall be deemed closed, and no
transfer of any shares of capital stock of Acquisition Sub shall thereafter be
made or consummated.
1.12 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF THE
SURVIVING CORPORATION. On the Effective Date, all rights, privileges, powers,
and franchises of each of the Merging Corporations, and all property, real,
personal, and mixed, and all debts due on whatever account, as well as stock
subscriptions and all other things in action of or belonging to any of the
Merging Corporations, shall be taken by and deemed to be transferred to and
shall be vested in the Surviving Corporation without further act or deed, and
all such rights, privileges, powers, and franchises, property, debts, or choses
in action, and all and every other interest of each of the Merging Corporations
shall be thereafter as effectually the property of the Surviving Corporation as
they were of the respective Merging Corporations, and the title to any real
property, whether vested by deed or otherwise, in either of the Merging
Corporations, shall not revert or be in any way impaired by reason of the
Merger; PROVIDED, HOWEVER, that all rights of creditors and all liens upon any
properties of each of the Merging Corporations shall be preserved unimpaired,
and all debts, liabilities and duties of the Merging Corporations shall
thenceforth attach to the Surviving Corporation and may be enforced against and
by it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it. Any action or proceeding pending by or against
either of the Merging Corporations may be prosecuted to judgment as if the
Merger had not taken place, or the Surviving Corporation may be substituted in
place of either of the Merging Corporations.
1.13 CONVEYANCES TO THE SURVIVING CORPORATION. The Merging Corporations
hereby agree, respectively, that from time to time, as and when requested by the
Surviving Corporation, or by its successors and assigns, they will execute and
deliver or cause to be executed and delivered, all such deeds, conveyances,
assignments, and other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, its successors or assigns,
may deem necessary or desirable to vest or perfect in or confirm to the
Surviving Corporation, its successors and assigns, title to and possession of
all the property, rights, privileges, powers, immunities, franchises, and
interests referred to in this Section 1.13 and otherwise carry out the intent
and purposes of this Agreement.
1.14 ACCOUNTING TREATMENT. The assets and liabilities of the Merging
Corporations shall be taken up on the books of the Surviving Corporation in
accordance with generally accepted accounting principles, and the capital
surplus and retained earnings accounts of the Surviving Corporation shall be
determined, in accordance with generally accepted accounting principles, by the
Board of Directors of the Surviving Corporation. Nothing herein shall prevent
the Board of Directors of the Surviving Corporation from making any future
changes in its accounts in accordance with law.
1.15 FEDERAL INCOME TAX TREATMENT. The Merger is intended to qualify as
a reverse triangular merger transaction described in ss. 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended (the "Code").
1.16 CLOSING. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at Porter & Hedges L.L.P., counsel to
Henley ("Porter & Hedges"), at 700 Louisiana, Houston, Texas 77002-2764 at 9:00
a.m. on January 9, 1998 (the "Closing Date"), unless another time, place or date
is agreed to by the Shareholder and Henley.
4
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1.17 CLOSING DELIVERIES. At the Closing, (a) the Shareholder shall
deliver to Henley the duly and validly issued certificate(s) representing all of
the Garvey Shares, (b) the Shareholder and Henley shall have delivered to one
another all other documents, instruments and agreements as required under this
Agreement, (c) Henley shall deliver to the Shareholder the Merger Consideration
payable at Closing as provided in Section 1.10.1, and (d) Henley and the
Shareholder will deliver to one another the opinions of counsel as described
below:
1.17.1 OPINION OF HENLEY'S COUNSEL. Henley shall deliver a
favorable opinion, dated as of the Closing Date, from Porter & Hedges,
in form and substance satisfactory to the Shareholder, to the effect
that (i) Henley and Acquisition Sub have been duly incorporated and are
validly existing as corporations in good standing under the laws of
their states of organization, (ii) all corporate proceedings required to
be taken by or on the part of Henley and Acquisition Sub to authorize
the execution of this Agreement and the implementation of the
transactions contemplated hereby have been taken, (iii) when this
Agreement has been duly executed and delivered by Henley and Acquisition
Sub, it will be the legal, valid and binding obligation of Henley and
Acquisition Sub and enforceable against Henley and Acquisition Sub in
accordance with its terms, except as enforceability may be limited by
(a) equitable principles of general applicability or (b) bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws
affecting the rights of creditors generally, and (iv) the Henley Shares
issuable in exchange for the Garvey Shares, when issued in accordance
with the terms of this Agreement, will be validly issued, fully paid and
non-assessable by Henley and will not be subject to any preemptive
rights to purchase such shares. In rendering such opinion, such counsel
may rely upon (i) certificates of public officials and of officers of
Henley and Acquisition Sub as to matters of fact and (ii) the opinion or
opinions of other counsel, which opinions shall be reasonably
satisfactory to the Shareholder, as to matters other than federal or
Texas law.
1.17.2 OPINION OF SHAREHOLDER'S AND GARVEY'S COUNSEL. The
Shareholder shall deliver a favorable opinion, dated as of the Closing
Date, from Moore, Costello & Hart, P.L.L.P., counsel to the Shareholder,
in form and substance satisfactory to Henley, to the effect that (i)
Garvey has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Minnesota,
(ii) all outstanding shares of the Garvey Common Stock have been validly
issued and are fully paid and nonassessable, (iii) all of the Garvey
Shares are owned of record by the Shareholder, (iv) when this Agreement
has been duly executed and delivered by Garvey and the Shareholder, it
will be the legal, valid and binding obligation of Garvey and the
Shareholder and enforceable against Garvey and the Shareholder in
accordance with its terms, except as the enforceability may be limited
by (a) equitable principles of general applicability or (b) bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws
affecting the rights of creditors generally, (v) the execution and
delivery of the Agreement will not constitute a default under or violate
Garvey's Articles of Incorporation or Bylaws or any provision of
Minnesota law applicable to Garvey or Shareholder, and (vi) upon filing
of Articles of Merger in Minnesota, the Merger will have been
effectuated as of the Effective Date in accordance with the MBCA. In
rendering such opinion, such counsel may rely upon (i) certificates of
public officials and of officers of Garvey or the Shareholder as to
matters of fact and (ii) on the opinion or opinions of other counsel,
which opinions shall be reasonably satisfactory to Henley, as to matters
other than federal or Minnesota law.
5
<PAGE>
1.18 EMPLOYMENT AGREEMENTS. At the Closing, Henley and the Shareholder
will enter into an employment agreement in substantially the same form and terms
as attached hereto as EXHIBIT A, and Henley and Jerry Prettyman shall enter into
an agreement in substantially the same form and terms as attached hereto as
EXHIBIT B.
1.19 LOCKUP AGREEMENT. At the Closing, the Shareholder will enter into a
lockup agreement in substantially the same form and terms as attached hereto as
EXHIBIT C (the "Lockup Agreement").
1.20 REVOLVING PROMISSORY NOTE. As soon as practicable after the Closing
Date, Henley will pay off the outstanding balance of the Revolving Promissory
Note with Liberty State Bank, or obtain a release of Shareholder's personal
guarantee. Henley further agrees that it will not make any future borrowings
under this credit facility, unless and until Henley shall have obtained the
release of Shareholder's personal guarantee.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF GARVEY AND THE SHAREHOLDER
As material inducements to the execution, delivery and performance of
this Agreement by Henley, each of Garvey and the Shareholder hereby jointly and
severally represents and warrants to Henley as follows, except as otherwise
described in the Exception Schedule attached hereto. The Exception Schedule
shall identify each exception by the section number(s) of this Article 2 to
which it relates.
2.1 ORGANIZATION AND STANDING. Garvey is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Minnesota.
Garvey has all necessary statutory and corporate power and authority to own,
operate, and lease its properties and to carry on its business as now owned or
leased and operated by it. To the best knowledge of Garvey and the Shareholder,
Garvey is qualified to transact business in every jurisdiction in which the
nature of Garvey's contacts requires such qualification. Garvey does not own,
directly or indirectly, any interest or investment (whether debt or equity) in
any other Person. True, correct and complete copies of Garvey's Articles of
Incorporation and Bylaws, as each may have been amended from time to time, are
attached to the Exception Schedule.
2.2 AUTHORITY AND CONSENT. The Shareholder is a resident of Minnesota,
above the age of 18 years, and has legal capacity and requisite power and
authority to enter into, and perform his obligations under this Agreement. The
execution and delivery of this Agreement has been authorized by the directors of
Garvey and the Shareholder, the consummation of the transactions contemplated
hereby has been duly and validly authorized by all necessary corporate action on
the part of Garvey, and this Agreement is a valid and binding obligation of
Garvey and the Shareholder enforceable against Garvey and the Shareholder
(subject to normal equitable principles) in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization, debtor
relief or similar laws affecting the rights of creditors generally.
6
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2.3 NO VIOLATIONS OR CONFLICTS. Neither the execution and delivery of
this Agreement by the Shareholder and Garvey nor the consummation of the Merger
and the other transactions contemplated hereby will: (a) violate or conflict
with any provision of Garvey's Articles of Incorporation or Bylaws, as amended
to date; (b) violate or conflict with any provision of any Laws applicable to
Garvey or its Business, the Shareholder, or either of their respective assets;
(c) result in a breach of, or constitute a default (or with notice or lapse of
time, or both, result in a breach of, or constitute a default) under or
otherwise give any Person the right to terminate or accelerate payment under or
performance of any note, bond, loan agreement, contract, lease, license,
franchise, permit, trust agreement or declaration of trust, or other agreement
or instrument to which Garvey or the Shareholder is a party or to which their
respective assets are subject; or (d) result in the creation or imposition of
any Encumbrance of any nature upon or with respect to any of the assets of
Garvey or the Shareholder.
2.4 CAPITALIZATION. The authorized capital stock of Garvey consists of
50,000 shares of capital stock which is comprised of (i) 25,000 shares of Class
A Voting Stock, par value $1.00 per share, 10,000 of which are issued and
outstanding, and (ii) 25,000 shares of Class B Non-Voting Stock, par value $.01
per share, none of which are issued and outstanding ("Garvey Non-Voting Stock").
All issued and outstanding shares of Garvey Common Stock are validly issued,
fully paid and non-assessable, and are owned beneficially and of record by the
Shareholder. No shares of Garvey Common Stock or Garvey Non-Voting Stock have
been issued in violation of Garvey's Articles of Incorporation or Bylaws, the
preemptive or other rights of any shareholder or former shareholder of Garvey,
or of any other Person, or any Laws. Neither the Shareholder nor Garvey has any
liability to any former owner of any of Garvey's securities by reason of any
failure by them to comply with any Laws, Garvey's Articles of Incorporation or
Bylaws, or any other agreements. There are no outstanding subscriptions,
options, rights, warrants, calls, preemptive rights, convertible securities, or
other agreements or commitments of any kind obligating Garvey or the Shareholder
to sell, convey, issue, transfer from treasury, or otherwise dispose of, any
additional shares of its capital stock of any class, or any other equity or debt
security. Except for the distribution of a 1994 Cadillac, since October 31,
1997, Garvey has not declared, set aside, paid or made, or agreed, arranged or
committed to declare, set aside, pay or make any dividend or other distribution
in respect of its capital stock, and has not directly or indirectly redeemed,
purchased or otherwise acquired its capital stock.
2.5 TITLE TO STOCK. All of the issued and outstanding shares of Garvey
Common Stock are owned beneficially or of record by the Shareholder. The
Shareholder holds good, indefeasible, valid and marketable title to all shares
of Garvey Common Stock so owned by him, free and clear of all Encumbrances. The
Shareholder possesses full authority and legal right to sell, transfer and
assign to Henley the entire legal and beneficial ownership of the Garvey Common
Stock owned by the Shareholder, free and clear of all Encumbrances. On the
Effective Date, Henley will own the entire legal and beneficial interest in such
Garvey Common Stock free and clear of all Encumbrances and subject to no legal,
equitable, transfer or other restrictions of any kind, except transfer
restrictions imposed by operation of applicable securities Laws, and any
Encumbrances imposed or created by Henley. There are no Claims pending or
threatened against Garvey or the Shareholder that concern or affect title to any
of Garvey's capital stock, or that seek to compel the issuance of capital stock
or other securities of Garvey, nor are Garvey or the Shareholder aware of any
facts or circumstances which would give rise to such a Claim. The Shareholder
acquired his Garvey Common Stock in transactions that fully complied with the
provisions of all applicable Laws. None of the outstanding shares of Garvey
Common Stock is subject to any voting trust, voting agreement
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or other agreement or understanding with respect to the voting thereof, nor is
any proxy in existence with respect thereto.
2.6 FINANCIAL INFORMATION. Garvey has delivered to Henley Garvey's
unaudited financial statements, consisting of a balance sheet (the "Balance
Sheet") as of October 31, 1997 (the "Balance Sheet Date"), and an income
statement for the twelve months ended October 31, 1997, true and correct copies
of which are attached to the Exception Schedule (such financial statements
referenced above are herein collectively referred to as the "Financial
Information"). Except for customary year-end audit adjustments to unaudited
statements, the Financial Information (a) is in accordance with Garvey's books
and records, (b) has been prepared in accordance with generally accepted
accounting principals consistently applied with prior periods, (c) fairly
presents and is a true and complete statement of the financial position and
results of operations of Garvey as of and for the periods indicated, and (d)
does not include or omit any material asset or liability (whether fixed,
accrued, contingent or other) the inclusion or omission of which renders such
financial statements misleading or incomplete. Since the Balance Sheet Date,
Garvey has not changed any accounting method or practice, or experienced any
material adverse change in its financial condition, operations, assets,
liabilities (fixed, accrued, contingent, or other), revenues, expenses, or
business prospects, or experienced any event or condition that is likely to
result in such a material adverse change in its business or assets.
2.7 TAXES.
2.7.1 GENERAL. Garvey has timely filed all federal, state,
county, local and other excise, franchise, property, severance, payroll,
income, capital stock, sales and use, fuel and other tax returns for all
fiscal years ended on or before October 31, 1997, and for any periods
thereafter for which returns are due, and all such returns are true and
correct in all material respects. Garvey has not filed an extension for
any tax return otherwise due. Garvey has timely paid all taxes which are
shown on such returns to be due or have been assessed against it and all
taxes, penalties and interest which any Governmental Authority has
proposed or asserted to be owing (except for those being contested in
good faith as set forth on the Exception Schedule). Garvey has made all
withholding payments of tax required to be made under all tax Laws.
Except as set forth on the Exception Schedule, provisions and accruals
for income taxes, payroll taxes payable, ad valorem property taxes,
sales taxes and all other taxes and governmental charges required to be
paid by Garvey as of the Balance Sheet Date have been set forth in the
Financial Information and conform in all material respects with federal
income tax principles and are adequate to cover Garvey's liability for
all periods before the Balance Sheet Date. Except for the audit
currently being conducted in South Dakota or as otherwise disclosed on
the Exception Schedule, there is no pending audit of Garvey, and Garvey
has not received any oral or written notice of any proposed audit, by
any Governmental Authority. Garvey has filed sales tax returns in
Minnesota, Iowa, Illinois, North Dakota, South Dakota and Wisconsin. All
tax liabilities to which the properties of Garvey may have been
subjected have been discharged, except for taxes assessed but not yet
payable. There are no tax Claims presently being asserted against
Garvey, and, to the knowledge of Garvey and the Shareholder, there is no
basis for any such Claim. Garvey has not granted any extension to any
taxing authority of the limitation period during which any tax liability
may be asserted thereby. Neither Garvey nor the Shareholder has received
notice or has knowledge of any proposal for increasing the assessed
value of any of Garvey's properties for tax purposes, or of any pending
proceedings or public improvements which
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would result in the levy of any special tax or assessment against any of
Garvey's properties. Garvey is not, and never has been, a member of a
consolidated group subject to Treasury Regulation 1.1502-6 or any
similar provision.
2.7.2 SUBCHAPTER S MATTERS. Garvey (i) made an effective, valid
and binding S election pursuant to Section 1362 of the Code effective
1986, (ii) has since maintained its status as an S Corporation pursuant
to Section 1361 of the Code without lapse or interruption, and (iii) has
made and continuously maintained elections similar to the federal S
election in each state or local jurisdiction where Garvey does business
or is required to file a tax return to the extent such states or
jurisdictions permit such elections. Garvey neither is nor will or can
be subject to the built-in gains tax under Section 1374 of the Code or
any similar corporate level tax imposed on Garvey by any taxing
authority. Garvey (i) has adopted or utilized LIFO as a method of
accounting for inventory, and (ii) has no tax item, election, agreement
or adjustment which will accelerate or trigger income or deferred
deductions of Garvey as a result of termination of Garvey's status as an
S Corporation.
2.8 LIABILITIES. Garvey has no liabilities or obligations, whether
absolute, accrued, contingent or otherwise, and neither Garvey nor the
Shareholder has any knowledge of any potential liabilities or obligations of
Garvey except: (a) as reflected or reserved against in the Balance Sheet; (b)
obligations to perform services or deliver merchandise in the Ordinary Course of
Business that are not delinquent; (c) obligations for services or goods received
by Garvey in the Ordinary Course of Business with respect to which invoices have
not been received; and (d) liabilities accrued or to be accrued through the
Closing Date and set forth on the Exception Schedule. Without limiting the
generality of the foregoing, Garvey has no liability as a guarantor, endorser,
co-maker, surety, accommodation maker or in any other capacity for any
indebtedness, liability, obligation or commitment of any other Person.
2.9 DEFAULTS. Garvey is not in default under, or in breach or violation
of, and, to the knowledge of Garvey and the Shareholder, no reason exists and no
event has occurred which, with notice or lapse of time or action by a third
party, will result in a default under, breach or violation of, or conflict with:
(a) Garvey's Articles of Incorporation or Bylaws, as amended to date; (b) any
lease, license, permit, Encumbrance, trust agreement or declaration of trust, or
other agreement or instrument to which Garvey is a party, or to which any of its
assets is subject; or (c) any Laws applicable to Garvey or its business or
assets, including, without limitation, Business Laws, Environmental Laws and
Laws respecting labor, employment and employment practices, except for any such
defaults, breaches, violations or conflicts which individually or in the
aggregate would not constitute a material adverse effect. Garvey has all
permits, certificates, licenses, approvals and other authorizations required in
connection with the operation of its business.
2.10 LITIGATION. There is no lawsuit, action, arbitration, mediation,
administrative proceeding, investigation by a Governmental Authority, or other
legal proceeding pending or, to the knowledge of Garvey or the Shareholder,
threatened against the Shareholder or Garvey or affecting their respective
assets or financial condition, and, to the knowledge of Garvey and the
Shareholder, no facts are in existence on which an action, lawsuit or other
legal or administrative proceeding might be brought. Neither the Shareholder nor
Garvey is subject to any court order, writ, injunction, court decree, settlement
agreement, or judgment that contain or order any ongoing obligations (whether
prohibitory or mandatory in nature) on the part of any of them.
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2.11 ADDITIONAL GARVEY INFORMATION. Attached to the Exception Schedule
are true, complete and correct lists and summaries of the following items,
including, without limitation, a description of all Encumbrances to which any
such item is subject, and Garvey and the Shareholder have delivered to Henley
true, complete and correct copies of any documents, instruments or agreements
referred to below or in such lists and summaries or underlying any item
described therein:
2.11.1 REAL PROPERTY [SCHEDULE 2.11.1]. A legal description of
all real property owned or leased by Garvey or for which it has an
option to purchase, which schedule includes, with respect to each
property, (i) the use to which such property is put, and (ii) whether
such property is owned or leased and, if leased, the name of the lessor
and a copy of any agreement pursuant to which the property is leased;
2.11.2 FURNITURE, MACHINERY AND EQUIPMENT [SCHEDULE 2.11.2]. All
machinery, transportation equipment, tools, equipment, furnishings, and
fixtures owned, leased or subject to a contract of purchase and sale, or
lease commitment, by Garvey with a description of the nature and amount
of any Encumbrances thereon;
2.11.3 INVENTORY [SCHEDULE 2.11.3]. All inventory items or groups
of inventory items owned by Garvey, excluding raw materials and work in
process, which raw materials and work in process are valued on the
Balance Sheet, together with the amount of any Encumbrances thereon; a
separate schedule of inventory as of January 9, 1998 will be provided
following the Closing;
2.11.4 INTELLECTUAL PROPERTY [SCHEDULE 2.11.4]. All patents,
trademarks, service marks, copyrights and other intellectual property
rights, and applications therefor or registrations thereof, wherever
issued or pending; all trade names, assumed or fictitious names, logos,
labels and other trade rights, whether or not registered, where
registered and where used; all inventions, discoveries, improvements,
processes, formulae, trade secrets, ideas and other know-how, whether
patentable or not; all shop rights; and all other agreements (including
agreements with Garvey's employees) relating in whole or in part to any
of the foregoing, and with respect to each of the foregoing, whether
owned, licensed or used by Garvey;
2.11.5 LICENSES AND PERMITS [SCHEDULE 2.11.5]. All licenses,
permits, franchises, and similar rights relating to Garvey's business;
2.11.6 CONTRACTS [SCHEDULE 2.11.6]. Each contract, agreement or
commitment to which Garvey is a party, by which it is bound or to which
it or its properties are subject, which involves at least $10,000 or is
not terminable on fewer than 30 days' notice;
2.11.7 RECEIVABLES [SCHEDULE 2.11.7]. All accounts and notes
receivable of Garvey as of December 31, 1997, together with (i) aging
schedules by invoice date and due date, (ii) the amounts provided for as
an allowance for bad debts, (iii) the identity and location of any asset
in which Garvey holds a security interest to secure payment of the
underlying indebtedness, and (iv) a description of the nature and amount
of any Encumbrances on such accounts and notes receivable;
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2.11.8 PAYABLES [SCHEDULE 2.11.8]. All accounts and notes payable
by Garvey as of December 31, 1997, together with an appropriate aging
schedule in a 30, 60, 90 and over 90- day aged payables format and
separately listing all amounts payable to the Shareholder or any
Affiliate of the Shareholder;
2.11.9 INDEBTEDNESS [SCHEDULE 2.11.9]. All indebtedness owed by
Garvey or to which any of its assets are subject, summarizing for each
item of indebtedness the material terms thereof and specifying all
assets collateralizing such indebtedness;
2.11.10 INSURANCE [SCHEDULE 2.11.10]. All insurance policies or
bonds carried by Garvey for its benefit or for the benefit of its
employees, including, without limitation, property, title, casualty,
liability, workers compensation and auto policies, as well as a listing
of any premiums, audit adjustments or retroactive adjustments due or
pending on such policies or any predecessor policies;
2.11.11 PERSONNEL [SCHEDULE 2.11.11]. The name, current salary or
wage rate, last raise date and amount, current bonus arrangements, last
bonus date and amount, and any other compensation arrangements
(excluding employee insurance and benefit plans described in SCHEDULE
2.11.12) of each director, officer and employee of Garvey, together with
a description of any licenses held by such person that are germane to
Garvey's business; the name and address of any other Person who is
authorized to bind Garvey contractually, including, without limitation,
independent drivers or independent contractors, and all written or oral
arrangements of Garvey with any employee, agent, consultant or
independent contractor, specifically identifying any arrangement which
cannot be terminated on notice of 14 or fewer days without liability to
Garvey or that entitles the beneficiary thereof to receive any
compensation continuation or severance payment or retain any position
with Garvey;
2.11.12 EMPLOYEE PLANS [SCHEDULE 2.11.12]. All bonus, incentive
compensation, deferred compensation, profit-sharing, retirement,
pension, welfare, group insurance, death benefit, or other fringe
benefit plans, arrangements or trust agreements of Garvey, together with
copies of the most recent reports with respect to such plans,
arrangements, or trust agreements filed with any Governmental Authority
and all Internal Revenue Service determination letters that have been
received with respect to such plans (collectively, the "Employee
Plans");
2.11.13 BANK ACCOUNTS [SCHEDULE 2.11.13]. The name, address and
contact person of each bank or other financial institution in which
Garvey has an account or safe deposit box, the account number, account
name and type of account, the names of all persons authorized to draw
thereon or have access thereto, and the names of all persons, if any,
holding powers of attorney to act for Garvey;
2.11.14 EMPLOYEE AGREEMENTS [SCHEDULE 2.11.14]. Any collective
bargaining agreements of Garvey with any labor union or other
representative of employees, including amendments, supplements, and
written or oral understandings, and all employment and consulting and
severance agreements of Garvey;
2.11.15 GUARANTIES [SCHEDULE 2.11.15]. All indebtedness,
liabilities and commitments of others and as to which Garvey is a
guarantor, endorser, co-maker, surety,
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or accommodation maker, or is contingently liable therefor and all
letters of credit, whether stand-by or documentary, issued by any third
party;
2.11.16 RESERVES AND ACCRUALS [SCHEDULE 2.11.16]. All accounting
reserves and accruals maintained in the Balance Sheet; and
2.11.17 ENVIRONMENTAL [SCHEDULE 2.11.17] All environmental
permits, approvals, certifications, licenses, registrations, orders and
decrees applicable to current operations conducted by Garvey and all
environmental audits, assessments, investigations and reviews conducted
by Garvey within the last five years on any property owned or used by
Garvey.
2.12 ABSENCE OF CERTAIN CHANGES AND EVENTS [SCHEDULE 2.12]. Except as
set forth in Schedule 2.12 hereto, other than as a result of the transactions
contemplated by this Agreement, since the Balance Sheet Date, there has not
been:
2.12.1 FINANCIAL CHANGE. Any material adverse change in the
financial condition, backlog, operations, assets, liabilities or
business of Garvey;
2.12.2 PROPERTY DAMAGE. Any material damage, destruction, or
loss to the business or properties of Garvey (whether or not covered by
insurance);
2.12.3 CAPITALIZATION CHANGE. Any change in the capital stock or
in the number of shares or classes of Garvey's authorized or outstanding
capital stock as described in Section 2.4 hereof;
2.12.4 LABOR DISPUTES. Any labor dispute; or
2.12.5 OTHER MATERIAL CHANGES. Any other event or condition known
to the Shareholder particularly pertaining to and adversely affecting
the operations, assets or business of Garvey which would constitute a
material adverse change.
2.13 TITLE TO AND QUIET POSSESSION OF ASSETS. Garvey has good,
indefeasible and marketable title to all of its respective assets and interests
in assets, whether real, personal, mixed, tangible or intangible, that are
reflected on the Balance Sheet, or that have been acquired since the Balance
Sheet Date, except for inventory items sold or consumed in the Ordinary Course
of Business after the Balance Sheet Date. All such assets are free and clear of
all Encumbrances except as set forth in the Exception Schedule. At the Closing
Date, Garvey will have full, free and exclusive use and quiet enjoyment of its
assets, and all rights pertaining thereto except for Encumbrances disclosed in
the Exception Schedule. There are no Persons other than Garvey in possession of
any portion of the assets owned or leased by Garvey. There are no condemnations
or other takings planned or proposed by any Government Authority or private
party which will affect the assets owned or used by Garvey. The continued use by
Garvey of its assets in the same manner previously used by it will not violate
or infringe upon the rights of others.
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2.14 INTELLECTUAL PROPERTY. Garvey owns or possesses licenses to use all
patents, patent applications, trademarks and service marks (including
registrations and applications therefor), trade names, copyrights and written
know-how, trade secrets and all other similar proprietary data and the goodwill
associated therewith (collectively, the "Intellectual Property") that are either
material to the Business or that are necessary for the rendering of any services
rendered by Garvey and the use or sale of any equipment or products used or sold
by Garvey, including all such Intellectual Property listed in SCHEDULE 2.11.4
hereto. The Intellectual Property is owned or licensed by Garvey free and clear
of any Encumbrance. Garvey has not granted to any other person any license to
use any Intellectual Property. Garvey has not received any notice of
infringement, misappropriation, or conflict with, the intellectual property
rights of others in connection with the use by Garvey of the Intellectual
Property or otherwise in connection with Garvey's operation of its business.
2.15 CONDITION OF ASSETS.
2.15.1 Garvey's premises, office equipment, machinery, vehicles, furnishings
and fixtures are in good operating condition and repair consistent with
Garvey's normal practices subject only to ordinary wear and tear. There
are no outstanding requirements or recommendations by Garvey's insurers
requiring or recommending any repairs or work be done with respect to
Garvey's assets or properties.
2.15.2 Garvey's accounts receivable are evidenced by valid and enforceable
written invoices, contracts or other agreements. All amounts paid or
collected under such contracts or agreements which are required by
applicable Laws, including Business Laws, to be deposited in trust or
deposit accounts have been so deposited on a timely basis in accordance
with such Laws. All such trust and deposit accounts have been
established, funded and maintained in accordance with all applicable
Laws, including Business Laws. Except as set forth in the Exception
Schedule, Garvey's accounts receivable are fully collectible without
resort to legal proceedings or collection agencies, and are not subject
to any refunds or other adjustments, or any defenses, rights of set-off,
assignments, Encumbrances, or conditions enforceable by third parties,
except to the extent reserved against in the Financial Information.
2.15.3 Garvey's inventories consist of items held for sale of a quality and
quantity usable in the Ordinary Course of Business, and the cost of such
inventories as of the Closing Date is no less than $200,000 in the
aggregate.
2.15.4 All contracts, leases, plans or other arrangements to which Garvey is a
party, by which it is bound or to which it or its assets are subject are
in good standing, in full force and effect, comply in all material
respects with applicable Laws, and constitute valid and binding
obligations of the respective parties thereto. To the knowledge of
Garvey and the Shareholder, no party (other than Garvey) to any such
contract, lease, plan or other arrangement is in default thereunder, and
no event has occurred which (with or without notice, lapse of time, or
the happening of any other event) would constitute a default thereunder.
2.15.5 All accounting records, tax records, operating and legal records, and
all other records pertaining to Garvey and its business, properties and
affairs, are located at the business office of Garvey. No such records
are stored by or in the possession of the Shareholder or his Affiliates.
Garvey's corporate record books (including stock records) are: (i)
complete,
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accurate and up to date with all necessary signatures; (ii) set forth
all meetings and actions taken by Garvey's shareholders and directors,
and all transactions involving Garvey's capital stock; and (iii) contain
all canceled stock certificates.
2.16 HAZARDOUS SUBSTANCES. During Garvey's ownership, lease or use of
property owned, leased or used by it (the "Property"): (a) the Property is not
being and has not been used by Garvey for the storage, treatment, generation,
transportation, processing, handling, burial or disposal of any Hazardous
Substance in material violation of any Environmental Laws; (b) no release of a
Hazardous Substance has occurred by Garvey on or about the property in
quantities which individually or in the aggregate would require reporting to any
Governmental Authority; (c) no underground storage tanks are or have been
located on the Property; (d) there are not and have not been any Hazardous
Substances resulting from Garvey's ownership, lease or use of the Property in
concentrations which exceed amounts permitted by applicable Environmental Laws
on the Property; (e) all environmental permits and authorizations necessary to
the continued use of the Property by Garvey and the operation of the facilities
located thereon by Garvey have been obtained, are being complied with, and all
fees and assessments in association therewith have been timely paid; (f) the
Property is not being and has not been used by Garvey as a site for burial of
sanitary waste or other non-hazardous waste; (g) the off-site transportation,
storage, treatment, recycling or disposal of Hazardous Substances and
non-hazardous substances existing on, generated or removed from the Property by
Garvey have been and are in compliance with applicable Environmental Laws; and
(h) there are no capital improvements requiring any expenditures by Garvey in
order to comply with any current or proposed Environmental Laws. To the
knowledge of Garvey and the Shareholder, each of (a) through (g) of the
immediately preceding sentence is true with respect to the Property prior to its
ownership or lease by Garvey, and with respect to properties adjacent to the
Property. No notice has been served on Garvey or the Shareholder from any
entity, governmental agency or individual regarding any existing, pending or
threatened investigation, inquiry, enforcement action or litigation related to
alleged violations under any applicable Environmental Laws, or regarding any
claims for remedial obligations, response costs or contribution under any
applicable Environmental Laws.
2.17 OPERATION OF BUSINESS. Garvey is in compliance in all material
respects with all Business Laws applicable to Garvey or the Business, including
the Occupational Safety and Health Act (29 U.S.C. ss.ss. 651, ET SEQ.), as
amended.
2.18 ERISA PLANS, LABOR ISSUES AND AFFILIATE PAYMENTS.
2.18.1 Garvey does not currently sponsor, maintain or contribute to, and has
not at any time sponsored, maintained or contributed to any employee
benefit plan (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (ERISA")) in which
any of its employees are or were participants (whether or not on an
active or frozen basis) other than those identified on SCHEDULE 2.11.12
(the "Employee Plans"). Each of the Employee Plans, if any, can be
terminated or amended at will by Garvey. Garvey has no collective
bargaining agreements with any labor union or other representative of
employees. Garvey has not engaged in any unfair labor practices which
could have a material adverse effect. Garvey has no pending or, to the
knowledge of Garvey or the Shareholder, threatened, dispute with any of
its existing or former employees. Since the Balance Sheet Date, Garvey
has not made any payments to any of its Affiliates, and has not granted
or agreed to grant any bonus to any current employee, any general
increase in the
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rates of salaries or compensation of its employees or any specific
increase to any current employee, except in accordance with regularly
scheduled periodic bonuses and increases identified on SCHEDULE 2.11.11,
and has not provided for any new pension, retirement or other employee
benefits to any of its current employees or any increases in any
existing benefits.
2.18.2 Each Employee Plan, if any, has been administered and maintained in
compliance with all applicable laws, rules and regulations, except where
the failure to be in compliance would not, individually or in the
aggregate, result in a material adverse effect.
2.18.3 Garvey has not received any notice that any Employee Plan, if any, is
currently the subject of an audit, investigation, enforcement action or
other similar proceeding conducted by any state or federal agency.
2.18.4 No pending or, to the knowledge of Garvey or the Shareholder,
threatened, claims, suits or other proceedings exist with respect to an
Employee Plan, if any, other than normal benefit claims filed by
participants or beneficiaries.
2.18.5 Garvey has no obligation or commitment to provide medical, dental or
life insurance benefits to or on behalf of any of its employees who may
retire or any of its former employees who have retired, except as may be
required pursuant to the continuation of coverage provisions of Section
4980B of the Code and the applicable provisions of ERISA.
2.18.6 Garvey has been and is in compliance with all applicable Laws respecting
employment and employment practices, terms and conditions of employment
and wages and hours, except for any such failures to be in compliance
that, individually or in the aggregate, would not result in a material
adverse effect, and Garvey is not liable for any arrears of wages or
penalties for failure to comply with any of the foregoing. Garvey has
not engaged in any unfair labor practice or discriminated on the basis
of race, color, religion, sex, national origin, age, disability or
handicap in its employment conditions or practices, and there are no
complaints or racial, color, religious, sex, national origin, age,
disability or handicap discrimination charges or complaints pending or,
to the knowledge of Garvey or the Shareholder, threatened against Garvey
before any federal, state or local court, board, department, commission
or agency (nor, to the knowledge of Garvey or the Shareholder, does any
valid basis therefor exist).
2.18.7 Garvey has never been a party to any agreement with any union, labor
organization or collective bargaining unit. No employees of Garvey are
represented by any union, labor organization or collective bargaining
unit. To the knowledge of Garvey or the Shareholder, none of the
employees of Garvey has threatened to organize or join in union, labor
organization or collective bargaining unit.
2.18.8 All employees of Garvey are citizens of, or are authorized in accordance
with federal immigration laws to be employed in, the United States.
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2.19 INSURANCE. Garvey has at all times carried insurance which Garvey
and the Shareholder believe to be adequate in character and amount and
consistent with good industry practices, with reputable insurers, in respect of
its properties, assets and business and has provided all required performance
bonds, and has complied with all applicable terms and conditions, including
payment of premiums, with respect to such insurance policies and performance
bonds. Garvey has received no notification from any insurance carrier denying or
disputing any claim made by Garvey, denying or disputing any coverage for any
such claim, denying or disputing the amount of any claim, or regarding the
possible cancellation of or premium increases with respect to any policies.
Garvey has no claim pending or anticipated against any of the insurance carriers
under any of such policies and there has been no actual or alleged occurrence of
any kind which may give rise to any such claim.
2.20 RELATED-PARTY TRANSACTIONS. Except as set forth on the Exception
Schedule, none of the shareholders, employees, officers, or directors of Garvey
or member of their immediate family, is indebted to Garvey, nor is Garvey
indebted (or committed to make loans or extend or guarantee credit) to any of
them. None of the shareholders, officers or directors of Garvey, or members of
their immediate family, have any direct or indirect ownership interest in any
firm or corporation with which Garvey is affiliated or with which Garvey has a
business relationship, or any firm or corporation that competes with Garvey,
except that the Shareholder may own stock in publicly traded companies that may
compete with Garvey. No member of the immediate family of any employee, officer
or director of Garvey is directly or indirectly interested in any material
contract, lease or other agreement of any type (oral or written) with Garvey.
2.21 INVESTMENT REPRESENTATIONS. The Shareholder acknowledges,
represents and agrees that:
2.21.1 The Henley Shares have not been and will not be registered under the
Securities Act or registered or qualified under any applicable state
securities laws, and will be "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act;
2.21.2 The Henley Shares will be issued in reliance upon exemptions from such
registration or qualification requirements, and the availability of such
exemptions depends in part upon the Shareholder's bona fide investment
intent with respect to the Henley Shares;
2.21.3 The Shareholder's acquisition of the Henley Shares will be solely for
his own account for investment, and he is not acquiring the Henley
Shares for the account of any other person(s) or with a view toward
resale, assignment, fractionalization, or distribution thereof;
2.21.4 The Shareholder shall not offer for sale, sell, transfer, pledge,
hypothecate or otherwise dispose of any of the Henley Shares except in
accordance with the restrictions set forth herein and in the Lockup
Agreement and the requirements of Rule 144 promulgated under the
Securities Act, or pursuant to a valid registration statement under the
Securities Act;
2.21.5 The Shareholder has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks
of an investment in the Henley Shares, and to make an informed
investment decision;
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2.21.6 The Shareholder has received the Disclosure Documents (as defined
below), and related materials regarding Henley; he has had the
opportunity to ask questions of, and receive answers from Henley's
officers and directors concerning the acquisition of the Henley Shares
and to obtain such other information concerning Henley and the Henley
Shares, to the extent they possessed the same or could acquire it
without unreasonable effort or expense, as he deemed necessary in
connection with making an informed investment decision;
2.21.7 Since the Henley Shares have not been registered under the Securities
Act or applicable state securities laws, and are subject to the Lockup
Agreement, the Shareholder must bear the economic risk of holding the
Henley Shares for an indefinite period of time, and is capable of
bearing such risk; and
2.21.8 Each certificate evidencing the Henley Shares will bear a conspicuous
restrictive legend substantially as follows:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS, AND THEY CANNOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE HYPOTHECATED EXCEPT
IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE ACT AND
SUCH OTHER STATE LAWS OR UPON DELIVERY TO THIS CORPORATION OF AN
OPINION OF LEGAL COUNSEL SATISFACTORY TO THE CORPORATION THAT AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
IN ADDITION, THE SECURITIES EVIDENCED HEREBY ARE SUBJECT TO THE
TERMS OF A LOCKUP AGREEMENT DATED JANUARY 9, 1998, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION.
2.22 CONTINUITY OF INTEREST. There is no plan or intention on the part
of the Shareholder to sell, exchange or otherwise dispose of a number of shares
of Henley Common Stock received pursuant to this Agreement that would reduce the
Shareholder's ownership of shares of Henley Common Stock received pursuant to
this Agreement in exchange for Garvey Stock owned by the Shareholder, to a
number of shares having a value, as of the Closing Date, of less than 50% of the
value of all shares of Garvey Stock issued and outstanding immediately prior to
the Closing Date. For the purposes of this representation, shares of Garvey
Stock exchanged for cash or other property, surrendered by dissenters, or
exchanged for cash in lieu of fractional shares of Henley Common Stock will be
treated as outstanding Garvey Stock as of the Closing Date. Moreover, shares of
Garvey Stock and shares of Henley Common Stock held by the Shareholder and
otherwise sold, redeemed or disposed of prior or subsequent to the Closing Date
will be considered in making this representation.
2.23 BROKERS. None of Garvey, the Shareholder, or any of their
respective Affiliates, has employed any broker, agent or finder, or incurred any
liability for any brokerage fees, agent's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
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2.24 UNTRUE STATEMENTS. This Agreement and all schedules, documents and
information furnished by the Shareholder or Garvey or any of their respective
representatives to Henley and its representatives pursuant hereto or in
connection with the transactions contemplated by this Agreement do not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements made herein and therein not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
HENLEY AND ACQUISITION SUB
As material inducements for the execution, delivery and performance of
this Agreement by the Shareholder and Garvey, Henley and Acquisition Sub hereby
jointly and severally represent and warrant to the Shareholder and Garvey as
follows, except as otherwise described in the attached Exception Schedule
attached hereto. The Exception Schedule shall identify each exception by the
section number(s) of this Article 3 to which it relates.
3.1 ORGANIZATION AND STANDING. Henley and Acquisition Sub are
corporations duly organized, validly existing and in good standing under the
laws of the States of Texas and Minnesota, respectively, and each has full
requisite corporate power and authority to carry on its respective business as
it is currently conducted, and to own and operate the properties currently owned
and operated by it, and is duly qualified or licensed to do business and is in
good standing as a foreign corporation authorized to do business in all
jurisdictions in which the character of the properties owned or the nature of
the business conducted by it would make such qualification or licensing
necessary.
3.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS. The
consummation of the transactions contemplated hereby has been duly and validly
authorized by all necessary corporate action on the part of each of Henley and
Acquisition Sub, and this Agreement is a valid and binding obligation of each of
Henley and Acquisition Sub enforceable (subject to normal equitable principles)
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting
the rights of creditors generally. The execution, delivery and performance of
this Agreement and the consummation of the Merger contemplated by this Agreement
will not result in the breach of any term or provision of or constitute a
default under any obligation, indenture, mortgage, deed of trust, lease,
contract or other agreement to which either Henley and Acquisition Sub, or any
of their Subsidiaries is a party.
3.3 SEC DOCUMENTS. Henley has made all filings with the United States
Securities and Exchange Commission (the "SEC") that it has been required to make
under the Securities Act and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Henley has attached to the Exception Schedule as SCHEDULE
3.3 its Proxy Statement dated May 5, 1997, its Form 10-KSB/A filed for the year
ended December 31, 1996, its Form 10-QSB filed for the period ended September
30, 1997, and its Forms 8-K dated October 15, 1997 and October 24, 1997
(collectively, the "Disclosure Documents"). As of their respective filing dates,
the Disclosure Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which it was made, not misleading.
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3.4 FINANCIAL INFORMATION. The financial information included in the
Disclosure Documents is true and accurate in all material respects and was
prepared in all material respects in accordance with generally accepted
accounting principles ("GAAP"). Except as disclosed on the Exception Schedule or
as otherwise specifically contemplated by the terms and provisions of this
Agreement, since September 30, 1997, (i) there has been no material adverse
change in the consolidated net worth of Henley, (ii) there has been no physical
damage, destruction or loss suffered
by Henley that would, after taking into account any insurance recoveries payable
in respect thereof, have a material adverse effect on Henley, and (iii) no event
has occurred and no condition exists which, individually or in the aggregate,
would have a material adverse effect on this Agreement, Henley, or the
transactions contemplated by this Agreement.
3.5 CAPITALIZATION. The authorized capital stock of Henley consists of
20,000,000 shares of Henley Common Stock, of which 3,133,556 were issued and
outstanding as of November 12, 1997, and 2,500,000 shares of preferred stock,
par value $.10 per share, none of which are issued and outstanding. The
authorized capital stock of Acquisition Sub consists of 1,000 shares of common
stock, par value $.01 per share, all of which are issued and outstanding and
held of record by Henley. Except as disclosed in the Disclosure Documents or the
Exception Schedule attached hereto, there are no outstanding subscriptions,
options, rights, warrants, calls, preemptive rights, convertible securities, or
other agreements or commitments of any kind obligating Henley or Acquisition Sub
to sell, convey, issue, transfer from treasury, or otherwise dispose of, any
additional shares of its capital stock of any class, or any other equity or debt
security. Since September 30, 1997, neither Henley nor Acquisition Sub has
declared, set aside, paid or made, or agreed, arranged or committed to declare,
set aside, pay or make any dividend or other distribution in respect of its
capital stock, and or directly or indirectly redeemed, purchased or otherwise
acquired its capital stock.
3.6 BROKERS. Neither Henley, Acquisition Sub nor any of their respective
Affiliates have employed any broker, agent, or finder, or incurred any liability
for any brokerage fees, agent's fees, commissions or finder's fees in connection
with the transactions contemplated herein.
3.7 UNTRUE STATEMENTS. This Agreement and all schedules, documents and
information furnished by Henley, Acquisition Sub or their respective
representatives to the Shareholder and Garvey and any of their respective
representatives pursuant hereto or in connection with the transactions
contemplated by this Agreement do not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements made
herein and therein not misleading.
ARTICLE 4
INDEMNIFICATION
4.1 INDEMNIFICATION BY THE SHAREHOLDER; RELEASE. In addition to any
other remedies available to Henley under this Agreement, or at law or in equity,
the Shareholder shall indemnify, defend and hold harmless Henley and the
Surviving Corporation, and their respective officers, directors, employees,
agents and stockholders, against and with respect to any and all Claims that
such indemnitees shall incur or suffer, which arise, result from or relate to
any breach of, or failure by the Shareholder or Garvey to perform, their
respective representations, warranties, covenants or agreements in this
Agreement or in any schedule, certificate, exhibit or other instrument furnished
or delivered to Henley or Acquisition Sub by Garvey or the Shareholder under
this Agreement. Shareholder hereby releases in full all Claims he may have
against Garvey as of the date of this Agreement.
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4.2 INDEMNIFICATION BY HENLEY AND SURVIVING CORPORATION. In addition to
any other remedies available to the Shareholder under this Agreement, or at law
or in equity, Henley and the Surviving Corporation shall jointly and severally
indemnify, defend and hold harmless the Shareholder and his employees and agents
against and with respect to any and all Damages that such indemnitees shall
incur or suffer, which arise, result from or relate to any breach of, or failure
by Acquisition Sub or Henley to perform, any of its representations, warranties,
covenants or agreements in this Agreement or in any schedule, certificate,
exhibit or other instrument furnished or delivered to Garvey or the Shareholder
by or on behalf of Henley or Acquisition Sub under this Agreement.
4.3 INDEMNIFICATION PROCEDURE. (a) Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any action
or proceeding by a third party (i.e., one who is not a party to this Agreement)
with respect to which a Claim for indemnification may be made pursuant to this
Article 4, such indemnified party shall, if a Claim in respect thereof is to be
made against any indemnifying party, give written notice to the latter of the
commencement of such third party action; PROVIDED, HOWEVER, that the failure of
any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of any obligations hereunder, to the extent the indemnifying
party is not materially prejudiced thereby. In case any such third party action
is brought against an indemnified party and indemnification is sought under this
Article 4, the indemnifying party shall be entitled to participate in and to
assume the defense thereof, jointly with any other indemnifying party similarly
notified, to the extent that it may wish, with counsel reasonably satisfactory
to such indemnified party, and after such notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof unless the indemnifying party has failed to assume the defense
of such Claim and to employ counsel reasonably satisfactory to such indemnified
person. An indemnifying party who elects not to assume the defense of a Claim
shall not be liable for the fees and expenses of more than one counsel in any
single jurisdiction for all parties indemnified by such indemnifying party with
respect to such Claim or with respect to claims separate but similar or related
in the same jurisdiction arising out of the same general allegations.
Notwithstanding any of the foregoing to the contrary, the indemnified party will
be entitled to select its own counsel and assume the defense of any action
brought against it if the indemnifying party fails to select counsel reasonably
satisfactory to the indemnified party, the expenses of such defense to be paid
by the indemnifying party. No indemnifying party shall consent to entry of any
judgment or enter into any settlement with respect to a third party Claim
without the consent of the indemnified party, which consent shall not be
unreasonably withheld, or unless such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability with respect to such third
party Claim. No indemnified party shall consent to entry of any judgment or
enter into any settlement of any such third party action, the defense of which
has been assumed by an indemnifying party, without the consent of such
indemnifying party, which consent shall not be unreasonably withheld.
(b) If any party becomes aware of a fact, circumstance, claim,
situation, demand or other matter (other than a third-party Claim) for which it
or any other indemnified party has been indemnified under this Article 4 and
which has resulted or could result in a Claim being owed to the
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indemnified party by the indemnifying party, the indemnified party shall give
prompt written notice of the Claim to the indemnifying party, stating the nature
and basis of the Claim and the amount claimed thereunder, together with
supporting information to the Claim, if any. If the indemnifying party does not
notify the indemnified party within 30 days from the date such Claim notice is
given that it disputes the Claim, the amount of the Claim shall conclusively be
deemed to be a liability of the indemnifying party hereunder.
(c) If an indemnified party and an indemnifying party cannot reach
agreement with respect to the validity and amount of any Claim within 30 days
after notice thereof is first given, the validity and amount thereof, as the
case may be, shall be finally settled pursuant to the dispute resolution
procedure set forth in Section 5.9 below.
(d) Payments of all amounts owing hereunder with respect to any Claim
shall be made immediately after (i) the settlement between the parties of the
third party Claim, or (ii) the final resolution of the dispute pursuant to
Section 5.9 below.
4.4 INDEMNIFICATION THRESHOLD. Notwithstanding any provision to the
contrary contained in this Agreement, none of Henley, Acquisition Sub or the
Shareholder shall make any Claim against the other party for any breach of
representation, warranty, covenant or agreement under this Agreement until the
dollar amount of all loss to such party for such breaches suffered after the
Closing, shall exceed in the aggregate the amount of $5,000, and, to the extent
such amount is exceeded, Henley, Acquisition Sub or the Shareholder, as the case
may be, shall be required to pay the amount of such excess loss to the other
party for all such breaches; provided, however, that the indemnification
threshold for any Sales Tax Claims (as defined below) will be $20,000
irrespective of any other Claims.
4.5 SALES TAX CLAIMS. For purposes of this Article 4, the term "Sales
Tax Claims" shall mean any Claims from states other than the Sales Tax States
which relate to Garvey's sales activities on or before the Closing Date. The
Shareholder will have the right to contest (or join Garvey in contesting) any
Sales Tax Claims for which he could become liable. In the event of any such
contest, the Shareholder will be given access to Garvey's customer files. To the
extent the Shareholder is ultimately liable and pays any such taxes, the
Shareholder shall become subrogated to any rights Garvey may have to recover
those assessed sales taxes from the original purchasers.
4.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement with regard to taxes shall survive the
Closing for as long as the applicable statute of limitations with regard to any
such Claims shall run. All other representations and warranties contained in
this Agreement shall survive for a period of three years. An indemnifying party
shall have no liability under this Article 4 unless notice of a Claim for
indemnity shall be given by the indemnified party prior to the expiration of
these survival periods.
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ARTICLE 5
MISCELLANEOUS
5.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the
following terms has the meaning ascribed to it in this Section 5.1:
5.1.1 "ACQUISITION SUB COMMON STOCK" means the common stock, par value $.01
per share of Acquisition Sub.
5.1.2 "AFFILIATE" when used to indicate a relationship with any Person, means:
(i) any corporation or organization of which such Person is an officer,
director or partner or is directly or indirectly the beneficial owner of
at least 10% of the outstanding shares of any class of equity securities
or financial interest therein; (ii) any trust or other estate in which
such Person has a beneficial interest or as to which such Person serves
as trustee or in any similar fiduciary capacity; or (iii) any Person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, or is
acting as agent on behalf of, or as an officer or director of, such
Person. As used in the definition of Affiliate, the term "control"
(including the terms "controlling," "controlled by" or "under common
control with") means the possession, direct or indirect, of the power to
direct, cause the direction of or influence the management and policies
of a Person, whether through the ownership of voting securities, by
contract, through the holding of a position as a director or officer of
such Person, or otherwise.
5.1.3 "AGREEMENT" means and includes this Agreement and the schedules and
exhibits hereto.
5.1.4 "BUSINESS LAWS" means all Laws relating to establishing, owning,
operating, managing, maintaining, improving or conducting the Business.
5.1.5 "CLAIMS" mean any claims, demands, actions, costs, damages, losses,
expenses, obligations, liabilities, recoveries, judgments, settlements,
suits, proceedings, or causes of action, including interest, penalties
(including civil and criminal penalties) and attorneys' fees.
5.1.6 "ENCUMBRANCE" means and includes (i) any security interest, mortgage,
deed of trust, pledge, lien (including unpaid debts for which a lien
arising under Laws may be asserted if such debts remain unpaid),
encumbrance, charge, defect, option, right of first refusal,
preferential purchase right, proxy or voting trust or agreement,
preemptive right, adverse Claim, equity, power of attorney, equitable
interest or servitude, other right or interest of any other Person, or
restriction of any kind, including but not limited to, any restriction
or servitude on the use, transfer, receipt of income, or other exercise
of any attributes of ownership, and (ii) any Uniform Commercial Code
financing statement or other public filing, notice, or record that by
its terms purports to evidence or notify interested parties of any of
the matters referred to in clause (i) that has not been terminated or
released by another proper public filing, notice, or record.
5.1.7 "ENVIRONMENTAL LAWS" mean all Laws relating to protection of the
environment, including, without limitation, land use, zoning, health,
chemical use, safety and sanitation Laws, and Laws governing the on or
off-site use, storage, treatment, recycling, generation, transportation,
processing, handling, production or disposal of Hazardous Substances
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or sanitary (non-hazardous) substances or waste, including, without
limitation, garbage, refuse or other similar substances.
5.1.8 "GARVEY COMMON STOCK" means the Class A Voting Stock, par value $1.00
per share, which together with the Garvey Non-Voting Stock, none of
which is outstanding, constitute all of the capital stock of Garvey
authorized by its Articles of Incorporation, as amended.
5.1.9 "GOVERNMENTAL AUTHORITY" means any federal, state, county, municipal, or
other local governmental body, legislature, agency, commission, board,
department, court or other authority, or any subdivision thereof, or
private body exercising any regulatory, judicial or taxing authority,
and includes, without limitation, the Federal Trade Commission, the Food
and Drug Administration, the Environmental Protection Agency, the
Occupational Safety and Health Administration, and the Internal Revenue
Service.
5.1.10 "HAZARDOUS SUBSTANCE" means, without limitation, (i) any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulations, polychlorinated biphenyls, benzene, petroleum and
petroleum products, methane, or (ii) hazardous materials, hazardous
wastes, biomedical wastes, hazardous or toxic substances or related
materials defined as such in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections
9601 ET SEQ.), the Resource Conservation and Recovery Act, as amended
(42 U.S.C. Sections 6901 ET SEQ.), or any other Environmental Laws.
5.1.11 "HENLEY COMMON STOCK" means Henley's common stock, par value $.01 per
share.
5.1.12 "LAWS" mean any statute, law, code, ordinance, rule, regulation, policy,
guideline interpretation, order, permit, license, certificate, writ,
judgment, injunction, decree, determination, award or other decision or
directive of, or promulgated, issued or declared by any Governmental
Authority.
5.1.13 "MARKET PRICE" means the average of the closing bid and asked prices of
the Henley Common Stock on The Nasdaq SmallCap Market for the thirty
consecutive trading days ending on the third day prior to the Closing
Date, as furnished by any NASD member firm selected from time to time by
the Company for such purpose; PROVIDED, HOWEVER, that if such average is
lower than $7.00, the Market Price shall be $7.00, and if such average
is higher than $9.00, the Market Price shall be $9.00.
5.1.14 "ORDINARY COURSE OF BUSINESS" means an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(i) such action is consistent with the past practices of such Person and
is taken in the ordinary course of the normal day-to-day operations of
such Person; (ii) such action is not required to be authorized by the
board of directors of such Person (or by any Person or group of Persons
exercising similar authority); and (iii) such action is similar in
nature and magnitude to actions customarily taken, without any
authorization by the board of directors (or by any Person or group of
Persons exercising similar authority), in the ordinary course of the
normal day-to-day operations of other Persons that are in the same line
of business as such Person.
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5.1.15 "PERSON" means an individual, corporation, limited liability company,
partnership, limited partnership, joint venture, joint stock company,
firm, company, syndicate, trust, estate, association, Governmental
Authority, business, organization or any other incorporated or
unincorporated entity.
5.1.16 "SUBSIDIARY," with respect to any Person, shall mean any corporation of
which more than fifty percent of the outstanding voting securities
shall, as of any applicable date of determination, be owned directly, or
indirectly through one or more intermediaries, by that Person.
5.2 FURTHER ASSURANCES. From time to time, as and when requested by any
party hereto, any other party hereto shall execute and deliver, or cause to be
executed and delivered, such documents and instruments and shall take, or cause
to be taken, such further or other actions as may be reasonably necessary to
effectuate the transactions contemplated hereby.
5.3 PUBLIC ANNOUNCEMENTS. Except as mutually agreed, neither Henley, the
Shareholder nor any of their respective Affiliates or agents shall issue any
press release or public announcement regarding the execution of this Agreement
or the transactions contemplated thereby.
5.4 EXPENSES. Henley and Acquisition Sub will pay all of its own costs
and expenses, including legal and accounting expenses, incurred in connection
with the negotiation, execution, delivery and performance of this Agreement and
the transactions contemplated hereby. Shareholder, out of personal funds and not
funds of Garvey, shall pay all of the costs and expenses, including legal and
accounting expenses, incurred by Shareholder and Garvey in connection with the
negotiation, execution, delivery and performance of this Agreement and the
transactions contemplated hereby; provided, that up to $5,000 of such legal and
accounting expenses and up to $1,500 for preparation of tax returns for the stub
period beginning November 1, 1997 and ending on the Closing Date may be paid out
of funds of Garvey.
5.5 NOTICES AND WAIVERS. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at their respective
addresses indicated on Schedule 5.5 attached hereto, or at such other address
and number as a party shall have previously designated by written notice given
to the other parties in the manner hereinabove set forth. Notices shall be
deemed given when received, if sent by facsimile means (confirmation of such
receipt by confirmed facsimile transmission being deemed receipt of
communications sent by facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail, return receipt requested.
5.6 GENDER AND CERTAIN REFERENCES. Unless otherwise specified, all
references herein to days, weeks, months or years shall be to calendar days,
weeks, months or years. Whenever the context requires, the gender of all words
used herein shall include the masculine, feminine and neuter. References to
Articles or Sections shall be to Articles or Sections of this Agreement unless
otherwise specified. The headings and captions used in this Agreement are solely
for convenient reference and shall not affect the meaning or interpretation of
any article, section or paragraph herein, or this Agreement. The terms "hereof,"
"herein" or "hereunder" shall refer to this Agreement
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as a whole and not to any particular article, section or paragraph. The terms
"including" or "include" are used herein in an illustrative sense and not to
limit a more general statement. When computing time periods described by a
number of days before or after a stated date or event, the stated date or date
on which the specified event occurs shall not be counted and the last day of the
period shall be counted.
5.7 SUCCESSOR AND ASSIGNS. This Agreement shall bind, inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder shall
not be assignable or delegable by any party; provided, however, that Henley
shall be entitled to assign its rights and delegate its duties hereunder to any
Subsidiary.
5.8 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and of the United States
applicable in Texas, excluding, however, (i) any provision of such laws that
would render invalid any provision of this Agreement, and (ii) any rule of
conflict-of-laws that would direct or refer the resolution of any issue to the
laws of any other jurisdiction. Each party hereto hereby acknowledges and agrees
that it has consulted legal counsel in connection with the negotiation of this
Agreement and that it has bargaining power equal to that of the other parties
hereto in connection with the negotiation and execution of this Agreement.
Accordingly, the parties hereto agree that the rule that an agreement shall be
construed against the draftsman shall have no application in the construction or
interpretation of this Agreement.
5.9 DISPUTE RESOLUTION. Any dispute or controversy between the parties
hereto arising from or relating to this Agreement or the construction, validity,
interpretation, meaning, enforcement, performance, non-performance, operation or
breach of this Agreement shall be submitted to mediation, and if such mediation
is unsuccessful then to mandatory, final and binding arbitration. Any mediation
or arbitration under this Agreement shall take place pursuant to the following
procedures:
5.9.1 If a dispute or controversy arises either party will request that
Judicial Arbitration and Mediation Service ("JAMS") (or similar
mediation service of a similar national scope if JAMS no longer then
exists) appoint an independent mediator, who shall serve as mediator for
all purposes hereof. Henley and the Shareholder shall each pay an equal
proportion of the cost of the mediator's services, in advance upon
request by the mediator or any party.
5.9.2 Within 10 days after appointment of the mediator, the mediator shall
schedule a meeting among the parties and the mediator for the purpose of
mediating the dispute. If the parties do not resolve the dispute within
30 days after appointment of the mediator, the dispute shall be resolved
in arbitration.
5.9.3 Within 15 days after the mediation, the parties shall each name and
appoint their own arbitrator. If either party fails to name and appoint
an arbitrator timely, then an arbitrator shall be appointed for that
party by the Senior United States District Judge for the United States
District Court in Houston, Texas. The two arbitrators so appointed shall
appoint a third arbitrator within 15 days, and if they cannot agree, the
appointment of the third arbitrator will he made by the Senior United
States District Judge for the United States District Court in Houston,
Texas.
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5.9.4 Each party shall bear its own arbitration fees, costs and expenses. The
arbitration hearing shall be held in Houston, Texas within 15 days of
the appointment of the third arbitrator at a location designated by a
majority of the arbitrators within 10 days of the appointment of the
third arbitrator. The Commercial Arbitration Rules of the American
Arbitration Association, as supplemented hereby, shall apply to the
arbitration. The substantive laws of the State of Texas (excluding
conflict of laws provisions) shall also apply to the arbitration.
5.9.5 The arbitration hearing shall be concluded within 10 days unless
otherwise ordered by a majority of the arbitrators, and the award
thereon shall be made within 15 days after the closing of submission of
evidence. An award rendered by a majority of the arbitrators shall be
final and binding on all parties to the proceeding and non-appealable,
and judgment on the award may be entered by any court of competent
jurisdiction.
5.9.6 The parties stipulate that the provisions of this Section 5.9 shall be a
complete defense to any suit, action or proceeding instituted in any
federal, state or local court or before any administrative tribunal with
respect to any controversy or dispute arising out of this Agreement
between the parties, and the parties waive any right to have the award
of the arbitrators appealed. The arbitration provisions of this
Agreement shall, with respect to such controversy or dispute, survive
the termination or expiration of this Agreement. Should any party
institute judicial proceedings seeking to avoid the mediation or
arbitration provisions of this Agreement, or should any party in
judicial proceedings successfully contest an arbitration award rendered
under this Section 5.9, the other parties shall be entitled to recover
reasonable attorney's fees, costs and expenses associated with the
judicial proceedings, with the amount of attorney's fees, costs and
expenses to be determined by the court. If a party fails to comply with
the terms of an arbitration award made under this Agreement, the other
parties shall be entitled to recover reasonable attorney's fees, costs
and expenses incurred in seeking judicial confirmation of the award,
with the amount of attorney's fees, costs and expenses to be determined
by the court. Failure to comply with the terms of an arbitration award
shall include without limitation the failure to pay the full amount due
under an arbitration award within the time specified in the arbitration
award.
5.9.7 In determining any award under this Section 5.9, the arbitrators may
award amounts for special damages, consequential damages, incidental
damages, lost profits, damages for lost business opportunity, punitive
damages or exemplary damages.
5.9.8 Neither any party hereto nor the arbitrators may disclose the existence
or results of any arbitration hereunder without the prior written
consent of the other parties; nor may any party hereto disclose to any
party any confidential information disclosed by any other party hereto
in the course of an arbitration hereunder without the prior written
consent of such other party.
5.10 SEVERABILITY; JUDICIAL MODIFICATION. If any term, provision,
covenant, or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions shall remain in full force and effect and
shall in no way be affected, impaired or invalidated. It is hereby stipulated
and declared to be the intention of the parties that they would have executed
this Agreement had the terms, provisions, covenants and restrictions which may
be hereafter declared invalid, void, or unenforceable not initially been
included herein.
26
<PAGE>
5.11 AMENDMENT AND ENTIRETY. This Agreement and any exhibits hereto or
thereto, may be amended, modified, or superseded only by written instrument
executed by all parties hereto. This Agreement sets forth the entire agreement
and understanding of the parties with respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements, and understandings
relating to the subject matter hereof.
5.12 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than the parties hereto and their respective
successors and assigns, nor shall any provision give any third Persons any right
of subrogation or action over against any party to this Agreement. Without
limiting the generality of the foregoing, it is expressly understood that this
Agreement does not create any third party beneficiary rights.
5.13 TIME OF ESSENCE. Time is of the essence in the performance of this
Agreement.
5.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by facsimile signature, each of which shall be deemed an
original and all which together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
27
<PAGE>
IN WITNESS WHEREOF, this Plan and Agreement of Merger is executed and
delivered by the parties on and as of the day first above written.
HENLEY HEALTHCARE, INC.
/s/ MICHAEL M. BARBOUR
-----------------------------
Michael M. Barbour,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
GARVEY ACQUISITION CORP.
/s/ MICHAEL M. BARBOUR
-----------------------------
Michael M. Barbour,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
GARVEY COMPANY
/s/ CHARLES R. OASE
-----------------------------
Charles R. Oase,
PRESIDENT
SHAREHOLDER:
/s/ CHARLES R. OASE
-----------------------------
Charles R. Oase
28
EXHIBIT 21.1
SUBSIDIARIES OF HENLEY HEALTHCARE, INC.
The following is a list of all of the subsidiaries of the Company as of
the date hereof. Each of the subsidiaries is wholly-owned by the Company.
CORPORATE NAME OF SUBSIDIARY STATE OF INCORPORATION
---------------------------- ----------------------
Health Career Learning Systems, Inc. Michigan
Garvey Company Minnesota
Med-Quip, Inc. Georgia
Henley Acquisition Corp. Texas
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8 (No. 33-76614 and No. 333-46383).
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report dated February 23,
1997, on the consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1996, included in this Form 10-KSB,
into the Company's previously filed Registration Statements on Form S-8 (No.
33-76614 and No. 333-46383).
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
March 27, 1998
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