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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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(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, 1998
[] 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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(b) of the Exchange Act: None
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. [ ]
The issuer's revenues for its most recent fiscal year are $41,931,617.
The aggregate market value of voting stock held by non-affiliates of the
registrant on April 9, 1999, based upon the average bid and ask price of the
common stock as reported on the Nasdaq SmallCap Market, was $10,398,271. The
number of shares of the issuer's common stock, $.01 par value, outstanding as of
April 9, 1999 was 5,789,820.
Documents incorporated by reference: The Registrant's Notice of Annual
Meeting of Shareholders and definitive Proxy Statement pertaining to the 1999
Annual Meeting of Shareholders (the "Proxy Statement") and filed pursuant to
Regulation 14A is incorporated herein by Reference into Part III of this report.
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) SECURING SUFFICIENT FINANCING AT TERMS WHICH WILL
ALLOW THE COMPANY TO CONTINUE ITS OPERATIONS, (II) THE COMPANY'S ABILITY TO
MANUFACTURE AND MARKET ITS PRODUCTS PROFITABLY, (III) THE EFFECT OF ANY CURRENT
OR FUTURE COMPETITIVE PRODUCTS, (IV) ONGOING COST OF RESEARCH AND DEVELOPMENT
ACTIVITIES, (V) TIMELY APPROVAL OF THE COMPANY'S PRODUCT CANDIDATES BY
APPROPRIATE GOVERNMENTAL AND REGULATORY AGENCIES, (VI) THE RETENTION OF KEY
PERSONNEL AND (VII) CAPITAL MARKET CONDITIONS. THIS REPORT MAY CONTAIN
TRADEMARKS AND SERVICE MARKS OF OTHER COMPANIES.
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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, brand name products and
services in the pain management industry. The Company has over 300 products that
compete in substantially all segments of the rehabilitation product market,
offering cost-effective alternatives to surgery and drugs. The Company has
operating units which are categorized by the type of service provided and type
of product manufactured or distributed. The Clinical unit manufactures and
markets a diversified line of pain management products used in clinical settings
for both physical therapy and rehabilitation as well as other applications. The
Training unit consists of Health Care Learning Systems ("HCLS") which provides
training and 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 International unit consists of
Enraf-Nonius, an established European Company that designs, manufactures and
markets a variety of ultra-sound and electrical stimulation products to
non-domestic healthcare markets through a worldwide network of distributors.
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
of brand name products 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).
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ACQUISITIONS AND DISPOSITIONS
During 1997 and 1998, the Company acquired a total of nine companies and
product lines, which has had the effect of significantly increasing the
Company's product lines and distribution and marketing networks. The Company
also sold its historically unprofitable Homecare division in 1998.
<TABLE>
<CAPTION>
DATE ACQUIRED
NAME OF COMPANY/PRODUCT OR DISPOSED STRATEGIC BENEFIT
- ------------------------------------- ------------- ------------------------------------------------------
<S> <C> <C>
Texas T.E.N.S., Inc.................. 1/97 Additional lines of medical supplies and devices with
established marketing and distribution channels.
Gatti Medical Supply, Inc. --
Homecare Division.................. 1/97 Additional lines of medical supplies and devices with
established marketing and distribution channels.
Med-Quip, Inc........................ 5/97 Additional lines of physical therapy and
rehabilitation products with established marketing and
distribution channels.
Cybex International, Inc............. 9/97 Additional line of high brand recognition isokinetic
rehabilitation products.
Summer Medical....................... 10/97 Additional lines of pain management and rehabilitation
products with established marketing and distribution
channels.
NCI, Inc............................. 12/97 Knowledge and expertise in training of medical
professionals.
Garvey Company....................... 1/98 Additional line of pain management and rehabilitation
products with established marketing and distribution
channels.
AMC Acquisition Corp................. 2/98 Additional line of durable medical equipment and
devices with established marketing and distribution
channels.
Enraf-Nonius, B.V.................... 5/98 Design, manufacture and sale of high brand-recognition
traction / treatment tables, ultrasound and electrical
stimulation products to primarily European markets
through established European Company.
Homecare Division.................... 8/98 Disposed of historically unprofitable business
dependent upon third-party reimbursement for revenues.
</TABLE>
To manage its growth, the Company must continue to implement and improve
its operational and financial systems and to expand, train and manage its
employee base. There can be no assurance that the Company has adequately
evaluated the costs and risks associated with this expansion, that the Company's
systems, procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to achieve the rapid
execution necessary to successfully offer the Company's products and services
and implement its business plan on a profitable basis. The Company's future
operating results will also depend on its ability to expand its support
organization commensurate with the growth of its business and to integrate newly
acquired operations. Any failure by the Company's management to effectively
anticipate, implement and manage the changes required to sustain the Company's
growth would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to successfully integrate the acquired businesses and become
profitable in the future. In addition, the Company may experience delays,
complications and expenses in integrating the newly acquired businesses. The
inability of the Company to successfully integrate or operate the recently
acquired businesses would have a material adverse effect on the Company's
business, financial condition and results of operations and would make it
unlikely that the Company's acquisition program will be successful.
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OPERATIONS
CLINICAL UNIT. The Company's Clinical unit designs, manufactures and
markets various lines of physical therapy and rehabilitation products. These
products and related accessories are used in physical therapy for control of
acute or chronic pain through non-invasive methods and to facilitate the healing
of injuries and 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.
TRAINING UNIT. The Company's Training unit sells HCLS training and safety
products and provides 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 Blood Borne
Pathogens Standard, Hazard Communication Standards, Safety Regulations and
State-Specific Regulations. It is the Company's intention that the Training unit
will continue to expand its training activities to include various other
products offered by the Company.
INTERNATIONAL UNIT. The Company's International unit was formed with the
acquisition of Enraf-Nonius, B.V. ("Enraf-Nonius") in 1998. Through
Enraf-Nonius, the Company gained the benefit of a brand of highly recognized and
respected traction/treatment tables, ultrasound and electrical stimulation
products that have been marketed internationally for over 65 years. Enraf-Nonius
has an extensive and well-established distribution network through which the
Company can continue to market Enraf-Nonius products as well as the Company's
domestic brand-name products, most of which have been approved for sale in
Europe (see "Business -- Government Regulation").
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
for 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. The Company markets its products under four principal brand
names:
"HENLEY HEALTHCARE" BRAND PRODUCTS
FLUIDOTHERAPY UNITS. Fluidotherapy is a patented dry heat treatment that
uses finely divided cellulose 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 clinical portable intermittent
traction machines, currently consisting of four 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
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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.
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 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.
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.
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. 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.
As part of its clinical operations, the Company is currently 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 --
Research and Development." Based upon the results of recent studies, including
those by General Motors Corporation 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.
"CYBEX MEDICAL" BRAND PRODUCTS
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
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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, nonthreatening 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.
"HCLS" BRAND PRODUCTS
HCLS specializes in OSHA compliance and infection control training for the
healthcare professions. In addition, the company provides a wide range of
required safety products including safety eyeware, spill kits, protective
gloves, etc., that are mandatory under OSHA regulations. Training occurs via
training manuals and training videos produced by the Company. Clients include
dental and medical offices, as well as veterinarians, podiatrists and nursing
homes. The Company supports its clients through the use of a toll-free technical
service hotline and quarterly compliance newsletters.
"ENRAF-NONIUS" BRAND PRODUCTS
Enraf-Nonius markets and distributes a complete line of innovative physical
therapy equipment.
SONOPULS. Sonopuls ultrasound units are used successfully in the treatment
of wounds, post traumatic disorders, circulatory disorders and afflictions of
the skin and the peripheral nervous system. In therapeutic ultrasound, a source
of alternating electrical current is applied to the surface of a crystal
material. As the current alternates, this is reversed thus causing the crystal
to vibrate at a specific frequency. Under proper conditions, these sound waves
can propagate in neighboring media (e.g., tissues) and cause both thermal and
nonthermal effects. Thermal effects, the localized heating at interfaces of
heterogeneous tissues, occur with ultrasound applied continuously. Physiological
responses due to thermal mechanisms include: increase in tissue extensibility,
alternations in blood flow, changes in nerve conduction velocity, changes in
pain threshold, increase enzymatic activity and changes in the contractile
activity of skeletal muscle. It is used for pain reduction, joint contractual
reduction, muscle spasm reduction and scar tissue softening. Nonthermal effects
of ultrasound occur due to mechanical phenomena taking place.
ENDOMED. Endomed electrical stimulation units provide a multitude of low,
medium and alternating electrical frequencies, which permits selective treatment
of deep-lying as well as superficial tissue structures. A common form of therapy
in physiotherapy is the strengthening of muscles with a therapeutic objective.
This objective can be, among others: to increase muscle strength, to improve the
(active) stability of a joint to regain muscle strength and to increase muscle
strength in order to achieve greater physical performance.
CURAPULS. Curapuls short-wave diathermy units provide pulsed short-waves
for effective therapy in the healing of wounds, reduction of pain and the
stimulation of the peripheral circulation. The Curapuls 970 is a versatile unit
for short-wave therapy providing a high level of maximum power for both
continuous and pulsed applications, without affecting low power applications.
The Curapuls 970 is CE-certified, thus
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permitting it to be marketed and distributed in the European Union (See
"Business -- Government Regulation").
RADARMED. The Radarmed 650 system is a versatile system of microwave units
used for heat therapy. The system consists of several microwave radiators with
various shapes and strengths that can be connected for treating multiple areas
of the body. The angled large-field radiator follows the contours of the body,
enabling effective treatment of large body areas. The local field radiator is
suitable for localized treatment, while the longitudinal field radiator is used
for elongated body parts, such as arms or legs.
ELTRAC. Eltrac traction machines provide both continuous and intermittent
cervical and lumbar traction treatments. The Eltrac is designed to combine
computer technology, functional design and operational convenience. The control
panel shows various parameters (such as traction force, base force, base hold
time and treatment time) which can be selected with fingertip controls. A
microcomputer compares the actual readings with the set values and immediately
attempts to eliminate any differences.
MANUMED TREATMENT TABLES. The Manumed line of treatment tables offers a
complete array of treatment tables available for physical and manual therapy.
EN-DYNAMIC. The EN-Dynamic computer isolated exercise stations offer a
pneumatic type of resistance. The air resistance is designed to be comfortable
and prevent the occurrence of unnecessary high compression forces in joints as
well as improper peak forces on the muscle-tendon system (as occurs, for
example, with weight stacks due to inertia). These features are intended to make
pneumatic resistance the preferable exercise load for force training of most
individuals.
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, athletic
trainers, chiropractors and their patients as well as to clinics and healthcare
networks. 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 and enables the Company to provide better
customer service and to maintain specialized expertise in each product line. The
Company believes that medical products are increasingly being purchased on a
national account or centralized basis by healthcare networks, which creates the
need for the Company's salespersons to maintain relationships with purchasing
managers within these networks.
The Company utilizes telemarketing, Internet and direct-mail programs to
market its products and services. The Company has domestic product distribution
centers in Ohio and Texas and approximately 160 dealers and distributors, 30
sales representatives and 15 direct salespersons representing its products
within the United States. The Company believes that using independent
distributors, which have their own sales forces, enables its products to reach
more consumers throughout the world in a more efficient manner. The Company has
found that utilizing independent distributors is less costly and requires less
administrative overhead and capital to maintain than dedicated sales forces. The
Company has added direct sales forces, where needed, in order to maintain its
market share in a particular area.
Internationally, the Company sells many of its products through a network
of over 140 distributors and representatives in various countries around the
world. 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 products manufactured and sold by
the Company in Europe are subject to the European Community regulations for
medical devices, including product certification ("CE Marking"). The Company
has obtained CE Marking qualification on all of its HydraFitness and Cybex
medical products and is currently working to obtain the CE Marking on the
remainder of its products that are sold in Europe (See "Business -- Government
Regulation").
MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures many of the products marketed by its clinical
operations under the "Henley Healthcare" and "Cybex Medical" brand names at
its two manufacturing facilities.
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BELTON, TEXAS FACILITY. The Company owns and operates a 59,000 square foot
manufacturing facility in Belton, Texas, at which it manufactures many of its
physical therapy and fitness products for its Clinical unit. The Belton
manufacturing facility is a complete fabrication, machining, electrostatic
powder coating and assembly facility. This operation also includes final
packaging and shipping facilities. The processes and product flow are all
controlled and documented through computer systems utilizing the quality systems
of ISO 9002. The finished goods manufactured at the Belton facility include the
Hydra-Fitness Pace line, the HF Star and Tru-Trac tables and uppercycles, as
well as the Cybex Medical line which includes the NORM(TM) testing and
rehabilitation system, UBE, Fitron and Kinetron.
SUGAR LAND, TEXAS FACILITY. The Company also owns and operates a 65,000
square foot manufacturing facility in Sugar Land, Texas, which is the primary
location for the manufacture of the electronics-based finished goods and
sub-assemblies. The Company employs a highly trained staff of assemblers and
technicians who complete numerous assembly tasks including PC board stuffing and
testing, cable and harness wiring, electromechanical sub-assembly, and final
assembly and integration. Many of these sub-assemblies are shipped to the
Belton facility where they are installed into various mechanically-based
finished goods manufactured at that site. The Sugar Land site also has a drug
delivery and electrode manufacturing group. The brand names of the finished
goods manufactured in Sugar Land include Tru-Trac Traction, Fluidotherapy,
Iotrode, MediPads, MediGel, LidoKain and Jeltrode. All manufacturing operations
are completed in compliance with the FDA's Quality Systems Regulations and ISO
9002. Additionally, many of the products are built in compliance with applicable
CE, UL and CSA specifications. Quality Assurance is part of a written QSR/ISO
compliance system.
DELFT, THE NETHERLANDS. Enraf-Nonius currently has all of its proprietary
products manufactured by original equipment manufacturers. The Company maintains
a quality assurance department which ensures all manufacturing is done in
accordance with ISO 9001 and CE Marking Certification standards.
COMPETITION
The Company has found that 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 product markets are product features,
customer service and pricing. Although the Company's products are not the
lowest-priced in their respective markets, the Company endeavors to maintain a
competitive edge by emphasizing overall value through a combination of
competitive pricing, product quality and customer service.
The pain management market is a relatively mature and competitive market,
subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy and governmental regulation and
private rates of reimbursement. The rehabilitation market is an evolving and
fragmented market with a number of different companies offering competing
treatments without any clear indication of preference among treating clinicians.
There can be no assurance that the Company will be able to maintain or increase
its market share in the pain management and rehabilitation markets.
CLINICAL PRODUCTS MARKET
The Company believes that the strength of its clinical products lies
primarily in the fact that some of its products such as Fluidotherapy, MediPads
and Gels, and HydraFitness have features that the Company believes are unique in
the marketplace. The Company believes that it can achieve a greater market share
through an emphasis on product features, quality and personal service with its
customers.
FUTURE COMPETITION WITH PRODUCTS IN DEVELOPMENT. While the Company is
currently awaiting FDA approval for the MicroLight 830(TM) and cannot commence
commercial sales until such approval is received, there are several foreign as
well as U.S. manufacturers of low energy lasers using similar technology to the
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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, if the Company receives FDA approval, 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. Qualified
companies could reverse engineer a similar laser 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.
The Company's Clinical product lines have several competitors. The
Chattanooga Group is the primary competitor with the Tru-Trac (traction and
tables) and Enraf-Nonius (ultra sound and electrical stimulation) product lines.
Other competitors with the Company's ultra sound product lines are Dynatronics,
Inc. and Excel (Canada). Dynatronics, Inc. and Empi, Inc. compete with the
Company's iontopherises product line. The Hydra-Fitness product line is unique
due to its use of hydraulics creating accommodating resistance, with the closest
competition being products utilizing weight stacks. The Cybex Medical line,
which includes the NORM, UBE and stationary bikes, has one primary competitor,
Biodex, Inc. The Fluidotherapy, Medipad and Medigel product lines are
proprietary to the Company and currently have no direct competition.
HCLS PRODUCTS MARKET
Competitors of HCLS training services include companies and individuals who
provide OSHA compliance services on a local level. The Company believes there
is, at this time, no other company operating on a national level. In the safety
products market, the Company has a number of large competitors who can fulfill
safety product requirements including Lab Safety Supply, Inc. and Cabot Safety
Inc. In addition, there are numerous small direct mail companies that market
such safety products.
EUROPEAN PRODUCTS MARKET
The Company believes that competition in the European physical therapy and
medical markets is intense. The ultrasound and electrical stimulation market in
Europe is shared by three major companies. Enraf-Nonius, Uniphy and Zimmer.
Enraf-Nonius has attempted to increase its market share by targeting not only
the high-end market but recently launching a new series of ultrasound and
electrical stimulators for the low to middle-end markets. Enraf-Nonius seeks to
become the leader in this market in which it competes primarily with products
and companies from England, Germany and France.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks patent protection for its proprietary
technology, both in the U.S. and abroad. The Company owns several U.S. issued
patents and various foreign counterparts. The Company's success will depend, in
part, on its ability to obtain patents and to operate without infringing on the
proprietary rights of others. There can be no assurance that patents issued to
or licensed by the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. There can be no assurance that the Company's pending patent
applications or patent applications in preparation presently or in the future,
if and when issued, will be valid and enforceable and withstand litigation.
There can be no assurance that others will not independently develop
substantially equivalent or superseding proprietary technology or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. The Company currently has one patent application pending in the U.S.
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There is a substantial backlog of patent applications at the U.S. Patent and
Trademark Office ("PTO"). Because patent applications in the U.S. are
maintained in secrecy until patents issue, and because publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, there can be no assurance that the Company will
obtain patent protection for its inventions. In addition, patent protection,
even if obtained, is affected by the limited period of time for which a patent
is effective. Furthermore, patent positions are highly uncertain and involve
complex legal and factual questions. Therefore, the scope or enforceability of
claims allowed in the patents on which the Company will rely cannot be predicted
with any certainty.
The Company also relies on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. Although the
Company has entered into confidentiality agreements with its employees and
consultants, which contain assignment of invention provisions, no assurance can
be given that others will not gain access to these trade secrets, that such
agreements will be honored or that the Company will be able to effectively
protect its rights to its unpatented trade secrets. Moreover, no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets.
In addition to protecting its proprietary technology and trade secrets, the
Company may be required to obtain licenses to patents or other proprietary
rights from third parties. No assurance can be given that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If the Company does not obtain required licenses, it could
encounter delays in product introductions while it attempts to design around
blocking patents, or it could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed.
Although, the Company has conducted searches to discover any patents which
its products, including the MicroLight 830, or their use might infringe and is
not aware of any such patents, there can be no assurance that no such
infringement has or will occur. The Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties, in a suit with another party. The PTO
could institute interference proceedings involving the Company in connection
with one or more of the Company's patents or patent applications, and such
proceedings could result in an adverse decision as to priority of invention. The
PTO or a comparable agency of a foreign jurisdiction could also institute
re-examination or opposition proceedings against the Company in connection with
one or more of the Company's patents or patent applications and such proceedings
could result in an adverse decision as to the validity of scope of the patents.
The Company currently markets its products using various registered
trademarks. The two most recognizable of its trademarks are Enraf-Nonius and
Cybex Medical. The Company believes that Cybex Medical and Enraf-Nonius are well
known and respected brand names in their respective markets throughout the
world.
The perpetual rights to use the trademarks Cybex Medical and Enraf-Nonius
have been acquired by the Company. The Company is required to pay a royalty of
2% of related sales on the Cybex Medical trademark and 1.5% of related sales on
the Enraf-Nonius trademark (with an annual minimum of approximately $500,000)
over the next 7 years.
GOVERNMENT REGULATION
FOOD AND DRUG ADMINISTRATION REGULATIONS. 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 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
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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.
The Company is not required to notify or obtain approval from the FDA
regarding any of its devices sold for veterinary 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 are
focused on the marketing and distribution of its many other products.
ISO 9000. ISO 9000 is a series of five standards for "quality
management" and "quality assurance" developed in 1987 by the International
Organization for Standardization (ISO) representing a consensus of more than 100
countries on quality systems. The standards were designed to help overcome
technical trade barriers and assure market consistency globally. ISO 9002
Certification addresses 19 criteria for assessing quality system areas including
management responsibility, contract review, process control, document and data
control, production, installation, servicing and training. The Company must
demonstrate continuous compliance with all established criteria.
The Company was awarded ISO 9002 Certification in October 1998 following an
extensive in-depth assessment of its quality management, quality assurance and
manufacturing process and systems by a third-party quality system auditor. The
Company believes that ISO Certification, although not yet mandatory, gives the
Company a competitive advantage for conducting business overseas, especially in
the nations of Europe.
EXPORT REGULATION AND CE MARKING. Sales of the Company's medical products
outside the United States are subject to regulatory requirements that vary
widely from country to country. The time required to obtain clearance for sale
in foreign countries may be longer or shorter that that required for FDA
clearance, and the requirements may differ. The FDA also regulates the sale of
exported medical devices, although to a lesser extent than devices sold in the
United States. For medical products exported to countries in Europe,
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the Company anticipates that its customers will want their products to qualify
for distribution under the "CE Mark." The CE Mark is a designation given to
products which comply with certain European Economic Area policy directives and
therefore may be freely traded in almost every European country. Commencing in
1998, medical product manufacturers will be required to obtain the
certifications necessary to enable the CE Mark to be affixed to medical products
they manufacture for sale throughout the European Community. To obtain the CE
Mark each product, depending upon the product classification, can be subjected
to safety testing, emissions testing, and subsequent review and approval by a
"notified body" recognized by the European Union. These criteria are in
addition to the quality system requirements of ISO 9002. The Company's NORM(TM)
Rehabilitation and Testing System, HFStar, PACE, UBE and Fitron Systems are CE
Marking Certified. The Company is in the process of obtaining CE Marking
Certification for its Tru-Trac 401 and 92B Systems and Fluidotherapy Systems. In
addition, the Company's distributors and customers must comply with other laws
generally applicable to foreign trade, including technology export restrictions,
tariffs, and other regulatory barriers. There can be no assurance that the
Company and its distributors and customers will obtain all required clearances
or approvals for exported products on a timely basis, if at all. Failure or
delay by the Company or its distributors and customers in obtaining the
requisite regulatory approvals for exported instruments manufactured by the
Company may have a material adverse effect on the Company's business, results of
operations, and financial condition.
Continued regulatory compliance is essential for Henley to maintain its
quality system certifications such as the ISO Certification and CE Marking.
Periodic inspections of the manufacturing facilities are conducted by the FDA to
ensure the Company adheres to applicable standards. The Belton and Sugar Land
manufacturing facilities were inspected by representatives from the FDA within
the past 18 months. As with any in-depth inspection, some nonconformities were
observed. The observations were addressed and corrective actions implemented by
the Company without adverse impact on the Company's ability to produce products.
HOMECARE UNIT DISPOSITION AND THIRD-PARTY REIMBURSEMENT
In August 1998, the Company sold all of its assets related to its Homecare
operations, including accounts receivable, inventory, property and equipment for
$3.65 million in cash and the assumption of certain related liabilities. For its
revenues, the Homecare division relied primarily on reimbursement from third
party sources. Third party operations require extensive capital investments due
to the nature of the business. Collections of the receivables occur 90-150 days
after billings. The Homecare inventory is primarily rental equipment and
requires substantial time to generate sufficient revenue to recoup the
investment in such equipment.
In prior years, the Company has taken significant financial writedowns as a
result of the valuation of its receivables and inventory. In consideration of
these financial difficulties the Company determined it was in its best interest
to dispose of the Homecare division.
HEALTHCARE REFORM
In the third quarter of fiscal 1998, the Health Care Financing
Administration ("HCFA") implemented salary equivalency reimbursement
guidelines for occupational therapy and speech language pathology services and
revised guidelines for physical therapy services. The net effect of these
guidelines was to reduce the long-term care reimbursement rates and gross profit
percentage from previous levels. Additionally, the Balanced Budget Act of 1997
requires a change from these salary equivalency guidelines for therapy services
to a prospective payment system ("PPS") for Medicare Part A services and a fee
schedule with annual maximum payments per patient for Medicare Part B services.
Management does not believe the PPS section of the Balanced Budget Act of 1997
will have a significant impact on the Company's revenues because the guidelines
primarily cover reimbursement for therapy services rather than therapy devices.
In addition, several states and the federal government are investigating a
variety of alternatives to reform the health care delivery system and further
reduce and control health care spending. These reform efforts include proposals
to limit spending on health care items and services, limit coverage for new
technology, and limit or control directly the prices health care providers and
drug and device manufacturers
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may charge for their services and products. The scope and timing of such reforms
cannot be predicted at this time, but if adopted and implemented, they could
have a material adverse effect on the Company.
RESEARCH AND DEVELOPMENT
GENERAL. The Company is continually conducting research and development
efforts on new products by utilizing a team approach involving the Company's
engineering, manufacturing and marketing resources. These research and
development ("R&D") 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 R&D efforts
are directed towards product improvement and enhancement of previously developed
or acquired products. Such enhancement often involves updating and redesigning
existing products to improve features, performance and reliability.
With the acquisition of Enraf-Nonius, the Company plans to consolidate its
R&D activities into Enraf-Nonius' existing R&D facilities. Enraf-Nonius
currently has 21 employees in its research and development department of
software, mechanical, electrical and design engineers and support staff who work
on updating and enhancing the Enraf-Nonius products to meet the needs of the
marketplace. Enraf-Nonius' R&D group has begun a project to enhance certain of
the Company's core products.
The Company is 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 from continuing operations in 1998 and 1997 amounted to
approximately $1,067,149 and $506,629, respectively.
CLINICAL TRIALS FOR THE MICROLIGHT 830(TM). The MicroLight 830(TM), a Class
III medical device, has been defined by the FDA as a "nonsignificant 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 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 repetitive stress injuries) 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.
The Company believes, although no assurances can be given, that the
MicroLight 830(TM) is an effective treatment for CTS. Conventional surgical and
nonsurgical 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) includes hospitals, clinics, medical doctors,
chiropractors, physical therapists, dentists, veterinarians and, ultimately,
individuals. 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 and/or the
need to conduct additional clinical trials. 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.
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The Company also estimates that it will incur $500,000 in expenditures for
research and development, in the event it obtains FDA approval for human
application of the MicroLight 830(TM). Such research and development effort will
primarily emphasize additional photobiostimulation applications for the
MicroLight 830, 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 reconstructive
and cosmetic surgery.
CYBEX NORM. The Cybex NORM is a quantitative isokenetic testing and
rehabilitation system with extended standard and custom testing and reporting
capabilities. Test data is collected and stored by the system and can be
compared to a normative database for client assessment. Recently, members of the
Company's Cybex team have updated the NORM software to function on the Windows
95/98 platforms. The system currently utilizes Pentium I and/or Pentium II
microprocessor technology and is expected to be fully functional on the newest
Pentium III systems in the near future.
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. Management believes this coverage is adequate given the fact
that all of the Company's products are considered noninvasive.
PRODUCT RECALLS
If a device that is designed or manufactured by the Company is found to be
defective, whether due to design or manufacturing defects, to improper use of
the product, or to other reasons, the device may need to be recalled, possibly
at the Company's expense. Furthermore, the adverse effect of a product recall on
the Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of the Company by applicable
regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. Recalls, especially
if accompanied by unfavorable publicity or termination of customer
relationships, could result in substantial costs, loss of revenues, and a
diminution of the Company's reputation, each of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
EMPLOYEES
The Company's performance is substantially dependent on the performance of
its executive officers and key employees, all of whom have worked together for a
relatively short period of time. In particular, the services of Michael M.
Barbour and Dan D. Sudduth would be difficult to replace. The Company currently
has no employment agreements with Messrs. Barbour and Sudduth, but may enter
into such agreements in the future. In addition, the Company has a $3,000,000
key person life insurance policy on the life of Mr. Barbour; however, the
proceeds of that policy may not be sufficient to compensate the Company for the
loss of Mr. Barbour's services. The Company does not have such policies in place
on any of its other employees. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
business, results of operations or financial condition of the Company. The
Company is heavily dependent upon its ability to attract, retain and motivate
skilled technical and managerial personnel. The Company's future success also
depends on its continuing ability to identify, hire, train and retain other
highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. The inability to attract, hire or retain the
necessary technical and managerial personnel could have a material adverse
effect upon the Company's business, results of operations or financial
condition.
As of April 9, 1999, the Company had approximately 287 full-time and two
part-time employees. None of the Company's employees are represented by a union,
and management believes that its relations
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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, Texas, 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 for the Clinical
unit are located at the Belton facility consisting of approximately 59,000
square feet.
The Company leases a regional warehouse and distribution facility in Akron,
Ohio, of approximately 15,000 square feet. The Company also leases approximately
4,900 square feet of office space in Plymouth, Michigan, as principal operations
center for the Training unit.
Internationally, the Company leases a 150,000 square foot warehousing
facility in Brunssum, The Netherlands, a 23,000 square foot office building in
Delft, The Netherlands, and an 18,000 square foot office and warehouse facility
in Sevran, France. All of these properties are related to the Company's Enraf-
Nonius subsidiary.
The Company believes that its facilities, whether leased or owned, are
properly maintained and 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 1998 and 1997 on The Nasdaq SmallCap Market:
CALENDAR PERIOD HIGH LOW
- --------------- ------ ------
1998:
First Quarter........................ $7.250 $4,625
Second Quarter....................... 7.000 5.125
Third Quarter........................ 5.875 2.562
Fourth Quarter....................... 4.875 2.000
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
The Company has authorized 20,000,000 shares of common stock, par value
$.01 per share. As of April 9, 1999, there were 5,789,820 shares issued and
outstanding and 279 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 nonassessable.
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In particular, the market price of the Company's
securities may be highly volatile. Factors such as announcements by the Company
or its competitors concerning acquisitions, technological innovations, new
commercial products or procedures by the Company or its competitors, proposed
governmental regulations and developments in both the U.S. and foreign
countries, disputes relating to patents or proprietary rights, publicity
regarding actual or potential medical results relating to products sold by the
Company or its competitors, public concern as to the safety of these products,
and economic and other external factors, as well as period-to-period
fluctuations and financial results, may have a significant effect on the market
price of the Company's securities.
From time to time, there has been limited trading volume with respect to
the Common Stock. In addition, there can be no assurance that there will
continue to be a trading market or that any analysts will continue to provide
research coverage with respect to the Common Stock. Accordingly, with respect to
the Common Stock, no assurances can be made that such factors will not affect
the market for the Common Stock.
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
For December 1998, the Company sold 50,000 shares of common stock to a
private investor in Mexico for $3 per share pursuant to an exemption from
registration available under Section 4(2) of the Securities Act of 1993, as
amended (the "Securities Act").
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
GENERAL
The Company's principal business strategies 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 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 and
Dispositions." 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 acquire 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 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 Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, specific economic
conditions in the pain management and rehabilitation, seasonal trends in sales,
capital expenditures, new acquisitions and other costs relating to the expansion
of operations, the introduction of new products or services by the Company or
its competitors, the mix of the products and services sold and the channels
through which they are sold and pricing changes. As a strategic response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions or acquisitions that could
have a material adverse effect on the Company's business, results of operations
and financial condition. Due to all of the foregoing factors, it is possible
that in some future quarter, the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock may be materially adversely affected.
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
Since the acquisition of Enraf-Nonius in May 1998, the Company has operated
Enraf-Nonius as a distinct separate unit apart from the Company's operations in
the United States. Accordingly, the following discussion of results of
operations is presented separately for Henley Healthcare, Inc. -- U.S. and
Enraf-Nonius. Additionally the results of operations exclude all amounts related
to the Homecare division
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which was sold during August 1998 and has been reflected as discontinued
operations in the accompanying financial statements.
CONTINUING OPERATIONS
FISCAL 1998 COMPARED TO 1997
HENLEY HEALTHCARE, INC. -- US
The Company achieved record sales in fiscal 1998, with total revenue of
approximately $23,897,000 reflecting an increase of approximately $6,312,000 or
35.9 percent over the amount reported for fiscal year 1997. The increase was
primarily due to increased sales from the acquired operations. Particularly, the
revenues associated with the Cybex and Garvey operations, which were acquired in
September 1997 and January 1998, respectively, added to the Company's sales
during 1998. Net loss from operations for fiscal 1998 amounted to approximately
$4,813,000 compared to a net loss of approximately $593,000 in fiscal 1997. The
increase in net loss resulted in large part from several non-recurring costs
which included: (i) the initial costs of integrating the manufacturing of
Cybex's product line into the Company's existing facilities; (ii) a non-cash
charge to write Cybex inventory down to its net realizable value; and (iii) the
incremental costs associated with the process of attaining ISO 9002 approval.
The Company's gross profit for fiscal 1998 was approximately $8,861,000
compared to approximately $7,444,000 for fiscal 1997. Gross margin as a
percentage of sales in 1998 decreased to 37.1 percent from 42.3 percent in 1997.
The decrease in gross margin as a percentage of sales is primarily the result of
the following factors: (i) initial costs of approximately $1.1 million related
to integrating the Cybex product line into existing company facilities; (ii) the
effect of writing down the Cybex inventory, approximately $0.8 million, to
reflect its net realizable value during the second quarter of 1998; and (iii)
the one-time incremental cost, approximately $0.5 million, of pursuing and
obtaining ISO 9002 approval. Exclusion of the $2.4 million of non-recurring
costs would result in gross profit of 47.1 percent for the year ended December
31, 1998, as compared to 42.3 percent for the comparable prior period. This
increase is due to an increased relative volume of sales of Cybex products which
carry a higher gross profit margin.
Sales, general and administrative expenses increased by approximately
$4,839,000, from approximately $5,820,000 in 1997 to approximately $10,659,000
in 1998, an increase of approximately 83.1 percent. Sales, general and
administrative costs increased as a percentage of revenues from approximately
33.1 percent for 1997 to approximately 44.6 percent for 1998. This increase was
due primarily to increased sales, general and administrative costs related to
the acquired operations. However, this increase was partially offset by certain
cost reduction initiatives the Company undertook beginning in June 1998 in order
to improve profitability. These reductions included an 8% pay reduction for all
employees, a reduction in staff levels, an increase in employee contribution
into health benefits, discontinuance of the Company 401(k) matching
contribution, plus other various internal cost cuts.
Research and development expense decreased by approximately $324,000, from
approximately $507,000 in 1997 to approximately $183,000 in 1998, a decrease of
approximately 63.9 percent. The decrease was primarily due to additional costs
regarding the onset of clinical trials during 1997 pertaining to the Company's
MicroLight 830 product. As a percentage of sales, research and development costs
decreased from 2.9 percent in 1997 to 0.8 percent in 1998. This was due, in
part, to an increased revenue base in 1998 due to the acquired operations.
Depreciation and amortization expense increased by approximately $956,000,
from approximately $667,000 in 1997 to approximately $1,623,000 in 1998, an
increase of approximately 143.3 percent. This increase was primarily a result of
increased depreciation and amortization related to the acquired operations.
Interest expense for 1998 amounted to approximately $1,214,000 compared to
approximately $1,148,000 in 1997. The increase in interest expense was primarily
due to the interest-bearing notes issued to finance the Company's acquisitions.
The increase was offset by the conversion of $4,000,000 from debt to equity in
February and March 1998.
17
<PAGE>
As of December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $12,728,000 that may be 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. Furthermore,
changes in ownership, as defined by the Internal Revenue Code, could limit the
Company's ability to utilize these carryforwards.
ENRAF-NONIUS
Historically, Enraf-Nonius has experienced operating losses due to
operating expenses exceeding the related revenue base. The Company's management
has identified certain areas in which it believes it can reduce Enraf-Nonius'
historical level of operating costs while also creating a synergistic effect of
combining Enraf-Nonius' distribution network with the Company's existing product
lines to increase revenue and gross profit. Specifically, management has
implemented programs to: (1) reduce excessive research and development,
marketing and consultant costs from which Enraf-Nonius had not been generating
an adequate return; (2) reallocate certain technical expertise included in
Enraf-Nonius' workforce to enhance the continued development of certain of
Henley's core product; and (3) dispose of certain operations of Enraf-Nonius
that have historically incurred operating losses. The results of the Company's
initiatives with respect to improving profitability at Enraf-Nonius have been
evidenced in Enraf-Nonius' operating results since acquisition. During the
seven-month period from acquisition through December 31, 1998, Enraf-Nonius
generated revenues of $18,035,000 which contributed gross profit of $6,711,000
or 37.2 percent and net income of $575,000 or 3.2 percent. Operating expenses
for the seven-month period ended December 31, 1998, were approximately
$5,638,000 or 58.2 percent as compared to 59.4 percent and 58.2 percent for the
six months ended June 30, 1998, and the year ended December 31, 1997,
respectively.
Effective January 1, 1999, Enraf-Nonius assumed the European, Australian,
and African sales and marketing functions for Henley's core products. The
Company believes that international sales of Henley's core products should
increase during 1999 as a result of the established distribution system of
Enraf-Nonius. Henley, in turn, intends to add Enraf-Nonius' sound and stim
products to their line of products available in the United States, Mexico, South
America and Asia.
Management believes that the successful implementation of cost reductions
and the potential synergies to be gained by combining Henley's product pipeline
with Enraf-Nonius' international distribution system will enable Enraf-Nonius to
continue to generate positive cash flow to sustain its operations and to service
the related acquisition debt.
DISCONTINUED OPERATIONS
The Company sold its Homecare division in August of 1998. The Homecare
division had revenue of $3,493,000 in 1998 through the date of sale and
$6,672,000 for the year ended December 31, 1997. Net loss from the operations of
the Homecare division during 1998 was $502,000 as compared to $1,532,000 for
1997. The operating loss for 1997 was primarily due to the effect of the
Company's fourth quarter revision of its estimates of collectibility of the
accounts receivable, which increased the provision for doubtful accounts by
approximately $2,000,000. Of this provision, approximately $1,500,000 related to
receivables outstanding for more than one year at December 31, 1997. Factors
contributing to the need for this increased provision included application of
insufficient resources to the collection of accounts receivable and logistical
problems and delays caused in connection with the implementation of a new
accounting system. The Company now has a credit and collections department that
consists of four full-time employees who verify and approve credit, review
accounts receivable agings on a timely basis and follow-up on collections of
accounts. The Homecare operations were the only part of the Company's operations
that included third-party billing and it was these types of receivables that
were the impetus for the significant increase in provision for doubtful
accounts.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 1998, and (iv) the amounts, if any, available
under the Amended Loan Agreement with Comerica Bank -- Texas ("Comerica") and
the revolving credit facility entered into in connection with the Enraf-Nonius
acquisition. At December 31, 1998, the Company had cash and cash equivalents in
the amount of $491,000 as compared to $124,000 at December 31, 1997. The
increase in cash and cash equivalents resulted primarily from additional cash at
companies acquired during 1998. At December 31, 1998, the Company had no
material capital expenditure commitments.
The Amended Loan Agreement with Comerica provides for (i) a one-year
revolving loan ("Line of Credit"), which permits borrowings up to $6,000,000
through May 3, 1999, and (ii) three term loans in the original 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 (collectively the
"Term Notes") 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, 1998, the Company had approximately $539,000 available for
borrowing under the Line of Credit. The total amount available for borrowing
under the Line of Credit is the lesser of (i) $6,000,000 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.
The Amended Loan Agreement 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. At December 31, 1998, the
Company was in default of certain of these financial and non-financial
covenants. While the bank has not demanded payment of the revolving loan for the
related term notes as of April 9, 1999, such debt has been classified as a
current liability in the accompanying balance sheet as of December 31, 1998.
Additionally, the Company has a scheduled loan payment of approximately
$1,500,000 due on May 1, 1999 under one of its debt agreements. As a result, at
December 31, 1998, the Company had a working capital deficit of $8,610,000 and a
current ratio of 0.70 to 1 as compared to working capital of $2,637,000 and a
current ratio of 1.2 to 1 at December 31, 1997. The Company is currently in
negotiations to replace its current bank financing with a different source and
expects to have a new credit facility in place within the next two months.
Pursuant to acquiring Enraf-Nonius in May 1998, the Company entered into a
revolving credit facility with a Netherlands bank (the "Enraf-Nonius Credit
Facility"). The agreement provides for aggregate borrowings up to $7,500,000,
subject to a revised borrowing base calculation derived from Enraf-Nonius'
eligible accounts receivable and inventory. The Enraf-Nonius Credit Facility had
an outstanding balance of $3,726,000 at December 31, 1998, and is subject to
interest, payable monthly, at the rate of AIBOR plus 1 percent per annum (3.67
percent at December 31, 1998). The Enraf-Nonius Credit Facility is secured by
Enraf-Nonius' accounts receivable, inventory and certain fixed assets and renews
annually. At December 31, 1998, approximately $104,000 was available under this
revolving credit facility.
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 subordinated to the Line of Credit and Term Notes with
Comerica, and is due and payable on May 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 percent per annum and increasing annually 2 percent per annum.
The indebtedness under the Note is secured by a second lien in substantially all
of the assets of the Company. The Company may redeem all or any portion of the
outstanding principal amount of the Note at
19
<PAGE>
redemption prices ranging from 104 percent to 110 percent 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
principal installments of $1.4 million commencing on May 1, 1999 at premiums
starting at 7 percent and decreasing 1 percent each year. The Company is
currently in negotiations with Maxxim concerning this initial principal payment.
The Company is also required to redeem 40 percent of the Note upon the
completion of a public offering. The Note is convertible into common stock at a
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
percent 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
antidilution 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 years
2003 and 2002 and partially to the Company's redemption obligation due in the
year 2001 as provided in the Note. The Company has filed a registration
statement covering the resale of the shares of Common Stock issued to Maxxim as
a result of the conversions described above.
Between March and April 1998, the Company sold an aggregate of 2,500 shares
of the Preferred Stock at $1,000 per share in private offerings, resulting in
net cash proceeds of approximately $2.3 million. The Series A Preferred Stock is
convertible into the Company's common stock at the lesser of (i) 75 percent 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)
$7.125 for the 1,825 shares sold in March and $6.375 for the 675 shares sold in
April. For so long as the Company is listed on The Nasdaq SmallCap or National
Markets or any national securities exchange, the conversion price shall not be
lower than $2.90. In addition, the Company may, at its option, redeem the Series
A Preferred Stock by paying 130 percent of the purchase price. The Series A
Preferred Stock shall pay an annual dividend of 4 percent, payable quarterly on
each subsequent March 31st, June 30th, September 30th and December 31st, in cash
or shares of common stock at the Company's option. In connection with the
agreement, the Company also issued to the investors 5-year warrants to purchase
an aggregate of 200,000 shares of the Company's common stock at exercise prices
ranging from $6.375 to $9.619. Proceeds from the issuance were used to reduce
the outstanding balance under the Company's Line of Credit with Comerica. The
Company has filed a registration statement covering the resale of the shares of
common stock issuable upon the conversion of the Series A Preferred Stock and
exercise of the warrants sold to the investors.
On July 1, 1998, the Company sold in a private placement 2,500 units
("Series B Units") consisting of (i) one share of the Company's Series B
Convertible Preferred Stock, and (ii) a warrant to acquire 50 shares of common
stock, for a purchase price of $1,000 per unit, to an accredited investor. In
addition, the placement agent, received warrants to acquire 67,308 shares with
the same terms as the warrants sold to the investor. (See Footnotes to
Consolidated Financial Statements). Proceeds were used to repay short term notes
to Delft Instruments in connection with the Enraf-Nonius acquisition. On August
10, 1998, the Company sold in a private placement 2,200 additional Series B
Units, for a purchase price of $1,000 per unit, to accredited investors. In
addition, the placement agent received warrants to acquire 59,231 shares with
the same terms as the warrants sold to the other purchasers. (See Footnotes to
Consolidated Financial Statements). Proceeds were used to repay short term notes
to Delft in connection with the Enraf-Nonius Acquisition.
Additionally, in April 1999, the Company sold 750 shares of its newly
issued $1,000 per share Series C Convertible Preferred Stock resulting in
$623,750 of net proceeds to the Company. The Series C Preferred Stock will be
convertible into common stock at a range from $1.75 to $2.64 per share, provided
20
<PAGE>
that the Company achieves specified performance criteria. The proceeds will be
used primarily to repay penalties and accrued dividends outstanding related to
the Series A Preferred Stock.
The Company's $6,000,000 Line of Credit under the Amended Loan Agreement
with Comerica is currently set to expire on May 3, 1999. In addition, a loan
payment of $1,500,000 to Maxxim is due on May 1, 1999 under the Note. As a
result, the Company is in negotiations to replace its current credit facility
with a different source of funding and expects to have a new credit facility in
place within the next two months. However, there can be no assurance that the
Company will be able to obtain a sufficient replacement credit facility on terms
favorable to the Company or at all. If the Company is unable to extend the term
of its Line of Credit and reschedule the loan payment due under the Note, the
Company will be in default under both agreements. In this event, there would be
substantial doubt as to the Company's ability to continue as a going concern.
If the Company is successful in obtaining a sufficient replacement credit
facility and rescheduling the loan payment to Maxxim, management believes that
(i) the expected positive cash flows from operations in 1999, (ii) proceeds from
the Series C Preferred Stock offering, and (iii) funds available under the new
credit facility and the Enraf-Nonius Credit Facility will be sufficient to
eliminate the working capital deficit that existed at December 31, 1998 and to
satisfy the Company's capital requirements for its existing operations for the
immediate future. However, the Company will need to obtain additional capital to
finance its acquisition strategy. 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.
INTERNATIONAL CURRENCY FLUCTUATIONS AND EURO CONVERSION
The Company has arrangements with several foreign distributors to
distribute products in Europe, Southeast Asia, the Far East, Central America and
South America. In addition, the Company obtains certain supplies from foreign
suppliers. The acquisition of Enraf-Nonius has also significantly expanded the
Company's foreign operations. International transactions subject the Company to
several potential risks, including fluctuating exchange rates (to the extent the
Company's transactions are not in U.S. dollars), varying economic and political
conditions, cultures and business practices in different countries or regions,
regulation of fund transfers by foreign governments, overlapping or differing
tax structures, and United States and foreign export and import duties and
tariffs. Fluctuations in the exchange rates between the U.S. dollar and the
currencies of the other countries in which the Company operates will affect the
results of the Company's international operations reported in U.S. dollars. It
is anticipated that approximately one-half of the Company's total sales for 1999
will be in currencies other than U.S. dollars. In addition, the Company may make
loans to and/or receive dividends and loans from certain of its foreign
subsidiaries and may suffer a loss as a result of adverse exchange rate
movements between the relevant currencies. There can be no assurance that any of
the foregoing will not have a material adverse effect upon the business of the
Company.
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency. Subsequent to the introduction
of the Euro, the local currencies are scheduled to remain legal tender in the
participating countries until January 1, 2002. During this transition period,
goods and services may be paid for using either the Euro or the participating
country's local currency. Thereafter, the local currencies will be canceled and
the Euro currency will be used for all transactions between the eleven
participating members of the European Union. The Euro conversion raises
strategic as well as operational issues. The conversion is expected to result in
a number of changes, including the stimulation of cross-border competition by
creating cross-border price transparency. The Company is assessing Euro issues
related to its product pricing, contract, treasury operations and accounting
systems. Although evaluation of these items is still in process, the Company
believes that the hardware and software systems it
21
<PAGE>
uses internally will accommodate this transition and any required policy or
operating changes will not have a material adverse effect on future results.
YEAR 2000 COMPLIANCE
The Year 2000 (the "Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer equipment, software and other devices with imbedded technology that are
time-sensitive, such as products, alarm systems and telephone systems, may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process data,
and may materially impact the Company's financial condition.
The Company has undertaken various initiatives intended to ensure that it
is prepared for the Y2K issue. The Company is in the process of assessing its
state of readiness. Presently, the Company is reviewing its scientific
equipment, computer systems and related software to identify and determine the
Y2K readiness of the Company's systems. This review is being performed by
internal teams from various disciplines within the Company. These teams are
currently evaluating the Company's Y2K issues, and, if necessary, developing
remediation plans. As a part of this review the Company will determine the known
risks related to the consequences of a failure to correct any Y2K deficiencies.
The Company has initiated formal communications with material third parties to
determine the extent to which the Company may be vulnerable to those third
parties' failure to remediate their Y2K problems. The Company is presently not
aware of any Y2K issues that have been encountered by any third party, which
could materially affect the Company's operations.
If necessary, during 1999, the Company will develop a contingency plan to
address potential Y2K issues. This contingency plan will likely address problems
that the Company identifies during the course of its remediation efforts and
reasonably foreseeable problems that may arise as a result of Y2K, including,
but not limited to the performance of the Company's computer system. The
contingency plan will be continually refined, as additional information becomes
available. However, it is unlikely that any contingency plan can fully address
all events that may arise.
The Company estimates that the costs associated with the Y2K issue will not
be material, and as such will not have a significant impact on the Company's
financial position or operating results. However, the failure to correct a
material Y2K problem could result in an interruption in the Company's normal
business activities or operations. Such failure could materially and adversely
affect the Company's results of operation, liquidity and financial condition.
The Enraf-Nonius computer system has been reviewed with regard to the Y2K
issue. The findings of this review resulted in a plan of action and financial
systems are presently being updated by in-house staff. Total cost in this regard
is expected to be between NLG 20,000 and NLG 30,000. The review showed that the
impact of the Y2K issue on the Company's order processing system is likely to be
minimal and no additional actions have been taken.
The embedded software in the Enraf-Nonius products has also been reviewed
and this showed that the products currently being sold or still being serviced
will not be affected by the Y2K issue.
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<PAGE>
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
-----
Report of Independent Public
Accountants........................ 24
Consolidated Balance Sheet........... 25
Consolidated Statements of Operations
and Comprehensive Loss............. 26
Consolidated Statements of
Stockholders' Equity............... 27
Consolidated Statements of Cash
Flows.............................. 28
Notes to Consolidated Financial
Statements......................... 29-45
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Henley Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of Henley
Healthcare, Inc. (a Texas corporation) and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Henley
Healthcare, Inc. and subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the year ended
December 31, 1998, the Company incurred a net loss of $5.8 million and had a
working capital deficit at December 31, 1998, of $8.6 million. As of December
31, 1998, and through March 26, 1999, the Company was in default of certain
financial and other covenants under its bank line of credit which expires May 3,
1999. The Company also has a loan payment of approximately $1.5 million due on
May 1, 1999. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company is currently pursuing additional
financing, although there can be no assurance that the Company will be
successful in its financing efforts. Management's plans in regard to these
matters are described in Note 1. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Houston, Texas
March 26, 1999
24
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1998
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 490,649
Accounts receivable, net of
allowance for doubtful accounts
of $1,470,026.................. 11,172,228
Inventory....................... 8,494,276
Prepaid expenses................ 132,190
Other current assets............ 203,000
------------
TOTAL CURRENT ASSETS....... 20,492,343
PROPERTY, PLANT AND EQUIPMENT, net... 6,607,631
GOODWILL, net........................ 5,272,666
INTANGIBLE AND OTHER ASSETS, net..... 18,671,480
------------
TOTAL ASSETS............... $ 51,044,120
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 9,185,425
Current maturities of long term
debt........................... 5,297,388
Accounts payable................ 8,248,460
Accrued expenses and other
current liabilities............ 6,370,655
------------
TOTAL CURRENT
LIABILITIES............... 29,101,928
INTEREST PAYABLE..................... 243,200
LONG-TERM DEBT, net of current
maturities......................... 7,514,504
OTHER LONG TERM LIABILITIES.......... 4,611,000
------------
TOTAL LIABILITIES.......... 41,470,632
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock -- $.10
par value; 5,000 shares
authorized; 2,500 shares issued
and outstanding................ 2,257,614
Series B Preferred stock -- $.10
par value; 8,000 shares
authorized; 4,700 shares issued
and outstanding................ 4,080,332
Common stock -- $.01 par value;
20,000,000 shares authorized;
5,712,205 shares issued;
5,433,205 shares outstanding... 57,121
Additional paid-in capital...... 21,445,025
Cumulative translation
adjustment..................... 441,156
Accumulated deficit............. (18,481,581)
Treasury stock, at cost, 279,000
common shares.................. (226,179)
------------
TOTAL STOCKHOLDERS'
EQUITY.................... 9,573,488
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY...... $ 51,044,120
============
The accompanying notes are an integral part of this consolidated financial
statement.
25
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
NET SALES............................ $ 41,931,617 $ 17,584,978
COST OF SALES........................ 26,359,735 10,140,676
-------------- --------------
GROSS PROFIT......................... 15,571,882 7,444,302
OPERATING EXPENSES:
Selling, general and
administrative................ 14,654,443 5,820,481
Research and development........ 1,067,149 506,629
Depreciation and amortization... 2,381,825 667,100
-------------- --------------
OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS.............. (2,531,535) 450,092
INTEREST EXPENSE..................... 1,711,566 1,147,842
OTHER (INCOME) LOSS, net............. (4,738) (105,018)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS...... (4,238,363) (592,732)
DISCONTINUED OPERATIONS:
Loss from Operations of Homecare
Division...................... (501,785) (1,531,701)
Extraordinary Item -- Loss on
Disposal of Homecare
Division...................... (1,091,035) --
-------------- --------------
NET LOSS............................. $ (5,831,183) $ (2,124,433)
-------------- --------------
PREFERRED STOCK DIVIDENDS............ (2,268,158) --
-------------- --------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS....................... $ (8,099,341) $ (2,124,433)
============== ==============
NET LOSS PER COMMON SHARE -- basic
and diluted:
Loss from Continuing
Operations.................... $(1.30) $(0.20)
Loss from Operations of Homecare
Division...................... $(0.10) $(0.51)
Loss from Disposal of Homecare
Division...................... $(0.22) $ --
-------------- --------------
NET LOSS PER COMMON SHARE -- basic
and diluted........................ $(1.62) $(0.71)
============== ==============
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE CALCULATIONS -- basic
and diluted........................ 5,023,649 3,000,119
COMPREHENSIVE LOSS:
Net Loss........................ $ (5,831,183) $ (2,124,433)
Foreign Currency Translation
Adjustment.................... 441,156 --
-------------- --------------
TOTAL COMPREHENSIVE LOSS............. $ (5,390,027) $ (2,124,433)
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ --------- ------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... -- $ -- -- $ -- 3,021,439 $ 30,214 $10,660,312
Issuance of common stock for
acquisitions....................... -- -- -- -- 361,117 3,611 2,907,229
Issuance of common stock for
noncompete agreement............... -- -- -- -- 10,000 100 53,025
Exercise of common stock options..... -- -- -- -- 20,000 200 159,800
Exercise of common stock warrants.... -- -- -- -- 61,341 613 336,713
Net loss............................. -- -- -- -- -- -- --
------ --------- ------ --------- --------- --------- -----------
Balance at December 31, 1997......... -- -- -- -- 3,473,897 34,738 14,117,079
Issuance of common stock for
acquisitions....................... -- -- -- -- 188,308 1,883 1,195,117
Issuance of Series A preferred
stock.............................. 2,500 2,257,614 -- -- -- -- --
Warrants issued with Series A
Preferred.......................... -- -- -- -- -- -- 825,541
Conversion of debt to common stock... -- -- -- -- 2,000,000 20,000 4,311,041
Issuance of Series B preferred
stock.............................. -- -- 4,700 4,080,332 -- -- --
Warrants issued with Series B
Preferred.......................... -- -- -- -- -- -- 846,747
Dividends on Series A Preferred
Stock.............................. -- -- -- -- -- -- --
Dividends on Series B Preferred
Stock.............................. -- -- -- -- -- -- --
Issuance of Common Stock for cash.... -- -- -- -- 50,000 500 149,500
Translation Adjustment............... -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- --
------ --------- ------ --------- --------- --------- -----------
Balance at December 31, 1998......... 2,500 $2,257,614 4,700 $4,080,332 5,712,205 $ 57,121 $21,445,025
====== ========= ====== ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE ACCUMULATED -------------------- STOCKHOLDERS'
INCOME DEFICIT SHARES COST EQUITY
-------------- ------------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... $-- $(8,257,807 ) 279,000 $(226,179) $2,206,540
Issuance of common stock for
acquisitions....................... -- -- -- -- 2,910,840
Issuance of common stock for
noncompete agreement............... -- -- -- -- 53,125
Exercise of common stock options..... -- -- -- -- 160,000
Exercise of common stock warrants.... -- -- -- -- 337,326
Net loss............................. -- (2,124,433 ) -- -- (2,124,433)
-------------- ------------ --------- --------- -------------
Balance at December 31, 1997......... -- (10,382,240 ) 279,000 (226,179) 3,543,398
Issuance of common stock for
acquisitions....................... -- -- -- -- 1,197,000
Issuance of Series A preferred
stock.............................. -- -- -- -- 2,257,614
Warrants issued with Series A
Preferred.......................... -- -- -- -- 825,541
Conversion of debt to common stock... -- -- -- -- 4,331,041
Issuance of Series B preferred
stock.............................. -- -- -- -- 4,080,332
Warrants issued with Series B
Preferred.......................... -- -- -- -- 846,747
Dividends on Series A Preferred
Stock.............................. -- (1,436,609 ) -- -- (1,436,609)
Dividends on Series B Preferred
Stock.............................. -- (831,549 ) -- -- (831,549)
Issuance of Common Stock for cash.... -- -- -- -- 150,000
Translation Adjustment............... 441,156 -- -- -- 441,156
Net loss............................. -- (5,831,183 ) -- -- (5,831,183)
-------------- ------------ --------- --------- -------------
Balance at December 31, 1998......... $441,156 $(18,481,581) 279,000 $(226,179) $9,573,488
============== ============ ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $(5,831,183) $(2,124,433)
----------- -----------
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization expense......... 2,381,825 716,264
Interest expense imputed on
notes payable................ 37,574 284,667
Provision for doubtful
accounts..................... 1,195,172 3,171,163
Loss on sale of Homecare
division..................... 1,091,035 --
Shares issued for
compensation................. -- 160,000
Shares issued for
noncompete agreement......... -- 53,125
Changes in operating assets and
liabilities:
Increase in accounts
receivable................... (1,313,522) (4,258,785)
(Increase) decrease in
inventory.................... 248,737 (398,533)
Decrease in prepaid
expenses and other current
assets....................... 357,229 88,115
(Increase) decrease in
other assets................. 542,618 (290,209)
Increase in accounts
payable and accrued
liabilities.................. 923,705 2,464,591
----------- -----------
Total adjustments..... 5,464,373 1,990,398
----------- -----------
Net cash used in operating
activities................... (366,810) (134,035)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash
acquired of $695,230 and
$68,600, respectively.......... (269,770) (4,862,371)
Proceeds from disposal of
Homecare division.............. 3,649,400 --
Capital expenditures............ (1,941,832) (356,533)
----------- -----------
Net cash provided by (used
in) investing activities..... 1,437,798 (5,218,904)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
preferred stock and warrants... 6,474,602 --
Net proceeds from issuance of
common stock................... 150,000 --
Proceeds from exercise of common
stock warrants................. -- 337,326
Payments of dividends on
preferred stock................ (143,024) --
Net proceeds from (payments on)
lines of credit ............... (6,655,006) 4,918,798
Proceeds from long-term debt.... 1,260,000 1,430,000
Principal payments of long-term
debt........................... (2,231,687) (1,717,457)
----------- -----------
Net cash provided by
financing activities......... (1,145,115) 4,968,667
----------- -----------
EFFECT OF TRANSLATION EXCHANGE RATE
CHANGES ON CASH.................... 441,156 --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 367,029 (384,272)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 123,620 507,892
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 490,649 $ 123,620
=========== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Henley Healthcare, Inc. (formerly Lasermedics, Inc.) and Subsidiaries
(collectively, the Company) was organized in November 1990 and is an
international manufacturer, provider and marketer of diversified products and
services in the physical therapy and rehabilitation industry. The Company's
customers are located throughout the world, with a concentration in the United
States and Europe.
The Company achieved substantial revenue growth over the last two years
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 business strategy. The Company's future success is dependent on many
factors which include, among others, competition, technological changes,
generating sufficient sales volume to achieve and maintain profitability and
obtaining sufficient financing to fund its stated business objectives. 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 Food and Drug
Administration (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.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the year ended
December 31, 1998, the Company incurred a net loss of $5.8 million and had a
working capital deficit at December 31, 1998, of $8.6 million. As of December
31, 1998, and through March 26, 1999, the Company was in default of certain
financial and other covenants under its bank line of credit which expires May 3,
1999. The Company also has an approximate $1.5 million loan payment due May 1,
1999. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is currently pursuing additional
financing, although there can be no assurance that the Company will be
successful in its financing efforts. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Henley
Healthcare, Inc., and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when the title passes to the buyer, typically when
the product is shipped or services have been rendered. Service revenues and
costs of service revenues are not presented separately in the consolidated
financial statements as they represent less than four percent of net sales. 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. Net revenue is reported at the estimated net
realizable amount from customers and third-party payors.
29
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation 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.
GOODWILL
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 is amortized on a straight-line basis over the
estimated useful life of 15 years. Accumulated amortization at December 31,
1998, was $518,270.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consists principally of acquired trade name
rights and other identifiable intangible assets which are being amortized on a
straight-line basis over periods ranging from two to 15 years. Accumulated
amortization at December 31, 1998, was $1,057,771.
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 (including goodwill)
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. Based on the
Company's analysis of the undiscounted future cash flows for its long-term
assets, no impairments have been recognized under SFAS No. 121.
INCOME TAXES
The Company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, under
which deferred income taxes reflect the tax consequences on future years of
temporary differences (differences between the tax bases of assets and
liabilities and their financial statement carrying 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
In accordance with SFAS No. 128, "Earnings per Share," the Company
presents both basic and diluted net loss per share in its historical financial
statements. 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. Dividends attributable to preferred
stock (see Note 10) reduce the net income available to common
30
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders. Additionally, the Company has separately presented per share
information for income (loss) from continuing and discontinued operations due to
the sale of the Homecare division in 1998 (see Note 16).
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 would record 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 to employees and non-employee directors. 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.
TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities are translated at the exchange rate as of the
balance sheet date. All revenue and expense accounts are translated at a
weighted average of exchange rates in effect during the year. Translation
adjustments are recorded as a separate component of equity.
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.
RECLASSIFICATION
Certain reclassifications have been made to prior-year consolidated
financial statements to conform to the current year's presentation.
2. INVENTORY:
Substantially all of the Company's inventory is pledged as collateral for
the Company's long-term debt. Inventory at December 31, 1998, included the
following:
<TABLE>
<S> <C>
Raw material......................... $ 5,693,076
Work-in-process...................... 91,945
Finished goods....................... 2,709,255
------------
$ 8,494,276
============
</TABLE>
31
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT:
Substantially all of the Company's property, plant and equipment is pledged
as collateral for the Company's long-term debt. At December 31, 1998, property,
plant and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
------------
Land................................. $ 459,000 --
<S> <C> <C>
Buildings and improvements........... 4,623,553 25 years
Machinery and equipment.............. 3,420,600 3 to 7 years
Office furniture and fixtures........ 516,925 5 years
--------------
9,020,078
Less -- Accumulated depreciation..... (2,412,447)
--------------
Property, plant and
equipment, net.......... $ 6,607,631
==============
</TABLE>
4. INTANGIBLE AND OTHER ASSETS:
At December 31, 1998, intangible and other assets consisted of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-------------
Distribution system.................. $ 12,500,000 15 years
<S> <C> <C>
Trade names.......................... 4,866,172 7 to 15 years
Patents.............................. 1,553,674 7 to 15 years
Proprietary training programs........ 719,405 5 to 10 years
Other................................ 90,000
--------------
19,729,251
Less -- Accumulated amortization..... (1,057,771)
--------------
Intangible and other
assets, net............. $ 18,671,480
==============
</TABLE>
5. ACQUISITIONS:
BUSINESSES
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 (TENS), 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 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,
31
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. (NCI), 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.
The 1997 acquisitions were all 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 results. The
estimated purchase price in excess of the estimated fair value (FV) of the net
assets acquired during 1997 aggregated approximately $3,047,000.
In January 1998, the Company acquired all of the issued and outstanding
common stock of Garvey Company (Garvey), a Minnesota corporation, as a wholly
owned subsidiary, for an estimated purchase price of approximately $792,000 plus
related acquisition costs of approximately $50,000. The purchase price was paid
by the issuance of 120,308 shares of the Company's common stock. The acquisition
was accounted for as a purchase.
In February 1998, the Company purchased substantially all of the assets and
assumed certain liabilities associated with AMC Acquisition Corp. (AMC), a Texas
corporation, for an estimated purchase price of approximately $405,000 plus
related acquisition costs of approximately $115,000. The purchase price was paid
by the issuance of 68,000 shares of common stock. The acquisition was accounted
for as a purchase.
On May 29, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Enraf-Nonius, B.V. (Enraf-Nonius), a wholly owned
subsidiary of Delft Instruments N.V. (Delft). Enraf-Nonius specializes in the
development, manufacture and sale of medical products, including ultrasound and
electrical stimulation used in pain management, physical therapy and
rehabilitation. The purchase price for Enraf-Nonius was approximately
$15,000,000 plus acquisition costs of approximately $800,000. The purchase was
financed with short- and long-term notes totaling approximately $7,000,000 from
Delft and $8,000,000 from bank financing. The short-term notes were repaid by
the Series B convertible preferred stock offerings that were funded in July and
August 1998. The acquisition was accounted for as a purchase.
The estimated purchase price in excess of the estimated fair value of the
net tangible assets acquired aggregates approximately $19,800,000 for the
acquisitions during 1998 as shown below:
<TABLE>
<CAPTION>
ENRAF-NONIUS GARVEY & AMC TOTAL
------------ ------------ --------------
<S> <C> <C> <C>
Purchase price....................... $ 15,000,000 $1,197,000 $ 16,197,000
Acquisition costs.................... 800,000 165,000 965,000
------------ ------------ --------------
15,800,000 1,362,000 17,162,000
------------ ------------ --------------
FV of tangible assets acquired....... 11,166,000 543,000 11,709,000
FV of liabilities assumed............ 13,679,000 670,000 14,349,000
------------ ------------ --------------
Net tangible assets (liabilities)
acquired........................... (2,513,000) (127,000) (2,640,000)
------------ ------------ --------------
Excess of cost over fair value of net
tangible assets (liabilities)
acquired........................... $ 18,313,000 $1,489,000 $ 19,802,000
============ ============ ==============
</TABLE>
33
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized pro forma (unaudited) information for the years
ended December 31, 1998 and 1997, assumes the acquisition of Enraf-Nonius had
occurred on January 1, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net sales............................ $ 52,453,117 $ 49,664,475
Net loss from continuing
operations......................... (3,623,577) (6,210,809)
Net loss from continuing operations
per common share................... $(1.17) $(2.07)
</TABLE>
The above pro forma amounts reflect adjustments for interest related to
financing the Enraf-Nonius acquisition, amortization of goodwill, royalty
expense, removal of former parent company charges and terminations of
professional and consultant fees. The amounts are based upon certain assumptions
and estimates and do not reflect any benefit from economies which might be
achieved from combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
on the basis assumed above, nor are they indicative of the results of future
combined operations.
OTHER ACQUISITIONS
In January 1997, the Company purchased substantially all of the inventory,
distribution systems and customer lists associated with the Homecare 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. These goals
were not attained and no additional shares were issued.
In September 1997, the Company entered into an agreement with Cybex
International, Inc. (Cybex), a New York corporation, 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 plus related acquisition
costs of approximately $1.0 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.
6. ACCRUED AND OTHER CURRENT LIABILITIES:
The following are included in accrued and other current liabilities at
December 31, 1998:
<TABLE>
<S> <C>
Payroll and commissions.............. $ 1,342,096
Acquisition costs.................... 604,582
Preferred stock dividends............ 589,503
Vacation payable..................... 564,000
Interest payable..................... 476,530
Warehousing fees..................... 399,000
Insurance premiums................... 358,307
Professional and other fees.......... 334,000
Other................................ 1,702,637
------------
$ 6,370,655
============
</TABLE>
34
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT:
The following table summarizes the Company's notes payable and capital
lease obligations at December 31, 1998, which are described below:
<TABLE>
<S> <C>
Note payable, Maxxim................. $ 3,000,000
Term notes, with bank................ 3,631,026
Note payable, Delft.................. 4,787,000
Capital lease obligations (see Note
12)................................ 1,259,000
Other notes payable.................. 134,866
------------
12,811,892
Less -- Current maturities........... 5,297,388
------------
$ 7,514,504
============
</TABLE>
NOTE PAYABLE, MAXXIM
In connection with the acquisition of its Henley division in April 1996,
the Company issued a convertible promissory note (the Note) to Maxxim Medical
(Maxxim). The Note is convertible into common stock of the Company at a
conversion price of $2.00 per share. The Note is payable subject to mandatory
redemption requirements of $1.4 million annually beginning on May 1, 1999, with
a final payment due May 1, 2001. These mandatory redemptions are subject to
premiums starting at 7 percent and decreasing 1 percent each year. The
installment premiums are recognized as interest expense on a straight-line basis
over the term of the Note. In addition, the Company is required to redeem 40
percent of the Note upon completion of a public offering. The Company also may
redeem any or all of the outstanding principal amount of the Note at its option
at redemption prices ranging from 104 percent to 110 percent of the principal
amount being redeemed, depending on when the redemption occurs as set forth in
the Note. Interest is payable semiannually on November 1 and May 1 of each
calendar year at a rate of 2 percent per annum and increasing 2 percent 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 percent per annum. Accordingly,
$243,200 of accrued interest has been classified as long-term in the
accompanying consolidated balance sheet as of December 31, 1998.
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 outstanding under the Note into an aggregate of 2,000,000 shares of
the Company's common stock, par value $.01 per share. Pursuant to the conversion
notice, the entire $4 million conversion was applied to the Company's full
redemption obligation due in the years 2003 and 2002 and partially to the
Company's redemption obligation due in the year 2001 as originally provided in
the Note. Additionally, accrued interest totalling $331,041 related to the
installment premium was converted to equity in conjunction with the debt
conversion.
TERM NOTES WITH BANK
The Company has an Amended Loan Agreement with a bank providing for (a) a
revolving loan arrangement which permits borrowings up to $6,000,000 and (b) two
term loans in the amounts of $1,430,000 ("Term Note A") and $1,616,000 ("Term
Note B"), respectively. Term notes A and B are payable in monthly installments
of principal plus interest aggregating $32,811. 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 plus one-half of
1 percent per annum (8.25 percent at December 31, 1998). Term Note A is due on
September 30, 2002, and Term Note B is callable by the bank beginning on its
fifth anniversary. At December 31, 1998, the balances outstanding under Term
Notes A and B were $1,096,338 and $1,337,688, respectively.
35
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company entered into an agreement with Maxxim whereby
it acquired from Maxxim an office/warehouse building located in Sugar Land,
Texas, for a purchase price of approximately $1.3 million. The purchase price
was financed with a new term note ("Term Note C") with the bank in the
principal amount of $1,260,000 with a maturity date of February 12, 2013. At
December 31, 1998, the balance outstanding under this term note was $1,197,000.
Term Note C bears interest at the prime rate plus one-half of 1 percent per
annum (8.25% at December 31, 1998), is payable in monthly principal installments
of $7,000 plus all accrued interest thereon and is subject to the terms and
conditions of the Amended Loan Agreement. Term Note C is secured by
substantially all of the assets of the Company.
The Amended Loan Agreement provides for a revolving loan which permits
borrowings up to $6,000,000, subject to a revised borrowing base calculation
derived from the Company's eligible accounts receivable and inventory. The
revolving loan had an outstanding balance of $5,459,425 at December 31, 1998,
and is subject to interest, payable monthly, at the prime rate plus one-half of
1 percent per annum (8.25 percent at December 31, 1998). At December 31, 1998,
approximately $539,000 was available for borrowings under the revolving loan.
The revolving loan's maturity date is May 3, 1999. All of the borrowings from
the bank are secured by substantially all of the assets of the Company.
The Amended Loan Agreement 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. As of December 31, 1998, the
Company was in default of certain of these financial and nonfinancial covenants.
While the bank has not demanded payment of the revolving loan, all debt balances
with the bank have been classified as a current liability in the accompanying
balance sheet as of December 31, 1998. Additionally, the Company is limited in
the amount of its capital expenditures, research and development expenditures
and dividends. Further, all future acquisitions and major corporate transactions
require approval of the bank, as do offerings of securities by the Company.
Pursuant to acquiring Enraf-Nonius in May 1998, the Company entered into a
revolving credit facility with a Netherlands bank. The agreement provides for
aggregate borrowings up to $7,500,000, subject to a revised borrowing base
calculation derived from Enraf-Nonius' eligible accounts receivable and
inventory. The revolving loan had an outstanding balance of $3,726,000 at
December 31, 1998, and is subject to interest, payable monthly, at the rate of
AIBOR plus 1 percent per annum (3.67 percent at December 31, 1998). The
revolving note is secured by Enraf-Nonius' accounts receivable, inventory and
certain fixed assets, and renews annually. At December 31, 1998, approximately
$104,000 was available under this revolving credit facility.
NOTE PAYABLE, DELFT
The note issued to Delft in connection with the acquisition of Enraf-Nonius
is payable in equal, semiannual principal amounts of approximately $480,000,
commencing June 1, 2000, through December 1, 2004. Interest accrues at 4 percent
annually through June 1, 1999, at which point the rate increases to 5 percent
through the balance of the note term. Management believes the interest rate on
the note approximates the market rate in the Netherlands at the date of
acquisition of Enraf. Interest is payable annually commencing June 1, 1999.
OTHER NOTES PAYABLE
Various notes payable to individuals in connection with acquisitions are
payable in monthly aggregate principal installments of $7,336 with maturities
from December 1999 through February 2001 at interest rates ranging from 8
percent to prime plus 2 percent.
The estimated fair value of the Maxxim Note amounted to $3,000,000 pursuant
to a valuation by an investment banking firm. Based on borrowing rates currently
available to the Company for loans with
36
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<S> <C>
For the year ending December 31
1999............................ $ 5,297,388
2000............................ 2,541,400
2001............................ 1,309,904
2002............................ 1,108,400
2003............................ 1,115,400
2004 and thereafter............. 1,439,400
--------------
$ 12,811,892
==============
</TABLE>
8. OTHER LONG-TERM LIABILITIES
The following are included in other long-term liabilities at December 31,
1998:
<TABLE>
<S> <C>
Pensions............................. $ 2,071,000
Reorganization Costs................. 2,540,000
------------
$ 4,611,000
============
</TABLE>
The amounts included in other long-term liabilities relate to liabilities
assumed by the Company in the acquisition of Enraf-Nonius from Delft in May
1998. The Company is obligated to reimburse $1,766,000 to Delft for future
pensions to be paid to certain former employees in The Netherlands upon their
retirement. The Company also has a pension liability of $305,000 for current
employees, which was based on actuarial calculations using a 6 percent discount
rate and assumed compensation rate increases of 1.8 to 2.0 percent.
Additionally, the Company is obligated to reimburse Delft for certain
reorganization costs to be incurred by Delft, which are related to the sale of
Enraf-Nonius.
As of December 31, 1998, Delft has made no requests for reimbursement for
any pension obligation. The Company is required to make monthly payments of
approximately $7,000, through May 2005, to repay a portion of the reorganization
costs. Approximately $50,000 of such costs were paid during the year ended
December 31, 1998. Pursuant to an agreement with Delft, which was established in
January 1999, payments on the balance of the reorganization liability
(approximately $2,056,000 at December 31, 1998) are payable in quarterly
installments over a five year term beginning in January 2000, and are subject to
interest at four percent in the first year and five percent thereafter.
37
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The following is an analysis of the Company's deferred tax assets and
liabilities at December 31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss
carryforwards.................. $ 4,327,000
Accrued expenses and other...... 60,000
Allowance for doubtful
accounts....................... 141,000
Deferred compensation........... 494,000
Valuation allowance............. (5,183,000)
--------------
Net deferred tax assets.... (161,000)
--------------
Deferred tax liabilities:
Depreciation and amortization... 161,000
--------------
Total deferred tax asset... $ --
==============
</TABLE>
The components of the Company's income tax provision for the years ended
December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Current:
Federal......................... $ (2,056,000) $ (666,000)
Foreign......................... 200,000 --
Deferred:
Federal......................... 2,056,000 666,000
Foreign......................... (200,000) --
-------------- ------------
Provision for income taxes...... $ -- $ --
============== ============
</TABLE>
Differences between the Company's effective income tax rate and the
statutory federal rate for the years ended December 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Provision at the statutory rate...... $ (1,983,000) $ (722,000)
Permanent differences and other...... 127,000 71,000
Increase in valuation allowance...... 1,856,000 651,000
-------------- ------------
Total tax provision............. $ -- $ --
============== ============
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $12,728,000 that may be available to
offset future taxable income. The carryforwards will begin to expire in 2005.
Between January 1993 and December 1998, 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 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.
38
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKHOLDERS' EQUITY:
In connection with the Amended Loan Agreement and the acquisition of the
Product Line in 1997, the Company entered into an amendment to a subordination
agreement (the Subordination Amendment) by and among Maxxim, the bank and the
Company. Pursuant to the Subordination Amendment, the maximum amount of the
Company's debt with the bank 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, beneficially owned by
Maxxim from 2,333,333 shares to 3,500,000 shares. The Note is convertible into
common stock at any time at Maxxim's option. The conversion price is subject to
adjustment upon the occurrence of certain events (including certain issuances of
common stock for less than the conversion price) to provide antidilution
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.
The Company issued to a former employee, in October 1997, 10,000 shares of
its common stock as partial consideration for a noncompete agreement. The
Company recognized $53,125 in compensation expense 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 recognized $160,000 in compensation expense based on the market
price of the common stock on the date of the settlement.
SERIES A AND B PREFERRED STOCK
In March and April 1998, the Company entered into agreements with certain
private institutional investors pursuant to which the Company issued 2,500
shares of its Series A convertible preferred stock (the Series A Preferred
Stock) for net proceeds of approximately $2.2 million in cash. The Series A
Preferred Stock is convertible into the Company's common stock at the lesser of
(a) 75 percent of the average closing bid price for the Company's common stock
as reported by Nasdaq for the five trading days prior to conversion or (b)
$7.125 for the 1,825 shares issued in March and $6.375 for the 675 shares issued
in April. For as long as the Company is listed on The Nasdaq SmallCap or
National Markets or any national securities exchange, the conversion price shall
not be lower than $2.90. In addition, the Company may, at its option, redeem the
Series A Preferred Stock by paying 130 percent of the purchase price. The Series
A Preferred Stock shall pay an annual dividend of 4 percent, payable quarterly
on each March 31, June 30, September 30 and December 31 in cash or shares of
common stock at the Company's option. The Company recorded $78,276 of such
dividends during the year ended December 31, 1998. In connection with the
agreement, the Company also issued to the investors five-year warrants to
purchase an aggregate of 200,000 shares of the Company's common stock at
exercise prices ranging from $6.375 to $9.619. The warrants have been recorded
at an estimated fair value of $825,541, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk-free
interest rate ranging from 5.54 percent to 5.56 percent; expected dividend yield
of zero; expected life of five years; and an expected volatility of 70 percent.
In July and August 1998, the Company entered into two agreements with
certain private institutional investors pursuant to which the Company issued
4,700 shares of its Series B convertible preferred stock (the Series B Preferred
Stock) for net proceeds of approximately $4.2 million in cash. The Series B
Preferred
39
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock is convertible into the Company's common stock at the lesser of (a) 110
percent of the average closing bid price for Henley's common stock as reported
by Nasdaq for the five trading days prior to issuance date ($5.4425 for 2,500
shares of Series B Preferred Stock sold on July 1, 1998, and $5.175 for 2,200
shares of Series B Preferred Stock sold on August 10, 1998) or (b) 87 percent of
the average bid price for any three consecutive days of the 20 days prior to
conversion. However, for as long as the Company meets certain quarterly and
annual net income and revenue criteria, the conversion price shall not be lower
than $3.50. The Series B Preferred Stock shall bear no dividend. In connection
with the agreement, the Company issued to the investors five-year warrants to
purchase an aggregate of approximately 362,000 shares of the Company's common
stock at exercise prices ranging from $5.87 to $6.00. The warrants have been
recorded at an estimated fair value of $846,747, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk-free
interest rate ranging from 5.37 percent to 5.51 percent; expected dividend yield
of zero; expected life of three years and four months; and an expected
volatility range of 62 percent to 65 percent.
In connection with the issuance of the Series A and Series B Preferred
Stock (the Preferred Stock), the Company incurred a deemed dividend on each
sale. Such dividends are calculated as the discount from fair market value as of
the date the Preferred Stock was sold to the investors. This aggregate discount
amount of $833,333 for the Series A Preferred Stock and $702,000 for the Series
B Preferred Stock has been treated as dividends to the holders of the Preferred
Stock and has been recorded during the year ended December 31, 1998. Pursuant to
the terms of the Preferred Stock, the Company incurred penalties during 1998 for
not meeting certain deadlines related to the registration of the common stock
subject to conversion from the Preferred Stock. The Company has recognized
$525,000 and $129,250 of such penalties as dividends on the Series A Preferred
Stock and the Series B Preferred Stock, respectively, during the year ended
December 31, 1998. The registration statement filed to register the Preferred
Stock became effective on January 28, 1999.
In December 1998, in a private transaction, the Company sold 50,000 shares
of its common stock to an individual investor at the then current market price
of $3.00 per share.
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 common stock options
during fiscal 1998 and 1997 as discussed below. At December 31, 1998, there were
55,000 and 1,095,000 common shares available for issuance under the Director
Stock Plan and the Incentive Plan, respectively. A summary of the Company's
common stock options and warrants as of December 31, 1998 and 1997, and activity
during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ----------- --------------
Outstanding at beginning of year..... 1,688,776 $ 5.24 1,811,502 $ 5.24
<S> <C> <C> <C> <C>
Canceled/expired..................... -- -- (91,385) 5.53
Granted.............................. 686,539 6.44 60,000 5.83
Exercised............................ -- -- (91,341) 4.57
----------- -----------
Outstanding at end of year........... 2,375,315 $ 5.59 1,688,776 $ 5.24
=========== ===========
Options and warrants exercisable at
year-end........................... 2,311,982 $ 5.59 1,688,776 $ 5.24
Weighted average fair value of
options and warrants granted during
the year........................... $ 4.25 $ 4.31
</TABLE>
40
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the information about stock options and
warrants outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING AND EXERCISABLE
- ---------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF SHARES CONTRACTUAL LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE
- --------------- ----------- ----------------- -----------
$1.00-$3.00 235,000 2.4 $3.00
<S> <C> <C> <C>
$4.00-$5.78 689,231 2.8 4.81
$6.00-$7.88 1,328,084 2.4 6.15
$8.00-$9.62 123,000 4.2 8.77
-----------
2,375,315 2.6 5.59
===========
</TABLE>
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply APB 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, 1998 and 1997, would approximate
the pro forma amounts shown in the table below.
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
Net loss, as reported................ $ (5,831,183) $ (2,124,433)
<S> <C> <C>
Net loss, pro forma.................. (6,083,445) (2,286,913)
Net loss per common share, as
reported........................... $(1.62) $(0.71)
Net loss per common share, pro
forma.............................. (1.66) (0.76)
</TABLE>
For the years ended December 31, 1998 and 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 77.2 percent and 80.7 percent, risk-free interest rate of 5.5
percent and 6.4 percent, and an expected life of 9.0 years and 7.3 years,
respectively.
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 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.
In connection with their reelection to the board of directors in July 1998,
four nonemployee directors were each granted a stock option under the Director
Stock Plan to purchase 10,000 shares of the Company's common stock at a price of
$6.125 per share. Also in July 1998, two employee directors were each granted
options under the Incentive Plan to purchase 25,000 shares of the Company's
common stock at a price of $6.125 per share, with such options becoming vested
over a three-year period contingent upon the continued employment of the
directors.
41
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 annually, which expire at various dates through November 1999. Certain
of these agreements provide for incentive bonuses and/or commissions, as defined
in the agreements.
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 since June 1991. Pursuant to the new
agreements, the Company paid $100,000 to CBS and obtained unto perpetuity the
sole and exclusive worldwide 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. The Company has made no royalty payments pursuant to
this agreement through December 31, 1998.
ROYALTY AGREEMENTS
In connection with the purchase of the Product Line of Cybex in September
1997, the Company agreed to pay royalties equal to 2 percent of revenues
generated by the sale of products from the Product Line for a period of five
years, subject to five year extentions at the Company's option. No payments have
been made during 1998. The Company has recorded a liability of approximately
$132,000 for royalties payable to Cybex as of December 31, 1998.
In connection with the acquisition of Enraf-Nonius (see Note 5), the
Company agreed to pay royalties, for a period of seven years, to Delft equal to
1 1/2 percent of revenues generated over a seven year period by the newly
acquired segment. This payment is submitted semiannually and is subject to
minimum annual payments of approximately $500,000. Approximately $258,000 of
such payments were made during 1998.
LEASES
The Company is obligated under various noncancelable operating leases
(including certain related-party leases aggregating approximately $8,750 per
month) for automobiles, warehousing and office space expiring through May 2005
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 $763,000 and $243,000 for the years ended December 31,
1998 and 1997, respectively.
In connection with the acquisition of Enraf-Nonius, the Company assumed the
lease of an office/warehouse building in France. The lease bears interest at a
rate of 5 percent annually and is treated as a capital lease for financial
reporting purposes. Equal quarterly payments of principal and interest of
approximately $47,000 are due through October 1, 2006.
42
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future operating and capital lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ----------
<S> <C> <C>
1999................................. $ 908,746 $ 189,000
2000................................. 810,780 189,000
2001................................. 691,290 189,000
2002................................. 642,000 189,000
2003................................. 632,000 189,000
Thereafter........................... 895,000 567,000
---------- ----------
Total minimum lease payment.......... $4,579,816 1,512,000
==========
Less- Interest....................... 253,000
----------
PV of future minimum lease payment... $1,259,000
==========
</TABLE>
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. RELATED-PARTY TRANSACTIONS:
Pursuant to an agreement with a financial relations company, the Company
paid monthly fees aggregating $10,000 in 1997 for financial consulting services
with regard to potential mergers and acquisitions. The agreement terminated on
January 31, 1997. The Executive Vice President and Chief Financial Officer, who
is also a director, of the Company was a stockholder of the financial relations
company and its Chairman of the Board.
14. 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
percent of their base compensation (as defined) each year. The Company will, at
its discretion, match at least 25 percent of the participant's contribution up
to a maximum of 6 percent 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. The Company elected not to match contributions to the Plan
for the year ended December 31, 1998. Matching contributions to the Plan for the
year ended December 31, 1997 amounted to approximately $44,000.
43
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Supplemental cash flow information for each of the years ended December 31,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash paid for:
Interest........................ $ 1,489,000 $ 797,000
Non-cash investing and financing
activities:
Common stock issued in
connection with acquisitions... 1,197,000 2,910,840
Conversion of note payable and
accrued interest -- Maxxim into
common stock................... 4,331,041 --
Common stock issued for
employment agreement and/or
noncompete agreement........... -- 53,125
Compensation related to common
stock options in legal
settlement..................... -- 160,000
</TABLE>
16. DISCONTINUED OPERATIONS:
On August 11, 1998, the Company sold all of its assets related to its
Homecare operations, including accounts receivable, inventory and property and
equipment, for $3,650,000 in cash and the assumption of certain related
liabilities. The results of the Homecare division have been reported separately
as discontinued operations for each period presented. Revenues for the Homecare
division were $3,492,874 and $6,672,036 for the 1998 period through August 11,
1998, and the year ended December 31, 1997, respectively. The Company recorded a
loss on disposal of the Homecare division for the amount of net assets,
including goodwill, exceeding the sales price at the date of sale.
17. SEGMENT REPORTING:
The Company has two continuing reportable segments: Henley Healthcare,
Inc., in the United States (Henley, U.S.) and its wholly owned subsidiary
Enraf-Nonius, which is based in The Netherlands. Both Henley, U.S., and
Enraf-Nonius specialize in the development, manufacture and sale of medical
products. The two entities are managed separately due to geographic
considerations. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Intersegment revenues are not significant. The only significant noncash
items reported in the respective segments' profit or loss are depreciation and
amortization.
Enraf-Nonius was acquired in May 1998. There were no identifiable segments
of the Company's continuing operations prior to the acquisition of Enraf-Nonius.
The following table summarizes certain financial information for each of
the Company's reportable segments for the year ended December 31, 1998:
<TABLE>
<CAPTION>
HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from unaffiliated
customers.......................... $ 23,896,617 $ 18,035,000 $ 41,931,617
Depreciation and amortization........ 1,622,825 759,000 2,381,825
Interest expense..................... 1,213,566 498,000 1,711,566
Interest income and other, net....... (4,738) -- (4,738)
Profit (loss)........................ (4,813,363) 575,000 (4,238,363)
Identifiable assets.................. 22,394,120 28,650,000 51,044,120
Capital expenditures................. 1,600,832 341,000 1,941,832
Identifiable long-lived assets....... 11,289,777 19,262,000 30,551,777
</TABLE>
44
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT (UNAUDITED):
In April 1999, the Company sold 750 shares of its newly issued $1,000 per
share Series C Convertible Preferred Stock resulting in $623,750 of net proceeds
to the Company. The Series C Preferred Stock will be convertible into common
stock at a range from $1.75 to $2.64 per share, provided that the Company
achieves specified performance criteria. The proceeds will be used primarily to
repay penalties and accrued dividends outstanding related to the Series A
Preferred Stock.
45
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 20, 1997, the Company informed Goldstein Golub Kessler LLP
("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 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required in response to this Item 9 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required in response to this Item 10 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item 11 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 12 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See "Index of Exhibits" below which lists the documents filed as exhibits
herewith.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three-month period ended
December 31, 1998.
46
<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 this 15th day of April, 1999.
HENLEY HEALTHCARE, INC.
(Registrant)
By: /s/ MICHAEL M. BARBOUR
MICHAEL M. BARBOUR,
(PRESIDENT AND CHIEF EXECUTIVE
OFFICER)
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated and on this 15th day of April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- ------------------------------------
<C> <S>
/s/ MICHAEL M. BARBOUR President, Chief Executive
MICHAEL M. BARBOUR Officer and Director
/s/ DAN D. SUDDUTH Executive Vice President, Chief
DAN D. SUDDUTH Financial Officer, Chief Accounting
Officer, Secretary and Director
________________________________ Medical Director, Chairman of
CHADWICK F. SMITH the Board and Director
________________________________ Director
KENNETH W. DAVIDSON
/s/ ERNEST J. HENLEY, PH.D. Director
ERNEST J. HENLEY, PH.D.
/s/ PEDRO A. RUBIO, M.D., PH.D. Director
PEDRO A. RUBIO, M.D., PH.D.
</TABLE>
47
<PAGE>
HENLEY HEALTHCARE, INC.
EXHIBITS TO FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX OF EXHIBITS
Exhibits filed herewith are designated by an asterisk (*); all exhibits not
so designated are incorporated by reference to a prior filing:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
2.1 -- Agreement for the Sale and Purchase of the Enraf-Nonius Companies, dated March 6, 1998, by
and between the Company on behalf of Henley Healthcare B.V. and Delft Instruments
Nederland B.V., Delft Instruments International B.V., Beheermaatschappij Elektroptik B.V.,
Delft Instruments France S.A., B.V. Industriele Houdstermaatschappij Odelca, Enraf-Nonius
Technology B.V., Beheermaatschappij Oldelca B.V., Dimeq Medizinelektronik GMBH Berlin and
N.V. Verenigde Instrumentenfabrieken Enraf-Nonius. (Incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K/A as filed on August 14, 1998).
2.2 -- Amendment to the Agreement Regarding the Sale and Purchase of the Enraf-Nonius Companies,
dated May 29, 1998, by and between Henley Healthcare B.V. and Delft Instruments Nederland
B.V., Delft Instruments International B.V., Beheermaatschappij Elektroptik B.V., Delft
Instruments France S.A., B.V. Industriele Houdstermaatschappij Odelca, Enraf-Nonius
Technology B.V., Beheermaatschappij Oldelca B.V., Dimeq Medizinelektronik GMBH Berlin and
N.V. Verenigde Instrumentenfabrieken Enraf-Nonius. (Incorporated herein by reference to
Exhibit 2.2 of the Company's Current Report on Form 8-K/A as filed on August 14, 1998).
2.3 -- Asset Purchase Agreement by and between Rehabilicare Inc. ("Rehabilicare") and the
Company dated August 6, 1998. (Incorporated herein by reference to Exhibit 2.3 of the
Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1998 as filed on
August 14, 1998).
3.1 -- Amended and Restated Articles of Incorporation (Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997 as filed on August 14, 1997.
3.2 -- Amended and Restated By-Laws (Exhibit 3.2 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997 as filed on March 31, 1998)
3.3 -- Statement of Designation of Series A Preferred Stock (Exhibit 3.3 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997 as filed on March 31, 1998).
3.5* -- Amendment to Articles of Incorporation Amending the Rights and Preferences of the Series B
Preferred Stock.
4.1* -- Specimen Form of Common Stock Certificate.
4.2* -- Specimen Form of Preferred Stock Certificate.
4.3 -- 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)).
4.4 -- Form of Underwriter's Warrant. (Exhibit 4C to the Company's Registration Statement on Form
S-18 (No. 33-49972) dated July 22, 1992).
4.5 -- Form of Subscription Agreement between the Company and the Series A Preferred Stock
Investors. (Incorporated herein by reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-QSB for the period ended March 31, 1998 as filed on May 15, 1998).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
4.6 -- Form of Stock Purchase Warrant Issued to Series A Preferred Stock Investors. (Incorporated
herein by reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-QSB for
the period ended March 31, 1998 as filed on May 15, 1998).
4.7 -- Form of Registration Rights Agreement between the Company and the Series A Preferred Stock
Investors. (Incorporated by reference to Exhibit 4.3 of the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 1998 as filed on May 15, 1998).
4.8 -- Registration Rights Agreement dated as of July 1, 1998, by and among the Company, Zanett
Lombardier, Ltd. ("Lombardier") and The Zanett Securities Corporation ("Zanett").
(Incorporated herein by reference to Exhibit 4.1 of the Company's Current Report on Form
8-K as filed on July 10, 1998).
4.9 -- Form of Stock Purchase Warrant issued to Lombardier and Zanett dated July 1, 1998.
(Incorporated herein by reference to Exhibit 4.2 of the Company's Current Report on Form
8-K as filed on July 10, 1998).
4.10 -- Securities Purchase Agreement dated as of July 1, 1998, between the Company and
Lombardier. (Incorporated herein by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K as filed on July 10, 1998).
4.11 -- Registration Rights Agreement dated as of August 10, 1998, by and among the Company,
Lombardier, Goldman Sachs Performance Partners, L.P. ("Partners") and Goldman Sachs
Performance Partners (Offshore), L.P. ("Offshore") and Zanett. (Incorporated herein by
reference to Exhibit 4.7 of the Company's Quarterly Report on Form 10-QSB for the period
ended June 30, 1998 as filed on August 14, 1998).
4.12 -- Form of Stock Purchase Warrant issued to Lombardier, Partners, Offshore and Zanett dated
August 10, 1998. (Incorporated herein by reference to Exhibit 4.8 of the Company's
Quarterly Report on Form 10-QSB for the period ended June 30, 1998 as filed on August 14,
1998).
4.13 -- Securities Purchase Agreement dated as of August 10, 1998, between the Company,
Lombardier, Partners and Offshore. (Incorporated herein by reference to Exhibit 4.9 of the
Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1998 as filed on
August 14, 1998).
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)).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
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 (Exhibit
10.11 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997
as filed on March 31, 1998).
10.12 -- Plan and Agreement of Merger with Garvey Company dated January 9, 1998 (Exhibit 10.12 to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 as filed
on March 31, 1998).
10.13 -- Asset Purchase Agreement with AMC Acquisition Corp., Dan D. Sudduth, Britton D. Sudduth
and Roger W. Dartt dated February 12, 1998 (Exhibit 10.13 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997 as filed on March 31, 1998).
10.14 -- Asset Purchase Agreement with August Schild d/b/a Summer Medical dated October 6, 1997
(Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997 as filed on March 31, 1998).
10.15 -- Subordinated Loan Agreement dated as of May 29, 1998, by and between Delft Instruments
Nederland B.V., Henley Healthcare B.V., and the Company. (Incorporated herein by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K/A as filed on August 14,
1998).
10.16 -- Fourth Amendment to Amended and Restated Loan Agreement, dated effective May 29, 1998, by
and between the Company and Comerica Bank-Texas. (Incorporated herein by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K/A as filed on August 14, 1998).
10.17 -- Amendment to Subordination Agreement dated as of May 29, 1998 by and between Maxxim
Medical, Inc. ("Maxxim"), the Company and Comerica Bank-Texas. (Incorporated herein by
reference to Exhibit 10.3 of the Company's Current Report on Form 8-K/A as filed on August
14, 1998).
10.18 -- Joinder Agreement dated effective as of May 29, 1998, executed by Henley Healthcare, B.V.
(Incorporated herein by reference to Exhibit 10.4 of the Company's Current Report on Form
8-K/A as filed on August 14, 1998).
10.19 -- Second Modification to Convertible Subordinated Promissory Note, dated as of June 5, 1998,
between the Company and Maxxim. (Incorporated herein by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K/A as filed on August 14, 1998).
10.20 -- Revolving Loan Agreement by and between the Company and the Bank of Artesia. (Incorporated
herein by reference to Exhibit 10.6 of the Company's Current Report on Form 8-K/A as filed
on August 14, 1998).
10.21 -- Facilities and Services Agreement by and between Rehabilicare and the Company dated August
6, 1998. (Incorporated herein by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended on June 30, 1998 as filed on August 14, 1998).
10.22 -- Letter Agreement dated February 20, 1998, between the Company and Maxxim relating to the
conversion of the Note (Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report for the period ended March 31, 1998 on Form 10-QSB filed on May 15,
1998).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
10.23 -- Letter Agreement dated March 13, 1998, between the Company and Maxxim relating to the
conversion of the Note (Incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report for the period ending March 31, 1998 on Form 10-QSB filed on May 15,
1998.)
16.1 -- Letter dated October 24, 1997, from GGK to the Commission regarding disclosure in the
Company's Form 8-K filed on that date (Exhibit 16.1 to the Company's Current Report on
Form 8-K dated October 24, 1997).
21.1* -- Subsidiaries of Registrant.
23.1* -- Consent of Arthur Andersen LLP
27.1* -- Financial Data Schedule.
</TABLE>
51
EXHIBIT 3.5
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
HENLEY HEALTHCARE, INC.
Henley Healthcare, Inc. (the "Corporation"), pursuant to the provisions of
Article 4.04 of the Texas Business Corporation Act (the "TBCA"), hereby adopts
the following Articles of Amendment to its Articles of Incorporation.
ARTICLE ONE
The name of the Corporation is Henley Healthcare, Inc.
ARTICLE TWO
The Articles of Incorporation of the Corporation are amended as follows:
the Statement of Designation of Rights and Preferences of the Series B
Convertible Preferred Stock, Par Value $.10 Per Share, filed with the Secretary
of State on July 1, 1998, as corrected and amended, is deleted in its entirety
and the Amended and Restated Statement of Designation of Rights and Preferences
of the Series B Convertible Preferred Stock attached hereto as Exhibt A is
substituted in its place.
ARTICLE THREE
These Articles of Amendment were duly adopted by the shareholder of the
Series B Convertible Preferred Stock on August 21, 1998.
ARTICLE FOUR
The number of shares of Series B Convertible Preferred Stock outstanding
at the time of the adoption of these Articles of Amendment was 4,700; and the
number of shares entitled to consent thereto was 4,700.
ARTICLE FIVE
The number of shares of the Series B Convertible Preferred Stock which
consented to these Articles of Amended was 4,700; and the number of shares which
did not consent to these Articles of Amendment was 0. The shareholders of all of
the shares of Series B Preferred Stock outstanding and entitled to vote on said
amendment have signed a consent in writing pursuant to Article 9.10(A) of the
TBCA adopting these Articles of Amendment and any written notice required by
Article 9.10(A)(4) of the TBCA has been given.
IN WITNESS WHEREOF, the undersigned Vice President of the Corporation
hereby executes these Articles of Amendment on this 24th day of August, 1998.
1
<PAGE>
HENLEY HEALTHCARE, INC.
/S/ DAN D. SUDDUTH
Dan D. Sudduth,
Executive Vice President and Chief
Financial Officer
2
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
STATEMENT OF DESIGNATION
OF RIGHTS AND PREFERENCES OF THE
SERIES B CONVERTIBLE PREFERRED STOCK OF
HENLEY HEALTHCARE, INC.
FIRST:
That pursuant to authority expressly granted and vested in the Board of
Directors (the "Board of Directors" or the "Board") of this Corporation by
Article 2.13 of the Texas Business Corporation Act and the provisions of the
Articles of Incorporation, the Board of Directors, on June 30, 1998, adopted the
following resolution setting forth the designations, powers, preferences and
rights of its Series B Convertible Preferred Stock and the amendments and
corrections filed since that date (as amended and corrected, the "STATEMENT OF
DESIGNATION").
RESOLVED: That the designations, powers, preferences and rights of the
Series B Convertible Preferred Stock be, and they hereby are, as set forth
below:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 8,000 shares of
Preferred Stock, is the Series B Convertible Preferred Stock (the "SERIES B
PREFERRED STOCK") and the stated value shall be One Thousand U.S. Dollars
($1,000.00) per share (the "STATED VALUE").
II. NO DIVIDENDS
The Series B Preferred Stock will bear no dividends, and the holders of
the Series B Preferred Stock shall not be entitled to receive dividends on the
Series B Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the closing
bid price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national
3
<PAGE>
reputation selected by the Corporation and reasonably acceptable to holders of a
majority of the then outstanding shares of Series B Preferred Stock. If
Bloomberg Financial Markets is not then reporting closing bid prices of such
security (collectively, "BLOOMBERG"), or if the foregoing does not apply, the
last reported bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
bid price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series B Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
B. "CONVERSION DATE" means, for any Conversion, the date on which the
notice of conversion in the form attached hereto (the "NOTICE OF CONVERSION") is
delivered by fax, as evidenced by a mechanically or electronically generated
confirmation thereof, (or delivered by other means resulting in notice) to the
Corporation before 8:00 p.m., New York City time on the Conversion Date
indicated in the Notice of Conversion. The holder shall confirm, by overnight
courier, in person (by courier or otherwise) or by telephone (to an authorized
officer of the Corporation or his or her administrative assistant), the delivery
of the Notice of Conversion to the Corporation on the date on which the Notice
of Conversion is delivered or before 9:00 a.m., New York City time on the
trading day immediately succeeding such date; provided that an overnight courier
delivery which is signed for or refused by the Corporation prior to 12:00 noon,
New York City time on a given day shall be deemed to have been delivered before
9:00 a.m. New York City time on such day. If the Notice of Conversion is not so
faxed or otherwise delivered or the overnight courier, in-person or telephone
confirmation is not so made or deemed to be made before such applicable times,
then the Conversion Date shall be the date as of which both such conditions are
satisfied (i.e., the Notice of Conversion is delivered on or before 8:00 p.m.
New York City time on a given day and the overnight courier, in-person or
telephone confirmation is made or deemed to be made either on such day of
delivery or before 9:00 a.m. New York City time on the immediately succeeding
trading day). Notwithstanding the foregoing, if the Series B Preferred Stock is
being redeemed pursuant to the optional Redemption at Maturity, the Conversion
Date shall be the Maturity Date (as defined below).
C. "CONVERSION PRICE" means the lower of the Fixed Conversion Price and
the Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein. Notwithstanding the foregoing, so long as the
Company has revenue and net income equal to or greater than the amounts set
forth below in each period set forth opposite such amounts (such amounts being
the "Performance Milestone" for such period):
FOR THE
FISCAL YEAR ENDED ANNUAL REVENUE ANNUAL NET INCOME
- ----------------- -------------- -----------------
December 31, 1998 ....................... $ 60,000,000 $ 3,912,000
December 31, 1999 ....................... $ 83,906,000 $ 6,168,000
4
<PAGE>
December 31, 2000 ....................... $ 89,995,000 $ 4,989,000
December 31, 2001 ....................... $ 94,535,000 $ 5,685,000
FOR THE QUARTERLY QUARTERLY NET
PERIOD ENDED QUARTERLY REVENUE INCOME
- ------------------------------------------- ----------------- --------------
September 30, 1998 ........................ $ 12,291,000 $ 900,000
March 31, 1999 .......................... $ 20,976,500 $ 1,542,000
June 30, 1999 ........................... $ 20,976,500 $ 1,542,000
September 30, 1999 ........................ $ 20,976,500 $ 1,542,000
March 31, 2000 .......................... $ 22,498,750 $ 1,247,250
June 30, 2000 ........................... $ 22,498,750 $ 1,247,250
September 30, 2000 ........................ $ 22,498,750 $ 1,247,250
March 31, 2001 .......................... $ 23,633,750 $ 1,421,250
June 30, 2001 ........................... $ 23,633,750 $ 1,421,250
September 30, 2001 ........................ $ 23,633,750 $ 1,421,250
then, the Conversion Price in effect on any Conversion Date after the Filing
Date (defined below) for such period and prior to the Filing Date (defined
below) for the subsequent period shall not be less than the Floor Price in
effect on such Conversion Date, provided, however, that no Floor Price shall be
in effect (a) whenever a Reserved Amount Trigger Event (as defined in Article V
hereof), a Conversion Default (as defined in Article VI hereof), a Trading
Market Trigger Event (as defined in Article VII hereof) or a Redemption Event
(as defined in Article VIII.A hereof) shall have occurred and be then
continuing, (b) after an Announcement Date (as defined in Article XI.C hereof)
and prior to the sixth (6th) trading day following (i) the consummation of the
proposed transaction or tender offer, exchange offer or other transaction to
which the Announcement Date relates or (ii) the Abandonment Date (as defined in
Article XI.C hereof), (c) until the determination has been made as to whether
the Performance Milestone set forth above for the quarterly period ended
September 30, 1998 has been met or (d) at any time after the Company fails to
meet the Performance Milestone for any period set forth above. The term "FILING
DATE" means, with respect to any period, the date
5
<PAGE>
the Company's Quarterly Report on Form 10-QSB (each a "10-QSB") or Annual Report
on Form 10-KSB (each a "10-KSB"), as the case may be, is filed with the
Securities and Exchange Commission for such period. The determination as to
whether the Performance Milestone for any period has been met shall be made by
comparing the revenue and net income for such period disclosed in the 10-QSB or
10-KSB, as the case may be, for such period, with the Performance Milestone for
such period and shall be made as of the Filing Date of such 10-QSB or 10-KSB, as
the case may be; provided, however, for purposes of making such a determination
of net income, net income shall be increased by an amount equal to the amount of
any non-cash charges and expenses taken by the Company, as reflected in its
financial statements, relating to the issuance of shares of its Series A
Preferred Stock, Series B Preferred Stock and warrants in connection therewith.
In the event the Company meets all the Performance Milestones for all the
periods set forth above, thereafter the Floor Price shall remain in effect.
D. "FIRST CONVERSION DATE" means the earliest of (i) the date the
Registration Statement required to be filed by the Corporation pursuant to those
certain Registration Rights Agreements (the "REGISTRATION RIGHTS AGREEMENTS") by
and among the Corporation and the other signatories thereto entered into in
connection with the Securities Purchase Agreement dated as of July 1, 1998 by
and among the Corporation and the other signatory thereto (the "FIRST SECURITIES
PURCHASE AGREEMENT") and the Securities Purchase Agreement dated as of August
10, 1998 by and among the Corporation and the other signatories thereto (the
"SECOND SECURITIES PURCHASE AGREEMENT" and, together with the First Securities
Purchase Agreement, the "SECURITIES PURCHASE AGREEMENTS") is declared effective,
(ii) the date the Corporation makes a public announcement that it intends to
merge or consolidate with any other entity (other than a merger in which the
Corporation is the surviving or continuing entity and the voting capital stock
of the Corporation immediately prior to such merger represents at least 50% of
the voting power of the capital stock of the Corporation after the merger) or to
sell or transfer all or substantially all of the assets of the Corporation,
(iii) the date any person, group or entity (including the Corporation) publicly
announces a tender offer, exchange offer or another transaction to purchase 50%
or more of the Corporation's outstanding Common Stock or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging proxy battle or otherwise, or (iv) the date on which a
Redemption Event described in Article VIII.A(iv) occurs.
E. "FIXED CONVERSION PRICE" means the amount obtained by multiplying 1.1
by the average of the Closing Bid Prices for the Corporation's common stock, par
value $.01 per share ("Common Stock") during the five (5) consecutive trading
days ending on the Issuance Date, and shall be subject to adjustment as provided
herein.
F. "ISSUANCE DATE" means the date of the relevant Closing under the
Securities Purchase Agreements and shall mean, with respect to Series B
Preferred Stock issued pursuant to the First Securities Purchase Agreement, July
1, 1998, and, with respect to Series B Preferred Stock issued pursuant to the
Second Securities Purchase Agreement, August 10, 1998.
G. "N" means the number of days from, but excluding, the Issuance Date.
6
<PAGE>
H. "VARIABLE CONVERSION PRICE" means, as of any date of determination, the
amount obtained by multiplying 0.87 by the average of the Closing Bid Prices for
the Common Stock for any three (3) consecutive trading days chosen by the holder
of Series B Preferred Stock during the period beginning on the twentieth trading
day prior to the Conversion Date for such Conversion and ending on such
Conversion Date (subject to equitable adjustment for any stock splits, stock
dividends, reclassifications or similar events during such 20 trading day
period), and shall be subject to adjustment as provided herein.
I. "FLOOR PRICE" means, with respect to any Conversion Date, $3.50, and
shall be subject to adjustment as provided herein.
J. "PREMIUM" means an amount equal to (X)x(N/365) x (1,000), where "X"
means four hundredths (.04), provided, however, that X shall mean ten hundredths
(.10) for the period beginning as of the last day of any TRADING VOLUME
VALUATION PERIOD (defined below) and thereafter in which the Trading Volume
Value (defined below) shall not equal or exceed $250,000, in which event X shall
remain four hundredths (.04) with respect to calculating the amount of the
Premium accrued prior to such day. The term "TRADING VOLUME VALUATION PERIOD"
shall mean any twenty (20) consecutive trading day period during the period
beginning on the twentieth trading day prior to August 10, 1999 and continuing
thereafter. The term "TRADING VOLUME VALUE" shall mean, for any Trading Volume
Valuation Period, the average of the products obtained by multiplying (i) the
Closing Bid Price for the Common Stock on a trading day by (ii) the total number
of shares of Common Stock traded on such trading day for each trading day in
such Trading Volume Valuation Period.
IV. CONVERSION
A. CONVERSION AT THE OPTION OF THE HOLDER. (i) Subject to the limitations
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series B Preferred Stock may, at any time and from time to time on or
after the First Conversion Date, convert (an "OPTIONAL CONVERSION") each of its
shares of Series B Preferred Stock into a number of fully paid and nonassessable
shares of Common Stock determined in accordance with the following formula if
the Corporation timely redeems the Premium thereon in cash in accordance with
subparagraph (ii) below:
1,000
----------------
Conversion Price
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + THE PREMIUM
-------------------
Conversion Price
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(ii) (a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion, to redeem the Premium
subject to such conversion for a sum of cash equal to the amount of the Premium
being so redeemed. All cash redemption payments hereunder shall be paid in
lawful money of the United States of America at such address for the holder as
appears on the record books of the Corporation (or at such other address as such
holder shall hereafter give to the Corporation by written notice). In the event
the Corporation so elects to redeem the Premium in cash and fails to pay such
holder the applicable redemption amount to which such holder is entitled by
depositing a check in the U.S. Mail to such holder within four (4) business days
of receipt by the Corporation of a Notice of Conversion (in the case of a
redemption in connection with an Optional Conversion), the Corporation shall
thereafter forfeit its right to redeem such Premium in cash and such Premium
shall thereafter be converted into shares of Common Stock in accordance with
Article IV.A(i).
(b) Each holder of Series B Preferred Stock shall have the
right to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem the Premium in cash
pursuant to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time by
sending notice (an "ELECTION NOTICE") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the Corporation
would elect to redeem the Premium for cash in lieu of issuing shares of Common
Stock therefor if such holder were to exercise its right of conversion pursuant
to this Article IV.A. The Corporation shall, no later than the close of business
on the second business day following receipt of an Election Notice, disclose to
such holder whether the Corporation would elect to redeem the Premium in
connection with a conversion pursuant to a Notice of Conversion delivered over
the subsequent ten (10) business day period. If the Corporation does not respond
to such holder within such two business day period via facsimile, the
Corporation shall, with respect to any conversion pursuant to a Conversion
Notice delivered within the subsequent ten (10) business day period, forfeit its
right to redeem such Premium in accordance with subparagraph (a) of this Article
IV.A(ii) and shall be required to convert such Premium into shares of Common
Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series B Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. The
holder shall confirm by overnight courier, in person (by courier or otherwise)
or by telephone (to an authorized officer of the Corporation or his or her
administrative assistant), the delivery of the Notice of Conversion to the
Corporation on the date on which the Notice of Conversion is delivered or before
9:00 a.m. New York City time on the trading day immediately succeeding such
date; provided that an overnight courier delivery which is signed for or refused
by the Corporation prior to 12:00 noon, New York City time on a given day shall
be deemed to have been delivered before 9:00 a.m. New York City time on such
day. Upon receipt by the Corporation of the Notice of Conversion by fax from a
holder, the Corporation shall, within one business day, following the later of
the Corporation's receipt of such Notice of
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Conversion and the holder's overnight courier, in-person or telephone
confirmation of the delivery of such Notice of Conversion, send, via fax, a
confirmation (the "NOTICE OF CONVERSION CONFIRMATION") to such holder stating
that the Notice of Conversion has been received, the date upon which the
Corporation expects to deliver the Common Stock issuable upon such conversion,
the name and telephone number of a contact person at the Corporation regarding
the conversion and, if applicable, the language required to effect a Redemption
in Lieu of Conversion (as defined in Article VIII.D). The Corporation shall not
be obligated to issue shares of Common Stock upon a
9
<PAGE>
conversion unless either the Preferred Stock Certificates are delivered to the
Corporation or the transfer agent as provided above, or the holder notifies the
Corporation or the transfer agent that such certificates have been lost, stolen
or destroyed and delivers the documentation to the Corporation required by
Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of
Preferred Stock Certificates from a holder of Series B Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, subject to the
Corporation's redemption rights set forth in Article VIII.D, no later than the
later of (a) the third business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the case of lost,
stolen or destroyed certificates, after provision of documentation pursuant to
Article XIV.B) (the "DELIVERY PERIOD"), issue and deliver to the holder or its
nominee, after registration of the resale of such shares under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), or delivery of documentation
reasonably satisfactory to the Corporation that the registration of such shares
is not required, to such holder's nominee, (x) that number of shares of Common
Stock issuable upon conversion of such shares of Series B Preferred Stock being
converted and (y) a certificate representing the number of shares of Series B
Preferred Stock not being converted, if any. If the Corporation's transfer agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, and so long as the certificates therefor do not
bear a legend and the holder thereof is not then required to return such
certificate for the placement of a legend thereon, the Corporation may cause its
transfer agent to electronically transmit the Common Stock issuable upon
conversion to the holder by crediting the account of the holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
TRANSFER"). If the aforementioned conditions to a DTC Transfer are not satisfied
or a DTC Transfer is otherwise not effected, the Corporation shall deliver to
the holder physical certificates representing the Common Stock issuable upon
conversion. Further, a holder may instruct the Corporation to deliver to the
holder physical certificates representing the Common Stock issuable upon
conversion in lieu of delivering such shares by way of DTC Transfer.
(ii) TAXES. The Corporation shall pay any and all taxes which may be
imposed upon the Corporation with respect to the issuance and delivery of the
shares of Common Stock upon the conversion of the Series B Preferred Stock other
than transfer taxes due upon conversion, if such holder has transferred to
another party the Series B Preferred Stock or the right to receive Common Stock
upon the holder's conversion thereof.
(iii) NO FRACTIONAL SHARES. If any conversion of Series B Preferred
Stock would result in the issuance of a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock shall be rounded up or
down to the nearest whole share, it being understood that .5 of one share shall
be rounded up to the next highest share.
(iv) CONVERSION DISPUTES. In the case of any dispute with respect to
a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above. If
such dispute involves the calculation of the Conversion Price, the Corporation
shall submit the disputed calculations to the Company's outside auditors
reasonably acceptable to the holder of Series B Preferred Stock being converted
via
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<PAGE>
facsimile at any time prior to the expiration of the Delivery Period. The
accountant, at the expense of the party in error, shall audit the calculations
and notify the Corporation and the holder of the results as soon as practicable
following the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
C. LIMITATIONS ON CONVERSIONS. The conversion of shares of Series B
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) CAP AMOUNT. If, notwithstanding the representations and
warranties of the Corporation contained in the Securities Purchase Agreements,
the Corporation is prohibited by the rules or regulations of any securities
exchange or quotation system on which the Common Stock is then listed or traded,
from listing or issuing a number of shares of Common Stock in excess of a
prescribed amount (the "CAP AMOUNT") without the approval of the Corporation's
shareholders, then the Corporation shall not be required to list or issue, as
applicable, shares in excess of the Cap Amount unless the Corporation has
obtained the required approvals. The Cap Amount shall be allocated pro rata to
the holders of Series B Preferred Stock as provided in Article XIV.C. In the
event a holder of Series B Preferred Stock submits a Notice of Conversion and
the Corporation is prohibited from listing or issuing shares of Common Stock to
satisfy such Notice of Conversion as a result of the operation of this
subparagraph (i), such holder shall be entitled to the rights set forth in
Article VII hereof.
(ii) No Five Percent Holders. Unless a holder of shares of Series B
Preferred Stock delivers a waiver in accordance with the last sentence of this
subparagraph (ii), except in connection with a Required Conversion at Maturity
(as defined below), in no event shall a holder of shares of Series B Preferred
Stock be entitled to receive shares of Common Stock upon a conversion to the
extent that the sum of (x) the number of shares of Common Stock beneficially
owned by the holder and its affiliates (exclusive of shares issuable upon
conversion of the unconverted portion of the shares of Series B Preferred Stock
or the unexercised or unconverted portion of any other securities of the
Corporation (including, without limitation, the warrants (the "Warrants") issued
by the Corporation pursuant to the Securities Purchase Agreements) subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock with respect to which the
determination of this subparagraph is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of this subparagraph, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise
provided in clause (x) above. Except as provided in the immediately succeeding
sentence, the restriction contained in this subparagraph (ii) shall not be
altered, amended, deleted or changed in any manner whatsoever unless the holders
of a majority of the outstanding shares of Common Stock and each holder of
outstanding shares of Series B Preferred Stock shall approve such alteration,
amendment, deletion or change. Notwithstanding the foregoing, a holder of shares
of Series B Preferred Stock may, by providing written notice to the Corporation,
adjust the restriction set forth in this subparagraph (ii) so that the
limitation on beneficial ownership
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<PAGE>
of 4.99% of the outstanding shares of Common Stock referred to above shall be
increased to 9.99%, which adjustment shall not take effect until the 61st day
after the date of such notice.
(iii) TIME LIMITATIONS. (a) So long as no Conversion Default (as
defined in Article VI hereof) or Redemption Event (as defined in Article VIII.A
hereof) has occurred and is then continuing, and except as otherwise provided
below, a holder of Series B Preferred Stock may not convert shares of Series B
Preferred Stock to the extent that the total number of shares of Series B
Preferred Stock previously converted by such holder (excluding for purposes of
this calculation any shares of Series B Preferred Stock converted by such holder
following the occurrence and during the continuation of a Conversion Default or
Redemption Event) together with the number of shares of Series B Preferred Stock
which such holder is attempting to convert exceeds the Maximum Conversion
Percentage (as defined herein) multiplied by the total number of shares of
Series B Preferred Stock purchased by such holder pursuant to the Securities
Purchase Agreements (with respect to each such holder, the "Original Share
Amount"). A holder's Original Share Amount shall be increased or decreased, as
applicable, upon any sale or purchase by such holder of shares of Series B
Preferred Stock occurring after the Issuance Date. "Maximum Conversion
Percentage" means:
IF THE CONVERSION DATE IS: THEN THE MAXIMUM CONVERSION PERCENTAGE IS:
On or after the 30th day
following July 1, 1998
(the "Initial Issuance
Date") and before the
60th day following the
Initial Issuance Date 15%
On or after the 60th day
following the Initial
Issuance Date and before
the 90th day following
the Initial Issuance Date 30%
On or after the 90th day
following the Initial
Issuance Date and before
the 120th day following
the Initial Issuance Date 45%
On or after the 120th day
following the Initial
Issuance Date and before
the 150th day following
the Initial Issuance Date 60%
On or after the 150th day
following the Initial
Issuance Date and before
the 180th day following
the Initial Issuance Date 75%
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<PAGE>
On or after the 180th day
following the Initial
Issuance Date and before
the 210th day following
the Initial Issuance Date 90%
On or after the 210th day
following the Initial
Issuance Date 100%
(b) Notwithstanding the foregoing, the restrictions on conversion set
forth in this Article IV.C. (iii) shall terminate (i) on or after the date the
Corporation makes a public announcement that it intends to merge or consolidate
with any other entity (other than a merger in which the Corporation is the
surviving or continuing entity and its capital stock is unchanged) or to sell or
transfer all or substantially all of the assets of the Corporation or (ii) on or
after the date any person, group or entity (including the Corporation) publicly
announces a tender offer, exchange offer or another transaction to purchase 50%
or more of the Corporation's Common Stock or otherwise publicly announces an
intention to replace a majority of the Corporation's Board of Directors by
waging a proxy battle or otherwise.
D. REQUIRED CONVERSION AT MATURITY. Subject to the limitations set forth
in Paragraph C(i) of this Article IV and provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series B Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act, for resale by the holders of such shares of Series B Preferred
Stock and (iii) eligible to be traded on either the Nasdaq SmallCap Market, The
Nasdaq National Market, the New York Stock Exchange or the American Stock
Exchange, each share of Series B Preferred Stock issued and outstanding on the
fifth anniversary of the Issuance Date thereof Date (the "Maturity Date"),
automatically shall be converted into shares of Common Stock on such date in
accordance with the conversion formulas set forth in Paragraph A of this Article
IV (the "Required Conversion at Maturity"). If the Required Conversion at
Maturity occurs, the Corporation and the holders of Series B Preferred Stock
shall follow the applicable conversion procedures set forth in Paragraph B of
this Article IV; provided, however, that the holders of Series B Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation or its
transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. RESERVED AMOUNT. Upon the initial issuance of the shares of Series B
Preferred Stock, the Corporation shall reserve 200% of the number of shares
which would be issuable if the outstanding shares of Series B Preferred Stock
were converted in their entirety on the Initial Issuance Date based on the
Conversion Price in effect on the First Conversion Date of the authorized but
unissued shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock and thereafter the number of authorized but unissued shares of
Common Stock so reserved (the "RESERVED AMOUNT") shall not be decreased and
shall at all times be sufficient to provide for the conversion of the Series B
Preferred Stock outstanding at the then current Conversion Price thereof. The
Reserved Amount shall be allocated to the holders of Series B Preferred Stock as
provided in Article XIV.C.
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<PAGE>
B. INCREASES TO RESERVED AMOUNT. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series B
Preferred Stock, the Corporation shall immediately notify the holders of Series
B Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking shareholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series B Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within 90 days after an Authorization Trigger Date
(such event being the "RESERVED AMOUNT TRIGGER EVENT"), each holder of Series B
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series B Preferred Stock
such that, after giving effect to such purchase, the holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of its Series B Preferred Stock.
If the Corporation fails to redeem any of such shares within five (5) business
days after its receipt of such Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.
C. ADJUSTMENT TO CONVERSION PRICE. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series B
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series B Preferred
Stock held by any holder (including shares of Series B Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such holder) shall be adjusted as provided in Article VI.A.
D. LIMITATIONS ON REDEMPTION RIGHT. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series B Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series B Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below that number of shares of Common Stock computed as set
forth in Article V.A.; (ii) the Corporation shall have taken immediate action
following the applicable Authorization Trigger Date (including, if necessary,
seeking stockholder approval to authorize the issuance of additional shares of
Common Stock) to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the outstanding Series B Preferred
Stock; and (iii) the Corporation continues to use its commercially reasonable
good faith best efforts (including the resolicitation of stockholder approval to
authorize the issuance of additional shares of Common Stock) to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon conversion of the outstanding Series B Preferred Stock. The Corporation
will be deemed to be using "its commercially reasonable good faith best efforts"
to increase the Reserved Amount so long as it solicits stockholder approval to
authorize the issuance of additional shares of Common Stock not less than three
(3) times during each twelve month period following the applicable Authorization
Trigger Date during which any shares of Series B Preferred Stock remain
outstanding.
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<PAGE>
VI. FAILURE TO SATISFY CONVERSIONS
A. CONVERSION DEFAULTS. The following shall constitute a "CONVERSION
DEFAULT": (i) following the submission by a holder of shares of Series B
Preferred Stock of a Notice of Conversion, the Corporation fails for any reason
(other than because of an event described in clause (iii) below) to deliver, on
or prior to the tenth business day following the expiration of the Delivery
Period for such conversion, such number of shares of Common Stock without a
restrictive legend covered by an effective registration statement to which such
holder is entitled upon such conversion, (ii) the Corporation provides notice to
any holder of Series B Preferred Stock at any time of its intention not to issue
freely tradeable shares of Common Stock upon exercise by any holder of its
conversion rights in accordance with the terms of this Statement of Designation
(other than because of an event described in clause (iii) below), or (iii) the
Corporation is prohibited, at any time, from listing shares of Common Stock or
from issuing shares of Common Stock upon conversion of Series B Preferred Stock
to any holder because the Corporation (A) does not at the date of such
conversion have available a sufficient number of authorized and reserved shares
of Common Stock or (B) such listing or issuance would exceed the then unissued
portion of such holder's Cap Amount. In the case of a Conversion Default
described in clause (i) or (iii) above, the Fixed Conversion Price in respect of
any shares of Series B Preferred Stock held by such holder (including shares of
Series B Preferred Stock submitted to the Corporation for conversion, but for
which shares of Common Stock have not been issued to such holder) shall
thereafter be the lesser of (x) the Fixed Conversion Price on the date of the
Conversion Default and (y) the lowest Conversion Price in effect during the
period beginning on, and including, such date through and including (A) in the
case of a Conversion Default referred to in clause (i) above, the earlier of (1)
the day such shares of Common Stock are delivered to the holder and (2) the day
on which the holder regains its rights as a holder of Series B Preferred Stock
with respect to such unconverted shares of Series B Preferred Stock pursuant to
the provisions of Article XIV.F hereof, and (B) in the case of a Conversion
Default referred to in clause (iii) above, the date on which the prohibition on
listing or issuance of Common Stock terminates. In the case of a Conversion
Default described in clause (ii) above, the Fixed Conversion Price with respect
to any conversion thereafter shall be the lowest Conversion Price in effect at
any time during the period beginning on, and including, the date of the
occurrence of such Conversion Default through and including the Default Cure
Date (as defined below). Following any adjustment to the Fixed Conversion Price
pursuant to this Article VI.A, the Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI. Upon the
occurrence of each reset of the Fixed Conversion Price pursuant to this
Paragraph A, the Corporation, at its expense, shall promptly compute the new
Fixed Conversion Price and prepare and furnish to each holder of Series B
Preferred Stock a certificate setting forth such new Fixed Conversion Price and
showing in detail each Conversion Price in effect during such reset period.
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series B Preferred Stock, (ii) with
respect to a Conversion Default described in clause (ii) of its definition, the
date the Corporation issues shares of Common Stock without a restrictive legend
covered by an effective registration statement in satisfaction of all
conversions of Series B Preferred Stock in accordance with Article IV.A, and
(iii) with respect to a Conversion Default described in clause (i) or clause
(ii) of its definition, the date on which the Corporation redeems shares of
Series B Preferred Stock held by such holder pursuant to paragraph C of this
Article VI.
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<PAGE>
B. Intentionally Omitted.
C. REDEMPTION RIGHT. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII, respectively) to issue shares of Common Stock within 10
business days after the expiration of the Delivery Period with respect to any
conversion of Series B Preferred Stock, then the holder may elect at any time
and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Redemption Notice to the Corporation, to have all of
such holder's shares of Series B Preferred Stock which were submitted for
conversion purchased by the Corporation for cash, at an amount per share equal
to the Redemption Amount (as defined in Article VIII.B). If the Corporation
fails to redeem any of such shares within five business days after its receipt
of such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
D. VOID NOTICE OF CONVERSION. If for any reason a holder has not received
all of the shares of Common Stock prior to the tenth (10th) business day after
the expiration of the Delivery Period with respect to a conversion of Series B
Preferred Stock and (i) such shares have not been called for redemption pursuant
to Article VIII.D(i)(y), provided the Redemption Amount therefor has been or may
be paid within the time limits set forth in Article VIII.D(iv), and (ii) such
shares are not subject to a redemption notice from the holder thereof, then the
holder, upon written notice to the Corporation's transfer agent, with a copy to
the Corporation, may void its Notice of Conversion with respect to, and retain
or have returned, as the case may be, any shares of Series B Preferred Stock
that have not been converted pursuant to such holder's Notice of Conversion;
provided that the voiding of a holder's Notice of Conversion shall not affect
such holders rights and remedies which have accrued prior to the date of such
notice pursuant to Article VI hereof or otherwise.
VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT
A. OBLIGATION TO CURE. If at any time after September 30, 1998 the then
unissued portion of any holder's Cap Amount is less than 135% of the number of
shares of Common Stock then issuable upon conversion of such holder's shares of
Series B Preferred Stock (a "TRADING MARKET TRIGGER EVENT"), the Corporation
shall immediately notify the holders of Series B Preferred Stock of such
occurrence and shall take immediate action (including, if necessary, seeking the
approval of its shareholders to authorize the listing or issuance of the full
number of shares of Common Stock which would be issuable upon the conversion of
the then outstanding shares of Series B Preferred Stock but for the Cap Amount)
to eliminate any prohibitions under applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its securities on
the Corporation's ability to list or issue shares of Common Stock in excess of
the Cap Amount ("TRADING MARKET PROHIBITIONS"). In the event the Corporation
fails to eliminate all such Trading Market Prohibitions within 120 days after
the Trading Market Trigger Event, then each holder of Series B Preferred Stock
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time until such date that all such Trading Market Prohibitions
are eliminated, by delivery of a Redemption Notice (as defined
16
<PAGE>
in Article VIII.C) to the Corporation, to require the Corporation to purchase
for cash, at an amount per share equal to the Redemption Amount, a number of the
holder's shares of Series B Preferred Stock such that, after giving effect to
such redemption, the then unissued portion of such holder's Cap Amount exceeds
135% of the total number of shares of Common Stock issuable upon conversion of
such holder's shares of Series B Preferred Stock. If the Corporation fails to
redeem any of such shares within five (5) business days after its receipt of
such Redemption Notice, then such holder shall be entitled to the remedies
provided in Articles VII.B and VIII.C.
B. REMEDIES. If the Corporation fails to redeem any shares of Series B
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series B Preferred Stock to any holder because
such listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, any holder who is so
prohibited from converting its Series B Preferred Stock because the shares of
Common Stock underlying such Series B Preferred Stock may not be listed or
issued, may elect either or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series B Preferred Stock (including
any shares of Series B Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the AMEX (or any
other stock exchange, interdealer quotation system or trading market) and to
cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board; or
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price equal
to the average of the Closing Bid Prices for the Common Stock during the five
consecutive trading days ending on the trading day immediately preceding the
date of the holder's written notice to the Corporation of its election to
receive shares of Common Stock pursuant to this subparagraph (ii) (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such five trading day period).
C. ADJUSTMENT TO CONVERSION PRICE. If the Corporation is prohibited, at
any time, from listing shares of Common Stock or from issuing shares of Common
Stock upon conversion of Series B Preferred Stock to any holder because such
listing or issuance would exceed the then unissued portion of such holder's Cap
Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, then the Fixed
Conversion Price in respect of any shares of Series B Preferred Stock held by
any holder (including shares of Series B Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued) shall be adjusted as provided in Article VI.A.
VIII. REDEMPTION
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A. REDEMPTION BY HOLDER. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including, from and after the First Conversion
Date, any of the shares of Common Stock issuable upon conversion of the Series B
Preferred Stock) is suspended from trading on any of, or is not listed (and
authorized) for trading on at least one of, the NASDAQ Small Cap Market, the
NASDAQ National Market, the New York Stock Exchange or the American Stock
Exchange for an aggregate of 10 full trading days in any nine month period;
(ii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Statement of Designation, the Securities Purchase Agreements or
the Registration Rights Agreements (a "LEGEND REMOVAL FAILURE"), and any such
failure continues uncured for ten business days after the Corporation has been
notified thereof in writing by the holder;
(iii) the Corporation provides notice to any holder of Series B
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, shares of Common Stock to
any holder of Series B Preferred Stock upon conversion in accordance with the
terms of this Statement of Designation (other than due to the circumstances
contemplated by Articles V or VII for which the holders shall have the remedies
set forth in such Articles);
(iv) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder approval being
conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation);
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Corporation and other than pursuant to a merger in which the Corporation is
the surviving or continuing entity and the voting capital stock of the
Corporation immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the merger) and its
capital stock is unchanged; or
(c) have fifty percent (50%) or more of the voting power of
its capital stock owned beneficially by one person, entity or "group" (as such
term is used under Section 13(d) of the Securities Exchange Act of 1934, as
amended); or
(vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreements or the Registration Rights
Agreements and such breach continues for 5 business days after the Corporation
has been notified thereof in writing by the holder;
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series B Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to
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time by delivery of a Redemption Notice (as defined in Paragraph C below) to the
Corporation while such Redemption Event continues, to require the Corporation to
purchase for cash any or all of the then outstanding shares of Series B
Preferred Stock held by such holder for an amount per share equal to the
Redemption Amount (as defined in Paragraph B below) in effect at the time of the
redemption hereunder. For the avoidance of doubt, the occurrence of any event
described in clauses (i), (iii) or (iv) above shall immediately constitute a
Redemption Event and there shall be no cure period. Upon the Corporation's
receipt of any Redemption Notice hereunder (other than during the three trading
day period following the Corporation's delivery of a Redemption Announcement (as
defined below) to all of the holders in response to the Corporation's initial
receipt of a Redemption Notice from a holder of Series B Preferred Stock), the
Corporation shall immediately (and in any event within one business day
following such receipt) deliver a written notice (a "Redemption Announcement")
to all holders of Series B Preferred Stock stating the date upon which the
Corporation received such Redemption Notice and the amount of Series B Preferred
Stock covered thereby. Subject to Article VIII.D, the Corporation shall not
redeem any shares of Series B Preferred Stock during the three trading day
period following the delivery of a required Redemption Announcement hereunder.
At any time and from time to time during such three trading day period, each
holder of Series B Preferred Stock may request (either orally or in writing)
information from the Corporation with respect to the instant redemption
(including, but not limited to, the aggregate number of shares of Series B
Preferred Stock covered by Redemption Notices received by the Corporation) and
the Corporation shall furnish (either orally or in writing) as soon as
practicable such requested information to such requesting holder.
B. DEFINITION OF REDEMPTION AMOUNT. The "REDEMPTION AMOUNT" with respect
to a share of Series B Preferred Stock means an amount equal to:
V
----- x M
C P
provided, however, if the Conversion Price is equal to or greater than the Floor
Price, Redemption Amount shall mean the greater of:
V
----- x M
C P
and (ii) V x 1.13
where:
"V" means the Face Amount thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the
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period beginning on the date on which the Corporation receives the Redemption
Notice and ending on the date immediately preceding the date of payment of the
Redemption Amount and (ii) with respect to redemptions pursuant to Article
VIII.A(v) hereof, the greater of (a) the amount determined pursuant to clause
(i) of this definition or (b) the fair market value, as of the date on which the
Corporation receives the Redemption Notice, of the consideration payable to the
holder of a share of Common Stock pursuant to the transaction which triggers the
redemption. For purposes of this definition, "fair market value" shall be
determined by the mutual agreement of the Corporation and holders of a
majority-in-interest of the shares of Series B Preferred Stock then outstanding,
or if such agreement cannot be reached within five business days prior to the
date of redemption, by an investment banking firm selected by the Corporation
and reasonably acceptable to holders of a majority-in-interest of the then
outstanding shares of Series B Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
C. REDEMPTION DEFAULTS. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series B Preferred Stock within
five business days after its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series B Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date on which the Corporation receives the Redemption Notice
and ending on the Conversion Date with respect to the conversion of such
Redemption Amount. In the event the Corporation is not able to redeem all of the
shares of Series B Preferred Stock subject to Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Corporation shall
redeem shares of Series B Preferred Stock from each holder pro rata, based on
the total number of shares of Series B Preferred Stock outstanding at the time
of redemption included by such holder in all Redemption Notices delivered prior
to the date upon which such redemption is to be effected relative to the total
number of shares of Series B Preferred Stock outstanding at the time of
redemption included in all of the Redemption Notices delivered prior to the date
upon which such redemption is to be effected.
D. REDEMPTION BY CORPORATION.
(i) The Corporation shall have the right at any time and from time
to time to redeem any shares which are the subject of a Notice of Conversion for
an amount of cash equal to the Redemption Amount (a "REDEMPTION IN LIEU OF
CONVERSION"), in its sole discretion by delivery of an Optional Redemption
Notice in accordance with the redemption procedures set forth below.
(ii) Within ten (10) calendar days prior to the beginning of any
calendar month during which the Corporation elects to effect a Redemption in
Lieu of Conversion, the Corporation shall provide written notice to the holders
of Series B Preferred Stock by facsimile and overnight courier stating that the
Corporation will redeem any conversions of Series B Preferred Stock in such
calendar month (an "OPTIONAL REDEMPTION NOTICE"). In the event the Corporation
fails to provide
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an Optional Redemption Notice to the holders of Series B Preferred Stock within
such ten (10) day period, the Corporation shall not be permitted to so redeem
any conversions of Series B Preferred Stock during such calendar month. In the
event a timely Optional Redemption Notice is provided as aforesaid, upon
Corporation's receipt of a Notice of Conversion the Corporation shall be
obligated to redeem the entire number of shares of the Series B Preferred Stock
which are the subject of the Notice of Conversion for the Redemption Amount (as
defined in Article VIII.B).
E. VOID REDEMPTION. In the event that the Corporation does not pay the
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays
such unpaid applicable Redemption Amount in full, a holder of Series B Preferred
Stock shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu
of redemption, require the Corporation to promptly return to such holder any or
all of the shares of Series B Preferred Stock that were submitted for redemption
by such holder under this Article VIII and for which the applicable Redemption
Amount (together with any interest thereon) has not been paid, by sending
written notice thereof to the Corporation via facsimile and confirmed by
overnight courier, in person (by courier or otherwise) or by telephone (to an
authorized officer of the Corporation or his or her administrative assistant)
(the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Corporation's receipt of such
Void Optional Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with respect
to those shares of Series B Preferred Stock subject to the Void Optional
Redemption Notice, and (ii) the Corporation shall immediately return any shares
of Series B Preferred Stock subject to the Void Optional Redemption Notice
IX. RANK
The Series B Preferred Stock shall rank (i) prior to the Corporation's
Common Stock; (ii) prior to any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series B
Preferred Stock ("JUNIOR SECURITIES"); (iii) junior to any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series B Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, senior to the Series B Preferred
Stock ("SENIOR SECURITIES"); and (iv) pari passu with the Series A Preferred
Stock and any other class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of the Series B Preferred
Stock obtained in accordance with Article XIII hereof) specifically ranking by
its terms on parity with the Series B Preferred Stock ("PARI PASSU SECURITIES"),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief
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<PAGE>
in respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the U.S. Federal bankruptcy laws or
any other applicable bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 60 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up, including, but not limited to, the sale or
transfer of all or substantially all of the Corporation's assets in one
transaction or in a series of related transactions (a "LIQUIDATION EVENT"), no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities and Pari Passu Securities) upon
liquidation, dissolution or winding up unless prior thereto the holders of
shares of Series B Preferred Stock shall have received the Liquidation
Preference with respect to each share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the holders of the
Series B Preferred Stock and holders of PARI PASSU Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series B Preferred Stock and the PARI PASSU
Securities shall be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share bears to the
aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series B
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Statement of Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price and the Floor Price shall be subject to adjustment
from time to time as follows:
A. STOCK SPLITS, STOCK DIVIDENDS, ETC. If, at any time on or after the
Initial Issuance Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Fixed Conversion Price and the Floor Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Fixed Conversion Price and the Floor Price
shall be proportionately increased. In such event, the Corporation shall notify
the Corporation's transfer agent of such change on or before the effective date
thereof.
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B. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time after the
Initial Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) -(iv) above being a "CORPORATE CHANGE"), then the holders of Series B
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Corporate Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Corporate Change
not taken place, and in any such case, appropriate provisions (in form and
substance reasonably satisfactory to the holders of a majority of the Series B
Preferred Shares then outstanding) shall be made with respect to the rights and
interests of the holders of the Series B Preferred Stock to the end that the
economic value of the shares of Series B Preferred Stock are in no way
diminished by such Corporate Change and that the provisions hereof (including,
without limitation, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is not the Corporation, an
immediate adjustment of the Fixed Conversion Price and the Floor Price so that
the Fixed Conversion Price and the Floor Price immediately after the Corporate
Change reflects the same relative value as compared to the value of the
surviving entity's common stock that existed between the Fixed Conversion Price
and the Floor Price and the value of the Corporation's Common Stock immediately
prior to such Corporate Change and an immediate revision to the Variable
Conversion Price so that it is determined as provided in Article III.H but based
on the price of the common stock of the surviving entity and the market in which
such common stock is traded) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
Corporate Change unless (i) each holder of Series B Preferred Stock has received
written notice of such transaction along with the notice sent to the holders of
the Common Stock of the Corporation, but in no event later than 20 days prior to
the record date for the determination of shareholders entitled to vote with
respect thereto, and (ii) the resulting, successor or acquiring entity (if not
the Corporation) assumes by written instrument (in form and substance reasonably
satisfactory to the holders of a majority of the Series B Preferred Shares then
outstanding) the obligations of this Statement of Designation. The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available for
issuance upon conversion of the shares of Series B Preferred Stock outstanding
as of the date of such transaction, and shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation at
any time after the Initial Issuance Date (i) makes a public announcement that it
intends to consolidate or merge with any other entity (other than a merger in
which the Corporation is the surviving or continuing entity and its capital
stock is unchanged) or to sell or transfer all or substantially all of the
assets of the Corporation or (ii) any person, group or entity (including the
Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the
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Corporation's Common Stock or otherwise publicly announces an intention to
replace a majority of the Corporation's Board of Directors by waging or proxy
battle or otherwise (the date of the announcement or commencement referred to in
clause (i) or (ii) of this Paragraph C is hereinafter referred to as the
"ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the tenth trading day following the
earlier of the consummation of the proposed transaction or tender offer,
exchange offer or another transaction or the Abandonment Date (as defined below)
(the earlier of such dates being the "ADJUSTED CONVERSION PRICE TERMINATION
DATE"), be equal to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement Date and (y)
the Conversion Price determined in accordance with Article III.C on the
Conversion Date set forth in the Notice of Conversion for the Optional
Conversion. After the Adjusted Conversion Price Termination Date, the Conversion
Price shall be determined as set forth in Article III.C. "ABANDONMENT DATE"
means with respect to any proposed transaction or tender offer, exchange offer
or another transaction for which a public announcement or an action contemplated
by this Paragraph C has been made or commenced, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or abandonment
of the proposed transaction or tender offer, exchange offer or another
transaction which caused this Paragraph C to become operative.
D. ADJUSTMENT DUE TO DISTRIBUTION. If, at any time after the Initial
Issuance Date, the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's common shareholders in shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"DISTRIBUTION"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
E. ISSUANCE OF OTHER SECURITIES. If at any time after the Initial Issuance
Date the Company issues or sells any shares of Common Stock or any securities
which are convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") for no consideration or for a consideration per share less than the
Dilutive Price (as defined in this subparagraph) on the date of issuance (a
"DILUTIVE ISSUANCE"), then effective immediately upon the Dilutive Issuance, the
Conversion Price will be adjusted in accordance with one of the two formulas
below. For purposes of this subparagraph, "DILUTIVE PRICE" means (i) the Floor
Price if, prior to the date of the Dilutive Issuance, the Company has met all
Performance Milestones or (ii) otherwise, the Market Price (as hereinafter
defined). If the Company has met all Performance Milestones (as defined in the
Statement of Designation), the Conversion Price will be adjusted in accordance
with the following formula:
O + P/F
C' = C x -------------- ;
CSDO
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or otherwise in accordance with the following formula:
O + P/M
C' = C x --------- ;
CSDO
where:
C' = the adjusted Conversion Price;
C = the then current Conversion Price;
M = the then current Market Price;
F = the Floor Price
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
herein, received by the Company upon such Dilutive
Issuance; and
CSDO = the total number of shares of Common Stock deemed
outstanding immediately after the Dilutive Issuance.
F. PURCHASE RIGHTS. If, at any time after the Initial Issuance Date, the
Corporation issues any securities which are convertible into or exchangeable for
Common Stock, or rights to purchase stock, warrants, securities or other
property (the "PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, then the holders of Series B Preferred Stock will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Series B Preferred Stock (without giving effect to the limitations contained in
Article IV.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
G. NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or the Floor Price pursuant to this
Article XI, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series B Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price and/or the
Floor Price at the time in effect and (iii) the number of shares of Common Stock
and the amount, if any, of other securities or property which at the time would
be received upon conversion of a share of Series B Preferred Stock.
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XII. VOTING RIGHTS
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Texas Business Corporation Act
(the "BUSINESS CORPORATION ACT") and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its shareholders
for the purpose of determining shareholders entitled to (a) receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger consolidation or recapitalization)
any share of any class or any other securities or property, or to receive any
other right, or (b) to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Corporation, or any
proposed merger, consolidation, liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each holder, at least 20
days prior to the record date specified therein (but in no event earlier than
public announcement of such proposed transaction), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Act the vote of the
holders of the Series B Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series B Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series B Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series B Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series B Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of a majority in interest
of the holders of the then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series B Preferred Stock;
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(b) alter or change the rights, preferences or privileges of
any previously issued shares of capital stock of the Corporation so as to affect
adversely the Series B Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock ranking
pari passu with the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "PARI PASSU SECURITIES");
(e) increase the authorized number of shares of Series B
Preferred Stock;
(f) issue any shares of Senior Securities;
(g) issue any shares of Series B Preferred Stock other than
pursuant to the Securities Purchase Agreements;
(h) redeem, or declare or pay any cash dividend or
distribution on, any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series B Preferred Stock then outstanding.
XIV. MISCELLANEOUS
A. CANCELLATION OF SERIES B PREFERRED STOCK. If any shares of Series B
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series B Preferred Stock.
B. LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series B Preferred Stock.
27
<PAGE>
C. ALLOCATION OF CAP AMOUNT AND RESERVED AMOUNT. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series B
Preferred Stock based on the number of shares of Series B Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series B Preferred Stock based on the
number of shares of Series B Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series B Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Series B Preferred Stock shall be allocated to the remaining holders of
shares of Series B Preferred Stock, pro rata based on the number of shares of
Series B Preferred Stock then held by such holders.
D. QUARTERLY STATEMENTS OF AVAILABLE SHARES. For each calendar quarter
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreements is declared effective
and thereafter so long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall deliver (or cause its transfer agent to
deliver) to each holder a written report notifying the holders of any occurrence
which prohibits the Corporation from issuing Common Stock upon any such
conversion. The report shall also specify (i) the total number of shares of
Series B Preferred Stock outstanding as of the end of such quarter, (ii) the
total number of shares of Common Stock issued upon all conversions of Series B
Preferred Stock prior to the end of such quarter, (iii) the total number of
shares of Common Stock which are reserved for issuance upon conversion of the
Series B Preferred Stock as of the end of such quarter and (iv) the total number
of shares of Common Stock which may thereafter be listed or issued by the
Corporation upon conversion of the Series B Preferred Stock before the
Corporation would exceed the Cap Amount and the Reserved Amount. The Corporation
(or its transfer agent) shall deliver the report for each quarter to each holder
prior to the tenth day of the calendar month following the quarter to which such
report relates. In addition, the Corporation (or its transfer agent) shall
provide, within 15 days after delivery to the Corporation of a written request
by any holder, any of the information enumerated in clauses (i) -(iv) of this
Paragraph D as of the date of such request.
E. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to make
any cash payment to a holder under this Statement of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.
F. STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion by a
holder of Series B Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder's rights as a holder of such converted shares of Series B Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to
28
<PAGE>
any remedies provided herein or otherwise available at law or in equity to such
holder because of a failure by the Corporation to comply with the terms of this
Statement of Designation. Notwithstanding the foregoing, if a holder has not
received certificates for all shares of Common Stock prior to the tenth business
day after the expiration of the Delivery Period with respect to a conversion of
Series B Preferred Stock for any reason, then (unless the holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Corporation within five business days after the expiration of such 10 business
day period) the holder shall regain the rights of a holder of Series B Preferred
Stock with respect to such unconverted shares of Series B Preferred Stock and
the Corporation shall, as soon as practicable, return such unconverted shares to
the holder. In all cases, the holder shall retain all of its rights and remedies
(including, without limitation, the right to have the Conversion Price with
respect to subsequent conversions determined in accordance with Article VI.A)
for the Corporation's failure to convert Series B Preferred Stock.
G. REMEDIES CUMULATIVE. The remedies provided in this Statement of
Designation shall be cumulative and in addition to all other remedies available
under this Statement of Designation, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Statement of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series B Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series B Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
29
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series B Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of common
stock ("COMMON STOCK") of HENLEY HEALTHCARE, INC. (the "CORPORATION") according
to the conditions of the Statement of Designation, Rights and Preferences of the
Series B Convertible Preferred Stock of Henley Healthcare, Inc. (the "STATEMENT
OF DESIGNATION"), as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC TRANSFER").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series B Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
|_| In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned
physical certificates representing such shares of Common Stock.
Date of Conversion: ____________________________________
Applicable Conversion Price: ___________________________
Number of Shares of Common Stock to be Issued: _________
Signature: _____________________________________________
Name: __________________________________________________
Address: _______________________________________________
_______________________________________________
_______________________________________________
30
EXHIBIT 4.1
HENLEY HEALTHCARE, INC.
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
NASDAQ: HENL COMMON STOCK CUSIP 42550V 107
THIS CERTIFIES THAT:
SPECIMEN
IS OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF .01 PAR VALUE EACH OF
====================== HENLEY HEALTHCARE, INC. =======================
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the State of Texas, and
to the Certificate of Incorporation and Bylaws of the Corporation, as now or
hereafter amended. This certificate is not valid until countersigned by the
Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers
Dated: _________________
COUNTERSIGNED OLDE MONMOUTH STOCK TRANSFER CO. INC.
77 MEMORIAL PARKWAY, SUITE 101
Atlantic Highlands, NJ 07716
TRANSFER AGENT
By
AUTHORIZED SIGNATURE
SECRETARY [SEAL] PRESIDENT
- --------------------------------------------------------------------------------
HENLEY HEALTHCARE, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-__________ Custodian____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act__________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,_______________________________________________________
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated, _______________
____________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Henley Healthcare, Inc. is authorized to issue shares of more than one
class or series. The Articles of Incorporation of Henley Healthcare, Inc., as
amended, set forth a statement of the designations, preferences, limitations and
relative rights of the shares of each class or series to the extent they have
been fixed and determined by the Board of Directors and a statement of the
authority of the Board of Directors to fix and determine the designations,
preferences, limitations and relative rights of subsequent series. The
corporation will furnish a copy of such statement to the record holder of this
certificate without charge on written request to the corporation at its
principal place of business.
The Articles of Incorporation of Henley Healthcare, Inc., provide, in
Article 7, that no holder of shares of any class of the corporation shall have
any preemptive right to subscribe for or acquire additional shares of the
corporation of the same or any other class.
EXHIBIT 4.2
ORGANIZED UNDER THE LAWS OF THE STATE OF TEXAS
NUMBER SHARES
HENLEY HEALTHCARE, INC.
SERIES [A, B or C] CONVERTIBLE PREFERRED STOCK
PAR VALUE $.10 PER SHARE
THIS CERTIFIES THAT ________________________SPECIMEN________________ IS THE
OWNER OF ______________________ FULLY PAID AND NON-ASSESSABLE SHARES OF THE
SERIES [A, B or C] CONVERTIBLE PREFERRED STOCK OF HENLEY HEALTHCARE, INC.
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND TO BE SEALED WITH THE SEAL OF THE
CORPORATION.
DATED _________________________
_______________________________ _____________________________
SECRETARY PRESIDENT
[SEAL]
SEE RESTRICTIVE LEGEND(S) ON BACK
- --------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED
UNDER AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
THE ARTICLES OF INCORPORATION OF THIS CORPORATION DENY PREEMPTIVE RIGHTS TO ITS
SHAREHOLDERS. A FULL STATEMENT OF SUCH LIMITATION IS SET FORTH IN THE ARTICLES
OF INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF
TEXAS. THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE HOLDER OF
THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF TWO OR MORE CLASSES OF STOCK. A
FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE
RIGHTS OF THE SHARES OF SUCH CLASSES IS SET FORTH IN THE ARTICLES OF
INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS. THE
CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE
OF BUSINESS OR REGISTERED OFFICE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used though not on the list.
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-__________ Custodian____________
TEN ENT -- as tenants by the entireties (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act__________________________
(State)
</TABLE>
FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELLS, ASSIGNS AND TRANSFERS UNTO
____________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
REPRESENTED BY THE WITHIN CERTIFICATE, AND HEREBY IRREVOCABLY CONSTITUTES AND
APPOINTS _______________________________________ ATTORNEY TO TRANSFER THE SAID
SHARES ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH FULL POWER OF
SUBSTITUTION IN THE PREMISES. DATED, _______________
IN PRESENCE OF ____________________________________
__________________________________________
EXHIBIT 21.1
SUBSIDIARIES OF HENLEY HEALTHCARE, INC.
The following is a list of all of the domestic subsidiaries of the Company as of
December 31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
DOMESTIC SUBSIDIARIES STATE OF INCORPORATION OWNERSHIP
- ------------------------------------- ------------------------------ ---------
<S> <C> <C>
Garvey Company....................... Minnesota 100%
Health Career Learning Systems,
Inc. .............................. Michigan 100%
Henley Acquisition Corp. ............ Texas 100%
Med-Quip, Inc. ...................... Georgia 100%
NCI, Inc. ........................... Michigan 100%
</TABLE>
The following is a list of all of the foreign subsidiaries of the Company as of
December 31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
FOREIGN SUBSIDIARIES JURISDICTION OF INCORPORATION OWNERSHIP
- ------------------------------------- ------------------------------ ---------
<S> <C> <C>
Enraf-Nonius, B.V. .................. The Netherlands 100%
Enraf-Nonius, N.V. .................. Belgium 100%
Enraf-Nonius Medizinelektronik
GMBH............................... Germany 100%
Enraf-Nonius Medical Equipment Co.
Ltd. .............................. Thailand 40%
Stats Doyer Hydrotherapie S. A. ..... France 25%
Enraf-Nonius S.A.France.............. France 99.7%
</TABLE>
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) and on Form
S-3 (No. 333-50769 and No. 333-63915).
ARTHUR ANDERSEN LLP
Houston, Texas
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 490,649
<SECURITIES> 0
<RECEIVABLES> 12,642,254
<ALLOWANCES> (1,470,026)
<INVENTORY> 8,494,276
<CURRENT-ASSETS> 20,492,343
<PP&E> 9,020,078
<DEPRECIATION> (2,412,447)
<TOTAL-ASSETS> 51,044,120
<CURRENT-LIABILITIES> 29,101,928
<BONDS> 0
0
6,337,946
<COMMON> 57,121
<OTHER-SE> 3,178,421
<TOTAL-LIABILITY-AND-EQUITY> 51,044,120
<SALES> 41,931,617
<TOTAL-REVENUES> 41,931,617
<CGS> 26,259,735
<TOTAL-COSTS> 18,103,417
<OTHER-EXPENSES> (4,738)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,711,566
<INCOME-PRETAX> (4,238,363)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,238,363)
<DISCONTINUED> (1,592,820)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,831,183)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
