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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________________ TO _______________
COMMISSION FILE NUMBER 0-28566
HENLEY HEALTHCARE, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED 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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
713-276-7000
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer: (i) 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 (ii) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]
As of November 12, 1999, the issuer had 5,865,876 shares of common stock
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I. FINANCIAL INFORMATION
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
"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.
ITEM 1. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth in
the "Index to Financial Statements."
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 ................................................................... 3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Nine Months
Ended September 30, 1999 and 1998 ................................................... 4
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months
Ended September 30, 1999 and 1998 ................................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 ................................................... 6
Notes to Consolidated Financial Statements ............................................... 7
</TABLE>
2
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 333,342 $ 490,649
Accounts receivable, net of allowance for doubtful
accounts of $1,127,507 and $1,470,026, respectively .............. 9,592,277 11,172,228
Inventory ........................................................... 7,899,531 8,494,276
Prepaid expenses .................................................... 374,031 132,190
Other current assets ................................................ 119,000 203,000
------------ ------------
TOTAL CURRENT ASSETS ................................................ 18,318,181 20,492,343
PROPERTY, PLANT AND EQUIPMENT, net ....................................... 6,293,631 6,607,631
GOODWILL, net ............................................................ 4,325,436 5,272,666
INTANGIBLE AND OTHER ASSETS, net ......................................... 16,168,240 18,671,480
------------ ------------
TOTAL ASSETS ........................................................ $ 45,105,488 $ 51,044,120
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ...................................................... $ 7,953,014 $ 9,185,425
Current maturities of long-term debt ................................ 6,558,066 5,297,388
Accounts payable .................................................... 5,623,225 8,248,460
Accrued expenses and other current liabilities ...................... 5,918,766 6,370,655
------------ ------------
TOTAL CURRENT LIABILITIES ........................................... 26,053,071 29,101,928
INTEREST PAYABLE ......................................................... 235,975 243,200
LONG-TERM DEBT, net of current maturities ................................ 5,800,615 7,514,504
OTHER LONG-TERM LIABILITIES .............................................. 3,920,000 4,611,000
------------ ------------
TOTAL LIABILITIES ................................................... 36,009,661 41,470,632
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock - $.10 par value; 5,000 shares
authorized; 1,570 and 2,500 shares issued and outstanding ......... 1,302,956 2,257,614
Series B Preferred stock - $.10 par value; 8,000 shares
authorized; 4,700 shares issued and outstanding ................... 4,309,640 4,080,332
Series C Preferred stock - $.10 par value; 2,250 shares
authorized; 750 shares issued and outstanding ..................... 630,281 --
Common stock - $.01 par value; 20,000,000 shares authorized;
6,144,876 and 5,712,205 issued; 5,865,876 and 5,433,205 outstanding 61,449 57,121
Additional paid-in capital .......................................... 22,765,469 21,445,025
Cumulative translation adjustment ................................... (109,687) 441,156
Accumulated deficit ................................................. (19,638,102) (18,481,581)
Treasury stock, at cost, 279,000 common shares ...................... (226,179) (226,179)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .......................................... 9,095,827 9,573,488
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 45,105,488 $ 51,044,120
============ ============
</TABLE>
The accompanying notes are
an integral part of these consolidated financial statements.
3
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES ......................................................... $ 41,766,215 $ 28,854,155
COST OF SALES ..................................................... 27,652,267 17,447,991
----------- -----------
GROSS PROFIT ...................................................... 14,113,948 11,406,164
OPERATING EXPENSES:
Selling, general and administrative .......................... 10,730,809 9,756,990
Research and development ..................................... 639,571 593,960
Depreciation and amortization ................................ 1,997,234 1,572,941
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......................... 746,334 (517,727)
INTEREST EXPENSE .................................................. 1,412,751 1,264,931
GAIN ON INVOLUNTARY CONVERSION AND OTHER, net ..................... (794,695) (20,715)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS, before taxes ............ 128,278 (1,761,943)
PROVISION FOR INCOME TAXES ........................................ 578,000 --
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS ............................... (449,722) (1,761,943)
DISCONTINUED OPERATIONS:
Loss from Operations of Homecare Division .................... -- (352,401)
Loss on Disposal of Homecare Division ......................... -- (978,419)
----------- -----------
NET LOSS .......................................................... ($ 449,722) ($ 3,092,763)
=========== ===========
Preferred Stock Dividends ......................................... (706,799) (1,152,730)
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS ......................... ($ 1,156,521) ($ 4,245,493)
=========== ===========
NET LOSS PER COMMON SHARE INFORMATION:
BASIC AND DILUTIVE
Loss from Continuing Operations .............................. ($ 0.20) ($ 0.60)
Loss from Operations of Homecare Division .................... -- (0.07)
Loss on Disposal of Homecare Division ........................ -- (0.20)
----------- -----------
Net Loss per Common Share - basic and dilutive ............... ($ 0.20) ($ 0.87)
=========== ===========
Shares used in computing basic and dilutive earnings per share 5,726,563 4,898,817
=========== ===========
COMPREHENSIVE LOSS:
Net loss ..................................................... ($ 449,722) ($ 3,092,763)
Foreign currency translation gain (loss) ..................... (550,843) 374,356
----------- -----------
Total Comprehensive Loss ..................................... ($ 1,000,565) ($ 2,718,407)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- ------------
<S> <C> <C>
NET SALES ......................................................... $ 16,618,308 $ 13,365,436
COST OF SALES ..................................................... 12,039,491 7,959,874
----------- ------------
GROSS PROFIT ...................................................... 4,578,817 5,405,562
OPERATING EXPENSES:
Selling, general and administrative .......................... 3,638,613 3,958,502
Research and development ..................................... 216,540 370,194
Depreciation and amortization ................................ 660,255 705,286
----------- ------------
INCOME FROM CONTINUING OPERATIONS ................................. 63,409 371,580
INTEREST EXPENSE .................................................. 492,497 499,160
GAIN ON INVOLUNTARY CONVERSION AND OTHER, net ..................... (17,476) (743)
----------- ------------
LOSS FROM CONTINUING OPERATIONS, before taxes ..................... (411,612) (126,837)
PROVISION FOR INCOME TAXES ........................................ 482,000 --
----------- ------------
NET LOSS FROM CONTINUING OPERATIONS ............................... (893,612) (126,837)
DISCONTINUED OPERATIONS:
Loss from Operations of Homecare Division .................... -- (50,423)
Loss on Disposal of Homecare Division ......................... -- (26,367)
----------- ------------
NET LOSS .......................................................... ($ 893,612) ($ 203,627)
=========== ============
Preferred Stock Dividends ......................................... (115,357) (907,884)
----------- ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS ......................... ($ 1,008,969) ($ 1,111,511)
=========== ============
NET LOSS PER COMMON SHARE INFORMATION:
BASIC AND DILUTIVE
Loss from Continuing Operations .............................. ($ 0.17) ($ 0.19)
Loss from Operations of Homecare Division .................... -- (0.01)
Loss on Disposal of Homecare Division ........................ -- (0.01)
----------- ------------
Net Loss per Common Share - basic and dilutive ............... ($ 0.17) ($ 0.21)
=========== ============
Shares used in computing basic and dilutive earnings per share 5,833,695 5,383,205
=========== ============
COMPREHENSIVE INCOME (LOSS):
Net loss ..................................................... ($ 893,612) ($ 203,627)
Foreign currency translation gain ............................ 185,202 374,356
----------- ------------
Total Comprehensive Income (Loss) ............................ ($ 708,410) $ 170,729
=========== ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ..................................................................... ($ 449,722) ($3,092,763)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense ................................... 1,997,234 1,572,941
Interest expense imputed on notes payable ............................... (7,225) --
Provision for doubtful accounts ......................................... 308,747 842,529
Issuance of common stock for services ................................... 32,500 --
Gain on involuntary conversion .......................................... (797,965) --
Loss on sale of Homecare division ....................................... -- 978,419
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........................... 1,521,204 (244,942)
Decrease in inventory ................................................ 300,866 530,474
Increase in prepaid expenses and other current assets ................ (157,841) (158,069)
(Increase) decrease in other assets .................................. 547,000 (39,253)
Decrease in accounts payable and accrued liabilities ................. (2,967,844) (1,443,842)
----------- -----------
Total adjustments .................................................. 776,676 2,038,257
----------- -----------
Net cash provided by (used in) operating activities ........... 326,954 (1,054,506)
Cash flows from investing activities:
Acquisitions, net of cash acquired ........................................... -- (672,539)
Proceeds from disposal of Homecare ........................................... -- 3,650,000
Capital expenditures ......................................................... (105,639) (1,685,478)
----------- -----------
Net cash provided by (used in) investing activities ................... (105,639) 1,291,983
Cash flows from financing activities:
Net proceeds from issuance of preferred stock and warrants ................... 623,750 6,545,311
Proceeds from issuance of common stock ....................................... 50,000 --
Payments of dividends on preferred stock ..................................... (471,629) (53,071)
Proceeds from involuntary conversion, net of expenses ........................ 975,973 --
Net payments on lines of credit .............................................. (891,411) (6,747,720)
Proceeds from long-term debt ................................................. -- 1,260,000
Principal payments of long-term debt and other liabilities ................... (671,211) (366,315)
----------- -----------
Net cash provided by (used in) financing activities ................... (384,528) 638,205
Effect of translation exchange rate changes on cash ................................. 5,906 --
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................ (157,307) 875,682
Cash and cash equivalents at beginning of period .................................... 490,649 123,620
----------- -----------
Cash and cash equivalents at end of period .......................................... $ 333,342 $ 999,302
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................. $ 1,275,751 $ 1,264,931
Non-cash provision for income taxes resulting in reduction of goodwill $ 578,000 --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of Henley
Healthcare, Inc. (the "Company"), have been prepared in accordance with
generally accepted accounting principles and the rules of the Securities and
Exchange Commission (the "SEC"), and should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in the
Company's latest Annual Report filed with the SEC on Form 10-KSB, as amended. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
consolidated financial statements, which would substantially duplicate the
disclosure contained in the audited consolidated financial statements for the
most recent fiscal year, as reported in the Company's 1998 Form 10-KSB, have
been omitted.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company incurred
significant losses prior to 1999 and had a working capital deficit at September
30, 1999, of $7.7 million. As of September 30, 1999, and through November 12,
1999, the Company was in technical default of certain financial and other
covenants under its bank line of credit which matured October 31, 1999. The
Company also has yet to make an approximate $1.5 million loan payment to Maxxim
Medical which was due May 1, 1999. These factors raise substantial doubt about
the Company's ability to continue as a going concern. As previously disclosed in
the Company's Form 10-KSB for the year ended December 31, 1998, as filed with
the Securities and Exchange Commission, the opinion of Arthur Andersen LLP, the
independent public accountants for the Company, included an explanatory fourth
paragraph stating that the Company's continued operations are dependent upon its
ability to obtain additional financing to meet its obligations as they become
due. 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.
2. NET INCOME PER COMMON SHARE:
Basic earnings per common share is based on the weighted average number of
common shares outstanding during the period, while diluted earnings per common
share considers the dilutive effect of stock options and warrants reflected
under the treasury stock method. The Company has other securities, including
convertible debt and convertible preferred stock, that could potentially dilute
basic earnings per share in the future that were not included in the computation
of diluted earnings per share because to do so would have been antidilutive for
the periods presented.
3. 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. 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. To
more accurately report the profitability of each segment, management has
allocated certain corporate costs that had previously been carried by Henley,
U.S. to Enraf-Nonius for the quarter ended September 30, 1999. The costs
allocated include interest expense, personnel costs and certain selling, general
and administrative costs. Interest expense is allocated based on the average
outstanding intercompany payable from Enraf-Nonius to Henley, U.S. All other
costs are allocated based on either actual amounts incurred by Henley, U.S. that
are directly attributable to Enraf-Nonius or one-half of those centrally
incurred costs that benefit both segments. All prior period amounts, for all
periods presented herein, have been restated to reflect the allocations
described above applied on a consistent basis. The following table summarizes
certain financial information for each of the Company's reportable segments for
the nine and three months ended September 30, 1999 and 1998:
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 Three Months Ended September 30, 1999
HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 15,210,215 $ 26,556,000 $ 41,766,215 $ 4,289,308 $ 12,329,000 $ 16,618,308
Gross Profit ........................ $ 5,963,948 $ 8,150,000 $ 14,113,948 $ 1,569,817 $ 3,009,000 $ 4,578,817
Net Income (loss) before income taxes ($ 312,722) $ 441,000 $ 128,278 ($ 741,612) $ 330,000 ($ 411,612)
Net income (loss) ................... ($ 312,722) ($ 137,000) ($ 449,722) ($ 741,612) ($ 152,000) ($ 893,612)
Nine Months Ended September 30, 1998 Three Months Ended September 30, 1998
HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 19,130,155 $ 9,724,000 $ 28,854,155 $ 6,693,436 $ 6,672,000 $ 13,365,436
Gross Profit ........................ $ 7,604,164 $ 3,802,000 $ 11,406,164 $ 2,859,562 $ 2,546,000 $ 5,405,562
Net Income (loss) before income taxes ($ 1,832,943) $ 71,000 ($ 1,761,943) ($ 5,837) ($ 121,000) ($ 126,837)
Net income (loss) ................... ($ 1,832,943) $ 71,000 ($ 1,761,943) ($ 5,837) ($ 121,000) ($ 126,837)
</TABLE>
4. STOCKHOLDERS' EQUITY:
During the three months ended September 30, 1999, the Company issued
approximately 42,000 shares of common stock in private placements and payments
of debts. Proceeds to the Company totaled $50,000.
5. PRO FORMA FINANCIAL INFORMATION:
Assuming that the Enraf-Nonius acquisition closed on January 1, 1998, sales, net
loss from continuing operations and net loss from continuing operations per
common share would have approximated $40,366,655, ($4,253,443) and ($1.10),
respectively, for the nine months ended September 30, 1998.
6. INVOLUNTARY CONVERSION:
During the first week in April 1999 the Company had a fire at its Sugar Land
manufacturing facility. The fire was contained within the area where the Company
manufactures its Fluidotherapy machines. However, smoke from the fire permeated
the entire building which houses the Company's executive offices as well as the
warehouse that included the Fluidotherapy manufacturing area. The entire
inventory of Fluidotherapy machines and parts on hand were lost to the fire and
the Company was unable to produce Fluidotherapy machines for approximately 10
weeks. Additionally, certain fixed assets and other inventory were damaged by
smoke from the fire which negatively impacted the Company's ability to
manufacture products and service its customers from its Sugar Land facility. All
losses caused by the fire, including business interruption, are fully covered by
insurance. Any assets damaged in the fire have been written off to expense and
charged against insurance proceeds received. The Company has filed all necessary
claims and has received approximately $1.2 million in proceeds through September
30, 1999 from the insurance carrier with respect to claims for the building and
its contents. The Company is currently negotiating with the insurer to determine
the total amount of the claim to be paid for business interruption. At September
30,1999 the Company has accrued approximately $500,000 of additional proceeds in
the accompanying financial statements based on assessments by management and its
independent consultant.
7. INCOME TAXES:
The Company has recorded a provision for income taxes related to net income
earned by its Enraf-Nonius, B.V. subsidiary. At the May 1998 acquisition date
Enraf-Nonius had net operating loss carryforwards available to offset future
income. However, due to Enraf-Nonius' history of incurring operating losses, a
valuation allowance was established, at acquisition, to fully offset the
available net operating loss carryforwards. The provision for income taxes does
not represent an income tax liability due to the expected usage of the available
net operating loss carryforwards. Since the net operating loss carryforwards
have been fully reserved against, the provision for income taxes has been
reflected as a reduction of goodwill associated with the acquisition of
Enraf-Nonius.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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).
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. 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. 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 industries, 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, the
Company's future 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.
During the first week in April 1999, the Company had a fire at its Sugar Land
manufacturing facility. The fire was contained within the area where the Company
manufactures its Fluidotherapy machines. However, smoke from the fire permeated
the entire building which houses the Company's executive offices as well as the
warehouse that included the Fluidotherapy manufacturing area. The entire
inventory of Fluidotherapy machines and parts on hand were lost to the fire and
the Company was unable to produce Fluidotherapy machines for approximately 10
weeks. Additionally, certain fixed assets and other inventory were damaged by
smoke from the fire which negatively impacted the Company's ability to
manufacture products and service its customers from its Sugar Land facility. All
losses caused by the fire, including business interruption, are fully covered by
insurance. Any assets damaged in the fire have been written off to expense and
charged against insurance proceeds received. The Company has filed all necessary
claims and has received approximately $1.2 million in proceeds from the
insurance carrier with respect to claims for the building and its contents. The
Company is currently negotiating with the insurer to determine the total amount
of the claim to be paid for business interruption. At September 30, 1999 the
Company has accrued approximately $500,000 of such proceeds in the accompanying
financial statements based on assessments by management and its independent
consultant.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and other detailed information contained
in the Company's Annual Report for fiscal year 1998 filed with the SEC on Form
10-KSB.
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.(Henley,
U.S.) and Enraf-Nonius. Additionally the results of operations exclude all
amounts related to the Homecare division which was sold in August 1998 and has
been reflected as discontinued operations in the comparative financial
statements for the three and nine months ended September 30, 1998. To more
accurately report the profitability of each segment, management has allocated
certain corporate costs that have been incurred by Henley, U.S. to Enraf-Nonius
for the quarter ended September 30, 1999. The costs allocated include interest
expense, personnel costs and certain selling, general and administrative
9
<PAGE>
costs. Interest expense is allocated based on the average outstanding
intercompany payable from Enraf-Nonius to Henley, U.S using the incremental
borrowing rate of Enraf-Nonius. All other costs are allocated based on either
actual amounts incurred by Henley, U.S. that are directly attributable to
Enraf-Nonius or one-half of those centrally incurred costs that benefit both
segments. All prior period amounts, for all periods presented herein, have been
restated to reflect the allocations described above applied on a consistent
basis.
CONTINUING OPERATIONS
HENLEY HEALTHCARE, INC. -- US
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
During the nine months ended September 30, 1999 the segment recorded net sales
of approximately $15,210,000 reflecting a decrease of approximately $3,920,000
or 20.5% from the amount reported for the nine months ended September 30, 1998.
The decrease was due primarily to (i) a general softness in the market for
medical capital equipment purchases caused by uncertainty of the impact of
previously announced governmental cuts of medical reimbursements which became
effective during 1999, (ii) the fire in April 1999 and (iii) the segment 's
change in its marketing strategy from emphasizing direct sales to emphasizing
dealer network sales. Sales to dealers are made at a discount to full retail but
require less commissions and selling expenses. As a result, gross sales and
gross profit as a percentage of sales are reduced. This reduction in gross
profit was offset by a decrease in commissions and selling expenses.
Additionally, the segment has lost some sales as a result of consolidating its
Garvey and Med-Quip facilities into its existing Akron warehouse location.
However, the loss of revenues has been mitigated by a significant reduction in
operating costs related to the closing of the facilities.
The segment's gross profit for the nine months ended September 30, 1999 was
approximately $5,964,000 compared to approximately $7,604,000 for the nine
months ended September 30, 1998. Gross profit as a percentage of sales remained
constant between the periods. The decrease in gross profit dollars is a direct
result of softness in the market for medical capital equipment purchases, the
fire in April 1999 and the change in the segment 's sales and marketing strategy
from direct sales to dealer network sales.
Selling, general and administrative expenses decreased by approximately
$2,163,000, from approximately $7,317,000 in 1998 to approximately $5,154,000 in
1999, a decrease of approximately 29.6%. Selling, general and administrative
costs decreased as a percentage of revenues from approximately 38.2% for 1998 to
approximately 33.9% for 1999. This decrease was due primarily to: a reduction of
commissions and selling expenses in connection with the segment's change in
marketing strategy from emphasizing direct sales to emphasizing dealer network
sales; removal of infrastructure related to the closure of the Garvey and
Med-Quip facilities; and consolidation of the human resources and payroll
functions during 1999. Selling, general and administrative expenses also
decreased as a result of certain cost reduction initiatives the segment
undertook beginning in June 1998 in order to improve profitability. These
reductions included a reduction in staff levels, an increase in employee
contributions into health benefits, discontinuance of the Company 401(k)
matching contribution, plus other various internal cost cuts.
Research and development expense remained relatively constant between the
periods.
Depreciation and amortization expense decreased $118,000 from $1,091,000 for the
nine months ended September 30, 1998 to $973,000 for the nine months ended
September 30, 1999 primarily as a result of certain non-competition agreements
becoming fully amortized.
Interest expense for the nine months ended September 30, 1999 amounted to
approximately $839,000 compared to approximately $916,000 in 1998. The decrease
in interest expense was primarily due to the conversion of $4,000,000 from debt
to equity in February and March 1998 offset by a three to five percent increase
on the interest rate charged on the segment's bank debt.
Other income increased $805,000 from $33,000 for the nine months ended September
30, 1998 to $838,000 for the nine months ended September 30, 1999 primarily as a
result of the recording of $798,000 of other income (net of related expenses)
pursuant to insurance claims related to the fire in April 1999.
As a result of the foregoing, the segment reported a net loss from continuing
operations of approximately $313,000 for the nine months ended September 30,
1999 compared to a net loss of approximately $1,833,000 for the same period in
1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
During the quarter ended September 30, 1999 the segment recorded net sales of
approximately $4,289,000 reflecting a decrease of approximately $2,404,000 or
35.9% from the amount reported for the quarter ended September 30, 1998. The
decrease was due primarily to softness in the market for medical capital
equipment purchases, the fire in April 1999 and, to a lesser extent, the
segment's change in marketing strategy from one emphasizing direct sales to one
emphasizing dealer network sales, as previously discussed. Additionally, the
segment has lost some sales as a result of consolidating its Garvey and Med-Quip
facilities into its existing Akron
10
<PAGE>
warehouse location, as previously discussed. However, the loss of revenues has
been partially offset by a significant reduction in operating costs related to
the closing of the facilities.
The segment's gross profit for the quarter ended September 30, 1999 was
approximately $1,570,000 compared to approximately $2,859,000 for quarter ended
September 30, 1998. Gross profit as a percentage of sales in 1999 decreased to
36.6% from 42.7% in 1998. The decrease in gross profit percentage is related to
softness in the market for medical capital equipment purchases, the fire in
April 1999 and, to a lesser extent, the change in the segment 's sales and
marketing strategy from direct sales to dealer network sales.
Selling, general and administrative expenses decreased by approximately
$551,000, from approximately $2,209,000 in 1998 to approximately $1,658,000 in
1999, a decrease of approximately 24.9%. This decrease was due primarily to (i)
a reduction of commissions and selling expenses in connection with the change in
the segment's marketing strategy from one emphasizing direct sales to one
emphasizing dealer network sales and (ii) removal of infrastructure related to
the closure of Garvey and Med-Quip facilities. Selling, general and
administrative expenses also decreased as a result of certain cost reduction
initiatives the segment undertook beginning in June through August 1998 in order
to improve profitability. These reductions included 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.
Selling, general and administrative costs increased as a percentage of revenues
from approximately 33.0% for 1998 to approximately 38.7% for 1999. This increase
as a percentage of sales is due primarily to lowered sales as discussed above.
Research and development expense remained relatively constant between the
periods.
Depreciation and amortization expense decreased $42,000 from $364,000 for the
quarter ended September 30, 1998 to $322,000 for the quarter ended September 30,
1999 primarily as a result of certain non-competition agreements becoming fully
amortized.
Interest expense for the quarter ended September 30, 1999 amounted to
approximately $308,000 compared to approximately $239,000 in 1998. The increase
in interest expense was primarily due to a three to five percent increase in the
interest rate on the segment 's bank debt.
Other income increased $40,000 for the quarter ended September 30, 1999 over the
prior year quarter primarily as a result of the recording of $69,000 of other
income (net of related expenses) pursuant to insurance claims related to the
fire in April 1999.
As a result of the foregoing, the segment reported a net loss from continuing
operations of approximately $742,000 for the three months ended September 30,
1999 compared to a net loss of approximately $6,000 for the same period in 1998.
ENRAF-NONIUS
Prior to acquisition by the Company, Enraf-Nonius was part of a larger entity
and did not prepare stand alone financial statements on a monthly basis.
Enraf-Nonius did provide financial statements for the six month period ended
June 30, 1998 for inclusion in the Company's registration statement filed in
August 1998. The following analysis compares the nine months ended September 30,
1999 to the pro forma results for the nine months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. PRO FORMA NINE MONTHS ENDED SEPTEMBER
30, 1998
Net sales during the nine months ended September 30, 1999 were $26,556,000, up
$5,319,000 or 25.0% from $21,237,000 for the nine months ended September 30,
1998. The increase in sales is due primarily to the Company beginning to make
shipments on a significant contract with the Indonesian government in 1999. The
increase in sales was mitigated somewhat with decreased sales caused by the
Company divesting certain operations in Belgium and Germany subsequent to the
acquisition of Enraf-Nonius in May 1998.
Operating costs, including direct costs and selling, general and administrative
costs, increased by $2,566,000 or 11.2% from approximately $22,932,000 for the
nine months ended September 30, 1998 to $25,498,000 for the nine months ended
September 30, 1999. The increase in operating costs relates to increased sales.
Operating costs decreased from 108.0% to 96.0% as a percentage of net sales from
1998 to 1999. This significant decrease in operating costs as a percentage of
sales was related to the Company's management executing its cost reduction plans
with respect to Enraf-Nonius. Specifically, the Company: (1) reduced excessive
research and development, marketing and consulting costs from which Enraf-Nonius
had not been generating an adequate return; (2) reallocated certain technical
expertise included in Enraf-Nonius' workforce to enhance the continued
development of certain of Henley, U.S.'s core products; (3) disposed of certain
operations of Enraf-Nonius which had historically incurred operating losses; and
(4) received approximately $250,000 in research and development subsidies from
the Dutch government. Additionally, revenues from the contract with the
Indonesian government increased the revenue base over which operating costs were
spread.
11
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
During the quarter ended September 30, 1999 the segment recorded net sales of
approximately $12,329,000 reflecting an increase of approximately $5,657,000 or
84.8% from the amount reported for the quarter ended September 30, 1998. The
increase was due primarily to the Company beginning shipments on a significant
contract with the Indonesian government during the third quarter of 1999.
The segment's gross profit for the quarter ended September 30, 1999 was
approximately $3,009,000 compared to approximately $2,546,000 for quarter ended
September 30, 1998. Gross profit as a percentage of sales in 1999 decreased to
24.4% from 38.2% in 1998. Both the increase in gross profit dollars and the
decrease in gross profit as a percentage of sales are related to the project
with the Indonesian government as the gross margin on this project is less than
the gross profit historically achieved on recurring sales.
Selling, general and administrative expenses increased by approximately
$231,000, from approximately $1,750,000 in 1998 to approximately $1,981,000 in
1999, an increase of approximately 13.2%. This increase was due primarily to
increasesd selling general and administrative expenses incurred to service the
contract with the Indonesian government.
Research and development expense decreased$164,000 from $340,000 for the quarter
in 1998 to $176,000 for the quarter in 1999. This decrease was the result of the
Company ending several consulting relationships which were in effect during the
1998 quarter.
Depreciation and amortization expense remained relatively constant between the
quarters presented.
Interest expense for the quarter ended September 30, 1999 amounted to
approximately $184,000 compared to approximately $260,000 in 1998. The decrease
in interest expense was primarily due to the Company maintaining a lower average
balance on its line of credit with a bank.
The Company has recorded a provision for income taxes related to net income
earned by its Enraf-Nonius, B.V. subsidiary. At the May 1998 acquisition date
Enraf-Nonius had net operating loss carryforwards available to offset future
income. However, due to Enraf-Nonius' history of incurring operating losses a
valuation allowance was established, at acquisition, to fully offset the
available net operating loss carryforwards. The provision for income taxes does
not represent an income tax liability due to the expected usage of the available
net operating loss carryforwards. Since the net operating loss carryforwards
have been fully reserved against, the provision for income taxes has been
reflected as a reduction of goodwill associated with the acquisition of
Enraf-Nonius.
Management believes that the continued successful implementation of cost
reductions and the potential synergies to be gained by combining Henley, U.S.'s
product manufacturing capabilities 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current sources of liquidity consist primarily of (i) funds from
operations, (ii) funds held at September 30, 1999, and (iii) 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 September 30, 1999, the Company had cash and
cash equivalents in the amount of $333,000 as compared to $491,000 at December
31, 1998. At September 30, 1999, the Company had no material capital expenditure
commitments.
The Company's Amended Loan Agreement with a bank provides for (i) a revolving
loan ("Line of Credit"), which permits borrowings up to $6,000,000 expiring on
August 15, 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 five percent per annum. Term Note B is
callable by the bank beginning on the fifth anniversary of the Amended Loan
Agreement. All of the borrowings from a bank are secured by substantially all of
the assets of the Company. As of September 30, 1999, the Company had no
availability 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 and September 30, 1999, 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 November 12, 1999, such debt has been classified as a
current liability in the accompanying balance sheet as of September 30, 1999.
12
<PAGE>
Additionally, the Company has yet to make a scheduled loan payment of
approximately $1,500,000 due on May 1, 1999 under one of its debt agreements
with Maxxim Medical, Inc. ("Maxxim"). At September 30, 1999, the Company had a
working capital deficit of $7,735,000 and a current ratio of 0.70 to 1 as
compared to a working capital deficit of $8,610,000 and a current ratio of 0.70
to 1 at December 31, 1998. The Company is seeking to replace its current bank
financing with a different source of funding.
In connection with an agreement entered into in April 1996 with Maxxim, the
Company issued to Maxxim a convertible subordinated promissory note in the
principal amount of $7 million (the "Note"). Among other terms, the Note is
subordinated to the Line of Credit and Term Notes with a bank, and 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.
In connection with the acquisition of 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 $2,010,000 at September 30,1999,
and is subject to interest, payable monthly, at the rate of AIBOR plus 1 percent
per annum. The Enraf-Nonius Credit Facility is secured by Enraf-Nonius' accounts
receivable, inventory and certain fixed assets and renews annually.
In July 1999 Enraf-Nonius was selected as a contractor to assist in providing
approximately $30 million of medical equipment and services to physical therapy
and rehabilitation facilities in 54 public hospitals throughout 23 provinces in
Indonesia over an 18 month period.
Financing of the project to the Indonesian government is provided pursuant to a
subsidy program initiated by the Dutch government. Payment is guaranteed through
the issue of a letter of credit with ABN-Amro Bank in the Netherlands. The
financing of working capital is provided to Enraf-Nonius by The Netherlands
based Banque Artesia.
In April 1999, the Company sold 750 units consisting of (i) one share of the
Company's Series C Convertible Preferred Stock, par value $.10 per share,
convertible into shares of the Company's common stock, and (ii) a warrant to
acquire 166.667 shares of common stock. The units were sold for a purchase price
of $1,000 per unit, resulting in $623,750 of net proceeds to the Company. The
Company allocated $136,875 of the proceeds received to the value of the warrants
based on the estimated fair value of the warrants at issue date. The Series C
Preferred Stock bears no dividends and is convertible into common stock at a per
share price equal to the lesser of (i) $2.875 or (ii) the product of 0.87 and
the average of the closing bid prices for the Company's common stock for any
three consecutive trading days during the twenty day period immediately prior to
the conversion date. Initial terms of the Series C Preferred Stock contained a
conversion floor price that could be removed if the Company did not attain
certain financial milestones. On June 30, 1999 it was determined that the
Company did not achieve one of said milestones. As a result of the guaranteed
discount created by the removal of the conversion floor price, the Company will
incur a deemed dividend in the future for the conversion of the Series C
Preferred Stock. This aggregate discount amount of $184,864 has been treated as
a dividend to the holders of the Series C Preferred Stock. The proceeds were
used primarily to repay penalties and outstanding accrued dividends related to
the Series A Preferred Stock. Pursuant to the issuance of the Series C Preferred
Stock, the Company amended its agreement with the holders of the Series B
Preferred Stock to reduce the conversion price and to reduce the exercise price
of warrants sold in connection with the Series B Preferred Stock. Specifically,
the conversion price ceiling was lowered from approximately $5.81 to $4.00 per
share. Additionally, the conversion price on the warrants held by the Series B
Preferred shareholders was reduced from $5.90 per share to $2.64. This reduction
of the exercise price on the warrants held by the Series B shareholders
represents a deemed dividend for the incremental value of the warrants with the
new exercise price versus the previous exercise price. Accordingly, the deemed
dividend is reflected as a reduction of income available to common shareholders
on the accompanying statements of operations for the nine months ended September
30, 1999. The deemed dividend of $229,308 was computed based on values
calculated by a Black-Scholes option pricing model.
The Company is seeking to replace its current credit facility with a different
source of funding. In addition, the Company is attempting to reschedule the loan
payment due under the Note to Maxxim. However, there can be no assurance that
the Company will be able to obtain a sufficient replacement credit facility or
reschedule the loan payment due under the Note 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) its current resources, (ii) the anticipated positive cash flows from
operations for the remainder of 1999, and (iii) funds available under the
expected new credit facility and the Enraf-Nonius Credit Facility will be
sufficient to eliminate the working capital deficit that existed at September
30, 1999 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
13
<PAGE>
Company's operating cash flows are inadequate or if the Company is unable to
attract 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 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.
Henley, U.S. upgraded its information systems during 1999. As a result of the
upgrade, all of the Henley, U.S. operating software and hardware is Y2K
compliant as guaranteed by the sellers of the products purchased by Henley,
U.S..
Henley, U.S. initiated formal communications with material third parties to
determine the extent to which Henley, U.S. 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 Henley, U.S. operations.
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 $10,000 and $15,000. 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
the Company believes that the products currently being sold or still being
serviced will not be affected by the Y2K issue.
The Company estimates that any additional 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
14
<PAGE>
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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
The following sales of unregistered securities occurred during the three months
ended September 30, 1999, in private transactions in which the Company relied on
the exemption from registration available under Section 4(2) of the Securities
Act of 1993, as amended, and Rule 506 of Regulation D promulgated thereunder:
(1) During the three months ended September 30, 1999 the Company issued
approximately 42,000 shares of common stock pursuant to private placements
and payments of debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 2, 1999. The
holders of 4,660,903 shares of the Company's common stock were present at the
meeting in person or by proxy and elected a board of six directors.
The shareholders voted as follows and elected the following persons to serve as
directors of the Company until the next annual meeting of stockholders and until
their successors are duly elected and qualified:
NUMBER OF NUMBER OF
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
Michael M. Barbour............... 4,647,533 13,370
Chadwick F. Smith, MD............ 4,647,533 13,370
Dan D. Sudduth................... 4,647,533 13,370
Pedro A. Rubio. MD, Ph.D......... 4,647,533 13,370
Kenneth W. Davidson.............. 4,647,533 13,370
Ernest J. Henley, Ph.D........... 4,647,533 13,370
Additionally, the shareholders voted on certain matters to amend the Series C
Preferred Stock and the Series B Preferred Stock.
The shareholders voted as follows to approve the amendments to the Series C
Preferred Stock and the Series B Preferred Stock:
NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
3,688,581 55,448 22,407
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits, from which schedules and exhibits have been
omitted and will be furnished to the Commission upon its request, are
filed with this Current Report on Form 10-QSB:
EXHIBIT
NO. DESCRIPTION
------- -----------
*10.3 -- Contract between the Ministry of Health of the
Republic of Indonesia and Enraf-Nonius B.V. Project
Division (ENP) for the development of medical
rehabilitation services in Indonesia.
27.1 -- Financial Data Schedule for the nine
months ended September 30, 1999.
- -----------
* Incorporated herein by reference to the Company's Current Report on Form 10-Q
filed on August 16, 1999.
16
<PAGE>
(B) REPORTS ON FORM 8-K
Form 8-K filed on July 13, 1999.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HENLEY HEALTHCARE, INC.
(Registrant)
Date: November 15, 1999 By: /s/ DAN D. SUDDUTH
Dan D. Sudduth
Executive Vice President,
Chief Financial Officer and
Secretary
(on behalf of the Company and as
Chief Accounting Officer)
18
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 333,342
<SECURITIES> 0
<RECEIVABLES> 10,719,784
<ALLOWANCES> (1,127,507)
<INVENTORY> 7,899,531
<CURRENT-ASSETS> 18,318,181
<PP&E> 9,241,588
<DEPRECIATION> (2,947,957)
<TOTAL-ASSETS> 45,105,488
<CURRENT-LIABILITIES> 26,053,071
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6,242,877
<COMMON> 61,449
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<CGS> 27,652,267
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