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 MARCH 31, 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 May 10, 1999, the issuer had 5,789,820 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
PAGE
------
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998................................................ 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998.................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998.................................... 5
Notes to Consolidated Financial Statements.......................... 6
2
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 363,100 $ 490,649
Accounts receivable, net of allowance for doubtful
accounts of $1,546,564 and $1,470,026, respectively ...... 10,626,480 11,172,228
Inventory .................................................. 7,675,572 8,494,276
Prepaid expenses ........................................... 280,202 132,190
Other current assets ....................................... 180,000 203,000
------------ ------------
TOTAL CURRENT ASSETS ....................................... 19,125,354 20,492,343
PROPERTY, PLANT AND EQUIPMENT, net .......................... 6,262,868 6,607,631
GOODWILL, net ............................................... 5,123,922 5,272,666
INTANGIBLE AND OTHER ASSETS, net ............................ 17,005,398 18,671,480
------------ ------------
TOTAL ASSETS ............................................... $ 47,517,542 $ 51,044,120
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ............................................. $ 8,399,094 $ 9,185,425
Current maturities of long-term debt ....................... 5,158,947 5,297,388
Accounts payable ........................................... 7,698,928 8,248,460
Accrued expenses and other current liabilities ............. 5,414,512 6,370,655
------------ ------------
TOTAL CURRENT LIABILITIES .................................. 26,671,481 29,101,928
INTEREST PAYABLE ............................................ 253,700 243,200
LONG-TERM DEBT, net of current maturities ................... 7,013,556 7,514,504
OTHER LONG-TERM LIABILITIES ................................. 4,218,000 4,611,000
------------ ------------
TOTAL LIABILITIES .......................................... 38,156,737 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 .......... 4,080,332 4,080,332
Common stock - $.01 par value; 20,000,000 shares authorized;
6,068,820 and 5,712,205 shares issued; 5,789,820 and
5,433,205 shares outstanding ............................. 60,688 57,121
Additional paid-in capital ................................. 22,466,844 21,445,025
Cumulative translation adjustment .......................... (27,844) 441,156
Accumulated Deficit ........................................ (18,295,992) (18,481,581)
------------ ------------
9,586,984 9,799,667
Treasury stock, at cost, 279,000 common shares ............. (226,179) (226,179)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................. 9,360,805 9,573,488
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 47,517,542 $ 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
(Unaudited)
Three Months Ended March 31,
1999 1998
------------ -------------
NET SALES ...................................... $ 13,338,016 $ 6,340,224
COST OF SALES .................................. 8,367,329 3,137,227
------------ ------------
GROSS PROFIT ................................... 4,970,687 3,202,997
OPERATING EXPENSES:
Selling, general and administrative ......... 3,340,907 2,575,183
Research and development .................... 264,399 47,578
Depreciation and amortization ............... 662,937 308,075
------------ ------------
INCOME FROM CONTINUING OPERATIONS .............. 702,444 272,161
INTEREST EXPENSE ............................... 467,628 378,795
OTHER (INCOME) EXPENSE, net .................... (18,014) 5,665
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ....... $ 252,830 ($ 112,299)
DISCONTINUED OPERATIONS:
Income from Operations of Homecare Division . 0 204,309
------------ ------------
NET INCOME ..................................... $ 252,830 $ 92,010
============ ============
Preferred Stock Dividends ...................... (67,241) (68,000)
------------ ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS .... $ 185,589 $ 24,010
============ ============
NET INCOME PER COMMON SHARE - basic and diluted:
Income (Loss) from Continuing Operations .... $ 0.03 ($ 0.04)
Income from Operations of Homecare Division . $ -- $ 0.05
------------ ------------
NET INCOME PER COMMON SHARE - basic and diluted $ 0.03 $ 0.01
============ ============
SHARES USED IN COMPUTING NET INCOME PER
COMMON SHARE - basic and diluted ............ 5,534,825 3,913,896
============ ============
COMPREHENSIVE INCOME (LOSS):
Net Income .................................. $ 252,830 $ 92,010
Foreign Currency Translation Adjustment ..... (469,000) --
------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) .............. ($ 216,170) $ 92,010
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
HENLEY HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income ................................................... $ 252,830 $ 92,010
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization expense ................... 662,937 308,075
Interest expense imputed on notes payable ............... 10,500 59,500
Provision for doubtful accounts ......................... 61,448 107,031
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .............. 484,300 (739,899)
(Increase) decrease in inventory ........................ 818,704 (5,360)
(Increase) decrease in prepaid expenses and other current (125,012) 97,891
Decrease in other assets ................................ -- 2,118
Decrease in accounts payable and accrued liabilities .... (1,502,189) (479,539)
----------- -----------
Total adjustments ..................................... 410,688 (650,183)
----------- -----------
Net cash provided by (used in) operating activities ..... 663,518 (558,173)
Cash flows from investing activities:
Acquisitions, net of cash acquired ........................... -- 8,230
Capital expenditures ......................................... (4,350) (1,402,819)
----------- -----------
Net cash used in investing activities ................... (4,350) (1,394,589)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock and warrants ... -- 1,800,000
Net payments on lines of credit .............................. (493,331) (194,694)
Proceeds from long-term debt ................................. -- 1,260,000
Principal payments of long-term debt and other liabilities ... (196,389) (107,432)
----------- -----------
Net cash provided by (used in) financing activities ..... (689,720) 2,757,874
Effect of translation exchange rate changes on cash ................ (96,997) --
----------- -----------
Net increase (decrease) in cash and cash equivalents ............... (127,549) 805,112
Cash and cash equivalents at beginning of period ................... 490,649 123,620
----------- -----------
Cash and cash equivalents at end of period ......................... $ 363,100 $ 928,732
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for interest .......................... $ 350,433 $ 105,586
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
HENLEY HEALTHCARE, INC.
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. For the year ended December
31, 1998, the Company incurred a net loss of $5.8 million and had a working
capital deficit at March 31, 1999, of $7.5 million. As of March 31, 1999, and
through May 10, 1999, the Company was in default of certain financial and other
covenants under its bank line of credit which expires May 31, 1999. The Company
also has yet to make 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. 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. FINANCINGS:
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, for a purchase price of $1,000 per unit,
resulting in $623,750 of net proceeds to the Company. The Series C Preferred
Stock bears no dividends and is 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 were used primarily to repay penalties and
accrued dividends outstanding 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
exercise price on the warrants held by the Series B Preferred shareholders was
reduced from $6.00 per share to $2.64.
3. 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. Both basic and diluted earnings per common
share are the same for each of the periods presented. 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.
4. 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.
6
<PAGE>
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 three months ended March 31, 1999:
<TABLE>
<CAPTION>
HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers....... $6,123,016 $7,215,000 $13,338,016
Net Income................................. 134,830 118,000 252,830
</TABLE>
5. STOCKHOLERS' EQUITY:
In January 1999, the Company issued 8,000 shares of common stock to settle a
lawsuit against the Company.
6. PRO FORMA FINANCIAL INFORMATION
Assuming that the Enraf-Nonius acquisition closed on January 1, 1998, sales,
net loss and net loss per common share would have approximated $13,622,474,
($1,239,549) and ($0.32), respectively, for the three months ended March 31,
1998.
7
<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).
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 the Henley Division in April 1996, 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, 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 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, 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 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. and
Enraf-Nonius. Additionally the results of operations exclude all amounts related
to the Homecare division which was sold during August 1998 and has been
reflected as discontinued operations in the comparative financial statements for
the three months ended March 31, 1998.
CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
HENLEY HEALTHCARE, INC. -- US
During the quarter ended March 31,1999 the Company recorded net sales of
approximately $6,123,000 reflecting a decrease of approximately $217,000 or 3.4
percent from the amount reported for quarter ended March 31, 1998. The decrease
was due to the Company's change in focus from more of a direct sales effort to a
dealer network sales effort. 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 is offset by a decrease in commissions and selling expenses. The
Company completed its move towards a dealer network sales effort during the
second quarter of 1998.
8
<PAGE>
The Company's gross profit for the quarter ended March 31, 1999 was
approximately $2,343,000 compared to approximately $3,203,000 for quarter ended
March 31, 1998. Gross margin as a percentage of sales in 1999 decreased to 38.3
percent from 50.5 percent in 1998. As discussed above, the decrease in gross
profit and gross profit percentage are a result of the change in the Company's
sales and marketing strategy from direct sales to dealer network sales.
Sales, general and administrative expenses decreased by approximately
$1,038,000, from approximately $2,575,000 in 1998 to approximately $1,537,000 in
1999, a decrease of approximately 40.3 percent. Sales, general and
administrative costs decreased as a percentage of revenues from approximately
40.6 percent for 1998 to approximately 25.1 percent for 1999. This decrease was
due primarily to a reduction of commissions and selling expenses in connection
with the Company's move from a direct sales effort to more of a dealer network.
Sales, general and administrative expenses also decreased as a result of 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 remained relatively constant between the
periods, decreasing $10,000 from $48,000 for the quarter ended March 31, 1998 to
$38,000 for the quarter ended March 31, 1999.
Depreciation and amortization expense remained relatively constant between the
periods, increasing $10,000 from $308,000 for the quarter ended March 31, 1998
to $318,000 for the quarter ended March 31, 1999.
Interest expense for the quarter ended March 31, 1999 amounted to approximately
$333,000 compared to approximately $379,000 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.
As a result of the foregoing, the Company reported net income from continuing
operations of approximately $135,000 for the three months ended March 31, 1999
compared to a net loss of approximately $113,000 for the same period in 1998.
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 consulting 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 10
month period from acquisition through March 31, 1999, Enraf-Nonius generated
revenues of $25,250,000 which contributed gross profit of $9,339,000 or 37.0
percent and net income of $673,000 or 2.7 percent. Operating expenses for the 10
month period ended March 31, 1999, were approximately $8,013,000 or 31.7 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.
Since Enraf-Nonius was acquired May 29, 1998, no comparable financial data for
the three months ended March 31, 1998 is available. During the three months
ended March 31, 1999, Enraf-Nonius recorded net sales of $7,215,000 and earned
gross profit of $2,628,000 or 36.4% of net sales. Sales, general and
administrative costs were $1,775,000 or 24.6% of net sales. Research and
development costs were $884,000 and depreciation and amortization totaled
$345,000. Net income for the three months ended March 31, 1999 was $118,000 or
1.6% of net sales.
Management believes that the successful implementation of cost reductions and
the potential synergies to be gained by combining Henley'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) proceeds from the sale of the Series C Preferred Stock in April
1999, (iii) funds held at March 31, 1999, 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 March 31, 1999, the Company had cash and cash
equivalents in the amount of $363,100 as compared to $491,000 at December 31,
1998. At March 31, 1999, the Company had no material capital expenditure
commitments.
9
<PAGE>
The Company's Amended Loan Agreement with Comerica Bank provides for (i) a
one-year revolving loan ("Line of Credit"), which permits borrowings up to
$6,000,000 through May 31, 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 three 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 March 31,
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 March 31, 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 or the
related term notes as of May 14, 1999, such debt has been classified as a
current liability in the accompanying balance sheet as of March 31, 1999.
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. As
a result, as of March 31, 1999, the Company had a working capital deficit of
$7,546,000 and a current ratio of 0.72 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
and expects to have a new credit facility in place within the next few months.
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 $2,400,000 at March 31,1999, 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. At March 31,
1999, approximately $361,000 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 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
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
10
<PAGE>
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 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, for a purchase price of $1,000 per
unit, resulting in $623,750 of net proceeds to the Company. The Series C
Preferred Stock bears no dividends and is 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 were used primarily to repay
penalties and accrued dividends outstanding 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 $6.00 per share to $2.64.
The Company's $6,000,000 Line of Credit under the Amended Loan Agreement with
Comerica is currently set to expire on May 31, 1999. In addition, a loan payment
of $1,500,000 to Maxxim was due on May 1, 1999 under the Note. As a result, the
Company is seeking 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 few 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 anticipated 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 March 31, 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 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.
11
<PAGE>
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.
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 operations, 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 $10,000 and $15,000.
The embedded software in the Enraf-Nonius products has also been reviewed and
the Company believes that the products currently being sold or serviced will not
be affected by the Y2K issue.
12
<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 March 31, 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:
On January 22, 1999, the Company issued 8,000 shares of common stock to settle a
lawsuit against the Company.
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
-------- -------------
*3.1 -- Statement of Designation of Rights and Preferences
of the Series C Convertible Preferred Stock of the
Company.
*3.2 -- Articles of Amendment to the Company's Articles of
Incorporation amending the Statement of Designation of
Rights and Preferences of the Series B Convertible
Preferred Stock.
*4.1 -- Registration Rights Agreement dated as of April 12,
1999, by and among the Company, Zanett Lombardier,
Ltd. and Zanett Securities Corporation.
*4.2 -- Form of Series C Warrant.
*4.3 -- Amendment and Exchange Agreement dated as of April
12, 1999, between the Company, Zanett Lombardier,
Ltd., Goldman Sachs Performance Partners, L.P., Golman
Sachs Performance Partners (Offshore), L.P. and Zanett
Securities Corporation.
*4.4 -- Form of Replacement Series B Warrant.
*10.1 -- Securities Purchase Agreement dated as of April 12,
1999, between the Company and Zanett Lombardier, Ltd.
*10.2 -- Placement Agency Agreement dated as of April 12,
1999 between the Company and Zanett Securities
Corporation.
27.1 -- Financial Data Schedule for the three months ended
March 31, 1999.
- -----------
* Incorporated herein by reference to the Company's Current Report on Form 8-K
filed on April 20, 1999.
13
<PAGE>
(B) REPORTS ON FORM 8-K
During the three months ended March 31, 1999, the Company filed the
following Current Reports on Form 8-K:
(1) January 28,1999 - Amendment to Form 8-K filed on June 15, 1998; and
(2) January 28, 1999 - Form 8-K.
In addition, the Company filed a Current Report on Form 8-K on April 20,
1999.
14
<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: May __ , 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)
15
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 363,100
<SECURITIES> 0
<RECEIVABLES> 12,173,004
<ALLOWANCES> (1,546,564)
<INVENTORY> 7,675,572
<CURRENT-ASSETS> 19,125,354
<PP&E> 8,800,428
<DEPRECIATION> (2,537,560)
<TOTAL-ASSETS> 47,517,542
<CURRENT-LIABILITIES> 26,671,481
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0
5,383,288
<COMMON> 60,688
<OTHER-SE> 3,916,829
<TOTAL-LIABILITY-AND-EQUITY> 47,517,542
<SALES> 13,338,016
<TOTAL-REVENUES> 13,338,016
<CGS> 8,367,329
<TOTAL-COSTS> 4,268,243
<OTHER-EXPENSES> (18,014)
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<INTEREST-EXPENSE> 467,628
<INCOME-PRETAX> 252,830
<INCOME-TAX> 0
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