UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _______________
COMMISSION FILE NUMBER 0-28566
HENLEY HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT 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
(REGISTRANT'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 15, 2000, the registrant had 7,356,240 shares of common stock
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this report are forward-looking
statements. These forward looking statements include, without limitation,
statements regarding the Company's estimate of the sufficiency of its existing
capital resources and its ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
the timing of regulatory approvals required to market certain of the Company's
products. Although the Company believes that the expectations reflected in these
forward looking statements are reasonable, it can not give any assurance that
such expectations reflected in these forward looking statements will prove to
have been correct.
When used in this report, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Since these forward-looking statements involve
risks and uncertainties, actual results could differ materially from those
expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report.
These statements should be read carefully because they discuss the
Company's expectations about its future performance, contain projections of its
future operating results or its future financial condition, or state other
"forward-looking" information. Investors in the Company's common stock should be
aware that the occurrence of any of the events that constitute risk for the
Company as described in this report could substantially harm the Company's
business, results of operations and financial condition and that upon the
occurrence of any of these events, the trading price of the Company's common
stock could decline, and the investor could lose all or part of their
investment.
The Company cannot guarantee any future results, levels of activity,
performance or achievements. Except as required by law, the Company undertakes
no obligation to update any of the forward-looking statements contained herein
after the date of this report.
ITEM 1. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
in the "Index to Consolidated Financial Statements."
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999................................................ 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999.................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999.................................... 5
Notes to Consolidated Financial Statements.......................... 6
2
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 368,367 $ 535,294
Accounts receivable, net of allowance for doubtful
accounts of $797,338 and $756,407, respectively .................... 6,533,606 7,695,984
Inventory ............................................................. 9,557,244 11,264,286
Prepaid expenses ...................................................... 88,476 220,643
Other current assets .................................................. 113,965 116,200
------------ ------------
TOTAL CURRENT ASSETS .................................................. 16,661,658 19,832,407
PROPERTY, PLANT AND EQUIPMENT, net ........................................ 5,599,658 5,901,070
INTANGIBLE AND OTHER LONG-LIVED ASSETS, net ............................... 16,734,425 17,315,359
------------ ------------
TOTAL ASSETS .......................................................... $ 38,995,741 $ 43,048,836
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ........................................................ $ 9,230,967 $ 9,670,200
Current maturities of long-term debt .................................. 7,530,131 7,324,205
Accounts payable ...................................................... 6,083,504 7,220,012
Accrued expenses and other current liabilities ........................ 4,882,290 6,707,485
------------ ------------
TOTAL CURRENT LIABILITIES ............................................. 27,726,892 30,921,902
INTEREST PAYABLE .......................................................... 445,800 364,774
LONG-TERM DEBT, net of current maturities ................................. 5,377,653 4,579,711
OTHER LONG-TERM LIABILITIES ............................................... 1,761,000 3,100,000
------------ ------------
TOTAL LIABILITIES ..................................................... 35,311,345 38,966,387
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.10 par value; 2,500,000 shares authorized; Series A
Preferred stock - 5,000 shares authorized;
395 and 1,035 shares issued and outstanding ....................... 39 103
Series B Preferred stock - 8,000 shares authorized;
3,894 and 4,700 shares issued and outstanding ..................... 389 470
Series C Preferred stock - 2,250 shares authorized;
750 shares issued and outstanding ................................. 75 75
Common stock - $.01 par value; 20,000,000 shares authorized;
7,257,570 and 6,411,139 issued; 6,978,570 and 6,132,139 outstanding .. 72,575 64,111
Additional paid-in capital ............................................ 29,600,202 29,337,454
Cumulative translation adjustment ..................................... (226,723) (493,528)
Accumulated deficit ................................................... (25,535,982) (24,600,057)
Treasury stock, at cost, 279,000 common shares ........................ (226,179) (226,179)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................ 3,684,396 4,082,449
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 38,995,741 $ 43,048,836
============ ============
</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 LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES ............................................ $ 13,689,178 $ 13,338,016
COST OF SALES ........................................ 9,594,762 8,367,329
------------ ------------
GROSS PROFIT ......................................... 4,094,416 4,970,687
OPERATING EXPENSES:
Selling, general and administrative ............... 3,711,125 3,340,907
Research and development .......................... 97,279 264,399
Depreciation and amortization ..................... 693,599 662,937
------------ ------------
INCOME (LOSS) FROM OPERATIONS ........................ (407,587) 702,444
INTEREST EXPENSE ..................................... 407,648 467,628
OTHER (INCOME) EXPENSE, net .......................... (55,310) (18,014)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .................... (759,925) 252,830
PROVISION FOR INCOME TAXES ........................... 176,000 --
------------ ------------
NET INCOME (LOSS) .................................... $ (935,925) $ 252,830
============ ============
Preferred Stock Dividends ............................ (151,945) (67,241)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ... $ (1,087,870) $ 185,589
============ ============
NET INCOME (LOSS) PER COMMON SHARE - basic and diluted $ (0.14) $ 0.03
============ ============
SHARES USED IN COMPUTING NET INCOME (LOSS) PER
COMMON SHARE - basic and diluted .................. 6,573,804 5,534,825
============ ============
COMPREHENSIVE INCOME (LOSS):
Net Income (Loss) ................................. $ (935,925) $ 252,830
Foreign Currency Translation Gain (Loss) .......... 266,805 (469,000)
------------ ------------
TOTAL COMPREHENSIVE LOSS ............................. $ (669,120) $ (216,170)
============ ============
</TABLE>
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,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ................................................... $ (935,925) $ 252,830
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization expense .......................... 693,599 662,937
Interest expense imputed on notes payable ...................... -- 10,500
Provision for doubtful accounts ................................ 63,600 61,448
Changes in operating assets and liabilities:
Decrease in accounts receivable ................................ 1,162,378 484,300
Decrease in inventory .......................................... 1,707,042 818,704
(Increase) decrease in prepaid expenses and other current assets 134,402 (125,012)
Decrease in accounts payable and accrued liabilities ........... (3,015,612) (1,502,189)
----------- -----------
Total adjustments ........................................... 745,409 410,688
----------- -----------
Net cash provided by (used in) operating activities ............ (190,516) 663,518
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (6,267) (4,350)
----------- -----------
Net cash used in investing activities .......................... (6,267) (4,350)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock and warrants .......... 84,416 --
Net payments on lines of credit ..................................... (244,233) (493,331)
Principal payments of long-term debt and other liabilities .......... (77,132) (196,389)
----------- -----------
Net cash used in financing activities .......................... (236,949) (689,720)
EFFECT OF TRANSLATION EXCHANGE RATE CHANGES ON CASH ........................ 266,805 (96,997)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................. (166,927) (127,549)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 535,294 490,649
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 368,367 $ 363,100
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for interest .................................. $ 255,206 $ 350,433
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<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. and Subsidiaries (collectively, the "Company"), have
been prepared in accordance with accounting principles generally accepted in the
United States and the rules of the United States 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 1999 Form 10-KSB, as
amended, have been omitted.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the quarter
ended March 31, 2000, the Company incurred a net loss of approximately $760,000
and had a working capital deficit at March 31, 2000, of approximately $11
million. As of December 31, 1999, and through May 22, 2000, the Company was in
default of certain financial and other covenants under its bank Line of Credit
which expired March 3, 2000. The Company also has two past due loan payments
totaling approximately $3.0 million. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company must quickly
obtain substantial amounts of working capital in order to successfully continue
operations. In addition, the Company needs substantial additional capital to
satisfy its outstanding debt obligations as well as to pay its outstanding trade
payables and overdue royalty obligations. In order to secure such working
capital, the Company must renegotiate its long-term debt and sell considerable
amounts of its equity securities. The Company is currently in negotiations for
such additional financing and could also pursue a sale of some of its assets,
although there can be no assurance that the Company will be successful in any of
these financing efforts. As previously disclosed in the Company's Form 10-KSB
for the year ended December 31, 1999, 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
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. LOSS PER COMMON SHARE:
Basic income (loss) per common share is based on the weighted average
number of common shares outstanding during the period, while diluted income
(loss) per common share considers the dilutive effect of stock options and
warrants reflected under the treasury stock method. Both basic and diluted
income (loss) 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 income (loss) per share in
the future that were not included in the computation of diluted income (loss)
per share because to do so would have been antidilutive for the periods
presented.
3. SEGMENT REPORTING:
The Company has two 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.
6
<PAGE>
To more accurately report the profitability of each segment, management
has allocated to Enraf-Nonius certain corporate costs that have been incurred by
Henley-U.S. for the quarter ended March 31, 2000. The allocated costs include
interest expense, personnel costs and certain selling, general and
administrative costs. Interest expense is allocated based on the average
outstanding inter-company 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 consistently reflect the allocations.
The following table summarizes certain financial information for each of
the Company's reportable segments for the three months ended March 31, 2000 and
1999:
<TABLE>
<CAPTION>
HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
2000
Revenues from unaffiliated customers . $ 3,203,000 $ 10,486,000 $ 13,689,000
Gross Profit ......................... 1,223,000 2,871,000 4,094,000
Net Income (loss) before income taxes (993,000) 233,000 (760,000)
Net Income (loss) .................... (993,000) 57,000 (936,000)
1999
Revenues from unaffiliated customers . $ 6,123,000 $ 7,215,000 $ 13,338,000
Gross Profit ......................... 2,343,000 2,628,000 4,971,000
Net Income (loss) before income taxes 135,000 118,000 253,000
Net Income ........................... 135,000 118,000 253,000
</TABLE>
4. STOCKHOLDERS' EQUITY:
In January 2000, the Company received $84,416 in subscriptions for common
stock warrants pursuant to its November 1999 private placement offering of such
warrants, which expired in February 2000.
During March 2000, the Company issued 30,738 shares of its Common Stock as
compensation for services received and recorded related compensation expense of
$25,375 based on the market price of the Common Stock on the measurement dates.
During the quarter ended March 31, 2000, certain holders of the Company's
Series A Preferred Stock converted an aggregate of 640 shares of preferred stock
into an aggregate of 316,538 shares of common stock, and certain holders of the
Company's Series B Preferred Stock converted an aggregate of 806 shares of
preferred stock into an aggregate of 674,050 shares of common stock.
5. INCOME TAXES:
The Company has recorded a provision for income taxes related to net
income earned by its Enraf-Nonius, B.V. subsidiary. This provision 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.
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) maximize the utilization of existing
facilities for increased productivity, (iii) achieve and maintain profitability,
(iv) reduce indebtedness, and (v) obtain approval from the FDA to market and
sell the MicroLight 830(TM) in commercial quantities for humAn application.
The Company's ability to manage its business 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 operations effectively would
have a material adverse effect on the financial condition, results of operations
and business of the Company.
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 industry, 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, marketing or other decisions 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 1999 filed
with the SEC on Form 10-KSB, as amended.
RESULTS OF OPERATIONS
The Company operates Enraf-Nonius as a distinct separate unit, apart from
the Company's operations in the United States due to geographic considerations.
Accordingly, the following discussion of results of operations is presented
separately for Henley Healthcare, Inc. - U.S. and Enraf-Nonius. To more
accurately report the profitability of each segment, management has allocated to
Enraf-Nonius certain corporate costs that have been incurred by Henley-U.S. for
the quarter ended March 31, 2000. The allocated costs include interest expense,
personnel costs and certain selling, general and administrative costs. Interest
expense is allocated based on the average outstanding inter-company 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 consistently reflect the
allocations.
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
HENLEY HEALTHCARE, INC. -- US
During the quarter ended March 31, 2000, Henley-U.S. recorded net sales of
approximately $3,203,000 reflecting a decrease of approximately $2,920,000 or
47.7 percent from the amount of $6,123,000 reported for the quarter ended March
31, 1999. The decrease was due primarily to the effects of inadequate working
capital. The Company continues to have a significant working capital deficit and
continues to be restricted in the use of its collections of operating revenues
under its current credit agreement. These factors continue to materially and
adversely affect the Company's ability to purchase supplies and raw materials
and to manufacture and deliver its products.
8
<PAGE>
The Company's gross profit for the quarter ended March 31, 2000 decreased
47.8 percent to $1,223,000 compared to $2,343,000 for the quarter ended March
31, 1999 due to lower net sales. Gross margin as a percentage of sales in 2000
remained relatively unchanged when compared to the same period in 1999.
Selling, general and administrative expenses increased by $54,000, from
$1,537,000 in 1999 to $1,591,000 in 2000, an increase of approximately 3.5
percent. This increase is primarily due to certain costs incurred in 2000
associated with employee severance packages. Selling, general and administrative
costs increased as a percentage of revenues from approximately 25.1 percent for
1999 to approximately 49.7 percent for 2000. This increase is primarily
attributable to decreased net sales without a corresponding decrease in selling,
general and administrative costs.
Research and development expense for the quarter ended March 31, 2000
increased 55.3 percent to $59,000 from $38,000 reported for the quarter ended
March 31, 1999. This increase was due primarily to costs incurred in conducting
the research for the upgrade of one of the Company's rehabilitation products as
well as increasing costs incurred in connection with ongoing research related to
the Company's laser product.
Depreciation and amortization for the quarter ended March 31, 2000
increased 7.9 percent to $343,000 from $318,000 reported for the quarter ended
March 31, 1999. This increase was due primarily to depreciation expense recorded
for the Company's new application software.
Interest expense for the quarter ended March 31, 2000 amounted to $278,000
compared to $333,000 for the same period in 1999. The decrease in interest
expense was primarily due to a decrease in average borrowings from 1999 to 2000,
which was partially offset by increases in interest rates on the outstanding
borrowings.
Henley-US reported net loss of approximately $993,000 for the three months
ended March 31, 2000 compared to net income of approximately $135,000 for the
same period in 1999.
ENRAF-NONIUS
For the quarter ended March 31, 2000, Enraf's revenues increased
$3,271,000 or 45.3 percent to $10,486,000 compared to $7,215,000 reported for
the same period in 1999. The increase in revenues was due primarily to a large
shipment in January 2000 under a contract with the Indonesian government. Gross
profit for the quarter ended March 31, 2000, was approximately $2,871,000 or
27.4 percent compared to approximately $2,628,000 or 36.4 percent for the same
period in 1999. Gross profit as a percentage of sales decreased due to the low
margins on the Indonesian contract and a seasonal decline in sales of Enraf's
higher-margin core products.
Operating expenses for the quarter ended March 31, 2000, were
approximately $2,508,000 or 23.9 percent of revenues compared to approximately
$2,375,000 or 32.9 percent reported for the same period in 1999. The increase in
operating expenses resulted primarily from incremental costs related to the
Indonesian project which was initiated in the third quarter of 1999.
For the quarter ended March 31, 2000, provision for income taxes amounted
to $176,000. This provision does not represent an income tax liability due to
the expected usage of the available net operating loss carryforwards.
Net income for the quarter ended March 31, 2000 was approximately $57,000
or 0.5 percent of sales compared to approximately $118,000 or 1.6 percent of
sales reported for the same period in 1999.
Effective January 1, 1999, Enraf-Nonius assumed the sales and marketing
functions for Henley's core products in Europe, Australia, and Africa.
Management believes that the continued successful implementation of cost
reductions and the potential synergies to be gained by combining Henley's core
products with Enraf-Nonius' international distribution system will enable
Enraf-Nonius to achieve and maintain positive cash flow.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had a working capital deficit of
approximately $11,000,000, which continues to increase because of restrictions
on the Company's use of collections of its revenues from operations. Currently,
nearly all of the Company's collections of revenues from its U.S. operations are
immediately applied to the outstanding balance of its fully-drawn and matured
Line of Credit (defined below). As a result, the Company's only current sources
of liquidity consist primarily of proceeds from the sale of its equity
securities and funds held at the end of fiscal year 1999 from the operations of
its subsidiary, Enraf-Nonius. The combined effects of this working capital
deficit and the restrictions on the use of collections of operating revenues has
materially and adversely affected the ability of the Company's U.S. operations
to purchase supplies and raw materials and to manufacture and deliver products.
This has resulted in significantly lower net sales for Henley-U.S.
The Company has an Amended Loan Agreement with Comerica Bank-Texas
("Comerica") that provides for (i) a revolving loan ("Line of Credit"), which
permitted borrowings of up to $6,000,000 through March 3, 2000 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 three
term loans is payable monthly and is calculated at a rate equal to the Prime
Rate (8.5 percent at March 31, 2000) plus (i) five percent per annum for the
Line of Credit, and (ii) three and one-half percent per annum for the three term
loans. 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. 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. As of March 31,
2000, the Company had no amounts available for borrowing under the Line of
Credit as its borrowings exceeded its borrowing base by approximately
$1,900,000. This amount has since increased to approximately $3,300,000 and will
likely continue to increase in the future unless the Company is, among other
things, successful in negotiating a replacement credit facility and obtaining
significant additional equity financing.
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 March 31, 2000, the Company
was in default of certain of these financial and non-financial covenants. While
the bank has not demanded payment of the Line of Credit or the related term
notes as of May 15, 2000, such debt has been classified as a current liability
in the accompanying balance sheet as of March 31, 2000. Additionally, the
Company did not make two scheduled loan payments of approximately $1,500,000
each due on May 1, 1999 and 2000 under the Maxxim Note described below. As a
result, at March 31, 2000, the Company had a working capital deficit of
approximately $11,000,000 and a current ratio of 0.60 to 1.
Pursuant to acquiring Enraf-Nonius in May 1998, the Company entered into a
revolving credit facility with a bank in The Netherlands, (the "Enraf-Nonius
Credit Facility"). The agreement provides for aggregate borrowings of up to
$7,500,000, subject to a revised borrowing base calculation derived from
Enraf-Nonius' eligible accounts receivable and inventory. The Enraf-Nonius
Credit Facility had an outstanding balance of $3,817,000 at March 31, 2000, and
is subject to interest, payable monthly, at the rate of AIBOR (3.5 percent at
March 31, 2000) 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, 2000, there were no funds available
for borrowing 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
10
<PAGE>
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.
Payments totaling approximately $3,000,000 to Maxxim were due by May 1, 2000
under the Note (including approximately $1,500,000 that was due May 1, 1999).
The Company is currently in negotiations with Maxxim concerning the timing and
amounts of the principal payments. 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.
The Company must quickly obtain substantial amounts of working capital in
order to successfully continue operations. In addition, the Company needs
substantial additional capital to satisfy its outstanding debt obligations under
the Line of Credit and the Note, as well as to pay its outstanding trade
payables and overdue royalty obligations. In order to secure such working
capital, the Company must quickly renegotiate its Line of Credit and the Note
and sell considerable amounts of its equity securities. The sale of a
substantial additional amount of equity securities could, however, result in
dilution to the percentage ownership interests of existing shareholders and
could also adversely affect the market price of the Company's Common Stock. The
Company may also pursue the sale of some of its assets in order to reduce its
indebtedness and obtain working capital. The Company is currently in
negotiations with Comerica and Maxxim, and is also negotiating for such
additional financing. There can be no assurance that the Company will be
successful in any of these financing efforts or in selling assets at attractive
prices. If the Company is not successful in quickly eliminating or reducing its
working capital deficit and fully satisfying its outstanding debt obligations by
obtaining sufficient financing, the Company will not be able to continue its
current operations and there will be substantially increased doubt as to the
Company's ability to continue as a going concern. 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. Over
one-half of the Company's total sales for 1999 were in currencies other than
U.S. dollars, and the Company anticipates a similar situation in 2000. 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. 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
11
<PAGE>
future results.
YEAR 2000 COMPLIANCE
The Year 2000 (the "Y2K") issue is the result of computer programs that
were 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.
Prior to and during 1999, the Company undertook various comprehensive
initiatives intended to ensure that it was prepared for the Y2K issue. The
Company has not encountered any significant Y2K failures, and is not aware of
any Y2K issues that have been encountered by any third party with whom it does
business, which could materially affect the Company's operations. The amounts
charged to expense in 1999, as well as the amounts anticipated to be charged to
expense related to the Y2K compliance issue are not significant and not expected
to be material to the Company's financial position, results of operations or
cash flows.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default under its loan agreements with Comerica and
Maxxim. See Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed with this Current Report on Form 10-Q:
EXHIBIT
NO. DESCRIPTION
27.1 -- Financial Data Schedule for the three
months ended March 31, 2000.
- -----------
(B) REPORTS ON FORM 8-K
None.
13
<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 22, 2000 By: /S/ JAMES L. STURGEON
---------------------------
James L. Sturgeon
Executive Vice President
and Chief Accounting Officer)
14
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 368,367
<SECURITIES> 0
<RECEIVABLES> 7,330,944
<ALLOWANCES> (797,338)
<INVENTORY> 9,557,244
<CURRENT-ASSETS> 16,661,658
<PP&E> 8,900,910
<DEPRECIATION> (3,301,252)
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<CURRENT-LIABILITIES> 27,726,892
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<COMMON> 72,575
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<SALES> 13,689,178
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<TOTAL-COSTS> 4,502,003
<OTHER-EXPENSES> (55,310)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 407,648
<INCOME-PRETAX> (759,925)
<INCOME-TAX> 176,000
<INCOME-CONTINUING> (935,925)
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