P&H DRAFT OF 4/13/00
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28566
HENLEY HEALTHCARE, INC.
(Name of small business issuer in its charter)
TEXAS 76-0335587
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
120 INDUSTRIAL BOULEVARD, SUGAR LAND, TEXAS 77478-3128
(Address of principal executive offices) (Zip code)
Issuer's telephone number: 281-276-7000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year are $57,427,318.
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 31, 2000, based upon the average bid and ask price of the
common stock as reported on the Nasdaq SmallCap Market, was $14,065,171. The
number of shares of the issuer's common stock, $.01 par value, outstanding as of
March 31, 2000 was 7,257,570.
Documents incorporated by reference: The Registrant's Notice of Annual
Meeting of Shareholders and definitive Proxy Statement pertaining to the 2000
Annual Meeting of Shareholders (the "Proxy Statement") and to be filed pursuant
to Regulation 14A is incorporated herein by reference into Part III of this
report.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB 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 Form 10-KSB are
forward-looking statements. These forward looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our existing
capital resources and our 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 our products.
Although we believe that the expectations reflected in these forward looking
statements are reasonable, we can not give any assurance that such expectations
reflected in these forward looking statements will prove to have been correct.
When used in this Form 10-KSB, 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. Because 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", "Additional Risk Factors" and elsewhere in this Form 10-KSB.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you should
be aware that the occurrence of any of the events described in these risk
factors and elsewhere in this Form 10-KSB could substantially harm our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline, and
you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-KSB after the date of this
Form 10-KSB.
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PART I
ITEM 1. BUSINESS
GENERAL
Henley Healthcare, Inc., formerly Lasermedics, Inc. (the "Company" or
"Henley"), was incorporated in November 1990 as a Texas corporation, and is a
manufacturer, provider and marketer of diversified, brand name products and
services in the pain management industry. The Company has over 300 products that
compete in substantially all segments of the rehabilitation products market,
offering cost-effective alternatives to surgery and drugs. The Company has
operating units which are categorized by the type of service provided and type
of product manufactured or distributed. The clinical unit manufactures and
markets a diversified line of pain management products used in clinical settings
for both physical therapy and rehabilitation as well as other applications. The
training unit consists of Health Career Learning Systems ("HCLS") which provides
training and safety products and technical support necessary to meet federal
Occupational Safety and Health Act ("OSHA") compliance standards and also
coordinates the training of medical professionals in the use of various other
products offered by the Company. The international unit consists of Enraf-Nonius
which designs, manufactures and markets a variety of ultra-sound and electrical
stimulation products to established international healthcare markets through a
worldwide network of distributors.
The Company's long-term strategic objectives are to (i) expand
distribution channels and explore new markets, (ii) maximize the utilization of
existing facilities for increased productivity, (iii) achieve and maintain
profitability, (iv) reduce long-term indebtedness, and (v) obtain approval from
the United States Food and Drug Administration ("FDA") to market and sell the
MicroLight 830(TM) in commercial quantities for human application.
OPERATIONS
CLINICAL UNIT. The Company's clinical unit designs, manufactures and
markets various lines of physical therapy and rehabilitation products. These
products and related accessories are used in physical therapy for control of
acute or chronic pain through non-invasive methods and to facilitate the healing
of injuries and wounds. Physical therapy involves the treatment of disabilities
or injuries with therapeutic exercise and the application of various heat,
hydrotherapy, traction, ultrasound or other modalities. The clinical products
are marketed principally through national and international sales forces
consisting of dedicated sales persons, dealers and sales representatives.
TRAINING UNIT. The Company's training unit, HCLS, sells its own training
and safety products and provides technical support necessary to meet OSHA
compliance standards. The HCLS system is designed to ease the task of
implementing OSHA requirements in the workplace by providing a simple,
thoroughly planned training program. The system consists of required information
relevant to Blood Borne Pathogens Standard, Hazard Communication Standards,
Safety Regulations and State-Specific Regulations. It is the Company's intention
that the training unit will continue to expand training activities to include
various other products offered by the Company.
INTERNATIONAL UNIT. The Company's international unit was formed with the
acquisition of Enraf-Nonius, B.V. ("Enraf-Nonius") in 1998. Through
Enraf-Nonius, the Company gained the benefit of a brand of highly recognized
traction/treatment tables as well as ultrasound and electrical stimulation
products that have been marketed internationally for over 65 years. Enraf-Nonius
has an extensive and well-established distribution network through which the
Company can continue to market Enraf-Nonius products along with the Company's
domestic brand-name products, most of which have been approved for sale in
Europe (see "Business -- Government Regulation").
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PRINCIPAL PRODUCTS
The Company develops, manufactures and markets a variety of products and
related accessories used for the control of acute or chronic pain by
non-invasive methods, to facilitate healing of wounds, for physical therapy and
for the treatment of disabilities or injuries with therapeutic exercise and the
application of various hydrotherapy, heat, traction, ultrasound or other
modalities. The Company also licenses products developed or manufactured by
other companies which are implemented into its existing and expanding
distribution system. The Company markets its products under four principal brand
names:
"HENLEY HEALTHCARE" BRAND PRODUCTS
FLUIDOTHERAPY UNITS. Fluidotherapy is a patented dry heat treatment that
uses finely divided cellulose particles suspended and circulated in a heated air
stream to apply heat, stimulation and pressure to a specific area of the body.
Patients receive such therapy by placing the area to be treated (e.g., hand,
ankle or knee) into the unit in which the cellulose particles circulate at the
appropriate temperature, speed and density. Fluidotherapy enables physical
therapists to provide their patients with a combination of heat, stimulation,
pressure and other therapies designed to treat the symptoms of various ailments
and conditions including arthritis, circulatory disorders and certain
sports-related injuries. The Company currently manufactures, markets and
distributes several models of fluidotherapy units.
TRU-TRAC TRACTION MACHINES AND TABLES. The Company develops,
manufactures, markets and distributes its Tru-Trac line of clinical portable
intermittent traction machines, currently consisting of four models. The Company
also manufactures, markets and distributes a proprietary line of Tru-Trac
traction and therapy tables used in a variety of physical therapy applications.
HYDRA-FITNESS EXERCISE AND REHABILITATION EQUIPMENT. Through its
Hydra-Fitness line of products, the Company develops, manufactures and sells
hydraulic exercise and rehabilitation systems. Hydraulic resistance is provided
by manipulating the size of the aperture in a patented, fluid-filled hydraulic
cylinder. Such hydraulic resistance provided by the machine is totally
accommodating throughout the full range of motion for each individual user and
the resistance stops when force is no longer applied. This contrasts with free
weight or weight stack equipment that must return to the starting point before
the resistance is zero. For this reason, Hydra-Fitness products can be utilized
for both medical and exercise purposes. The majority of the Company's sales of
Hydra-Fitness products is for medical use by handicapped and rehabilitating
patients and in geriatrics. The Company manufactures numerous models of
Hydra-Fitness machines.
JELTRODE ELECTRODES. The Company manufactures, markets and distributes
its proprietary Jeltrode electrodes for use with the Company's nerve stimulators
in a variety of nerve and muscle stimulation and electrotherapy applications.
The Company believes that traditional electrodes used in these therapies often
irritate the skin, are messy to apply and painful to remove. A Jeltrode
electrode uses a unique adhesive gel, is hypoallergenic, virtually painless to
apply and remove and can be re-hydrated, cleaned and re-used. Since the adhesive
gel is water-based, electrical resistance between the electrode and skin is
reduced, resulting in enhanced product performance and prolonged battery life.
IOTRODE IONTOPHORESIS ELECTRODES. Iontophoresis is a process which uses
electric current to assist drug transfer through the skin. The Company
manufactures, markets and distributes its Iotrode iontophoresis electrode for
use with its Dynaphor iontophoresis device. Using the electrodes, clinicians are
able to deliver small molecule drugs that can be ionized for the treatment of
pain and inflammation through the skin. For many applications, the use of
iontophoresis is superior because it is non-invasive, allows medications to be
dispersed over a wider range of tissue and avoids many of the systemic and
localized side effects associated with oral medications and injections.
MEDIPADS/MEDIGELS. The Company's Medipads and Medigels are
drug-impregnated, water-based gels and gel pads used for delivery of drugs
directly through the skin on a localized basis. The Medipads and Medigels can be
used topically with various non-prescription dosages of drugs such as
hydrocortisone and lidocaine.
THE MICROLIGHT 830(TM). The MicroLight 830(TM) is a portable, hand-held,
battery-operated low energy laser with an output which does not exceed 100
milliwatts. The Company currently distributes the MicroLight 830(TM) to various
clinicians participating in the Company's current research program under its
Investigational Device Exemption ("IDE") as allowed by FDA regulations.
The MicroLight 830(TM) is manufactured by CB Svendsen a/s ("CBS"), a
Danish company, which has sold its low level laser devices in more than 20
foreign countries to physicians, physical therapists, dermatologists and
veterinarians, for use in connection with wound healing, pain reduction and
anti-inflammatory indications. The Company has worked on the development and
marketing of the MicroLight 830(TM) with CBS since June 1991. In March 1997, the
Company and CBS
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entered into new agreements pursuant to which the Company paid $100,000 to CBS
and obtained unto perpetuity the sole and exclusive world-wide distribution
rights to all low level laser devices manufactured by or for CBS. In connection
with these agreements, the Company is required to pay a 3 percent royalty on
revenue generated by the Company on sales of the applicable products.
As part of its clinical operations, the Company is currently engaged in
the development and application of the MicroLight 830(TM) to treat soft tissue.
The Company is currently seeking approval from the FDA to sell the MicroLight
830(TM) in commercial quantities for human application. See "Business --
Research and Development." Based upon the results of research studies, including
those by General Motors Corporation and the Mayo Clinic, the Company believes,
although no assurances can be given, that the MicroLight 830(TM) is an effective
treatment for carpal tunnel syndrome.
"CYBEX MEDICAL" BRAND PRODUCTS
NORM(TM) TESTING AND REHABILITATION SYSTEM. In September 1997, the
Company acquired the manufacturing, marketing and distribution rights to the
multi-joint, isokinetic NORM(TM) testing and rehabilitation system from Cybex.
(NORM(TM) stands for Normative Outcomes for Rehabilitation Management.) The
Company began manufacturing, marketing and distributing this product shortly
thereafter. The system utilizes isokinetic resistance to provide accurate and
reproducible measurement of dynamic performance and functional capability.
Isokinetic resistance is an automatically accommodating resistance which varies
in opposition to the amount of force applied against it. The NORM(TM) provides
clinicians with instant access to the world's largest on-line isokinetic
normative database which provides immediate objective documentation to assess
patient needs. The NORM(TM) and the other products acquired from Cybex are well
established in the market place. The Company makes available to customers
extensive literature including published results by accredited researchers
attesting to the accuracy, effectiveness, validity and reproducibility of the
results of these products.
ISOKINETIC ERGOMETERS. The Company began manufacturing, marketing and
distributing the Fitron isokinetic cycle ergometer ("Fitron") and the Upper Body
Ergometer ("UBE") in October 1997. Both the Fitron and UBE are designed with a
wide range of exercise speeds, work rates and anatomical range of motion for
physical therapy, athletic rehabilitation, performance training and
cardiovascular conditioning. The Fitron is principally a versatile lower-limb
cycle ergometer while the UBE incorporates all of the proven benefits of the
Fitron into a versatile ergometer for the upper body.
KINETRON TRAINING SYSTEM. The Kinetron closed kinetic chain training
system ("Kinetron") is an exercise system for the treatment of patients
requiring gradual, stabilized and counterbalanced weight bearing exercise
treatment. Kinetron is designed to provide a safe, nonthreatening exercise
environment for patients at any level. Speed and weight-bearing conditions are
controlled by the clinician in order to allow rehabilitation to begin earlier
than with other body treatment systems. It is used to treat orthopedic,
neurological, acute care and sports medicine patients and can progress patients
in speed, force, range-of-motion, timing and coordination while building their
confidence. The Company began manufacturing, marketing and distributing the
Kinetron in October 1997.
"HCLS" BRAND PRODUCTS
HCLS, the Company's training unit, specializes in OSHA compliance and
infection control training for the healthcare professions. In addition, the
Company provides a wide range of required safety products including safety
eyewear, spill kits, protective gloves, etc., that are mandatory under OSHA
regulations. Training occurs via training manuals and training videos produced
by the Company. Clients include dental and medical offices, as well as
veterinarians, podiatrists and nursing homes. The Company supports its clients
through the use of a toll-free technical service hotline and quarterly
compliance newsletters.
"ENRAF-NONIUS" BRAND PRODUCTS
Enraf-Nonius markets and distributes a complete line of innovative
physical therapy equipment.
SONOPULS. Sonopuls ultrasound units are used successfully in the
treatment of wounds, post traumatic disorders, circulatory disorders and
afflictions of the skin and the peripheral nervous system. In therapeutic
ultrasound, a source of alternating electrical current is applied to the surface
of a crystal material. As the current alternates, there is a reversal that
causes the crystal to vibrate at a specific frequency. Under certain conditions,
these sound waves can propagate in neighboring media (e.g., tissues) and cause
both non-thermal and thermal effects. Non-thermal effects occur by mechanical
phenomena. Thermal effects, the localized heating at interfaces of heterogeneous
tissues, occur with ultrasound applied continuously. Physiological responses due
to thermal mechanisms include: increase in tissue extensibility, alternations in
blood flow, changes in nerve conduction velocity, changes in pain threshold,
increase in enzymatic activity and changes in the contractile activity of
skeletal muscle. The Sonopuls units are also used for the reduction of pain,
joint contraction, muscle spasm and for the softening of scar tissue.
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ENDOMED. Endomed electrical stimulation units provide a multitude of
low, medium and alternating electrical frequencies, which permits selective
treatment of deep-lying as well as superficial tissue structures. A common form
of therapy in physiotherapy is the strengthening of muscles with a therapeutic
objective. The objective can be, among others, to increase muscle strength,
improve the (active) stability of a joint to regain muscle strength or achieve
greater physical performance through increased muscle strength.
CURAPULS. Curapuls short-wave diathermy units provide pulsed short-waves
for effective therapy in the healing of wounds, reduction of pain and the
stimulation of the peripheral circulation. The Curapuls 970 is a versatile unit
for short-wave therapy with the capacity to provide maximum power for both
continuous and pulsed applications, without affecting low power applications.
The Curapuls 970 is CE-certified, thus permitting it to be marketed and
distributed in the European Union (See "Business -- Government Regulation").
RADARMED. The Radarmed 650 system is a versatile system of microwave
units used for heat therapy. The system consists of several microwave radiators
with various shapes and strengths that can be connected for treating multiple
areas of the body. The angled large-field radiator follows the contours of the
body, enabling effective treatment of large body areas. The local field radiator
is suitable for localized treatment, while the longitudinal field radiator is
used for elongated body parts, such as arms or legs.
ELTRAC. Eltrac traction machines provide both continuous and
intermittent cervical and lumbar traction treatments. The Eltrac is designed to
combine computer technology, functional design and operational convenience. The
control panel shows various parameters (such as traction force, base force, base
hold time and treatment time) which can be selected with fingertip controls. A
microcomputer compares the actual readings with the set values and immediately
attempts to eliminate any differences.
MANUMED TREATMENT TABLES. The Manumed line of treatment tables offers a
complete array of treatment tables available for physical therapy.
EN-DYNAMIC. The EN-Dynamic computer-isolated exercise stations offer a
pneumatic type of resistance. The air resistance is designed to be comfortable
and prevent the occurrence of unnecessary high compression forces in joints as
well as improper peak forces on the muscle-tendon system (as occurs, for
example, with weight stacks due to inertia). These features are intended to make
pneumatic resistance the preferable exercise load for force training of most
individuals.
DISTRIBUTION AND MARKETING
The Company's products are marketed through a network of national and
international independent dealers and distributors, direct salespersons and
commissioned sales representatives to physicians, physical therapists, athletic
trainers, chiropractors and their patients as well as to clinics and healthcare
networks. The Company believes that its approach to sales and marketing is
supported by the desire of its customers to identify with individual account
managers and product specialists and enables the Company to provide better
customer service and to maintain specialized expertise in each product line. The
Company believes that medical products are increasingly being purchased on a
national account or centralized basis by healthcare networks, which creates the
need for the Company's salespersons to maintain relationships with purchasing
managers within these networks.
The Company utilizes telemarketing, direct-mail programs and the
Internet to market its products and services. The Company has domestic product
distribution centers in Ohio and Texas and approximately 160 dealers and
distributors, 30 sales representatives and 15 direct salespersons representing
its products within the United States. The Company believes that using
independent distributors, which have their own sales forces, enables its
products to reach more consumers throughout the world in a more efficient
manner. The Company has found that utilizing independent distributors is less
costly and requires less administrative overhead and capital to maintain than
dedicated sales forces. The Company has added direct sales forces in order to
maintain its market share in a particular area.
Internationally, the Company sells many of its products through a
network of over 140 distributors and representatives in various countries around
the world. The Company believes that its network of international distributors
will enhance its marketing and distribution efforts as it seeks to extend its
market share of the international marketplace. The products manufactured and
sold by the Company in Europe are subject to the European Community regulations
for medical devices, including product certification ("CE Marking"). The Company
has obtained CE Marking qualification on all of its HydraFitness and Cybex
medical products and is currently working to obtain the CE Marking on the
remainder of its products that are sold in Europe (See "Business -- Government
Regulation").
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MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures many of the products marketed by its clinical
operations under the "Henley Healthcare" and "Cybex Medical" brand names at its
two manufacturing facilities.
BELTON, TEXAS FACILITY. The Company owns and operates a 59,000 square
foot manufacturing facility in Belton, Texas, at which it manufactures many of
its physical therapy and fitness products for its Clinical unit. The Belton
manufacturing facility is a complete fabrication, machining, electrostatic
powder coating and assembly facility. This operation also includes final
packaging and shipping facilities. The processes and product flow are all
controlled and documented through computer systems utilizing the quality systems
of ISO 9002. The finished goods manufactured at the Belton facility include the
Hydra-Fitness Pace line, the HF Star and Tru-Trac tables and uppercycles, as
well as the Cybex Medical line which includes the NORM(TM) testing and
rehabilitation system, UBE, Fitron and Kinetron.
SUGAR LAND, TEXAS FACILITY. The Company also owns and operates a 65,000
square foot manufacturing facility in Sugar Land, Texas, which is the primary
location for the manufacture of the electronics-based finished goods and
sub-assemblies. The Company employs a highly trained staff of assemblers and
technicians who complete numerous assembly tasks including PC board stuffing and
testing, cable and harness wiring, electromechanical sub-assembly, and final
assembly and integration. Many of these sub-assemblies are shipped to the Belton
facility where they are installed into various mechanically-based finished goods
manufactured at that site. The Sugar Land site also has a drug delivery and
electrode manufacturing group. The brand names of the finished goods
manufactured in Sugar Land include Tru-Trac Traction, Fluidotherapy, Iotrode,
MediPads, MediGel, LidoKain and Jeltrode. All manufacturing operations are
completed in compliance with the FDA's Quality Systems Regulations and ISO 9002.
Additionally, many of the products are built in compliance with applicable CE,
UL and CSA specifications. Quality Assurance is part of a written QSR/ISO
compliance system.
DELFT, THE NETHERLANDS. Enraf-Nonius currently has all of its
proprietary products manufactured by original equipment manufacturers. The
Company maintains a quality assurance department which ensures all manufacturing
is done in accordance with ISO 9001 and CE Marking Certification standards.
COMPETITION
Competition in the medical device and physical medicine markets is
intense. The Company's products compete with the products of many other
companies in the business of developing, manufacturing, distributing and
marketing physical therapy and rehabilitation products. Many of these companies
may have substantially greater financial and other resources than the Company,
and may have established reputations for success in the development, sale and
service of their products. The Company believes that the principal competitive
factors in each of its product markets are product features, customer service
and pricing. Although the Company's products are not the lowest-priced in their
respective markets, the Company endeavors to maintain a competitive edge by
emphasizing overall value through a combination of competitive pricing, product
quality and customer service.
The pain management market is a relatively mature and competitive
market, subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy and governmental regulation and
private rates of reimbursement. The rehabilitation market is an evolving and
fragmented market with a number of different companies offering competing
treatments without any clear indication of preference among treating clinicians.
There can be no assurance that the Company will be able to maintain or increase
its market share in the pain management and rehabilitation markets.
CLINICAL PRODUCTS MARKET
The Company believes that the strength of its clinical products in the
marketplace lies primarily in the uniqueness of the features of some of its
products such as Fluidotherapy, MediPads and Gels, and HydraFitness. The Company
believes that it can achieve a greater market share through an emphasis on
product features, quality and personal service with its customers.
FUTURE COMPETITION WITH PRODUCTS IN DEVELOPMENT. While the Company is
currently awaiting FDA approval for the MicroLight 830(TM) and cannot commence
commercial sales until such approval is received, there are several foreign as
well as U.S. manufacturers of low energy lasers using similar technology to the
MicroLight 830(TM). However, these competitive lasers may emit light of a
different wavelength, are not generally portable and may be more expensive than
the Company's product. Consequently, if the Company receives FDA approval, the
Company anticipates future competition relating to the MicroLight 830(TM).
Furthermore, there may be no effective barrier to competitors using other
wavelengths of low-level laser light inasmuch as the manufacture of the
MicroLight 830(TM) does not incorporate any patented inventions. Qualified
companies could reverse engineer a similar laser and market it, subject to
obtaining the requisite FDA pre-marketing approval ("PMA"), for human use.
Although there may be no absolute barriers to entry for competitive lasers, the
Company believes that, pursuant to specific FDA
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regulations, the safety and efficacy data submitted to the FDA by one entity
supporting such entity's PMA application cannot be used by another entity in its
PMA application. Generally, this means that another entity desiring to submit a
PMA application for a laser similar to the MicroLight 830(TM) cannot rely on the
Company's clinical trial results to support such entity's PMA application, but
must conduct its own trials and gather its own data. Although no assurances can
be given, this provision could increase the length of time for a competitor of
the Company to obtain FDA approval to commercially sell a similar product in the
United States for human application.
The Company's clinical product lines have several competitors. The
Chattanooga Group is the primary competitor with the Tru-Trac (traction and
tables) and Enraf-Nonius (ultra sound and electrical stimulation) product lines.
Other competitors with the Company's ultra sound product lines are Dynatronics,
Inc. and Excel (Canada). Dynatronics, Inc. and Empi, Inc. compete with the
Company's iontopherises product line. The Hydra-Fitness product line is unique
due to its use of hydraulics creating accommodating resistance, with the closest
competition being products utilizing weight stacks. The Cybex Medical line,
which includes the NORM, UBE and stationary bikes, has one primary competitor,
Biodex, Inc. The Fluidotherapy, Medipad and Medigel product lines are
proprietary to the Company and currently have no direct competition.
HCLS PRODUCTS MARKET
Competitors of HCLS training services include companies and individuals
who provide OSHA compliance services on a local level. The Company believes
there is, at this time, no other company operating on a national level. In the
safety products market, the Company has a number of large competitors who can
fulfill safety product requirements including Lab Safety Supply, Inc. and Cabot
Safety Inc. In addition, there are numerous small direct mail companies that
market such safety products.
EUROPEAN PRODUCTS MARKET
The Company believes that competition in the European physical therapy
and medical markets is intense. The ultrasound and electrical stimulation market
in Europe is shared by three major companies. Enraf-Nonius, Uniphy and Zimmer.
Enraf-Nonius has attempted to increase its market share by targeting not only
the high-end market but recently launching a new series of ultrasound and
electrical stimulators for the low-to-middle-end markets. Enraf-Nonius seeks to
become the leader in this market in which it competes primarily with products
and companies from England, Germany and France.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks patent protection for its proprietary
technology, both in the U.S. and abroad. The Company owns several U.S. issued
patents and various foreign counterparts. The Company's success will depend, in
part, on its ability to obtain patents and to operate without infringing on the
proprietary rights of others. There can be no assurance that patents issued to
or licensed by the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. There can be no assurance that the Company's pending patent
applications or patent applications in preparation presently or in the future,
if and when issued, will be valid and enforceable and withstand litigation.
There can be no assurance that others will not independently develop
substantially equivalent or superseding proprietary technology or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. The Company currently has one patent application pending in the U.S.
There is a substantial backlog of patent applications at the U.S. Patent and
Trademark Office ("PTO"). Because patent applications in the U.S. are maintained
in secrecy until patents issue, and because publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, there can be no assurance that the Company will obtain patent
protection for its inventions. In addition, patent protection, even if obtained,
is affected by the limited period of time for which a patent is effective.
Furthermore, patent positions are highly uncertain and involve complex legal and
factual questions. Therefore, the scope or enforceability of claims allowed in
the patents on which the Company will rely cannot be predicted with any
certainty.
The Company also relies on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. Although the
Company has entered into confidentiality agreements with its employees and
consultants, which contain assignment of invention provisions, no assurance can
be given that others will not gain access to these trade secrets, that such
agreements will be honored or that the Company will be able to effectively
protect its rights to its unpatented trade secrets. Moreover, no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets.
In addition to protecting its proprietary technology and trade secrets,
the Company may be required to obtain licenses to patents or other proprietary
rights from third parties. No assurance can be given that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If the Company does not obtain required licenses, it
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could encounter delays in product introductions while it attempts to design
around blocking patents, or it could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed.
Although, the Company has conducted searches to discover any patents
which its products, including the MicroLight 830(TM), or their use might
infringe and is not aware of any such patents, there can be no assurance that no
such infringement has or will occur. The Company could incur substantial costs
in defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties, in a suit with another party. The PTO
could institute interference proceedings involving the Company in connection
with one or more of the Company's patents or patent applications, and such
proceedings could result in an adverse decision as to priority of invention. The
PTO or a comparable agency of a foreign jurisdiction could also institute
re-examination or opposition proceedings against the Company in connection with
one or more of the Company's patents or patent applications and such proceedings
could result in an adverse decision as to the validity of scope of the patents.
The Company currently markets its products using various registered
trademarks. The two most recognizable of its trademarks are Enraf-Nonius and
Cybex Medical. The Company believes that Cybex Medical and Enraf-Nonius are well
known and respected brand names in their respective markets throughout the
world.
The perpetual rights to use the trademarks Cybex Medical and
Enraf-Nonius have been acquired by the Company. The Company is required to pay a
royalty of 2% of related sales on the Cybex Medical trademark and 1.5% of
related sales on the Enraf-Nonius trademark (with an annual minimum of
approximately $500,000) through 2005. During 1999 the Company made royalty
payments of approximately $455,000 in connection with sales related to
Enraf-Nonius. No royalty payments were made in 1999 in connection with sales
related to the Cybex Medical trademark. Consequently, Cybex now has the right to
terminate the Trademark License upon thirty days written notice to the Company.
Accrued royalties due Cybex at December 31, 1999 were approximately $201,817.
At the date of this Form 10-KSB, such notice had not been received by the
Company.
GOVERNMENT REGULATION
FOOD AND DRUG ADMINISTRATION REGULATIONS. All medical devices are
subject to FDA regulation under the Medical Device Amendments of the Food, Drug
and Cosmetic Act, as amended ("FDCA"). Pursuant to the FDCA, a medical device is
ultimately classified as either a Class I, Class II or Class III device. Class I
devices are subject only to general controls which are applicable to all
devices. Such controls include regulations regarding FDA inspections of
facilities, Quality Systems Regulations (formerly known as Good Manufacturing
Practices), labeling, maintenance of records and filings with the FDA. Class II
devices must meet general performance standards established by the FDA. Class
III devices are subjected to a more stringent PMA process by the FDA before they
can be commercially marketed and must adhere to such standards once on the
market. Such PMA can involve extensive testing to prove safety and efficacy of
the devices. Most of the Company's products are Class II devices. FDA marketing
clearance of these devices is obtained under Section 510 (k) of the FDCA, which
provides for FDA clearance for products that can be shown to be substantially
equivalent to devices in commerce prior to May 1976 (the month and year of
enactment of the FDCA) or which have subsequently been granted market clearance.
Most of the Company's remaining products are Class I devices (i.e., treatment
tables and fitness and exercise equipment.)
Currently, all of the Company's products and manufacturing facilities
are subject to pervasive and continuing regulation by the FDA. All phases of the
manufacturing and distribution process are governed by FDA regulation. Products
must be produced in registered establishments and be manufactured in accordance
with Quality Systems Regulations, as such term is defined under the Code of
Federal Regulations. In addition, all such devices must be periodically listed
with the FDA. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The export of
devices is also subject to regulation in certain instances. The FDA conducts
inspections periodically to ensure compliance with these regulations.
The FDA's mandatory Medical Device Reporting ("MDR") regulation
obligates the Company to provide information to the FDA on injuries alleged to
have been associated with the use of a product or in connection with certain
product failures which could cause serious injury or death. If as a result of
FDA inspections, MDR reports or other information, the FDA believes that the
Company is not in compliance with regulations, the FDA can institute proceedings
to detain or seize products, enjoin future violations, or assess civil or
criminal penalties against the Company, its officers or employees. Although the
Company and its products have not been the subject of such FDA enforcement
action, any such action by the FDA could result in a disruption of the Company's
operations for an undetermined time.
In addition to the foregoing, foreign countries in which the Company's
products may be sold, as well as state governments and other federal and local
agencies within the U.S., may impose additional regulatory requirements on the
Company, and such actions could have a material adverse effect on the Company's
ability to do business.
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The Company is not required to notify or obtain approval from the FDA
regarding any of its devices sold for veterinary applications. However, the
Company is required to obtain, prior to commencing any sales activities, a
radiological health registration number and to file an Initial Report for all
models of its devices. With no objection from the FDA to the introduction of the
LASERMEDICS VMD 830(TM) into commerce, the Company continues to market this
product in the veterinary market, although much of the Company's efforts are
focused on the marketing and distribution of its many other products.
ISO 9000. ISO 9000 is a series of five standards for "quality
management" and "quality assurance" developed in 1987 by the International
Organization for Standardization (ISO) representing a consensus of more than 100
countries on quality systems. The standards were designed to help overcome
technical trade barriers and assure market consistency globally. ISO 9002
Certification addresses 19 criteria for assessing quality system areas including
management responsibility, contract review, process control, document and data
control, production, installation, servicing and training. The Company must
demonstrate continuous compliance with all established criteria.
The Company was awarded ISO 9002 Certification in October 1998 following
an extensive in-depth assessment of its quality management, quality assurance
and manufacturing process and systems by a third-party quality system auditor.
The Company believes that ISO Certification, although not yet mandatory, gives
the Company a competitive advantage for conducting business overseas, especially
in the nations of Europe.
EXPORT REGULATION AND CE MARKING. Sales of the Company's medical
products outside the United States are subject to regulatory requirements that
vary widely from country to country. The time required to obtain clearance for
sale in foreign countries may be longer or shorter that that required for FDA
clearance, and the requirements may differ. The FDA also regulates the sale of
exported medical devices, although to a lesser extent than devices sold in the
United States. For medical products exported to countries in Europe, the Company
anticipates that its customers will want their products to qualify for
distribution under the "CE Mark." The CE Mark is a designation given to products
which comply with certain European Economic Area policy directives and therefore
may be freely traded in almost every European country. Commencing in 1998,
medical product manufacturers will be required to obtain the certifications
necessary to enable the CE Mark to be affixed to medical products they
manufacture for sale throughout the European Community. To obtain the CE Mark
each product, depending upon the product classification, can be subjected to
safety testing, emissions testing, and subsequent review and approval by a
"notified body" recognized by the European Union. These criteria are in addition
to the quality system requirements of ISO 9002. The Company's NORM(TM)
Rehabilitation and Testing System, HFStar, PACE, UBE, Fitron, Tru-Trac 401 and
92B Systems are CE Marking Certified. The Company is in the process of obtaining
CE Marking Certification for its Fluidotherapy Systems. In addition, the
Company's distributors and customers must comply with other laws generally
applicable to foreign trade, including technology export restrictions, tariffs,
and other regulatory barriers. There can be no assurance that the Company and
its distributors and customers will obtain all required clearances or approvals
for exported products on a timely basis, if at all. Failure or delay by the
Company or its distributors and customers in obtaining the requisite regulatory
approvals for exported instruments manufactured by the Company may have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Continued regulatory compliance is essential for Henley to maintain its
quality system certifications such as the ISO Certification and CE Marking.
Periodic inspections of the manufacturing facilities are conducted by the FDA to
ensure the Company adheres to applicable standards. The Belton and Sugar Land
manufacturing facilities were inspected by representatives from the FDA within
the past 18 months. As with any in-depth inspection, some nonconformities were
observed. The observations were addressed and corrective actions implemented by
the Company without adverse impact on the Company's ability to produce products.
HOMECARE UNIT DISPOSITION
In August 1998, the Company sold all of its assets related to its
Homecare operations, including accounts receivable, inventory, property and
equipment for $3.65 million in cash and the assumption of certain related
liabilities. For its revenues, the Homecare division relied primarily on
reimbursement from third party sources. Third party operations require extensive
capital investments due to the nature of the business. Collections of the
receivables generally occur 90-150 days after billings. The Homecare inventory
is primarily rental equipment and requires substantial time to generate
sufficient revenue to recoup the investment in such equipment.
In prior years, the Company recorded significant expenses as a result of
the valuation of its receivables and inventory. In consideration of these
financial difficulties the Company determined it was in its best interest to
dispose of the Homecare division.
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RESEARCH AND DEVELOPMENT
GENERAL. The Company is continually conducting research and development
efforts on new products by utilizing a team approach involving the Company's
engineering, manufacturing and marketing resources. These research and
development ("R&D") efforts are designed primarily to apply state-of-the-art
technology and the Company's expertise to the treatment of wide-ranging medical
conditions. Although the Company has developed a number of its products, such as
the original Fluidotherapy device, Medipads and others, most of its R&D efforts
are directed towards product improvement and enhancement of previously developed
or acquired products. Such enhancement often involves updating and redesigning
existing products to improve features, performance and reliability.
With the acquisition of Enraf-Nonius, the Company plans to consolidate
its R&D activities into Enraf-Nonius' existing R&D facilities. Enraf-Nonius
currently has 21 employees in its research and development department of
software, mechanical, electrical and design engineers and support staff who work
on updating and enhancing the Enraf-Nonius products to meet the needs of the
marketplace. Enraf-Nonius' R&D group has begun a project to enhance certain of
the Company's core products.
The Company is involved in the development and application of various
new products, many of which are in early stages of development and will require
additional development work, FDA approval, clinical or other testing or market
research and development efforts prior to commercial introduction. In this
regard, the Company is continuing its clinical research and investigation using
the MicroLight 830(TM) under its IDE. Expenses incurred in connection with
research and development from continuing operations in 1999 and 1998 amounted to
approximately $1,044,056 and $1,067,149, respectively.
CLINICAL TRIALS FOR THE MICROLIGHT 830(TM). The MicroLight 830(TM), a
Class III medical device, has been defined by the FDA as a "nonsignificant risk"
device. The Company is allowed to conduct clinical trials under an approved IDE
using the MicroLight 830(TM). In August 1997, the FDA accepted the Company's
Pre-IDE Clinical Investigation Plan for a multi-center, double-blind,
randomized, clinical study to evaluate the efficacy of the MicroLight 830(TM) in
the treatment of CTS. These clinical trials are subject to IDE regulations,
including record keeping, adverse event reporting and other clinical study
requirements. Pursuant to IDE regulations the Company's clinical researchers are
required to be reviewed and approved by an Institutional Review Board (IRB) to
treat human patients for research purposes. The objective of these clinical
trials is to evaluate the therapeutic effects of low-level laser energy in pain
management, soft tissue trauma (including repetitive stress injuries) and dental
applications. The Company is sponsoring independent research studies on the
effects of the MicroLight 830(TM) at various clinical sites in the U.S. In
December 1999, the Company submitted to the FDA a Pre-market Approval
Application ("PMAA") after the conclusion of the multi-center, double-blind,
randomized, clinical trials for CTS. The PMAA is currently under review by the
FDA's Office of Device Evaluation.
The Company believes, although no assurances can be given, that the
MicroLight 830(TM) is an effective treatment for CTS. Conventional surgical and
nonsurgical treatments for CTS and other repetitive stress injuries have been
for the most part unsuccessful in allowing CTS sufferers to continue with or
return to productive employment. As a result of the limited success of these
treatments, CTS frequently results in temporary or permanent disability at
substantial economic costs. The Company believes that the potential market for
the MicroLight 830(TM) includes hospitals, clinics, medical doctors,
chiropractors, physical therapists, dentists, veterinarians and, ultimately,
individuals.
The Company also estimates that it will incur $500,000 in expenditures
for research and development, in the event it obtains FDA approval for human
application of the MicroLight 830(TM). Such research and development effort will
primarily emphasize additional photobiostimulation applications for the
MicroLight 830(TM), such as pain suppression, wound healing and sports injuries,
in various medical disciplines including general medicine, dentistry, veterinary
medicine, physical therapy, orthopedic surgery, dermatology and reconstructive
and cosmetic surgery.
CYBEX NORM. The Cybex NORM is a quantitative isokenetic testing and
rehabilitation system with extended standard and custom testing and reporting
capabilities. Test data is collected and stored by the system and can be
compared to a normative database for client assessment. Recently, members of the
Company's Cybex team have updated the NORM software to function on the Windows
95/98 platforms. The system currently utilizes first generation Pentium
microprocessor technology and is expected to be fully functional on the newest
Pentium systems in the near future.
PRODUCT LIABILITY AND INSURANCE
The Company's business includes the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
currently maintains product liability insurance covering up to $3,000,000 in
liability claims. Management believes this coverage is adequate given the fact
that all of the Company's products are considered noninvasive.
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PRODUCT RECALLS
If a device that is designed or manufactured by the Company is found to
be defective, whether due to design or manufacturing defects, to improper use of
the product, or to other reasons, the device may need to be recalled, possibly
at the Company's expense. Furthermore, the adverse effect of a product recall on
the Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of the Company by applicable
regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. Recalls, especially
if accompanied by unfavorable publicity or termination of customer
relationships, could result in substantial costs, loss of revenues, and a
diminution of the Company's reputation, each of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
EMPLOYEES
The Company's performance is substantially dependent on the performance
of its executive officer and key employees, all of whom have worked together for
a relatively short period of time. In particular, the services of Michael M.
Barbour would be difficult to replace. The Company currently has no employment
agreement with Mr. Barbour, but may enter into such an agreement in the future.
In addition, the Company has a $3,000,000 key person life insurance policy on
the life of Mr. Barbour; however, the proceeds of that policy may not be
sufficient to compensate the Company for the loss of Mr. Barbour's services. The
Company does not have such policies in place on any of its other employees. The
loss of the services of any of its executive officers or other key employees
could have a material adverse effect on the business, results of operations or
financial condition of the Company. The Company is heavily dependent upon its
ability to attract, retain and motivate skilled technical and managerial
personnel. The Company's future success also depends on its continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract, hire or retain the necessary technical and managerial
personnel could have a material adverse effect upon the Company's business,
results of operations or financial condition.
As of March 31, 2000, the Company had approximately 142 full-time and 3
part-time employees. None of the Company's employees are represented by a union,
and management believes that its relations with its employees are good. The
Company believes that the success of its business will depend, in part, on its
ability to attract and retain qualified personnel.
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ADDITIONAL RISK FACTORS
SHAREHOLDERS AND POTENTIAL INVESTORS IN SHARES OF THE COMPANY'S STOCK
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO OTHER
INFORMATION IN THIS FORM 10-KSB. THE COMPANY IS IDENTIFYING THESE RISK FACTORS
AS IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY WRITTEN OR ORAL FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. THE COMPANY IS RELYING UPON THE
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS AND ANY SUCH STATEMENTS MADE BY OR ON
BEHALF OF THE COMPANY ARE QUALIFIED BY REFERENCE TO THE FOLLOWING CAUTIONARY
STATEMENTS, AS WELL AS THOSE SET FORTH ELSEWHERE IN THIS FORM 10-KSB.
THE COMPANY WILL BE REQUIRED TO RAISE ADDITIONAL CAPITAL IN ORDER TO FUND ITS
CURRENT OPERATIONS AND TO CONTINUE ITS FUTURE OPERATIONS AND THERE IS
SUBSTANTIAL DOUBT AS TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.
The Company recorded a net loss of $5,349,860 or $1.07 per share for the
year ended December 31, 1999 on net sales of $57,349,625 and there can be no
assurance that the Company will be able to achieve profitability for the long
term. At December 31, 1999, the Company had a working capital deficit of
approximately $11,000,000. Currently, nearly all of the Company's revenue from
its operations is immediately applied to the outstanding balance of its matured
line of credit (the "Line of Credit") with Comerica Bank - Texas ("Comerica").
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. This working capital deficit has since increased because of
the restrictions on the Company's use of its revenues from operations. The
combined effects of this working capital deficit and the restrictions on the use
of its revenues has materially and adversely affected the Company's ability to
purchase supplies and raw materials and to manufacture and deliver products. The
Company must quickly procure substantial amounts of working capital in order to
successfully continue its operations. In addition, the Company needs substantial
additional capital to satisfy its outstanding debt obligations under the Line of
Credit and the Maxxim Note, as described below in Item 6, as well as to pay its
outstanding trade payables and overdue royalty obligations. In order to procure
such working capital, the Company must quickly renegotiate its Line of Credit
and sell substantial amounts of its equity securities. 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 substantial 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. See Item 6, "Liquidity and Capital Resources." Because of these issues,
the Company's independent public accountants have qualified their opinion by
indicating that there is substantial doubt as to the Company's ability to
continue as a going concern.
DUE TO ITS LIMITED NATURE, YOU SHOULD NOT RELY ON THE COMPANY'S COMBINED
OPERATING HISTORY AS AN INDICATOR OF ITS FUTURE PERFORMANCE.
The Company was incorporated in November 1990 to develop a portable
hand-held, battery-operated, low-energy laser device to be used to treat soft
tissue. Since that time, the Company has completed eleven acquisitions related
to the non-invasive pain management and rehabilitation industry. As a result of
this rapid growth in its operations, the Company has a limited combined
operating history. Although the Company experienced significant revenue growth
from fiscal 1998 to fiscal 1999, the Company incurred net losses of
approximately $5,350,000 and $5,831,000 for the years ended December 31, 1998
and 1999, respectively. The Company may not be able to successfully integrate
the acquired businesses and become profitable in the future. In addition, the
Company may experience delays, complications and expenses in integrating
acquired businesses. The Company's inability to successfully integrate or
operate acquired businesses would have a material adverse effect on its
business, financial condition and results of operations.
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THE COMPANY'S SUCCESS WILL DEPEND ON ITS ABILITY TO EFFECTIVELY MANAGE ITS
GROWTH.
Over the last four years, the Company has completed eleven acquisitions,
and this rapid growth continues to place a significant strain on its managerial,
operational and financial resources. To manage its growth, the Company must
continue to implement and improve our operational and financial systems and to
expand, train and manage its employee base. The Company may not have adequately
evaluated the costs and risks associated with this expansion, and its systems,
procedures and controls may not be adequate to support its operations. In
addition, its management may not be able to achieve the rapid execution
necessary to successfully offer its products and services and implement its
business plan on a profitable basis. The Company's future operating results will
also depend on its ability to expand its support organization commensurate with
the growth of its business and to integrate any acquired operations. Any failure
by the Company's management to effectively anticipate, implement and manage the
changes required to sustain its growth would have a material adverse effect on
its business, financial condition and results of operations. There can be no
assurance that the Company will be able to successfully integrate acquired
businesses and become profitable in the future and it may not be able to
effectively manage such change. In addition, the Company may experience delays,
complications and expenses in integrating acquired businesses. The inability of
the Company to successfully integrate or operate acquired businesses would have
a material adverse effect on the Company's business, financial condition and
results of operations.
THE MARKETS FOR THE COMPANY'S PRODUCTS ARE VOLATILE AND THE COMPANY MAY NOT BE
ABLE TO ACHIEVE OR MAINTAIN SUFFICIENT MARKET SHARE.
The pain management market is a relatively mature and competitive
market, subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy and governmental regulation. The
rehabilitation market is an evolving and fragmented market with a number of
different companies offering competing treatments without any clear indication
of preference among treating clinicians. The Company may never be able to
capture a significant portion of the pain management market or establish a
significant position in the rehabilitation market.
THE COMPANY IS IN AN EXTREMELY COMPETITIVE INDUSTRY THAT IS DOMINATED BY SEVERAL
COMPANIES WHICH HAVE SIGNIFICANTLY GREATER FINANCIAL, TECHNICAL, AND MARKETING
RESOURCES THAN THE COMPANY HAS.
Competition in the industry from other pain management and
rehabilitation device companies, as well as from pharmaceutical companies and
biotechnology companies, is intense. Some of the companies with which the
Company competes have significantly greater resources, established direct sales
organizations and greater experience in the marketing and sales of products
through direct distribution. Although the Company believes that the broad range
of rehabilitation products the Company sells distinguishes us from such
competitors, there can be no assurance that the Company will be able to compete
effectively.
THE COMPANY MAY BE LIABLE FOR SUBSTANTIAL MONETARY DAMAGES SHOULD ITS PRODUCTS
INJURE SOMEONE.
Like most producers of medical products, the Company faces the risk of
product liability claims and unfavorable publicity in the event that the use of
its products causes injury or has other adverse effects. Although the Company
has product liability insurance for risks of up to $3,000,000 and has not been
subject to any material claims for product liability, such insurance may be
inadequate to cover all potential product claims. In addition, the Company may
not be able to maintain such insurance indefinitely or be able to avoid product
liability exposure.
PRODUCT RECALLS COULD MATERIALLY AFFECT THE COMPANY'S RESULTS OF OPERATIONS.
If a device that the Company designed or manufactured is found to be
defective, whether due to design or manufacturing defects, improper use of the
product, or other reasons, the device may need to be recalled, possibly at the
Company's expense. Furthermore, the adverse effect of a product recall on the
Company might not be limited to the cost of a recall. For example, a product
recall could cause a general investigation of our products and operations by
applicable regulatory authorities as well as cause other customers to review and
potentially terminate their relationships with the Company. None of the
Company's products have been the subject of a recall. However, a recall,
especially if accompanied by unfavorable publicity or termination of customer
relationships, could result in substantial costs, loss of revenues, and a
diminution of our reputation, any of which could have a material adverse effect
on the Company's business, results of operations and financial condition.
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VARIOUS MARKET AND ECONOMIC FACTORS MAY CAUSE THE COMPANY'S FUTURE QUARTERLY
OPERATING RESULTS TO VARY.
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 its
control. These factors include general economic conditions, specific economic
conditions in the pain management and rehabilitation industries, seasonal trends
in sales, capital expenditures 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 its business, results of operations and financial
condition. Due to the foregoing factors, it is likely 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 COMPANY'S SUCCESS IS HEAVILY DEPENDENT UPON THE RETENTION OF CERTAIN KEY
EMPLOYEES.
The Company's performance is substantially dependent on the performance
of its executive officers and key employees all of whom have worked together for
a relatively short period of time. In particular, the services of Michael M.
Barbour would be difficult to replace. The Company currently has no employment
agreements with Mr. Barbour. The Company has a $3,000,000 key person life
insurance policy on the life of Mr. Barbour; however, the proceeds of that
policy may not be sufficient to compensate the Company for the loss of Mr.
Barbour's services. The Company does not have such policies in place on any of
our other employees. The loss of the services of any of our executive officers
or other key employees could have a material adverse effect on our business,
results of operations or financial condition. In addition, the Company is
heavily dependent upon its ability to attract, retain and motivate skilled
technical and managerial personnel. The Company's future success also depends on
its continuing ability to identify, hire, train and retain other highly
qualified technical and managerial personnel. Competition for such personnel is
intense, and the Company may not be able to attract, assimilate or retain other
highly qualified technical and managerial personnel in the future. The inability
to attract, hire or retain the necessary technical and managerial personnel
could have a material adverse effect upon the Company's business, results of
operations or financial condition.
THE COMPANY'S BUSINESS IS SUBJECT TO STRICT REGULATION BY THE U.S. FOOD AND DRUG
ADMINISTRATION
The development of the MicroLight 830(TM) product and certain of the
Company's other products are subject to extensive and rigorous regulation by the
FDA pursuant to the Federal Food, Drug, and Cosmetic Act, by comparable agencies
in foreign countries, and by state regulatory agencies. Under the Food and Drug
Act, medical devices must receive FDA clearance before they can be commercially
marketed in the United States. The process of obtaining marketing clearance from
the FDA for new products can take a number of years and require the expenditure
of substantial resources, and may involve rigorous pre-clinical and clinical
testing. The time required for completing such testing and obtaining FDA
clearance is uncertain, and the Company may not obtain sufficient resources to
complete the required testing and regulatory review process. In addition, the
Company may not obtain such FDA clearances, or may encounter delays that will
adversely affect its ability to commercialize additional products. Delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA review of each submitted application. Similar
delays may also be encountered in other countries. Even if regulatory approvals
to market a product are obtained from the FDA, these approvals may entail
limitations on the indicated uses of the product. In addition, as can be
expected with any investigational device, modifications will be made to the
Company's products to incorporate and enhance their functionality and
performance based upon new data and design review. The FDA may request
additional information relating to product improvements, and could require
further regulatory review thereby delaying the testing, approval and
commercialization of the Company's development products, and could withhold
approval of any such improvement. The FDA can withdraw product approvals due to
failure to comply with regulatory standards or the occurrence of unforseen
problems following initial approval. Later discovery of previously unknown
problems with a product, manufacturer, or facility may result in restrictions on
such product or manufacturer, including fines, delays or suspensions of
regulatory clearances, seizures or recalls of products, operating restrictions
and criminal prosecution, and could have a material adverse effect on the
Company. FDA regulations depend heavily on administrative interpretation, and
future interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, could adversely affect the Company.
The MicroLight 830(TM), a Class III medical device, has been defined by
the FDA as a "non-significant risk" device. The Company is allowed to conduct
clinical trials under an approved Investigational Device Exemption using the
MicroLight 830(TM). In August 1997, the FDA accepted the Company's
Pre-Investigational Device Exemption Clinical Investigation Plan for a
multi-center, double-blind, randomized, clinical study to evaluate the efficacy
of the MicroLight 830(TM) in the treatment of carpal tunnel syndrome. These
clinical trials are subject to Investigational Device Exemption regulations,
including record
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keeping, adverse event reporting and other clinical study requirements. Pursuant
to Investigational Device Exemption regulations the Company's clinical
researchers are required to be reviewed and approved by an Institutional Review
Board to treat human patients for research purposes. The objective of these
clinical trials is to evaluate the therapeutic effects of low-level laser energy
in pain management, soft tissue trauma and dental applications. The Company has
recently concluded specific aspects of independent research studies of the
MicroLight 830(TM) at various clinical sites in the U.S. The Company cannot
predict whether (i) the results of the various research studies that are being
or have been conducted using the MicroLight 830(TM), will demonstrate to the
FDA's satisfaction the safety and effectiveness of the MicroLight 830(TM) in
treating carpal tunnel syndrome; (ii) the FDA will agree that the design of the
studies is satisfactory; (iii) the FDA will not require additional clinical
studies; or (iv) the Company will be able to obtain the necessary FDA marketing
clearance for the MicroLight 830(TM) on a timely basis, if at all. The FDA's
rejection of the clinical design or the data generated could lead to rejection
of the application for commercial marketing of the MicroLight 830(TM) and/or the
need to conduct additional clinical trials. Until it obtains FDA market
clearance, the Company is unable to sell the product in commercial quantities
for human application in the U.S. market.
THE COMPANY'S REVENUES MAY BE ADVERSELY AFFECTED BY GOVERNMENT AND THIRD-PARTY
REIMBURSEMENT REFORMS
Governmental and other efforts to reduce healthcare spending have
affected, and will continue to affect, the Company's operating results. The cost
of a significant portion of health care in the United States is funded by
government and private insurance programs, such as Medicare, Medicaid, health
maintenance organizations, and private insurers, including Blue Cross/Blue
Shield plans. Government imposed limits on reimbursement of hospitals and other
health care providers have significantly curtailed their spending budgets. Under
certain government insurance programs, a healthcare provider is reimbursed a
fixed sum for services rendered in treating a patient, regardless of the actual
charge for such treatment. Private and third-party reimbursement plans are also
developing increasingly sophisticated methods of controlling healthcare costs
through redesign of benefits and exploration of more cost-effective methods of
delivering healthcare. In general, these government and private cost-containment
measures have caused healthcare providers to be more selective in the purchase
of medical products.
Under most third-party reimbursement plans, the coverage of an item or
service and the amount of payment that will be made are separate decisions.
Efforts to reduce or control healthcare spending are likely to limit both the
coverage of certain medical and therapeutic devices, especially newly approved
products, and the amount of payment that will be allowed. Restrictions on
coverage and payment of the Company's products by third-party payors could have
an adverse impact on the Company.
In the third quarter of fiscal 1998, the Health Care Financing
Administration ("HCFA") implemented salary equivalency reimbursement guidelines
for occupational therapy and speech language pathology services and revised
guidelines for physical therapy services. The net effect of these guidelines was
to reduce the long-term care reimbursement rates and gross profit percentage
from previous levels. Additionally, the Balanced Budget Act of 1997 requires a
change from these salary equivalency guidelines for therapy services to a
prospective payment system ("PPS") for Medicare Part A services and a fee
schedule with annual maximum payments per patient for Medicare Part B services.
Management does not believe the PPS section of the Balanced Budget Act of 1997
will have a significant impact on the Company's revenues because the guidelines
primarily cover reimbursement for therapy services rather than therapy devices.
In addition, several states and the federal government are investigating
a variety of alternatives to reform the health care delivery system and further
reduce and control health care spending. These reform efforts include proposals
to limit spending on health care items and services, limit coverage for new
technology, and limit or control directly the prices health care providers and
drug and device manufacturers may charge for their services and products.
Although the scope and timing of such reforms cannot be predicted at this time,
it is a continuing trend in U.S. health care for such payments to be under
continual scrutiny and downward pressure. The Company believes that
reimbursement in the future will be subject to increased restrictions, both in
the United States and in foreign markets and that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products which the Company offers. If
adopted and implemented, any such cost reduction reforms could have a material
adverse effect on the Company.
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INTERNATIONAL TRANSACTIONS AND TRANSACTIONS IN FOREIGN CURRENCIES PRESENT RISKS
THAT COULD MATERIALLY AFFECT THE COMPANY'S BUSINESS AND FINANCIAL PERFORMANCE.
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 significantly expanded the Company's
foreign operations. International transactions subject us to several potential
risks, including (i) fluctuating exchange rates (to the extent the Company's
transactions are not in U.S. dollars); (ii) varying economic and political
conditions; (iii) cultures and business practices in different countries or
regions; (iv) regulation of fund transfers by foreign governments (v)
overlapping or differing tax structures; and (vi) 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 its international operations reported in U.S. dollars. It is
anticipated that more than one-half of the Company's total sales for 2000 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 our foreign
subsidiaries and may suffer a loss as a result of adverse exchange rate
movements between the relevant currencies. Any of the foregoing could have a
material adverse effect upon the Company's business.
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies 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 the 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.
Sales of the Company's medical products outside the United States are
subject to regulatory requirements that vary widely from country to country. The
time required to obtain clearance for sales in foreign countries may be longer
or shorter than that required for FDA clearance, and the requirements may
differ. The FDA also regulates the sale of exported medical devices, although to
a lesser extent than devices sold in the United States. For medical products
exported to countries in Europe, the Company anticipates that its customers will
want their products to qualify for distribution under the "CE Mark." The CE Mark
is a designation given to products which comply with certain European Economic
Area policy directives and therefore may be freely traded in almost every
European country. Commencing in 1998, medical product manufacturers are required
to obtain certifications necessary to enable the CE Mark to be affixed to
medical products they manufacture for sale throughout the European Community. In
addition, the Company's distributors and customers must comply with other laws
generally applicable to foreign trade, including technology export restrictions,
tariffs, and other regulatory barriers. The Company's distributors and customers
may not be able to obtain all required clearances or approvals for exported
products on a timely basis, if at all. Failure or delay by the Company's
customers in obtaining the requisite regulatory approvals for exported
instruments it manufactures may have a material adverse effect on its business,
results of operations, and financial condition.
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THE COMPANY'S SUCCESS IS HEAVILY DEPENDENT UPON A VARIETY OF PROPRIETARY
INTELLECTUAL PROPERTY RIGHTS. THE COMPANY'S CURRENT PROTECTIONS MAY NOT BE
SUFFICIENT TO PROTECT THESE TECHNOLOGIES.
The Company actively seeks patent protection for its proprietary
technology, both in the U.S. and abroad. The Company owns several U.S. issued
patents and various foreign counterparts. The Company's success will depend, in
part, on its ability to obtain patents and to operate without infringing on the
proprietary rights of others. There can be no assurance that patents issued to
or licensed by the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. The Company's pending patent applications or patent applications in
preparation presently or in the future, if and when issued, may not be valid and
enforceable and withstand litigation. In addition, others may independently
develop substantially equivalent or superseding proprietary technology and
equivalent products may be marketed in competition with the Company's products,
thereby substantially reducing the value of its proprietary rights. The Company
currently has one patent application pending in the U.S. There is a substantial
backlog of patent applications at the U.S. Patent and Trademark Office. Because
patent applications in the U.S. are maintained in secrecy until patents issue,
and because publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months, the Company may not
obtain patent protection for its inventions. In addition, patent protection,
even if obtained, is effective only for a limited period of time. Furthermore,
patent positions are highly uncertain and involve complex legal and factual
questions. Therefore, the scope or enforceability of claims allowed in the
patents on which the Company will rely cannot be predicted with any certainty.
The Company also rely on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. Although the
Company has entered into confidentiality agreements with its employees and
consultants, which contain assignment of invention provisions, the Company
cannot be certain that others will not gain access to these trade secrets, that
such agreements will be honored or that the Company will be able to effectively
protect the Company's rights to our unpatented trade secrets. Moreover, others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
In addition to protecting its proprietary technology and trade secrets,
the Company may be required to obtain licenses to patents or other proprietary
rights from third parties. The Company cannot be certain that any licenses
required under any patents or proprietary rights would be made available on
acceptable terms, if at all. If the Company does not obtain required licenses,
the Company could encounter delays in product introductions while it attempts to
design around blocking patents, or it could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Although the Company has conducted searches to discover any patents on
which its products or their use might infringe and are not aware of any such
patents, the Company cannot be certain that no such infringement has or will
occur. The Company could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted by
third parties, in a suit with another party. The U.S. Patent and Trademark
Office could institute interference proceedings with the Company in connection
with one or more of our patents or patent applications, and such proceedings
could result in an adverse decision as to priority of invention. The U.S. Patent
and Trademark Office or a comparable agency of a foreign jurisdiction could also
institute reexamination or opposition proceedings against us in connection with
one or more of our patents or patent applications and such proceedings could
result in an adverse decision as to the validity or scope of the patents.
THE CURRENT PUBLIC MARKET FOR OUR COMMON STOCK IS LIMITED AND HIGHLY VOLATILE.
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In particular, the market price of the Company's
securities is highly volatile. The following factors may have a significant
effect on the market price of our securities: (i) announcements by us or our
competitors concerning acquisitions; (ii) technological innovations; (iii) new
commercial products or procedures by us or our competitors; (iv) proposed
governmental regulations and developments in both the U.S. and foreign
countries; (v) disputes relating to patents or proprietary rights; (vi)
publicity regarding actual or potential medical results relating to products
sold by the Company or its competitors; (vi) public concern as to the safety of
these products; (vii) economic and other external factors; (viii)
period-to-period fluctuations; and (ix) financial results.
From time to time, there has been limited trading volume with respect to
the Company's common stock. In addition, there can be no assurance that there
will continue to be a trading market or that any analysts will continue to
provide research coverage with respect to its common stock. Accordingly, such
factors may affect the market for the Company's common stock.
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THE MARKET PRICE OF THE COMPANY'S COMMON STOCK COULD BE ADVERSELY AFFECTED BY
SALES OF RESTRICTED AND OTHER SECURITIES.
As of March 31, 2000, there were approximately 7,257,570 shares of our
common stock issued and outstanding. Approximately 1,450,000 shares of common
stock are issuable upon exercise of employee and director stock options under
the Company's non-employee director stock plan and incentive stock plan and will
become eligible for sale in the public markets at prescribed times in the
future. The Company's issuance of such 1,450,000 shares is registered on a Form
S-8 Registration Statement. As of April 1, 2000, other outstanding options were
exercisable to purchase approximately 876,000 shares of common stock. The
Company also has outstanding warrants which are exercisable into an aggregate of
796,099 shares of common stock. In addition, 1,500,000 shares of common stock
are issuable upon conversion of the remaining $3,000,000 principal balance of a
convertible promissory note issued to Maxxim Medical, Inc. Lastly, each series
of preferred stock is convertible into additional shares of the Company's common
stock.
The maximum number of shares issuable upon the conversion of the
outstanding shares of the Company's Series B and Series C Preferred Stock cannot
be estimated since the Series B and Series C Preferred Stock have no minimum on
the conversion price. Since all of the preferred shares have floating conversion
rates, the number of shares issuable upon conversion will vary inversely to the
market price of our common stock.
The issuance and sale of a significant number of shares of common stock
upon the exercise of stock options and warrants, the conversion of our
outstanding preferred stock, or the sales of a substantial number of shares of
common stock pursuant to Rule 144 or otherwise, could adversely affect the
market price of the common stock.
THE ISSUANCE OF ADDITIONAL COMMON STOCK UPON THE CONVERSION OR EXERCISE OF
OUTSTANDING DERIVATIVE SECURITIES COULD RESULT IN DILUTION TO EACH SHAREHOLDER'S
PERCENTAGE OWNERSHIP INTEREST AND COULD MATERIALLY AFFECT THE MARKET PRICE OF
THE COMMON STOCK.
A substantial number of shares of common stock are issuable by the
Company upon the conversion of the outstanding principal balance of the Maxxim
Note, the outstanding shares of our convertible preferred stock and upon the
exercise of warrants and options which the Company has issued. Such issuances
could result in dilution to a shareholder's percentage ownership interest and
could adversely affect the market price of the common stock. Under the
applicable conversion formulas of our preferred stock, the number of shares of
common stock issuable upon conversion is inversely proportional to the market
price of the common stock at the time of conversion (i.e., the number of shares
increases as the market price of the common stock decreases). The maximum number
of shares of common stock which may be issuable upon conversion of the Series A
Preferred Stock is limited by provision which prohibits the applicable
conversion price from going below $2.90. However, the Series B and Series C
Preferred Stock does not have any such conversion price limitation and there is
no maximum to the number of shares which could issue upon conversion of the
Series B and Series C Preferred Stock. Therefore, any drop in the market price
will increase the potential dilution which could occur upon conversion of the
Series B or Series C Preferred Stock, which could, in turn, cause the market
price to go lower, and have the effect of creating a declining market price. In
addition, the existence of the floating conversion rate preferred stock and, in
particular, the absence of a floor price with respect to the Series B and Series
C Preferred Stock, could increase our vulnerability to short-selling strategies.
As a result, a total of approximately 3,687,099 shares of common stock
are currently issuable upon the exercise or conversion of such preferred stock,
options, warrants, and the Maxxim Note, which, if issued, would represent
approximately 51% of the then outstanding shares of common stock and result in a
change of control. The number of shares issuable upon the exercise or conversion
of each of our common stock equivalents is subject to adjustment upon the
occurrence of certain dilutive events.
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CERTAIN PROVISIONS CONTAINED IN THE COMPANY'S ARTICLES OF INCORPORATION AND
TEXAS LAW MAY PREVENT OR DELAY A THIRD-PARTY ATTEMPT TO ACQUIRE CONTROL OF THE
COMPANY.
The Company's Articles of Incorporation and the Texas Business
Corporation Act contain certain provisions that may delay or prevent an attempt
by a third-party to acquire control of the Company. For instance, the Company's
board of directors may authorize the issuance of additional shares of preferred
stock without shareholder approval. In addition, the severance provisions of
employment agreements with certain members of management could impede an
attempted change of control of the Company.
THE COMPANY DOES NOT INTEND TO PAY CASH DIVIDENDS ON ITS COMMON STOCK IN THE
NEAR FUTURE, BUT THE COMPANY IS REQUIRED TO PAY DIVIDENDS ON ITS SERIES A
PREFERRED STOCK.
The Company's proposed operations may not result in sufficient revenues
to enable it to operate at a profitable level. The Company has not paid any
dividends on its common stock to date, and have no plans to pay any dividends on
its common stock for the foreseeable future. However, the Company's Series A
Preferred Stock accrues a dividend of 4% per year, payable at the Company's
discretion in cash or in shares of common stock based on a share price equal to
the closing price of our common stock on The Nasdaq SmallCap Market on the
particular dividend date.
ITEM 2. PROPERTIES
The Company owns three buildings of which two are located in Sugar Land,
Texas, and the third in Belton, Texas. The addresses of these owned facilities
are 120 Industrial Boulevard, Sugar Land, Texas 77478, 140 Industrial Boulevard,
Sugar Land, Texas 77478 and 2121 Industrial Park Road, Belton, Texas 76513. The
Company's principal executive and administrative offices are located at the 120
Industrial Boulevard, Sugar Land, Texas, facility consisting of approximately
25,000 square feet. Electronics manufacturing and warehouse operations for the
Company's pain management products and certain administrative functions are
located at the 140 Industrial Boulevard, Sugar Land, facility consisting of
approximately 50,000 square feet. The manufacturing and warehouse facilities for
much of the Company's physical therapy and fitness products for the Clinical
unit are located at the Belton facility consisting of approximately 59,000
square feet.
The Company leases a regional warehouse and distribution facility in
Akron, Ohio, of approximately 15,000 square feet. The Company also leases
approximately 4,900 square feet of office space in Plymouth, Michigan, as
principal operations center for the Training unit.
Internationally, the Company leases a 150,000 square foot warehousing
facility in Brunssum, The Netherlands, a 23,000 square foot office building in
Delft, The Netherlands, and an 18,000 square foot office and warehouse facility
in Sevran, France. All of these properties are utilized by the Company's Enraf-
Nonius subsidiary.
The Company believes that its facilities, whether leased or owned, are
properly maintained and adequate to meet its current needs and should continue
to be adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
LASERMEDICS SALES CORP. V. HENLEY HEALTHCARE, INC. This is a breach of
contract action wherein Lasermedics Sales Corp. ("LSC") alleges that the Company
breached a Special Representation Agreement executed by the parties in May 1992.
LSC is seeking in excess of $1.5 million in damages, contending that the Company
failed to pay certain commissions to LSC, failed to pay an agreed upon monthly
fee, failed to issue warrants to LSC following the Company's January 1993
initial public offering, and failed to pay LSC for its return of the warrants.
The United States District Court for the Southern District of New York has
ordered that the dispute be arbitrated. No arbitration date has been set
although the Company is seeking to have the arbitration scheduled for July 2000.
The Company denies the allegations asserted by LSC and contends that LSC is not
entitled to any damages. The Company has asserted a counter-claim against LSC
and a third-party claim against a principal of LSC. Henley intends to vigorously
defend against LSC's claims.
QUITAM Action. The Company has been advised that it is the subject of a
whistleblower suit filed in Tampa, Florida. The Company has not been served with
the complaint but has obtained a copy of the suit from the United States
District Court of the Middle District of Florida. The suit was initiated by a
former employee of Rehabilicare, Inc., and the United States Government has
intervened as a coplaintiff under the False Claims Act.
The suit alleges that Rehabilicare, Inc., Staodyn, Inc. (a corporation
acquired through a subsidiary of Rehabilicare in 1998), and the Company (from
which Rehabilicare acquired certain assets of a division in 1998), improperly
filed
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approximately 500,000 Medicare claims, that they were overpaid more than
$120,000,000 on such claims and that the total statutory amount recoverable
under the suit could be $15.4 billion. The suit is based primarily on an
allegation that all three companies submitted claims to the government on the
basis of certificates of medical necessity faxed from physicians, rather than on
signed originals, but also alleges that the companies altered those certificates
and overbilled for accessories contained in a "standard medicare kit."
Based on a limited review of the complaint, the Company believes that
only a small number of the claims in dispute were conducted by the Company prior
to the sale of this business in 1998 to Rehabilicare. The Company also believes
that the claims in the complaint are without merit, and intends to vigorously
defend and seek dismissal of the suit.
The Company is also currently involved in certain routine litigation.
Management believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently trades in and is quoted on The
Nasdaq SmallCap Market under the symbol "HENL." The following table sets forth
the range of high and low bid prices on the Company's common stock for calendar
years 1999 and 1998 on The Nasdaq SmallCap Market:
CALENDAR PERIOD HIGH LOW
- --------------- ------ ------
1999:
First Quarter.................................. $3.375 $2.000
Second Quarter................................. 2.937 1.500
Third Quarter.................................. 2.406 0.625
Fourth Quarter................................. 3.187 0.937
1998:
First Quarter.................................. $7.250 $4.625
Second Quarter................................. 7.000 5.125
Third Quarter.................................. 5.875 2.562
Fourth Quarter................................. 4.875 2.000
The Company has authorized 20,000,000 shares of common stock, par value
$.01 per share. As of March 31, 2000, there were 7,257,570 shares issued and
outstanding and 267 shareholders of record, although the Company believes that
there are other persons who are beneficial owners of the Company's securities
held in "street" names. All shares of common stock currently outstanding are
validly issued, fully paid and nonassessable.
RECENT SALES OF UNREGISTERED SECURITIES
During August 1999, the Company sold 50,000 shares of common stock to a
private investor for $2.00 per share pursuant to an exemption from registration
available under Section 4(2) of the Securities Act of 1993, as amended.
In January 2000, the Company sold in a private placement three-year
warrants to purchase 2,180,167 shares of Common Stock and five-year warrants to
purchase 114,835 shares of Common Stock to approximately 33 accredited
individuals and entities. The three- and five-year warrants were sold for $.10
and $.20 each, respectively, and are both exercisable at an exercise price of
$3.00 per share. The private placement was made pursuant to an exemption from
registration available under Section 4(2) of the Securities Act of 1933, as
amended.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
GENERAL
The Company's principal business strategies are to (i) expand
distribution channels and explore new markets, (ii) maximize the utilization of
existing facilities for increased productivity, (iii) achieve and maintain
profitability, (iv) reduce long-term indebtedness, and (v) obtain approval from
the FDA to market and sell the MicroLight 830(TM) in commercial quantities for
human application.
Through 1998, the Company pursued a strategy of consolidating the highly
fragmented physical therapy and rehabilitation industry and grew significantly
as a result of 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 historical results of operations
do not fully reflect the operating efficiencies and improvements that may be
achieved by integrating the acquired businesses and product lines.
The Company's ability to manage its 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.
The Company's operating results may also 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 or marketing decisions or acquisitions
that could have a material adverse effect on the Company's business, results of
operations and financial condition. Due to all of the foregoing factors, it is
possible that in some future quarter, the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock may be materially adversely affected.
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.
RESULTS OF OPERATIONS
Since the acquisition of Enraf-Nonius in May 1998, the Company has
generally operated Enraf-Nonius as a distinct and separate unit 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 accompanying financial
statements.
CONTINUING OPERATIONS
FISCAL 1999 COMPARED TO 1998
HENLEY HEALTHCARE, INC. -- US
The Company's sales revenue in fiscal 1999 amounted to approximately
$18,805,000 reflecting a decrease of approximately $5,092,000 or 21.3 percent
under the amount reported for fiscal year 1998. The decrease was primarily due
to various factors that resulted in decreased sales. The primary factor for this
decrease was the sale of the Company's Homecare division in the third quarter of
1998 and the loss of the associated sales revenue. Secondly, reductions in
medical care reimbursements mandated by the Balanced Budget Act of 1997 resulted
in a material reduction in sales of the Company's Cybex brand equipment.
Finally, a fire at the Company's primary manufacturing facility in Houston,
Texas in 1999 temporarily but significantly diminished the Company's capacity to
manufacture and deliver its products. Net loss from operations for fiscal 1999
amounted to approximately $4,031,000 compared to a net loss of approximately
$4,813,000 in fiscal 1998. The decrease in net loss resulted in large part from
decreased operating expenses related to certain cost-reduction measures
undertaken by the Company. The cost reduction measures included a significant
reduction in employees and related overhead
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and the consolidation of several of the Company's smaller operations into a
centralized location. The Company has substantially repaired the fire damage to
its primary manufacturing facility and believes that the 1999 amendments to the
Balanced Budget Act of 1997 will result in higher medical care reimbursements
than those experienced in 1999. Despite these improvements, however, the Company
has and will continue to have a significant and increasing working capital
deficit and will continue to be restricted in the use of its operating revenues.
These factors will continue to materially and adversely affect the Company's
ability to purchase supplies and raw materials and to manufacture and deliver
its products until the Company is able to obtain substantial working capital and
satisfy its outstanding debt obligations by renegotiating its Line of Credit and
selling substantial amounts of its equity securities.
The Company's gross profit for fiscal 1999 was approximately $6,565,000
compared to approximately $8,861,000 for fiscal 1998. Gross margin as a
percentage of sales in 1999 decreased to 35.1 percent from 37.1 percent in 1998.
The decrease in gross margin as a percentage of sales is primarily the result of
higher costs of raw materials due to the Company's inability to take advantage
of volume discounts for lack of sufficient cash working capital. Our lack of
working capital has also caused certain of the Company's suppliers to charge
higher prices for supplies purchased by the Company and to demand cash payment
for such supplies upon delivery. Additionally, a fire at the Company's primary
facility in Houston in 1999 resulted in significant delays in product shipments
and an overall reduction in operating efficiency.
Sales, general and administrative expenses decreased by approximately
$2,878,000, from approximately $10,659,000 in 1998 to approximately $7,781,000
in 1999, a decrease of approximately 23.8 percent. Sales, general and
administrative costs decreased as a percentage of revenues from approximately
43.9 percent for 1998 to approximately 41.5 percent for 1999. This decrease was
due primarily to decreased sales and general and administrative costs related to
the consolidation of several of the Company's smaller operations. This
consolidation also reduced the overall number of employees, as many former sales
employees became self-employed independent sales representatives. The reduction
in employees also had the related effect of a, decreasing in the Company's
contributions to various employee benefits programs.
Research and development expense increased by approximately $10,000 from
approximately $183,000 in 1998 to approximately $193,000 in 1999, an increase of
approximately 5.5 percent. The increase was primarily due to additional costs
incurred in 1999 relating to the clinical trials of the Company's MicroLight
830(TM) product. As a percentage of sales, research and development costs
increased from 0.8 percent in 1998 to 1.0 percent in 1999. This was due, in
part, to a decreased revenue base in 1999 from the recently discontinued
operations
Depreciation and amortization expense increased by approximately
$702,000, from approximately $1,623,000 in 1998 to approximately $2,325,000 in
1999, a decrease of approximately 18.4 percent. This increase was primarily a
result of an accelerated amortization of a discontinued line.
Interest expense for 1999 was approximately $1,114,000 compared to
approximately $1,214,000 in 1998. The decrease in interest expense was primarily
a decrease in average borrowings from 1998 to 1999, which was offset by
increases in interest rates on the outstanding borrowings.
Other income increased to approximately $208,000 in 1999 compared to
approximately $5,000 recorded in 1998. The increase was primarily the result of
decreased depreciation associated with the amortization of Cybex goodwill.
Income tax expense in 1999 increased by approximately $678,000 over 1998
income tax expense. This increase was due primarily to income generated by
Enraf-Nonius. As of December 31, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $14 million that may be
available to offset future taxable income. The carryforwards will begin to
expire in the year 2005. A valuation allowance was provided to fully reserve the
net deferred tax asset due to realization uncertainties regarding future
operating results. Furthermore, changes in ownership, as defined by the Internal
Revenue Code, could limit the Company's ability to utilize these carryforwards.
ENRAF-NONIUS
Historically, Enraf-Nonius has experienced operating losses due to large
expenses from certain operating inefficiencies. Subsequent to the acquisition,
the Company's management has implemented various programs to reduce costs and
improve operating efficiencies.
For the year ended December 31, 1999, Enraf's revenues were $38,622,000
which resulted in gross profit of $11,510,000 or 29.8 percent and a net loss of
$293,000 or (0.8) percent. During the seven-month period from May 1998, the date
of the Company's acquisition of Enraf, through December 31, 1998, Enraf
generated revenues of $18,035,000 which resulted in gross profit of $6,711,000
or 37.2 percent and net income of $575,000 or 3.2 percent. The decrease in gross
margin in 1999 compared to 1998 resulted primarily from a decline in sales of
Enraf's high-margin core products. Operating expenses for the year ended
December 31, 1999, were approximately $10,350,000 or 26.8 percent of revenue.
Operating expenses for the seven-month period ended December 31, 1998, were
approximately $5,638,000 or 58.2 percent of revenue.
Effective January 1, 1999, Enraf-Nonius assumed the sales and marketing
functions for Henley's core products in
24
<PAGE>
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 continue to generate positive cash flow.
DISCONTINUED OPERATIONS
The Company sold its Homecare division in August of 1998. The Homecare
division had revenue of $3,493,000 in 1998 through the date of sale. Net loss
from the operations of the Homecare division during 1998 was $502,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficit of
approximately $11,000,000. Currently, nearly all of the Company's revenue from
its operations is immediately applied to the outstanding balance of its matured
Line of Credit 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. This working capital deficit has since
increased because of the restrictions on the Company's use of its revenues from
operations. The combined effects of this working capital deficit and the
restrictions on the use of its revenues has materially and adversely affected
the Company's ability to purchase supplies and raw materials and to manufacture
and deliver products.
The Company has an Amended Loan Agreement with Comerica that provides
for (i) a revolving loan ("Line of Credit"), which permitted borrowings 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 December 31,
1999) 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. As of December 31, 1999, the Company had no amounts available
for borrowing under the Line of Credit as its borrowings exceeded its borrowing
base by approximately $1,000,000 and the Line of Credit became due and payable
in full on March 3, 2000. This amount has since increased to approximately
$1,900,000 and will likely continue to increase in the future unless the Company
is, among other factors, 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 December 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 Line of Credit or the
related term notes as of March 31, 2000, such debt has been classified as a
current liability in the accompanying balance sheet as of December 31, 1999.
Additionally, the Company did not make a scheduled loan payment of approximately
$1,500,000 due on May 1, 1999 under the Maxxim Note described below. Further,
the Maxxim Note has a additional $1,500,000 payment scheduled for May 1, 2000.
As a result, at December 31, 1999, the Company had a working capital deficit of
$11,297,000 and a current ratio of 0.63 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 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 December 31, 1999,
and is subject to interest, payable monthly, at the rate of AIBOR (3.5 percent
at December 31, 1999) 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 December 31, 1999, 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 percent of the principal amount being redeemed, depending on when the
25
<PAGE>
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 will be 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 required 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.
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.
In April 1999, the Company sold 750 shares of its newly issued $1,000
per share Series C Convertible Preferred Stock resulting in $576,717 of net
proceeds to the Company. Each share of the Series C Preferred Stock is
convertible into common stock at the lesser of (i) 87% of the average closing
bid price for the Company's Common Stock as reported by Nasdaq for any three
consecutive trading days chosen by the holder of the Series C Shares during the
period beginning on the twentieth day prior to the conversion date for such
conversion and ending on such conversion date, or (ii) $2.875. The proceeds from
this sale were used primarily to repay penalties and accrued dividends
outstanding related to the Company's Series A Preferred Stock.
The Company must quickly procure substantial amounts of working capital
in order to successfully continue its operations. In addition, the Company needs
substantial additional capital to satisfy its outstanding debt obligations under
the Line of Credit and the Maxxim Note, as well as to pay its outstanding trade
payables and overdue royalty obligations. In order to procure such working
capital, the Company must quickly renegotiate its Line of Credit and sell
substantial amounts of its equity securities. 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 substantial 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. 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
26
<PAGE>
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 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.
Consequently, 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
miniscule and not expected to be material to the Company's financial position,
results of operation or cash flows.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements."
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Report of Independent Public Accountants.................................. 22
Consolidated Balance Sheet................................................ 23
Consolidated Statements of Operations and Comprehensive Loss.............. 24
Consolidated Statements of Stockholders' Equity........................... 25
Consolidated Statements of Cash Flows..................................... 26
Notes to Consolidated Financial Statements................................ 27-39
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Henley Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of Henley
Healthcare, Inc. (a Texas corporation) and subsidiaries as of December 31, 1999,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Henley Healthcare,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the year ended
December 31, 1999, the Company incurred a net loss of $5.3 million and had a
working capital deficit at December 31, 1999, of $11million. As of December 31,
1999, and through March 31, 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 a past due loan payment totaling $1.5 million and
another loan payment totaling approximately $1.5 million due on May 1, 2000.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company is currently pursuing additional financing,
although there can be no assurance that the Company will be successful in its
financing efforts. Management's plans in regard to these matters are described
in Note 1. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 2000
29
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 535,294
Accounts receivable, net of allowance for doubtful
accounts of $756,407 .................................................... 7,695,984
Inventory .................................................................. 11,264,286
Prepaid expenses ........................................................... 220,643
Other current assets ....................................................... 116,200
------------
TOTAL CURRENT ASSETS ....................................................... 19,832,407
PROPERTY, PLANT AND EQUIPMENT, net ............................................. 5,901,070
INTANGIBLE AND OTHER LONG-LIVED ASSETS, net .................................... 17,315,359
------------
TOTAL ASSETS ............................................................... $ 43,048,836
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ............................................................ $ 9,670,200
Current maturities of long-term debt ....................................... 7,324,205
Accounts payable ........................................................... 7,220,012
Accrued expenses and other current liabilities ............................. 6,707,485
------------
TOTAL CURRENT LIABILITIES .................................................. 30,921,902
INTEREST PAYABLE ............................................................... 364,774
LONG-TERM DEBT, net of current maturities ...................................... 4,579,711
OTHER LONG-TERM LIABILITIES .................................................... 3,100,000
------------
TOTAL LIABILITIES .......................................................... 38,966,387
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock - $.10 par value; 5,000 shares
authorized; 1,035 shares issued and outstanding .......................... 103
Series B Preferred stock - $.10 par value; 8,000 shares
authorized; 4,700 shares issued and outstanding .......................... 470
Series C Preferred stock - $.10 par value; 2,250 shares
authorized; 750 shares issued and outstanding ............................ 75
Common stock - $.01 par value; 20,000,000 shares authorized;
6,411,139 shares issued; 6,132,139 shares outstanding .................... 64,111
Additional paid-in capital ................................................. 29,337,454
Cumulative translation adjustment .......................................... (493,528)
Accumulated deficit ........................................................ (24,600,057)
Treasury stock, at cost, 279,000 common shares ............................. (226,179)
------------
TOTAL STOCKHOLDERS' EQUITY ................................................. 4,082,449
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. 43,048,836
============
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
30
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
NET SALES ....................................................... $ 57,349,625 $ 41,931,617
COST OF SALES ................................................... 39,275,096 26,359,735
------------ ------------
GROSS PROFIT .................................................... 18,074,529 15,571,882
OPERATING EXPENSES:
Selling, general and administrative .......................... 15,948,260 14,654,443
Research and development ..................................... 1,044,056 1,067,149
Depreciation and amortization ................................ 3,657,138 2,381,825
------------ ------------
LOSS FROM CONTINUING OPERATIONS ................................. (2,574,925) (2,531,535)
INTEREST EXPENSE ................................................ 1,845,950 1,711,566
GAIN ON INVOLUNTARY CONVERSION AND OTHER, net ................... 250,985 (4,738)
------------ ------------
LOSS FROM CONTINUING OPERATIONS, before taxes ................... (4,671,860) (4,238,363)
PROVISION FOR INCOME TAXES ...................................... 678,000 --
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS ............................. (5,349,860) (4,238,363)
DISCONTINUED OPERATIONS:
Loss from Operations of Homecare Division .................... -- (501,785)
Loss on Disposal of Homecare Division ........................ -- (1,091,035)
------------ ------------
NET LOSS ........................................................ $ (5,349,860) $ (5,831,183)
============ ============
Preferred Stock Dividends ....................................... (768,617) (2,268,158)
------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS ....................... $ (6,118,477) $ (8,099,341)
============ ============
- ------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE INFORMATION:
BASIC AND DILUTIVE
Loss from Continuing Operations .............................. $ (1.06) $ (1.30)
Loss from Operations of Homecare Division .................... -- (0.10)
Loss on Disposal of Homecare Division ........................ -- (0.22)
------------ ------------
Net Loss per Common Share - basic and dilutive ............... $ (1.06) $ (1.61)
============ ============
Shares used in computing basic and dilutive earnings per share 5,786,791 5,023,649
============ ============
- ------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS:
Net loss ..................................................... $ (5,349,860) $ (5,831,183)
Foreign currency translation gain (loss) ..................... (934,684) 441,156
------------ ------------
Total Comprehensive Loss ..................................... $ (6,284,544) $ (5,390,027)
============ ============
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
31
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------- ----------------- -----------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 .................. -- $ -- -- $ -- -- $ --
Issuance of common stock for acquisitions ..... -- -- -- -- -- --
Issuance of preferred stock - Series A ........ 2,500 250 -- -- -- --
Warrants issued with preferred stock - Series A -- -- -- -- -- --
Conversion of debt to common stock ............ -- -- -- -- -- --
Issuance of preferred stock - Series B ........ -- -- 4,700 470 -- --
Warrants issued with preferred stock - Series B -- -- -- -- -- --
Dividends on preferred stock - Series A ....... -- -- -- -- -- --
Dividends on preferred stock - Series B ....... -- -- -- -- -- --
Issuance of common stock for cash ............. -- -- -- -- -- --
Translation Adjustment ........................ -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1998 .................. 2,500 $ 250 4,700 $ 470
Issuance of preferred stock - Series C ........ -- -- -- -- 750 75
Conversion of preferred stock to common stock . (1,465) (147) -- -- -- --
Issuance of common stock for cash ............. -- -- -- -- -- --
Issuance of common stock for services ......... -- -- -- -- -- --
Dividends on preferred stock - Series A ....... -- -- -- -- -- --
Dividends on preferred stock - Series B ....... -- -- -- -- -- --
Dividends on preferred stock - Series C ....... -- -- -- -- -- --
Issuance of warrants for cash ................. -- -- -- -- -- --
Issuance of warrants for services ............. -- -- -- -- -- --
Translation Adjustment ........................ -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1999 .................. 1,035 $ 103 4,700 $ 470 750 $ 75
====== ====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN COMPREHENSIVE
SHARES PAR VALUE CAPITAL INCOME
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 .................. 3,473,897 $ 34,738 $14,117,079 $ --
Issuance of common stock for acquisitions ..... 188,308 1,883 1,195,117 --
Issuance of preferred stock - Series A ........ -- -- 2,257,364 --
Warrants issued with preferred stock - Series A -- -- 825,541 --
Conversion of debt to common stock ............ 2,000,000 20,000 4,311,041 --
Issuance of preferred stock - Series B ........ -- -- 4,079,862 --
Warrants issued with preferred stock - Series B -- -- 846,747 --
Dividends on preferred stock - Series A ....... -- -- -- --
Dividends on preferred stock - Series B ....... -- -- -- --
Issuance of common stock for cash ............. 50,000 500 149,500 --
Translation Adjustment ........................ -- -- -- 441,156
Net loss ...................................... -- -- -- --
--------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 .................. 5,712,205 $ 57,121 $27,782,251 $ 441,156
Issuance of preferred stock - Series C ........ -- -- 576,717 --
Conversion of preferred stock to common stock . 616,562 6,166 222,945 --
Issuance of common stock for cash ............. 25,000 250 49,750 --
Issuance of common stock for services ......... 57,372 574 136,938 --
Dividends on preferred stock - Series A ....... -- -- -- --
Dividends on preferred stock - Series B ....... -- -- 212,493 --
Dividends on preferred stock - Series C ....... -- -- 173,646 --
Issuance of warrants for cash ................. -- -- 146,068 --
Issuance of warrants for services ............. -- -- 36,646 --
Translation Adjustment ........................ -- -- -- (934,684)
Net loss ...................................... -- -- -- --
--------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1999 .................. 6,411,139 $ 64,111 $29,337,454 $ (493,528)
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(CONTINUED)
<TABLE>
<CAPTION>
TREASURY STOCK TOTAL
ACCUMULATED ------------------------- STOCKHOLDERS'
DEFICIT SHARES COST EQUITY
------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 .................. $(10,382,240) (279,000) $ (226,179) $ 3,543,398
Issuance of common stock for acquisitions ..... -- -- -- 1,197,000
Issuance of preferred stock - Series A ........ -- -- -- 2,257,614
Warrants issued with preferred stock - Series A -- -- -- 825,541
Conversion of debt to common stock ............ -- -- -- 4,331,041
Issuance of preferred stock - Series B ........ -- -- -- 4,080,332
Warrants issued with preferred stock - Series B -- -- -- 846,747
Dividends on preferred stock - Series A ....... (1,436,609) -- -- (1,436,609)
Dividends on preferred stock - Series B ....... (831,549) -- -- (831,549)
Issuance of common stock for cash ............. -- -- -- 150,000
Translation Adjustment ........................ -- -- -- 441,156
Net loss ...................................... (5,831,183) -- -- (5,831,183)
------------ --------- ------------ ------------
BALANCE AT DECEMBER 31, 1998 .................. $(18,481,581) (279,000) $ (226,179) $ 9,573,488
Issuance of preferred stock - Series C ........ -- -- -- 576,792
Conversion of preferred stock to common stock . -- -- -- 228,964
Issuance of common stock for cash ............. -- -- -- 50,000
Issuance of common stock for services ......... -- -- -- 137,512
Dividends on preferred stock - Series A ....... (382,478) -- -- (382,478)
Dividends on preferred stock - Series B ....... (212,493) -- -- --
Dividends on preferred stock - Series C ....... (173,646) -- -- --
Issuance of warrants for cash ................. -- -- -- 146,068
Issuance of warrants for services ............. -- -- -- 36,646
Translation Adjustment ........................ -- -- -- (934,684)
Net loss ...................................... (5,349,859) -- (5,349,859)
------------ --------- ------------ ------------
BALANCE AT DECEMBER 31, 1999 .................. $(24,600,057) (279,000) $ (226,179) $ 4,082,449
============ ========= ============ ============
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
32
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ............................................................ ($5,349,859) ($5,831,183)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense .......................... 3,657,138 2,381,825
Interest expense imputed on notes payable ...................... -- 37,574
Provision for doubtful accounts ................................ 530,000 1,195,172
Issuance of common stock for services .......................... 94,146 --
Gain on involuntary conversion ................................. (669,030) --
Non-cash provision for income taxes ............................ 678,000 --
Loss on sale of Homecare division .............................. -- 1,091,035
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .................... 3,332,371 (1,313,522)
(Increase) decrease in inventory .............................. (3,128,889) 248,737
(Increase) decrease in prepaid expenses and other current assets (1,653) 357,229
Decrease in other assets ...................................... -- 542,618
Increase (decrease) in accounts payable and accrued liabilities 127,766 923,705
----------- -----------
Net cash used in operating activities ......................... (730,010) (366,810)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired .................................. -- (269,770)
Proceeds from disposal of Homecare .................................. -- 3,649,400
Capital expenditures ................................................ (7,408) (1,941,832)
----------- -----------
Net cash provided by (used in) investing activities ........... (7,408) 1,437,798
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock and warrants .......... 722,860 6,474,602
Proceeds from issuance of common stock .............................. 50,000 150,000
Payments of dividends and penalties on preferred stock .............. (470,031) (143,024)
Net proceeds from involuntary conversion ............................ 872,038 --
Net proceeds (payments) on lines of credit .......................... 1,021,775 (6,655,006)
Proceeds from long-term debt ........................................ -- 1,260,000
Principal payments of long-term debt and other liabilities .......... (479,895) (2,231,687)
----------- -----------
Net cash provided by (used in) financing activities ............ 1,716,747 (1,145,115)
EFFECT OF TRANSLATION EXCHANGE RATE CHANGES ON CASH ........................ (934,684) 441,156
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................. 44,645 367,029
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 490,649 123,620
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 535,294 $ 490,649
=========== ===========
</TABLE>
The accompanying notes are an integral part
of this consolidated financial statement.
33
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Henley Healthcare, Inc. (formerly Lasermedics, Inc.) and Subsidiaries
(collectively, the Company) was organized in November 1990 and is an
international manufacturer, provider and marketer of diversified products and
services in the physical therapy and rehabilitation industry. The Company's
customers are located in many parts of the world, with a concentration in the
United States and Europe.
The Company has grown over the last three years through acquisition of
businesses and product lines. Consequently, the Company continues to face the
challenge of successfully integrating the operations of the acquired businesses
and implementing the acquired product lines into its overall business strategy.
The Company's future success is dependent on many factors which include, among
others, competition, technological changes, generating sufficient sales volume
to achieve and maintain profitability and obtaining sufficient financing to fund
its stated business objectives. The Company will continue to seek to expand the
market for its products. However, markets for the Company's current and future
products are highly competitive and subject to continuing technological change
and development. Future sales growth will depend to some extent upon the ability
of the Company to successfully market its current and future products in this
competitive environment. Additionally, some of the Company's products are
regulated by the United States Food and Drug Administration ("FDA"), from whom
the Company is also required to secure clearance prior to marketing certain new
products. Lack of clearance or delays in securing such clearance could have a
negative impact on sales of such new products.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the year ended
December 31, 1999, the Company incurred a net loss of $5.3 million and had a
working capital deficit at December 31, 1999, of approximately $1.1 million. As
of December 31, 1999, and through March 31, 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 a past due loan payment totaling
$1.5 million and another loan payment totaling approximately $1.5 million due on
May 1, 2000. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company is currently pursuing 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. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Henley
Healthcare, Inc., and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when the title passes to the buyer, typically when
the product is shipped or services have been rendered. Service revenues and
costs of service revenues are not presented separately in the consolidated
financial statements as they represent less than four percent of net sales. The
Company sells a wide range of products to a diversified base of customers around
the world. Net revenue is reported at the estimated net realizable amount from
customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
maintains cash in bank deposit accounts which, at times, exceed federally
insured limits.
INVENTORY
Inventory is stated at the lower of cost, determined by the first-in,
first-out (FIFO) valuation method, or market. Cost includes the acquisition of
raw materials and components, direct labor and overhead.
35
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is provided using
the straight-line method over the estimated useful lives of the assets.
Maintenance, repairs and minor replacements are charged to expense as incurred;
significant renewals and betterments are capitalized.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
Intangible and other assets consists principally of goodwill, acquired
trade name rights and other identifiable intangible assets which are being
amortized on a straight-line basis over periods of up to 15 years. Goodwill
represents the excess of the aggregate purchase price paid by the Company over
the fair market value of the tangible and identifiable intangible net assets
acquired arising from business acquisitions accounted for under the purchase
method. Accumulated amortization at December 31, 1999, was approximately
$2,830,000.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and
certain identifiable intangibles (including goodwill) held and used by a company
be reviewed for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company periodically assesses the realizability of its long-lived assets
pursuant to the provisions of SFAS No. 121. Based on the Company's analysis of
the undiscounted future cash flows for its long-term assets, no impairments have
been recognized under SFAS No. 121.
During the fourth quarter of 1999, the Company discontinued a consulting
service line. Accordingly, accumulated amortization was accelerated to fully
amortize goodwill associated with the service line, which totaled approximately
$1,036,000.
INCOME TAXES
The Company uses the liability method of accounting for income taxes
pursuant to SFAS No. 109, under which deferred income taxes reflect the tax
consequences on future years of temporary differences (differences between the
tax bases of assets and liabilities and their financial statement carrying
amounts at year-end). The Company provides a valuation allowance that reduces
deferred tax assets to their estimated net realizable value based on an
evaluation of the likelihood of the realization of those tax benefits.
LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share," the Company
presents both basic and dilutive net loss per share in its historical financial
statements. Basic net loss per common share is based on the weighted average
number of shares outstanding during the period, while dilutive net loss per
common share considers the dilutive effect of stock options and warrants
reflected under the treasury stock method. Dividends attributable to preferred
stock (see Note 9) increase the net loss available to common stockholders.
Additionally, the Company has separately presented per share information for
loss from continuing and discontinued operations due to the sale of the Homecare
division in 1998 (see Note 15).
STOCK OPTIONS
The Company measures compensation cost using APB Opinion No. 25 (APB 25)
as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation."
Pursuant to APB 25, the Company would record deferred compensation expense for
stock-based compensation arrangements based on the excess of the market value of
the common stock on the measurement date over the exercise price of the common
stock option/warrant granted to employees and non-employee directors. The
deferred compensation is amortized over the vesting period of each unit of
stock-based compensation. No compensation expense is recorded if the exercise
price of the stock-based compensation grant is equal to or greater than the
market price of the Company's common stock on the date of grant.
36
<PAGE>
RESEARCH AND DEVELOPMENT
Expenditures relating to research and development are expensed as
incurred.
TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities are translated at the exchange rate as of the
balance sheet date. All revenue and expense accounts are translated at a
weighted average of exchange rates in effect during the year. Translation
adjustments are recorded as a separate component of equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. Transaction gains and losses
during 1999 and 1998 were not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management affecting the reported amounts of assets and
liabilities and revenue and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission, (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999, and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation. Management is
currently evaluating the impact of SAB 101 and does not believe that adoption of
this SAB will have a material impact on the Company's financial position or
results of operations.
2. INVENTORY:
Substantially all of the Company's inventory is pledged as collateral
for the Company's line of credit long-term debt. Inventory at December 31, 1999,
included the following:
Raw material........................... $ 3,949,174
Work-in-process........................ 3,975,478
Finished goods......................... 3,339,634
-----------
$11,264,286
===========
3. PROPERTY, PLANT AND EQUIPMENT:
Substantially all of the Company's property, plant and equipment is
pledged as collateral for the Company's long-term debt. At December 31, 1999,
property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
------------
<S> <C> <C>
Land............................................... $ 420,000 --
Buildings and improvements......................... 4,027,883 25 years
Machinery and equipment............................ 4,082,932 3 to 7 years
Office furniture and fixtures...................... 464,828 5 years
----------
8,995,643
Less -- Accumulated depreciation................... (3,094,573)
----------
Property, plant and equipment, net...... $5,901,070
==========
</TABLE>
37
<PAGE>
4. INTANGIBLE AND OTHER ASSETS:
At December 31, 1999, intangible and other assets consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C> <C>
Distribution system ............................... $ 10,718,000 15 years
Trade names ....................................... 4,325,171 15 years
Goodwill .......................................... 2,944,577 15 years
Patents ........................................... 1,361,675 7 to 15 years
Proprietary training programs ..................... 719,405 5 to 10 years
Other ............................................. 77,000 Up to 15 years
20,145,828
Less -- Accumulated amortization .................. (2,830,469)
------------
Intangible and other assets, net ........ $ 17,315,359
============
</TABLE>
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
The following are included in accrued expenses and other current
liabilities at December 31, 1999:
Payroll and commissions ............................. $1,140,706
Reserve for contract ................................ 455,000
Preferred stock dividends and penalties ............. 246,730
Vacation payable .................................... 514,000
Interest payable .................................... 512,273
Insurance premiums .................................. 447,986
Professional and other fees ......................... 533,292
Other ............................................... 2,857,498
----------
$6,707,485
==========
6. LONG-TERM DEBT:
The following table summarizes the Company's notes payable and capital
lease obligations at December 31, 1999:
Note payable, Maxxim ............................... $ 3,000,000
Term notes, with bank .............................. 3,153,297
Note payable, Delft ................................ 4,067,000
Capital lease obligations (see Note 11) ............ 983,000
Other notes payable ................................ 700,619
-----------
11,903,916
Less -- Current maturities ......................... 7,324,205
-----------
$ 4,579,711
===========
38
<PAGE>
NOTE PAYABLE, MAXXIM
In connection with the acquisition of its Henley division in April 1996,
the Company issued a convertible promissory note (the Note) to Maxxim Medical,
Inc. ("Maxxim".) The Note is convertible into common stock of the Company at a
conversion price of $2.00 per share. The Note is payable subject to mandatory
redemption requirements of $1.4 million annually beginning on May 1, 1999, with
a final payment due May 1, 2001. These mandatory redemptions are subject to
premiums starting at 7 percent and decreasing 1 percent each year. The
installment premiums are recognized as interest expense on a straight-line basis
over the term of the Note. In addition, the Company is required to redeem 40
percent of the Note upon completion of a public offering. The Company also may
redeem any or all of the outstanding principal amount of the Note at its option
at redemption prices ranging from 104 percent to 110 percent of the principal
amount being redeemed, depending on when the redemption occurs as set forth in
the Note. Interest is payable semiannually on November 1 and May 1 of each
calendar year at a rate of 2 percent per annum and increasing 2 percent annually
on May 1. However, the Company accrues interest related to the Note on a
straight-line basis at an average rate of 7.4 percent per annum. Accordingly,
$365,000 of accrued interest has been classified as long-term in the
accompanying consolidated balance sheet as of December 31, 1999. As of December
31, 1999, and through March 31, 2000, the Company was in default of payments on
the Note totaling approximately $1.5 million which were due on May 1, 1999.
On February 20, 1998, and March 13, 1998, the Company entered into
agreements with Maxxim pursuant to which Maxxim converted an aggregate of
$4,000,000 outstanding under the Note into an aggregate of 2,000,000 shares of
the Company's common stock, par value $.01 per share. Pursuant to the conversion
notice, the entire $4 million conversion was applied to the Company's full
redemption obligation due in the years 2003 and 2002 and partially to the
Company's redemption obligation due in the year 2001 as originally provided in
the Note. Additionally, accrued interest totaling $331,041 related to the
installment premium was converted to equity in conjunction with the debt
conversion.
TERM NOTES WITH BANK
The Company has an Amended Loan Agreement with a bank providing for (a)
a revolving loan arrangement which permits borrowings up to $6,000,000 and (b)
two term loans in the amounts of $1,430,000 ("Term Note A") and $1,616,000
("Term Note B"), respectively. Term Notes A and B are payable in monthly
installments of principal plus interest aggregating $32,811. The revolving loan
also includes a $250,000 letter-of-credit facility. Interest on the revolving
loan and the term loans is payable monthly and is calculated at a rate equal to
the Prime Rate (8.5 percent at December 31, 1999) plus (i) five percent per
annum for the revolving loan, and (ii) three and one-half percent per annum for
the term loans. Term Note A is due on September 30, 2002, and Term Note B is
callable by the bank beginning on its fifth anniversary. At December 31, 1999,
the balances outstanding under Term Notes A and B were $810,342 and $1,229,955,
respectively.
In February 1998, the Company entered into an agreement with Maxxim
whereby it acquired from Maxxim an office/warehouse building located in Sugar
Land, Texas, for a purchase price of approximately $1.3 million. The purchase
price was financed with a new term note ("Term Note C") with the bank in the
principal amount of $1,260,000 with a maturity date of February 12, 2013. At
December 31, 1999, the balance outstanding under this term note was $1,113,000.
Term Note C bears interest at the prime rate (8.5 percent at December 31, 1999)
plus three and one-half percent per annum, is payable in monthly principal
installments of $7,000 plus all accrued interest thereon and is subject to the
terms and conditions of the Amended Loan Agreement.
LINES OF CREDIT
The Amended Loan Agreement provides for a revolving loan which permits
borrowings of up to $6,000,000, subject to a revised borrowing base calculation
derived from the Company's eligible accounts receivable and inventory. The
revolving loan, included in the accompanying balance sheet as a line of credit,
had an outstanding balance of $5,853,200 at December 31, 1999, and is subject to
interest, payable monthly, at the prime rate (8.5 percent at December 31, 1999)
plus five percent per annum. At December 31, 1999, no funds were available for
borrowings under the revolving loan as the Company's borrowings exceeded its
borrowing base by approximately $1.0 million. As of March 31, 2000, the
borrowings in excess of the borrowing base were approximately $2.7 million. The
revolving loan's maturity date was March 3, 2000. All of the borrowings from the
bank are secured by substantially all of the assets of the Company.
The Amended Loan Agreement contains a number of affirmative covenants,
negative covenants and financial
39
<PAGE>
covenants with which the Company must comply, including a minimum tangible net
worth, leverage ratio, working capital ratio, fixed charge ratio and interest
coverage ratio. As of December 31, 1999, the Company was in default of certain
of these financial and nonfinancial covenants. While the bank has not demanded
payment of the revolving loan, all debt balances with the bank have been
classified as a current liability in the accompanying balance sheet as of
December 31, 1999. Additionally, the Company is limited in the amount of its
capital expenditures, research and development expenditures and dividends.
Further, all future acquisitions and major corporate transactions require
approval of the bank, as do offerings of securities by the Company.
On May 29, 1998, the Company acquired substantially all of the assets
and assumed certain liabilities of Enraf-Nonius, B.V. (Enraf-Nonius), a wholly
owned subsidiary of Delft Instruments N.V. (Delft). Enraf-Nonius specializes in
the development, manufacture and sale of medical products, including ultrasound
and electrical stimulation used in pain management, physical therapy and
rehabilitation. The purchase price for Enraf-Nonius was approximately
$15,000,000 plus acquisition costs of approximately $800,000. The purchase was
financed with short- and long-term notes totaling approximately $7,000,000 from
Delft and $8,000,000 from bank financing. Pursuant to acquiring Enraf-Nonius,
the Company entered into a revolving credit facility with a Netherlands bank.
The agreement provides for aggregate borrowings up to $7,500,000, subject to a
revised borrowing base calculation derived from Enraf-Nonius' eligible accounts
receivable and inventory. The revolving loan, included in the accompanying
balance sheet as a line of credit, had an outstanding balance of $3,817,000 at
December 31, 1999, and is subject to interest, payable monthly, at the rate of
AIBOR (3.5 percent at December 31, 1999) plus 1 percent per annum. The revolving
note is secured by Enraf-Nonius' accounts receivable, inventory and certain
fixed assets, and renews annually. At December 31, 1999, no funds were available
for borrowing under this revolving credit facility.
NOTE PAYABLE, DELFT
The note issued to Delft in connection with the acquisition is payable
in equal, semiannual principal amounts of approximately $480,000, commencing
June 1, 2000, through December 1, 2004. Interest accrued at 4 percent annually
through June 1, 1999, at which point the rate increased to 5 percent through the
balance of the note term. Management believes the interest rate on the note
approximates the market rate in the Netherlands at the date of acquisition of
Enraf. Interest is payable annually commencing June 1, 1999.
OTHER NOTES PAYABLE
Various notes payable to individuals in connection with acquisitions are
payable in monthly aggregate principal installments of $7,336 with maturities
from December 1999 through February 2001 at interest rates ranging from 8
percent to prime plus 2 percent. At December 31, 1999, approximately $80,000 in
notes payable had matured and had not been paid.
The estimated fair value of the Maxxim Note amounted to $3,000,000
pursuant to a valuation by an investment banking firm. Based on borrowing rates
currently available to the Company for loans with similar terms and average
maturities, the fair value of the Company's other long-term debt approximates
the carrying amount.
Aggregate maturities of long-term debt are as follows:
For the year ending December 31,
2000 ........................................... $ 7,324,205
2001 ........................................... 1,473,678
2002 ........................................... 918,000
2003 ........................................... 924,000
2004 ........................................... 933,000
2005 and thereafter ....................... 380,000
-----------
$11,952,883
===========
40
<PAGE>
7. OTHER LONG-TERM LIABILITIES
The following are included in other long-term liabilities at December
31, 1999:
Pension reimbursement to Delft ...................... $ 1,533,000
Reorganization costs reimbursement to Delft ......... 1,643,000
-----------
3,176,000
Less current maturities ............................. (76,000)
-----------
$ 3,100,000
===========
The amounts included in other long-term liabilities relate to
liabilities incurred pursuant to the Company's acquisition of Enraf-Nonius from
Delft Instruments in May 1998. The Company agreed to reimburse Delft Instruments
for pensions related to certain employees as they become due and for incremental
reorganization costs precipitated by the acquisition. The Company will be
required to reimburse Delft Instruments for any pensions paid to the specified
employees as they retire. At December 31, 1999, no requests for reimbursement
had been made by Delft Instruments and no payments had been made by the Company
to Delft Instruments.
The Company is required to make monthly payments of approximately
$7,000, through May 2005, to repay a portion of the reorganization costs.
Approximately $84,000 and $50,000 of such costs were paid during the years ended
December 31, 1999 and 1998, respectively. Pursuant to an agreement with Delft,
entered into in January 1999, payments on the balance of the reorganization
liability are payable in quarterly installments over a five year term beginning
in January 2000, and are subject to interest at four percent in the first year
and five percent thereafter.
8. INCOME TAXES:
The following is an analysis of the Company's deferred tax assets and
liabilities at December 31, 1999:
Deferred tax assets: 1999
-----------
Accrued expenses and other .................... $ 372,000
Allowance for doubtful accounts receivable .... 318,000
Deferred compensation ......................... 494,000
Net operating loss carryforwards .............. 3,358,000
-----------
4,542,000
Deferred tax liabilities:
Depreciation and amortization ................. (151,000)
-----------
Net deferred tax asset before valuation allowance .... 4,392,000
Valuation allowance ...................... (4,392,000)
-----------
Net deferred tax asset ............................... -0-
41
<PAGE>
The provision for income tax is as follows:
1999 1998
----------- -----------
Current:
Federal .............................. $ (969,000) $(2,056,000)
Foreign .............................. 678,000 200,000
----------- -----------
Total Current (291,000) (1,856,000)
Deferred:
Federal .............................. 969,000 2,056,000
Foreign .............................. -- (200,000)
----------- -----------
Total Deferred 969,000 1,856,000
----------- -----------
Provision for income taxes ........... $ 678,000 $-----0----
=========== ===========
Differences between the Company's effective income tax rate and the
statutory federal rate for the years ended December 31, 1999 and 1998, are as
follows:
1999 1998
----------- -----------
Provision at the statutory rate .... $(1,585,000) $(1,983,000)
Permanent differences and other .... 1,176,000 127,000
Increase in valuation allowance .... 1,087,000 1,856,000
----------- -----------
Total tax provision ......... $ 678,000 $----------
=========== ===========
In accordance with SFAS No. 109, reductions in the deferred tax valuation
allowance associated with deferred tax assets acquired in the Company's
acquisition of Enraf-Nonius have been recorded as a reduction of goodwill and
other intangibles related to Enraf-Nonius. Accordingly, income tax expense
totaling approximately $678,000 has been recorded in the accompanying statement
of operations for 1999, which relate to the operations of Enraf-Nonius.
As of December 31, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $9,877,000 that may be
available to offset future taxable income. The carryforwards will begin to
expire in 2005. Between January 1993 and December 1998, the Company completed an
initial public offering, had warrants exercised, completed private offerings of
securities and made acquisitions of established businesses or product lines.
Under Internal Revenue Code Section 382, these activities effected an ownership
change and thus severely limit, on an annual basis, the Company's ability to
utilize its net operating loss carryforwards.
9. STOCKHOLDERS' EQUITY:
COMMON STOCK
In January 1998, the Company acquired all of the issued and outstanding
common stock of Garvey Company ("Garvey") for a purchase price of approximately
$792,000 plus related acquisition costs of approximately $50,000. The purchase
price was paid by the issuance of 120,308 shares of the Company's common stock.
The acquisition was accounted for as a purchase.
In February 1998, the Company purchased substantially all of the assets
and assumed certain liabilities associated with AMC Acquisition Corp. ("AMC")
for a purchase price of approximately $405,000 plus related acquisition costs of
approximately $115,000. The purchase price was paid by the issuance of 68,000
shares of common stock. The acquisition was accounted for as a purchase.
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.
In December 1998, in a private transaction, the Company sold 50,000
shares of its common stock to an individual investor at the then current market
price of $3.00 per share. Also, in July 1999, the Company, in a private
transaction, sold 25,000 shares of its common stock to an individual investor at
the then market price of $2.00 per share.
42
<PAGE>
During 1999, the Company issued an aggregate of 57,372 shares of common
stock in settlement of outstanding obligations or as compensation for services
received and recorded the related compensation expense based on the market value
of the common shares on the issuance date.
SERIES A, B AND C PREFERRED STOCK
In March and April 1998, the Company entered into agreements with
certain private institutional investors pursuant to which the Company issued
2,500 shares of its Series A convertible preferred stock (the Series A Preferred
Stock) for net proceeds of approximately $2.2 million in cash. The Series A
Preferred Stock is convertible into the Company's common stock at the lesser of
(a) 75 percent of the average closing bid price for the Company's common stock
as reported by Nasdaq for the five trading days prior to conversion or (b)
$7.125 for the 1,825 shares issued in March and $6.375 for the 675 shares issued
in April. For as long as the Company is listed on The Nasdaq SmallCap or
National Markets or any national securities exchange, the conversion price shall
not be lower than $2.90. In addition, the Company may, at its option, redeem the
Series A Preferred Stock by paying 130 percent of the purchase price. The Series
A Preferred Stock shall pay an annual dividend of 4 percent, payable quarterly
on each March 31, June 30, September 30 and December 31 in cash or shares of
common stock at the Company's option. The Company recorded $68,078 and $78,276
of such dividends during the years ended December 31, 1999 and 1998,
respectively. In connection with the agreement, the Company also issued to the
investors five-year warrants to purchase an aggregate of 200,000 shares of the
Company's common stock at exercise prices ranging from $6.375 to $9.619. The
warrants have been recorded at an estimated fair value of $825,541, which was
computed using the Black-Scholes option pricing model and the following
assumptions: risk-free interest rate ranging from 5.54 percent to 5.56 percent;
expected dividend yield of zero; expected life of five years; and an expected
volatility of 70 percent.
During 1999, an aggregate of 1,465 shares of the Series A Preferred
Stock were converted into an aggregate of 616,562 shares of common stock based
on the provisions of the agreements under which the Preferred Stock was issued.
In July and August 1998, the Company entered into two agreements with
certain private institutional investors pursuant to which the Company issued
4,700 shares of its Series B convertible preferred stock (the Series B Preferred
Stock) for net proceeds of approximately $4.2 million in cash. The Series B
Preferred Stock is convertible into the Company's common stock at the lesser of
(a) 110 percent of the average closing bid price for Henley's common stock as
reported by Nasdaq for the five trading days prior to issuance date ($5.4425 for
2,500 shares of Series B Preferred Stock sold on July 1, 1998, and $5.175 for
2,200 shares of Series B Preferred Stock sold on August 10, 1998) or (b) 87
percent of the average bid price for any three consecutive days of the 20 days
prior to conversion. However, for as long as the Company meets certain quarterly
and annual net income and revenue criteria, the conversion price shall not be
lower than $3.50. The Series B Preferred Stock bears no dividend. In connection
with the agreement, the Company issued to the investors five-year warrants to
purchase an aggregate of approximately 362,000 shares of the Company's common
stock at exercise prices ranging from $5.87 to $6.00. The warrants have been
recorded at an estimated fair value of $846,747, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk-free
interest rate ranging from 5.37 percent to 5.51 percent; expected dividend yield
of zero; expected life of three years and four months; and an expected
volatility range of 62 percent to 65 percent.
In connection with the issuance of the Series A and Series B Preferred
Stock (together, the Preferred Stock), the Company incurred a deemed dividend on
each sale. Such dividends are calculated as the discount from fair market value
as of the date the Preferred Stock was sold to the investors. This aggregate
discount amount of $833,333 for the Series A Preferred Stock and $702,000 for
the Series B Preferred Stock has been treated as dividends to the holders of the
Preferred Stock and was recorded during the year ended December 31, 1998.
Pursuant to the terms of the Preferred Stock, the Company incurred penalties
during 1998 and 1999 for not meeting certain deadlines related to the
registration of the common stock subject to conversion from the Preferred Stock.
Such penalties for the Series A Preferred Stock and the Series B Preferred Stock
aggregating $314,400 and $654,250 were recognized as dividends in 1999 and 1998,
respectively. The registration statement filed to register the Preferred Stock
became effective on January 28, 1999.
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 $576,792 of net proceeds to the Company. The Series C Preferred
43
<PAGE>
Stock bears no dividends and is convertible into common stock at a range from
$1.75 to $2.88 per share, provided that the Company achieves specified
performance criteria. Initial terms of the Series C Preferred Stock contained a
conversion floor price that could be removed if the Company did not attain
certain financial milestones. On June 30, 1999 it was determined that the
Company did not achieve one of the milestones. As a result of the guaranteed
discount created by the removal of the conversion floor price, the Company will
incur a deemed dividend in the future for the conversion of the Series C
Preferred Stock. This aggregate discount amount of $173,646 has been treated as
a dividend to the holders of the Series C Preferred Stock during 1999.
The proceeds from the issuance of the Series C Convertible Preferred
Stock were used primarily to repay outstanding penalties and accrued dividends
related to the Series A Preferred Stock. Pursuant to the issuance of the Series
C Preferred Stock, the Company amended its agreement with the holders of the
Series B Preferred Stock to reduce the conversion price and to reduce the
exercise price of warrants sold in connection with the Series B Preferred Stock.
Specifically, the conversion price ceiling was lowered from approximately $5.81
to $4.00 per share. Additionally, the exercise price on the warrants held by the
Series B Preferred shareholders was reduced from approximately $6.00 per share
to $2.64. This reduction of the exercise price on the warrants held by the
Series B shareholders represents a deemed dividend for the incremental value of
the warrants with the new exercise price versus the previous exercise price.
Accordingly, the deemed dividend is reflected as a reduction of income available
to common shareholders in the accompanying statements of operations for the year
ended December 31, 1999. The deemed dividend of $212,493 was computed based on
values calculated using the Black-Scholes option-pricing model.
10. STOCK OPTIONS AND WARRANTS:
Pursuant to the provisions of the 1996 Non-Employee Director Stock
Option Plan (the Director Stock Plan) and the 1996 Incentive Stock Plan (the
Incentive Plan), certain of the Company's directors and employees were granted
common stock options during fiscal 1999 and 1998 as discussed below. Under these
plans, options have been granted at fair market value as of the date of grant.
Grants under these plans vest immediately or over three years and have terms of
five or ten years. At December 31, 1999, there were 10,000 and 1,064,000 common
shares available for issuance under the Director Stock Plan and the Incentive
Plan, respectively. A summary of the Company's common stock options and warrants
as of December 31, 1999 and 1998, and activity during the years then ended is
presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ................... 2,375,315 $5.59 1,688,776 $5.24
Canceled/expired ................................... (1,370,315) 5.82 -- --
Granted ............................................ 667,099 2.66 686,539 6.44
---------- ----------
Outstanding at end of year ......................... 1,672,099 $4.23 2,375,315 $5.59
========== ----- ========== -----
Options and warrants exercisable at end of year .... 1,536,099 $4.18 2,311,982 $5.59
----- -----
Weighted average fair value of
options and warrants granted during
the year ........................................ $2.15 $4.25
----- -----
</TABLE>
44
<PAGE>
The following table summarizes the information about stock options and warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
-------------------------------- --------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF SHARES EXERCISE CONTRACTUAL LIFE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) EXERCISABLE PRICE
- --------------- ----------- -------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00-$3.00 855,039 $2.67 2.8 794,039 $2.69
$4.00-$5.78 442,060 4.56 2.7 437,060 4.56
$6.00-$7.88 252,000 6.73 6.4 182,000 6.77
$8.00-$9.62 123,000 8.77 3.2 123,000 8.77
------- -------
1,672,099 4.23 3.3 1,536,099 4.18
========= =========
</TABLE>
The Company has elected, in accordance with the provisions of SFAS No.
123, to apply APB 25 and related interpretations in accounting for stock options
granted to employees and, accordingly, has presented the disclosure-only
information as required by SFAS No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the grant
date as prescribed by SFAS No. 123, the Company's net loss and net loss per
common share for the years ended December 31, 1999 and 1998, would approximate
the pro forma amounts shown in the table below.
1999 1998
---- ----
Net loss, as reported ................ $(5,349,860) $(5,831,183)
Net loss, pro forma .................. (5,571,852) (6,083,445)
Net loss per common share, as reported $ (1.06) $ (1.62)
Net loss per common share, pro forma . $ (1.10) $ (1.66)
For the years ended December 31, 1999 and 1998, the pro forma values
were calculated using the Black-Scholes option pricing model and included the
following weighted average assumptions: zero dividends, expected stock price
volatility of 75.0 percent and 77.2 percent, risk-free interest rate of 5.2
percent and 5.5 percent, and an expected life of 2.9 years and 9.0 years,
respectively.
At December 31, 1999, the Company received proceeds from the issuance of
related Common Stock Warrants in the aggregate amount of $146,068. In January,
February and March 2000, the Company received $84,416 in proceeds from the
issuance of additional Common Stock Warrants.
During March 2000, the Company issued 30,738 shares of its Common Stock
as compensation for services received. The Company has recorded related
compensation expense based on the market price of the Common Stock on the dates
of issue.
In November 1999, the Company offered for sale, in a private placement,
three-year and five-year warrants for the purchase of up to an aggregate of
1,000,000 shares of the Company's Common Stock at a price of $0.10 per share and
$0.20 per share, respectively. At December 31, 1999, the Company had received
proceeds from the sale of warrants of approximately $146,000. During 1999,
holders of an aggregate of 125,000 previously outstanding options and 1,245,315
previously outstanding warrants elected not to exercise their rights, and their
options and/or warrants expired or were cancelled.
In connection with their re-election to the board of directors in July
1998, four non-employee directors were each granted a stock option under the
Director Stock Plan to purchase 10,000 shares of the Company's common stock at a
price of $6.125 per share. Also in July 1998, two employee directors were each
granted options under the Incentive Plan to purchase 25,000 shares of the
Company's common stock at a price of $6.125 per share, with such options
becoming vested over a three-year period contingent upon the continued
employment of the directors.
In connection with their re-election to the board of directors in July
1999, four non-employee directors were each granted a stock option under the
Director Stock Plan to purchase 10,000 shares of the Company's common stock at a
price of $1.75 per share. In August 1999, a non-employee director was granted an
option to purchase 47,060 shares of the Company's common stock at a price of
$3.00 per share, as compensation for services rendered. At December 31, 1999,
the Company recorded related compensation expense of approximately $37,000 based
on the fair value of the option at the date of grant.
45
<PAGE>
11. COMMITMENTS AND CONTINGENCIES:
EXCLUSIVE RIGHTS AGREEMENT
Under certain agreements with CB Svendsen a/s ("CBS"), the Danish
company with whom the Company has worked on the development and marketing of the
MicroLight 830(TM) since June 1991, the Company obtained unto perpetuity the
sole and exclusive worldwide distribution rights to all low-level laser devices
manufactured by or for CBS. In connection with these agreements, the Company is
required to pay a 3 percent royalty on revenue generated by the Company on sales
of the applicable products. The Company has made no sales of the relevant
products and no royalty payments pursuant to the agreements through December 31,
1999.
ROYALTY AGREEMENTS
In connection with the purchase of the Product Line of Cybex in
September 1997, the Company agreed to pay royalties equal to 2 percent of
revenues generated by the sale of products from the Product Line for a period of
five years. At the Company's option, the agreement can be extended in five-year
increments. No royalty payments were made during 1999 and 1998 in connection
with sales related to the Cybex Medical trademark. Consequently, Cybex now has
the right to terminate the Trademark License upon thirty days written notice to
the Company. At December 31, 1999, such notice had not been received by the
Company. The Company has recorded related liabilities of approximately $201,817
at December 31, 1999.
In connection with the acquisition of Enraf-Nonius (see Note 6), the
Company agreed to pay royalties to Delft, for a period of seven years. The
annual royalty is equal to 1 1/2 percent of revenues generated by the newly
acquired segment. This payment is made semiannually and is subject to minimum
annual payments of approximately 1 million Dutch Guilders (approximately
US$455,000 at December 31, 1999). Royalty payments of approximately $455,000 and
$258,000 were made to Delft during the year ended December 31, 1999 and the
seven months ended December 31, 1998, respectively.
PRODUCT LIABILITY AND INSURANCE
The Company's business includes the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
currently maintains product liability insurance covering up to $3,000,000 in
liability claims. Management believes this coverage is adequate given the fact
that all of the Company's products are considered noninvasive.
LEASES
The Company is obligated under various noncancelable operating leases
(including certain related-party leases aggregating approximately $8,750 per
month) for automobiles, warehousing and office space expiring through May 2005,
which are subject to increase for real estate taxes and operating expense
escalation. Rent expense charged to operations under these operating leases
amounted to approximately $810,000 and $763,000 for the years ended December 31,
1999 and 1998, respectively.
In connection with the acquisition of Enraf-Nonius, the Company assumed
the lease of an office/warehouse building in France. The lease bears interest at
a rate of 5 percent annually and is treated as a capital lease for financial
reporting purposes. Equal quarterly payments of principal and interest of
approximately $47,000 are due through October 1, 2006.
Minimum future operating and capital lease payments are as follows:
OPERATING CAPITAL
--------- -------
2000 ................................... $ 708,780 $ 194,000
2001 ................................... 595,290 123,000
2002 ................................... 550,000 129,000
2003 ................................... 541,000 135,000
2004 ................................... 541,000 142,000
Thereafter ............................. 225,000 260,000
---------- ----------
Total minimum lease payment ............ $3,161,070 983,000
==========
Less- Interest ......................... -0-
----------
PV of future minimum lease payment ..... $ 983,000
==========
46
<PAGE>
LITIGATION AND CLAIMS
The Company is subject to legal proceedings and claims arising in the
ordinary course of its business. In the opinion of management, the ultimate
outcome of all legal actions and claims will not have a material adverse effect
upon the consolidated financial position and results of operations of the
Company.
12. RELATED-PARTY TRANSACTIONS:
In August 1999, a non-employee director was granted an option to
purchase 47,060 shares of the Company's common stock at a price of $3.00 per
share, as compensation for services rendered. The Company recorded expense for
the fair value for the option issued. The fair value was computed using the same
assumptions as the pro forma disclosures discussed in Note 10.
13. EMPLOYEE BENEFIT PLANS:
The Company's 401(k) Savings Plan (the Plan) adopted in fiscal 1996,
covers all qualified employees. An officer of the Company serves as trustee of
the Plan. The Plan permits participants to contribute up to 15 percent of their
base compensation (as defined) each year. The Company has the discretion to
match a portion of the participant's contribution up to a maximum of 6 percent
of gross pay. The Company elected not to match contributions to the Plan for the
years ended December 31, 1999 and 1998.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Supplemental cash flow information for each of the years ended December
31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid for:
Interest ................................................................... $1,684,355 $1,489,000
Non-cash investing and financing activities:
Common stock issued in connection with acquisitions ........................ -- 1,197,000
Conversion of note payable and accrued
interest -- Maxxim into common stock ..................................... -- 4,331,041
Issuance of common stock and common stock warrants for services ...... 174,158 --
Non-cash provision for income taxes resulting in reduction of goodwill ........... 678,000 --
</TABLE>
15. DISCONTINUED OPERATIONS:
On August 11, 1998, the Company sold all of its assets related to its
Homecare operations, including accounts receivable, inventory and property and
equipment, for $3,650,000 in cash and the assumption of certain related
liabilities. The results of the Homecare division have been reported separately
as discontinued operations for the year ended December 31, 1998. Revenues for
the Homecare division were $3,492,874 for the period from January 1, 1998
through August 11, 1998. The Company recorded a loss on disposal of the Homecare
division for the amount of net assets, including goodwill, exceeding the sales
price at the date of sale.
47
<PAGE>
16. SEGMENT REPORTING:
The Company has two continuing reportable segments: Henley Healthcare,
Inc., in the United States (Henley, U.S.) and its wholly owned subsidiary
Enraf-Nonius, which is based in The Netherlands. Both Henley, U.S., and
Enraf-Nonius specialize in the development, manufacture and sale of medical
products. The two entities are managed separately due to geographic
considerations. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Intersegment revenues are not significant. The only significant noncash
items reported in the respective segments' profit or loss are depreciation and
amortization.
Enraf-Nonius was acquired in May 1998. There were no identifiable
segments of the Company's continuing operations prior to the acquisition of
Enraf-Nonius. The following tables summarize certain financial information for
each of the Company's reportable segments for the years ended December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
---- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers ...................... $ 18,727,625 $ 38,622,000 $ 57,349,625
Depreciation and amortization ............................. 2,325,138 1,332,000 3,657,138
Interest expense .......................................... 1,113,950 732,000 1,845,950
Gain on involuntary conversion and other, net ............. 207,985 43,000 250,985
Loss from continuing operations ........................... (5,056,860) (293,000) (5,349,860)
Identifiable assets ....................................... 16,134,366 26,914,000 43,048,366
Capital expenditures ...................................... 417,818 37,332 455,150
Identifiable long-lived assets ............................ 9,671,429 13,545,000 23,216,429
1999 HENLEY, U.S. ENRAF-NONIUS CONSOLIDATED
---- ------------ ------------ ------------
Revenues from unaffiliated customers ...................... $ 23,896,617 $ 18,035,000 $ 41,931,617
Depreciation and amortization ............................. 1,622,825 759,000 2,381,825
Interest expense .......................................... 1,213,566 498,000 1,711,566
Gain on involuntary conversion and other, net ............. (4,738) -- (4,738)
Income (loss) from continuing operations .................. (4,813,363) 575,000 (4,238,363)
Identifiable assets ....................................... 22,394,120 28,650,000 51,044,120
Capital expenditures ...................................... 1,600,832 341,000 1,941,832
Identifiable long-lived assets ............................ 11,289,777 19,262,000 30,551,777
</TABLE>
45
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required in response to this Item 9 is incorporated
herein by reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION.
The information required in response to this Item 10 is incorporated
herein by reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this Item 11 is incorporated
herein by reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 12 is incorporated
herein by reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See "Index of Exhibits" below which lists the documents filed as
exhibits herewith.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three-month period
ended December 31, 1999.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 14th day of April, 2000.
HENLEY HEALTHCARE, INC.
(Registrant)
By: /s/ MICHAEL M. BARBOUR
Michael M. Barbour,
(PRESIDENT AND CHIEF EXECUTIVE OFFICER)
By: /s/ JAMES STURGEON
James Sturgeon
(EXECUTIVE VICE PRESIDENT - FINANCE
AND CHIEF ACCOUNTING OFFICER)
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated and on this 14th day of April, 2000.
SIGNATURE TITLE
--------- -----
/s/ MICHAEL M. BARBOUR President, Chief Executive
Michael M. Barbour Officer and Director
/s/ DAN D. SUDDUTH Director
Dan D. Sudduth
/s/ CHADWICK M. SMITH Medical Director, Chairman of
Chadwick M. Smith the Board and Director
/s/ KENNETH W. DAVIDSON Director
Kenneth W. Davidson
________________________ Director
Ernest J. Henley, Ph.D.
________________________ Director
Pedro A. Rubio, M.D., Ph.D.
48
<PAGE>
HENLEY HEALTHCARE, INC.
EXHIBITS TO FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX OF EXHIBITS
Exhibits filed herewith are designated by an asterisk (*); all exhibits
not so designated are incorporated by reference to a prior filing:
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 -- Agreement for the Sale and Purchase of the Enraf-Nonius
Companies, dated March 6, 1998, by and between the Company on
behalf of Henley Healthcare B.V. and Delft Instruments Nederland
B.V., Delft Instruments International B.V., Beheermaatschappij
Elektroptik B.V., Delft Instruments France S.A., B.V.
Industriele Houdstermaatschappij Odelca, Enraf-Nonius Technology
B.V., Beheermaatschappij Oldelca B.V., Dimeq Medizinelektronik
GMBH Berlin and N.V. Verenigde Instrumentenfabrieken
Enraf-Nonius. (Incorporated herein by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K/A as filed on August
14, 1998).
2.2 -- Amendment to the Agreement Regarding the Sale and Purchase of
the Enraf-Nonius Companies, dated May 29, 1998, by and between
Henley Healthcare B.V. and Delft Instruments Nederland B.V.,
Delft Instruments International B.V., Beheermaatschappij
Elektroptik B.V., Delft Instruments France S.A., B.V.
Industriele Houdstermaatschappij Odelca, Enraf-Nonius Technology
B.V., Beheermaatschappij Oldelca B.V., Dimeq Medizinelektronik
GMBH Berlin and N.V. Verenigde Instrumentenfabrieken
Enraf-Nonius. (Incorporated herein by reference to Exhibit 2.2
of the Company's Current Report on Form 8-K/A as filed on August
14, 1998).
2.3 -- Asset Purchase Agreement by and between Rehabilicare Inc.
("Rehabilicare") and the Company dated August 6, 1998.
(Incorporated herein by reference to Exhibit 2.3 of the
Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1998 as filed on August 14, 1998).
3.1 -- Amended and Restated Articles of Incorporation (Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997 as filed on August 14, 1997.
3.2 -- Amended and Restated By-Laws (Exhibit 3.2 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1997 as filed on March 31, 1998)
3.3 -- Statement of Designation of Series A Preferred Stock (Exhibit
3.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 as filed on March 31, 1998).
3.4 -- Amendment to Articles of Incorporation Amending the Statement
of Designation of Rights and Preferences of the Series B
Preferred Stock (Incorporated herein by reference to Exhibit 3.2
to the Company's Current Report on Form 8-K as filed on April
20, 1999).
3.5 -- Statement of Designation of Rights and Preferences of the
Series C Preferred Stock of the Company (Incorporated herein by
reference to Exhibit 3.1 to the Company's Current Report on Form
8-K as filed on April 20, 1999).
4.1 -- Specimen Form of Common Stock Certificate (Incorporated
herein by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998).
4.2 -- Specimen Form of Preferred Stock Certificate (Incorporated
herein by reference to Exhibit 4.2 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998).
4.3 -- Specimen Form of Warrant Certificate. (Exhibit 4.2 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995 (File No. 0-28566)).
49
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
4.4 -- Form of Underwriter's Warrant. (Incorporated herein by
reference to the Company's Exhibit 4C to the Company's
Registration Statement on Form S-18 (No. 33-49972) dated July
22, 1992).
4.5 -- Form of Subscription Agreement between the Company and the
Series A Preferred Stock Investors. (Incorporated herein by
reference to Exhibit 4.1 of the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 1998 as filed on May
15, 1998).
4.6 -- Form of Stock Purchase Warrant Issued to Series A Preferred
Stock Investors. (Incorporated herein by reference to Exhibit
4.2 of the Company's Quarterly Report on Form 10-QSB for the
period ended March 31, 1998 as filed on May 15, 1998).
4.7 -- Form of Registration Rights Agreement between the Company and
the Series A Preferred Stock Investors. (Incorporated by
reference to Exhibit 4.3 of the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 1998 as filed on May
15, 1998).
4.8 -- Registration Rights Agreement dated as of July 1, 1998, by
and among the Company, Zanett Lombardier, Ltd. ("Lombardier")
and The Zanett Securities Corporation ("Zanett"). (Incorporated
herein by reference to Exhibit 4.1 of the Company's Current
Report on Form 8-K as filed on July 10, 1998).
4.9 -- Form of Stock Purchase Warrant issued to Lombardier and
Zanett dated July 1, 1998. (Incorporated herein by reference to
Exhibit 4.2 of the Company's Current Report on Form 8-K as filed
on July 10, 1998).
4.10 -- Securities Purchase Agreement dated as of July 1, 1998,
between the Company and Lombardier. (Incorporated herein by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K as filed on July 10, 1998).
4.11 -- Registration Rights Agreement dated as of August 10, 1998, by
and among the Company, Lombardier, Goldman Sachs Performance
Partners, L.P. ("Partners") and Goldman Sachs Performance
Partners (Offshore), L.P. ("Offshore") and Zanett. (Incorporated
herein by reference to Exhibit 4.7 of the Company's Quarterly
Report on Form 10-QSB for the period ended June 30, 1998 as
filed on August 14, 1998).
4.12 -- Form of Stock Purchase Warrant issued to Lombardier,
Partners, Offshore and Zanett dated August 10, 1998.
(Incorporated herein by reference to Exhibit 4.8 of the
Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1998 as filed on August 14, 1998).
4.13 -- Securities Purchase Agreement dated as of August 10, 1998,
between the Company, Lombardier, Partners and Offshore.
(Incorporated herein by reference to Exhibit 4.9 of the
Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1998 as filed on August 14, 1998).
4.14 -- Registration Rights Agreement dated as of April 12, 1999 by
and among the Company, Zanett Lombardier, Ltd. and Zanett
Securities Corporation (Incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K as filed
on April 20, 1999).
4.15 -- Form of Series C Warrant (Incorporated herein by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K as filed
on April 20, 1999).
4.16 -- Amendment and Exchange Agreement dated as of April 12, 1999
among the Company, Zanett Lombardier, Ltd., Goldman Sachs
Performance Partners, L.P. and Zanett Securities Corporation
(Incorporated herein by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K as filed on April 20,
1999).
4.17 -- Form of Replacement Series B Warrant (Incorporated herein by
reference to Exhibit 4.4 to the Company's Current Report on Form
8-K as filed on April 20, 1999).
50
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
4.18* -- Form of Warrant to Purchase Common Stock issued to certain
accredited investors on January 25, 2000.
4.19* -- Form of Subscription Agreement relating to the offering of
three-and five-year warrants to purchase common stock.
10.1 -- 1996 Amended and Restated Non-Employee Director Stock Option
Plan. (Exhibit C to the Company's Proxy Statement on Schedule
14A dated June 24, 1996 (File No. 0-28566)).
10.2 -- 1996 Incentive Stock Plan. (Exhibit B to the Company's Proxy
Statement on Schedule 14A dated June 24, 1996 (File No.
0-28566)).
10.3 -- Employment Agreement with Michael Barbour dated November 22,
1996. (Exhibit 10.4 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996 (File No. 0-28566)).
10.4 -- Consulting Agreement with Chadwick F. Smith, MD dated
November 22, 1996. (Exhibit 10.5 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996 (File No.
0-28566)).
10.5 -- Asset Purchase Agreement dated November 12, 1996 with MJH
Medical Equipment and Michael J. Houska. (Exhibit 10.6 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-28566)).
10.6 -- Employment Agreement with Michael J. Houska dated November
12, 1996. (Exhibit 10.7 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996 (File No. 0-28566)).
10.7 -- Plan and Agreement of Merger with Health Career Learning
Systems, Inc. dated November 27, 1996. (Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-28566)).
10.8 -- Stock Purchase Agreement with Paula L. Buhr dated January 24,
1996. (Exhibit 10.9 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996 (File No. 0-28566)).
10.9 -- Asset Purchase Agreement with Gatti Medical Supply dated
January 24, 1996. (Exhibit 10.10 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996 (File No.
0-28566)).
10.10 -- Master Agreement and Manufacturing Agreement with CB
Svendsen, a/s dated March 12, 1997. (Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-28566)).
10.11 -- Asset Purchase Agreement with Cybex International, Inc. dated
September 30, 1997 (Exhibit 10.11 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997 as filed on
March 31, 1998).
10.12 -- Plan and Agreement of Merger with Garvey Company dated
January 9, 1998 (Exhibit 10.12 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 as filed on
March 31, 1998).
10.13 -- Asset Purchase Agreement with AMC Acquisition Corp., Dan D.
Sudduth, Britton D. Sudduth and Roger W. Dartt dated February
12, 1998 (Exhibit 10.13 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 as filed on March
31, 1998).
10.14 -- Asset Purchase Agreement with August Schild d/b/a Summer
Medical dated October 6, 1997 (Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1997 as filed on March 31, 1998).
51
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 -- Subordinated Loan Agreement dated as of May 29, 1998, by and
between Delft Instruments Nederland B.V., Henley Healthcare
B.V., and the Company. (Incorporated herein by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K/A as
filed on August 14, 1998).
10.16 -- Fourth Amendment to Amended and Restated Loan Agreement,
dated effective May 29, 1998, by and between the Company and
Comerica Bank-Texas. (Incorporated herein by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K/A as
filed on August 14, 1998).
10.17 -- Amendment to Subordination Agreement dated as of May 29, 1998
by and between Maxxim Medical, Inc. ("Maxxim"), the Company and
Comerica Bank-Texas. (Incorporated herein by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K/A as
filed on August 14, 1998).
10.18 -- Joinder Agreement dated effective as of May 29, 1998,
executed by Henley Healthcare, B.V. (Incorporated herein by
reference to Exhibit 10.4 of the Company's Current Report on
Form 8-K/A as filed on August 14, 1998).
10.19 -- Second Modification to Convertible Subordinated Promissory
Note, dated as of June 5, 1998, between the Company and Maxxim.
(Incorporated herein by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K/A as filed on August 14,
1998).
10.20 -- Revolving Loan Agreement by and between the Company and the
Bank of Artesia. (Incorporated herein by reference to Exhibit
10.6 of the Company's Current Report on Form 8-K/A as filed on
August 14, 1998).
10.21 -- Facilities and Services Agreement by and between Rehabilicare
and the Company dated August 6, 1998. (Incorporated herein by
reference to Exhibit 10.7 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended on June 30, 1998 as filed on
August 14, 1998).
10.22 -- Letter Agreement dated February 20, 1998, between the Company
and Maxxim relating to the conversion of the Note (Incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly
Report for the period ended March 31, 1998 on Form 10-QSB filed
on May 15, 1998).
10.23 -- Letter Agreement dated March 13, 1998, between the Company
and Maxxim relating to the conversion of the Note (Incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly
Report for the period ending March 31, 1998 on Form 10-QSB filed
on May 15, 1998.)
10.24 -- Securities Purchase Agreement dated as of April 12, 1999,
between the Company and Zanett Lombardier, Ltd. (Incorporated
herein by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K as filed on April 20, 1999).
10.25 -- Placement Agency Agreement dated as of April 12, 1999,
between the Company and Zanett Securities Corporation
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K as filed on April 20,
1999).
16.1 -- Letter dated October 24, 1997, from GGK to the Commission
regarding disclosure in the Company's Form 8-K filed on that
date (Exhibit 16.1 to the Company's Current Report on Form 8-K
dated October 24, 1997).
21.1* -- Subsidiaries of Registrant.
23.1* -- Consent of Arthur Andersen LLP
27.1* -- Financial Data Schedule.
52
EXHIBIT 21.1
SUBSIDIARIES OF HENLEY HEALTHCARE, INC.
The following is a list of all of the domestic subsidiaries of the Company as of
December 31, 1999:
PERCENTAGE
DOMESTIC SUBSIDIARIES STATE OF INCORPORATION OWNERSHIP
--------------------- ---------------------- ----------
Garvey Company.......................... Minnesota 100%
Health Career Learning Systems, Inc. ... Michigan 100%
Henley Acquisition Corp................. Texas 100%
Med-Quip, Inc........................... Georgia 100%
NCI, Inc................................ Michigan 100%
The following is a list of all of the foreign subsidiaries of the Company as of
December 31, 1999:
PERCENTAGE
FOREIGN SUBSIDIARIES JURISDICTION OF INCORPORATION OWNERSHIP
-------------------- ----------------------------- ----------
Enraf-Nonius, B.V....................... The Netherlands 100%
Enraf-Nonius, N.V....................... Belgium 100%
Enraf-Nonius Medizinelektronik GMBH..... Germany 100%
Enraf-Nonius Medical Equipment Co. Ltd.. Thailand 40%
Stats Doyer Hydrotherapie S. A.......... France 25%
Enraf-Nonius S.A.France................. France 99.7%
53
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8 (No. 33-76614 and No. 333-46383) and on Form
S-3 (No. 333-50769 and No. 333-63915).
ARTHUR ANDERSEN LLP
Houston, Texas
April 12, 2000
54
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