UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _______________
COMMISSION FILE NUMBER 0-28566
HENLEY HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0335587
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 INDUSTRIAL BOULEVARD, SUGAR LAND, TEXAS 77478
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
713-276-7000
(REGISTRANT'S TELEPHONE NUMBER)
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 17, 2000, the registrant had 15,172,001 shares of common stock
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
in the "Index to Consolidated Financial Statements."
2
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999................................................ 4
Consolidated Statements of Operations for the Nine and Three Months
Ended September 30, 2000 and 1999 (Unaudited).................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited).................... 6
Notes to Consolidated Financial Statements.......................... 7
3
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 684,946 $ 535,294
Accounts receivable, net of allowance for doubtful
accounts of $973,000 and $756,407, respectively ......................... 4,893,569 7,695,984
Inventory .................................................................. 8,740,663 11,264,286
Prepaid expenses ........................................................... 188,583 220,643
Assets held for sale ....................................................... 2,161,123 --
Other current assets ....................................................... 56,200 116,200
------------- -------------
TOTAL CURRENT ASSETS ....................................................... 16,725,084 19,832,407
PROPERTY, PLANT AND EQUIPMENT, net ............................................. 3,069,859 5,901,070
INTANGIBLE AND OTHER LONG-LIVED ASSETS, net .................................... 14,411,299 17,315,359
------------- -------------
TOTAL ASSETS ............................................................... $ 34,206,242 $ 43,048,836
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ............................................................. $ 3,580,000 $ 9,670,200
Current maturities of long-term debt ....................................... 3,930,725 7,324,205
Accounts payable ........................................................... 5,285,089 7,220,012
Accrued expenses and other current liabilities ............................. 5,092,915 6,707,485
------------- -------------
TOTAL CURRENT LIABILITIES .................................................. 17,888,729 30,921,902
INTEREST PAYABLE ............................................................... 507,902 364,774
LONG-TERM DEBT, net of current maturities ...................................... 9,319,564 4,579,711
OTHER LONG-TERM LIABILITIES .................................................... 2,371,000 3,100,000
------------- -------------
TOTAL LIABILITIES .......................................................... 30,087,195 38,966,387
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.10 par value; 2,500,000 shares authorized; Series A
Preferred stock - 5,000 shares authorized;
100 and 1,035 shares issued and outstanding ............................ 10 103
Series B Preferred stock - 8,000 shares authorized;
2,900 and 4,700 shares issued and outstanding .......................... 290 470
Series C Preferred stock - 2,250 shares authorized;
750 shares issued and outstanding ...................................... 75 75
Series D Preferred stock - 3,885 shares authorized;
1,191 shares issued and outstanding .................................... 119 --
Common stock - $.01 par value; 20,000,000 shares authorized;
15,050,601 and 6,411,139 issued; 14,771,601 and 6,132,139
outstanding ............................................................ 150,506 64,111
Additional paid-in capital ................................................. 35,558,468 29,337,454
Cumulative translation adjustment .......................................... (913,859) (493,528)
Accumulated deficit ........................................................ (30,450,383) (24,600,057)
Treasury stock, at cost, 279,000 common shares ............................. (226,179) (226,179)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY ................................................. 4,119,047 4,082,449
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 34,206,242 $ 43,048,836
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES .............................................. $ 32,878,618 $ 41,766,215 $ 7,285,564 $ 16,618,308
COST OF SALES .......................................... 23,651,117 27,652,267 4,727,094 12,039,491
------------ ------------ ------------ ------------
GROSS PROFIT ........................................... 9,227,501 14,113,948 2,558,470 4,578,817
OPERATING EXPENSES:
Selling, general and administrative ................. 9,003,833 10,730,809 2,994,142 3,638,613
Research and development ............................ 238,061 639,571 52,531 216,540
Depreciation and amortization ....................... 1,878,095 1,997,234 608,733 660,255
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS .......................... (1,892,488) 746,334 (1,096,936) 63,409
INTEREST EXPENSE ....................................... 1,441,233 1,412,751 405,055 492,497
OTHER (INCOME) EXPENSE, net ............................ (124,690) (794,695) (120,059) (17,476)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ...................... (3,209,031) 128,278 (1,381,932) (411,612)
PROVISION FOR INCOME TAXES ............................. (655,000) (578,000) (196,000) (482,000)
------------ ------------ ------------ ------------
NET LOSS ............................................... $ (3,864,031) $ (449,722) $ (1,577,932) $ (893,612)
============ ============ ============ ============
Preferred Stock Dividends .............................. $ (1,986,295) $ (706,799) $ (1,881,528) $ (115,357)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS ............. $ (5,850,326) $ (1,156,521) $ (3,459,460) $ (1,008,969)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - basic and diluted .......... $ (0.71) $ (0.20) $ (0.32) $ (0.17)
============ ============ ============ ============
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE - basic and diluted .................... 8,292,802 5,726,563 10,691,796 5,833,695
============ ============ ============ ============
COMPREHENSIVE LOSS:
Net Income (Loss) ................................... $ (3,864,031) $ (449,722) $ (1,560,168) $ (893,612)
Foreign Currency Translation Gain (Loss) ............ (420,330) (550,843) (735,505) 185,202
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE LOSS ............................... $ (4,284,361) $ (1,000,565) $ (2,313,437) $ (708,410)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ................................................................ $ (3,864,031) $ (449,722)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization expense .............................. 1,878,095 1,997,234
Interest expense imputed on notes payable .......................... 237,202 (7,225)
Provision for doubtful accounts .................................... 411,577 308,747
Issuance of common stock for services .............................. 500,207 32,500
Gain on involuntary conversion ..................................... -- (797,965)
Non-cash provision for income taxes ................................ 655,000 578,000
Changes in operating assets and liabilities:
Decrease in accounts receivable .................................. 2,669,822 1,521,204
Decrease in inventory ............................................ 2,244,639 300,866
(Increase) decrease in prepaid expenses and other current
assets ........................................................ 92,060 (157,841)
Decrease in other long-term assets ............................... -- 547,000
Decrease in accounts payable and accrued liabilities ............. (3,830,962) (3,545,844)
------------ ------------
Total adjustments ................................................ 4,857,640 776,676
------------ ------------
Net cash provided by operating activities ........................... 993,609 326,954
Cash flows from investing activities:
Capital expenditures .................................................... (231,977) (105,639)
------------ ------------
Net cash used in investing activities ............................... (231,977) (105,639)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock and warrants .............. 3,595,416 623,750
Proceeds from issuance of common stock .................................. -- 50,000
Payments of dividends on preferred stock ................................ -- (471,629)
Proceeds from involuntary conversion, net of expenses ................... -- 975,973
Net payments on lines of credit, debt & other long-term liabilities ..... (3,787,065) (1,562,622)
------------ ------------
Net cash used in financing activities ............................... (191,649) (384,528)
Effect of translation exchange rate changes on cash .......................... (420,331) 5,906
------------ ------------
Net increase (decrease) in cash and cash equivalents ......................... 149,652 (157,307)
Cash and cash equivalents at beginning of period ............................. 535,294 490,649
------------ ------------
Cash and cash equivalents at end of period ................................... $ 684,946 $ 333,342
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ..................................... $ 1,109,662 $ 1,275,751
Non-cash provision for income taxes resulting in reduction of goodwill ....... $ 655,000 $ 578,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of
Henley Healthcare, Inc. and Subsidiaries (collectively, the "Company"), have
been prepared in accordance with accounting principles generally accepted in the
United States and the rules of the United States Securities and Exchange
Commission (the "SEC"), and should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the Company's
latest Annual Report filed with the SEC on Form 10-KSB, as amended. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
consolidated financial statements, which would substantially duplicate the
disclosure contained in the audited consolidated financial statements for the
most recent fiscal year, as reported in the Company's 1999 Form 10-KSB, as
amended, have been omitted. Certain reclassifications have been made to prior
period balances to conform to current period presentation.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the quarter
ended September 30, 2000, the Company incurred a net loss of approximately
$1,578,000 and had a working capital deficit at September 30, 2000, of
approximately $1,164,000. As of December 31, 1999, and through expiration of the
agreement on March 3, 2000, the Company was in default of certain financial and
other covenants under its line of credit with Comerica Bank - Texas
("Comerica"). The lender had waived the default. In May 2000, the Company
renegotiated its line of credit with Comerica, renegotiated its convertible note
with Maxxim Medical, Inc.("Maxxim"),and sold shares of Series D Convertible
Preferred Stock, par value $.10 per share (the "Series D Shares") for
$2,500,000. In September 2000, the Company sold an additional $1,000,000 of
Series D shares making the total Series D shares sold for the nine month period
ending September 30, 2000 equal to $3,500,000 (see Note 5 and 7). During the
nine months ending September 2000, the Company satisfied some of its vendor
claims with shares of the Company's common stock, par value $.01 per share (the
"Common Stock").
Under the terms of the amended and restated credit agreement with
Comerica, as long as the Company stays within the prescribed borrowing base and
in compliance with the agreement, there are no restrictions on the use of the
collections of operating revenues. While these steps have improved the Company's
ability to purchase supplies and raw materials to manufacture and deliver
products, there are no assurances that the Company's working capital position
has improved enough to successfully continue operations. Also, additional
capital will likely be needed to satisfy outstanding vendor obligations, overdue
royalty obligations, the note with Maxxim and outstanding debt obligations under
the line of credit with Comerica. As previously disclosed in the Company's
Annual Report on Form 10-KSB as filed with the SEC for the year ended December
31, 1999, as amended, the opinion of Arthur Andersen LLP, the independent public
accountants for the Company, included an explanatory fourth paragraph stating
that the Company's continued operations are dependent upon its ability to obtain
additional financing to meet obligations as they become due.
2. LOSS PER COMMON SHARE:
Basic income (loss) per common share is based on the weighted average
number of common shares outstanding during the period, while diluted income
(loss) per common share considers the dilutive effect of stock options and
warrants reflected under the treasury stock method. The Company has stock
options and warrants, convertible debt and convertible preferred stock, that
could potentially dilute basic income (loss) per share in the future that were
not included in the computation of diluted income (loss) per share because to do
so would have been antidilutive for the periods presented.
7
<PAGE>
3. SALE OF FACILITIES
The Company has listed its Sugar Land, Texas land and buildings for sale
and management expects such sale to occur in early 2001, although there can be
no assurances that the sale, if any, will occur. Accordingly, the Company has
reclassified its Sugar Land, Texas land and buildings as current assets held for
sale. The net book value of these assets at September 30, 2000 is approximately
$2,161,000. The related debt of approximately $2,200,000 has been included in
current maturities of long-term debt.
4. SEGMENT REPORTING:
The Company has two reportable segments: Henley Healthcare, Inc., in the
United States (Henley - U.S.) and its wholly owned subsidiary Enraf-Nonius,
which is based in The Netherlands. Both Henley - U.S., and Enraf-Nonius
specialize in the development, manufacture, distribution, and sale of medical
products. The two entities are operated separately due to geographic
considerations. Inter-segment revenues are not significant. The only significant
non-cash items reported in the respective segments' profit or loss is
depreciation and amortization.
To more accurately report the profitability of each segment, management
has allocated to Enraf-Nonius certain corporate costs that have been incurred by
Henley- U.S. for the periods ended September 30, 2000 and 1999. The allocated
costs include interest expense, personnel costs and certain selling, general and
administrative costs. Interest expense is allocated based on the average
outstanding inter-company payable from Enraf-Nonius to Henley-U.S using the
incremental borrowing rate of Enraf-Nonius. All other costs are allocated based
on actual amounts incurred by Henley-U.S. that are directly attributable to
Enraf-Nonius or one-half of those centrally incurred costs that benefit both
segments. All prior period amounts, for all periods presented herein, have been
restated to consistently reflect the allocations.
The following table summarizes certain financial information for each of
the Company's reportable segments for the nine and three months ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
HENLEY - U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ -------------
<S> <C> <C> <C>
Nine months ended September 30, 2000
Revenues from unaffiliated customers .. $ 7,081,000 $ 25,798,000 $ 32,879,000
Gross Profit .......................... 2,091,000 7,137,000 9,228,000
Net Income (loss) before income taxes . (3,869,000) 660,000 (3,209,000)
Net Income (loss) ..................... (3,869,000) 5,000 (3,864,000)
Nine months ended September 30, 1999
Revenues from unaffiliated customers .. $ 15,210,000 $ 26,556,000 $ 41,766,000
Gross Profit .......................... 5,964,000 8,150,000 14,114,000
Net Income (loss) before income taxes . (313,000) 441,000 128,000
Net Income (loss) ..................... (313,000) (137,000) (450,000)
<CAPTION>
HENLEY - U.S. ENRAF-NONIUS CONSOLIDATED
------------ ------------ -------------
Three months ended September 30, 2000
Revenues from unaffiliated customers .. $ 1,996,000 $ 5,290,000 $ 7,286,000
Gross Profit .......................... 676,000 1,882,000 2,558,000
Net Income (loss) before income taxes . (1,522,000) 140,000 (1,382,000)
Net Income (loss) ..................... (1,522,000) (56,000) (1,578,000)
Three months ended September 30, 1999
Revenues from unaffiliated customers .. $ 4,289,000 $ 12,329,000 $ 16,618,000
Gross Profit .......................... 1,570,000 3,009,000 4,579,000
Net Income (loss) before income taxes . (742,000) 330,000 (412,000)
Net Income (loss) ..................... (742,000) (152,000) (894,000)
</TABLE>
8
<PAGE>
5. STOCKHOLDERS' EQUITY:
In January 2000, the Company received $95,416 for the exercise of warrants
issued in connection with its November 1999 private placement offering of such
warrants.
During April 2000, the Company issued 28,738 shares of its Common Stock as
compensation for services received and recorded related compensation expense of
$57,101 based on the market price of the Common Stock on the measurement dates.
During September the Company issued 5,000 shares of its Common Stock as
compensation for services received and recorded related compensation expense of
$6,187 based on the market price of the Common Stock on the measurement dates.
During January 2000, the Company issued 25,000 shares for services and
recorded related general and administrative expense of $58,755 based on the
market price of the Common Stock on the measurement dates.
During July 2000, the Company issued 100,490 shares of its Common Stock as
prepayment of computer consulting. The values of the services are based on the
market price of the Common Stock on the date the service is provided. At
September 30, 2000 the service was valued at $72,253.
During the quarter ended September 30, 2000, the Company issued 114,394
shares of its Common Stock to vendors as settlement for approximately $465,000
of outstanding invoices. For the nine months ended September 30, 2000, a total
of 695,000 shares of common stock have been issued to settle debt of
approximately $1,355,000.
During the nine months ended September 30, 2000, certain holders of the
Company's Series A Preferred Stock converted an aggregate of 935 shares of
Series A Preferred Stock into an aggregate of 474,920 shares of Common Stock. In
addition during the nine months ended September 30, 2000, certain holders of the
Company's Series A Preferred Stock received an aggregate of 66,396 shares of
Common Stock for dividends and penalties related to their preferred shares.
During the nine months ended September 30, 2000, certain holders of the
Company's Series B Preferred Stock converted an aggregate of 1,800 shares of
Series B Preferred Stock into an aggregate of 1,905,452 shares of Common Stock.
In addition during the nine months ended September 30, 2000, certain holders of
the Company's Series B Preferred Stock converted premiums earned on their
preferred stock into an aggregate of 351,669 shares of Common Stock.
During the nine months ended September 30, 2000, certain holders of the
Company's Series D Preferred Stock converted an aggregate of 2,693 shares of
Series D Preferred Stock into an aggregate of 4,943,071 shares of Common Stock.
In addition during the nine months ended September 30, 2000, certain holders of
the Company's Series D Preferred Stock received an aggregate of 42,722 shares of
Common Stock for dividends related to their preferred shares.
6. INCOME TAXES:
The Company has recorded a provision for income taxes related to net
income earned by its Enraf-Nonius, B.V. subsidiary. This provision does not
represent a cash income tax liability due to the expected usage of the available
net operating loss carryforwards. Since the net operating loss carryforwards
have been fully reserved against, the provision for income taxes has been
reflected as a reduction of goodwill and identifiable intangibles associated
with the acquisition of Enraf-Nonius.
7. FINANCING:
SERIES D PREFERRED STOCK PLACEMENT
On May 23, 2000 and September 5, 2000, the Company, sold in a private
placement 2,500 and 1,000 Series D Shares, respectively, convertible into shares
of the Common Stock, for an aggregate purchase price of $2,500,000 and
$1,000,000,
9
<PAGE>
respectively. The proceeds of the private placement were used to reduce bank
debt, pay vendors and for operating capital. The purchasers were The Endeavour
Capital Fund S.A., Esquire Trade & Invest, Inc., and Celeste Trust Reg
(collectively, the "Purchasers"), each of which are accredited investors. In
connection with the issuance of the Series D Shares, the Purchasers also were
issued warrants to acquire 280,000 shares of Common Stock. The warrants expire
May 31, 2005 and have an exercise price of $1.99 per share. The estimated fair
value of the warrants total approximately $250,000 and have been recorded as a
cost of capital in additional paid-in capital. The Series D Shares bear a 6%
cumulative dividend payable to the holders of the Series D Shares on the date of
each conversion into shares of Common Stock. The dividends shall be payable in
cash or in Common Stock at the Company's option. The Series D Shares are
convertible into the Company's Common Stock at the lesser of (i) 105% of the
average closing bid price for the Company's Common Stock as reported by
Bloomberg L.P. for the 10 consecutive trading days immediately proceeding the
initial issuance of the Series D shares (the "Fixed Conversion Price"), or (ii)
the amount obtained by multiplying .8 by the average closing bid price for the
Company's Common Stock as reported by Bloomberg L.P.for the lowest three trading
days during the period beginning on the fifteenth day prior to the conversion
date for such conversion and ending on such conversion date. The Fixed
Conversion Price for the shares issued in both May and September 2000 is $1.59
per share.
In connection with the issuance of the Series D Shares, the Company
incurred a deemed dividend on each sale. Such dividends are calculated as the
discount from fair value as of the date of the initial sale of the Series D
Shares to investors. The aggregate discount amount of $1,339,943 has been
treated as dividends to the holders of the Series D Shares and was recorded
during the nine months ended September 30, 2000. Also, the Company recorded
preferred stock dividends, premiums and penalties of $484,237 during the nine
months ended September 30, 2000 payable to the holders of the Series A, B, C and
D Preferred Stock pursuant to the terms of the respective agreements.
The Series D Shares have no voting rights and rank junior to all of the
Company's previously issued shares of Series A, Series B and Series C Preferred
Stock. The Company, at its option, may force the conversion of the Series D
Shares under certain circumstances, including if the market price of the Common
Stock exceeds 300% of the Fixed Conversion Price. In addition, the Series D
Shares are redeemable at the holder's option if, among other things, the Company
is unable to issue shares of its Common Stock upon conversion of the Series D
Shares due to Nasdaq regulations. The Series D Shares have a liquidation
preference of $1,000 per share, plus the accrued and unpaid dividends thereon
through the date of final distribution.
The placement agent, Union Atlantic LC and Union Atlantic Capital L.C.,
received a commission of 11% which was paid by the issuance of 275 Series D
Shares on the May 23,2000 placement and 110 Series D shares on the September 5,
2000 placement. Additionally, the placement agent received warrants to acquire
an aggregate 175,000 shares of Common Stock, respectively, at a price equal to
110% of the warrants issued to the Purchasers, with expiration dates in May and
September 2004. The fair value of the Series D Shares of approximately $385,000
and the fair value of the warrants of approximately $137,000 have been recorded
as a cost of capital.
In addition, The Endeavour Capital Fund S.A. was issued a warrant to
acquire 50,000 shares of Common Stock in connection with the $200,000 bridge
loan provided by it prior to the private placement. The warrant expires May 1,
2005 and has an exercise price of $2.00 per share. The fair value of the
warrants of approximately $50,000 has been recorded as interest expense during
the quarter ended June 30, 2000. The bridge loan was repaid out of proceeds
received from the sale of Series D Shares.
Pursuant to the terms of the Statement of Designation of Rights and
Preferences of the Series D Preferred Stock, the Company is not required to
issue shares of its Common Stock on conversion of the Preferred Stock unless
such shares have been approved for listing on the exchange or market on which
the Common Stock is trading. The Company received shareholder approval to issue
shares of Common
10
<PAGE>
Stock in excess of Nasdaq limitations at the annual shareholders meeting held on
August 29, 2000.
COMERICA AMENDED LOAN AGREEMENT
On May 23, 2000, the Company entered into a Second Amended and Restated
Loan Agreement with Comerica (the "Amended Loan Agreement"). The Amended Loan
Agreement is effective as of March 3, 2000. The Amended Loan Agreement provides
for (i) a revolving loan ("Line of Credit"), with permitted borrowings of up to
$5,200,000 through April 1, 2002 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, $7,000 and $8,978,
respectively, plus interest, through September 30, 2002, April 30, 2011 and
February 12, 2013, respectively. Interest on the Line of Credit and three term
loans is payable monthly and is calculated at a rate equal to the Prime Rate
(9.5% at September 30, 2000) plus one and one-half percent per annum, until the
respective maturity dates at which the interest payable for such note will be
the maximum rate allowed under applicable law. Term Note B is callable by
Comerica beginning on April 1, 2002 and each anniversary thereafter. All of the
borrowings from Comerica are secured by substantially all the assets of the
Company. The total amount available for borrowing under the Line of Credit is
the lesser of (i) $5,200,000 and (ii) a variable borrowing base calculated based
on the amount and type of accounts receivable and the value of certain items of
inventory. Prior to the Company entering into the Amended Loan Agreement, it had
no amounts available for borrowing under the Line of Credit, and its borrowings
exceeded its borrowing base. As of September 30, 2000, the Company had $300,000
available for borrowing under the Line of Credit, as amended.
The Amended Loan Agreement relaxed a number of affirmative covenants,
negative covenants and financial covenants with which the Company must comply,
including reducing the minimum tangible net worth test and eliminating the
leverage ratio, the fixed charge coverage ratio and the current ratio. The
Amended Loan Agreement also contains a covenant that may require the Company to
issue shares of its Common Stock to Comerica if the sale or disposal of certain
assets is not completed within a specified time.
MAXXIM MEDICAL SUBORDINATED PROMISSORY NOTE
In connection with an agreement entered into in April 1996 with Maxxim,
the Company issued to Maxxim a convertible subordinated promissory note in the
principal amount of $7 million (the " Maxxim Note"). The Maxxim Note is due and
payable on May 1, 2003 with interest payable semi-annually on November 1 and May
1 of each year and calculated at a rate equal to 2 percent per year and
increasing at a rate of 2 percent per year. Effective May 1, 2000, the Company
amended the Maxxim Note (the "Amendment") with respect to certain interest
payments and mandatory redemption provisions. The Amendment provides that all
past due interest installments are deferred until May 1, 2002. The Amendment
also provides that such interest installments, which were due on May 1 and
November 1, 2000, are deferred until May 1, 2002. The Maxxim Note is secured by
a second lien on substantially all of the Company's assets. 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 upon when the redemption occurs.
In addition, the Maxxim Note was subject to mandatory redemption in annual
principal installments of $l.4 million which began on May 1, 1999 at premiums
starting at 7 percent and decreasing by 1 percent each year. The Company did not
make the mandatory principal redemption payment on May 1, 1999. The Amendment
provided that the past due mandatory principal redemption payment due May 1,
1999 and redemption payments payable on May 1, 2000 were deferred until May 1,
2002. The Maxxim Note also requires the Company to redeem 40 percent of the
Maxxim Note upon the completion of a public offering. As amended, the Note is
convertible into common stock at a conversion price of $2 per share. Upon
default under the Maxxim 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
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the Company's common stock for the 30 trading days immediately before the
default. The Maxxim Note also provides anti dilution protection, including the
adjustment of the conversion price upon the occurrence of certain events,
including the issuance of common stock for less than the conversion price.
ENRAF - NONIUS CREDIT FACILITY
In connection with the acquisition of Enraf-Nonius in May 1998, the
Company entered into a revolving credit facility with a bank in The Netherlands,
(the "Enraf-Nonius Credit Facility"). The agreement provides for aggregate
borrowings of up to $7,500,000, subject to a revised borrowing base calculation
derived from Enraf-Nonius' eligible accounts receivable and inventory. The
Enraf-Nonius Credit Facility had an outstanding balance of $3,580,000 at
September 30, 2000, and is subject to interest, payable monthly, at the rate of
AIBOR (3.5 percent at September 30, 2000) plus 1 percent per annum. The
Enraf-Nonius Credit Facility is secured by Enraf-Nonius' accounts receivable,
inventory and certain fixed assets. The Enraf-Nonius Credit Facility renews
annually and has restrictions on payments that may be made to Henley Healthcare,
Inc. At September 30, 2000, there were no funds available for borrowing under
this revolving credit facility.
8. Contingencies
The Company is currently delinquent in filing certain regulatory
informational reports and has recently filed other delinquent informational
filings. These filings may be subject to penalties which cannot be currently
estimated.
9. Accounting Pronouncement
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. The Company is
required to adopt SAB 101 by the fourth quarter of 2000. Upon its adoption, SAB
101 will be effective as of January 1, 2000, at which time the Company would be
required to report any changes in revenue recognition as a cumulative change in
accounting principle. The Company does not believe the impact of SAB 101 will
have a material effect on its financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, specific economic
conditions in the pain management and rehabilitation industry, seasonal trends
in sales, capital expenditures and other costs relating to the integration of
operations, the introduction of new products or services by the Company or its
competitors, the mix of the products and services sold and the channels through
which they are sold and pricing changes. As a strategic response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service, marketing or other decisions that could have a material
adverse effect on the Company's business, results of operations and financial
condition. Due to all of the foregoing factors, it is possible that in some
future quarter, the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock may be materially adversely affected.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto and other detailed
information contained in the Company's Annual Report for fiscal year 1999 filed
with the SEC on Form 10-KSB, as amended.
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RESULTS OF OPERATIONS
The Company operates Enraf-Nonius as a distinct separate unit, apart from
the Company's operations in the United States due to geographic considerations.
Accordingly, the following discussion of results of operations is presented
separately for Henley - U.S. and Enraf-Nonius. To more accurately report the
profitability of each segment, management has allocated to Enraf-Nonius certain
corporate costs that have been incurred by Henley-U.S. for the three and nine
months ended September 30, 2000. The allocated costs include interest expense,
personnel costs and certain selling, general and administrative costs. Interest
expense is allocated based on the average outstanding inter-company payable from
Enraf-Nonius to Henley U.S using the incremental borrowing rate of Enraf-Nonius.
All prior period amounts, for all periods presented herein, have been restated
to consistently reflect the allocations.
HENLEY - U.S.
Revenue during the quarter ended September 30, 2000 decreased 54% to
$1,996,000, compared to $4,289,000 for the same period last year. Revenue for
the nine-month period ended September 30, 2000 decreased 53% to $7,081,000
compared to $15,210,000 for the nine months ended September 30, 1999. The
decline in sales is primarily the result of inadequate working capital, which
has adversely affected the Company's ability to purchase supplies and raw
materials to manufacture and deliver products. Demand for the Company's products
is strong as the Company has a current backlog of approximately $2,100,000.
There can be no assurances that this demand will continue or that the current
backlog will not be canceled due to the Company's inability to deliver products.
Many of the initiatives described in the quarterly report for the period
ending June 30, 2000 have been delayed because of recent management turnover and
realignment. To address the revenue shortfall, the Company has several
initiatives designed to increase sales:
1) To alleviate the adverse impact of it's working capital shortfall, the
Company has placed increased emphasis on the timely conversion of
accounts receivable and inventory into cash and has initiated a plan
to satisfy past due payables and to purchase products and supplies
under favorable terms.
2) The Company is placing increased emphasis on working with and
expanding its sales network and providing products and services to
increase the success of the sales network.
3) The Company is reorganizing its sales team along product lines to
focus marketing efforts and product support
Gross profit for the quarter ended September 30, 2000 decreased 57% to
$676,000 compared to $1,570,000 for the same period last year. For the nine
months ended September 30, 2000, gross profit decreased 65% to $2,091,000
compared to $5,964,000 for the same period in 1999. Gross margin as a percentage
of sales in 2000 decreased when compared to the same periods in 1999 due to
lower net sales and underutilization of manufacturing capacity.
For the quarter ended September 30, 2000, selling, general and
administrative expenses decreased by $171,000 from $1,731,000 to $1,560,000 in
2000. For the nine-month period ended September 30, 2000 selling, general and
administrative expenses decreased by $1,245,000 to $3,901,000 in 2000 from
$5,146,000 for the same period in 1999. This 24% decrease is due primarily to
the Company's restructuring that included downsizing of various departments
throughout the Company as part of management's initiative to reduce expenses and
improve efficiency. As a percentage of revenues, selling, general and
administrative costs increased from approximately 34% for the nine month ended
September 30, 1999 to approximately 55% percent for the nine-months ended
September 30, 2000. The increase as a percent of sales is primarily attributable
to decreased net sales without a corresponding decrease in selling, general and
administrative costs. The Company will continue its efforts to reduce its
expense structure. Management is continually evaluating all aspects of the
Company's operation and implementing measures to improve efficiency and decrease
costs.
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Depreciation and amortization expense decreased $12,000 from $322,000 for
the quarter ended September 30, 1999 to $310,000 for the quarter ended September
30, 2000. For the nine months ended September 30, 2000 depreciation and
amortization decreased 2% to $956,000 from $973,000 reported for the nine months
ended September 30, 1999. This decrease was due primarily to write off of NCI at
December 31, 1999.
For the three months ended September 30, 2000 interest expense increased
$41,000 from $372,000 to $413,000 or 11%. Interest expense increased $69,000 or
7% from $1,030,000 to $1,099,000 for the nine months ended September 30, 2000.
This increase is the result of interest imputed on the Maxxim note. Management
will continue to strive toward reducing overall indebtedness and as a result,
interest expense.
Henley-US reported a net loss of approximately $3,869,000 for the nine
months ended September 30, 2000, which included expenses of approximately
$150,000 related to the private placement and renewing of it's senior credit
facility and $350,000 related to its restructuring efforts. During the
comparable period of 1999 net loss was $313,000, which included other income
from a gain on insurance from a fire at the Company's Sugar Land facility.
With the strategic initiatives underway to improve overall performance,
the Company intends to continue to focus its resources in the following areas:
o Strengthening distribution channels;
o Increasing sales of core products;
o Reducing expenses and improving efficiencies;
o Improving quality and efficiency of its manufacturing operations;
o Reducing debt; and
o Obtaining approval for the Microlight 830.
ENRAF-NONIUS
For the quarter ended September 30, 2000, Enraf-Nonius' revenues decreased
$7,039,000 or 57% to $5,290,000 compared to $12,329,000 reported for the same
period in 1999. The decrease in revenues during the third quarter is a result of
a decrease in shipments to Indonesia as the shipment of goods is substantially
complete. For the nine months ended September 30, 2000, Enraf-Nonius' revenues
decreased $758,000 or 3% to $25,798,000 compared to $26,556,000 reported for the
same period in 1999. The decrease in revenues was due primarily to a reduction
in shipments to Indonesia.
Gross profit for the quarter ended September 30, 2000 was approximately
$1,882,000 or 36% of revenues compared to approximately $3,009,000 or 24% of
revenues for the same period in 1999. In the third quarter gross profit as a
percentage of revenues increased due to a reduction in revenues from large
projects that have lower margins than Enraf-Nonius core business. Gross profit
for the nine-months ended September 30, 2000 was approximately $7,137,000 or 28%
of revenues compared to approximately $8,150,000 or 31% of revenues for the same
period in 1999. Gross profit as a percentage of revenues decreased due to the
lower margins on the large projects and lower revenues of Enraf-Nonius higher
margin core business during 2000.
Operating expenses for the quarter ended September 30, 2000 were
approximately $1,750,000 or 33% of revenues compared to approximately $2,640,000
or 21% of revenues reported for the same period in 1999. Operating expenses for
the nine months ended September 30, 2000, were approximately $6,135,000 or 24%
of revenues compared to approximately $7,092,000 or 27% reported for the same
period in 1999. The decrease in operating expenses resulted from cost saving
measures implemented by management and start up expenses incurred in 1999
related to the Indonesian contract.
Net loss for the quarter ended September 30, 2000 was approximately
$56,000 or 1% of revenue compared to a net loss of approximately $152,000 or 1%
of revenue
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reported for the period in 1999. For the nine months ended September 30, 2000
net income was $5,000 compared to a loss of approximately $137,000 reported for
the same period in 1999.
Management believes that the continued successful implementation of cost
reductions will enable Enraf-Nonius to maintain positive cash flow. Additionally
management believes that increased distribution of Enraf-Nonius products in the
United States will provided manufacturing efficiencies that may have a positive
impact on Enraf-Nonius' profitability.
To continue to improve its performance, Enraf - Nonius will focus its
resources in the following areas:
o Strengthening distribution channels and sales of core products;
o Development of a North American distribution network;
o Reducing expenses and improving efficiencies; and
o Reducing debt and continuing to improve cash flow.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had a working capital deficit of
approximately $1,164,000. During 2000, the Company has entered into financing
transactions in an attempt to improve its working capital position, including
renegotiating its Line of Credit with Comerica, renegotiating the Maxxim Note,
selling $3,500,000 of Series D Shares, and paying some of its vendor claims with
shares of Company Common Stock. Although the Amended Loan Agreement allows for
additional borrowings, as of September 30, 2000, the amount available under the
Line of Credit was only $300,000. The funds provided from operations for the
nine-month period ended September 30, 2000 was $994,000. The only other sources
of liquidity for the Company consist of proceeds from the sale of its equity
securities and the disposal of assets. The sale of preferred shares is resulting
in substantial dilution to common shareholders.
SERIES D SHARES. On September 5, 2000, the Company, sold an additional
1,000 Series D Shares for an aggregate purchase price of $1,000,000. The
Purchaser The Endeavour Capital Fund S.A., Esquire Trade & Invest, Inc., and
Celeste Trust Reg had previously acquired 2,500 Series D Shares on May 23, 2000.
See Notes to Consolidated Financial Statements.
The Series D Shares bear a 6% cumulative dividend payable to the holders
of the Series D Shares on the date of each conversion into shares of Common
Stock. The dividends shall be payable in cash or in Common Stock at the
Company's option. The Series D Shares are convertible into the Company's Common
Stock at the lesser of (i) the "Fixed Conversion Price", or (ii) the amount
obtained by multiplying .8 by the average closing bid price for the Company's
Common Stock as reported by Bloomberg L.P. for the lowest three trading days
during the period beginning on the fifteenth day prior to the conversion date
for such conversion and ending on such conversion date.
The Series D Shares have no voting rights and rank junior to all of the
Company's previously issued shares of Series A, Series B and Series C Preferred
Stock. The Company, at its option, may force the conversion of the Series D
Shares under certain circumstances, including if the market price of the Common
Stock exceeds 300% of the Fixed Conversion Price. The Series D Shares have a
liquidation preference of $1,000 per share, plus the accrued and unpaid
dividends thereon through the date of final distribution.
The placement agent, Union Atlantic LC and Union Atlantic Capital L.C.,
received a commission of 11% which was paid by the issuance of 110 Series D
Shares. The placement agent also received a warrant to purchase 50,000 shares of
common stock.
Pursuant to the terms of the Statement of Designation of Rights and
Preferences of the Series D Preferred Stock, the Company is not required to
issue shares of its Common Stock on conversion of the Preferred Stock unless
such shares
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<PAGE>
have been approved for listing on the exchange or market on which the Common
Stock is trading. The Company received shareholder approval to issue shares of
Common Stock in excess of Nasdaq limitations at the annual shareholders meeting
held on August 29, 2000.
AMENDED LOAN AGREEMENT. On May 23, 2000, the Company entered into the Amended
Loan Agreement with Comerica. The Amended Loan Agreement is effective as of
March 3, 2000. The Amended Loan Agreement provides for (i) a Line of Credit,
with permitted borrowings of up to $5,200,000 through April 1, 2002 and (ii)
three Term Notes in the original amounts of $1,430,000, $1,616,000 and
$1,260,000, respectively. Interest on the Line of Credit and three term loans is
payable monthly and is calculated at a rate equal to the Prime Rate (9.5% at
September 30, 2000) plus one and one-half percent per annum. Prior to the
Company entering into the Amended Loan Agreement, it had no amounts available
for borrowing under the Line of Credit and its borrowings exceeded its borrowing
base. As of September 30, 2000, the Company had $300,000 available for borrowing
under the Line of Credit. See Notes to Consolidated Financial Statements.
ENRAF-NONIUS CREDIT FACILITY. Pursuant to acquiring Enraf-Nonius in May 1998,
the Company entered into the Enraf-Nonius Credit Facility. The agreement
provides for aggregate borrowings of up to $7,500,000, subject to a revised
borrowing base calculation derived from Enraf-Nonius' eligible accounts
receivable and inventory. The Enraf-Nonius Credit Facility had an outstanding
balance of $3,580,000 at September 30, 2000, and is subject to interest, payable
monthly, at the rate of AIBOR (3.5 percent at September 30, 2000) plus 1 percent
per annum. The Enraf-Nonius Credit Facility renews annually and has restrictions
on payments that may be made to Henley Healthcare, Inc. At September 30, 2000,
there were no funds available for borrowing under this revolving credit
facility. See Notes to Consolidated Financial Statements.
MAXXIM NOTE. Effective May 1, 2000, the Company amended the Maxxim Note with
respect to certain interest payments and mandatory redemption provisions. The
Amendment provides that all past due interest installments are deferred until
May 1, 2002. The Amendment also provides that such interest installments, which
were due on May 1 and November 1, 2000, are deferred until May 1, 2002. The
Amendment also provided that the past due mandatory principal redemption payment
due on May 1, 1999 and redemption payments payable on May 1, 2000 were deferred
until May 1, 2002. See Notes to Consolidated Financial Statements.
While the Company has successfully renegotiated the Line of Credit, the
Maxxim Note and has sold new equity securities, it still has a negative working
capital position and a limited amount of funds available from operations. Under
the terms of the Amended Loan Agreement with Comerica, as long as the Company
stays within the prescribed borrowing base and in compliance with the agreement,
there are no restrictions on the use of the collections of operating revenues.
While these steps have improved the Company's ability to purchase supplies and
raw materials to manufacture and deliver products, there are no assurances that
the Company's working capital position has improved enough to successfully
continue operations. Also, additional capital may be needed to satisfy
outstanding vendor obligations, overdue royalty obligations, the Maxxim Note and
outstanding debt obligations under the Line of Credit with Comerica. As
previously disclosed in the Company's Annual Report on Form 10-KSB as filed with
the SEC for the year ended December 31, 1999, as amended, the opinion of Arthur
Andersen LLP, the independent public accountants for the Company, included an
explanatory fourth paragraph stating that the Company's continued operations are
dependent upon its ability to obtain additional financing to meet obligations as
they become due.
The Company may pursue the sale of some of its assets and/or the sale of
equity securities in order to reduce its indebtedness and obtain working
capital. The sale of equity securities could, however, result in dilution to the
percentage ownership interests of existing shareholders and could also adversely
affect the market price of the Company's Common Stock.
There can be no assurance that the Company will be successful selling
additional securities or selling assets at attractive prices. If the Company is
not successful in quickly eliminating or reducing its working capital deficit
and satisfying its outstanding debt obligations, the Company may not be able to
continue
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its current operations and there will be substantially increased doubt as to the
Company's ability to continue as a going concern.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this report are forward-looking
statements. These forward looking statements include, without limitation,
statements regarding the Company's estimate of the sufficiency of its existing
capital resources and its ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
the timing of regulatory approvals required to market certain of the Company's
products. Although the Company believes that the expectations reflected in these
forward looking statements are reasonable, it can not give any assurance that
such expectations reflected in these forward looking statements will prove to
have been correct.
When used in this report, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate," and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Since these forward-looking statements involve
risks and uncertainties, actual results could differ materially from those
expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report.
These statements should be read carefully because they discuss the
Company's expectations about its future performance, contain projections of its
future operating results or its future financial condition, or state other
"forward looking" information. Investors in the Company's common stock should be
aware that the occurrence of any of the events that constitute risk for the
Company as described in this report could substantially harm the Company's
business, results of operations and financial condition and that upon the
occurrence of any of these events, the trading price of the Company's common
stock could decline, and the investor could lose all or part of their
investment.
The Company cannot guarantee any future results, levels of activity,
performance or achievements. Except as required by law, the Company undertakes
no obligation to update any of the forward-looking statements contained herein
after the date of this report.
ITEM 3: DISCLOSURE ABOUT MARKET RISK
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 significantly expanded the Company's
foreign operations. International transactions subject the Company to several
potential risks, including fluctuating exchange rates (to the extent the
Company's transactions are not in U.S. dollars), varying economic and political
conditions, cultures and business practices in different countries or regions,
regulation of fund transfers by foreign governments, overlapping or differing
tax structures, and United States and foreign export and import duties and
tariffs. Fluctuations in the exchange rates between the U.S. dollar and the
currencies of the other countries in which the Company operates will affect the
results of the Company's international operations reported in U.S. dollars. Over
one-half of the Company's total sales for 1999 were in currencies other than
U.S. dollars, and the Company anticipates a similar situation in 2000. In
addition, the Company may make loans to and/or receive dividends and loans from
certain of its foreign subsidiaries and may suffer a loss as a result of adverse
exchange rate movements between the relevant currencies. There can be no
assurance that any of the foregoing will not have a material adverse effect upon
the business of the Company.
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency. The local currencies are
scheduled to remain legal tender in the participating countries until January 1,
2002. During
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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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following sales of unregistered securities occurred during the quarter ended
September 30, 2000, in private transactions in which the Company relied on the
exemption from registration available under Section 4(2) of the Securities Act
of 1993, as amended and Regulation D:
On September 5, 2000, the Company, sold in a private placement 1,000
shares of the Company's Series D Shares, convertible into shares of the
Company's Common Stock, for an aggregate purchase price of $1,000,000. Each of
the Purchasers are accredited investors. The Purchasers had previously purchased
2,500 Series D Shares on May 23, 2000. The placement agent, Union Atlantic LC
and Union Atlantic Capital L.C., received a commission of 11% which was paid by
the issuance of 110 Series D Shares, as well as warrants to acquire 50,000
shares. The placement agent had received 2.75 Series D Shares and warrants to
purchase 125,000 shares of Common Stock on May 23, 2000. (See the Notes to
Consolidated Financial Statements).
During the quarter ending September 30, 2000, the Company also issued
445,157 shares of its Common Stock to certain vendors (the "Vendors") in
connection with the settlement of $360,996 outstanding payments to such Vendors.
The Company has filed a registration statement covering the resale of
shares of (I) the Common Stock issuable on conversion of the Series D Shares,
and (ii) the Common Stock issuable on exercise of the Warrants. The Company
intends to file a registration statement covering the resale of shares of Common
Stock issued to certain of the Vendors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on August 29, 2000.
The holders of 6,034,565 shares of the Company's Common Stock were present at
the meeting in person or by proxy and approved the following matters:
ELECTION OF DIRECTORS. The shareholders voted as follows and elected the
following seven members to serve as directors of the Company until their
successors are duly elected and qualified:
NUMBER OF NUMBER OF
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
Michael M. Barbour .............................. 5,921,955 28,000
Pedro A. Rubio, MD, Ph.D ........................ 5,921,955 28,000
Kenneth W. Davidson ............................. 5,863,955 100,000
Col. Walter Cunningham .......................... 5,949,955 14,000
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J. Terry Manning ................................ 5,949,955 14,000
Gabriel L. Shaheen .............................. 5,949,955 14,000
James L. Sturgeon ............................... 5,949,955 14,000
NAME CHANGE. The shareholders voted as follows to amend the Company's Articles
of Incorporation to change the Company's name to ePainRx Inc.:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARE
VOTED FOR VOTED AGAINST ABSTAINED
------------------ ---------------- ---------------
5,720,836 187,209 126,520
NASDAQ LIMITATIONS. The shareholders voted as follows with respect to the
issuance of shares of Common Stock in excess of Nasdaq limitations in connection
with the sale of Series D Shares:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARE
VOTED FOR VOTED AGAINST ABSTAINED
------------------ ---------------- ---------------
2,200,918 141,485 76,674
AUTHORIZED CAPITAL. The shareholders voted as follows to amend the Company's
Articles of Incorporation to change increase the authorized capital:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARE
VOTED FOR VOTED AGAINST ABSTAINED
------------------ ---------------- ---------------
5,770,500 206,815 57,250
ITEM 5. OTHER INFORMATION
NAME CHANGE
On Tuesday, August 29, 2000, the Company announced that it had received
shareholder approval to change its name from Henley Healthcare, Inc. to ePainRx
Inc. The board of directors has elected to delay the name change for an
indefinite period.
The Company plans to continue operating under its traditional business
structure, but will use the Internet as an additional tool for further
development and growth of the business. The Company may use ePainRx as a trade
name on a limited basis for certain Internet activities.
RESIGNATION
On September 1, 2000, Michael M. Barbour, President, Chief Executive
Officer and a director, resigned. The Board of Directors appointed its Chairman,
Dr. Pedro A. Rubio, as interim President and Chief Executive Officer. James L.
Sturgeon, formerly Executive Vice President - Finance and Chief Accounting
Officer, was appointed Chief Operating Officer. On November 14, 2000, Mr.
Sturgeon's title was changed to Chief Financial Officer, Secretary and
Treasurer.
On November 3, 2000, Kenneth W. Davidson, director, notified the company of his
resignation from the board.
FDA INQUIRY
The Company has been notified that the FDA has inquired with respect to
certain issues relating to recordkeeping and labeling regarding the Company's
Medipad and Medigel products. Due to a raw materials problem, the Company has
not manufactured the Medipad since December 1999. The Company is currently not
marketing the Medigel products. The Company is in the process of responding to
the issues raised by the FDA and is cooperating fully in this inquiry.
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MICROLIGHT 830
In July 2000, the FDA requested clarification from the Company with
respect to certain points outlined in the PMA submitted to the FDA regarding the
Company's Microlight 830, a laser treatment for carpal tunnel syndrome. On
September 6, 2000, the Company responded to the FDA's questions. On November 9,
2000, the Company submitted the Quality System Plan and Manufacturing
Documentation Supplement to its Premarket Approval Application for the
MicroLight 830 to the FDA. This Supplement outlines the Company's capability to
manufacture the MicroLight 830 Laser in accordance with the FDA's Quality System
(QS)/GMP regulations. The Company believes it has responded to all the FDA's
request for information and expects to have a response from the FDA by March 6,
2001. However, the Company can make no assurances that the Premarket Application
will be approved. The FDA response could deny or make additional requests for
information.
Sale of Facilities
On November 8, 2000 the Company received a contract to purchase real
estate owned by the company for $2,700,000 with closing anticipated in the first
quarter of 2001. The real estate is located at 120 and 140 Industrial Boulevard,
Sugar Land, Texas and houses the Companies corporate offices and some of its
manufacturing and distribution operations. If the transaction closes, the
Company will use the proceeds to reduce debt. The Company believes this
transaction will result in lower interest and occupancy expense if and when the
sale is completed and it believes that moving it's Sugar Land operations to
another facility will have little or no negative impact on the Company. While
the Company has accepted the contract, there is no assurance that the
transaction will be completed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" below which lists the documents filed as exhibits
herewith.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the three-month
period ended September 30, 2000:
o Current Report on Form 8-K dated September 1, 2000 filed to report, among
other things, that the Company had received FDA approval to sell the
Enraf-Nonius' Sonopuls 190 Ultrasound System, and a charter amendment to
increase the number of shares of capital stock that the company is authorized
to issue, and to announce the resignation of Michael M. Barbour as President,
Chief Executive Officer and a director and the appointment of Dr. Pedro A.
Rubio, as interim President and CEO and James Sturgeon as Chief Operating
Officer.
o Current Report on Form 8-K dated September 21, 2000 filed to report, among
other things, that the Company had completed a private offering of its
securities.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HENLEY HEALTHCARE, INC.
(Registrant)
Date: November 20, 2000 /s/ JAMES L. STURGEON
---------------------------
James L. Sturgeon
Chief Financial Officer
20
<PAGE>
HENLEY HEALTHCARE, INC.
EXHIBITS TO FORM 10-Q
FOR THE QUARTER
ENDED SEPTEMBER 30, 2000
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
------- -----------
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 D Convertible Preferred Stock of Henley Healthcare, Inc.
(Incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K as filed on April 20,
1999).
3.6 -- Statement of Designation of Rights and Preferences of the
Series D Convertible Preferred Stock of Henley Healthcare, Inc.
(Incorporated herein by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K as filed on June 7, 2000).
3.7* -- Articles of Amendment to Articles of Incorporation as filed
September 1, 2000, amending the Company's authorized capital
stock.
4.20 -- Registration Rights Agreement dated as of May 19, 2000, by and
among Henley Healthcare, Inc., The Endeavour Capital Fund S.A.,
Esquire Trade & Invest, Inc., and Celeste Trust Reg.
(Incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K as filed on June 7, 2000).
4.21 -- Form of Series D Warrant. (Incorporated herein by reference to
Exhibit 4.2 to the Company's Current report on Form 8-K as
filed on June 7, 2000).
27.1* -- Financial Data Schedule.
21
