UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(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/A or any
amendment to this Form 10-KSB/A. [X]
The issuer's revenues for its most recent fiscal year are $57,349,625
The aggregate market value of voting stock held by non-affiliates of the
registrant on April 25, 2000, based upon the average bid and ask price of the
common stock as reported on the Nasdaq SmallCap Market, was $11,953,890. The
number of shares of the issuer's common stock, $.01 par value, outstanding as of
April 25, 2000 was 7,356,240.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB/A 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/A 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 Form 10-KSB/A, 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/A.
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 described in these risk factors
and elsewhere in this Form 10-KSB/A 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 in this Form
10-KSB/A after the date of this Form 10-KSB/A.
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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 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.
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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 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
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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.
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
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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").
During 1999, the Company's international unit, Enraf-Nonius, entered into
an agreement with the Indonesian government under which Enraf would supply to
the Indonesian government the Company's products aggregating approximately $30
million over a two-year period. The Company anticipates that this will assist in
expanding its marketing and distribution opportunities in that region of the
world.
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.
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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 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
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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 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 $201,000. At the date of this Form
10-KSB/A, 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
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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.
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
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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.
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
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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 approximately $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.
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 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
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
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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/A. 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/A.
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 approximately $5,350,000 or $1.06 per
share for the year ended December 31, 1999 on net sales of approximately
$57,350,000 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 $11,100,000 which has since increased
because of restrictions on the Company's use of its collections of revenues from
operations. Currently, nearly all of the Company's collections of its revenues
from operations are immediately applied to the outstanding balance of its
matured line of credit ("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. The combined effects of this working
capital deficit and the restrictions on the use of collections of operating
revenues has materially and adversely affected the 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 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 considerable 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.
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." Due to 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, THE COMPANY'S COMBINED OPERATING HISTORY SHOULD NOT
BE RELIED ON AS AN INDICATOR OF THE COMPANY'S 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, 1999
and 1998, 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 its 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 it 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 the Company's 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 has 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 the Company's 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 the Company's
control. These factors include general economic conditions, specific economic
conditions in the pain management and rehabilitation industries, seasonal trends
in sales, capital expenditures 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
operational, pricing, service or marketing decisions 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
agreement 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
its other employees. The loss of the services of any of the Company's executive
officers or other key employees could have a material adverse effect on the
Company's 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 is 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 could 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 unforeseen
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.
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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 ("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 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 its 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 its 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 the Company in
connection with one or more of its 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 THE COMPANY'S 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 the securities: (i) announcements by the Company
or its competitors concerning acquisitions; (ii) technological innovations;
(iii) new commercial products or procedures by the Company or its 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
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coverage with respect to its common stock. Accordingly, such factors may affect
the market for the Company's common stock.
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK COULD BE ADVERSELY AFFECTED BY
SALES OF RESTRICTED AND OTHER SECURITIES.
As of April 25, 2000, there were approximately 7,356,240 shares of the
Company's 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 March 31, 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 precisely determined prior to the conversion decision 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 the
Company's 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 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 the Company's 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 outstanding convertible 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 do 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 the
Company's vulnerability to short-selling strategies.
As a result, an estimated total of approximately 7,100,000 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 50% 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 the common stock equivalents is subject to adjustment
upon the occurrence of certain dilutive events.
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.
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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 has 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 the Company's 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 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."
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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 December 1998, the Company sold 50,000 shares of its common stock
to a private investor at $3.00 per share. Also, during July 1999, the Company
sold 25,000 shares of its common stock also to a private investor at $2.00 per
share. These sales were made 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 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, 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 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
$18,728,000 reflecting a decrease of approximately $5,169,000 or 21.6 percent
under the amount of approximately $23,897,000 reported for fiscal year 1998. The
decrease was primarily due to three major factors that resulted in decreased
sales. The primary factor 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 the medical care reimbursements mandated by the Balanced Budget
Act of 1997 resulted in a material reduction in sales revenue of the Company's
Cybex brand products. Finally, a fire at the Company's primary manufacturing
facility in Houston,
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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 $5,057,000 compared to approximately $4,813,000
reported for fiscal 1998. The increase in net loss resulted primarily from the
effects of an acceleration of goodwill amortization associated with a
discontinued service line which were partially offset by 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 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 Houston 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
collections 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 reported 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. The 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, the fire at the Company's
manufacturing 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 27.0 percent. Sales, general and
administrative costs decreased as a percentage of revenues from approximately
44.6 percent for 1998 to approximately 41.5 percent for 1999. This decrease was
due primarily to decreased sales, 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 some former sales
employees became self-employed independent sales representatives. The reduction
in employees also had the related effect of decreasing the Company's
contribution into 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 percentage
increase is attributable to a decreased revenue base in 1999 resulting from
certain factors, discussed above, that caused decreased revenues in 1999.
Depreciation and amortization expense increased by approximately $702,000,
from approximately $1,623,000 in 1998 to approximately $2,325,000 in 1999, an
increase of approximately 43.3 percent. This increase was primarily the result
of an acceleration of goodwill amortization associated with a discontinued
service 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
due to 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 related to
insurance proceeds paid to the Company with respect to the fire damage in 1999.
The Company recorded consolidated income tax expense in 1999 of
approximately $678,000 based on income related to the operations of
Enraf-Nonius. There was no consolidated income tax expense recorded in 1998. As
of December 31, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $9.9 million that may be available to
offset future taxable income. The carryforwards will begin to expire in the year
2005. A valuation allowance has been 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.
25
<PAGE>
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 approximately
$38,622,000 which contributed gross profit of approximately $11,510,000 or 29.8
percent and a net loss of approximately $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 approximately
$18,035,000 which contributed gross profit of approximately $6,711,000 or 37.2
percent and net income of approximately $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 31.3 percent of revenue.
Effective January 1, 1999, Enraf-Nonius assumed the sales and marketing
functions for Henley's core products in Europe, Australia, and Africa.
Management believes that the continued successful implementation of cost
reductions and the potential synergies to be gained by combining Henley's core
products with Enraf-Nonius' international distribution system will enable
Enraf-Nonius to 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 $11,100,000, which has since increased because of Comerica's
restrictions on the Company's use of collections of its revenues from
operations. Currently, nearly all of the Company's collections of its revenues
from its U.S. operations are 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. The combined effects of this
working capital deficit and the restrictions on the use of collections of
operating revenues has materially and adversely affected the 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 of up to
$6,000,000 through March 3, 2000 and (ii) three term loans in the original
amounts of $1,430,000 ("Term Note A"), $1,616,000 ("Term Note B") and $1,260,000
("Term Note C"). Term Note A, Term Note B and Term Note C (collectively the
"Term Notes") are payable in monthly installments of $23,833, $8,978 and $7,000,
respectively, plus interest through September 2002, May 2011 and February 2013,
respectively. The Line of Credit also includes a $250,000 letter of credit
facility. Interest on the Line of Credit and three term loans is payable monthly
and is calculated at a rate equal to the Prime Rate (8.5 percent at 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. The total amount available for borrowing under the Line of
Credit is the lesser of (i) $6,000,000 and (ii) a variable borrowing base
calculated based on the amount and type of outstanding accounts receivable and
the value of certain items of inventory. As of 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 $1,100,000. This amount
has since increased to approximately $2,700,000 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
26
<PAGE>
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
an 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 approximately
$11,100,000 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 of up to
$7,500,000, subject to a revised borrowing base calculation derived from
Enraf-Nonius' eligible accounts receivable and inventory. The Enraf-Nonius
Credit Facility had an outstanding balance of $3,817,000 at 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
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 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 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 $576,792 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) 2.88. 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 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
considerable amounts of its equity securities. The sale of a substantial
additional amount of equity securities could, however, result in dilution to the
percentage ownership interests of existing shareholders and could also adversely
affect the market price of the Company's Common Stock. The Company is currently
in negotiations for such additional financing and could also pursue a sale of
some of its assets, although there can be no assurance that the Company will be
successful in either of these financing efforts. 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
27
<PAGE>
current operations and there will be substantially increased doubt as to the
Company's ability to continue as a going concern. There can be no assurance that
the Company will be successful in arranging such financing at all or on terms
commercially acceptable to the Company.
INTERNATIONAL CURRENCY FLUCTUATIONS AND EURO CONVERSION
The Company has arrangements with several foreign distributors to
distribute products in Europe, Southeast Asia, the Far East, Central America and
South America. In addition, the Company obtains certain supplies from foreign
suppliers. The acquisition of Enraf-Nonius has also significantly expanded the
Company's foreign operations. International transactions subject the Company to
several potential risks, including fluctuating exchange rates (to the extent the
Company's transactions are not in U.S. dollars), varying economic and political
conditions, cultures and business practices in different countries or regions,
regulation of fund transfers by foreign governments, overlapping or differing
tax structures, and United States and foreign export and import duties and
tariffs. Fluctuations in the exchange rates between the U.S. dollar and the
currencies of the other countries in which the Company operates will affect the
results of the Company's international operations reported in U.S. dollars. Over
one-half of the Company's total sales for 1999 were in currencies other than
U.S. dollars, and the Company anticipates a similar situation in 2000. In
addition, the Company may make loans to and/or receive dividends and loans from
certain of its foreign subsidiaries and may suffer a loss as a result of adverse
exchange rate movements between the relevant currencies. There can be no
assurance that any of the foregoing will not have a material adverse effect upon
the business of the Company.
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency. The local currencies are
scheduled to remain legal tender in the participating countries until January 1,
2002. During this transition period, goods and services may be paid for using
either the Euro or the participating country's local currency. Thereafter, the
local currencies will be canceled and the Euro currency will be used for all
transactions between the eleven participating members of the European Union. The
Euro conversion raises strategic as well as operational issues. The conversion
is expected to result in a number of changes, including the stimulation of
cross-border competition by creating cross-border price transparency. The
Company is assessing Euro issues related to its product pricing, contract,
treasury operations and accounting systems. Although evaluation of these items
is still in process, the Company believes that the hardware and software systems
it uses internally will accommodate this transition and any required policy or
operating changes will not have a material adverse effect on future results.
YEAR 2000 COMPLIANCE
The Year 2000 (the "Y2K") issue is the result of computer programs that
were written using two digits rather than four to define the applicable year.
Computer equipment, software and other devices with imbedded technology that are
time-sensitive, such as products, alarm systems and telephone systems, may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process data,
and may materially impact the Company's financial condition.
Prior to and during 1999, the Company undertook various comprehensive
initiatives intended to ensure that it was prepared for the Y2K issue. The
Company has not encountered any significant Y2K failures, and is not aware of
any Y2K issues that have been encountered by any third party with whom it does
business, which could materially affect the Company's operations. The amounts
charged to expense in 1999, as well as the amounts anticipated to be charged to
expense related to the Y2K compliance issue are miniscule and not expected to be
material to the Company's financial position, results of operations or cash
flows.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
in the "Index to Consolidated Financial Statements."
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants.............................. 30
Consolidated Balance Sheet............................................ 31
Consolidated Statements of Operations and Comprehensive Loss.......... 32
Consolidated Statements of Stockholders' Equity....................... 33
Consolidated Statements of Cash Flows................................. 34
Notes to Consolidated Financial Statements............................ 35-48
29
<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 approximately $11.1 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, 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
30
<PAGE>
HENLEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1999
------------
ASSETS
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
============
The accompanying notes are an integral part of
this consolidated financial statement.
31
<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 .......................................................... (768,616) (2,268,158)
------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS .......................................... ($ 6,118,475) ($ 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
these consolidated financial statements.
32
<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
PREFERRED STOCK PREFERRED STOCK
----------------------------- ----------------------------
SHARES PAR VALUE SHARES PAR VALUE
------------ ------------ ------------ ------------
<S> <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 ........ -- -- -- --
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
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SERIES C
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- ---------------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
---------- ------------ ------------ ------------ ------------
<S> > <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 ........................ -- -- -- -- --
Net loss ...................................... -- -- -- -- --
---------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 .................. 5,712,205 $ 57,121 $ 27,782,251
Issuance of preferred stock - Series C ........ 750 75 -- -- 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 ........................ -- -- -- -- --
Net loss ...................................... -- -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 .................. 750 $ 75 6,411,139 $ 64,111 $ 29,337,454
========== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
OTHER TREASURY STOCK TOTAL
COMPREHENSIVE ACCUMULATED ----------------------------- STOCKHOLDERS'
INCOME DEFICIT SHARES COST EQUITY
------------ ------------ ------------ ------------ ------------
<S> <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 -- -- -- 441,156
Net loss ...................................... -- (5,831,183) -- -- (5,831,183)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 .................. $ 441,156 $(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 ....... -- (382,477) -- -- (382,477)
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) -- -- -- (934,684)
Net loss ...................................... -- (5,349,860) -- (5,349,860)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 .................. $ (493,528) $(24,600,057) (279,000) $ (226,179) $ 4,082,449
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
33
<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 .......................................................................... ($5,349,860) ($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 ........................................ 94,147 --
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 long-lived assets ....................................... -- 542,618
Increase (decrease) in accounts payable and accrued liabilities ........... 127,766 923,705
----------- -----------
Net cash used in operating activities ..................................... (730,011) (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 .......................................... 872,039 --
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 .......................... 1,716,748 (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
these consolidated financial statements.
34
<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 $11.1 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
approximately $1.5 million and another loan payment also 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 must quickly
procure substantial amounts of working capital in order to successfully continue
operations. In addition, the Company needs substantial additional capital to
satisfy its outstanding debt obligations under the Line of Credit and the 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 considerable amounts of its equity
securities. The sale of a substantial additional amount of equity securities
could, however, result in dilution to the percentage ownership interests of
existing shareholders and could also adversely affect the market price of the
Company's Common Stock. The Company is currently in negotiations for such
additional financing and could also pursue a sale of some of its assets,
although there can be no assurance that the Company will be successful in any of
these financing efforts. 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
35
<PAGE>
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.
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 amounted to
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,
36
<PAGE>
"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.
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 the
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 United States 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 and 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 line of credit or long-term debt. At
December 31, 1999, property, plant and equipment consisted of the following:
37
<PAGE>
ESTIMATED
USEFUL LIFE
------------
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
==========
4. INTANGIBLE AND OTHER ASSETS:
At December 31, 1999, intangible and other assets consisted of the following:
ESTIMATED
USEFUL LIFE
---------------
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
===========
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 costs....... 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
Reserve for research costs ...... 377,874
Other............................ 2,479,624
----------
$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,
approximately $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,
39
<PAGE>
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 $1.1 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 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............................. 1,424,711
2002............................. 918,000
2003............................. 924,000
2004............................. 933,000
2005 and thereafter.............. 380,000
-------------
$ 11,903,916
=============
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 $ --
========== ===========
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
42
<PAGE>
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.
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. In
February 2000, however, the Company agreed to eliminate this conversion price
floor in exchange for the investor's agreement to provide another round of
equity funding which has yet to be completed. 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 $68,077 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
43
<PAGE>
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
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 price floor 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 price floor, 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>
The following table summarizes the information about stock options and warrants
outstanding at December 31, 1999:
44
<PAGE>
<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.
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 received
subscriptions for common stock warrants in the aggregate amount of $146,068. In
January 2000, the Company received $84,416 in additional subscriptions for
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.
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.
45
<PAGE>
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 common stock at the date of grant.
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.
46
<PAGE>
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................... 182,000
--------
PV of future minimum lease payment... $801,000
========
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 of 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>
47
<PAGE>
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.
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
1998 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>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information concerning each executive officer
and director of the Company as of the date hereof:
NAME AGE POSITION
- ---- --- --------
Michael M. Barbour 55 President, Chief Executive Officer, Director
James L. Sturgeon 49 Executive Vice President and Chief Accounting
Officer
Chadwick F. Smith, MD 65 Director, Chairman of the Board
Dan D. Sudduth 58 Director
Pedro A. Rubio, M.D., Ph.D. 55 Director
Kenneth W. Davidson 52 Director
Ernest J. Henley, Ph.D. 73 Director
Michael M. Barbour has been President, Chief Executive Officer and
Director of the Company since May 1991. He has over 13 years experience in the
field of laser products. Prior to forming Lasermedics, he was President of
Medical Training Centers of America (formerly The Houston Laser Institute) from
January 1987 to April 1991, which he founded in order to train and inform
doctors in the medical and surgical use of lasers. From April 1984 to January
1987, he was President of Surgimedics, a Houston, Texas, manufacturer and
distributor of medical products. Mr. Barbour graduated from the University of
Houston in 1967 with a B.B.A. in marketing.
James L. Sturgeon joined the Company in March 2000 as Director of Finance
and was elected Executive Vice President and Chief Accounting Officer in April
2000. From 1998 to April 2000, Mr. Sturgeon served as Executive Vice
President-Commercial Banking at Compass Bank, Houston. From 1993 through 1997,
he was Executive Vice President-Corporate Financial Services for Comerica
Bank-Texas. Mr. Sturgeon serves on the Boards of Directors of several civic and
charitable organizations. Mr. Sturgeon received a B.B.A. degree from University
of Houston in 1973 and an M.B.A degree from Southern Methodist University in
1977.
Chadwick F. Smith, M.D., has been a Director of the Company since May 1991
and Chairman of the Board of Directors since June 1993. He has also served as a
consultant to the Company. See "Certain Relationships and Related Transactions."
Dr. Smith is a Clinical Professor of Orthopedic Surgery at the University of
Southern California School of Medicine, a position he has held since 1981. He
has also been a member of the Medical Staff of Orthopedic Hospital, Los Angeles,
California, since 1966. Dr. Smith graduated with a B.A. from Southern Methodist
University in 1954, graduated from the University of Texas Medical School in
1958 and has been a Diplomate of the American Board of Orthopedic Surgery since
1968.
Dan D. Sudduth joined the Company as Executive Vice President and Chief
Financial Officer in February 1997 and resigned from those positions in February
2000. He continues to serve as a Director of the Company, a position he has held
since January 1996. Mr. Sudduth was Chief Financial Officer for Mezzanine
Telecom, Inc., a Houston-based telecommunications company ("MTI"), from 1994 to
January 1997 and currently serves as a Director of MTI. During 1995 and 1996,
Mr. Sudduth was President and Director of AMC Home Healthcare, Inc., a
respiratory therapy company in Houston, Chairman of Mezzanine Financial
Relations, Inc., a merchant banking firm in Houston, and Chief Financial Officer
and Director of Creative Communications International, Inc., a Houston
telecommunications company. From 1992 to 1994, Mr. Sudduth served as Chairman
and Chief Executive Officer of Heart Labs of America, Inc. From 1988 to 1992, he
was President and Chief Financial Officer of American Biomed, Inc. Mr. Sudduth
received a B.B.A. in 1964 from Lamar University.
49
<PAGE>
Pedro A. Rubio, M.D., Ph.D., has been a Director of the Company since
January 1996. He currently is a Clinical Associate Professor of Surgery at the
University of Texas Health Science Center (Houston). Dr. Rubio was Chairman of
the Department of Surgery at Columbia/HCA Medical Center from 1978 until 1994
when he became Chairman Emeritus. He served as the World President of the
International College of Surgeons in 1995. Dr. Rubio is a member of the European
Academy of Sciences, the Mexican Academy of Medical Sciences and the Academia
Mexicana de Cirugia. A diplomate of eight American Boards and 3 Mexican Boards
he holds sub-specialty certification in two fields. Dr. Rubio has published 270
papers in national and international journals, eight surgical monographs, nine
chapters, two surgical atlases and 21 scientific films. He holds the following
degrees: Bachelor of Science, Master of Sciences in Surgical Technology, Doctor
of Philosophy in Biomedical Technology and Doctor of Medicine and Surgery.
Kenneth W. Davidson has been a Director of the Company since April 1996.
He has also been President, Chief Executive Officer and Chairman of the Board of
Directors of Maxxim Medical, Inc., since November 1986, and a Director since
1982. Prior to that time, Mr. Davidson was the Corporate Director of Business
Development at Intermedics, Inc., which is principally a manufacturer of
implantable devices such as pacemakers. Mr. Davidson is also a Director of
Encore Orthopedics, Inc., a designer and manufacturer of implantable orthopedic
devices.
Ernest J. Henley, Ph.D., has been a Director of the Company since April
1996 and is also a consultant to the Company. He has been a Director of Maxxim
since 1976. See "Certain Relationships and Related Transactions." Dr. Henley's
principal employment for more than 15 years has been as a Professor of Chemical
Engineering at the University of Houston.
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. All
non-employee directors of the Company are reimbursed for expenses incurred for
attendance at meetings of the Board of Directors and any Board committee and are
eligible to receive stock options pursuant to the 1996 Non-Employee Director
Stock Option Plan. See "Item 10. Executive Compensation."
Each officer of the Company serves at the discretion of the Board of
Directors, subject to the terms of his employment agreement, if any, and is
eligible to receive stock options pursuant to the 1996 Incentive Stock Plan.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires a company's directors and
executive officers, and persons who own more than 10 percent of the equity
securities of the Company to file initial reports of ownership and reports of
changes in ownership of the Common Stock with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent shareholders are
required to furnish the Company with copies of all Section 16(a) reports they
file.
Based solely on a review of the forms the Company has received or
prepared, the Company believes that during the year ended December 31, 1999, all
filing requirements applicable to the Company's directors, officers and greater
than 10 percent shareholders were met.
50
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION. The following table provides information
concerning compensation paid or accrued during the fiscal years ended December
31, 1999, 1998 and 1997, to the Company's President and Chief Executive Officer,
Michael M. Barbour and Chief Financial Officer, Dan D. Sudduth. In February
2000, Mr. Sudduth resigned as an officer of the Company but remains a director.
During 1999, 1998 and 1997, no other executive officers received compensation
which exceeded $100,000:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Michael M. Barbour ................. 1999 $ 178,460 26,180 --
CEO 1998 $ 147,200 50,000 --
1997 $ 160,000 40,000 --
Dan D. Sudduth ..................... 1999 $ 157,480 15,950 --
CFO 1998 $ 138,000 30,000 --
1997 134,811 -- --
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------------------------
AWARDS PAYOUTS
---------------------------- ------------
SECURITIES
UNDERLYING
RESTRICTED OPTIONS/ LTIP ALL OTHER
NAME AND POSITION STOCK AWARDS SARS (#) PAYOUTS COMPENSATION
- ------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Michael M. Barbour ................. -- 11,666 -- --
CEO -- 11,666 -- --
-- 3,333 -- --
Dan D. Sudduth ..................... -- 11,666 -- --
CFO -- 11,666 -- --
-- 3,333 -- --
</TABLE>
OPTION/SAR GRANTS. The following table provides certain information with
respect to common stock options granted during the fiscal year ended December
31, 1999 to the Company's Chief Executive Officer and Chief Financial Officer:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS EXERCISE
NAME AND OPTION/SARS /SARS GRANTED PRICE EXPIRATION
POSITION GRANTED TO EMPLOYEES ($/SHARE) DATE
-------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Michael M. Barbour...................
CEO --- --- --- ---
Dan D. Sudduth.......................
CFO --- --- --- ---
</TABLE>
51
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR ENDED
OPTION VALUES. The following table provides certain information with respect to
option exercises during the fiscal year ended December 31, 1999 by the Company's
Chief Executive Officer and Chief Financial Officer:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS AT
ACQUIRED ON VALUE AT FISCAL YEAR END (#) FISCAL YEAR END ($) (1)
NAME EXERCISE REALIZED DECEMBER 31, 1999 REALIZED
- ---------------------------- ---------------- ------------ ------------------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- -------------------- --------------- ---------------
<S> <C> <C>
Michael M. Barbour -- -- 250,000 10,000 -- --
Dan D. Sudduth -- -- 60,000 10,000 -- --
</TABLE>
(1) Calculated by multiplying the number of shares underlying outstanding
in-the-money options by the difference between the last sales price of the
common stock on December 31, 1999 ($1.72 per share) and the exercise
prices, which range between $1.75 and $7.88 per share. Options are
in-the-money if the fair market value of the underlying common stock
exceeds the exercise price of the option.
COMPENSATION OF DIRECTORS
Effective January 15, 1996, the Board of Directors of the Company (the
"BOD") adopted the following plans which were approved by the Company's
shareholders in July 1996: (i) a 1996 Incentive Stock Plan under which the
Company can issue up to 1.2 million shares of the Company's common stock to
eligible officers, employees and consultants of the Company, and (ii) a 1996
Non-Employee Directors Stock Option Plan (the "Outside Director Plan") under
which the Company can issue up 250,000 shares of common stock to its outside
directors. On February 17, 1998, the Company filed a registration statement on
Form S-8 covering all of the shares issuable under both plans with the
Securities and Exchange Commission.
In connection with their re-election to the BOD in July 1999, Drs. Rubio,
Smith, and Henley and Mr. Davidson were each granted a stock option under the
Outside Director Plan to purchase 10,000 shares of the Company's common stock at
a price of $1.75 per share.
The Outside Director Plan also provides that at the discretion of the BOD,
the Company may pay a cash fee to non-employee directors from time to time for
serving on and for attendance at meetings of the BOD or any committee thereof
(as such fees are set by the BOD from time to time.) During the year ended
December 31, 1999, the Company did not pay the non-employee directors for
attendance at meetings of the BOD.
52
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the number
and percentage of shares of common stock beneficially owned as of April 25,
2000, by any person (including any group of affiliated persons) known by the
Company to own 5 percent or more of the outstanding shares of the Company's
common stock, each named executive officer and director, and all executive
officers and directors of the Company as a group. Unless otherwise indicated,
the Company has been advised that all holders listed have the power to vote and
dispose of the number of shares set forth as beneficially owned by them.
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT
OF BENEFICIAL OWNER (1) OWNERSHIP (2) OF CLASS
- ----------------------- ------------- --------
Maxxim Medical, Inc................. 2,120,500 (3) 23.9%
10300 49th Street North
Clearwater, FL 33762
Chadwick F. Smith, MD............... 325,666 (4) 4.4%
1127 Wilshire Blvd.
Los Angeles, California 90017
Michael M. Barbour.................. 275,748 (5) 3.7%
Pedro A. Rubio, MD, Ph.D............ 262,855 (6) 3.5%
Dan D. Sudduth...................... 168,511 (7) 2.3%
Ernest J. Henley, Ph.D.............. 65,000 (8) *
Kenneth W. Davidson.................
10300 49th Street North
Clearwater, FL 33762 40,000 (8) *
James L. Sturgeon................... 12,250 *
All Executive Officers and Directors
as a Group (7 persons).............. 1,150,030 14.9%
* Less than 1% of outstanding shares.
(1) Unless otherwise specified, the address of each beneficial owner is c/o
Henley Healthcare, Inc. 120 Industrial Boulevard, Sugar Land, Texas 77478.
(2) Except as otherwise indicated, all shares are beneficially owned, and the
sole investment and voting power is held, by the person named. This table
is based on information supplied by the officers, directors and principal
shareholders and reporting forms, if any, filed with the Securities and
Exchange Commission on behalf of such persons. A person is deemed to
beneficially own shares of common stock underlying options, warrants or
other convertible securities if the stock can be acquired by such person
within sixty days of the date hereof.
(3) In addition to holding 620,500 shares of common stock, Maxxim is the
holder of the Maxxim Note, which is currently convertible into 1,500,000
shares of common stock (subject to adjustment). See "Certain Relationships
and Related Transactions."
(4) Includes 30,000 shares issuable upon exercise of currently exercisable
options.
(5) Includes 25,000 shares issuable upon exercise of currently exercisable
options.
(6) Includes 112,060 shares issuable upon exercise of currently exercisable
options or warrants.
(7) Includes 85,000 shares issuable upon exercise of currently exercisable
options.
53
<PAGE>
(8) The 65,000 and 40,000 shares listed for each of Dr. Henley and Mr.
Davidson, respectively, consist entirely of warrants and/or options
exercisable as of the date hereof and do not include the 2,120,500 shares
beneficially owned by Maxxim Medical, Inc. of which Dr. Henley and Mr.
Davidson are directors. Dr. Henley and Mr. Davidson disclaim beneficial
ownership af all shares owned by Maxxim.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 1996, the Company entered into a consulting agreement with
Chadwick F. Smith, MD, one of its Directors. The agreement included an annual
compensation of $90,000 and terminated on December 31, 1998.
In connection with an agreement entered into in April 1996 with Maxxim,
the Company issued to Maxxim a convertible subordinated promissory Note in the
principal amount of $7 million (the "Note"). The Note is due and payable on May
1, 2003 with interest payable semi-annually on November 1 and May 1 of each
calendar year and calculated at a rate equal to 2 percent per annum and
increasing annually 2 percent per annum. The indebtedness under the Note is
secured by a second lien in substantially all of the assets of the Company. The
Company may redeem all or any portion of the outstanding principal amount of the
Note at redemption prices ranging from 104 percent to 110 percent of the
principal amount being redeemed, depending on when the redemption occurs as set
forth in the Note. In addition, the Note is subject to mandatory redemption in
annual principal installments of $1.4 million commencing on May 1, 1999 at
premiums starting at 7 percent and decreasing 1 percent each year. The Company
is currently in negotiations with Maxxim concerning the initial principal
payment. The Company is also required to redeem 40 percent of the Note upon the
completion of a public offering. The Note is convertible into common stock at a
conversion price of $2 per share, provided that upon the occurrence of any
default under the Note, the conversion price will be automatically adjusted to
an amount equal to the lesser of the conversion price then in effect or 80
percent of the average market price for the Company's common stock for the 30
trading days immediately preceding the event of default. The conversion price is
also subject to adjustment upon the occurrence of certain events (including
certain issuances of common stock for less than the conversion price) to provide
antidilution protection.
Effective May 1996 The Company signed a consulting agreement with Dr.
Smith, a director of the Company. The agreement include annual compensation of
$90,000 and terminated on December 31, 1998.
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.
On February 9, 1998 the Company purchased substantially all of the assets
and assumed certain liabilities from AMC Acquisition Corp. for an estimated
purchase price of $450,000 plus related acquisition costs of approximately
$6.618 per share. Mr. Sudduth and his son, Britton D. Sudduth, were shareholders
of AMC and each recieved 17,000 shares of common stock valued at $112,506.
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 term note with a bank in the principal amount of
$1,260,000 with a maturity date of February 12, 2013.
Steve Barbour, brother of Michael M. Barbour, the Company's Chief
Executive Officer, is employed by the Company as a sales manager and recieved
total compensation in 1999 of $87,718.
In 1999, Dr. Henley, a director of the Company, performed consulting
services for the Company on an as-needed basis for amonthly fee of 1,750. Dr.
Henley continues to perform consulting services from time to time under this
arrangement.
54
<PAGE>
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.
55
<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 1st day of May, 2000.
HENLEY HEALTHCARE, INC.
(Registrant)
By: /s/ MICHAEL M. BARBOUR
MICHAEL M. BARBOUR,
(PRESIDENT AND CHIEF EXECUTIVE OFFICER)
By: /s/ JAMES L. STURGEON
JAMES L. 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 1st day of May, 2000.
SIGNATURE TITLE
/s/ MICHAEL M. BARBOUR President, Chief Executive
------------------------------- Officer and Director
MICHAEL M. BARBOUR
/s/ DAN D. SUDDUTH Director
-------------------------------
DAN D. SUDDUTH
Chairman of the Board
------------------------------- and Director
CHADWICK F. SMITH
Director
-------------------------------
KENNETH W. DAVIDSON
/s/ ERNEST J. HENLEY, PH.D. Director
-------------------------------
ERNEST J. HENLEY, PH.D.
/s/ PEDRO A. RUBIO, M.D., PH.D. Director
-------------------------------
PEDRO A. RUBIO, M.D., PH.D.
56
<PAGE>
HENLEY HEALTHCARE, INC.
EXHIBITS TO FORM 10-KSB/A
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).
57
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
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)).
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).
58
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
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)).
59
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
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.)
60
<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
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.
61
THE SECURITIES REPRESENTED BY THESE WARRANTS AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW. THE SECURITIES
REPRESENTED BY THESE WARRANTS MAY NOT BE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS.
WARRANTS
to Purchase Common Stock of
HENLEY HEALTHCARE, INC.
Expiring on ___________, [2003 or 2005]
These Common Stock Purchase Warrants (the "Warrants") certify that for
value received, _______________ (the "Holder") or its permitted assigns, is
entitled, subject to the terms and conditions set forth below, to subscribe for
and purchase from the Company (as hereinafter defined), in whole or in part,
_______ shares of duly authorized, validly issued, fully paid and nonassessable
shares of Common Stock (as hereinafter defined) at the initial Exercise Price of
$3.00 per share, subject, however, to the provisions and upon the terms and
conditions hereinafter set forth. The number of Warrants (as hereinafter
defined), the number of shares of Common Stock purchasable hereunder, and the
Exercise Price therefor are subject to adjustment as hereinafter set forth.
These Warrants and all rights hereunder shall expire at 5:00 p.m., Houston,
Texas time, on _____________________, [2003 or 2005] (the "Expiration Date").
ARTICLE I
DEFINITIONS
As used herein, the following terms shall have the meanings set forth
below:
1.1 "COMPANY" shall mean Henley Healthcare, Inc., a Texas corporation,
and shall also include any successor thereto with respect to the obligations
hereunder, by merger, consolidation or otherwise.
1.2 "COMMON STOCK" shall mean and include the Company's Common Stock,
par value $.01 per share, authorized on the date of the original issue of these
Warrants and shall
<PAGE>
also include (i) in case of any reorganization, reclassification, consolidation,
merger, share exchange or sale, transfer or other disposition of assets, the
stock or other securities provided for herein, and (ii) any other shares of
common stock of the Company into which such shares of Common Stock may be
converted.
1.3 "EXERCISE PRICE" shall mean the initial purchase price per share of
Common Stock of $3.00 payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
1.4 "MARKET PRICE" for any day, when used with reference to Common
Stock, shall mean the last reported sale price for the Common Stock on such day
on the principal securities exchange on which the Common Stock is listed or
admitted to trading, or if no such sale takes place on such date, the average of
the closing bid and asked prices thereof as officially reported, or, if not so
listed or admitted to trading on any securities exchange, the last sale price
for the Common Stock on the National Association of Securities Dealers national
market system on such date, or, if there shall have been no trading on such date
or if the Common Stock shall not be listed on such system, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
NASD member firm selected from time to time by the Company for such purpose.
1.5 "WARRANT" shall mean the right upon exercise to purchase one Warrant
Share.
1.6 "WARRANT SHARES" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrants
2
<PAGE>
ARTICLE II
EXERCISE OF WARRANTS
2.1 METHOD OF EXERCISE. The Warrants represented hereby may be exercised
by the Holder, in whole or in part, at any time and from time to time on or
after the date of first issuance of the Warrant until 5:00 p.m., Houston, Texas
time, on the Expiration Date. To exercise the Warrants, the Holder shall deliver
to the Company, at the Warrant Office designated herein, (i) a written notice in
the form of the Subscription Notice attached as an exhibit hereto, stating
therein the election of the Holder to exercise the Warrants in the manner
provided in the Subscription Notice; (ii) payment in full of the Exercise Price;
and (iii) these Warrants. The Warrants shall be deemed to be exercised on the
date of receipt by the Company of the Subscription Notice, accompanied by
payment for the Warrant Shares and surrender of these Warrants, as aforesaid,
and such date is referred to herein as the "Exercise Date." Upon such exercise,
the Company shall, as promptly as practicable and in any event within five
business days, issue and deliver to the Holder a certificate or certificates for
the full number of the Warrant Shares purchased by the Holder hereunder, and
shall, unless the Warrants have expired, deliver to the Holder a new Warrant
representing the number of Warrants, if any, that shall not have been exercised,
in all other respects identical to these Warrants. As permitted by applicable
law, the person in whose name the certificates for Common Stock are to be issued
shall be deemed to have become a holder of record of such Common Stock on the
Exercise Date and shall be entitled to all of the benefits of such holder on the
Exercise Date, including without limitation the right to receive dividends and
other distributions for which the record date falls on or after the Exercise
Date and to exercise voting rights.
2.2 EXPENSES AND TAXES. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp or other transnational
taxes) other than income or transfer taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock issuable
upon exercise of the Warrants.
2.3 RESERVATION OF SHARES. The Company shall reserve at all times so
long as the Warrants remain outstanding, free from preemptive rights, out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the Warrants, a sufficient number of shares of Common
Stock to provide for the exercise of the Warrants.
2.4 VALID ISSUANCE. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and, without limiting the generality of the
foregoing, the Company shall take no action or fail to take any action which
will cause a contrary result (including, without limitation, any action that
would cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
2.5 ACKNOWLEDGMENT OF RIGHTS. At the time of the exercise of the
Warrants in accordance with the terms hereof and upon the written request of the
Holder, the Company will
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acknowledge in writing its continuing obligation to afford to the Holder any
rights (including, without limitation, any right to registration of the Warrant
Shares) to which the Holder shall continue to be entitled after such exercise in
accordance with the provisions of these Warrants; PROVIDED, however, that if the
Holder shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to the Holder any such rights.
2.6 NO FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of these Warrants. If more
than one Warrant shall be presented for exercise at the same time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
such exercise shall be computed on the basis of the aggregate number of whole
shares of Common Stock purchasable on exercise of the Warrants so presented. If
any fraction of a share of Common Stock would, except for the provisions of this
Section, be issuable on the exercise of these Warrants, the Company shall pay an
amount in cash calculated by it to be equal to the Market Price of one share of
Common Stock at the time of such exercise multiplied by such fraction computed
to the nearest whole cent.
ARTICLE III
TRANSFER
3.1 WARRANT OFFICE. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's principal executive offices at 120 Industrial Boulevard, Sugar
Land, Texas 77478, and may subsequently be such other office of the Company or
of any transfer agent of the Common Stock in the continental United States as to
which written notice has previously been given to the Holder. The Company shall
maintain, at the Warrant Office, a register for the Warrants in which the
Company shall record the name and address of the person in whose name these
Warrants has been issued, as well as the name and address of each permitted
assignee of the rights of the registered owner hereof.
3.2 OWNERSHIP OF WARRANTS. The Company may deem and treat the person in
whose name the Warrants are registered as the holder and owner hereof until
provided with notice to the contrary. The Warrants may be exercised by an
assignee for the purchase of Warrant Shares without having new Warrants issued.
3.3 RESTRICTIONS ON TRANSFER OF WARRANTS. Subject to the provisions of
Section 3.4 below, these Warrants may be transferred, in whole or in part, by
the Holder. The Company agrees to maintain at the Warrant Office books for the
registration and transfer of the Warrants. The Company, from time to time, shall
register the transfer of the Warrants in such books upon surrender of this
Warrant at the Warrant Office properly endorsed or accompanied by appropriate
instruments of transfer and written instructions for transfer. Upon any such
transfer and upon payment by the Holder or its transferee of any applicable
transfer taxes, new Warrants shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrants shall be canceled by the Company. The Company shall pay all taxes
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(other than securities transfer taxes or income taxes) and all other expenses
and charges payable in connection with the transfer of the Warrants pursuant to
this Section.
3.4 COMPLIANCE WITH SECURITIES LAWS. Subject to the terms hereof and
notwith-standing any other provisions contained in these Warrants, the Holder
understands and agrees that the following restrictions and limitations shall be
applicable to the Warrants and all Warrant Shares and to all resales or other
transfers thereof pursuant to the Securities Act of 1933, as amended (the
"Securities Act"):
3.4.1 The Holder agrees that the Warrants and the Warrant Shares
may not be sold or otherwise transferred unless the Warrants and Warrant
Shares are registered under the Securities Act and applicable state
securities or blue sky laws or are exempt therefrom.
3.4.2 Legends in substantially the following form will be placed
on the certificate(s) evidencing the Warrants and Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER,
OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER,
THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS."
3.4.3 Stop transfer instructions will be imposed with respect to
the Warrants and Warrant Shares so as to restrict resale or other
transfer thereof.
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ARTICLE IV
ADJUSTMENTS
4.1 STOCK SPLITS AND REVERSE SPLITS. In the event that the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Warrant Shares
purchasable pursuant to this Warrant immediately prior to such subdivision shall
be proportionately increased, and conversely, in the event that the outstanding
shares of Common Stock shall at any time be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.
4.2 REORGANIZATIONS AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets with respect to
or in exchange for their shares, then the following provisions shall apply:
4.2.1 As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other
disposition, lawful and adequate provisions shall be made whereby the
Holder shall thereafter have the right to purchase and receive upon the
terms and conditions specified in these Warrants and in lieu of the
Warrant Shares immediately theretofore receivable upon the exercise of
the rights represented hereby, such shares of capital stock, securities
or assets as may be issued or payable with respect to or in exchange for
a number of outstanding shares of such Common Stock equal to the number
of Warrant Shares immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger, share exchange
or sale not taken place, and in any such case appropriate provision
reasonably satisfactory to the Holder shall be made with respect to the
rights and interests of the Holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the
Exercise Price and of the number of Warrant Shares receivable upon the
exercise) shall thereafter be applicable, as nearly as possible, in
relation to any shares of capital stock, securities or assets thereafter
deliverable upon the exercise of Warrants.
4.2.2 In the event of a merger, share exchange or consolidation
of the Company with or into another person as a result of which a number
of shares of common stock or its equivalent of the successor person
greater or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger, share exchange or consolidation are
issuable to holders of Common Stock, then the Exercise Price in effect
immediately prior to such merger, share exchange or consolidation shall
be adjusted in
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the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock.
4.2.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior
to or simultaneously with the consummation thereof the successor person
(if other than the Company) resulting from such consolidation, share
exchange or merger or the person purchasing or otherwise acquiring such
assets shall have assumed by written instrument executed and mailed or
delivered to the Holder at the last address of the Holder appearing on
the books of the Company the obligation to deliver to the Holder such
shares of capital stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to receive, and all
other liabilities and obligations of the Company hereunder. Upon written
request by the Holder, such successor person will issue new Warrants
revised to reflect the modifications in these Warrants effected pursuant
to this Section.
4.2.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of
Common Stock, the Company shall not effect any consolidation, merger,
share exchange or sale, transfer or other disposition of all or
substantially all of the Company's assets with the person having made
such offer or with any affiliate of such person, unless prior to the
consummation of such consolidation, merger, share exchange, sale,
transfer or other disposition the Holder shall have been given a
reasonable opportunity to then elect to receive upon the exercise of the
Warrants either the capital stock, securities or assets then issuable
with respect to the Common Stock or the capital stock, securities or
assets, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer.
4.3 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, convertible securities or
options or rights thereto) or other property), the Exercise Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
4.4 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase
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or decrease of at least one share of Common Stock purchasable upon an exercise
of each Warrant and no adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least $0.01 in the
Exercise Price; provided, however, that any adjustments are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest full share or nearest
one hundredth of a dollar, as applicable.
4.5 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrants shall be adjusted as
herein provided, or the rights of the Holder shall change by reason of other
events specified herein, the Company shall compute the adjusted Exercise Price
and the adjusted number of Warrant Shares in accordance with the provisions
hereof and shall prepare an officer's certificate setting forth the adjusted
Exercise Price and the adjusted number of Warrant Shares issuable upon the
exercise of the Warrants or specifying the other shares of stock, securities or
assets receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such adjustments or
other changes are based. The Company shall cause to be mailed to the Holder
copies of such officer's certificate together with a notice stating that the
Exercise Price and the number of Warrant Shares purchasable upon exercise of the
Warrants have been adjusted and setting forth the adjusted Exercise Price and
the adjusted number of Warrant Shares purchasable upon the exercise of the
Warrants.
4.6 NOTIFICATIONS TO HOLDERS. In case at any time the Company proposes:
(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution (other
than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders of
its Common Stock any additional shares of capital stock of any class or
other rights;
(iii) to effect any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the Holder (a) at
least 10 days (but not more than 90 days) prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such issuance, reorganization,
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reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation or winding up, and (b) in the case of any
such issuance, reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
at least 10 days (but not more than 90 days) prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock, as the case may be, for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, as the case may be.
ARTICLE V
REDEMPTION
5.1 COMPANY'S RIGHT TO REDEEM; NOTICE. At such time that the Market
Price of the Common Stock is equal to or greater than $3.50 per share for a
period of ten consecutive trading days, but prior to the Expiration Date, the
Company at its sole discretion shall have the right to redeem these Warrants, in
whole or in part, at a redemption price of $[.10 or .20] (the "Redemption
Price") for each Warrant. Notice of any proposed redemption shall be made by
means of certified mail return receipt requested, addressed to the Holder at
this address as it appears on the books of the Company at least thirty (30) days
prior to the date fixed for such redemption (the "Redemption Date"). Each such
notice shall specify (i) the Redemption Date, (ii) the Redemption Price, (iii)
the place for payment and for delivering the Warrants and other necessary
transfer instruments to be executed by the Holder in order for the Holder to
collect the Redemption Price. Any notice given in such manner (a "Redemption
Notice") shall be conclusively deemed to have been duly given whether or not
such notice is in fact received.
5.2 RIGHT TO RECEIVE REDEMPTION PRICE. The holder of any Warrants
redeemed upon any exercise of the Company's redemption right shall not be
entitled to receive payment of the Redemption Price for such Warrants until such
holder shall cause to be delivered to the place specified in the Redemption
Notice (i) the Warrants subject to such redemption and (ii) transfer instruments
satisfactory to the Company. Any redemption of less than all of the outstanding
Warrants subject to redemption ("Redeemable Warrants") shall be on a pro rata
basis based on the number of Redeemable Warrants held by each holder as it
relates to the total number of Redeemable Warrants outstanding on the date of
notice of redemption.
5.3 EFFECT OF REDEMPTION. On the Redemption Date, each Warrant specified
in the Redemption Notice shall be deemed to cease to be outstanding and all
rights of the Holder with respect to such Warrants shall be extinguished on the
Redemption Date, except for the right to receive the Redemption Price. The
Holder shall have the right to exercise the Warrants at any time prior to 5:00
p.m. Houston, Texas time on the last business day preceding the Redemption Date.
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ARTICLE VI
MISCELLANEOUS
6.1 ENTIRE AGREEMENT. Except as provided in the related Warrant Purchase
Agreement, these Warrants contain the entire agreement between the Holder and
the Company with respect to the Warrant Shares purchasable upon exercise hereof
and the related transactions and supersedes all prior arrangements or
understandings with respect thereto.
6.2 GOVERNING LAW. These Warrants shall be governed by and construed in
accordance with the laws of the State of Texas.
6.3 WAIVER AND AMENDMENT. Any term or provision of these Warrants may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of these Warrants may be amended or supplemented at any
time by agreement of the Holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of these Warrants
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of these Warrants shall not in any way effect, limit or
waive a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of these Warrants.
6.4 ILLEGALITY. In the event that any one or more of the provisions
contained in these Warrants shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of these Warrants shall not, at the election of the party for whom
the benefit of the provision exists, be in any way impaired.
6.5 COPY OF WARRANT. A copy of these Warrants shall be filed among the
records of the Company.
6.6 NOTICE. Any notice or other document required or permitted to be
given or delivered to the Holder shall be in writing and delivered at, or sent
by certified or registered mail or by facsimile to the Holder at, the last
address shown on the books of the Company maintained at the Warrant Office for
the registration of these Warrants or at any more recent address of which the
Holder shall have notified the Company in writing. Any notice or other document
required or permitted to be given or delivered to the Company, other than such
notice or documents required to be delivered to the Warrant Office, shall be
delivered at, or sent by certified or registered mail or by facsimile to, the
offices of the Company at 120 Industrial Boulevard, Sugar Land, Texas 77478 or
such other address within the continental United States of America as shall have
been furnished by the Company to the Holder.
6.7 LIMITATION OF LIABILITY; NOT SHAREHOLDERS. No provision of these
Warrants shall be construed as conferring upon the Holder the right to vote,
consent, receive dividends or
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receive notices (other than as herein expressly provided) in respect of meetings
of shareholders for the election of directors of the Company or any other matter
whatsoever as a shareholder of the Company. No provision hereof, in the absence
of affirmative action by the Holder to purchase shares of Common Stock, and no
mere enumeration herein of the rights or privileges of the Holder, shall give
rise to any liability of the Holder for the purchase price of any shares of
Common Stock or as a shareholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
6.8 EXCHANGE, LOSS OR DESTRUCTION. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, mutilation or destruction of
these Warrants, and in the case of any such loss, theft or destruction upon
delivery of an appropriate affidavit in such form as shall be reasonably
satisfactory to the Company and include reasonable indemnification of the
Company, or in the event of such mutilation upon surrender and cancellation of
these Warrants, the Company will make and deliver new Warrants of like tenor, in
lieu of such lost, stolen, destroyed or mutilated Warrants. Any Warrants issued
under the provisions of this Section in lieu of any Warrants alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrants, shall constitute an
original contractual obligation on the part of the Company. These Warrants shall
be promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.
Dated:_________________________, 2000.
HENLEY HEALTHCARE, INC.
By: _________________________________
Michael M. Barbour, President
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SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrants, hereby elects to
exercise purchase rights represented thereby for, and to purchase thereunder,
______________________ shares of the Common Stock covered by such Warrants, and
herewith makes payment in full for such shares, and requests (a) that
certificates for such shares (and any other securities or other property
issuable upon such exercise) be issued in the name of, and delivered to,
___________________ and (b), if such shares shall not include all of the shares
issuable as provided in such Warrants, that new Warrants of like tenor and date
for the balance of the shares issuable thereunder be delivered to the
undersigned.
___________________________________________
Date: ___________________________
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ASSIGNMENT
For value received, _______________________, hereby sells, assigns and
transfers unto ____________ these Warrants, together with all rights, title and
interest therein, and does irrevocably constitute and appoint
________________________ attorney, to transfer such Warrants on the books of the
Company, with full power of substitution.
___________________________________________
Date: ___________________________
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SUBSCRIPTION AGREEMENT
HENLEY HEALTHCARE, INC.
PRIVATE PLACEMENT
OF WARRANTS TO PURCHASE UP TO _____________ SHARES
OF
COMMON STOCK
This Subscription Agreement (this "AGREEMENT") is made between Henley
Healthcare, Inc., a Texas corporation (the "COMPANY"), and the undersigned
prospective purchaser who is subscribing hereby for three- and/or five-year
warrants (collectively, the "WARRANTS") to purchase shares of common stock, par
value $.01 per share ("COMMON STOCK"), of the Company. The three-year warrants
shall be in the form of EXHIBIT A attached hereto and the five-year Warrants
shall be in the form of EXHIBIT B attached hereto. The Warrants shall have the
following material terms:
THREE-YEAR WARRANTS FIVE-YEAR WARRANTS
___________________ ___________________
PURCHASE PRICE : $ .10 per warrant $ .20 per warrant
EXERCISE PERIOD : Three Years Five Years
REDEMPTION PRICE : $ .10 per warrant $ .20 per warrant
EXERCISE PRICE : $3.00 per share $3.00 per share
The undersigned must subscribe for a minimum of 2,000 three-year
Warrants and/or 2,000 five-year Warrants. The Company may reject any such
subscriptions in whole or in part in its sole discretion. In no event will the
Company accept subscriptions for more than ______________ Warrants in the
aggregate.
Pursuant to the offering of the Warrants to which the undersigned
subscribes, the undersigned has been provided with the following, each of which
the undersigned has reviewed thoroughly:
(1) Risk Factors;
(2) the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998; and
(3) the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999.
<PAGE>
In consideration of the Company's agreement to sell the Warrants to the
undersigned upon the terms and conditions of this Agreement and the Warrants,
the undersigned agrees and represents as follows:
1. SUBSCRIPTION
(a) The undersigned hereby irrevocably subscribes for and agrees
to purchase the number of Warrants indicated on the signature page
hereto at a purchase price of $.10 per three-year Warrant and $.20 per
five-year Warrant. The undersigned encloses herewith payment in good
funds payable to the Company in the full amount of the purchase price of
the Warrants for which the undersigned is subscribing (the "PAYMENT").
(b) The undersigned understands that the Payment as provided in
paragraph (a) above shall be delivered to the Company at its executive
offices in Houston, Texas. The payment (or, in the case of rejection of
all or a portion of the undersigned's subscription, the part of the
payment relating to such rejected whole or portion) will be returned
promptly, without interest, if the undersigned's subscription is
rejected in whole or in part.
(c) The offering of the Warrants (the "OFFERING") will terminate
on _________________ (the "TERMINATION DATE") unless extended on one or
more occasions at the option of the Company. Upon receipt by the Company
of Payment for all Warrants to be purchased by the subscribers whose
subscriptions are accepted in whole or in part (each, a "PURCHASER" and,
collectively, the "PURCHASERS"), the Warrants so purchased will be
issued in the names of each such Purchaser, and the names and addresses
of each such Purchaser will be entered into a register for the Warrants,
to be maintained by the Company, as the record owners of Warrants. The
Company will issue to each Purchaser a certificate representing the
Warrants purchased in the form of EXHIBIT A, in the case of three-year
Warrants, and in the form of EXHIBIT B, in the case of five-year
Warrants.
2. REPRESENTATIONS AND WARRANTIES OF THE UNDERSIGNED. The undersigned
hereby represents and warrants to, and agrees with the Company as follows:
(a) The undersigned has been furnished with and has carefully
read the Risk Factors and this Agreement, including Exhibits A and B
hereto, and is familiar with and understands the terms of the Offering.
The undersigned has carefully considered and has, to the extent the
undersigned believes such discussion necessary, discussed with the
undersigned's professional legal, tax, accounting and financial
advisors, of the suitability of an investment in the Warrants for the
undersigned's particular tax and financial situation and has determined
that the Warrants being subscribed for by the undersigned are a suitable
investment for the undersigned.
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(b) The undersigned is an individual "ACCREDITED INVESTOR," as
that term is defined in Rule 501(a) promulgated under the Securities
Act, which is incorporated herein by reference. The undersigned has the
knowledge and experience in financial and business matters necessary for
evaluating the merits and risks of an acquisition of Warrants. THE
UNDERSIGNED HAS CHECKED THE BOX ON THE SIGNATURE PAGE HERETO INDICATING
THE BASIS ON WHICH HE IS REPRESENTING HIS STATUS AS AN "ACCREDITED
INVESTOR."
(c) The undersigned acknowledges that (i) the undersigned has had
the right to request copies of any documents, records, and books
pertaining to this investment and (ii) any such documents, records and
books which the undersigned requested have been made available for
inspection by the undersigned and the undersigned's attorney, accountant
or adviser.
(d) The undersigned or the undersigned's adviser has had a
reasonable opportunity to ask questions of and receive answers from a
person or persons acting on behalf of the Company concerning the
offering and all such questions have been answered to the full
satisfaction of the undersigned.
(e) The undersigned is not subscribing for Warrants as a result
of or after any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or meeting.
(f) If the undersigned is a natural person, the undersigned has
reached the age of majority in the state in which the undersigned
resides, has adequate means of providing for the undersigned's current
financial needs and contingencies, is able to bear the substantial
economic risks of an investment in the Warrants for an indefinite period
of time, has no need for liquidity in such investment and, at the
present time, could afford a complete loss of such investment.
(g) The undersigned or the undersigned's purchaser
representative, as the case may be, has such knowledge and experience in
financial, tax and business matters so as to enable the undersigned to
use the information made available to the undersigned in connection with
the offering to evaluate the merits and risks of an investment in the
Warrants and to make an informed investment decision with respect
thereto.
(h) The undersigned will not sell or otherwise transfer the
Warrants or the shares of Common Stock issuable upon exercise of the
Warrants (the "WARRANT SHARES") without registration under the
Securities Act of 1933, as amended (the "SECURITIES ACT") and applicable
state securities laws or an exemption therefrom. Subject to the terms of
Section 4 below, neither the Warrants nor the Warrant Shares have been
registered under the Securities Act or under the securities laws of any
state. The undersigned represents that the undersigned is purchasing the
Warrants and the Warrant Shares for the undersigned's own account, for
investment and not with a view to resale or
3
<PAGE>
distribution except in compliance with the Securities Act. The
undersigned has not offered or sold the Warrants being acquired nor does
the undersigned have any present intention of selling, distributing or
otherwise disposing of such Warrants or Warrant Shares either currently
or after the passage of a fixed or determinable period of time or upon
the occurrence or non-occurrence of any predetermined event or
circumstance in violation of the Securities Act. The undersigned is
aware that there is currently no market for the Warrants, the Company
has no obligation to register the Warrants subscribed for hereunder, or
to make available an exemption from the registration requirements
pursuant to Rule 144 or any successor rule for resale of the Warrants.
(i) The undersigned recognizes that investment in the Warrants
involves substantial risks, including loss of the entire amount of such
investment. Further, the undersigned has carefully read and considered
the matters set forth in the Risk Factors and has taken full cognizance
of and understands all of the risks related to the purchase of the
Warrants.
(j) In addition to any other restrictive legends that may be
required by the terms of the Warrants, the undersigned acknowledges that
the certificates representing the Warrants and the Warrant Shares shall
be stamped or otherwise imprinted with a legend substantially in the
following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT AND SUCH LAWS OR PURSUANT TO AN EXEMPTION
THEREFROM, WHICH, IN THE OPINION OF COUNSEL FOR THE
HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS
AVAILABLE."
(k) The undersigned shall indemnify and hold harmless the
Company, and its officers, directors or control persons who are or may
be a party or are or may be threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of or
arising from any actual or alleged misrepresentation or misstatement of
facts or omission to represent or state facts made or alleged to have
been made by the undersigned to the Company, or omitted or alleged to
have been omitted by the undersigned, concerning the undersigned or the
undersigned's authority to invest or financial position in connection
with the offering, against losses, liabilities and expenses for which
the Company, or its officers, directors or control persons have not
otherwise been reimbursed (including attorneys' fees, judgements, fines
and amounts paid in settlement) actually and reasonably incurred by the
Company, or such officers, directors or control persons in connection
with such action, suit or proceeding.
4
<PAGE>
3. ADDITIONAL AGREEMENTS. The undersigned understands, acknowledges and
agrees with the Company as follows:
(a) This subscription may be rejected, in whole or in part, by
the Company in its sole and absolute discretion at any time. The
acceptance, in whole or in part, by the Company of this subscription
shall be evidenced by the countersignature of a duly authorized
representative of the Company on the page immediately following the
signature page hereto (the "ACCEPTANCE PAGE").
(b) Except as set forth in Section 3(a) above, the undersigned
hereby acknowledges and agrees that the subscription hereunder is
irrevocable by the undersigned, that, except as required by law, the
undersigned is not entitled to cancel, terminate or revoke this
Agreement or any agreements of the undersigned hereunder and that this
Agreement and such other agreements shall survive the death or
disability of the undersigned and shall be binding upon and inure to the
benefit of the parties and their heirs, executors, administrators,
successors, legal representatives and permitted assigns. If the
undersigned is more than one person, the obligations of the undersigned
hereunder shall be joint and several and the agreements,
representations, warranties and acknowledgments herein contained shall
be deemed to be made by and be binding upon each such person and his
heirs, executors, administrators, successors, legal representatives and
permitted assigns.
(c) No federal or state agency has made any finding or
determination as to the accuracy or adequacy of the information provided
by the Company to the undersigned in connection with the Offering or as
to the fairness of the terms of the Offering for investment or any
recommendation or endorsement of the Warrants or the Warrant Shares.
(d) The Offering is intended to be exempt from registration under
the Securities Act by virtue of Section 4(2) of the Securities Act and
the provisions of Regulation D thereunder, which is in part dependent
upon the truth, completeness and accuracy of the representations and
warranties of the undersigned herein.
(e) The representations, warranties and agreements of the
undersigned contained herein and in any other writing delivered in
connection with the transactions contemplated hereby shall survive the
execution and delivery of this Agreement and the purchase of the
Warrants.
4. REGISTRATION RIGHTS. The Company covenants and agrees that within one
hundred (100) days following the Termination Date, the Company will cause to be
filed pursuant to Rule 415 of the Securities Act a Shelf Registration Statement
on Form S-3, or such other Form as the Company is then eligible to use, (the
"SHELF REGISTRATION STATEMENT") as to the Warrant Shares issuable upon exercise
of the Warrants sold to the Purchasers in the Offering contemplated herein,
naming the holders of the Warrants as selling shareholders. The
5
<PAGE>
Company shall use its commercially reasonable best efforts to have such Shelf
Registration Statement declared effective as soon as reasonably practicable
after such filing, and to keep such Shelf Registration Statement continuously
effective until five years following the date on which Shelf Registration
Statement becomes effective under the Securities Act; provided, however, that
the Company may voluntarily suspend the effectiveness of such Shelf Registration
Statement for a limited time, which in no event shall be longer than 120 days,
if the Company has been advised by counsel that the offering of the Warrant
Shares pursuant to the Shelf Registration Statement would adversely affect, or
would be improper in view of (or improper without disclosure in a prospectus), a
proposed financing, reorganization, re-capitalization, merger, consolidation, or
similar transaction involving the Company, in which case the Company shall be
required to keep such Shelf Registration Statement effective for an additional
period of time beyond five years following the date of the effectiveness thereof
equal to the number of days the effectiveness thereof is suspended pursuant to
this proviso. Upon the occurrence of any event that would cause the Shelf
Registration Statement to contain a material misstatement or omission or not to
be effective and usable during the period that such Shelf Registration Statement
is required to be effective and usable, the Company shall promptly file an
amendment to the Shelf Registration Statement and use its best efforts to cause
such amendment to be declared effective as soon as practicable thereafter. The
Company will bear all costs and expenses related to the Shelf Registration
Statement other than the expenses incurred by the Purchasers for underwriters'
commissions and discounts or legal fees incurred by the Purchasers. The
Purchasers shall furnish to the Company such information regarding their
holdings and the proposed manner of distribution thereof as the Company may
reasonably request and it shall be required in connection with the Shelf
Registration Statement.
5. MISCELLANEOUS
(a) This Agreement shall not be waived, modified, changed,
discharged, terminated, revoked or canceled except by an instrument in
writing signed by the party effecting the same against whom any change,
discharge or termination is sought.
(b) Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested,
addressed: (i) if to the Company, at 120 Industrial Boulevard, Sugar
Land, Texas 77478, Attention: President, and (ii) if to the undersigned,
to the address for correspondence set forth on the signature page
hereto, or at such other address as may have been specified by written
notice given in accordance with this Paragraph 5(b).
(c) Failure of the Company to exercise any right or remedy under
this Agreement or any other agreement between the Company and the
undersigned, or otherwise, or delay by the Company in exercising such
right or remedy, will not operate as a waiver thereof. No waiver by the
Company will be effective unless and until it is in writing and signed
by the Company.
6
<PAGE>
(d) This Agreement shall be enforced, governed and construed in
all respects in accordance with the laws of the State of Texas, without
regard to laws governing choice of law, as such laws are applied by
Texas courts to agreements entered into and to be performed in Texas by
and between residents of Texas, and shall be binding upon the
undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company,
its successors and assigns. If any provision of this Agreement is
invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it
may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof that may prove invalid or
unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(e) This Agreement, including the exhibits hereto, constitutes
the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by
both parties hereto.
(f) Each party hereto has had the opportunity to review this
Agreement with its separate legal counsel.
6. SIGNATURE. The signature of this Agreement is contained as part of
the applicable subscription package, entitled "SIGNATURE PAGE."
[SIGNATURE AND ACCEPTANCE PAGES FOLLOW]
7
<PAGE>
SIGNATURE PAGE
The undersigned hereby subscribes for the number of Warrants set forth below.
1. Dated: ____________________________________
2. Number and Purchase Price of Warrants:
- --------------------------------------------------------------------------------
(A) NUMBER OF (B) PURCHASE PRICE (C) TOTAL PURCHASE
TYPE OF WARRANT WARRANTS PER WARRANT PRICE (A X B =C)
- --------------------------------------------------------------------------------
Three-Year Warrants $.10 $
- --------------------------------------------------------------------------------
Five-Year Warrants $.20 $
- --------------------------------------------------------------------------------
3. Aggregate Purchase Price for number of Warrants subscribed for (combine
Total Purchase Price for both types of Warrants): $_____________________
4. Check the box below indicating the basis on which you are representing
your status as an "accredited investor":
[ ] a corporation or partnership, not formed for the specific
purpose of acquiring the Shares, with total assets in excess of
$5,000,000;
[ ] a director or executive officer of the Company;
[ ] a natural person whose individual net worth, or joint net worth
with the undersigned's spouse, at the time of this purchase
exceeds $1,000,000;
[ ] a natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income
with the undersigned's spouse in excess of $300,000 in each of
those years and has a reasonable expectation of reaching the same
income level in the current year;
[ ] a trust with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the Shares, whose purchase
is directed by a person who has such knowledge and experience in
financial and business matters that he is capable of evaluating
the merits and risks of the prospective investment; or
[ ] an entity in which all of the equity holders are "accredited
investors" by virtue of their meeting one or more of the above
standards.
_____________________________________ ________________________________________
Signature of Purchaser Taxpayer Identification or
(and title, if applicable) Social Security Number
_____________________________________ Name and Residence Address
Name of Purchaser (please print as (post office address not acceptable):
name will appear on certificates)
________________________________________
Number and Street
________________________________________
City State Zip Code
8
<PAGE>
ACCEPTANCE PAGE
The Company hereby accepts the foregoing subscription as indicated below:
1. Dated: _________________________
2. Name of Purchaser: _______________________________________
3. Number of Three-Year Warrants accepted: __________________
4. Number of Five-Year Warrants accepted: ___________________
HENLEY HEALTHCARE, INC.
By: ________________________________
Michael M. Barbour, President
9
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:
JURISDICTION PERCENTAGE
FOREIGN SUBSIDIARIES OF INCORPORATION OWNERSHIP
-------------------- --------------------- ----------
Enraf-Nonius, B.V........................ The Netherlands 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%
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/A, 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
May 1, 2000
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 535,294
<SECURITIES> 0
<RECEIVABLES> 8,452,391
<ALLOWANCES> (756,407)
<INVENTORY> 11,264,286
<CURRENT-ASSETS> 19,832,407
<PP&E> 8,995,643
<DEPRECIATION> (3,094,573)
<TOTAL-ASSETS> 43,048,836
<CURRENT-LIABILITIES> 30,921,902
<BONDS> 0
0
648
<COMMON> 64,111
<OTHER-SE> 4,017,690
<TOTAL-LIABILITY-AND-EQUITY> 43,048,836
<SALES> 57,349,625
<TOTAL-REVENUES> 57,349,625
<CGS> 39,275,096
<TOTAL-COSTS> 20,649,454
<OTHER-EXPENSES> 250,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,845,950
<INCOME-PRETAX> (4,671,860)
<INCOME-TAX> 678,000
<INCOME-CONTINUING> (5,349,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,349,860)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
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