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0001018871-08-000011.txt : 20080312
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20080312122741
ACCESSION NUMBER: 0001018871-08-000011
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20071231
FILED AS OF DATE: 20080312
DATE AS OF CHANGE: 20080312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEALTHTRONICS, INC.
CENTRAL INDEX KEY: 0001018871
STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]
IRS NUMBER: 582210668
STATE OF INCORPORATION: GA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-30406
FILM NUMBER: 08682907
BUSINESS ADDRESS:
STREET 1: 1301 CAPITAL OF TEXAS HWY.
STREET 2: SUITE B-200
CITY: AUSTIN
STATE: TX
ZIP: 78746
BUSINESS PHONE: 512.328.2892
MAIL ADDRESS:
STREET 1: 1301 CAPITAL OF TEXAS HWY.
STREET 2: SUITE B-200
CITY: AUSTIN
STATE: TX
ZIP: 78746
FORMER COMPANY:
FORMER CONFORMED NAME: HEALTHTRONICS SURGICAL SERVICES INC
DATE OF NAME CHANGE: 20010613
FORMER COMPANY:
FORMER CONFORMED NAME: HEALTHTRONICS INC /GA
DATE OF NAME CHANGE: 19980623
10-K
1
f10k2007stf.htm
10k
_______________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-30406
_____________________________
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA
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58-2210668
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1301 Capital of Texas
Highway, Suite B-200, Austin, Texas 78746
(Address of principal executive office) (Zip code)
(512) 328-2892
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES __
NO X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES __ NO X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer ¨
Accelerated filer
x
Non-accelerated filer ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES __ NO X
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of
the registrants most recently completed second fiscal quarter.
Aggregate Market Value at June 30, 2007: $ 125,167,000
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Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
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Title of Each Class
Common Stock, no par value
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Number of Shares Outstanding at
February 28, 2008
35,783,811
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DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrants definitive proxy material for the 2008 annual meeting of stockholders are incorporated by
reference into Part III of the Form 10-K.
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HEALTHTRONICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
PART I
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ITEM 1.
BUSINESS
General
We provide healthcare services and manufacture medical devices, primarily for the urology community.
Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high
technology medical devices and equipment for mobile command and control centers and the media and
broadcast industry. On July 31, 2006, we completed the sale of our specialty vehicle manufacturing
division. For a further discussion of this sale, see Specialty Vehicle Manufacturing under this Part
I.
For a discussion of recent developments, see Managements Discussion and Analysis of Financial
Condition and Results of OperationsRecent Developments.
On November 10, 2004, Prime Medical Services, Inc. (Prime) completed a merger with HealthTronics
Surgical Services, Inc. (HSS) pursuant to which Prime merged with and into HSS, with HealthTronics,
Inc. (HealthTronics) as the surviving corporation. Under the terms of the merger agreement, as a
result of the merger, Primes stockholders received one share of HealthTronics common stock for each
share of Prime common stock they owned. Immediately following the merger, Primes stockholders owned
approximately 62% of the outstanding shares of HealthTronics common stock, and Primes directors and
senior management represented a majority of the combined companys directors and senior management. As a
result, Prime was deemed to be the acquiring company for accounting purposes and the merger was
accounted for as a reverse acquisition under the purchase method of accounting for business combinations
in accordance with accounting principles generally accepted in the United States. The consideration paid
(purchase price) was allocated to the tangible and intangible net assets of HSS based on their fair
values, and the net assets of HSS were recorded at their fair values as of the completion of the merger
and added to those of Prime. The assets acquired and liabilities assumed were deemed to be those of
HealthTronics because HealthTronics was the surviving legal entity.
In this document, references to we, us, our and HealthTronics shall mean HealthTronics and its
consolidated subsidiaries after the merger, except when the context requires, such references shall
refer to HealthTronics and its consolidated subsidiaries either before or after the merger. References
to Prime shall mean Prime and its consolidated subsidiaries before the merger, and references to HSS
shall mean HSS and its consolidated subsidiaries before the merger.
Urology
Our lithotripsy services are provided principally through limited partnerships or other entities that we
manage, which use lithotripsy devices. In 2007, physicians who are affiliated with us used our
lithotripters to perform approximately 48,000 procedures in the U.S. We do not render any medical
services. Rather, the physicians do.
We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy
services. Retail contracts are contracts where we contract with the hospital and private insurance
payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches
functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee
for all patients other than governmental pay patients, for which the hospital bills the non-physician
fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all
patients. In both cases, the billing party contractually bears the costs associated with the billing
service, including pre-certification, as well as non-collection. The non-billing party is generally
entitled to its fees regardless of whether the billing party actually collects the non-physician fee.
Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally
receives a greater proportion of the total non-physician fee to compensate for its billing costs and
collection risk. Conversely, under the retail contracts where we generally provide the billing services
and bear the collection risk, we receive a greater proportion of the total non-physician fee.
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Although the non-physician fee under both retail and wholesale contracts varies widely based on
geographical markets and the identity of the third party payor, we estimate that nationally, on average,
our share of the non-physician fee was roughly $2,100, respectively, for both 2007 and 2006. At this
time, we do not anticipate a material shift between our retail and wholesale arrangements.
As the general partner of the limited partnerships or the manager of the other types of entities, we
also provide services relating to operating our lithotripters, including scheduling, staffing, training,
quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers.
Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate.
In treating benign prostate disease, we deploy three technologies: (1) trans-urethral microwave therapy
(TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation
(TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. In
September 2007, we completed the sale of our Rocky Mountain Prostate business, which represented almost
our entire TUMT treatment operations. For treating prostate and other cancers prior to November 30,
2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy
cancer cells. We sold our cryosurgery business on November 30, 2006 and have classified it as
discontinued operations in the accompanying consolidated financial statements.
We recognize urology revenue primarily from the following sources:
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Fees for urology services
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A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments
performed using our lithotripters. We, through our partnerships or other entities, facilitate the use
of our equipment and provide other support services in connection with these treatments at hospitals and
other health care facilities. The professional fee payable to the physician performing the procedure is
generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment
services are billed in the same manner as our lithotripsy services under either retail or wholesale
contracts. These services are also primarily performed through limited partnerships, which we manage.
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Fees for operating our lithotripters
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Through our partnerships and otherwise directly by us, we provide services related to operating our
lithotripters and receive a management fee for performing these services.
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Medical Products
We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture,
sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and
are the exclusive U.S. distributor of the Revolix branded laser. The operations of our Claripath
pathology laboratory are also included in our medical products segment at this time.
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Fees for maintenance services
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We provide equipment maintenance services to our partnerships as well as outside parties. These
services are billed either on a time and material basis or at a fixed monthly contractual rate.
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Fees for equipment sales, consumable sales and licensing applications
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We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix
laser and we also manufacture and sell consumables related to the lithotripters. With respect to some
lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer
of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing
fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and
consumables are recognized when the related items are delivered. Revenues from licensing fees are
recorded when the patient is treated. In some cases, we lease certain equipment to our partnerships as
well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures
are performed.
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Fees for Claripath anatomical pathology services. We provide anatomical pathology services primarily to
the urology marketplace. Revenues from these services are recorded when the related laboratory
procedures are performed.
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Specialty Vehicle Manufacturing
Before July 31, 2006, we designed, constructed and engineered mobile trailers, coaches, and special
purpose mobile units that transport high technology medical devices such as magnetic resonance imaging,
or MRI, cardiac catheterization labs, CT scanware, lithotripters and positron emission tomography, or
PET, and equipment designed for mobile command and control centers, and broadcasting and communications
applications.
Before July 31, 2006, a significant portion of our revenue had been derived from our manufacturing
operations. Revenue from the manufacture of trailers where we had a customer contract prior to beginning
production was recognized when the project was substantially complete. Substantially complete is when
the following has occurred (1) all significant work on the project is done; (2) the specifications under
the contract have been met; and (3) no significant risks remain. Revenue from the manufacture of
trailers built to an OEMs forecast was recognized upon delivery.
On June 22, 2006, HealthTronics and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck
Corporation (Oshkosh), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh
agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed
this sale on July 31, 2006 and have classified it as discontinued operations in the accompanying
consolidated financial statements.
Orthotripsy
In orthopaedics, we provided non-invasive surgical solutions for a wide variety of orthopaedic
conditions such as chronic plantar fasciitis and chronic lateral epicondylitis, more commonly known as
heel pain and tennis elbow, respectively. We provided these services with our device called the
OssaTron, which is an evolution of the lithotripsy technology. The OssaTron is approved by the FDA for
the two previously stated indications and has been demonstrated to be effective through clinical
studies. In August 2005, we sold our orthopaedics business unit to SanuWave, Inc., a company controlled
by Prides Capital Partners L.L.C.
Revenues and Industry Segments
The information required by Regulation S-K Items 101(b) and 101(d) related to financial information
about segments and financial information about sales is contained in Note K of our consolidated
financial statements, which are included in this Annual Report on Form 10-K.
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Competition
The lithotripsy services market is highly fragmented and competitive. We compete with other companies,
private facilities and medical centers that offer lithotripsy machines and services, including smaller
regional and local lithotripsy service providers. Certain of our current and potential competitors have
substantial financial resources and may compete with us for acquisitions and development of operations
in markets targeted by us. Additionally, while we believe that lithotripsy has emerged as the superior
treatment for kidney stone disease, we also compete with hospitals, clinics and individual medical
practitioners that offer alternative treatments for kidney stones.
In Medical Products, we also compete with other manufacturers of minimally invasive medical devices in
our markets. The primary competitors include Dornier MedTech GmbH, Siemens AG, Storz Medical, Richard
Wolf GmbH and Direx.
Potential Liabilities-Insurance
All medical procedures performed in connection with our business activities are conducted directly by,
or under the supervision of, physicians who are not our employees. We do not provide medical services to
any patients. However, patients being treated at health care facilities at which we provide our
non-medical services could suffer a medical emergency resulting in serious injury or death, which
subjects us to the risk of lawsuits seeking substantial damages.
We may also face product liability claims as a result of our medical device manufacturing.
We currently maintain general and professional liability insurance with a total limit of $1,000,000 per
loss event and $3,000,000 policy aggregate and an umbrella excess limit of $10,000,000, with a
deductible of $50,000 per occurrence. In addition, we require medical professionals who utilize our
services to maintain professional liability insurance. All of these insurance policies are subject to
annual renewal by the insurer. If these policies were to be canceled or not renewed, or failed to
provide sufficient coverage for our liabilities, we might be forced to self-insure against the potential
liabilities referred to above. In that event, a single incident might result in an award of damages that
might have a material adverse effect on our results of operations or financial condition. We sponsor a
partially self-insured group medical insurance plan. The plan is designed to provide a specified level
of coverage, with stop-loss coverage provided by a commercial insurer. Our maximum claim exposure is
limited to $100,000 per person per policy year.
Government Regulation and Supervision
We are directly, or indirectly through physicians and hospitals and other health care facilities, which
we will refer to as Customers, subject to extensive regulation by both the federal government and the
governments in states in which we conduct business, including:
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the federal False Claims Act;
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the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions;
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federal and state billing and claims submission laws and regulations;
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the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to
patient privacy;
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the federal physician self-referral prohibition commonly known as the Stark Law and the state law
equivalents of the Stark Law;
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state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting
arrangements involving physicians; and
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federal and state laws governing the equipment we use in our business concerning patient safety and
equipment operating specifications.
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Practices prohibited by these statutes include, but are not limited to, the payment, receipt, offer, or
solicitation of money or other consideration in connection with the referral of patients for services
covered by a federal or state health care program. We contract with physicians under a variety of
financial arrangements, and physicians have ownership interests in some entities in which we also have
an interest. If our operations are found to be in violation of any of the laws and regulations to which
we or our Customers are subject, we may be subject to the applicable penalty associated with the
violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare,
Medicaid, and other governmental healthcare programs, loss of licenses, and the curtailment of our
operations. While we believe that we are in compliance with all applicable laws, we cannot assure that
our activities will be found to be in compliance with these laws if scrutinized by regulatory
authorities. Any penalties, damages, fines or curtailment of our operations, individually or in the
aggregate, could adversely affect our ability to operate our business and our financial results. The
risks of us being found in violation of these laws and regulations is increased by the fact that many of
them have not been fully interpreted by the regulatory authorities or in the courts, and their
provisions are open to a variety of interpretations. Any action brought against us for violation of
these laws or regulations, even if we were to successfully defend against it, could cause us to incur
significant legal expenses and divert our managements attention from the operation of our business.
In July 2007, the Centers for Medicare & Medicaid Services proposed new regulations under which
physician ownership of interests in our non-lithotripsy partnerships might be deemed a prohibited
financial relationship under the physician self-referral prohibitions under the Stark Law. If the
proposed rules were to go into effect, the proposed rules might require us to significantly change our
partnership model for those of our partnerships and limited liability companies that provide services to
treat benign prostatic hyperplasia and prostate cancer. We cannot predict with any certainty whether or
when these proposed regulations might be finalized and, if finalized, whether physician-owned interests
in our non-lithotripsy partnerships would become prohibited financial relationships. If that were to
occur, we might be required to, among other things, repurchase the ownership interests of such
physicians in such partnerships or otherwise dissolve such partnerships. This in turn could impair our
relationships with the physicians or the hospitals at which our non-lithotripsy partnerships provide
services. We can give you no assurances that, if the proposed regulations are finalized, the final
rules would not have a material adverse effect on our operations, financial condition or results of
operations.
As previously reported on a Form 8-K filed by Prime on September 28, 2004, we concluded an internal
investigation of a business transaction involving our specialty vehicle manufacturing division, which transaction may have
violated the federal anti-kickback laws. We voluntarily reported the transaction to the U.S. General
Services Administration, or GSA. The GSA has assigned a government investigator in response to our
voluntary disclosure and we intend to fully cooperate with any GSA investigation. Based on the findings
of our outside legal counsel, we (1) believe this was an isolated incident, and (2) do not believe the
pending resolution of this matter will materially and adversely affect our financial condition, results
of operation, or business.
Equipment
We either manufacture or purchase our urology equipment and maintain that equipment with either internal
personnel or pursuant to service contracts with the manufacturers or other service companies. For mobile
lithotripsy, we either purchase or lease the tractor, usually for a term up to five years, and purchase
the trailer or a self contained coach. We are not dependent on one manufacturer of medical equipment.
Employees
As of February 28, 2008, we employed approximately 413 full-time employees and approximately 6 part-time
employees.
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Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors
discussed below, which could materially affect our business, financial condition or future results.
If we are not able to establish or maintain relationships with physicians and hospitals, our ability to
successfully commercialize our current or future service offerings will be materially harmed.
We are dependent on health care providers in two respects. First, if physicians and hospitals and other
health care facilities, which we will refer to as Customers, determine that our services are not of
sufficiently high quality or reliability, or if our Customers determine that our services are not cost
effective, they will not utilize our services. In addition, any change in the rates of or conditions for
reimbursement could substantially reduce (1) the number of procedures for which we or our Customers can
obtain reimbursement or (2) the amounts reimbursed to us or our Customers for services provided by us.
If third-party payors reduce the amount of their payments to Customers, our Customers may seek to reduce
their payments to us or seek an alternate supplier of services. Because unfavorable reimbursement
policies have constricted and may continue to constrict the profit margins of the hospitals and other
healthcare facilities we bill directly, we may need to lower our fees to retain existing customers and
attract new ones. These reductions could have a significant adverse effect on our revenues and financial
results by decreasing demand for services or creating downward pricing pressure. Second, physicians
generally own equity interests in our partnerships. We provide a variety of services to the partnerships
and in general manage their day-to-day affairs. Our operations could become disrupted, and financial
results adversely affected, if these physician partners became dissatisfied with our services, if these
physician partners believe that our competitors or other persons provide higher quality services or a
more cost-beneficial model or service, or if we became involved in disputes with our partners.
We are subject to extensive federal and state health care regulation.
We are subject to extensive regulation by both the federal government and the governments in states in
which we conduct business. See Government Regulation and Supervision under this Part I for further
discussion on these regulations.
Third party payors could refuse to reimburse health care providers for use of our current or future
service offerings and products, which could make our revenues decline.
Third party payors are increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement of medical procedures and treatments. In addition, significant
uncertainty exists as to the reimbursement status of newly approved health care products. Lithotripsy
treatments are reimbursed under various federal and state programs, including Medicare and Medicaid, as
well as under private health care programs, primarily at fixed rates. Governmental programs are subject
to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental
funding restrictions, and private programs are subject to policy changes and commercial considerations,
all of which may have the effect of decreasing program payments, increasing costs or requiring us to
modify the way in which we operate our business. These changes could have a material adverse effect on
us.
New and proposed federal and state laws and regulatory initiatives relating to various initiatives in
health care reform (such as improving privacy and the security of patient information and combating
health care fraud) could require us to expend substantial sums to appropriately respond to and comply
with this broad variety of legislation (such as acquiring and implementing new information systems for
privacy and security protection), which could negatively impact our financial results.
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Recent legislation and several regulatory initiatives at the state and federal levels address patient
privacy concerns. New federal legislation extensively regulates the use and disclosure of individually
identifiable health-related information and the security and standardization of electronically
maintained or transmitted health-related information. We do not yet know the total financial or other
impact of these regulations on our business. Continuing compliance with these regulations will likely
require us to spend substantial sums, including, but not limited to, purchasing new computer systems,
which could negatively impact our financial results. Additionally, if we fail to comply with the privacy
regulations, we could suffer civil penalties of up to $25,000 per calendar year per standard (with well
over fifty standards with which to comply) and criminal penalties with fines of up to $250,000 for
willful and knowing violations. In addition, health care providers will continue to remain subject to
any state laws that are more restrictive than the federal privacy regulations. These privacy laws vary
by state and could impose additional penalties.
The provisions of HIPAA criminalize situations that previously were handled exclusively civilly through
repayments of overpayments, offsets and fines by creating new federal health care fraud crimes. Further,
as with the federal laws, general state criminal laws may be used to prosecute health care fraud and
abuse. We believe that our business arrangements and practices comply with existing health care fraud
law. However, a violation could subject us to penalties, fines and/or possible exclusion from Medicare
or Medicaid. Such sanctions could significantly reduce our revenue or profits.
A number of proposals for health care reform have been made in recent years, some of which have included
radical changes in the health care system. Health care reform could result in material changes in the
financing and regulation of the health care business, and we are unable to predict the effect of such
change on our future operations. It is uncertain what legislation on health care reform, if any, will
ultimately be implemented or whether other changes in the administration of or interpretation of
existing laws involving governmental health care programs will occur. There can be no assurance that
future health care legislation or other changes in the administration of or interpretation of existing
legislation regarding governmental health care programs will not have a material adverse effect on our
business or the results of our operations.
We face intense competition and rapid technological change that could result in products that are
superior to the products we manufacture or superior to the products on which our current or proposed
services are based.
Competition in our business segments is intense. We compete with national, regional and local providers
of urology services. This competition could lead to a decrease in our profitability. Moreover, if our
customers determine that our competitors offer better quality products or services or are more cost
effective, we could lose business to these competitors. The medical device industry is subject to rapid
and significant technological change. Others may develop technologies or products that are more
effective or less costly than our products or the products on which our services are based, which could
render our products or services obsolete or noncompetitive. Our business is also impacted by competition
between lithotripsy services, on the one hand, and surgical and other established methods for treating
urological conditions, on the other hand.
We may be subject to costly and time-consuming product liability actions that would materially harm our
business.
Our urology services and manufacturing business exposes us to potential product liability risks that are
inherent in these industries. All medical procedures performed in connection with our business
activities are performed by or under the supervision of physicians who are not our employees. We do not
perform medical procedures. However, we may be held liable if patients undergoing urology treatments
using our devices are injured. We may also face product liability claims as a result of our medical
device manufacturing. We cannot ensure that we will be able to avoid product liability exposure. Product
liability insurance is generally expensive, if available at all. We cannot ensure that our present
insurance coverage is adequate or that we can obtain adequate insurance coverage at a reasonable cost in
the future.
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Our success will depend partly on our ability to operate without infringing on or utilizing the
proprietary rights of others.
The medical device industry is characterized by a substantial amount of litigation over patent and other
intellectual property rights. No one claims that any of our medical devices infringe on their
intellectual property rights; however, it is possible that we may have unintentionally infringed on
others patents or other intellectual property rights. Intellectual property litigation is costly. If we
do not prevail in any litigation, in addition to any damages we might have to pay, we could be required
to stop the infringing activity or obtain a license. Any required license may not be available to us on
acceptable terms. If we fail to obtain a required license or are unable to design around a patent, we
may be unable to sell some of our products, which would reduce our revenues and net income.
If we fail to attract and retain key personnel and principal members of our management staff, our
business, financial condition and operating results could be materially harmed.
Our success depends greatly on our ability to attract and retain qualified management and technical
personnel, as well as to retain the principal members of our existing management staff. The loss of
services of any key personnel could adversely affect our current operations and our ability to implement
our growth strategy. There is intense competition within our industry for qualified staff, and we cannot
assure you that we will be able to attract and retain the necessary qualified staff to develop our
business. If we fail to attract and retain key management staff, or if we lose any of our current
management team, our business, financial condition and operating results could be materially harmed.
The market price of our common stock may experience substantial fluctuation for reasons over which we
have little control.
Our stock price has a history of volatility. Fluctuations have occurred even in the absence of
significant developments pertaining to our business. Stock prices and trading volume of companies in the
health care and health services industry have fallen and risen dramatically in recent years. Both
company-specific and industry-wide developments may cause this volatility. Factors that could impact the
market price of our common stock include the following:
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future announcements concerning us, our competition or the health care services market
generally;
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developments relating to our relationships with hospitals, other health care facilities, or
physicians;
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developments relating to our sources of supply;
|
|
|
|
claims made or litigation filed against us;
|
|
|
|
changes in, or new interpretations of, government regulations;
|
|
|
|
changes in operating results from quarter to quarter;
|
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|
sales of stock by insiders;
|
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|
news reports relating to trends in our markets;
|
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|
acquisitions and financings in our industry; and
|
|
|
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overall volatility of the stock market.
|
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their
operating results. These fluctuations, coupled with changes in our results of operations and general
economic, political and market conditions, may adversely affect the market price of our common stock.
Our acquisition strategy could fail or present unanticipated problems for our business in the future,
which could adversely affect our ability to make acquisitions or realize anticipated benefits from those
acquisitions.
We have followed an acquisition strategy that has resulted in rapid growth in our business. This
acquisition strategy includes acquiring healthcare services businesses and is dependent on the continued
availability of suitable acquisition candidates and our ability to finance and complete any particular
acquisition successfully. Moreover, the U.S. Federal Trade Commission, or FTC, initiated an
investigation in 1991 to determine whether the limited partnerships in which Lithotripters, Inc., now
one of our wholly-owned subsidiaries, was the general partner posed an unreasonable threat to
competition in the healthcare field. While the FTC closed its investigation and took no action, the FTC
or another governmental authority charged with the enforcement of federal or state antitrust laws or a
private litigant might, due to our size and market share, seek to (1) restrict our future growth by
prohibiting or restricting the acquisition of additional lithotripsy operations or (2) require that we
divest certain of our lithotripsy operations. Furthermore, acquisitions involve a number of risks and
challenges, including:
|
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diversion of managements attention;
|
|
|
|
the need to integrate acquired operations;
|
|
|
|
potential loss of key employees of the acquired companies; and
|
|
|
|
an increase in our expenses and working capital requirements.
|
Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from
our acquired businesses or realize other anticipated benefits from those acquisitions.
Our results of operations could be adversely affected as a result of goodwill impairments.
Goodwill represents the excess of the purchase price paid for a company over the fair value of that
companys tangible and intangible net assets acquired. As of December 31, 2007, we had goodwill of
$217.5 million. If we determine in the future that the fair value of any of our reporting segments does
not exceed the carrying value of the related reporting segment, goodwill in that reporting segment will
be deemed impaired. If impaired, the amount of goodwill will be reduced to the value determined by us to
be the fair value of the reporting segment. The amount of the reduction will be deducted from earnings
during the period in which the impairment occurs. An impairment will also reduce stockholders equity
in the period incurred by the amount of the impairment. In the fourth quarter of 2007, in connection
with our annual goodwill impairment test, we recorded an impairment to our urology services segment
goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future
discounted cash flows from this segment. This decrease was primarily caused by lower projected growth
rates for our laser operations as well as the timing of certain future growth for our IGRT operations.
In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related
to our urology services segment and $8.4 million related to our medical products segment. The
impairment to our urology services segment was due primarily to a decrease in the number of overall
procedures during 2006, primarily across our western region partnerships, combined with the loss of
certain partnerships and contracts late in 2006 to competitors. The impairment in our medical products
segment relates primarily to our decision to reduce or exit certain product lines, specifically patient
management tables and orthopedic consumables during the fourth quarter of 2006 along with the closing of
our European operations. For further discussion of our 2007 and 2006 goodwill impairments, see footnote
C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|
Our manufacturing operations are partially dependent upon third-party suppliers, making us vulnerable to
a supply shortage.
We obtain materials and manufactured components from third-party suppliers. Some of our suppliers are
the sole source for a particular supply item. Any delay in our suppliers abilities to provide us with
necessary material and components may affect our manufacturing capabilities or may require us to seek
alternative supply sources. Delays in obtaining supplies may result from a number of factors affecting
our suppliers, such as capacity constraints, labor disputes, the impaired financial condition of a
particular supplier, suppliers allocations to other purchasers, weather emergencies or acts of war or
terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers
and, accordingly, could have a material adverse effect on our business, results of operations and
financial condition.
We could be adversely affected by special risks and requirements related to our medical products
manufacturing business.
We are subject to various special risks and requirements associated with being a medical equipment
manufacturer, which could have adverse effects. These include the following:
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|
|
the need to comply with applicable federal Food and Drug Administration and foreign regulations
relating to good manufacturing practices and medical device approval requirements, and with
state licensing requirements;
|
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|
|
the need for special non-governmental certifications and registrations regarding product
safety, product quality and manufacturing procedures in order to market products in the
European Union;
|
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|
potential product liability claims for any defective goods that are distributed; and
|
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|
|
the need for research and development expenditures to develop or enhance products and compete
in the equipment markets.
|
Our indebtedness may limit our financial and operating flexibility.
As of December 31, 2007, we had indebtedness of approximately $8.5 million related to equipment
purchased by our limited partnerships, which indebtedness will be repaid from the cash flows of the
partnerships. We also have a revolving line of credit with a borrowing limit of $50.0 million pursuant
to a senior credit facility we entered into in March 2005. As of December 31, 2007, there were no
amounts drawn on the revolver. Prior to July 31, 2006, we had outstanding a $125.0 million senior
secured term loan B due 2011. This term loan B was repaid on July 31, 2006 with a portion of the
proceeds we received from the sale of our specialty vehicles manufacturing division.
We have been assigned a B-1 senior implied rating by Moodys Investor Service Inc. We have also been
assigned a BB- corporate credit rating by Standard and Poors Ratings Group. All of these ratings are
below investment grade. As a result, at times we may have difficulty accessing capital markets or
raising capital on favorable terms as we will incur higher borrowing costs than our competitors that
have higher ratings. Therefore, our financial results may be negatively affected by our inability to
raise capital or the cost of such capital as a result of our credit ratings.
|
We must comply with various covenants contained in our revolving credit facility and any other future
debt arrangements that, among other things, limit our ability to:
|
|
|
incur additional debt or liens;
|
|
|
|
make payments in respect of or redeem or acquire any debt or equity issued by us;
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sell assets;
|
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make loans or investments;
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|
acquire or be acquired by other companies; and
|
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amend some of our contracts.
|
Although we have no monies drawn on our revolving line of credit, that could change and the level of
indebtedness could have important consequences to you. For example, it could:
|
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|
increase our vulnerability to general adverse economic and industry conditions;
|
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|
limit our ability to fund future working capital and capital expenditures, to engage in future
acquisitions, or to otherwise realize the value of our assets and opportunities fully because
of the need to dedicate a portion of our cash flow from operations to payments on our debt or
to comply with any restrictive terms of our debt;
|
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|
|
limit our flexibility in planning for, or reacting to, changes in the industry in which we
operate; and
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|
place us at a competitive disadvantage as compared to our competitors that have less debt.
|
In addition, if we fail to comply with the terms of any of our debt, our lenders will have the right to
accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt.
Realization of any of these factors could adversely affect our business, financial condition and results
of operations.
We have in the past identified material weaknesses in our internal control over financial reporting, and
the identification of any significant deficiencies or material weaknesses in the future could affect our
ability to ensure timely and reliable financial reports.
In connection with our managements assessment of internal control over financial reporting as of
December 31, 2005 under Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules issued by
the Securities and Exchange Commission (SEC), which assessment is set forth in our Annual Report on
Form 10-K for 2005, we identified two material weaknesses in our internal control over financial
reporting. The Public Company Accounting Oversight Board defines a material weakness as a single
deficiency, or combination of deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected.
We have remedied these material weaknesses.
|
Although our management will continue to periodically review and evaluate the effectiveness of our
internal controls, we can give you no assurance that there will be no material weaknesses in our
internal control over financial reporting. We may in the future have material weaknesses in our internal
control over financial reporting as a result of our controls becoming inadequate due to changes in
conditions, the degree of compliance with our internal control policies and procedures deteriorating, or
for other reasons. If we have significant deficiencies or material weaknesses in our internal control
over financial reporting, our ability to record, process, summarize and report financial information
within the time periods specified in the rules and forms of the SEC will be adversely affected. This
failure could materially and adversely impact our business, our financial condition and the market value
of our securities.
Executive Officers
As of February 28, 2008, our executive officers were as follows:
|
Name |
Age |
|
Position |
|
James S.B. Whittenburg |
36 |
|
Chief Executive Officer and President |
|
Ross A. Goolsby |
40 |
|
Chief Financial Officer and Senior Vice President |
|
Richard A. Rusk |
46 |
|
Vice President, Corporate Controller, Treasurer and Secretary |
The foregoing does not include positions held in our subsidiaries. Our officers are elected for annual
periods. There are no family relationships between any of our executive officers and/or directors.
Mr. Whittenburg was appointed as our President and Chief Executive Officer on August 13, 2007. From June
2006 until August 13, 2007, Mr. Whittenburg served as President of our Urology Division, and he was our
acting President and Chief Executive Officer from May 2007 until August 2007. He served as President of
our Specialty Vehicle Manufacturing Division from December 2005 until its sale in July 2006 and was our
General Counsel and Senior Vice PresidentDevelopment from March 2004 until June 2006. Previously
Mr. Whittenburg practiced law at Akin Gump Strauss Hauer & Feld LLP, where he specialized in corporate
and securities law. Mr. Whittenburg, a CPA, is licensed to practice law in Texas.
Mr. Goolsby joined us as our Chief Financial Officer and Senior Vice President on January 8, 2007. Prior
to such appointment, Mr. Goolsby served as the Chief Financial Officer, Vice President of Finance and
Secretary of SigmaTel, Inc., a publicly-traded semiconductor company, from September 2001 to December
2006. From 1999 until 2001, Mr. Goolsby served as Chief Financial Officer of Utiliserve, Inc., an
electrical utility products distributor. From 1993 until 1999, Mr. Goolsby served as a Vice President
and Controller of Cameron Ashley Building Products, Inc., a publicly-traded building products
distributor. Mr. Goolsby holds a Bachelor of Business Administration in Accounting from the University
of Houston.
Mr. Rusk joined us in August 2000 as our Corporate Controller and was named Vice President in June
2002. In June 2006, Mr. Rusk was named our Treasurer and in September 2006, Mr. Rusk was named our
Secretary. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the
last ten years as a senior audit manager.
|
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange
Act). You may read and copy any materials that we file with the SEC at the SECs public reference room
at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that
contains these SEC filings. You can obtain these filings at the SECs website at http://www.sec.gov.
We also make available free of charge on or through our website (http://www.healthtronics.com) our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if
applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
SEC.
ITEM 1A. RISK FACTORS
The information required by this item is set forth under Risk Factors in Part I, Item 1.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is located in Austin, Texas in an office building owned by us. In
addition, in May 2005, we entered into a five-year lease on a 41,000 square foot facility in Kennesaw,
Georgia related to our Medical Products operations for approximately $23,000 a month.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions that have arisen in the ordinary course of business.
We believe that any liabilities arising from these actions will not have a material adverse effect on
our financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
|
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the high and low closing prices per share for our common stock on the
Nasdaq Global Select Market for the years ended December 31, 2007 and 2006 (NASDAQ Symbol HTRN).
|
|
2007
|
2006
|
|
High
|
Low
|
High
|
Low
|
|
First Quarter |
|
|
$ | 6 |
.60 |
$ | 5 |
.06 |
$ | 8 |
.60 |
$ | 7 |
.08 |
|
Second Quarter | | |
$ | 5 |
.47 |
$ | 4 |
.35 |
$ | 8 |
.50 |
$ | 6 |
.67 |
|
Third Quarter | | |
$ | 5 |
.25 |
$ | 3 |
.66 |
$ | 7 |
.60 |
$ | 5 |
.97 |
|
Fourth Quarter | | |
$ | 5 |
.30 |
$ | 4 |
.03 |
$ | 7 |
.38 |
$ | 6 |
.10 |
On February 12, 2008, we had 617 holders of record of our common stock.
We are not currently paying dividends on our common stock. We have the authority to declare and pay
dividends on our common stock at our discretion, as long as we have funds legally available to do so and
our senior credit facility permits the declaration and payment. Our senior credit facility restricts our
ability to pay cash dividends. In addition, we intend to retain our earnings to finance the expansion of
our business and for general corporate purposes. Therefore, we do not anticipate paying cash dividends
on our common stock in the foreseeable future.
Equity Compensation Plan Information
At December 31, 2007, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock
option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive
plan. The plans, and all amendments thereto, had been approved by Primes and HSS shareholders, as the
case may be. The following table sets forth certain information as of December 31, 2007 about our equity
compensation plans:
|
|
(a)
|
(b)
|
(c)
|
|
Plan Category
|
Number of shares of our
common stock to be issued
upon exercise of
outstanding options
|
Weighted-average exercise
price of outstanding options
|
Number of shares of our
common stock remaining
available for future
issuance under equity
compensation plans
(exceeding securities
reflected in column (a))
|
|
Prime 1993 stock option plan |
|
|
| 105,666 |
|
$ | 7 |
.79 |
| -- |
|
|
|
Prime 2003 stock option plan | | |
| 129,000 |
|
$ | 5 |
.84 |
| -- |
|
|
|
HSS equity incentive plan and stock | | |
|
option plans | | |
| 2,959,499 |
|
$ | 7 |
.10 |
| 1,005,944 |
|
|
|
Other equity compensation plans | | |
|
approved by our security holders | | |
| N/A |
|
| N/A |
|
| N/A |
|
Performance Graph
The following graph compares our cumulative total shareholder return with the cumulative total
shareholder returns of the Nasdaq Market Index and the Nasdaq Health Services Index, for the period from
December 31, 2003 through December 31, 2007.
|
ITEM 6.
SELECTED FINANCIAL DATA
The following tables set forth our summary consolidated historical financial information that has been
derived from (a) our audited consolidated statements of income and cash flows for each of the years
ended December 31, 2007, 2006, 2005, 2004 and 2003, (b) our audited consolidated balance sheets as of
December 31, 2007, 2006, 2005, and 2004, (c) our unaudited consolidated balance sheet as of December 31,
2003, and (d) our unaudited consolidated statements of income and cash flows for each of the three
months ended December 31, September 30, June 30, and March 31, for 2007 and 2006. As discussed under
Business-General under Part I, Item 1 of this Annual Report on Form 10-K, the merger of Prime and HSS
was accounted for as a reverse acquisition under the purchase method of accounting for business
combinations in accordance with U.S. generally accepted accounting principles. As a result, the
financial information presented below reflects the results of operations of Prime and HSS on a
consolidated basis after November 10, 2004 and the results of operations of Prime for the periods prior
to November 10, 2004. In addition, the financial information presented below reflects our financial
condition on a consolidated basis as of December 31, 2007, 2006, 2005 and 2004 and Primes financial
condition as of December 31, 2003. You should read this financial information in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
The historical results are not necessarily indicative of results to be expected in any future period.
|
(In thousands, except per share data) |
Years Ended December 31,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Revenues: |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Urology Services | | |
$ | 122,736 |
|
$ | 123,265 |
|
$ | 133,360 |
|
$ | 75,361 |
|
$ | 58,702 |
|
Medical Products | | |
| 17,101 |
|
| 19,080 |
|
| 18,202 |
|
| 10,846 |
|
| 1,714 |
|
Other | | |
| 581 |
|
| 546 |
|
| 705 |
|
| 936 |
|
| 1,022 |
|
|
| |
| |
| |
| |
| |
Revenues from continuing operations | | |
$ | 140,418 |
|
$ | 142,891 |
|
$ | 152,267 |
|
$ | 87,143 |
|
$ | 61,438 |
|
|
| |
| |
| |
| |
| |
Income (loss) from: | | |
Continuing Operations | | |
$ | (14,485 |
) |
$ | (16,446 |
) |
$ | 10,933 |
|
$ | 5,261 |
|
$ | 6,301 |
|
Discontinued Operations | | |
| (147 |
) |
| 25,129 |
|
| (1,745 |
) |
| (3,908 |
) |
| 121 |
|
|
| |
| |
| |
| |
| |
Net income (loss) | | |
$ | (14,632) |
(1) |
$ | 8,683 |
(2) |
$ | 9,188 |
|
$ | 1,353 |
(3) |
$ | 6,422 |
|
| |
|
| |
|
|
| |
| |
| |
| |
| |
Diluted earnings (loss) per share: | | |
Continuing Operations | | |
$ | (0.41 |
) |
$ | (0.47 |
) |
$ | 0.31 |
|
$ | 0.24 |
|
$ | 0.36 |
|
| |
|
| |
|
Discontinued Operations | | |
| -- |
|
| 0.72 |
|
| (0.05 |
) |
| (0.18 |
) |
| 0.01 |
|
|
| |
| |
| |
| |
| |
Total | | |
$ | (0.41 |
) |
$ | 0.25 |
|
$ | 0.26 |
|
$ | 0.06 |
|
$ | 0.37 |
|
|
| |
| |
| |
| |
| |
Dividends per share | | |
|
None |
| |
None |
| |
None |
| |
None |
| |
None |
Total assets | | |
$ | 336,056 |
|
$ | 346,733 |
|
$ | 483,037 |
|
$ | 474,158 |
|
$ | 279,378 |
|
|
| |
| |
| |
| |
| |
Long-term obligations (a) | | |
$ | 4,269 |
|
$ | 6,063 |
|
$ | 129,980 |
|
$ | 114,442 |
|
$ | 113,125 |
|
|
| |
| |
| |
| |
| |
(a) Includes long term debt, other long term obligations and deferred compensation liability.
|
Quarterly Data
|
Quarter Ended
|
(in thousands, except per share data)
|
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
2007 |
|
(unaudited) |
|
|
Revenues |
|
|
$ | 32,751 |
|
$ | 35,563 |
|
$ | 35,955 |
|
$ | 36,149 |
|
Net income (loss) | | |
$ | (30 |
) |
$ | 179 |
|
$ | 745 |
|
$ | (15,526 |
)(1) |
Per share amounts (basic): | | |
Net income (loss) | | |
$ | -- |
|
$ | 0.01 |
|
$ | 0.02 |
|
$ | (0.44 |
) |
Weighted average shares outstanding | | |
| 35,406 |
|
| 35,425 |
|
| 35,425 |
|
| 35,425 |
|
Per share amounts (diluted): | | |
Net income (loss) | | |
$ | -- |
|
$ | 0.01 |
|
$ | 0.02 |
|
$ | (0.44 |
) |
Weighted average shares outstanding | | |
| 35,417 |
|
| 35,426 |
|
| 35,425 |
|
| 35,425 |
|
Quarterly Data
|
Quarter Ended
|
(in thousands, except per share data) |
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
2006 |
|
(unaudited) |
|
Revenues |
|
|
$ | 37,106 |
|
$ | 36,474 |
|
$ | 35,863 |
|
$ | 33,448 |
|
Net income (loss) | | |
$ | 1,273 |
|
$ | 1,368 |
|
$ | 31,177 |
|
$ | (25,135 |
)(2) |
Per share amounts (basic): | | |
Net income (loss) | | |
$ | 0.04 |
|
$ | 0.04 |
|
$ | 0.88 |
|
$ | (0.71 |
) |
Weighted average shares outstanding | | |
| 34,906 |
|
| 35,056 |
|
| 35,286 |
|
| 35,373 |
|
Per share amounts (diluted): | | |
Net income (loss) | | |
$ | 0.04 |
|
$ | 0.04 |
|
$ | 0.88 |
|
$ | (0.71 |
) |
Weighted average shares outstanding | | |
| 35,251 |
|
| 35,361 |
|
| 35,370 |
|
| 35,373 |
|
|
|
(1) In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded
an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was
due to a decrease in our estimated future discounted cash flows for this segment. This decrease
was primarily caused by lower projected growth rates for our laser operations as well as the timing
of certain future growth for our IGRT operations.
(2) In the third quarter of 2006, we completed the sale of our Specialty Vehicle Manufacturing segment
and recognized a gain of $53.6 million. This gain utilized approximately $20.4 million of our
deferred tax asset. In the fourth quarter of 2006, we recorded an impairment to our goodwill
totaling $12.2 million related to our urology services segment and $8.4 million related to our
medical products segment. The impairment to our urology services segment was due primarily to a
decrease in the number of overall procedures during 2006, primarily across our western region
partnerships, combined with the loss of certain partnerships and contracts late in 2006 to
competitors. The impairment in our medical products segment relates primarily to our decision to
reduce or exit certain product lines, specifically patient management tables and orthopedic
consumables during the fourth quarter of 2006 along with the closing of our European operations.
(3) In the fourth quarter of 2004, we incurred $1 million of costs related to the Prime and HSS merger.
These costs primarily included certain severance costs of Prime employees, costs related to our new
HealthTronics branding and certain costs for exiting board members primarily for the cashless
exercise of stock options. We also accrued $1.9 million of costs related to our discretionary bonus
plan. We also incurred costs totaling $6 million related to the closing of our manufacturing plants
in Carlisle, Pennsylvania and Sanford, Florida. In connection with completing this closing process,
we also reorganized our division management and culled backlog of commitments based on revised cost
structure and resources, which resulted in a write-down of work in process for projects that would
be unprofitable and raw materials for product lines which we are discontinuing.
|
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E
of the Exchange Act and the Private Securities Litigation Reform Act of 1995 about us that are subject
to risks and uncertainties. All statements other than statements of historical fact included in this
document are forward-looking statements. Although we believe that in making such statements our
expectations are based on reasonable assumptions, such statements may be influenced by factors that
could cause actual outcomes and results to be materially different from those projected.
|
Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as
will, would, should, plans, likely, expects,
anticipates, intends, believes, estimates, thinks, may, and
similar expressions, are forward-looking statements. The following important factors, in addition to those discussed under Risk
Factors under Part I, Item 1, could affect the future results of the health care industry in general, and us in particular, and
could cause those results to differ materially from those expressed in such forward-looking statements.
|
|
|
uncertainties in our establishing or maintaining relationships with physicians and hospitals;
|
|
|
|
the impact of current and future laws and governmental regulations;
|
|
|
|
uncertainties inherent in third party payors attempts to limit health care coverages and levels of reimbursement;
|
|
|
|
the effects of competition and technological changes;
|
|
|
|
the availability (or lack thereof) of acquisition or combination opportunities; and
|
|
|
|
general economic, market or business conditions.
|
General
We provide healthcare services and manufacture medical devices, primarily for the urology community.
Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high
technology medical devices and equipment for mobile command and control centers and the media and
broadcast industry.
Urology Services. Our lithotripsy services are provided principally through limited partnerships or
other entities that we manage, which use lithotripsy devices. In 2007, physicians who are affiliated
with us used our lithotripters to perform approximately 48,000 procedures in the U.S. We do not render
any medical services. Rather, the physicians do.
We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy
services. Retail contracts are contracts where we contract with the hospital and private insurance
payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches
functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee
for all patients other than governmental pay patients, for which the hospital bills the non-physician
fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all
patients. In both cases, the billing party contractually bears the costs associated with the billing
service, including pre-certification, as well as non-collection. The non-billing party is generally
entitled to its fees regardless of whether the billing party actually collects the non-physician fee.
Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally
receives a greater proportion of the total non-physician fee to compensate for its billing costs and
collection risk. Conversely, under the retail contracts where we generally provide the billing services
and bear the collection risk, we receive a greater proportion of the total non-physician fee.
Although the non-physician fee under both retail and wholesale contracts varies widely based on
geographical markets and the identity of the third party payor, we estimate that nationally, on average,
our share of the non-physician fee was roughly $2,100 for both 2007 and 2006. At this time, we do not
anticipate a material shift between our retail and wholesale arrangements.
|
As the general partner of the limited partnerships, we also provide services relating to operating our
lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and
contracting with payors, hospitals and surgery centers.
Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate.
In treating benign prostate disease, we deploy three technologies: (1) trans-urethral microwave therapy
(TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation
(TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. In
September 2007, we completed the sale of our Rocky Mountain Prostate business, which represented almost
our entire TUMT treatment operations. For treating prostate and other cancers, prior to November 30,
2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy
cancer cells.
We recognize urology revenue primarily from the following sources:
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|
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Fees for urology services
.
A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments
performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of
our equipment and provide other support services in connection with these treatments at hospitals and
other health care facilities. (For a further discussion on our partnerships, see Urology and
Government Regulation and Supervision in Part I.) The professional fee payable to the physician
performing the procedure is generally billed and collected by the physician. Benign prostate disease and
prostate cancer treatment services are billed in the same manner as our lithotripsy services under
either retail or wholesale contracts. These services are also primarily performed through limited
partnerships, which we manage.
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|
|
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Fees for operating our lithotripters. Through our partnerships and otherwise directly by us, we provide services related to operating our
lithotripters and receive a management fee for performing these services.
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Medical Products. We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture,
sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and
are the exclusive U.S. distributor of the Revolix branded laser. The operations of our Claripath
pathology laboratory are also included in our medical products segment at this time.
We recognize medical products revenue from the following sources:
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|
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Fees for maintenance services.
We provide equipment maintenance services to our partnerships as well as outside parties. These services
are billed either on a time and material basis or at a fixed monthly contractual rate.
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Fees for equipment sales, consumable sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix
laser and we also manufacture and sell consumables related to the lithotripters. With respect to some
lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer
of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing
fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and
consumables are recognized when the related items are delivered. Revenues from licensing fees are
recorded when the patient is treated. In some cases, we lease certain equipment to our partnerships as
well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures
are performed.
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Fees for Claripath anatomical pathology services. We provide anatomical pathology services
primarily to the urology marketplace. Revenues from these services are recorded when the
related laboratory procedures are performed.
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Recent Developments
Effective April 28, 2007, we acquired all of the outstanding capital stock of Keystone ABG, Inc., which
owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the Partnership), and an
approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate
purchase price of $6.8 million, plus certain additional cash consideration to be paid depending on the
number of limited partner units sold by us in a post-closing offering of such units, plus an earnout.
In August 2007, we completed our post-closing offering of the limited partner units and paid an
additional $934,000.
On August 7, 2007, Sam B. Humphries, our President and Chief Executive Officer, died as a result of
complications from a May 21, 2007 cardiac event. Mr. Humphries had been on medical leave since May 21,
2007.
On August 13, 2007, our Board of Directors appointed James S. B. Whittenburg as our President and Chief
Executive Officer and as a member of our Board of Directors. Mr. Whittenburg had been serving as acting
President and Chief Executive Officer since late May, 2007. Prior to that appointment, Mr. Whittenburg
served as President-Urology Services.
On September 28, 2007, we completed the sale of our Rocky Mountain Prostate business. As a result of
this sale we received proceeds totaling $1.35 million in cash and recognized a gain of $450,000.
Accordingly, all activities related to our Rocky Mountain Prostate business have been included in
discontinued operations in the accompanying condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies and estimates:
Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate
that require judgment and are based on assumptions of future operations. We are required to test for
impairments at least annually or if circumstances change that would reduce the fair value of a reporting
unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We now have
two reporting units, urology services and medical products. The fair value of each reporting unit is
estimated using a combination of the income, or discounted cash flows, approach and the market approach,
which utilizes comparable companies data. Because we have recognized goodwill based solely on our
controlling interest, the fair value of each reporting unit also relates only to our controlling
interest. If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the reporting units goodwill with
the carrying value of that goodwill. If the carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit. Both the income approach and the market approach require significant assumptions to
determine the fair value of each reporting unit. The significant assumptions used in the income
approach include estimates of our future revenues, profits, capital expenditures, working capital
requirements, operating plans, industry data and other relevant factors. The significant assumptions
utilized in the market approach include the determination of appropriate market comparables, the
estimated multiples of revenue, EBIT and EBITDA a willing buyer is likely to pay, and the estimated
control premium a willing buyer is likely to pay. For a discussion of our 2007 and 2006 goodwill
impairments and the specific assumptions used in the income and market approaches in the 2007 and 2006
analyses, see footnote C to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
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A second critical accounting policy and estimate which requires judgment of management is the estimated
allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical
collection amounts, current contracts with payors, current changes of the facts and circumstances
relating to these matters and certain negotiations with related payors.
A third critical accounting policy is consolidation of our investment in partnerships or limited
liability companies (LLCs) where we, as the general partner or managing member, exercise effective
control, even though our ownership is less than 50%. The consolidated financial statements include our
accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships or
LLCs where we, as the general partner or managing member, exercise effective control, even though our
ownership is less than 50%. The related agreements provide us with broad powers. The other parties do
not participate in the management of the entity and do not have the substantial ability to remove us.
Investment in entities in which our investment is less than 50% ownership and we do not have significant
control are accounted for by the equity method if ownership is between 20%50%, or by the cost method if
ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have
effective control; however, if it was determined this control did not exist, these investments would be
reflected on the equity method of accounting. Although this would change individual line items within
our consolidated financial statements, it would have no effect on our net income and/or total
stockholders equity.
Year ended December 31, 2007 compared to the year ended December 31, 2006
Our total revenues decreased $2,473,000 (2%) as compared to 2006. Revenues from our urology services
decreased $529,000 (0.4%) as compared to 2006. Revenues from our lithotripsy business decreased
$1,694,000 in 2007 as compared to 2006, while revenues from our prostate business increased $1,165,000 in
2007 as compared to 2006. The actual number of lithotripsy procedures performed in 2007 decreased by 5%
compared to 2006, primarily due to partnership and mobile route closures in late 2006 and continued weak
performance across our western region partnerships in early 2007. The average rate per procedure
increased by 3% in 2007 as compared to 2006. Revenues for our medical products segment decreased by
$1,979,000 (10%) compared to 2006 primarily due to less sales of our lithotripters and the
discontinuation of sales of certain tables in early 2007. Medical products revenues before intersegment
eliminations totaled $26.1 million for 2007 and $28.4 million for 2006. We sold 8 lithotripters and 28
tables in 2007 compared to 17 lithotripters and 100 tables in 2006. Revenues from our service
operations and consumable sales decreased $2,173,000 in 2007 as compared to 2006. This decrease relates
primarily to lower electrode sales especially as related to our foreign operations which we closed in
2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $3,418,000
and $1,138,000 for the years ended December 31, 2007 and 2006, respectively.
Our costs of services and general and administrative expenses for 2007 decreased $7,726,000 (6%)
compared to 2006. Our cost of services associated with our urology services operations increased
$2,228,000 (4%) in 2007 as compared with 2006. The cause of this increase relates primarily to
increased rental expenses paid on Revolix units leased from our medical products division of $1,500,000
and a decrease in gains resulting from sales of various partnership interests in 2007 as compared to
2006 of $969,000 which are recorded against operating expenses. This was partially offset by lower
laser supply costs of $1,087,000, which corresponds to more partnerships utilizing the Revolix laser as
compared to the greenlight laser. Our cost of services associated with our medical products operations
for 2007 decreased $5,572,000 (33%) compared to 2006. The primary cause of this decrease relates to
significant decreases in external sales of lithotripters and tables in 2007, a cost reduction recorded
as a result of the receipt of lease payments from our urology services division on Revolix units noted
above, partially offset by approximately $900,000 in increased expenses at our new lab. A significant
portion of medical products costs relate to providing maintenance services to our urology services
segment and are allocated to the urology services segment. In the future we expect margins in medical
products to continue to vary significantly from period to period based on the mix of intercompany and
third-party sales. Our selling, general and administrative costs decreased $4,414,000 (22%) in 2007 as
compared to 2006. This is primarily attributable to approximately $1,850,000 in costs paid to strategic
consultants, $1 million in severance payments, $500,000 in higher share based compensation costs which
were incurred in 2006 compared to 2007, as well as approximately $516,000 in decreased personnel,
insurance, marketing, recruiting and other costs. In addition we received approximately $900,000 as a
result of our former Swiss manufacturing subsidiarys insolvency proceedings in 2007, which was recorded
against selling, general and administrative expenses.
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In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an
impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to
a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily
caused by lower projected growth rates for our laser operations as well as the timing of certain future
growth for our IGRT operations. In the fourth quarter of 2006, we recorded an impairment to our
goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our
medical products segment. The impairment to our urology services segment was due primarily to a
decrease in the number of overall procedures during 2006, primarily across our western region
partnerships, combined with the loss of certain partnerships and contracts late in 2006 to competitors.
The impairment in our medical products segment relates primarily to our decision to reduce or exit
certain product lines, specifically patient management tables and orthopedic consumables during the
fourth quarter of 2006 along with the closing of our European operations.
Income from discontinued operations in 2007 decreased $25,276,000 compared to 2006. Income from
discontinued operations in 2006 included $33,542,000 attributable to our specialty vehicle manufacturing
segment and $8,413,000 in losses attributable to our HIFU, cryosurgery, and Rocky Mountain Thermotherapy
(RMPT) operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of
our specialty vehicle manufacturing segment. In 2007, we had a loss from discontinued operations of
$147,000 attributable to our RMPT and HIFU operations. This loss included a gain of $450,000 from the
sale of our RMPT business, which closed September 28, 2007.
Depreciation and amortization expense decreased $168,000 in 2007 compared to 2006.
Minority interest in consolidated income for 2007 increased $2,291,000 (5%) compared to 2006, as a
result of increases in minority interest percentages at certain partnerships.
Provision for income taxes in 2007 increased $1,709,000 compared to 2006 due to lower taxable loss in
2007 than 2006.
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Year ended December 31, 2006 compared to the year ended December 31, 2005
Our total revenues decreased $9,376,000 (6%) as compared to 2005. Revenues from our urology services
segment decreased $10,095,000 (8%) as compared to 2005. Revenues from our lithotripsy business decreased
$8,386,000 in 2006 as compared to 2005, while revenues from our prostate business decreased $1,709,000
in 2006 as compared to 2005. The actual number of lithotripsy procedures performed in 2006 decreased by
9% compared to 2005, primarily due to weak performance across our western region partnerships and the
loss of certain partnerships and contracts in late 2006. The average rate per procedure increased by 1%
in 2006 as compared to 2005. Revenues for our medical products segment increased by $878,000
(5%) compared to 2005 primarily due to a mix of sales between external customers and sales to our urology
services segment. Medical products revenues before intersegment eliminations totaled $28.4 million for
2006 and $27.4 million for 2005. We sold 17 lithotripters and 100 tables in 2006 compared to 16
lithotripters and 73 tables in 2005. Revenues from our service operations and consumable sales
decreased $399,000 in 2006 as compared to 2005. Revenues from our new lab which started operations in
January 2006, totaled $1,138,000 for the year ended December 31, 2006.
Our costs of services and general and administrative expenses for 2006 increased $33,907,000 (39%)
compared to 2005. Our cost of services associated with our urology services operations increased
$98,000 (0.2%) in 2006 as compared with 2005. The primary cause of this increase relates to increased
salaries and benefits costs of $640,000 related to annual merit increases, increased rental expenses
paid to our medical products segment on Revolix units of approximately $900,000, and an increase in
expenses related to a new entity of approximately $811,000 in 2006. This was partially offset by an
increase in capital gains of $938,000 resulting from sales of various partnership interests, which is
recorded against divisional expenses and decreases in laser supply costs of $1,013,000, which
corresponds to our shift from the greenlight laser to the Revolix laser. Our cost of services
associated with our medical products operations for 2006 increased $7,572,000 (82%) compared to 2005.
The primary causes of this increase relate to approximately $4 million in increased costs of goods sold
related to increased sales to outside customers as well as certain inventory write downs due to
discontinued product lines in late 2006, $1.2 million in increased costs at our new lab, increases in
salaries and benefits expenses of $600,000 primarily related to increased head count in our sales force,
increased legal expenses of $400,000 and increased expenses of $750,000 related to increased insurance,
consulting and professional fees and bad debt expense. A significant portion of medical products costs
relate to providing maintenance services to our urology services segment and are allocated to the
urology segment. In the future we expect margins in medical products to vary significantly from period
to period based on the mix of intercompany and third-party sales. Our selling, general and
administrative costs increased $5,806,000 (40%) in 2006 as compared to 2005. This is primarily
attributable to increases in 2006 in salaries and benefit expenses of $700,000 primarily related to
increases in our marketing head count, costs related to severance payments of approximately $1 million,
$1.5 million in new costs related to share based compensation expense, and $1.8 million paid to
strategic consultants in 2006.
In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related
to our urology services segment and $8.4 million related to our medical products segment. The
impairment to our urology services segment was due primarily to a decrease in the number of overall
procedures during 2006, primarily across our western region partnerships, combined with the loss of
certain partnerships and contracts late in 2006 to competitors. The impairment in our medical products
segment relates primarily to our decision to reduce or exit certain product lines, specifically
patient management tables and orthopedic consumables during the fourth quarter of 2006 along with the
closing of our European operations.
On June 22, 2006, we entered into an agreement to sell our specialty vehicle manufacturing segment.
Accordingly, in 2005 we have classified this segment as held for sale in the accompanying consolidated
financial statements. The sale was completed on July 31, 2006. As a result of the sale we realized a
gain of $53.6 million, which is included in discontinued operations in the accompanying financial
statements. This gain utilized approximately $20.4 million of our deferred tax assets.
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Depreciation and amortization expense decreased $169,000 in 2006 compared to 2005.
Minority interest in consolidated income for 2006 decreased $4,539,000 (9%) compared to 2005, as a
result of a decrease in income from our urology services segment due primarily to lower revenues noted
above.
Provision for income taxes in 2006 decreased $11,065,000 compared to 2005 due to a decrease in taxable
income, primarily related to our goodwill impairment recorded in 2006. Our effective tax rate
significantly increased in 2006 as compared to 2005, since approximately half of our goodwill impairment
was not deductible for tax purposes.
2008 Outlook
As discussed above under Recent Developments, the urology services segment experienced a decrease in
overall lithotripsy procedures during 2007 (as compared to 2006), primarily across our western region
partnerships, combined with loss of certain partnerships and contracts in the fourth quarter of 2006.
In addition, we exited or reduced sales efforts in certain product lines in the medical products segment
in the fourth quarter of 2006. The numbers of procedures performed have remained relatively stable
over the third and fourth quarters of 2007. We intend to increase our urology services operations
primarily through forming new operating partnerships in new markets as well as by acquisitions. We
intend to grow our medical products operations by offering new equipment and expanding our customer
base. As of the date of filing this Annual Report on Form 10-K, we anticipate that the levels of
revenues and income from continuing operations (exclusive of goodwill impairments) for 2008 will be
materially consistent with the reported financial results for 2007, but we cannot provide assurances
that the 2008 results will be materially consistent with our 2007 results. See Forward Looking
Statements under this Item 7 and Risk Factors under Part I, Item 1.
Liquidity and Capital Resources
Cash Flows
Our cash and cash equivalents were $25,198,000 and $27,857,000 at December 31, 2007 and 2006,
respectively. Our subsidiaries generally distribute all of their available cash quarterly, after
establishing reserves for estimated capital expenditures and working capital. For the years ended
December 31, 2007 and 2006, our subsidiaries distributed cash of approximately $42,736,000 and
$46,969,000, respectively, to minority interest holders.
Cash provided by our operations, after minority interest, was $61,877,000 for the year ended
December 31, 2007 and $48,892,000 for the year ended December 31, 2006. From 2006 to 2007, fee and other
revenue collected decreased by $1,837,000 due primarily to decreased revenues. Cash paid to employees,
suppliers of goods and others decreased by $874,000 in 2007. This fluctuation is attributable to the
significant payoff of accrued expenses in 2007 partially offset by a decrease in our overall expenses.
Cash used by our investing activities for the year ended December 31, 2007, was $18,757,000. We used
approximately $8 million in cash to acquire our interests in the new Keystone partnership and we used $4
million to acquire increased ownership in two other partnerships. We purchased equipment and leasehold
improvements totaling $9,469,000 in 2007. Cash used by our investing activities for the year ended
December 31, 2006, was $128,409,000, primarily due to cash from discontinued operations which was
$138,971,000 and represents the sales proceeds from the sale of our specialty vehicle manufacturing
segment, partially offset by $11,902,000 in equipment and leasehold improvements purchases.
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Cash used in our financing activities for the year ended December 31, 2007, was $45,581,000, primarily
due to distributions to minority interests of $42,736,000 and payments on notes payable of $5,760,000
partially offset by borrowings on notes payable of $2,546,000. Cash used in our financing activities for
the year ended December 31, 2006, was $175,369,000, primarily due to distributions to minority interests
of $46,969,000 and net payments on notes payable of $129,600,000 which included repayment in full of our
term loan B. We also received $1,907,000 in proceeds from the exercise of stock options in 2006.
Accounts receivable as of December 31, 2007 has decreased $863,000 from December 31, 2006. This decrease
relates primarily to lower revenues as well as to the timing of collections.
Inventory as of December 31, 2007 totaled $10,221,000 and decreased $1,253,000 from December 31, 2006.
Senior Credit Facility
Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior
secured term loan B due 2011. We entered into this senior credit facility in March 2005. The loan
bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. On July 31,
2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to
repay the term loan B in full. As of December 31, 2007, there were no amounts drawn on the revolver.
Our senior credit facility contains covenants that, among other things, limit our ability to incur debt,
create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted
payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility
requires us to maintain certain financial ratios. We were in compliance with the covenants under our
senior credit facility as of December 31, 2007.
8.75% Notes
In April 2005, our $125 million term loan B referred to above was funded and we used the proceeds to
redeem the $100 million of unsecured senior subordinated notes. The notes were subject to an 8.75% rate
of interest and interest was payable semi-annually on April 1st and October 1st.
Other
Other long term debt. As of December 31, 2007, we had notes totaling $8.5 million related to equipment
purchased by our limited partnerships. These notes are paid from the cash flows of the related
partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next
three years.
Other long term obligations. At December 31, 2007, we had an obligation totaling $75,000 related to
payments to the previous owner of Aluminum Body Corporation, a wholly owned subsidiary of ours that we
sold as part of the sale of our specialty vehicles manufacturing segment (ABC), for $75,000 per
quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at December 31, 2007,
as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation
totaling $58,338 related to payments to an employee for $4,167 a month continuing until February 28,
2009 as consideration for a noncompetition agreement. We have an obligation totaling $100,000 related to
payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a
previous employee of our Medical Products division.
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Unrecognized Tax Benefits: As of December 31, 2007, we had $2.3 million of unrecognized tax benefits.
This represents the tax benefits associated with various tax positions taken, or expected to be taken,
on domestic and international tax returns that have not been recognized in our financial statements due
to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the
taxing authorities is at various stages and therefore we are unable to make a reliable estimate of the
eventual cash flows by period that will be required to settle these matters. In addition, certain of
these matters may not require cash settlement due to the existence of credit and operating loss
carryforwards as well as other offsets, including the indirect benefit from other taxing jurisdictions
that may be available.
General
The following table presents our contractual obligations as of December 31, 2007 (in thousands):
|
| Payments due by period
|
---|
Contractual Obligations
| Total
| Less than 1 year
| 1-3 years
| 3-5 years
| More than 5 years
|
---|
Long Term Debt (1) |
|
|
$ |
8,526 |
|
$ |
4,332 |
|
$ |
3,667 |
|
$ |
496 |
|
$ |
31 |
|
Operating Leases
(2) |
|
|
|
6,397 |
|
|
1,652 |
|
|
2,715 |
|
|
1,524 |
|
|
506 |
|
Non-compete contracts (3)
| |
|
|
233 |
|
|
165 |
|
|
68 |
|
|
-- |
|
|
-- |
|
Unrecognized tax benefit (4)
| |
|
|
2,294 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
2,294 |
|
|
|
|
| |
| |
| |
| |
Total
|
|
|
$ |
17,450 |
|
$ |
6,149 |
|
$ |
6,450 |
|
$ |
2,020 |
|
$ |
2,831 |
|
|
|
|
| |
| |
| |
| |
|
(1) |
Represents long term debt as discussed above.
|
| (2)
|
Represents operating leases in the ordinary course of our business.
|
| (3)
|
Represents an obligation of $75 due to the previous owner of one of our subsidiaries, at a rate of $75
per quarter until March 2008, an obligation of $58 due to an employee of Medstone, at a rate of $4 per
month continuing until February 28, 2009, and an obligation of $100 due to a previous employee of ours,
at a rate of $3 per month until June 15, 2010. |
|
(4)
|
Represents unrecognized tax benefits as discussed above. |
In addition, the scheduled principal repayments for all long term debt as of December 31, 2007 are
payable as follows:
|
|
($ in thousands)
|
|
2008 |
|
|
$ | 4,332 |
|
|
2009 | | |
| 2,406 |
|
|
2010 | | |
| 1,261 |
|
|
2011 | | |
| 426 |
|
|
2012 | | |
| 70 |
|
|
Thereafter | | |
| 31 |
|
|
|
| |
|
Total | | |
$ | 8,526 |
|
|
|
| |
Our primary sources of cash are cash flows from operations and borrowings under our senior credit
facility. Our cash flows from operations and therefore our ability to make scheduled payments of
principal, or to pay the interest on, or to refinance, our indebtedness, or to fund planned capital
expenditures, will depend on our future performance, which is subject to general economic, financial
competitive, legislative, regulatory and other factors discussed under Risk Factors under Part I.
Likewise, our ability to borrow under our senior credit facility will depend on these factors, which
will affect our ability to comply with the covenants in our facility and our ability to obtain waivers
for, or otherwise address, any noncompliance with the terms of our facility with our lenders.
We intend to increase our urology services operations primarily through forming new operating
subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our medical
products operations by offering new equipment and expanding our customer base. We intend to fund the
purchase price for future acquisitions and developments using borrowings under our senior credit
facility and cash flows from our operations. In addition, we may use shares of our common stock in such
acquisitions where we deem appropriate.
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Based upon the current level of our operations and anticipated cost savings and revenue growth, we
believe that cash flows from our operations and available cash, together with available borrowings under
our senior credit facility, will be adequate to meet our future liquidity needs both for the short term
and for at least the next several years. However, there can be no assurance that our business will
generate sufficient cash flows from operations, that we will realize our anticipated revenue growth and
operating improvements or that future borrowings will be available under our senior credit facility in
an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.
Inflation
Our operations are not significantly affected by inflation because we are not required to make large
investments in fixed assets. However, the rate of inflation will affect certain of our expenses, such as
employee compensation and benefits.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised
2007), "Business Combinations", (SFAS 141R). SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The
Statement also establishes disclosure requirements to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R is effective for
business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be
dependent on the future business combinations that we may pursue after its effective date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51" (SFAS 160). This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 requires companies to report a noncontrolling interest in a
subsidiary as equity. Additionally, companies are required to include amounts attributable to both the
parent and the noncontrolling interest in the consolidated net income and provide disclosure of net
income attributable to the parent and to the noncontrolling interest on the face of the consolidated
statement of income. This Statement clarifies that after control is obtained, transactions which change
ownership but do not result in a loss of control are accounted for as equity transactions. Prior to this
Statement being issued, decreases in a parents ownership interest in a subsidiary could be accounted
for as equity transactions or as transactions with gain or loss recognition in the income statement. A
change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation
would result in a gain or loss in net income. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 with earlier adoption prohibited. The adoption of SFAS 160 will revise our
presentation of consolidated financial statements and further impact will be dependent on our future
changes in ownership in subsidiaries after the effective date.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159
expands the use of fair value accounting to many financial instruments and certain other items. The
fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a
company has similar instruments that it elects not to measure based on fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. Based on our current operations, we do
not expect that the adoption of SFAS 159 will have a material impact on our financial position or
results of operations.
|
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff
Position (FSP FAS 157-b-Effective Date of FASB Statement No. 157) which, if adopted as proposed, would
delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). Based on our current operations, we do not expect that the adoption of SFAS 157
will have a material impact on our financial position or results of operations.
|
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of December 31, 2007, we had long-term debt (including current portion) totaling $8,526,000, of which
$6,132,000 had fixed rates of 1% to 11%, and $2,394,000 incurred interest at a variable rate equal to a
specified prime rate. We are exposed to some market risk due to the remaining floating interest rate
debt totaling $2,394,000. We make monthly or quarterly payments of principal and interest on $1,201,000
of the floating rate debt. An increase in interest rates of 1% would result in a $12,000 annual
increase in interest expense on this existing principal balance
|
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached hereto.
|
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As of December 31, 2007, under the supervision and with the participation of our management, including
our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our
principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures
(as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange
Act)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded
that, as of December 31, 2007, our disclosure controls and procedures were effective.
(b) Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance to our management and board of directors regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2007 based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in its report entitled Internal ControlIntegrated Framework.
Based on this assessment, our management concluded that, as of December 31, 2007, our internal control
over financial reporting was effective based on those criteria.
|
Ernst & Young, LLP, our independent registered public accounting firm, has issued an audit report on
managements assessment of our internal control over financial reporting. The report of Ernst & Young,
LLP is included herein.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the
three months ended December 31, 2007 that have materially affected, or are reasonably likely to
materially affect, such internal control over financial reporting.
|
ITEM 9B.
OTHER INFORMATION
In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an
impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to
a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily
caused by lower projected growth rates for our laser operations as well as the timing of certain future
growth for our IGRT operations. For further discussion of this impairment, see footnote C to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|
Report of Independent Registered Public Accounting Firm
|
The Board of Directors and Shareholders of HealthTronics, Inc.
We have audited HealthTronics, Inc.s internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). HealthTronics, Inc.s
management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, HealthTronics, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of HealthTronics, Inc. as of December 31, 2007, and the
related consolidated statements of operations, shareholders equity, and cash flows for year then ended
of HealthTronics, Inc. and our report dated March 6, 2008, expressed an unqualified opinion thereon.
/s/: Ernst & Young LLP
Austin, Texas
March 6, 2008
|
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be contained in our definitive proxy statement to be filed in
connection with our 2008 annual meeting of stockholders, except for the information regarding our
executive officers, which is presented in Part I of this Form 10-K. The information required by this
item contained in our definitive proxy statement is incorporated herein by reference.
|
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in our definitive proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item will be contained in our definitive proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in our definitive proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements.
The information required by this item is contained in Appendix A attached hereto.
|
(b) Exhibits. (1)
|
3.1
3.2
3.3
4.1
10.1
10.2
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13
|
Amended and Restated Articles of Incorporation of the Company (Incorporated by
reference to Annex D to the Rule 424(b)(3) joint proxy statement/prospectus, dated
October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004)
Amended and Restated Bylaws of the Company (Incorporated by reference to Annex E to
the Rule 424(b)(3) joint proxy statement/prospectus, dated October 6, 2004, filed by
HealthTronics with the SEC on October 7, 2004)
First Amendment to Bylaws of HealthTronics, Inc. (incorporated by reference to
Exhibit 3.1 of HealthTronics Current Report Form 8-K filed on December 17, 2007.)
Specimen of Common Stock Certificate (Filed as an Exhibit to the HSS Registration
Statement on Form S-4 (Registration No. 33-56900))
Form of Indemnification Agreement dated October 11, 1993 between the Company and
certain of its officers and directors (Filed as an Exhibit to the Current Report on
Form 8-K of Prime dated October 18, 1993)
Release and Severance Agreement dated December 30, 2001 by and between Prime Medical
Services Inc. and Kenneth S. Shifrin (Filed as an Exhibit to the Annual Report on Form
10-K of Prime for the year ended December 31, 2001)
Amended and Restated 1993 Stock Option Plan, as amended June 18, 2002 (Filed as an
Exhibit to the Annual Report on Form 10-K of Prime for the year ended December 31,
2002)
Prime Medical Services, Inc., 2003 Stock Option Plan (Incorporated by reference to
Annex D of the Rule 424(b)(3) joint proxy statement/prospectus, dated January 7, 2004,
filed by Prime with the SEC on January 8, 2004)
HealthTronics 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to
HealthTronics current report on Form 8-K filed on January 25, 2005)
Form of Board Service and Release Agreement by and between HealthTronics and Argil J.
Wheelock, M.D. (Filed as Exhibit 10.22 to the HSS Registration Statement on Form S-4
(Registration No. 333-117102))
Board Service, Amendment and Release Agreement by and between HealthTronics and
Kenneth S. Shifrin (Incorporated by reference to the HSS Registration Statement on
Form S-4 (Registration No. 333-117102))
HSS Stock Option Plan - 2002 (Incorporated by reference to Exhibit 10.1 of
HealthTronics Current Report on Form 8-K filed on January 25, 2005)
HSS Stock Option Plan - 2001 (Incorporated by reference to Appendix A to HSS proxy
statement filed with the SEC on April 18, 2001)
HSS Stock Option Plan - 2000 (Incorporated by reference to Appendix A to HSS proxy
statement filed with the SEC on April 25, 2000)
Form of Incentive Stock Option Agreement
Form of Nonstatutory Stock Option Agreement
Credit Agreement, dated as of March 23, 2005, among HealthTronics, Inc. the lenders
party thereto, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank,
National Association, as Administrative Agent for the lenders (Incorporated by
reference to Exhibit 10.1 of the Companys 10-Q filed with the Securities and Exchange
Commission on November 8, 2005).
|
|
10.14*
10.15*
10.16
10.17*
10.18*
10.19*
10.20*
10.21*
10.22
10.23
10.24
10.25
10.26*
10.27*
|
Executive Employment Agreement, effective October 1, 2005, by and between HealthTronics, Inc. and
James S. B. Whittenburg (incorporated by reference to Exhibit 99.4 to the Companys
Form 8-K filed with the Securities and Exchange Commission on September 27, 2005).
First Amendment to the HealthTronics, Inc. 2004 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to HealthTronics Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, filed on August 5, 2005).
Form of Indemnification Agreement for directors and certain officers of HealthTronics
(incorporated by reference to Exhibit 99.1 to HealthTronics Current Report on Form
8-K filed on June 1, 2005).
First Amendment to Board Service and Release Agreement, dated as of March 2, 2006, by
and between HealthTronics and Argil J. Wheelock, M.D. (incorporated by reference to
Exhibit 10.1 of HealthTronics Current Report Form 8-K filed on March 8, 2006.)
Second Amendment to the Companys 2004 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 14, 2006.)
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 14, 2006).
Executive Employment Agreement, effective January 8, 2007, by and between
HealthTronics and Ross A. Goolsby (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 11, 2006).
Second Amendment to Executive Employment Agreement, dated as of October 26, 2007, by
and between HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference
to Exhibit 10.1 to the Companys Form 8-K filed with the Securities and Exchange
Commission on November 1, 2007).
Stock Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics,
Inc., Lithotripters, Inc., Keystone ABG Inc., Keystone Kidney Associates, PC, David
Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 20, 2007).
Interest Purchase Agreement, dated as of February 13, 2007, by and among
HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein,
M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 20, 2007).
Amended and Restated Distribution Agreement, dated as of February 28, 2007, by and
among HealthTronics, Inc., Lisa Laser USA, Inc., and LISA laser products OHG
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 6, 2007).
First Amendment to Interest Purchase Agreement, dated as of May 25, 2007, by and among
HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein,
M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 31, 2007).
Termination and Consulting Agreement, dated July 9, 2007, by and between
HealthTronics, Inc. and Christopher B. Schneider. (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 12, 2007).
First Amendment to Executive Employment Agreement, dated as of August 10, 2007, by and
between HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 15, 2007).
|
|
21.1 23.1 23.2 31.1 31.2 32.1 32.2
|
List of subsidiaries of the Company. (Filed herewith)
Consent of Independent Registered Public Accounting Firm. (Filed herewith)
Consent of Independent Registered Public Accounting Firm. (Filed herewith)
Certification of Chief Executive Officer. (Filed herewith)
Certification of Chief Financial Officer. (Filed herewith)
Certification of Chief Executive Officer. (Filed herewith)
Certification of Chief Financial Officer. (Filed herewith)
|
_____________________
* Executive compensation plans and arrangements.
|
|
(1) |
The exhibits listed above will be furnished to any security holder upon written request for such exhibit
to Ross A. Goolsby, HealthTronics, Inc., 1301 Capital of Texas Highway, Suite 200B, Austin, Texas
78746. The Securities and Exchange Commission (the SEC) maintains a website that contains reports,
proxy and information statements and other information regarding registrants that file electronically
with the SEC at http://www.sec.gov.
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
HEALTHTRONICS, INC.
By: /s/ James S. B. Whittenburg
James S. B. Whittenburg,
Chief Executive Officer and
President (Principal Executive Officer)
Date: March 11, 2008
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
By:
Date:
By:
Date:
By:
Date:
By:
Date:
By:
Date:
By:
Date: |
/s/
James S. B. Whittenburg
James S. B. Whittenburg,
Chief Executive Officer and
President (Principal Executive Officer)
and Director
March 11, 2008
/s/
Ross A. Goolsby
Ross A. Goolsby,
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
March 11, 2008
/s/
R. Steven Hicks
R. Steven Hicks, Non-executive Chairman of the Board
March 11, 2008
/s/
Donny R. Jackson
Donny R. Jackson, Director
March 11, 2008
/s/
Timothy J. Lindgren
Timothy J. Lindgren, Director
March 11, 2008
/s/
Kevin A. Richardson II
Kevin A. Richardson II, Director
March 11, 2008
|
By:
Date:
By:
Date:
By:
Date:
By:
Date:
|
/s/
Kenneth S. Shifrin
Kenneth S. Shifrin, Director
March 11, 2008
/s/
Perry M. Waughtal
Perry M. Waughtal, Director
March 11, 2008
/s/
Argil J. Wheelock, M.D.
Argil J. Wheelock, M.D., Director
March 11, 2008
/s/
Mark G. Yudof
Mark G. Yudof, Director
March 11, 2008
|
|
Page |
|
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2007, 2006
and 2005.
Consolidated Balance Sheets at December 31, 2007 and 2006.
Consolidated Statements of Stockholders Equity for the years ended December 31, 2007,
2006 and 2005.
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.
Notes to Consolidated Financial Statements.
| A-2
A-4
A-5
A-7
A-8
A-11
|
Report of Independent Registered Public Accounting Firm
|
The Board of Directors and Stockholders
HealthTronics, Inc.:
We have audited the accompanying consolidated balance sheets of HealthTronics, Inc. and subsidiaries as
of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the two years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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
consolidated financial position of HealthTronics, Inc. and subsidiaries at December 31, 2007 and 2006,
and the consolidated results of its operations and its cash flows for each of the two years in the
period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note I to the consolidated financial statements, effective January 1, 2006, the Company
changed its method of accounting for stock-based compensation to conform to Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment. As discussed in Note J to the consolidated
financial statements, effective January 1, 2007, the Company changed its method of accounting for income
taxes to conform to Financial Accounting Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of HealthTronics, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 6, 2008, expressed an unqualified opinion thereon.
/s/: Ernst & Young LLP
Austin, Texas
March 6, 2008
|
Report of Independent Registered Public Accounting Firm
|
The Board of Directors and Stockholders
HealthTronics, Inc:
We have audited the accompanying consolidated statements of income, stockholders equity, and cash flows
of HealthTronics, Inc. and subsidiaries for the year ended December 31, 2005. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the results of operations and the cash flows of HealthTronics, Inc. and subsidiaries for the
year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/: KPMG LLP
Austin, Texas
April 13, 2006, except as to Note L, 2005 information related
to Specialty Vehicles Manufacturing, CryoSurgery, Rocky Mountain Prostate
Thermotherapies, and HIFU discontinued operations, which is as of March 12, 2007
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
($ in thousands, except per share data) |
Years Ended December 31,
|
|
2007
|
2006
|
2005
|
Revenue: |
|
|
| |
|
| |
|
| |
|
Urology Services | | |
$ | 122,736 |
|
$ | 123,265 |
|
$ | 133,360 |
|
Medical Products | | |
| 17,101 |
|
| 19,080 |
|
| 18,202 |
|
Other | | |
| 581 |
|
| 546 |
|
| 705 |
|
|
| |
| |
| |
Total revenue | | |
| 140,418 |
|
| 142,891 |
|
| 152,267 |
|
|
| |
| |
| |
Cost of services and general and administrative expenses: | | |
Urology Services | | |
| 53,490 |
|
| 51,262 |
|
| 51,164 |
|
Medical Products | | |
| 11,225 |
|
| 16,797 |
|
| 9,225 |
|
Selling, general and administrative | | |
| 15,884 |
|
| 20,298 |
|
| 14,492 |
|
Impairment charges | | |
| 20,800 |
|
| 20,600 |
|
| -- |
|
Depreciation and amortization | | |
| 11,107 |
|
| 11,275 |
|
| 11,444 |
|
|
| |
| |
| |
| | |
| 112,506 |
|
| 120,232 |
|
| 86,325 |
|
|
| |
| |
| |
Operating income | | |
| 27,912 |
|
| 22,659 |
|
| 65,942 |
|
|
Other income (expenses): | | |
Interest and dividends | | |
| 1,146 |
|
| 755 |
|
| 448 |
|
Interest expense | | |
| (829 |
) |
| (1,146 |
) |
| (1,139 |
) |
|
| |
| |
| |
| | |
| 317 |
|
| (391 |
) |
| (691 |
) |
|
| |
| |
| |
Income from continuing operations before provision | | |
for income taxes and minority interest | | |
| 28,229 |
|
| 22,268 |
|
| 65,251 |
|
|
Minority interest in consolidated income | | |
| 45,568 |
|
| 43,277 |
|
| 47,816 |
|
Provision (benefit) for income taxes | | |
| (2,854 |
) |
| (4,563 |
) |
| 6,502 |
|
|
| |
| |
| |
Income (loss) from continuing operations | | |
| (14,485 |
) |
| (16,446 |
) |
| 10,933 |
|
Income (loss) from discontinued operations, net of tax | | |
| (147 |
) |
| 25,129 |
|
| (1,745 |
) |
|
| |
| |
| |
Net income (loss) | | |
$ | (14,632 |
) |
$ | 8,683 |
|
$ | 9,188 |
|
|
| |
| |
| |
Basic earnings per share: | | |
Income (loss) from continuing operations | | |
$ | (0.41 |
) |
$ | (0.47 |
) |
$ | 0.32 |
|
Income (loss) from discontinued operations | | |
$ | -- |
|
$ | 0.72 |
|
$ | (0.05 |
) |
|
| |
| |
| |
Net income (loss) | | |
$ | (0.41 |
) |
$ | 0.25 |
|
$ | 0.27 |
|
|
| |
| |
| |
Weighted average shares outstanding | | |
| 35,421 |
|
| 35,157 |
|
| 34,311 |
|
|
| |
| |
| |
Diluted earnings per share: | | |
Income (loss) from continuing operations | | |
$ | (0.41 |
) |
$ | (0.47 |
) |
$ | 0.31 |
|
Income (loss) from discontinued operations | | |
$ | -- |
|
$ | 0.72 |
|
$ | (0.05 |
) |
|
| |
| |
| |
Net income (loss) | | |
$ | (0.41 |
) |
$ | 0.25 |
|
$ | 0.26 |
|
|
| |
| |
| |
Weighted average shares outstanding | | |
| 35,421 |
|
| 35,347 |
|
| 35,182 |
|
|
| |
| |
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
($ in thousands)
|
December 31,
|
|
2007
|
2006
|
ASSETS |
|
|
| |
|
| |
|
|
Current assets: | | |
Cash and cash equivalents | | |
$ | 25,198 |
|
$ | 27,857 |
|
Accounts receivable, less allowance for doubtful | | |
accounts of $2,368 in 2007 and $2,166 in 2006 | | |
| 21,889 |
|
| 22,752 |
|
Other receivables | | |
| 2,703 |
|
| 1,201 |
|
Deferred income taxes | | |
| 12,547 |
|
| 6,825 |
|
Prepaid expenses and other current assets | | |
| 1,656 |
|
| 1,716 |
|
Inventory | | |
| 10,221 |
|
| 11,474 |
|
|
| |
| |
Total current assets | | |
| 74,214 |
|
| 71,825 |
|
|
| |
| |
Property and equipment: | | |
Equipment, furniture and fixtures | | |
| 47,751 |
|
| 46,155 |
|
Building and leasehold improvements | | |
| 12,437 |
|
| 12,710 |
|
|
| |
| |
| | |
| 60,188 |
|
| 58,865 |
|
Less accumulated depreciation and | | |
amortization | | |
| (27,169 |
) |
| (24,595 |
) |
|
| |
| |
Property and equipment, net | | |
| 33,019 |
|
| 34,270 |
|
|
| |
| |
Assets held for sale | | |
| -- |
|
| 1,258 |
|
Other investments | | |
| 1,353 |
|
| 1,348 |
|
Goodwill, at cost | | |
| 217,505 |
|
| 229,261 |
|
Intangible assets | | |
| 5,220 |
|
| 5,669 |
|
Other noncurrent assets | | |
| 4,745 |
|
| 3,102 |
|
|
| |
| |
| | |
$ | 336,056 |
|
$ | 346,733 |
|
|
| |
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
|
($ in thousands, except share data) |
December 31,
|
|
2007
|
2006
|
LIABILITIES |
|
|
| |
|
| |
|
|
Current liabilities: | | |
Current portion of long-term debt | | |
$ | 4,332 |
|
$ | 5,664 |
|
Accounts payable | | |
| 5,859 |
|
| 6,295 |
|
Accrued distributions to minority interests | | |
| 226 |
|
| 7,687 |
|
Accrued expenses | | |
| 7,275 |
|
| 10,477 |
|
|
| |
| |
Total current liabilities | | |
| 17,692 |
|
| 30,123 |
|
|
Liabilities held for sale | | |
| -- |
|
| 258 |
|
Long-term debt, net of current portion | | |
| 4,194 |
|
| 5,673 |
|
Other long term obligations | | |
| 75 |
|
| 134 |
|
Deferred income taxes | | |
| 30,024 |
|
| 24,924 |
|
|
| |
| |
Total liabilities | | |
| 51,985 |
|
| 61,112 |
|
|
Minority interest | | |
| 41,653 |
|
| 30,104 |
|
|
STOCKHOLDERS' EQUITY | | |
|
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | | |
| -- |
|
| -- |
|
Common stock, no par value, 70,000,000 authorized: 35,610,236 issued | | |
and 35,560,097 outstanding in 2007; 35,475,236 issued and 35,379,831 | | |
outstanding in 2006 | | |
| 202,049 |
|
| 200,941 |
|
Accumulated earnings | | |
| 40,841 |
|
| 55,473 |
|
Treasury stock, at cost, 50,139 shares in 2007 and 95,405 shares in 2006 | | |
| (472 |
) |
| (897 |
) |
|
| |
| |
Total stockholders' equity | | |
| 242,418 |
|
| 255,517 |
|
|
| |
| |
| | |
$ | 336,056 |
|
$ | 346,733 |
|
|
| |
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2007, 2006 and 2005
|
($ in thousands, except share data) |
Issued Common Stock
|
Accumulated |
Treasury Stock
|
|
|
Shares
|
Amount
|
Earnings
|
Shares
|
Amount
|
Total
|
Balance, December 31, 2004 |
|
|
| 33,196,565 |
|
$ | 179,510 |
|
$ | 37,602 |
|
| -- |
|
$ | -- |
|
$ | 217,112 |
|
Net income | | |
| -- |
|
| -- |
|
| 9,188 |
|
| -- |
|
| -- |
|
| 9,188 |
|
Purchase of treasury stock | | |
| -- |
|
| -- |
|
| -- |
|
| (143,921 |
) |
| (1,388 |
) |
| (1,388 |
) |
Issuance of stock for acquisitions | | |
| 89,200 |
|
| 1,236 |
|
| -- |
|
| -- |
|
| -- |
|
| 1,236 |
|
Exercise of stock options, including | | |
tax benefit totaling $2,509 | | |
| 1,675,207 |
|
| 15,334 |
|
| -- |
|
| -- |
|
| -- |
|
| 15,334 |
|
Exercise of stock warrants | | |
| 49,684 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
| |
Balance, December 31, 2005 | | |
| 35,010,656 |
|
| 196,080 |
|
| 46,790 |
|
| (143,921 |
) |
| (1,388 |
) |
| 241,482 |
|
Net income | | |
| -- |
|
| -- |
|
| 8,683 |
|
| -- |
|
| -- |
|
| 8,683 |
|
Purchase of treasury stock | | |
| -- |
|
| -- |
|
| -- |
|
| (10,000 |
) |
| (73 |
) |
| (73 |
) |
Contribution of treasury stock | | |
| -- |
|
| -- |
|
| -- |
|
| 58,516 |
|
| 564 |
|
| 564 |
|
Issuance of stock for acquisitions | | |
| 166,666 |
|
| 1,095 |
|
| -- |
|
| -- |
|
| -- |
|
| 1,095 |
|
Exercise of stock options, including | | |
tax benefit totaling $69 | | |
| 297,914 |
|
| 1,978 |
|
| -- |
|
| -- |
|
| -- |
|
| 1,978 |
|
Share-based compensation | | |
| -- |
|
| 1,788 |
|
| -- |
|
| -- |
|
| -- |
|
| 1,788 |
|
|
| |
Balance, December 31, 2006 | | |
| 35,475,236 |
|
| 200,941 |
|
| 55,473 |
|
| (95,405 |
) |
| (897 |
) |
| 255,517 |
|
Net loss | | |
| -- |
|
| -- |
|
| (14,632 |
) |
| -- |
|
| -- |
|
| (14,632 |
) |
Contribution of treasury stock | | |
| -- |
|
| -- |
|
| -- |
|
| 45,266 |
|
| 425 |
|
| 425 |
|
Share-based compensation | | |
| 135,000 |
|
| 1,108 |
|
| -- |
|
| -- |
|
| -- |
|
| 1,108 |
|
|
| |
Balance, December 31, 2007 | | |
| 35,610,236 |
|
$ | 202,049 |
|
$ | 40,841 |
|
| (50,139 |
) |
$ | (472 |
) |
$ | 242,418 |
|
|
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS |
($ in thousands)
|
Years Ended December 31,
|
|
2007
|
2006
|
2005
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
| |
|
| |
|
| |
|
Fee and other revenue collected | | |
$ | 144,821 |
|
$ | 146,658 |
|
$ | 158,739 |
|
Cash paid to employees, suppliers of goods and others | | |
| (82,361 |
) |
| (83,235 |
) |
| (96,638 |
) |
Interest received | | |
| 1,146 |
|
| 755 |
|
| 448 |
|
Interest paid | | |
| (835 |
) |
| (1,296 |
) |
| 1,140 |
|
Taxes paid | | |
| (538 |
) |
| (475 |
) |
| (407 |
) |
Discontinued operations | | |
| (356 |
) |
| (13,515 |
) |
| (7,022 |
) |
|
| |
| |
| |
Net cash provided by operating activities | | |
| 61,877 |
|
| 48,892 |
|
| 56,260 |
|
|
| |
| |
| |
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Purchase of entities, net of cash acquired | | |
| (11,829 |
) |
| -- |
|
| 2,417 |
|
Purchases of equipment and leasehold improvements | | |
| (9,469 |
) |
| (11,902 |
) |
| (10,578 |
) |
Proceeds from sales of assets | | |
| 1,224 |
|
| 1,365 |
|
| 2,198 |
|
Distributions from investments | | |
| -- |
|
| -- |
|
| 992 |
|
Other | | |
| (18 |
) |
| (25 |
) |
| -- |
|
Discontinued operations | | |
| 1,335 |
|
| 138,971 |
|
| (2,122 |
) |
|
| |
| |
| |
Net cash (used in) provided by investing activities | | |
| (18,757 |
) |
| 128,409 |
|
| (7,093 |
) |
|
| |
| |
| |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Borrowings on notes payable | | |
| 2,546 |
|
| 4,657 |
|
| 163,814 |
|
Payments on notes payable, exclusive of interest | | |
| (5,760 |
) |
| (134,257 |
) |
| (173,265 |
) |
Distributions to minority interest | | |
| (42,736 |
) |
| (46,969 |
) |
| (46,434 |
) |
Contributions by minority interest, net of buyouts | | |
| 389 |
|
| (314 |
) |
| 963 |
|
Exercise of stock options | | |
| -- |
|
| 1,907 |
|
| 12,825 |
|
Purchase of treasury stock | | |
| -- |
|
| (73 |
) |
| (1,388 |
) |
Discontinued operations | | |
| (20 |
) |
| (320 |
) |
| (1,915 |
) |
|
| |
| |
| |
Net cash used in financing activities | | |
| (45,581 |
) |
| (175,369 |
) |
| (45,400 |
) |
|
| |
| |
| |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | |
| (2,461 |
) |
| 1,932 |
|
| 3,767 |
|
|
Cash and cash equivalents, beginning of period, includes cash | | |
from discontinued operations of $(198), $4,650 | | |
and $2,292 for 2007, 2006 and 2005, respectively | | |
| 27,659 |
|
| 25,727 |
|
| 21,960 |
|
|
| |
| |
| |
Cash and cash equivalents, end of period, includes cash | | |
from discontinued operations of $(198) and $4,650 | | |
for 2006 and 2005 respectively | | |
$ | 25,198 |
|
$ | 27,659 |
|
$ | 25,727 |
|
|
| |
| |
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
($ in thousands)
|
Years Ended December 31,
|
|
2007
|
2006
|
2005
|
Reconciliation of net income to net cash |
|
|
| |
|
| |
|
| |
|
provided by operating activities: | | |
Net income (loss) | | |
$ | (14,632 |
) |
$ | 8,683 |
|
$ | 9,188 |
|
Adjustments to reconcile net income (loss) to cash provided | | |
by operating activities: | | |
Minority interest in consolidated income | | |
| 45,568 |
|
| 43,277 |
|
| 47,816 |
|
Depreciation and amortization | | |
| 11,107 |
|
| 11,275 |
|
| 11,444 |
|
Provision for uncollectible accounts | | |
| (108 |
) |
| 581 |
|
| 835 |
|
Equity in earnings of affiliates | | |
| -- |
|
| -- |
|
| (987 |
) |
Provision for deferred income taxes | | |
| (624 |
) |
| (4,997 |
) |
| 3,975 |
|
Proceeds from termination of interest rate swap | | |
| -- |
|
| -- |
|
| (564 |
) |
Non-cash share-based compensation | | |
| 1,534 |
|
| 2,352 |
|
| -- |
|
Impairment charges | | |
| 20,800 |
|
| 20,600 |
|
| -- |
|
Other | | |
| 70 |
|
| (636 |
) |
| (134 |
) |
Discontinued Operations | | |
| (117 |
) |
| (38,643 |
) |
| (2,294 |
) |
Changes in operating assets and liabilities, | | |
net of effect of purchase transactions: | | |
Accounts receivable | | |
| 1,008 |
|
| 1,821 |
|
| 1,823 |
|
Other receivables | | |
| (1,124 |
) |
| 2,094 |
|
| (2,273 |
) |
Other assets | | |
| 2,026 |
|
| 1,036 |
|
| (5,360 |
) |
Accounts payable | | |
| (579 |
) |
| 482 |
|
| (103 |
) |
Accrued expenses | | |
| (3,052 |
) |
| 967 |
|
| (7,106 |
) |
|
| |
| |
| |
Total adjustments | | |
| 76,509 |
|
| 40,209 |
|
| 47,072 |
|
|
| |
| |
| |
Net cash provided by operating activities | | |
$ | 61,877 |
|
$ | 48,892 |
|
$ | 56,260 |
|
|
| |
| |
| |
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
($ in thousands)
|
Years Ended December 31,
|
|
2007
|
2006
|
2005
|
SUPPLEMENTAL INFORMATION OF NON-CASH |
|
|
| |
|
| |
|
| |
|
INVESTING AND FINANCING ACTIVITIES: | | |
|
At December 31, the Company had accrued distributions payable | | |
to minority interests. The effect of this transaction was as follows: | | |
Current liabilities increased by | | |
$ | 226 |
|
$ | 7,687 |
|
$ | 8,250 |
|
Minority interest decreased by | | |
| 226 |
|
| 7,687 |
|
| 8,250 |
|
|
In 2007, the Company acquired two lithotripsy partnerships and sold | | |
three lithotripsy partnerships. The net assets and | | |
liabilities acquired/sold were as follows: | | |
Current assets increased by | | |
| 580 |
|
| -- |
|
| -- |
|
Noncurrent assets increased by | | |
| 1,816 |
|
| -- |
|
| -- |
|
Goodwill increased by | | |
| 9,044 |
|
| -- |
|
| -- |
|
Current liabilities increased by | | |
| 380 |
|
| -- |
|
| -- |
|
Other long-term obligations decreased by | | |
| 354 |
|
| -- |
|
| -- |
|
Minority interest increased by | | |
| 802 |
|
| -- |
|
| -- |
|
|
In 2005, the Company acquired two lithotripsy partnerships and made | | |
residual adjustments for 2004 acquisitions. The acquired | | |
assets and liabilities were as follows: | | |
Current assets increased by | | |
| -- |
|
| -- |
|
| 356 |
|
Noncurrent assets increased by | | |
| -- |
|
| -- |
|
| (4,973 |
) |
Goodwill increased by | | |
| -- |
|
| -- |
|
| 10,295 |
|
Current liabilities increased by | | |
| -- |
|
| -- |
|
| 3,272 |
|
Other long-term obligations increased by | | |
| -- |
|
| -- |
|
| 83 |
|
Stockholders' equity increased by | | |
| -- |
|
| -- |
|
| 1,236 |
|
See accompanying notes to consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
A.
ORGANIZATION AND OPERATION OF THE COMPANY
We now provide healthcare services and manufacture medical devices, primarily for the urology
community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport
high technology medical devices and equipment for mobile command and control centers and the media and
broadcast industry.
We are headquartered in Austin, Texas and provide urology services in approximately 40 states.
On November 10, 2004, Prime Medical Services, Inc. (Prime) completed a merger with HealthTronics
Surgical Services, Inc. (HSS) pursuant to which Prime merged with and into HSS, with HealthTronics, Inc.
(HealthTronics) as the surviving corporation. Under the terms of that agreement, as a result of the
merger, Primes stockholders received one share of HealthTronics common stock for each share of Primes
common stock. Because Primes stockholders now own approximately 62% of the shares of HealthTronics
common stock due to the merger, and because Primes directors and senior management represent a majority
of the combined companys directors and senior management, Prime was deemed to be the acquiring company
for accounting purposes and the merger was accounted for as a reverse acquisition under the purchase
method of accounting for business combinations in accordance with U.S. generally accepted accounting
principles. The consideration paid (purchase price) was allocated to the tangible and intangible net
assets of HSS based on their fair values, and the net assets of HSS were recorded at fair value as of
the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed
were deemed to be those of HealthTronics because HealthTronics is the surviving legal entity.
On June 22, 2006, we and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation
(Oshkosh), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed
to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale
on July 31, 2006. Accordingly, we have included our specialty vehicle manufacturing segment in
discontinued operations in the accompanying consolidated financial statements.
During the fourth quarter of 2006, we also sold our cryosurgery operations, committed to a plan to sell
our Rocky Mountain Prostate business and announced our decision to discontinue our involvement in the
clinical trials of the Ablatherm device. Accordingly, all of these activities have been reflected as
discontinued operations in the accompanying consolidated financial statements. In September 2007, we
completed the sale of our Rocky Mountain Prostate business.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company, our wholly-owned
subsidiaries, and entities more than 50% owned and limited partnerships or limited liability
corporations (LLCs) where we, as the general partner or managing member, exercise effective control,
even though our ownership is less than 50%. The related agreements provide for broad powers by us. The
other parties do not participate in the management of the entity and do not have the substantial ability
to remove us. In accordance with Financial Accounting Standards Board (FASB) Interpretation 46R,
Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51 (FIN 46), we have determined that
one of our consolidated partnerships, acquired in the HSS Merger and in which we have a 20% interest,
has related party relationships with two VIEs and has consolidated those entities. Investments in
entities in which our investment is less than 50% ownership and we do not have significant control are
accounted for by the equity method if ownership is between 20%50%, or by the cost method if ownership
is less than 20%. All significant intercompany accounts and transactions have been eliminated.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Cash Equivalents
We consider as cash equivalents demand deposits and all short-term investments with a maturity at date of
purchase of three months or less.
Property and Equipment
Property and equipment are stated at cost. Major betterments are capitalized while normal maintenance and repairs
are charged to operations. Depreciation is computed by the straight-line method using estimated useful lives of
three to twenty years. Leasehold improvements are generally amortized over ten years or the term of the lease,
whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or
amortization are removed from the related accounts and any gain or loss is credited or charged to operations.
Depreciation expense for property and equipment was $10,079,000, $9,844,000 and $10,183,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Impairment of long-lived assets
We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for
impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be
recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and
exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount
of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset. If the
assets carrying value is not recoverable, an impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds its fair value. We determine fair values by using a combination of
comparable market values and discounted cash flows, as appropriate.
Goodwill and Other Intangible Assets
We record as goodwill the excess of the purchase price over the fair value of the net assets associated with
acquired businesses. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead
are tested for impairment at least annually. Intangible assets with definite useful lives are amortized over
their respective estimated useful lives to their estimated residual values. We now have two reporting units,
urology services and medical products. We test for impairment of goodwill at least annually, during the fourth
quarter, at the reporting unit level by comparing the reporting units carrying amount, including goodwill, to
the fair value of the reporting unit. The fair value of the reporting units are estimated using a combination of
the income, or discounted cash flows approach and the market approach, which utilizes comparable companies
data. Because we have recognized goodwill based only on our controlling interest, the fair value of each
reporting unit also relates only to our controlling interest. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the
fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Revenue Recognition
Our revenue recognition policies are in accordance with the SECs Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue Recognition,
and other authoritative accounting literature. In the case of arrangements which require significant
production, modification or customization of products, we follow the guidance in the AICPA Statement of
Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production Type
Contracts, whereby we apply the completed contract method, since all our contracts are of a short-term
nature. After the sale of our specialty vehicles manufacturing segment in July 2006, we no longer have
any sale arrangements which follow SOP 81-1.
Our fees for urology services are recorded when the procedure is performed and are based on a contracted
rate with a hospital (wholesale contract) or based on a contractual rate with commercial insurance
carriers (retail contract), individual or state and federal health care agencies, net of contractual fee
reduction. Management fees from limited partnerships are recorded monthly when earned. Distributions
from cost basis investments are recorded when received and totaled $1,321,000, $1,005,000 and $987,000
in 2007, 2006 and 2005, respectively.
Sales of medical devices including related accessories (which started in February 2004 with the
acquisition of Medstone International, Inc. (Medstone)) are recorded when delivered to the customer
and any trial period ends. There are no post-shipment obligations after revenue is recognized except a
possible maintenance equipment contract. If the sale includes maintenance services over a period of
time, we defer the fair value of the maintenance services and recognize it ratably over the contract
period. Fair value of undelivered elements is determined based on prices when the items are sold
separately. Licensing fees (which started with the acquisition of Medstone in February 2004) are
recorded when the related lithotripsy procedure is performed on the equipment we sold to third parties;
leasing fees and revenues from maintenance contracts are recorded monthly as the related services are
provided; sales of consumable products are recorded when delivered to the customer. We provide
anatomical pathology services primarily to the urology market place. Revenues from these services are
recorded when the related laboratory procedures are performed.
Prior to the sale of our specialty vehicle manufacturing segment on July 31, 2006, revenue from the
manufacture of trailers where we had a customer contract prior to beginning production was recognized
when the project was substantially complete. Substantially complete was when the following had occurred
(1) all significant work on the project was done; (2) the specifications under the contract had been
met; and (3) no significant risks remained. Revenue from the manufacture of trailers built to an OEMs
forecast was recognized upon delivery. Costs incurred, which primarily consist of labor and materials,
on uncompleted projects were capitalized as work in process. Provisions for estimated losses on
uncompleted projects were made in the period in which the losses were determined.
Major Customers and Credit Concentrations
For the years ending December 31, 2007, 2006 and 2005, we had no customers who exceeded 10% of
consolidated revenues. Concentrations of credit risk with respect to cash relate to deposits held with
banks in excess of insurance provided. Generally, these deposits may be redeemed upon demand and,
therefore, in the opinion of management, bear minimal risk. Concentrations of credit risk with respect
to receivables are limited due to the wide variety of customers, as well as their dispersion across many
geographic areas. Other than as disclosed below, we do not consider ourselves to have any significant
concentrations of credit risk. At December 31, 2007, approximately 28% of accounts receivable relate to
units operating in New York, 7% relate to units in Louisiana, 6% relate to units operating in Florida,
6% related to units in Indiana, and 5% each relate to units in Texas and Minnesota. At December 31,
2006, approximately 23% of accounts receivable relate to units operating in New York, 7% relate to units
operating in Florida, 7% relate to units in Louisiana, 6% related to units in Texas, and 5% each relate
to units in Georgia, Indiana and Minnesota.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Income Tax
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Accounts Receivable
Accounts receivable are recorded based on revenues, net of contractual fee reductions and less an
estimated allowance for doubtful accounts. The allowance for doubtful accounts is based on our
assessment of the collectibility of customer accounts. We regularly review the allowance by considering
factors such as historical experience, credit quality, age of the accounts receivable balances, and
current economic conditions that may affect a customers ability to pay. The following is a summary of
accounts receivable allowances:
|
($ in thousands)
|
Balance at
Beginning of
Year
|
Costs and
Expenses
|
Deductions
|
Other
|
Balance at
End of Year
|
Allowance for Doubtful Accounts: |
2007 | | |
$ | 2,166 |
|
$ | 329 |
|
$ | 127 |
|
$ | -- | |
$ | 2,368 |
|
2006 | | |
$ | 1,491 |
|
$ | 776 |
|
$ | 101 |
|
$ | -- | |
$ | 2,166 |
|
2005 | | |
$ | 812 |
|
$ | 835 |
|
$ | 156 |
|
$ | -- | |
$ | 1,491 |
|
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the average cost method.
Certain components that meet our manufacturing requirements are only available from a limited number of
suppliers. The inability to obtain components as required or to develop alternative sources, if and as
required in the future, could result in delays or reduction in product shipments, which in turn could
have a material adverse effect on our manufacturing business, financial condition and results of
operations.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
As of December 31, 2007 and 2006, inventory consists of the following (in thousands):
|
|
2007
|
2006
|
|
Raw Materials |
|
|
$ | 6,144 |
|
$ | 7,070 |
|
|
Finished Goods | | |
| 4,077 |
|
| 4,404 |
|
|
|
| |
| |
|
| | |
$ | 10,221 |
|
$ | 11,474 |
|
|
| |
| |
Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment, which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including stock option grants based on
estimated fair values. SFAS No. 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value of the awards portion
that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior
to the adoption of SFAS No. 123(R), we accounted for share-based awards to employees and directors using
the intrinsic valued method in accordance with Accounting Principles Board Opinion (APB) No. 25 as
allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method,
share-based compensation expense was only recognized by us if the exercise price of the stock option was
less than the fair market value of the underlying stock at the date of grant.
We have elected to use the modified prospective application method whereby SFAS No. 123(R) applies to
new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled
after the effective date. In accordance with the modified prospective method, our consolidated
financial statements for the year ended December 31, 2005 and prior have not been restated to reflect,
and do not include, the impact of SFAS No. 123(R). We have provided proforma disclosures of net income
and earnings per share as if the fair value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense in footnote I.
Debt Issuance Costs
We expense debt issuance costs as incurred.
Advertising costs
Costs related to advertising are expensed as incurred.
Research and Development
Research and development costs are expensed as incurred and are not material in any of the periods
presented.
Estimates Used to Prepare Consolidated Financial Statements
Management uses estimates and assumptions in preparing financial statements in accordance with U.S.
generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were assumed in preparing the
consolidated financial statements.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Reclassification
Certain reclassifications have been made to expense catagories presented in previous years to be
consistent with the 2007 presentation. In 2006, we classified our operating expenses in the
accompanying consolidated statements of income by nature using the following categories: Salaries,
wages and benefits; Other cost of services; General and administrative; Legal and professional;
Manufacturing costs; Advertising; and Other. In 2007, in order to more closely match each class of
revenue we have reclassified our operating expense categories by function as follows: Urology services,
Medical products, and Sales, general & administrative. These reclassifications were between operating
expense categories and did not change total operating expense in any period.
Earnings Per Share
Basic earnings per share is based on the weighted average shares outstanding without any dilutive
effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares,
including options and warrants. A reconciliation of such earnings per share data is as follows:
|
(In thousands, except per share data)
|
Net Income (loss)
|
No. of Shares
|
Per Share Amounts
|
For the year ended December 31, 2007 |
|
|
| |
|
| |
|
| |
|
Basic | | |
$ | (14,632 |
) |
| 35,421 |
|
$ | (0.41 |
) |
Effect of dilutive securities: | | |
Options | | |
| |
| |
-- |
|
|
| |
| |
| |
Diluted | | |
$ | (14,632 |
) |
| 35,421 |
|
$ | (0.41 |
) |
|
| |
| |
| |
For the year ended December 31, 2006 | | |
Basic | | |
$ | 8,683 |
|
| 35,157 |
|
$ | 0.25 |
|
Effect of dilutive securities: | | |
Options | | |
| | |
| 190 |
|
|
| |
| |
| |
Diluted | | |
$ | 8,683 |
|
| 35,347 |
|
$ | 0.25 |
|
|
| |
| |
| |
For the year ended December 31, 2005 | | |
Basic | | |
$ | 9,188 |
|
| 34,311 |
|
$ | 0.27 |
|
Effect of dilutive securities: | | |
Options | | |
| | |
| 871 |
|
|
| |
| |
| |
Diluted | | |
$ | 9,188 |
|
| 35,182 |
|
$ | 0.26 |
|
|
| |
| |
| |
Unexercised employee stock options and warrants to purchase 3,329,000, 3,223,000 and 751,000 shares of
our common stock as of December 31, 2007, 2006 and 2005, respectively, were not included in the
computations of diluted EPS because the exercise prices were greater than the average market price of
our common stock during the respective periods.
Recently Issued Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised
2007), Business Combinations, (SFAS 141R). SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The
Statement also establishes disclosure requirements to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R is effective for
business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be
dependent on the future business combinations that we may pursue after its effective date.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 (SFAS 160). This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 requires companies to report a noncontrolling interest in a
subsidiary as equity. Additionally, companies are required to include amounts attributable to both the
parent and the noncontrolling interest in the consolidated net income and provide disclosure of net
income attributable to the parent and to the noncontrolling interest on the face of the consolidated
statement of income. This Statement clarifies that after control is obtained, transactions which change
ownership but do not result in a loss of control are accounted for as equity transactions. Prior to this
Statement being issued, decreases in a parents ownership interest in a subsidiary could be accounted
for as equity transactions or as transactions with gain or loss recognition in the income statement. A
change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation
would result in a gain or loss in net income. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 with earlier adoption prohibited. The adoption of SFAS 160 will revise our
presentation of the consolidated financial statements and further impact will be dependent on our future
changes in ownership in subsidiaries after the effective date.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
expands the use of fair value accounting to many financial instruments and certain other items. The
fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a
company has similar instruments that it elects not to measure based on fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. Based on our current operations, we do not
expect that the adoption of SFAS 159 will have a material impact on our financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff
Position (FSP FAS 157-bEffective Date of FASB Statement No. 157) which, if adopted as proposed, would
delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). Based on our current operations, we do not expect that the adoption of SFAS 157
will have a material impact on our financial position or results of operations.
C. GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS No. 142 Goodwill and Other Intangible Assets effective January 1, 2002. Under this
standard, we no longer amortize goodwill and indefinite life intangible assets, but those assets are
subject to annual impairment tests. As of December 31, 2007, we had $4 million in indefinite life
intangible assets related to the HealthTronics brand name. Other intangible assets with finite lives
consisted primarily of non-compete agreements, hospital contracts and patents at December 31, 2007 and
2006. The agreements will continue to be amortized over their useful lives.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The net carrying value of goodwill as of December 31, 2007 and 2006 is comprised of the following:
|
|
Total
|
Urology Services
|
Medical Products
|
Balance, December 31, 2005 |
|
|
$ | 255,817 |
|
$ | 238,298 |
|
$ | 17,519 |
|
Additions | | |
| 402 |
|
| 402 |
|
| -- |
|
Deletions | | |
| (6,358 |
) |
| (6,358 |
) |
| -- |
|
Impairments | | |
| (20,600 |
) |
| (12,200 |
) |
| (8,400 |
) |
|
| |
| |
| |
Balance, December 31, 2006 | | |
$ | 229,261 |
|
$ | 220,142 |
|
$ | 9,119 |
|
Additions | | |
| 11,735 |
|
| 11,735 |
|
| -- |
|
Deletions | | |
| (2,691 |
) |
| (2,691 |
) |
| -- |
|
Impairments | | |
| (20,800 |
) |
| (20,800 |
) |
| -- |
|
|
| |
| |
| |
Balance, December 31, 2007 | | |
$ | 217,505 |
|
$ | 208,386 |
|
$ | 9,119 |
|
|
| |
| |
| |
In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an
impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to
a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily
caused by lower projected growth rates for our laser operations as well as the timing of certain future
growth for our IGRT operations. In the fourth quarter of 2006, we recorded an impairment to our
goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our
medical products segment. The impairment to our urology services segment was due primarily to a
decrease in the number of overall procedures during 2006, primarily across our western region
partnerships, combined with the loss of certain partnerships and contracts late in 2006 to competitors.
The impairment in our medical products segment relates primarily to our decision to reduce or exit
certain product lines, specifically patient management tables and orthopedic consumables, during the
fourth quarter of 2006 along with the closing of our European operations.
We record as goodwill the excess of the purchase price over the fair value of the net assets associated
with acquired businesses. Goodwill and intangible assets with indefinite useful lives are not amortized,
but instead are tested for impairment at least annually. Intangible assets with definite useful lives
are amortized over their respective estimated useful lives to their estimated residual values. We now
have two reporting units, urology services and medical products. We test for impairment of goodwill at
least annually, during the fourth quarter, at the reporting unit level by comparing the reporting units
carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the
reporting units are estimated using a combination of the income, or discounted cash flows, approach and
the market approach, which utilizes comparable companies data. Because we have recognized goodwill
based only on our controlling interest, the fair value of each reporting unit also relates only to our
controlling interest.
If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any. The second step of the
goodwill impairment test compares the implied fair value of the reporting units goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Our discounted cash flow projections for each reporting unit were based on five-year financial
forecasts. The five-year forecasts were based on annual financial forecasts developed internally by
management for use in managing our business and through discussions with an independent valuation firm
engaged by us. The significant assumptions of these five-year forecasts included annual revenue growth
rates ranging from -5.0% to 8.1% and from -19.3% to 23.5% for the urology services and medical products
reporting units, respectively. The future cash flows were discounted to present value using a mid-year
convention and a discount rate of 11.0% for the urology services reporting unit and 12.0% for the
medical products reporting unit. Terminal values for both reporting units were calculated using a
Gordon growth methodology with a long-term growth rate of 5.0%. The future terminal values of the
urology services and medical products reporting units were $283,660 and $45,158 respectively at December
31, 2007. The future terminal values of the urology services and medical products reporting units were
$299,995 and $51,547 respectively at December 31, 2006.
The significant assumptions used in determining fair values of reporting units using comparable company
market values include the determination of appropriate market comparables, the estimated multiples of
revenue, EBIT, and EBITDA a willing buyer is likely to pay, and the estimated control premium a willing
buyer is likely to pay.
Other intangible assets as of December 31, 2007 and 2006, subject to amortization expense, are comprised
of the following:
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
|
December 31, 2007 |
|
|
| |
|
| |
|
| |
|
Urology Services | | |
$ | 2,590 |
|
$ | 1,759 |
|
$ | 831 |
|
Medical Products | | |
| 2,776 |
|
| 2,387 |
|
| 389 |
|
|
| |
| |
| |
Total | | |
$ | 5,366 |
|
$ | 4,146 |
|
$ | 1,220 |
|
|
| |
| |
| |
December 31, 2006 | | |
Urology Services | | |
$ | 2,130 |
|
$ | 1,215 |
|
$ | 915 |
|
Medical Products | | |
| 2,656 |
|
| 1,902 |
|
| 754 |
|
|
| |
| |
| |
Total | | |
$ | 4,786 |
|
$ | 3,117 |
|
$ | 1,669 |
|
|
| |
| |
| |
Amortization expense for other intangible assets with finite lives was $1,028,000, $1,431,000 and
$1,261,000 for the years ended December 31, 2007, 2006 and 2005, respectively. We estimate annual
amortization expense for each of the five succeeding fiscal years as follows:
|
|
Year
|
Amount
|
|
|
|
2008 |
|
|
$ | 598,000 |
|
| | |
2009 | | |
| 304,000 |
|
| | |
2010 | | |
| 153,000 |
|
| | |
2011 | | |
| 82,000 |
|
| | |
2012 | | |
| 82,000 |
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
D. ACQUISITIONS
Effective April 28, 2007, we acquired a 21% general partner interest in Keystone Mobile Partners, L.P.
(Keystone) and an additional 14% limited partner interest in Keystone for an aggregate purchase price
of approximately $6.8 million plus certain additional cash consideration to be paid depending on the
number of limited partner units sold by us in a post-closing offering of such units, plus certain
earnouts. In August 2007, we completed our post-closing offering of the limited partner units and paid
an additional $934,000. Keystone provides lithotripsy services to the Greater Philadelphia and eastern
Pennsylvania area. We recorded approximately $8 million of goodwill related to this transaction, all of
which is tax deductible.
In 2007, we increased our ownership in two partnerships for an aggregate purchase price of approximately
$4 million. We recorded approximately $3.6 million of goodwill related to these transactions, all of
which is tax deductible.
Unaudited proforma combined income data for the years ended December 31, 2007 and 2006 of the Company
assuming the acquisitions were effective January 1, of each year is as follows:
|
|
($ in thousands, except per share data) |
2007 |
|
2006 |
|
|
|
|
| |
| |
|
Total revenues |
|
|
$ | 145,387 |
|
$ | 152,603 |
|
| |
|
|
Total expenses | | |
| 158,921 |
|
| 166,493 |
|
|
Discontinued Operations | | |
| (147 |
) |
| 25,129 |
|
|
|
| |
| |
|
Net income (loss) | | |
$ | (13,681 |
) |
$ | 11,239 |
|
|
|
| |
| |
|
Diluted earnings per share | | |
$ |
(0.39) |
$ |
|
0.32 |
|
|
|
| |
| |
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of our significant financial instruments as of
December 31, 2007 and 2006 are as follows:
|
|
2007
|
2006
|
( $ in thousands)
|
Carrying Amount |
|
Fair Value |
|
Carrying Amount |
|
Fair Value |
|
|
| |
| |
| |
| |
Financial assets: |
|
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | |
$ | 25,198 |
|
$ | 25,198 |
|
$ | 27,857 |
|
$ | 27,857 |
|
Warrants/Common Stock | | |
| 450 |
|
| 360 |
|
| 150 |
|
| 544 |
|
Financial liabilities: | | |
Debt | | |
$ | 8,526 |
|
$ | 8,526 |
|
$ | 11,337 |
|
$ | 11,337 |
|
Other long-term obligations | | |
| 75 |
|
| 67 |
|
| 134 |
|
| 130 |
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The following methods and assumptions were used by us in estimating our fair value disclosures for
financial instruments.
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair value because they mature in less
than 90 days and do not present unanticipated credit concerns.
Debt
The carrying value of the debt at December 31, 2007 and 2006 approximates fair value.
Other Long-Term Obligations
At December 31, 2007, as part of our acquisition of Medstone International Inc. in February 2004, we had
an obligation totaling $58,338 related to payments to an employee for $4,167 per month continuing until
February 28, 2009 as consideration for a noncompetition agreement. We have an obligation totaling
$100,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition
agreement with a previous employee of our Medical Products division.
Warrants
In November, 2006, we announced our decision to discontinue our involvement in the clinical trials of
the Ablatherm device manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the
exclusive rights to distribute such device in the United States, when and if a Pre-Market Approval of
such device is granted by the FDA and forfeits our rights to vest in additional warrants to EDAP common
stock. We have accordingly included our costs related to the clinical trials of High Intensity Focused
Ultrasound (HIFU) in discontinued operations in the accompanying condensed consolidated statements of
income. At December 31, 2006, we had 200,000 warrants to purchase EDAP TMS S.A. common stock. During
2007, we exercised these warrants and now own 200,000 shares of EDAP common stock.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. Fair value estimates are based on existing balance sheet
financial instruments without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the aforementioned estimates.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
F. ACCRUED EXPENSES
Accrued expenses consist of the following: |
|
|
December 31,
|
|
($ in thousands)
|
2007
|
2006
|
|
Accrued group insurance costs |
|
|
$ | 393 |
|
$ | 321 |
|
|
Compensation and payroll related expense | | |
| 3,840 |
|
| 3,339 |
|
|
Accrued interest | | |
| 7 |
|
| 13 |
|
|
Accrued taxes | | |
| 871 |
|
| 2,937 |
|
|
Accrued professional fees | | |
| 170 |
|
| 480 |
|
|
Unearned revenues | | |
| 913 |
|
| 1,325 |
|
|
Other | | |
| 1,081 |
|
| 2,062 |
|
|
|
| |
| |
|
| | |
$ | 7,275 |
|
$ | 10,477 |
|
|
|
| |
| |
G. INDEBTEDNESS
Long-term debt is as follows:
|
($ in thousands) |
|
December31,
|
Interest Rates
|
Maturities
|
2007
|
2006
|
Floating |
|
|
| 2007-20 |
12 |
$ | 2,394 |
|
$ | 3,712 |
|
1%-11% | | |
| 2007-20 |
12 |
| 6,132 |
|
| 7,625 |
|
|
|
| |
| |
| | |
| |
|
$ | 8,526 |
|
$ | 11,337 |
|
Less current portion of long-term debt | | |
| | |
| 4,332 |
|
| 5,664 |
|
|
|
| |
| |
| | |
| |
|
$ | 4,194 |
|
$ | 5,673 |
|
|
|
| |
| |
Senior Credit Facility
In March 2005, we refinanced our then existing revolving credit facility with a $175 million senior
credit facility comprised of a five year $50 million revolver and a $125 million senior secured term
loan B (term loan B), due 2011. In April 2005, we used the proceeds from the new term loan B to
redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding
under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005
related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005.
This loan bore interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. We
were required to make quarterly principal payments in connection with the term loan B of $312,500 until
February 2010, when quarterly payments would have increased to $29.7 million. On July 31, 2006, we used
a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term
loan B in full. At December 31, 2007, there were no amounts drawn on the revolver. Our senior credit
facility contains covenants that, among other things, limit our ability to incur debt, create liens,
make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter
into transactions with affiliates, and make acquisitions. In addition, our facility requires us to
maintain certain financial ratios. Our assets and the stock of our subsidiaries collateralize the
revolving credit facility. We were in compliance with the covenants under our senior credit facility as
of December 31, 2007.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
8.75% Notes
In April 2005, our $125 million term loan B was funded and we used the proceeds to redeem the $100
million of 8.75% unsecured senior subordinated notes. The notes were subject to an 8.75% rate of
interest and interest was payable semi-annually on April 1st and October 1st.
Other long term debt
On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing
segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas.
As of December 31, 2007, we had notes totaling $8.5 million related to equipment purchased by our
limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear
interest at LIBOR or prime plus a certain premium and are due over the next three years. These notes
include a revolver at one of our partnerships which totals $1.8 million. As of December 31, 2007,
$1,193,000 was drawn on this revolver.
Interest Rate Swap
In August 2002, we entered into an interest rate swap which was designated as a fair value hedge
pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An
Amendment of FASB Statement No. 133. This swap was executed to convert $50 million of the 8.75% notes
from a fixed to floating rate instrument. The floating rate was based on LIBOR plus 4.56%. In March
2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate
based on LIBOR plus 5.11%. We terminated the swaps in May 2003. In August 2003, we entered into two new
interest rate swaps for $25 million each which were also designated as fair value hedges. The floating
rates of these two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively.
In January 2004, we terminated these swaps for approximately $150,000. In the second quarter of 2005,
approximately $564,000 in proceeds from these swaps were recognized when the 8.75% notes were redeemed
as described above.
The stated principal repayments for all indebtedness as of December 31, 2007 are payable as follows:
|
|
Year
|
Amount
|
|
|
|
2008 |
|
|
$ | 4,332 |
|
| | |
2009 | | |
| 2,406 |
|
| | |
2010 | | |
| 1,261 |
|
| | |
2011 | | |
| 426 |
|
| | |
2012 | | |
| 70 |
|
| | |
Thereafter | | |
| 31 |
|
H. COMMITMENTS AND CONTINGENCIES
We are involved in various claims and legal actions that have arisen in the ordinary course of business.
Management believes that any liabilities arising from these actions will not have a material adverse
effect on our financial condition, results of operations or cash flows.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
We sponsor a partially self-insured group medical insurance plan. The plan is designed to provide a
specified level of coverage, with stop-loss coverage provided by a commercial insurer. Our maximum claim
exposure is limited to $100,000 per person per policy year. At December 31, 2007, we had 244 employees
enrolled in the plan. The plan provides non-contributory coverage for employees and contributory
coverage for dependents. Our contributions totaled $2,852,000, $2,351,000 and $2,586,000, in 2007, 2006
and 2005 respectively.
We lease office space in several locations. Rent expense totaled $1,757,000, $1,491,000 and $2,665,000
for the years ended December 31, 2007, 2006 and 2005. Future annual minimum lease payments under all
noncancelable operating leases are as follows:
|
|
($ in thousands) Year
|
Amount
|
|
|
|
2008 |
|
|
$ | 1,652 |
|
| | |
2009 | | |
| 1,462 |
|
| | |
2010 | | |
| 1,253 |
|
| | |
2011 | | |
| 946 |
|
| | |
2012 | | |
| 578 |
|
| | |
Thereafter | | |
| 506 |
|
I. STOCK BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and directors
including stock option grants based on estimated fair values. SFAS No. 123(R) requires companies to
estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. The value of the awards portion that is ultimately expected to vest is recognized as expense
over the requisite service periods. Prior to the adoption of SFAS No. 123(R), we accounted for
share-based awards to employees and directors using the intrinsic valued method in accordance with
Accounting Principles Board Opinion (APB) No. 25 as allowed under SFAS No. 123, Accounting for
Stock-Based Compensation. Under the intrinsic value method, share-based compensation expense was only
recognized by us if the exercise price of the stock option was less than the fair market value of the
underlying stock at the date of grant.
We have elected to use the modified prospective application method such that SFAS No. 123(R) applies to
new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled
after the effective date. In accordance with the modified prospective method, our consolidated
financial statements for the year ended December 31, 2005 has not been restated to reflect, and does not
include, the impact of SFAS No. 123(R).
Under SFAS No. 123R, nonvested stock awards are awards that the employee has not yet earned the right to
sell, and are subject to forfeiture if the terms of service are not satisfied. These awards should be
measured based on the market prices of otherwise identical (i.e., identical except for the vesting
condition) common stock at the grant date. A nonvested equity share awarded to an employee shall be
measured at its fair value as if it were vested and issued on the grant date. The vesting restrictions
are taken into account by recognizing compensation cost only for awards for which the employee has
rendered the requisite service (i.e., vested).
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
As of December 31, 2007, total unrecognized share-based compensation cost related to unvested stock
options was approximately $2.8 million, which is expected to be recognized over a weighted average
period of approximately 1.8 years. As of December 31, 2007, there was $612,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements granted under the Plan.
That cost is expected to be recognized over a weighted-average period of 4 years. For the years ended
December 31, 2007 and 2006, we have included approximately $1,108,000 and $1,788,000, respectively, for
share-based compensation cost (in 2006 $167,000 of cost were included in discontinued operations) in the
accompanying consolidated statement of income.
Share-based compensation expense recognized during the years ended December 31, 2007 and December 31,
2006 is related to awards granted prior to, but not yet fully vested as of, January 1, 2006 and awards
granted subsequent to December 31, 2005. We have historically, and continue to estimate the fair value
of share-based awards using the Black-Scholes-Merton (Black Scholes) option-pricing model.
Our income before income taxes for the years ended December 31, 2007 and 2006, was lower by $1,108,000
and $1,788,000, respectively, and net income was lower by $978,000 and $1,450,000 respectively, than if
we had continued to account for share-based compensation under APB Opinion No. 25. For the same period,
basic earnings per share was $0.03 and $0.04 lower, and diluted earnings per share was $0.03 and $0.04
lower for the years ended December 31, 2007 and 2006 due to our adopting SFAS 123R.
Stock Option Plans
At December 31, 2007, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock
option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive
plan. The plans, and all amendments thereto, had been approved by Primes and HSS shareholders, as the
case may be. Since November 2004, the only active plan has been our 2004 equity incentive plan, which,
as amended, authorized the grant of up to 2,950,000 shares to purchase our common stock, including
2,000,000 shares approved in June 2006.
Options granted under the plans shall terminate no later than ten years from the date the option is
granted, unless the option terminates sooner by reason of termination of employment, disability or
death. Options may vest immediately or over one to five years. In the third quarter of 2006, we modified
the vesting terms of approximately 87,000 options related to employees of our specialty vehicle segment
which was sold July 31, 2006, and recognized $167,000 in discontinued operations in 2006. In the second
half of 2005, we modified the vesting terms of approximately 50,000 options related to employees of our
orthotripsy segment which was sold, and recognized approximately $116,000 in discontinued operations in
2005.
The following table sets forth certain information as of December 31, 2007 about our equity compensation
plans:
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(a)
|
(b)
|
(c)
|
Plan Category
|
Number of shares of our
common stock to be issued
upon exercise of
outstanding options
|
Weighted-average exercise
price of outstanding options
|
Number of shares of our
common stock remaining
available for future
issuance under equity
compensation plans
(exceeding securities
reflected in column (a))
|
Prime 1993 stock option plan |
|
|
| 105,666 |
|
$ | 7 |
.79 |
| -- |
|
|
Prime 2003 stock option plan | | |
| 129,000 |
|
$ | 5 |
.84 |
| -- |
|
|
HSS equity incentive plan and stock | | |
option plans | | |
| 2,959,499 |
|
$ | 7 |
.10 |
| 1,005,944 |
|
|
Other equity compensation plans | | |
approved by our security holders | | |
| N/A |
|
| N/A |
|
| N/A |
|
Share-Based Compensation Cost under SFAS No. 123
Prior to January 1, 2006, we disclosed compensation cost in accordance with SFAS No. 123. The
provisions of SFAS No. 123 require us to disclose the assumptions used in calculating the fair value pro
forma expense. Had compensation expense for the plans been determined based on the fair value of the
options at grant dates for awards under the plans consistent with SFAS No. 123, our net income and
earnings per share would have been as follows:
|
|
($ in thousands)
|
December 31, 2005
|
|
Net income, as reported |
|
|
$ | 9,188 |
|
|
Share-based compensation recorded, net of tax | | |
| 72 |
|
|
Share-based compensation proforma, net of tax | | |
| (2,607 |
) |
|
|
| |
|
Pro forma net income | | |
$ | 6,653 |
|
|
|
| |
|
Pro forma earnings per share: | | |
|
Basic | | |
$ | 0.19 |
|
|
|
| |
|
Diluted | | |
$ | 0.19 |
|
|
|
| |
To estimate compensation expense which would have been recognized under SFAS No. 123 for the year ended
December 31, 2005 and to calculate the compensation cost that was recognized under SFAS No. 123(R) for
the years ended December 31, 2007 and 2006, we used the Black-Scholes option-pricing model with the
following weighted-average assumptions for equity awards granted. For December 31, 2007, 2006 and 2005,
respectively: risk-free interest rates were 4.6%, 4.9% and 3.9%; dividend yields were 0%, 0% and 0%;
volatility factors of the expected market price of our common stock were 47%, 47% and 46%; and a
weighted-average expected life of the option of 6 years, 6 years and 4 years.
The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an
equivalent expected term. We have not paid dividends in the past and do not plan to pay any dividends
in the future. We utilized the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the
Securities and Exchange Commission relative to "plain vanilla" options in determining the expected term
of option grants. SAB 107 permits the expected term of "plain vanilla" options to be calculated as the
average of the option's vesting term and contractual period. This simplified method is based on the
vesting period and the contractual term for each grant or for each vesting tranche for awards with
graded vesting. The mid-point between the vesting date and the expiration date is used as the expected
term under this method. We have used this method in determining the expected term of all options granted
after December 31, 2005. We have determined volatility using historical stock prices over a period
consistent with the expected term of the option. We recognize compensation cost for awards with graded
vesting on a straight-line basis over the requisite service period for the entire award. The amount of
compensation expense recognized at any date is at least equal to the portion of the grant date value of
the award that is vested at that date.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Activity and pricing information regarding all stock options to purchase shares of our common stock are
summarized as follows:
|
|
2007
|
2006
|
2005
|
|
Options (000)
|
Weighted Average Price
|
Options (000)
|
Weighted Average Price
|
Options (000)
|
Weighted Average Price
|
Outstanding at beginning of year |
|
|
| 3,908 |
|
$ | 7.32 |
|
| 3,048 |
|
$ | 7.65 |
|
| 4,327 |
|
$ | 7.39 |
|
Granted | | |
| 245 |
|
| 5.82 |
|
| 1,992 |
|
| 7.05 |
|
| 652 |
|
| 8.75 |
|
Exercised | | |
| -- |
|
| -- |
|
| (298 |
) |
| 6.40 |
|
|
(1,675 |
) |
|
7.59 |
|
Cancelled | | |
| (552 |
) |
| 8.07 |
|
| (588 |
) |
| 8.78 |
|
| (256 |
) |
| 6.53 |
|
Forfeited | | |
| (407 |
) |
| 7.38 |
|
|
(246 |
) |
|
6.94 |
|
|
-- |
|
|
-- |
|
|
| |
| |
| |
| |
| |
| |
Outstanding at end of year | | |
| 3,194 |
|
$ | 7.07 |
|
| 3,908 |
|
$ | 7.32 |
|
| 3,048 |
|
$ | 7.65 |
|
|
| |
|
| |
|
| |
Exercisable at end of year | | |
| 2,049 |
|
$ | 7.35 |
|
| 2,450 |
|
$ | 7.51 |
|
| 2,813 |
|
$ | 7.71 |
|
Weighted-average fair value of |
options granted during the period |
| |
| $2.99 |
|
| |
|
| $3.38 |
|
| |
|
$ | 5.44 |
|
| |
|
During the year ended December 31, 2007, there were no exercises of options to purchase common stock and
the total fair value of shares vested during 2007 was $966,000. During the year ended December 31,
2006, the total intrinsic value of options exercised to purchase common stock was approximately $353,000
and the total fair value of shares vested during 2006 was $1.7 million.
During the year ended December 31, 2007, there was no financing cash generated from share-based
compensation arrangements for the purchase of shares upon exercise of options. During the year ended
December 31, 2006, financing cash generated from share-based compensation arrangements amounted to
$1,908,000 for the purchase of shares upon exercise of options. We issue new shares upon exercise of
options to purchase our common stock.
Additional information regarding options outstanding for all plans as of December 31, 2007, is as
follows:
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Outstanding Options
|
Exercisable Options
|
Range of Exercise Prices |
Options (000)
|
Weighted Average Remaining Contractual Life
|
Weighted Average Exercise Price
|
Options(000)
|
Weighted Average Remaining Contractual Life
|
Weighted Average Exercise Price
|
$4.49 - $6.49 |
|
|
|
422 |
|
7.4 years |
|
|
$ |
5 |
.93 |
|
|
212 |
5.6 years |
|
|
$ | 5 |
.98 |
$6.50 - $6.99 | | |
| 1,640 |
|
7.0 years | | |
| 6 |
.66 |
| |
781 |
4.9 years | | |
| 6 |
.62 |
$7.00 - $7.50 | | |
| 547 |
|
6.9 years | | |
| 7 |
.37 |
| |
472 |
6.7 years | | |
| 7 |
.40 |
$7.51 - $9.20 | | |
| 383 |
|
6.0 years | | |
| 7 |
.98 |
| |
383 |
6.0 years | | |
| 8 |
.00 |
$9.21 - $14.25 | | |
| 202 |
|
5.2 years | | |
| 10 |
.25 |
| |
201 |
5.2 years | | |
| 10 |
.25 |
|
| |
|
| |
| |
| |
| |
| | |
| 3,194 |
|
| | |
$ | 7 |
.07 |
| |
2,049 |
|
|
|
$ |
7. |
35 |
|
| |
|
| |
| |
| |
| |
Aggregate intrinsic value (in thousands) | | |
$ | 12 |
|
| | |
| |
|
| $ |
-- |
|
| |
|
| |
| |
| |
| |
The aggregate intrinsic value in the table above is based on our closing stock price of $4.59 per share
as of December 31, 2007.
A summary of the status of the our nonvested shares as of December 31, 2007 and changes during the year
ended December 31, 2007 is as follows:
|
|
Nonvested Shares
|
Shares (000)
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at January 1, 2007 |
|
|
| -- |
|
$ | -- |
|
|
Granted | | |
| 135 |
|
| 4.75 |
|
|
Vested | | |
| -- |
|
| -- |
|
|
Forfeited | | |
| -- |
|
| -- |
|
|
|
| |
| |
|
Nonvested at December 31, 2007 | | |
| 135 |
|
$ | 4.75 |
|
|
|
| |
| |
J. INCOME TAXES
We file a consolidated tax return with our wholly-owned subsidiaries and also own varying interests in
numerous partnerships. A substantial portion of consolidated book income from continuing operations
before provision for income taxes and minority interest is not taxed at the corporate level as it
represents income attributable to other partners who are responsible for the tax on that income.
Accordingly, only the portion of income from these partnerships attributable to our ownership interests
is included in taxable income in the consolidated tax return and financial statements.
Components of income from continuing operations before income taxes are as follows:
|
|
|
Years Ended December 31,
|
|
($ in thousands)
|
2007
|
2006
|
2005
|
|
United States |
|
|
$ | (17,881 |
) |
$ | (19,947 |
) |
$ | 15,944 |
|
|
Foreign | | |
| 542 |
|
| (1,062 |
) |
| 1,491 |
|
|
|
| |
| |
| |
|
| | |
$ | (17,339 |
) |
$ | (21,009 |
) |
$ | 17,435 |
|
|
|
| |
| |
| |
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Income tax expense (benefit) consists of the following:
|
|
Years Ended December 31,
|
|
($ in thousands)
|
2007
|
2006
|
2005
|
|
Federal: |
|
|
| |
|
| |
|
| |
|
|
Current | | |
$ | -- |
|
$ | 681 |
|
$ | -- |
|
|
Deferred | | |
| (2,878 |
) |
| (4,877 |
) |
| 5,611 |
|
|
State: | | |
|
Current | | |
| 212 |
|
| 456 |
|
| 154 |
|
|
Deferred | | |
| (401 |
) |
| (582 |
) |
| 398 |
|
|
Foreign | | |
|
Current | | |
| -- |
|
| -- |
|
| 339 |
|
|
Deferred | | |
| 213 |
|
| (241 |
) |
| -- |
|
|
|
| |
| |
| |
|
| | |
$ | (2,854 |
) |
$ | (4,563 |
) |
$ | 6,502 |
|
|
|
| |
| |
| |
A reconciliation of expected income tax expense (computed by applying the United States statutory income
tax rate of 35% to earnings before income taxes) to total income tax expense in the accompanying
consolidated statements of income follows:
|
|
Years Ended December 31,
|
|
($ in thousands)
|
2007
|
2006
|
2005
|
|
Expected federal income tax |
|
|
$ | (6,069 |
) |
$ | (7,353 |
) |
$ | 6,102 |
|
|
State taxes | | |
| (123 |
) |
| (82 |
) |
| 359 |
|
|
Foreign rate differential | | |
| 17 |
|
| 130 |
|
| (183 |
) |
|
Goodwill impairment | | |
| 3,589 |
|
| 3,090 |
|
| -- |
|
|
Other | | |
| (268 |
) |
| (348 |
) |
| 224 |
|
|
|
| |
| |
| |
|
| | |
$ | (2,854 |
) |
$ | (4,563 |
) |
$ | 6,502 |
|
|
|
| |
| |
| |
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:
|
($ in thousands)
|
2007
|
2006
|
Deferred tax assets: |
|
|
| |
|
| |
|
Net operating loss carryforward | | |
$ | 9,193 |
|
$ | 3,754 |
|
Allowance for bad debts | | |
| 123 |
|
| 328 |
|
FAS 123(R) expense | | |
| 552 |
|
| 295 |
|
AMT Credit | | |
| 578 |
|
| 783 |
|
Capitalized costs | | |
| 1,105 |
|
| 707 |
|
Accrued expenses deductible for tax purposes when paid | | |
| 996 |
|
| 958 |
|
|
| |
| |
Total gross deferred tax assets | | |
| 12,547 |
|
| 6,825 |
|
Less valuation allowance | | |
| -- |
|
| -- |
|
|
| |
| |
Net deferred tax assets | | |
| 12,547 |
|
| 6,825 |
|
|
| |
| |
Deferred tax liabilities: | | |
Property and equipment, principally due to differences in depreciation | | |
| (894 |
) |
| (292 |
) |
Intangible assets, principally due to differences in amortization periods for tax purposes | | |
| (26,683 |
) |
| (24,632 |
) |
|
| |
| |
Total gross deferred tax liability | | |
| (27,577 |
) |
| (24,924 |
) |
|
| |
| |
Net deferred tax liability | | |
$ | (15,030 |
) |
$ | (18,099 |
) |
|
| |
| |
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
In assessing the realizablity of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this
assessment. In order to fully realize the deferred tax assets, we will need to generate future taxable
ordinary income approximating $26.1 million prior to the expiration of net operating loss. Based on
projections of future taxable income over the periods in which the deferred tax assets are deductible
and tax planning strategies, management believes it is more likely than not that we will realize the
benefits of these deductible differences at December 31, 2007. At December 31, 2007, we have federal
net operating loss carry forwards of approximately $26.1 million which are available to offset federal
taxable income in future years through 2027.
As a result of our merger with HealthTronics in 2004, we acquired certain tax benefits, a portion of
which are subject to limitations imposed by Section 382 of the Internal Revenue Code. These tax
benefits include built-in losses, which are available to offset future taxable income of approximately
$57.9 million, capital loss carry forwards which are available to offset future capital gain income
through 2008 of approximately $28 million, and net operating loss carry forwards which are available to
offset future taxable income through 2021 of approximately $27.6 million. Due to the uncertainty of our
ability to realize these tax benefits, there was no recognition of them in our purchase accounting at
the time of our acquisition. Accordingly, these tax benefits are not reflected as deferred tax assets in
our schedules above.
With regards to a portion of these tax benefits, in October 2005, we filed amended federal income tax
returns for the years ended December 31, 2000, 2001, 2002 and 2003 requesting refunds totaling $4.3
million. Additionally, we have utilized a portion of these tax benefits to determine our federal and
state income tax liabilities for the years ended December 31, 2004, 2005, and 2006. Due to the amounts
of our refund requests, we are currently under audit or review by the Internal Revenue Service for the
2000, 2001, 2002, 2003, 2004, 2005, and 2006 tax years.
Notwithstanding the likelihood of completion in 2008, management, at this time, is unable to determine
with any level of certainty that any of these tax benefits will be realized; accordingly, these tax
benefits have not been recognized for any purpose in these financial statements. Future recognition, if
any, of these tax benefits, net of a valuation allowance, will be credited to goodwill. Interest income
received as the result of our refund requests with the Internal Revenue Service, if any, will be
reported as interest income in the period in which the Internal Revenue Service determines we are
entitled to the refunds.
Effective January 1, 2007, we adopted Financial Accounting Board Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 specifies the way public companies are to account for
uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and
measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. Adoption
of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to our retained earnings.
At January 1, 2007, our unrecognized tax benefits totaled $2.3 million and are included in deferred and
other tax liabilities, none of which, if recognized in total, would impact the effective income tax rate.
A reconciliation of the beginning and ending amount of our unrecognized tax benefit is as follows:
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
($ in thousands) |
|
|
| |
|
|
|
Balance at beginning of year | | |
$ | 2,294 |
|
|
Additions based on tax positions related to the current year | | |
| -- |
|
|
Additions for tax positions of prior years | | |
| -- |
|
|
Reductions for tax provisions for prior years | | |
| -- |
|
|
Settlements | | |
| -- |
|
|
Reductions for lapse of statute of limitations | | |
| -- |
|
|
|
| |
|
Balance at end of year | | |
$ | 2,294 |
|
|
|
| |
Our continuing practice is to recognize interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. We had approximately $153,000 of accrued interest
and no accrued penalties at December 31, 2007. The accrued interest is included as a component of the
deferred tax liabilities noted above.
As previously stated above, we are under audit or review by the Internal Revenue Service for the 2000,
2001, 2002, 2003, 2004, 2005, and 2006 tax years. It is reasonable to expect that the examination phase
of the Internal Revenue Service audit may conclude in the next 12 months and that the related
unrecognized tax benefits for the tax positions taken in previously filed tax returns may differ from
recorded liabilities for uncertain tax positions in our financial statements at January 1, 2007.
However, based on the current status of the examination it is not possible to estimate the effect of any
such change to previously recorded uncertain tax positions.
Deferred taxes are not provided on undistributed earnings of foreign subsidiaries because such earnings
are expected to be indefinitely reinvested outside the United States. If these amounts were not
considered permanently reinvested, a cumulative deferred tax liability approximating $118,000 and
$50,000 would be provided for in 2007 and 2006, respectively.
K. SEGMENT REPORTING
We now have two reportable segments: urology services and medical products. Our specialty vehicle
manufacturing division, which was sold on July 31, 2006 was also considered a reportable segment prior
to its sale. The urology services segment provides services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory
compliance and contracting with payors, hospitals and surgery centers. Also in the urology segment, we
provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate
disease, we deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective
vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three
technologies apply an energy source which reduces the size of the prostate gland. Our medical products
segment manufactures, sells and maintains lithotripters and their related consumables. They also
manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management
tables, and are the exclusive U.S. distributor of the Revolix branded laser. The operations of our
Claripath pathology laboratory are also included in our medical products segment at this time.
The accounting policies of the segments are the same as those described in Note B, Summary of
Significant Accounting Policies. We measure performance based on the pretax income or loss after
consideration of minority interests from our operating segments, which do not include unallocated
corporate general and administrative expenses and corporate interest income and expense.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Our segments are divisions that offer different services, and require different technology and marketing
approaches. The majority of the urology services segment is comprised of acquired entities.
Substantially all of our revenues are earned in the United States and long-lived assets are located in
the United States. We do not have any major customers who account for more than 10% of our revenues.
|
($ in thousands)
|
Urology Services
|
|
Medical Products |
|
|
|
|
|
|
2007 |
|
|
| |
|
| |
|
Revenue from external customers | | |
$ | 122,736 |
|
$ | 17,101 |
|
Intersegment revenues | | |
| -- |
|
| 9,039 |
|
Interest income | | |
| 523 |
|
| 38 |
|
Interest expense | | |
| 767 |
|
| -- |
|
Depreciation and amortization | | |
| 8,116 |
|
| 2,322 |
|
Impairment of Goodwill | | |
| 20,800 |
|
| -- |
|
Segment profit (loss) | | |
| (10,991 |
) |
| 738 |
|
Segment assets | | |
| 285,239 |
|
| 37,732 |
|
Capital expenditures | | |
| 3,321 |
|
| 5,775 |
|
|
2006 | | |
Revenue from external customers | | |
$ | 123,265 |
|
$ | 19,080 |
|
Intersegment revenues | | |
| -- |
|
| 9,296 |
|
Interest income | | |
| 294 |
|
| 55 |
|
Interest expense | | |
| 872 |
|
| 1 |
|
Depreciation and amortization | | |
| 8,535 |
|
| 1,972 |
|
Impairment of Goodwill | | |
| 12,200 |
|
| 8,400 |
|
Segment profit (loss) | | |
| 1,346 |
|
| (11,586 |
) |
Segment assets | | |
| 293,119 |
|
| 37,065 |
|
Capital expenditures | | |
| 8,743 |
|
| 4,315 |
|
|
2005 | | |
Revenue from external customers | | |
$ | 133,360 |
|
$ | 18,202 |
|
Intersegment revenues | | |
| -- |
|
| 9,250 |
|
Interest income | | |
| 230 |
|
| 64 |
|
Interest expense | | |
| 834 |
|
| -- |
|
Depreciation and amortization | | |
| 9,707 |
|
| 855 |
|
Segment profit | | |
| 18,233 |
|
| 5,164 |
|
Segment assets | | |
| 314,887 |
|
| 43,319 |
|
Capital expenditures | | |
| 10,207 |
|
| 382 |
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The following is a reconciliation of revenues per above to the consolidated revenues per the
consolidated statements of income:
|
($ in thousands)
|
2007 |
|
2006
|
|
2005 |
|
|
|
|
|
|
|
|
Total revenues for reportable segments |
|
|
$ | 148,876 |
|
$ | 151,641 |
|
$ | 160,812 |
|
Corporate revenue | | |
| 581 |
|
| 546 |
|
| 705 |
|
Elimination of intersegment revenues | | |
| (9,039 |
) |
| (9,296 |
) |
| (9,250 |
) |
|
| |
| |
| |
Total consolidated revenues | | |
$ | 140,418 |
|
$ | 142,891 |
|
$ | 152,267 |
|
|
| |
| |
| |
The following is a reconciliation of profit per above to income before taxes per the consolidated
statements of income:
|
($ in thousands)
|
2007 |
|
2006
|
|
2005 |
|
|
|
|
|
|
|
|
Total profit (loss) for reportable segments |
|
|
$ | (10,253 |
) |
$ | (10,240 |
) |
$ | 23,397 |
|
Corporate revenue | | |
| 581 |
|
| 546 |
|
| 705 |
|
Unallocated corporate expenses: | | |
General and administrative | | |
| (7,519 |
) |
| (10,680 |
) |
| (5,634 |
) |
Net interest expense | | |
| 522 |
|
| 133 |
|
| (150 |
) |
Other, net | | |
| (670 |
) |
| (768 |
) |
| (883 |
) |
|
| |
| |
| |
Unallocated corporate expenses total | | |
| (7,667 |
) |
| (11,315 |
) |
| (6,667 |
) |
|
| |
| |
| |
Income (loss) before income taxes | | |
$ | (17,339 |
) |
$ | (21,009 |
) |
$ | 17,435 |
|
|
| |
| |
| |
The following is a reconciliation of segment assets per above to the consolidated assets per the
consolidated balance sheets:
|
($ in thousands)
|
2007 |
|
2006
|
|
2005 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
$ | 322,971 |
|
$ | 330,184 |
|
$ | 358,206 |
|
Unallocated corporate assets | | |
| 13,085 |
|
| 16,549 |
|
| 124,831 |
|
|
| |
| |
| |
Consolidated total | | |
$ | 336,056 |
|
$ | 346,733 |
|
$ | 483,037 |
|
|
| |
| |
| |
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The reconciliation of the other significant items to the amounts reported in the consolidated financial
statements is as follows:
|
($ in thousands)
|
Segments
|
Corporate
|
Eliminating Entries
|
Consolidated
|
2007 |
|
|
| |
|
| |
|
| |
|
| |
|
Interest and dividends | | |
$ | 561 |
|
$ | 585 |
|
$ | -- |
|
$ | 1,146 |
|
Interest expense | | |
| 767 |
|
| 62 |
|
| -- |
|
| 829 |
|
Depreciation and amortization | | |
| 10,438 |
|
| 669 |
|
| -- |
|
| 11,107 |
|
Capital expenditures | | |
| 9,096 |
|
| 373 |
|
| -- |
|
| 9,469 |
|
|
2006 | | |
Interest and dividends | | |
$ | 349 |
|
$ | 406 |
|
$ | -- |
|
$ | 755 |
|
Interest expense | | |
| 873 |
|
| 273 |
|
| -- |
|
| 1,146 |
|
Depreciation and amortization | | |
| 10,507 |
|
| 768 |
|
| -- |
|
| 11,275 |
|
Capital expenditures | | |
| 13,058 |
|
| 202 |
|
| (1,358 |
) |
| 11,902 |
|
|
2005 | | |
Interest and dividends | | |
$ | 294 |
|
$ | 250 |
|
$ | (96 |
) |
$ | 448 |
|
Interest expense | | |
| 834 |
|
| 401 |
|
| (96 |
) |
| 1,139 |
|
Depreciation and amortization | | |
| 10,562 |
|
| 882 |
|
| -- |
|
| 11,444 |
|
Capital expenditures | | |
| 10,589 |
|
| 535 |
|
| (546 |
) |
| 10,578 |
|
The amounts in 2007, 2006 and 2005 for interest income and expense, depreciation and amortization and
capital expenditures represent amounts recorded by the operations of our corporate functions, which have
not been allocated to the segments.
L. DISCONTINUED OPERATIONS
In November, 2006 we announced our decision to discontinue our involvement in the clinical trials of the
Ablatherm device manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the
exclusive rights in the United States, when and if a Pre-Market Approval is granted by the FDA and
forfeits our rights to earn additional warrants to EDAP common stock. We have accordingly included our
costs related to the clinical trials in discontinued operations in the accompanying consolidated
statements of income.
In the fourth quarter of 2006, we committed to a plan to sell our Rocky Mountain Prostate
Thermotherapies (RMPT) business. In July 2007, we entered into a purchase agreement to sell the RMPT
business for $1.35 million. This sale closed on September 28, 2007. We classified this business as
held for sale in the accompanying 2006 consolidated balance sheet and included its results from
operations in discontinued operations.
On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc. (AMPI).
Under the terms of the sale, we received approximately 10% of the outstanding shares of AMPI as
consideration. Due to the uncertainty of any future distributions, we have assigned no value to this
investment in a closely held private company. We have included the operations of this business in
discontinued operations in the accompanying consolidated statements of income.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
During the second quarter 2006, we committed to a plan to sell our specialty vehicle manufacturing
segment. On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which
Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We
completed this sale on July 31, 2006, and recognized a gain on the sale totaling $53.6 million. This
gain utilized approximately $20.4 million of our deferred tax assets. Our specialty vehicle
manufacturing segment has been reported in discontinued operations for all periods presented.
The following table details selected financial information included in income (loss) from discontinued
operations in the consolidated statements of income for December 31, 2007, 2006 and 2005.
Consolidated Statements of Income
|
|
|
|
|
($ in thousands)
|
2007
|
2006
|
2005
|
For the Year Ended December 31 |
|
|
| |
|
| |
|
| |
|
Revenue | | |
Specialty Vehicles Manufacturing | | |
$ | -- |
|
$ | 57,526 |
|
$ | 109,447 |
|
CryoSurgery | | |
| -- |
|
| 1,490 |
|
| 2,589 |
|
Rocky Mountain Prostate Thermotherapies | | |
| 3,268 |
|
| 4,289 |
|
| 3,391 |
|
Orthotripsy | | |
| -- |
|
| -- |
|
| 6,613 |
|
HIFU | | |
| -- |
|
| -- |
|
| -- |
|
Cost of services | | |
Specialty Vehicles Manufacturing | | |
| -- |
|
| (51,616 |
) |
| (98,170 |
) |
CryoSurgery | | |
| -- |
|
| (1,235 |
) |
| (1,780 |
) |
Rocky Mountain Prostate Thermotherapies | | |
| (3,739 |
) |
| (4,587 |
) |
| (2,976 |
) |
Orthotripsy | | |
| -- |
|
| -- |
|
| (7,714 |
) |
HIFU | | |
| (216 |
) |
| (1,233 |
) |
| (192 |
) |
Depreciation and amortization | | |
Specialty Vehicles Manufacturing | | |
| -- |
|
| (542 |
) |
| (1,215 |
) |
CryoSurgery | | |
| -- |
|
| (512 |
) |
| (558 |
) |
Rocky Mountain Prostate Thermotherapies | | |
| -- |
|
| (224 |
) |
| (84 |
) |
Orthotripsy | | |
| -- |
|
| -- |
|
| (280 |
) |
HIFU | | |
| (3 |
) |
| (17 |
) |
| (3 |
) |
Other | | |
Specialty Vehicles Manufacturing | | |
| -- |
|
| (72 |
) |
| (109 |
) |
CryoSurgery | | |
| -- |
|
| (118 |
) |
| (229 |
) |
Rocky Mountain Prostate Thermotherapies | | |
| -- |
|
| (4 |
) |
| -- |
|
Orthotripsy | | |
| -- |
|
| -- |
|
| (1,077 |
) |
HIFU | | |
| -- |
|
| -- |
|
| -- |
|
|
| |
| |
| |
Income (loss) from discontinued operations | | |
$ | (690 |
) |
$ | 3,145 |
|
$ | 7,653 |
|
|
| |
| |
| |
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
($ in thousands)
|
Year Ended December 31,
|
|
2007
|
2006
|
2005
|
Gain on sale of specialty vehicle manufacturing |
|
|
$ | -- |
|
$ | 53,551 |
|
$ | -- |
|
Gain on Sale of Rocky Mountain Prostate Thermotherapy | | |
| 451 |
|
Loss from disposal of cryosurgery operations | | |
| -- |
|
| (3,729 |
) |
| -- |
|
Impairment of Rocky Mountain Prostate Thermotherapy | | |
| -- |
|
| (4,263 |
) |
| -- |
|
Income from discontinued operations | | |
| (690 |
) |
| 3,145 |
|
| 7,653 |
|
Interest allocated to discontinued operations | | |
| -- |
|
| (4,830 |
) |
| (10,648 |
) |
Income tax (expense) benefit on discontinued operations | | |
| 92 |
|
| (18,745 |
) |
| 1,250 |
|
|
| |
| |
| |
Income (loss) from discontinued operations, net of tax | | |
$ | (147 |
) |
$ | 25,129 |
|
$ | (1,745 |
) |
|
| |
| |
| |
Assets and liabilities held for sale as of December 31, 2006 relate entirely to our RMPT operations and
primarily consist of accounts receivable, supplies and accrued expenses.
Pursuant to EITF 87-24 Allocation of Interest to Discontinued Operations, we have allocated certain
interest and the related fees incurred to refinance our senior credit facility that was required to be
repaid as a result of the disposal of our specialty vehicle manufacturing segment. Accordingly, we have
included in discontinued operations interest expense totaling $4,830,000 and $7,806,000 for the years
ended December 31, 2006 and 2005. We have also included loan fees and bond call premium of $2,842,000
year ended December 31, 2005, which were incurred solely related to the refinancing of the debt which
was required to be repaid.
The gain on sale of our specialty vehicle manufacturing operations, the loss from disposal of our
cryosurgery operations, and the impairment of Rocky Mountain Prostate Thermotherapy, noted above,
include charges to goodwill of $50.4 million, $2.7 million and $3.25 million, respectively.
In the fourth quarter of 2004, we decided to divest our orthopaedics business unit. In July 2005, we
sold our orthopaedics business unit to SanuWave, Inc., a company controlled by Prides Capital Partners
L.L.C., a related party. Under the terms of the sale we received $6.4 million in cash, two $2 million
unsecured notes and a small passive ownership interest in the acquiring entity. The notes bear interest
at 6% per annum with no payments for the first five years, then interest only payments for the next five
years with a balloon payment after ten years. Due to the uncertainty of future estimated collections, we
have assigned no value to the notes or the ownership interest. Prior to this divesture, we provided
approximately $700,000 of maintenance services to our orthopaedics business unit which were eliminated
in consolidation. Subsequent to this sale, we have provided limited assistance to SanuWave, Inc. related
to certain sales and service operations. We were paid $100,000 per month from August 2005 until January
2006 related to these services. At December 31, 2007 and 2006, SanuWave, Inc. owed us a net amount of
approximately $52,000 and $1,000,000, respectively. We terminated all sales operations effective April
30, 2006.
As part of the merger between Prime and HSS in November 2004, HSS had a minority owned Swiss subsidiary,
HMT Holding AG (HMT), which was in a net liability position at the date of acquisition. In December
2004, we decided to no longer fund the operations of HMT as part of our plan to rationalize its acquired
manufacturing activities. Also in December 2004, the directors of HMT received a letter from their
external auditors informing them HMT was over-indebted. Based on this action, the directors had a
statutory obligation to initiate insolvency proceedings and in January 2005 filed for relief under Swiss
insolvency laws. We deconsolidated the operations of HMT in December 2004.
|
HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
We purchased debt of HMT AG in the first quarter of 2005. We paid $1.3 million and incurred certain
contingent obligations in the amount of $350,000 in return for assignment of a $5.1 million claim
against HMT AG held by a foreign bank. In addition to the claim, we also received an assignment from the
bank of a pledge of HMT AGs accounts receivable that secured the $5.1 million claim. Through
December 31, 2007, we had recovered approximately $2.8 million. Any additional recoveries in the future
will be recorded as income when received.
M. VARIABLE INTEREST ENTITIES
We have determined that one of our consolidated partnerships, acquired in the HSS merger and in which we
have a 20% interest, has certain related party relationships with two Variable Interest Entities (VIE),
and in accordance with FIN 46(R), has consolidated those entities. As a result of consolidating the
VIEs, of which the partnership is the primary beneficiary, we have recognized minority interest of
approximately $1 million on our consolidated balance sheets at December 31, 2007 and 2006, which
represents the difference between the assets and the liabilities recorded upon the consolidation of the
VIEs. The liabilities recognized as a result of consolidating the VIEs do not represent additional
claims on our general assets. Rather, they represent claims against the specific assets of the
consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not
represent additional assets that could be used to satisfy claims against our general assets. Reflected
on our consolidated balance sheet are $4 million and $3.6 million in both 2007 and 2006, respectively,
of VIE assets, representing all of the assets of the VIEs. The VIEs assist the partnership in providing
urological services, minimally invasive prostate treatments, and other services in the Greater New York
metropolitan area.
N. RELATED PARTY TRANSACTIONS
On July 27, 2006, John Q. Barnidge resigned, effective August 10, 2006, from his positions as our Senior
Vice President and Chief Financial Officer. In connection with his departure, we entered into a
severance and non-competition agreement with Mr. Barnidge whereby (1) we agreed to make a severance
payment of $310,000 to Mr. Barnidge and (2) Mr. Barnidge agreed to a four-year non-competition provision
in exchange for a payment from us equal to $150,000 for each year under the non-competition provision.
Such Payment totaled $910,000 was expensed when paid on August 10, 2006.
In March 2006, we and Argil J. Wheelock, M.D., our then chairman of the board, amended Dr. Wheelocks
board service and release agreement to provide that he would receive the $1,410,000 severance payment
referred to in that agreement upon his no longer serving as our chairman of the board. After the
amendment, Dr. Wheelock resigned from his position as chairman of the board, and we paid him the
severance amount. Dr. Wheelock continues to serve as a member of our board of directors and will
continue to be paid his monthly board service compensation set forth in his board service agreement.
|
GRAPHIC
2
chart.gif
GRAPHIC
begin 644 chart.gif
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`
end
EX-21
3
ex211.htm
Exhibit 21.1
EXHIBIT 21.1
SUBSIDIARIES OF HEALTHTRONICS, INC.
As of February 28, 2008
Name of Subsidiary
(doing business as)
|
| |
State of Incorporation
or Organization
|
HealthTronics Service Center, LLC., | | |
Delaware | | |
Lithotripters, Inc., | | |
North Carolina | | |
Medstone International, Inc., | | |
Delaware | | |
Prime Kidney Stone Treatment, Inc., | | |
New Jersey | | |
Prime Lithotripter Operations, Inc., | | |
New York | | |
Prime Lithotripsy Services, Inc., | | |
New York | | |
Prime Management, Inc. | | |
Nevada | | |
Prime Medical Operating, Inc., | | |
Delaware | | |
Sun Medical Technologies, Inc., | | |
California | | |
HealthTronics Group, L.P., | | |
Delaware | | |
Surgicenter Management, Inc., | | |
Delaware | | |
HT Lithotripsy Management Company, L.L.C., | | |
Delaware | | |
HT Prostate Therapy Management Company, L.L.C., | | |
Delaware | | |
Litho Group, Inc., | | |
Delaware | | |
Florida Lithology No. 2, Inc., | | |
Florida | | |
HT Prostate Services, L.L.C., | | |
Delaware | | |
West Coast Cambridge, Inc., | | |
California | | |
Integrated Lithotripsy of Georgia, Inc., | | |
Georgia | | |
Midwest Cambridge Inc., | | |
Illinois | | |
T2 Lithotripter Investment, Inc., | | |
Delaware | | |
AmCare Health Services, Inc., | | |
Pennsylvania | | |
AMCARE, Inc., | | |
California | | |
N.Y.L.S.A. #4 Inc., | | |
Delaware | | |
Integrated Hearing Services, Inc., | | |
Delaware | | |
NGST, Inc., | | |
Tennessee | | |
Dallas Lithotripsy L.P. | | |
Texas | | |
Southern California Stone Center, L.L.C. | | |
California | | |
Mobile Kidney Stone Centers, Ltd. | | |
California | | |
Fayetteville Lithotripters Limited Partnership - Arkansas I | | |
Arkansas | | |
Reston Lithotripsy L.P. | | |
Virginia | | |
Metro Lithotripsy L.P. | | |
Georgia | | |
Louisiana Lithotripters Investment Limited Partnership | | |
Louisiana | | |
Fayetteville Lithotripters Limited Partnership - Louisiana I | | |
Louisiana | | |
San Diego Lithotripters Limited Partnership | | |
California | | |
Northern Nevada Lithotripsy Associates, LLC | | |
Nevada | | |
Fayetteville Lithotripters Limited Partnership - South Carolina II | | |
South Carolina | | |
Tennessee Lithotripters Limited Partnership | | |
Tennessee | | |
Texas Lithotripsy Limited Partnership V L.P. | | |
Texas | | |
Utah Lithotripsy L.P. | | |
Utah | | |
Fayetteville Lithotripters Limited Partnership - Virginia I | | |
Virginia | | |
Texas Lithotripsy Limited Partnership III L.P. | | |
Texas | | |
Great Lakes Lithotripsy Partnership, L.P. | | |
Wisconsin | | |
South Orange County Lithotripters, LLC | | |
California | | |
Red River Urological Services L.P. | | |
Texas | | |
Washington Urological Services, LLC | | |
Washington | | |
Wyoming Urological Services, LP | | |
Wyoming | | |
Mobile Kidney Stone Centers of Calif. II, L.P. | | |
California | | |
Mobile Kidney Stone Centers of Calif., III, L.P. | | |
California | | |
Kentucky I Lithotripsy, LLC | | |
Kentucky | | |
Western Kentucky Lithotripters LP | | |
Kentucky | | |
Mississippi Lithotripters LP | | |
Mississippi | | |
Texas Lithotripsy LP VIII | | |
Texas | | |
Greater Atlanta Lithotripsy, LLC | | |
Georgia | | |
West Coast Litho Services, LLC | | |
California | | |
Galaxy Lithotripsy, LLC | | |
Georgia | | |
New Jersey Kidney Stone Center, LLC | | |
New Jersey | | |
Alaska Extracorporeal Shockwave Therapy, LLC | | |
Alaska | | |
High Plains Lithotripsy, LLC | | |
Nebraska | | |
Florida Lithology, LTD | | |
Florida | | |
Greater Nebraska Lithotripsy, LLC | | |
Nebraska | | |
Midwest Urologic Stone Unit, Limited Partnership | | |
Minnesota | | |
Bay Area Partners, Ltd. | | |
Florida | | |
West Florida Urology, LLC | | |
Florida | | |
Allied Urological Services, LLC | | |
New York | | |
Georgia Litho Group, LLLP | | |
Georgia | | |
Gulf South Lithotripsy | | |
Louisiana | | |
Gulf Coast II Lithotripsy, L.P. | | |
Louisiana | | |
Kansas Lithotripsy, LLC | | |
Kansas | | |
Lithotripsy of Northern Indiana | | |
Indiana | | |
Lithotripsy Institute of Indiana | | |
Indiana | | |
Mobile Bay Lithotripsy Partners | | |
Alabama | | |
South Kansas Lithotripsy | | |
Kansas | | |
Sullivan County Lithotripsy Services | | |
Tennessee | | |
Advanced Urology Services, LLC | | |
Delaware | | |
Prostate Therapy Associates | | |
Louisiana | | |
Cryopartners | | |
Delaware | | |
New Jersey Urological Services, LLC | | |
New Jersey | | |
KCPR, LLC | | |
Texas | | |
HealthTronics GmbH | | |
Switzerland | | |
Sunshine Urological Services, LP | | |
Texas | | |
Montana Urological Services, LLC | | |
Texas | | |
Cobb Laser Services, LLC | | |
Delaware | | |
Cobb Stone Treatment Center | | |
Delaware | | |
OKS Prostate Services, LLC | | |
Delaware | | |
Sacramento ESL Services, LLC | | |
Texas | | |
Cascade Laser Services, LLC | | |
Washington | | |
Claripath Labs, Inc. | | |
Delaware | | |
HealthTronics Medical, LLC | | |
Delaware | | |
South Orange West Coast Litho JV | | |
California | | |
Treasure Valley Urological Services, LLC | | |
Idaho | | |
Buckeye Urological Services, LP | | |
Texas | | |
Tenn-Ga Stone Group II, LP | | |
Tennessee | | |
Great Lakes Laser Services, LP | | |
Texas | | |
Greater Alabama Lithotripsy, LLC | | |
Alabama | | |
Promobile Therapies, LLC | | |
Indiana | | |
East Tennessee Prostate Services, LP | | |
Tennessee | | |
Beltway Urology Services LP | | |
Texas | | |
Northeast Tennessee Lithotripsy Partners, LP | | |
Delaware | | |
SI Lithotripsy, LLC | | |
Texas | | |
Rocky Mountain Laser, LP | | |
Delaware | | |
HealthTronics Total Rad, LLC | | |
Delaware | | |
Total Rad OpCo, LLC | | |
Delaware | | |
Keystone ABG, LLC | | |
Pennsylvania | | |
Keystone Mobile Partners, LP | | |
Pennsylvania | | |
Diamond State Lithotripsy, LLC | | |
Delaware | | |
San Diego Urology, LLC | | |
Delaware | | |
EX-23
4
exh231.htm
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
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We consent to the incorporation by reference the following Registration Statements:
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1. |
Registration Statement (Form S-8 No. 333-31820) pertaining to the HealthTronics, Inc. stock option plan;
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2. |
Registration Statement (Form S-8 No. 333-43412) pertaining to the HealthTronics Surgical Services, Inc.
2000 stock option plan;
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3. |
Registration Statement (Form S-8 No. 333-68292) pertaining to the HealthTronics Surgical Services, Inc.
2001 stock option plan;
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4. |
Registration Statement (Form S-8 No. 333-104403) pertaining to the HealthTronics Surgical Services, Inc.
2002 stock option plan;
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5. |
Registration Statement (Form S-8 No. 333-120430) pertaining to the Prime Medical Services, Inc. 2003
stock option plan and 1993 stock option plan;
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6. |
Registration Statement (Form S-8 No. 333-126301) pertaining to the HealthTronics, Inc. 2004 equity
incentive plan;
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7. |
Registration Statement (Form S-8 No. 333-135100) pertaining to the HealthTronics, Inc. 2004 equity
incentive plan;
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8. |
Registration Statement (Form S-3 No. 333-106867) of HealthTronics, Inc.; and
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9. |
Registration Statement (Form S-3 No. 333-114221) of HealthTronics, Inc.
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of our reports dated March 6, 2008, with respect to the consolidated financial statements of
HealthTronics, Inc., and the effectiveness of internal control over financial reporting of
HealthTronics, Inc., included in this Annual Report (Form 10-K) of HealthTronics, Inc. for the year
ended December 31, 2007.
/s/ Ernst & Young LLP
Austin, Texas
March 6, 2008
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EX-23
5
exh232.htm
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
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The Board of Directors
HealthTronics, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-31820, 333-43412,
333-68292, 333-104403, 333-120430, 333-126301 and 333-135100) on Form S-8 and (Nos.
333-106867,333-114221) on Form S-3 of HealthTronics, Inc. of our report dated April 13, 2006, except as
to Note L, 2005 information related to Specialty Vehicles and Manufacturing, CryoSurgery, Rocky Mountain
Prostrate Thermotherapies, and HIFU discontinued operations, which is as of March 12, 2007, with respect
to consolidated statements of income, stockholders equity, and cash flows for the year ended December
31, 2005, which report appears in the December 31, 2007 annual report on Form 10-K of HealthTroncis, Inc.
/s/ KPMG
Ausitn, Texas
March 10, 2008
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EX-31
6
ex311.htm
Exhibit 31.1
I, James S. B. Whittenburg, President and Chief Executive Officer of HealthTronics, Inc., certify that:
1. |
I have reviewed this annual report on Form 10-K of HealthTronics, Inc.;
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
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3. |
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
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4. |
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting; and
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5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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Date:
March 11, 2008
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|
By: /s/ James S. B. Whittenburg James S. B. Whittenburg President and Chief Executive Officer |
EX-31
7
ex312.htm
Exhibit 31.2
I, Ross A. Goolsby, Chief Financial Officer of HealthTronics, Inc., certify that:
1. |
I have reviewed this annual report on Form 10-K of HealthTronics, Inc.;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting; and
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
Date:
March 11, 2008
|
|
By: /s/ Ross A. Goolsby Ross A. Goolsby
Chief Financial Officer
|
EX-32
8
exh321.htm
Exhibit 32.1
Certification of
Chief Executive Officer
of HealthTronics, Inc.
|
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies
the annual report on Form 10-K (the Form 10-K) for the year ended December 31, 2007 of HealthTronics,
Inc., a Georgia corporation (the Issuer).
I, James S.B. Whittenburg, the President and Chief Executive Officer of the Issuer, certify that to the
best of my knowledge:
|
|
(i) |
the Form 10-K fully complies with the requirements of section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
|
|
(ii) |
the information contained in the Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of the Issuer.
|
Dated: March 11, 2008
|
/s/ James S. B. Whittenburg
James S. B. Whittenburg
President and Chief Executive Officer
HealthTronics, Inc.
|
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and is not being filed as part of the Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form within the electronic
version of this written statement required by Section 906, has been provided to the Issuer and will be
retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.
|
EX-32
9
exh322.htm
Exhibit 32.2
Certification of
Chief Financial Officer
of HealthTronics, Inc.
|
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies
the annual report on Form 10-K (the Form 10-K) for the year ended December 31, 2007 of HealthTronics,
Inc., a Georgia corporation (the Issuer).
I, Ross A. Goolsby, Chief Financial Officer of the Issuer, certify that to the best of my knowledge:
|
|
(i) |
the Form 10-K fully complies with the requirements of section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
|
|
(ii) |
the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Issuer.
|
Dated: March 11, 2008
|
/s/ Ross A. Goolsby
Ross A. Goolsby
Chief Financial Officer
HealthTronics, Inc.
|
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and is not being filed as part of the Form 10-K or as a separate disclosure document.
A signed original of this written statement required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form within the electronic
version of this written statement required by Section 906, has been provided to the Issuer and will be
retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.
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