_______________________________________________________
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, 2006
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)
GEORGIA | 58-2210668 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1301 Capitol of Texas Highway, Suite B-200, Austin, TX 78746
(Address of principal executive office) (Zip code)
(512) 328-2892
(Registrant’s 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 Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES __ NO X Aggregate Market Value at June 30, 2006: $ 217,851,000 |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. |
Title of Each Class Common Stock, no par value | Number of Shares Outstanding at February 28, 2007 35,379,831 |
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant’s definitive proxy material for the 2007 annual meeting of stockholders are incorporated by reference into Part III of the Form 10-K. |
HEALTHTRONICS, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 PART I |
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ITEM 1. BUSINESS
General
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, Prime’s stockholders received one share of HealthTronics common stock for each share of Prime common stock they owned. Immediately following the merger, Prime’s stockholders owned approximately 62% of the outstanding shares of HealthTronics common stock, and Prime’s directors and senior management represented a majority of the combined company’s 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. |
Urology
Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 procedures in the U.S. We do not render any medical services. Rather, the physicians do. |
2 |
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 $2,000, respectively, for both 2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements. |
• | 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. 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. | |
• | 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. |
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. |
| • | 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. |
• | Fees for equipment sales, consumable sales and licensing applications . We manufacture, sell and maintain lithotripters and certain medical tables. 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. |
3 |
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. |
4 |
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. |
• | the federal False Claims Act; | |
• | the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions; | |
• | federal and state billing and claims submission laws and regulations; | |
• | the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to patient privacy; | |
• | the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law; | |
• | state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; and | |
• | federal and state laws governing the equipment we use in our business concerning patient safety and equipment operating specifications. |
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 management’s attention from the operation of our business. |
5 |
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 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. |
6 |
We are subject to extensive federal and state health care regulation. |
7 |
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. |
8 |
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. |
• | future announcements concerning us, our competition or the health care services market generally; | |
• | developments relating to our relationships with hospitals, other health care facilities, or physicians; | |
• | 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; | |
• | sales of stock by insiders; | |
• | news reports relating to trends in our markets; | |
• | acquisitions and financings in our industry; and | |
• | 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. |
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• | diversion of management’s 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. |
10 |
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: |
• | 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; | |
• | 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; | |
• | potential product liability claims for any defective goods that are distributed; and | |
• | 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. |
• | incur additional debt or liens; | |
• | make payments in respect of or redeem or acquire any debt or equity issued by us; | |
• | sell assets; | |
• | make loans or investments; | |
• | acquire or be acquired by other companies; and | |
• | amend some of our contracts. |
Our level of indebtedness could have important consequences to you. For example, it could: |
• | increase our vulnerability to general adverse economic and industry conditions; |
11 |
• | 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; | |
• | limit our flexibility in planning for, or reacting to, changes in the industry in which we operate; and | |
• | 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. |
Name | Age | Position | |
---|---|---|---|
Sam B. Humphries | 63 | Chief Executive Officer and President | |
Ross A. Goolsby | 39 | Chief Financial Officer and Senior Vice President | |
James S.B. Whittenburg | 35 | President –Urology Services | |
Christopher B. Schneider | 39 | President – Medical Products |
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Name | Age | Position | |
---|---|---|---|
Richard A. Rusk | 45 | 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. |
13 |
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. |
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PART II |
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ITEM 5. MARKET FOR REGISTRANT’S 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, 2006 and 2005 (NASDAQ Symbol “HTRN”). |
2006 | 2005 | |||||||||||||
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High | Low | High | Low | |||||||||||
First Quarter | $ | 8 | .60 | $ | 7 | .08 | $ | 11 | .71 | $ | 9 | .35 | ||
Second Quarter | $ | 8 | .50 | $ | 6 | .67 | $ | 13 | .84 | $ | 10 | .95 | ||
Third Quarter | $ | 7 | .60 | $ | 5 | .97 | $ | 13 | .99 | $ | 9 | .67 | ||
Fourth Quarter | $ | 7 | .38 | $ | 6 | .10 | $ | 10 | .00 | $ | 6 | .49 |
On January 25, 2007, we had 617 holders of record of our common stock. |
(a) | (b) | (c) | |||||||||
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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 | 361,169 | $ | 7 | .46 | -- | ||||||
Prime 2003 stock option plan | 129,000 | $ | 5 | .84 | -- | ||||||
HSS equity incentive plan and stock | |||||||||||
option plans | 3,417,278 | $ | 7 | .36 | 683,165 | ||||||
Other equity compensation plans | |||||||||||
approved by our security holders | N/A | N/A | N/A |
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Performance Graph |
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, 2006, 2005, 2004 and 2003, (b) our unaudited consolidated statements of income and cash flows for the year ended December 31, 2002, (c) our audited consolidated balance sheets as of December 31, 2006, 2005 and 2004, (d) our unaudited consolidated balance sheets as of December 31, 2003 and 2002, and (e) 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 2006 and 2005. 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, 2006, 2005 and 2004 and Prime’s financial condition as of December 31, 2003 and 2002. You should read this financial information in conjunction with “Management’s 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. |
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(In thousands, except per share data) | Years Ended December 31, | ||||||||||||||||
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2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
Revenues: | |||||||||||||||||
Urology Services | $ | 123,265 | $ | 133,360 | $ | 75,361 | $ | 58,702 | $ | 69,498 | |||||||
Medical Products | 19,080 | 18,202 | 10,846 | 1,714 | 803 | ||||||||||||
RVC | -- | -- | -- | -- | 10,143 | ||||||||||||
Other | 546 | 705 | 936 | 1,022 | 739 | ||||||||||||
Revenues from continuing operations | $ | 142,891 | $ | 152,267 | $ | 87,143 | $ | 61,438 | $ | 81,183 | |||||||
Income (loss) from: | |||||||||||||||||
Continuing Operations | (16,446 | ) | 10,933 | 5,261 | 6,301 | (1,982 | ) | ||||||||||
Discontinued Operations | 25,129 | (1,745 | ) | (3,908 | ) | 121 | 2,483 | ||||||||||
Net income | $ | 8,683 | (1) | $ | 9,188 | $ | 1,353 | (2) | $ | 6,422 | $ | 501 | (3) | ||||
Diluted earnings (loss) per share: | |||||||||||||||||
Continuing Operations | $ | (0.47 | ) | $ | 0.31 | $ | 0.24 | $ | 0.36 | $ | (0.12 | ) | |||||
Discontinued Operations | $ | 0.72 | $ | (0.05 | ) | $ | (0.18 | ) | $ | 0.01 | $ | 0.15 | |||||
Total | $ | 0.25 | $ | 0.26 | $ | 0.06 | $ | 0.37 | $ | 0.03 | |||||||
Dividends per share | None | None | None | None | None | ||||||||||||
Total assets | $ | 346,733 | $ | 483,037 | $ | 474,158 | $ | 279,378 | $ | 265,050 | |||||||
Long-term obligations (a) | $ | 6,063 | $ | 129,980 | $ | 114,442 | $ | 113,125 | $ | 118,306 | |||||||
(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 | ||||||||||
2006 | (unaudited) | |||||||||||||
Revenues | $ | 37,106 | $ | 36,474 | $ | 35,863 | $ | 33,448 | ||||||
Net income (loss) | $ | 1,273 | $ | 1,368 | $ | 31,177 | (1) | $ | (25,135 | )(1) | ||||
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 |
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Quarterly Data | Quarter Ended | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share data) | March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||
2005 | (unaudited) | ||||||||||||||||
Revenues | $ | 34,943 | $ | 37,821 | $ | 41,339 | $ | 38,164 | |||||||||
Net income | $ | 1,534 | $ | 2,575 | $ | 3,131 | $ | 1,948 | |||||||||
Per share amounts (basic): | |||||||||||||||||
Net income | $ | 0.05 | $ | 0.08 | $ | 0.09 | $ | 0.06 | |||||||||
Weighted average shares outstanding | 33,315 | 34,040 | 34,889 | 34,976 | |||||||||||||
Per share amounts (diluted): | |||||||||||||||||
Net income | $ | 0.04 | $ | 0.07 | $ | 0.09 | $ | 0.06 | |||||||||
Weighted average shares outstanding | 34,316 | 35,218 | 35,789 | 35,379 | |||||||||||||
(1) 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 is 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. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements |
18 |
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 |
19 |
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. |
• | 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. | |
• | 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. |
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. |
• | 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. | |
• | Fees for equipment sales, consumable sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables. 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 devices and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. |
Recent Developments |
20 |
On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc., a closely held private company (AMPI). We used the proceeds from the sale to acquire approximately 10% of the outstanding shares of AMPI. Due to the uncertainty of any future distributions related to our AMPI shares, we have assigned no value to this investment. |
21 |
Year ended December 31, 2006 compared to the year ended December 31, 2005 |
22 |
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. |
23 |
2007 Outlook |
24 |
Senior Credit Facility |
25 |
General |
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) | $ | 11,357 | $ | 5,677 | $ | 4,494 | $ | 1,152 | $ | 34 | |||||||
Operating Leases (2) | 7,552 | 1,721 | 2,885 | 2,015 | 931 | ||||||||||||
Non-compete contracts (3) | 642 | 508 | 134 | -- | -- | ||||||||||||
Total | $ | 19,551 | $ | 7,906 | $ | 7,513 | $ | 3,167 | $ | 965 | |||||||
(1) | Represents long term debt as discussed above. |
(2) | Represents operating leases in the ordinary course of our business. |
(3) | Represents an obligation of $375 due to the previous owner of one of our subsidiaries, at a rate of $75 per quarter, an obligation of $142 due to an employee of Medstone, at a rate of $21 per month until February 28, 2007 and $4 beginning March 1, 2007 and continuing until February 28, 2009, an obligation of $83 due to a previous employee of HealthTronics, at a rate of $8 per month until October 31, 2007 and an obligation of $42 due to a previous employee of HealthTronics, at a rate of $4 per month until October 31, 2007. |
(4) | Represents the estimated liability, in accordance with SFAS No. 150, of the “put” rights discussed in “Recent Developments” under this Item 7. |
In addition, the scheduled principal repayments for all long term debt as of December 31, 2006 are payable as follows: |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2007 | $ | 5,677 | ||||
2008 | 2,651 | |||||
2009 | 1,843 | |||||
2010 | 883 | |||||
2011 | 269 | |||||
Thereafter | 34 | |||||
Total | $ | 11,357 | ||||
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. |
26 |
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. |
27 |
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. We adopted SFAS 154 effective January 1, 2006, and this adoption did not have a material effect on our financial position or results of operations. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk |
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
None. |
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures |
28 |
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. |
ITEM 9B. OTHER INFORMATION
In connection with the audit of our 2006 financial statements, we determined that goodwill related to our urology services and medical products segments was impaired. We recognized in the fourth quarter of 2006, goodwill impairment of approximately $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment of our urology services segment is due primarily to a decrease in the number of overall lithotripsy procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. |
29 |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Stockholders |
30 |
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of HealthTronics, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for year then ended of HealthTronics, Inc. and our report dated March 8, 2007, expressed an unqualified opinion thereon. |
31 |
PART III |
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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 2007 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 2007 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 2007 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 2007 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 2007 annual meeting of stockholders and is incorporated herein by reference. |
32 |
PART IV |
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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 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) 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 Company’s 10-Q filed with the Securities and Exchange Commission on November 8, 2005). |
33 |
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 10.28 | Consulting and Non-Competition Agreement, dated September 21, 2005, by and between HealthTronics, Inc. and Brad A. Hummel (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 27, 2005). 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 Company’s Form 8-K filed with the Securities and Exchange Commission on September 27, 2005). Executive Employment Agreement, effective October 1, 2005, by and between HealthTronics, Inc. and Christopher B. Schneider (incorporated by reference to Exhibit 99.5 to the Company’s 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). Deferred Compensation Plan for HealthTronics, Inc., adopted December 1, 2004 (incorporated by reference to Exhibit 10.2 to HealthTronics’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, filed May 10, 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.) Consulting and Non-Competition Agreement, dated as of January 23, 2006 by and between the Company and Joseph M. Jenkins, M.D. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 11, 2006). Executive Employment Agreement, effective as of May 8, 2006, by and between the Company and Sam B. Humphries (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2006.) Second Amendment to the Company’s 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s 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 Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2006). Interest and Stock Purchase Agreement, dated as of June 22, 2006, by and between HealthTronics, Inc. and AK Acquisition Corp. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 28, 2006). Severance and Non-Competition Agreement, dated July 27, 2006, by and between HealthTronics, Inc. and John Q. Barnidge (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2006) Second Amendment to Executive Employment Agreement, dated as of August 23, 2006, by and between HealthTronics, Inc. and Sam B. Humphries (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 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 Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 11, 2006). |
34 |
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) |
_____________________ |
(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”. |
35 |
SIGNATURES |
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/ Sam B. Humphries Sam B. Humphries Chief Executive Officer and President (Principal Executive Officer) Date: March 15, 2007 |
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/ Sam B. Humphries Sam B. Humphries, Chief Executive Officer and President (Principal Executive Officer) and Director March 15, 2007 /s/ Ross A. Goolsby Ross A. Goolsby, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 15, 2007 /s/ R. Steven Hicks R. Steven Hicks, Non-executive Chairman of the Board March 15, 2007 /s/ Donny R. Jackson Donny R. Jackson, Director March 15, 2007 /s/ Timothy J. Lindgren Timothy J. Lindgren, Director March 15, 2007 /s/ Kevin A. Richardson II Kevin A. Richardson II, Director March 15, 2007 |
36 |
By: Date: By: Date: By: Date: By: Date: By: Date: | /s/ William A. Searles William A. Searles, Director March 15, 2007 /s/ Kenneth S. Shifrin Kenneth S. Shifrin, Director March 15, 2007 /s/ Perry M. Waughtal Perry M. Waughtal, Directorr March 15, 2007 /s/ Argil J. Wheelock, M.D. Argil J. Wheelock, M.D., Director March 15, 2007 /s/ Mark G. Yudof Mark G. Yudof, Director March 15, 2007 |
37 |
APPENDIX A |
INDEX |
Page | |
---|---|
Reports of Independent Registered Public Accounting Firms Consolidated Financial Statements: Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004. Consolidated Balance Sheets at December 31, 2006 and 2005. Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004. Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004. Notes to Consolidated Financial Statements. | A-2 A-4 A-5 A-7 A-8 A-11 |
A-1 |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Stockholders HealthTronics, Inc.: |
A-2 |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Stockholders |
A-3 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME |
---|
($ in thousands, except per share data) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2005 | 2004 | |||||||||
Revenue: | |||||||||||
Urology Services | $ | 123,265 | $ | 133,360 | $ | 75,361 | |||||
Medical Products | 19,080 | 18,202 | 10,846 | ||||||||
Other | 546 | 705 | 936 | ||||||||
Total revenue | 142,891 | 152,267 | 87,143 | ||||||||
Cost of services and general and administrative expenses: | |||||||||||
Salaries, wages and benefits | 44,755 | 39,741 | 23,802 | ||||||||
Other costs of services | 19,247 | 16,377 | 7,945 | ||||||||
General and administrative | 8,552 | 7,946 | 5,480 | ||||||||
Legal and professional | 4,630 | 2,142 | 1,090 | ||||||||
Manufacturing costs | 9,761 | 6,855 | 5,273 | ||||||||
Advertising | 1,151 | 1,490 | 872 | ||||||||
Other | 261 | 330 | 49 | ||||||||
Goodwill impairment | 20,600 | -- | -- | ||||||||
Depreciation and amortization | 11,275 | 11,444 | 6,763 | ||||||||
120,232 | 86,325 | 51,274 | |||||||||
Operating income | 22,659 | 65,942 | 35,869 | ||||||||
Other income (expenses): | |||||||||||
Interest and dividends | 755 | 448 | 319 | ||||||||
Interest expense | (1,146 | ) | (1,139 | ) | (650 | ) | |||||
(391 | ) | (691 | ) | (331 | ) | ||||||
Income from continuing operations before provision | |||||||||||
for income taxes and minority interest | 22,268 | 65,251 | 35,538 | ||||||||
Minority interest in consolidated income | 43,277 | 47,816 | 27,030 | ||||||||
Provision (benefit) for income taxes | (4,563 | ) | 6,502 | 3,247 | |||||||
Income (loss) from continuing operations | (16,446 | ) | 10,933 | 5,261 | |||||||
Income (loss) from discontinued operations, net of tax | 25,129 | (1,745 | ) | (3,908 | ) | ||||||
Net income | $ | 8,683 | $ | 9,188 | $ | 1,353 | |||||
Basic earnings per share: | |||||||||||
Income (loss) from continuing operations | $ | (0.47 | ) | $ | 0.32 | $ | 0.24 | ||||
Income (loss) from discontinued operations | $ | 0.72 | $ | (0.05 | ) | $ | (0.18 | ) | |||
Net income | $ | 0.25 | $ | 0.27 | $ | 0.06 | |||||
Weighted average shares outstanding | 35,157 | 34,311 | 21,903 | ||||||||
Diluted earnings per share: | |||||||||||
Income (loss) from continuing operations | $ | (0.47 | ) | $ | 0.31 | $ | 0.24 | ||||
Income (loss) from discontinued operations | $ | 0.72 | $ | (0.05 | ) | $ | (0.18 | ) | |||
Net income | $ | 0.25 | $ | 0.26 | $ | 0.06 | |||||
Weighted average shares outstanding | 35,347 | 35,182 | 22,201 | ||||||||
See accompanying notes to consolidated financial statements. |
A-4 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS |
($ in thousands) | December 31, | |||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 27,857 | $ | 21,077 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,166 in 2006 and $1,491 in 2005 | 22,752 | 25,154 | ||||||
Other receivables | 1,201 | 3,296 | ||||||
Deferred income taxes | 6,825 | 19,978 | ||||||
Prepaid expenses and other current assets | 1,716 | 3,084 | ||||||
Inventory | 11,474 | 11,506 | ||||||
Total current assets | 71,825 | 84,095 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 46,155 | 43,920 | ||||||
Building and leasehold improvements | 12,710 | 12,706 | ||||||
58,865 | 56,626 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (24,595 | ) | (23,591 | ) | ||||
Property and equipment, net | 34,270 | 33,035 | ||||||
Assets held for sale | 1,258 | 99,092 | ||||||
Other investments | 1,348 | 1,323 | ||||||
Goodwill, at cost | 229,261 | 255,817 | ||||||
Intangible assets | 5,669 | 6,937 | ||||||
Other noncurrent assets | 3,102 | 2,738 | ||||||
$ | 346,733 | $ | 483,037 | |||||
See accompanying notes to consolidated financial statements. |
A-5 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) |
($ in thousands, except share data) | December 31, | |||||||
---|---|---|---|---|---|---|---|---|
2006 | 2005 | |||||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 5,664 | $ | 11,043 | ||||
Accounts payable | 6,295 | 5,813 | ||||||
Accrued distributions to minority interests | 7,687 | 8,250 | ||||||
Accrued expenses | 10,477 | 9,701 | ||||||
Total current liabilities | 30,123 | 34,807 | ||||||
Liabilities held for sale | 258 | 19,271 | ||||||
Long-term debt, net of current portion | 5,673 | 129,195 | ||||||
Other long-term obligations | 134 | 642 | ||||||
Deferred income taxes | 24,924 | 24,091 | ||||||
Total liabilities | 61,112 | 208,006 | ||||||
Minority interest | 30,104 | 33,549 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | -- | -- | ||||||
Common stock, no par value, 70,000,000 authorized: 35,475,236 issued and 35,379,831 | ||||||||
outstanding in 2006; 35,010,656 issued and 34,866,735 outstanding in 2005 | 200,941 | 196,080 | ||||||
Accumulated earnings | 55,473 | 46,790 | ||||||
Treasury stock, at cost, 95,405 shares in 2006 and 143,921 shares in 2005 | (897 | ) | (1,388 | ) | ||||
Total stockholders' equity | 255,517 | 241,482 | ||||||
$ | 346,733 | $ | 483,037 | |||||
See accompanying notes to consolidated financial statements. |
A-6 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2006, 2005 and 2004 |
---|
($ in thousands, except share data) | Issued Common Stock | Capital in Excess of | Accumulated | Treasury Stock | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | Par Value | Earnings | Shares | Amount | Total | ||||||||||||||||||
Balance, December 31, 2003 | 17,324,585 | $ | 173 | $ | 70,813 | $ | 36,249 | (242,716 | ) | $ | (1,214 | ) | $ | 106,021 | ||||||||||
Net income | -- | -- | -- | 1,353 | -- | -- | 1,353 | |||||||||||||||||
Purchase of treasury stock | -- | -- | -- | -- | (140,250 | ) | (704 | ) | (704 | ) | ||||||||||||||
Retirement of treasury stock | (382,966 | ) | (1,918 | ) | -- | -- | 382,966 | 1,918 | -- | |||||||||||||||
Value of stock options assumed in | ||||||||||||||||||||||||
acquisition | -- | 4,346 | -- | -- | -- | -- | 4,346 | |||||||||||||||||
Conversion to no par common stock | -- | 88,959 | (88,959 | ) | -- | -- | -- | -- | ||||||||||||||||
Issuance of stock for acquisition | 16,107,279 | 87,412 | 17,891 | -- | -- | -- | 105,303 | |||||||||||||||||
Exercise of stock options, including | ||||||||||||||||||||||||
tax benefit totaling $295 | 114,677 | 537 | 166 | -- | -- | -- | 703 | |||||||||||||||||
Exercise of stock warrants | 32,990 | 1 | 89 | -- | -- | -- | 90 | |||||||||||||||||
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 | ||||||||||
See accompanying notes to consolidated financial statements. |
A-7 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS |
---|
($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2005 | 2004 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Fee and other revenue collected | $ | 146,658 | $ | 158,739 | $ | 85,358 | |||||
Cash paid to employees, suppliers | |||||||||||
of goods and others | (83,235 | ) | (96,638 | ) | (53,377 | ) | |||||
Interest received | 755 | 448 | 308 | ||||||||
Interest paid | (1,296 | ) | 1,140 | (1,161 | ) | ||||||
Taxes (paid) refunded | (475 | ) | (407 | ) | 1,893 | ||||||
Discontinued Operations | (13,515 | ) | (7,022 | ) | 832 | ||||||
Net cash provided by operating activities | 48,892 | 56,260 | 33,853 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Purchase of entities, net of cash acquired | -- | 2,417 | 4,902 | ||||||||
Purchases of equipment and leasehold improvements | (11,902 | ) | (10,578 | ) | (7,285 | ) | |||||
Proceeds from sales of equipment | 1,365 | 2,198 | 949 | ||||||||
Distributions from investments | -- | 992 | 406 | ||||||||
Other | (25 | ) | -- | -- | |||||||
Discontinued Operations | 138,971 | (2,122 | ) | (2,592 | ) | ||||||
Net cash provided by (used in) investing activities | 128,409 | (7,093 | ) | (3,620 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Payments on notes payable, exclusive of interest | (134,257 | ) | (173,265 | ) | (28,623 | ) | |||||
Borrowings on notes payable | 4,657 | 163,814 | 34,992 | ||||||||
Distributions to minority interest | (46,969 | ) | (46,434 | ) | (25,896 | ) | |||||
Contributions by minority interest, net of buyouts | (314 | ) | 963 | 377 | |||||||
Exercise of stock options | 1,907 | 12,825 | 408 | ||||||||
Purchase of treasury stock | (73 | ) | (1,388 | ) | -- | ||||||
Discontinued Operations | (320 | ) | (1,915 | ) | 689 | ||||||
Net cash used in financing activities | (175,369 | ) | (45,400 | ) | (18,053 | ) | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,932 | 3,767 | 12,180 | ||||||||
Cash and cash equivalents, beginning of period, includes cash | |||||||||||
from discontinued operations of $4,650, $2,292 | |||||||||||
and $2,427 for 2006, 2005 and 2004, respectively | 25,727 | 21,960 | 9,780 | ||||||||
Cash and cash equivalents, end of period, includes cash | |||||||||||
from discontinued operations of $(198), $4,650 and $2,292 | |||||||||||
for 2006, 2005 and 2004 respectively | $ | 27,659 | $ | 25,727 | $ | 21,960 | |||||
See accompanying notes to consolidated financial statements. |
A-8 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
---|
($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2005 | 2004 | |||||||||
Reconciliation of net income to net cash | |||||||||||
provided by operating activities: | |||||||||||
Net income | $ | 8,683 | $ | 9,188 | $ | 1,353 | |||||
Adjustments to reconcile net income to cash provided | |||||||||||
by operating activities: | |||||||||||
Minority interest in consolidated income | 43,277 | 47,816 | 27,030 | ||||||||
Depreciation and amortization | 11,275 | 11,444 | 6,763 | ||||||||
Provision for uncollectible accounts | 581 | 835 | 32 | ||||||||
Equity in earnings of affiliates | -- | (987 | ) | (425 | ) | ||||||
Provision for deferred income taxes | (4,997 | ) | 3,975 | (231 | ) | ||||||
Proceeds from termination of interest rate swap | -- | (564 | ) | -- | |||||||
Non-cash share-based compensation | 2,352 | -- | -- | ||||||||
Impairment charges | 20,600 | -- | -- | ||||||||
Other | (636 | ) | (134 | ) | (64 | ) | |||||
Discontinued Operations | (38,643 | ) | (2,294 | ) | 9,381 | ||||||
Changes in operating assets and liabilities, | |||||||||||
net of effect of purchase transactions: | |||||||||||
Accounts receivable | 1,821 | 1,823 | (1,920 | ) | |||||||
Other receivables | 2,094 | (2,273 | ) | 209 | |||||||
Other assets | 1,036 | (5,360 | ) | 59 | |||||||
Accounts payable | 482 | (103 | ) | (4,409 | ) | ||||||
Accrued expenses | 967 | (7,106 | ) | (3,925 | ) | ||||||
Total adjustments | 40,209 | 47,072 | 32,500 | ||||||||
Net cash provided by operating activities | $ | 48,892 | $ | 56,260 | $ | 33,853 | |||||
See accompanying notes to consolidated financial statements. |
A-9 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
---|
($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2005 | 2004 | |||||||||
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 | $ | 7,687 | $ | 8,250 | $ | 8,429 | |||||
Minority interest decreased by | 7,687 | 8,250 | 8,429 | ||||||||
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 decreased 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 | -- | ||||||||
In 2004, the Company acquired two lithotripsy companies | |||||||||||
The acquired assets and liabilities were as follows: | |||||||||||
Current assets increased by | -- | -- | 20,621 | ||||||||
Noncurrent assets increased by | -- | -- | 42,638 | ||||||||
Goodwill increased by | -- | -- | 115,855 | ||||||||
Current liabilities increased by | -- | -- | 22,524 | ||||||||
Other long-term obligations increased by | -- | -- | 56,967 | ||||||||
Deferred income taxes increased by | -- | -- | 4,076 | ||||||||
Stockholders' equity increased by | -- | -- | 106,739 |
See accompanying notes to consolidated financial statements. |
A-10 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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A. ORGANIZATION AND OPERATION OF THE COMPANY |
A-11 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Cash Equivalents |
A-12 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 $1,005,000, $987,000 and $425,000 in 2006, 2005 and 2004, respectively. |
A-13 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Accounts Receivable |
($ in thousands) | Balance at Beginning of Year | Costs and Expenses | Deductions | Other | Balance at End of Year | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for Doubtful Accounts: | |||||||||||||||||
2006 | $ | 1,491 | $ | 776 | $ | 101 | $ | -- | $ | 2,166 | |||||||
2005 | $ | 812 | $ | 835 | $ | 156 | $ | -- | $ | 1,491 | |||||||
2004 | $ | 402 | $ | 32 | $ | 70 | $ | 448 | (a) | $ | 812 |
(a) Amounts acquired in acquisitions. |
2006 | 2005 | ||||||||
---|---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 7,070 | $ | 7,570 | |||||
Finished Goods | 4,404 | 3,936 | |||||||
$ | 11,474 | $ | 11,506 | ||||||
Stock-Based Compensation |
A-14 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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. |
A-15 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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(In thousands, except per share data) | Net Income | No. of Shares | Per Share Amounts | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
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 | ||||||
For the year ended December 31, 2004 | |||||||||||
Basic | $ | 1,353 | 21,903 | $ | 0.06 | ||||||
Effect of dilutive securities: | |||||||||||
Options and warrants | -- | 298 | |||||||||
Diluted | $ | 1,353 | 22,201 | $ | 0.06 | ||||||
Unexercised employee stock options and warrants to purchase 3,223,000, 751,000 and 1,666,000 shares of our common stock as of December 31, 2006, 2005 and 2004, 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. |
A-16 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. We adopted SFAS 154 effective January 1, 2006, and this adoption did not have a material effect on our financial position or results of operations. |
Total | Urology Services | Medical Products | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2004 | $ | 245,725 | $ | 228,206 | $ | 17,519 | |||||
Additions | 10,092 | 10,092 | -- | ||||||||
Deletions | -- | -- | -- | ||||||||
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 | |||||
A-17 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 is 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. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. |
Gross Carrying Amount | Accumulated Amortization | Net | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2006 | |||||||||||
Urology Services | $ | 2,130 | $ | 1,215 | $ | 915 | |||||
Medical Products | 2,656 | 1,902 | 754 | ||||||||
Total | $ | 4,786 | $ | 3,117 | $ | 1,669 | |||||
December 31, 2005 | |||||||||||
Urology Services | $ | 2,476 | $ | 1,064 | $ | 1,412 | |||||
Medical Products | 2,494 | 969 | 1,525 | ||||||||
Total | $ | 4,970 | $ | 2,033 | $ | 2,937 | |||||
Amortization expense for other intangible assets with finite lives was $1,431,000, $1,261,000 and $304,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We estimate annual amortization expense for each of the five succeeding fiscal years as follows: |
Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2007 | $ | 997,000 | ||||||
2008 | 314,000 | |||||||
2009 | 111,000 | |||||||
2010 | 82,000 | |||||||
2011 | 82,000 | |||||||
2012 | 83,000 |
D. ACQUISITIONS |
A-18 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Unaudited proforma combined income data for the year ended December 31, 2006 of the Company assuming the acquisition was effective January 1, of each year is as follows: |
($ in thousands, except per share data) | 2005 | |||||||
---|---|---|---|---|---|---|---|---|
Total revenues | $ | 154,203 | ||||||
Total expenses | 143,075 | |||||||
Discontinued Operations | (1,557 | ) | ||||||
Net income | $ | 9,571 | ||||||
Diluted earnings per share | $ | 0.27 | ||||||
E. FAIR VALUE OF FINANCIAL INSTRUMENTS |
2006 | 2005 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
( $ in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
Financial assets: | ||||||||||||||
Cash and cash equivalents | $ | 27,857 | $ | 27,857 | $ | 21,077 | $ | 21,077 | ||||||
Warrants | 150 | 544 | 150 | 220 | ||||||||||
Financial liabilities: | ||||||||||||||
Debt | $ | 11,337 | $ | 11,337 | $ | 140,238 | $ | 140,238 | ||||||
Other long-term obligations | 134 | 130 | 642 | 618 |
The following methods and assumptions were used by us in estimating our fair value disclosures for financial instruments. |
A-19 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Warrants |
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2006 | 2005 | ||||||
Accrued group insurance costs | $ | 321 | $ | 457 | ||||
Compensation and payroll related expense | 3,339 | 2,954 | ||||||
Accrued interest | 13 | 163 | ||||||
Accrued taxes | 2,937 | 2,033 | ||||||
Accrued severance payments | -- | 1,410 | ||||||
Accrued professional fees | 480 | 746 | ||||||
Unearned revenues | 1,325 | 1,058 | ||||||
Other | 2,062 | 880 | ||||||
$ | 10,477 | $ | 9,701 | |||||
G. INDEBTEDNESS |
($ in thousands) | December31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Interest Rates | Maturities | 2006 | 2005 | ||||||||
Floating | 2007-2012 | $ | 3,712 | $ | 132,770 | ||||||
1%-11% | 2007-2012 | 7,625 | 7,468 | ||||||||
$ | 11,337 | $ | 140,238 | ||||||||
Less current portion of long-term debt | 5,664 | 11,043 | |||||||||
$ | 5,673 | $ | 129,195 | ||||||||
A-20 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Senior Credit Facility |
A-21 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The stated principal repayments for all indebtedness as of December 31, 2006 are payable as follows: |
Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2007 | $ | 5,664 | ||||||
2008 | 2,644 | |||||||
2009 | 1,843 | |||||||
2010 | 883 | |||||||
2011 | 269 | |||||||
Thereafter | 34 |
H. COMMITMENTS AND CONTINGENCIES |
($ in thousands) Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2007 | $ | 1,721 | ||||||
2008 | 1,488 | |||||||
2009 | 1,398 | |||||||
2010 | 1,191 | |||||||
2011 | 823 | |||||||
Thereafter | 931 |
A-22 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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I. STOCK BASED COMPENSATION |
A-23 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The following table sets forth certain information as of December 31, 2006 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 | 361,169 | $ | 7 | .46 | -- | ||||||
Prime 2003 stock option plan | 129,000 | $ | 5 | .84 | -- | ||||||
HSS equity incentive plan and stock | |||||||||||
option plans | 3,417,278 | $ | 7 | .36 | 683,165 | ||||||
Other equity compensation plans | |||||||||||
approved by our security holders | N/A | N/A | N/A |
Share-Based Compensation Cost under SFAS No. 123 |
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2005 | 2004 | ||||||
Net income, as reported | $ | 9,188 | $ | 1,353 | ||||
Share-based compensation recorded, net of tax | 72 | 184 | ||||||
Share-based compensation proforma, net of tax | (2,607 | ) | (1,859 | ) | ||||
Pro forma net income (loss) | $ | 6,653 | $ | (322 | ) | |||
Pro forma earnings (loss) per share: | ||||||||
Basic | $ | 0.19 | $ | (0.02 | ) | |||
Diluted | $ | 0.19 | $ | (0.02 | ) | |||
To estimate compensation expense which would have been recognized under SFAS No. 123 for the years ended December 31, 2005 and 2004, and to calculate the compensation cost that was recognized under SFAS No. 123(R) for the year ended December 31, 2006, we used the Black-Scholes option-pricing model with the following weighted-average assumptions for equity awards granted. For December 31, 2006, 2005 and 2004, respectively: risk-free interest rates were 4.9%, 3.9% and 3.9%; dividend yields were 0%, 0% and 0%; volatility factors of the expected market price of our common stock were 47%, 46% and 45%; and a weighted-average expected life of the option of 6 years, 4 years and 4 years. |
A-24 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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. |
2006 | 2005 | 2004 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Options (000) | Weighted Average Price | Options (000) | Weighted Average Price | Options (000) | Weighted Average Price | |||||||||||||||
Outstanding at beginning of year | 3,048 | $ | 7.65 | 4,327 | $ | 7.39 | 2,522 | $ | 7.34 | |||||||||||
Granted | 1,992 | 7.05 | 652 | 8.75 | 2,730 | 7.39 | ||||||||||||||
Exercised | (298 | ) | 6.40 | (1,675 | ) | 7.59 | (196 | ) | 6.52 | |||||||||||
Cancelled | (588 | ) | 8.78 | (256 | ) | 6.53 | (729 | ) | 7.40 | |||||||||||
Forfeited | (246 | ) | 6.94 | -- | -- | -- | -- | |||||||||||||
Outstanding at end of year | 3,908 | $ | 7.32 | 3,048 | $ | 7.65 | 4,327 | $ | 7.39 | |||||||||||
Exercisable at end of year | 2,450 | $ | 7.51 | 2,813 | $ | 7.71 | 3,341 | $ | 7.59 | |||||||||||
Weighted-average fair value of | ||||||||||||||||||||
options granted during the period | $3.38 | $5.44 | $ | 2.33 |
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. |
A-25 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Additional information regarding options outstanding for all plans as of December 31, 2006, is as follows: |
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 | 269 | 5.8 years | $ | 5 | .84 | 258 | 5.7 years | $ | 5 | .85 | |||||||||||
$6.50 - $6.99 | 1,819 | 8.1 years | 6 | .66 | 827 | 5.9 years | 6 | .62 | |||||||||||||
$7.00 - $7.50 | 817 | 6.8 years | 7 | .37 | 612 | 5.9 years | 7 | .42 | |||||||||||||
$7.51 - $9.20 | 675 | 7.2 years | 8 | .07 | 425 | 5.9 years | 8 | .06 | |||||||||||||
$9.21 - $14.25 | 328 | 4.5 years | 10 | .54 | 328 | 4.5 years | 10 | .54 | |||||||||||||
Total | 3,908 | $ | 7 | .32 | 2,450 | $ | 7. | 51 | |||||||||||||
Aggregate intrinsic value (in thousands) | $ | 118 | $ | 111 | |||||||||||||||||
The aggregate intrinsic value in the table above is based on our closing stock price of $6.67 per share as of December 31, 2006. |
Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
United States | $ | (19,947 | ) | $ | 15,944 | $ | 8,508 | ||||
Foreign | (1,062 | ) | 1,491 | -- | |||||||
$ | (21,009 | ) | $ | 17,435 | $ | 8,508 | |||||
A-26 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Income tax expense (benefit) consists of the following: |
Years Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
Federal: | |||||||||||
Current | $ | 681 | $ | -- | $ | (273 | ) | ||||
Deferred | (4,877 | ) | 5,611 | 2,781 | |||||||
State: | |||||||||||
Current | 456 | 154 | 506 | ||||||||
Deferred | (582 | ) | 398 | 233 | |||||||
Foreign: | |||||||||||
Current | -- | 339 | -- | ||||||||
Deferred | (241 | ) | -- | -- | |||||||
$ | (4,563 | ) | $ | 6,502 | $ | 3,247 | |||||
A reconciliation of expected income tax (benefit) 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) | 2006 | 2005 | 2004 | ||||||||
Expected federal income tax | $ | (7,353 | ) | $ | 6,102 | $ | 2,978 | ||||
State taxes | (82 | ) | 359 | 480 | |||||||
Foreign rate differential | 130 | (183 | ) | -- | |||||||
Goodwill impairment | 3,090 | -- | -- | ||||||||
Other | (348 | ) | 224 | (211 | ) | ||||||
$ | (4,563 | ) | $ | 6,502 | $ | 3,247 | |||||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below: |
($ in thousands) | 2006 | 2005 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred tax assets: | ||||||||
Net operating loss carryforward | $ | 3,754 | $ | 15,008 | ||||
Capital loss carryforward | -- | 5,308 | ||||||
Allowance for bad debts | 328 | -- | ||||||
FAS 123(R) expense | 295 | -- | ||||||
AMT Credit | 783 | -- | ||||||
Capitalized costs | 707 | (142 | ) | |||||
Loan origination fees amortizable for tax purposes | -- | 890 | ||||||
Accrued expenses deductible for tax purposes when paid | 958 | 1,732 | ||||||
Total gross deferred tax assets | 6,825 | 22,796 | ||||||
Less valuation allowance | -- | -- | ||||||
Net deferred tax assets | 6,825 | 22,796 | ||||||
Deferred tax liabilities: | ||||||||
Property and equipment, principally due to differences in depreciation | (292 | ) | (2,684 | ) | ||||
Intangible assets, principally due to differences in amortization periods for tax purposes | (24,632 | ) | (24,225 | ) | ||||
Total gross deferred tax liability | (24,924 | ) | (26,909 | ) | ||||
Net deferred tax liability | $ | (18,099 | ) | $ | (4,113 | ) | ||
A-27 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 $10 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, 2006. At December 31, 2006, we have federal net operating loss carry forwards of approximately $10 million which are available to offset federal taxable income in future years through 2025. |
A-28 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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($ in thousands) | Urology Services | Medical Products | ||||||
---|---|---|---|---|---|---|---|---|
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 | 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 | ||||||
2004 | ||||||||
Revenue from external customers | $ | 75,361 | $ | 10,846 | ||||
Intersegment revenues | -- | 5,514 | ||||||
Interest income | 76 | 94 | ||||||
Interest expense | 369 | 4 | ||||||
Depreciation and amortization | 5,509 | 650 | ||||||
Segment profit | 11,402 | 1,813 | ||||||
Segment assets | 311,916 | 33,903 | ||||||
Capital expenditures | 6,400 | 180 |
A-29 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The following is a reconciliation of revenues per above to the consolidated revenues per the consolidated statements of income: |
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues for reportable segments | $ | 151,641 | $ | 160,812 | $ | 91,721 | |||||
Corporate revenue | 546 | 705 | 936 | ||||||||
Elimination of intersegment revenues | (9,296 | ) | (9,250 | ) | (5,514 | ) | |||||
Total consolidated revenues | $ | 142,891 | $ | 152,267 | $ | 87,143 | |||||
The following is a reconciliation of profit per above to income before taxes per the consolidated statements of income: |
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total profit (loss) for reportable segments | $ | (10,240 | ) | $ | 23,397 | $ | 13,215 | ||||
Corporate revenue | 546 | 705 | 936 | ||||||||
Unallocated corporate expenses: | |||||||||||
General and administrative | (10,680 | ) | (5,634 | ) | (4,911 | ) | |||||
Net interest expense | 133 | (150 | ) | (127 | ) | ||||||
Other, net | (768 | ) | (883 | ) | (605 | ) | |||||
Unallocated corporate expenses total | (11,315 | ) | (6,667 | ) | (5,643 | ) | |||||
Income (loss) before income taxes | $ | (21,009 | ) | $ | 17,435 | $ | 8,508 | ||||
The following is a reconciliation of segment assets per above to the consolidated assets per the consolidated balance sheets: |
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total assets for reportable segments | $ | 330,184 | $ | 358,206 | $ | 345,819 | |||||
Unallocated corporate assets | 16,549 | 124,831 | 128,339 | ||||||||
Consolidated total | $ | 346,733 | $ | 483,037 | $ | 474,158 | |||||
A-30 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 | ||||||||||
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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 | |||||||||
2004 | ||||||||||||||
Interest and dividends | $ | 170 | $ | 216 | $ | (67 | ) | $ | 319 | |||||
Interest expense | 373 | 344 | (67 | ) | 650 | |||||||||
Depreciation and amortization | 6,159 | 604 | -- | 6,763 | ||||||||||
Capital expenditures | 6,580 | 705 | -- | 7,285 |
The amounts in 2006, 2005 and 2004 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. |
A-31 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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. We have classified our specialty vehicle manufacturing segment as held for sale in the accompanying condensed consolidated balance as of December 31, 2005 and the results of its operations have been reported in discontinued operations for all periods presented. This gain utilized approximately $20.4 million of our deferred tax assets. |
($ in thousands) | 2006 | 2005 | 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
For the Year Ended December 31 | |||||||||||
Revenue | |||||||||||
Specialty Vehicles Manufacturing | $ | 57,526 | $ | 109,447 | 109,844 | ||||||
CryoSurgery | 1,490 | 2,589 | 331 | ||||||||
Rocky Mountain Prostate Thermotherapies | 4,289 | 3,391 | 520 | ||||||||
Orthotripsy | -- | 6,613 | 2,468 | ||||||||
HIFU | -- | -- | -- | ||||||||
Cost of services | |||||||||||
Specialty Vehicles Manufacturing | (51,616 | ) | (98,170 | ) | (106,235 | ) | |||||
CryoSurgery | (1,235 | ) | (1,780 | ) | (283 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (4,587 | ) | (2,976 | ) | (432 | ) | |||||
Orthotripsy | -- | (7,714 | ) | (1,739 | ) | ||||||
HIFU | (1,233 | ) | (192 | ) | -- | ||||||
Depreciation and amortization | |||||||||||
Specialty Vehicles Manufacturing | (542 | ) | (1,215 | ) | (1,076 | ) | |||||
CryoSurgery | (512 | ) | (558 | ) | (84 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (224 | ) | (84 | ) | (23 | ) | |||||
Orthotripsy | -- | (280 | ) | (261 | ) | ||||||
HIFU | (17 | ) | (3 | ) | -- | ||||||
Other | |||||||||||
Specialty Vehicles Manufacturing | (72 | ) | (109 | ) | (138 | ) | |||||
CryoSurgery | (118 | ) | (229 | ) | (62 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (4 | ) | -- | -- | |||||||
Orthotripsy | -- | (1,077 | ) | (348 | ) | ||||||
HIFU | -- | -- | -- | ||||||||
Income from discontinued operations | $ | 3,145 | $ | 7,653 | $ | 2,482 | |||||
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. |
A-32 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The major classes of assets and liabilities of discontinued operations held for sale in the December 31, 2005 consolidated balance sheet are as follows: |
Consolidated Balance Sheet |
($ in thousands) | Specialty Vehicle Manufacturing | CryoSurgery | Rocky Mountain Prostate Thermotherapies | ||||||||
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Cash | $ | 4,405 | $ | 354 | $ | -- | |||||
Accounts receivable | 9,517 | 605 | 741 | ||||||||
Prepaid expenses and other current assets | 642 | 433 | 368 | ||||||||
Inventory | 22,392 | -- | -- | ||||||||
Deferred income taxes | 524 | -- | -- | ||||||||
Property plant and equipment (net) | 6,579 | 1,428 | 297 | ||||||||
Goodwill | 50,370 | -- | -- | ||||||||
Other non-current assets | 437 | -- | -- | ||||||||
Total assets | $ | 94,866 | $ | 2,820 | $ | 1,406 | |||||
Accounts payable | $ | 5,387 | $ | 246 | $ | 242 | |||||
Accrued expenses | 5,290 | 342 | 44 | ||||||||
Customer deposits | 4,594 | -- | -- | ||||||||
Long-term debt | 25 | 83 | 39 | ||||||||
Other long-term obligations | -- | 417 | -- | ||||||||
Deferred income taxes | 2,562 | -- | -- | ||||||||
Total liabilities | $ | 17,858 | $ | 1,088 | $ | 325 | |||||
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, $7,806,000 and $8,977,000 for the years ended December 31, 2006, 2005 and 2004. We have also included loan fees and bond call premium of $2,842,000 year ended December 31, 2005, which were incurred solely related to the refinancing of the debt which was required to be repaid. |
($ in thousands) | Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2006 | 2005 | 2004 | |||||||||
Gain on sale of specialty vehicle manufacturing | $ | 53,551 | $ | -- | $ | -- | |||||
Loss from disposal of cryosurgery operations | (3,729 | ) | -- | -- | |||||||
Impairment of Rocky Mountain Prostate Thermotherapy | (4,263 | ) | -- | -- | |||||||
Income from discontinued operations | 3,145 | 7,653 | 2,482 | ||||||||
Interest allocated to discontinued operations | (4,830 | ) | (10,648 | ) | (8,977 | ) | |||||
Income tax (expense) benefit on discontinued operations | (18,745 | ) | 1,250 | 2,587 | |||||||
Income from discontinued operations, net of tax | $ | 25,129 | $ | (1,745 | ) | $ | (3,908 | ) | |||
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. |
A-33 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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, 2006 and 2005, SanuWave, Inc. owed us a net amount of approximately $1,000,000 and $500,000, respectively. We terminated all sales operations effective April 30, 2006. |
A-34 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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N. RELATED PARTY TRANSACTIONS |
A-35 |