_______________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and 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 Capital of Texas Highway, Suite 200B, Austin, TX 78746
(Address of principal executive office) (Zip code)
(512) 328-2892
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. .. 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). |
Indicate the number of shares outstanding of each of the issuer'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 May 1, 2007 35,425,097 |
PART IFINANCIAL INFORMATIONItem 1 - Financial Statements |
-2- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
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($ in thousands, except per share data) |
Three Months Ended March 31, | ||||||||
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2007 | 2006 | |||||||
Revenue: | ||||||||
Urology Services | $ | 28,385 | $ | 30,754 | ||||
Medical Products | 4,239 | 6,200 | ||||||
Other | 127 | 152 | ||||||
Total revenue | 32,751 | 37,106 | ||||||
Cost of services and general and administrative expenses: | ||||||||
Salaries, wages and benefits | 10,931 | 10,807 | ||||||
Other costs of services | 4,613 | 4,899 | ||||||
General and administrative | 2,009 | 2,109 | ||||||
Legal and professional | 607 | 505 | ||||||
Manufacturing costs | 2,063 | 3,695 | ||||||
Advertising | 175 | 226 | ||||||
Other | 5 | 215 | ||||||
Depreciation and amortization | 2,816 | 2,689 | ||||||
23,219 | 25,145 | |||||||
Operating income | 9,532 | 11,961 | ||||||
Other income (expenses): | ||||||||
Interest and dividends | 276 | 132 | ||||||
Interest expense | (236 | ) | (324 | ) | ||||
40 | (192 | ) | ||||||
Income from continuing operations before provision | ||||||||
for income taxes and minority interest | 9,572 | 11,769 | ||||||
Minority interest in consolidated income | 9,509 | 10,356 | ||||||
Provision (benefit) for income taxes | (15 | ) | 605 | |||||
Income from continuing operations | 78 | 808 | ||||||
Income (loss) from discontinued operations, net of tax | (108 | ) | 465 | |||||
Net income (loss) | $ | (30 | ) | $ | 1,273 | |||
Basic earnings per share: | ||||||||
Income from continuing operations | $ | -- | $ | 0.03 | ||||
Income (loss) from discontinued operations | $ | -- | $ | 0.01 | ||||
Net income (loss) | $ | -- | $ | 0.04 | ||||
Weighted average shares outstanding | 35,406 | 34,906 | ||||||
Diluted earnings per share: | ||||||||
Income from continuing operations | $ | -- | $ | 0.03 | ||||
Income (loss) from discontinued operations | $ | -- | $ | 0.01 | ||||
Net income (loss) | $ | -- | $ | 0.04 | ||||
Weighted average shares outstanding | 35,417 | 35,251 | ||||||
See accompanying notes to condensed consolidated financial statements. |
-3- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
($ in thousands) | March 31, 2007 | December 31, 2006 | ||||||
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ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,999 | $ | 27,857 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,116 in 2007 and $2,166 in 2006 | 22,403 | 22,752 | ||||||
Other receivables | 1,164 | 1,201 | ||||||
Deferred income taxes | 7,196 | 6,825 | ||||||
Prepaid expenses and other current assets | 1,983 | 1,716 | ||||||
Inventory | 11,831 | 11,474 | ||||||
Total current assets | 69,576 | 71,825 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 45,433 | 46,155 | ||||||
Building and leasehold improvements | 12,691 | 12,710 | ||||||
58,124 | 58,865 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (25,064 | ) | (24,595 | ) | ||||
Property and equipment, net | 33,060 | 34,270 | ||||||
Assets held for sale | 1,048 | 1,258 | ||||||
Other investments | 1,352 | 1,348 | ||||||
Goodwill, at cost | 227,115 | 229,261 | ||||||
Intangible assets | 5,339 | 5,669 | ||||||
Other noncurrent assets | 4,583 | 3,102 | ||||||
$ | 342,073 | $ | 346,733 | |||||
See accompanying notes to condensed consolidated financial statements. |
-4- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) |
($ in thousands, except share data) | March 31, 2007 | December 31, 2006 | ||||||
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LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 5,413 | $ | 5,664 | ||||
Accounts payable | 6,053 | 6,295 | ||||||
Accrued distributions to minority interests | 644 | 7,687 | ||||||
Accrued expenses | 8,299 | 10,477 | ||||||
Total current liabilities | 20,409 | 30,123 | ||||||
Liabilities held for sale | 202 | 258 | ||||||
Long-term debt, net of current portion | 5,254 | 5,673 | ||||||
Other long term obligations | 53 | 134 | ||||||
Deferred income taxes | 25,393 | 24,924 | ||||||
Total liabilities | 51,311 | 61,112 | ||||||
Minority interest | 34,463 | 30,104 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | ||||||||
Common stock, no par value, 70,000,000 authorized: 35,475,236 issued in 2007 | ||||||||
and 35,425,097 outstanding in 2007; 35,475,236 issued in 2006 and | ||||||||
35,379,831 outstanding in 2006 | 201,328 | 200,941 | ||||||
Accumulated earnings | 55,443 | 55,473 | ||||||
Treasury stock, at cost, 50,139 shares in 2007 and 95,405 shares in 2006 | (472 | ) | (897 | ) | ||||
Total stockholders' equity | 256,299 | 255,517 | ||||||
$ | 342,073 | $ | 346,733 | |||||
See accompanying notes to condensed consolidated financial statements. |
-5- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
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Three Months Ended March 31, | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Fee and other revenue collected | $ | 33,839 | $ | 36,082 | ||||
Cash paid to employees, suppliers of goods and others | (22,059 | ) | (22,950 | ) | ||||
Interest received | 276 | 131 | ||||||
Interest paid | (222 | ) | (299 | ) | ||||
Taxes (paid) refunded | (366 | ) | 374 | |||||
Discontinued operations | (86 | ) | (1,092 | ) | ||||
Net cash provided by operating activities | 11,382 | 12,246 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Sale of entities, net of cash sold | (206 | ) | -- | |||||
Purchases of equipment and leasehold improvements | (1,796 | ) | (2,873 | ) | ||||
Proceeds from sales of assets | 495 | 63 | ||||||
Distributions from investments | -- | 211 | ||||||
Other | (18 | ) | -- | |||||
Discontinued operations | (1 | ) | (745 | ) | ||||
Net cash used in investing activities | (1,526 | ) | (3,344 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on notes payable | 619 | 1,200 | ||||||
Payments on notes payable, exclusive of interest | (1,448 | ) | (1,784 | ) | ||||
Distributions to minority interest | (11,810 | ) | (14,196 | ) | ||||
Contributions by minority interest, net of buyouts | (141 | ) | (1,018 | ) | ||||
Exercise of stock options | -- | 167 | ||||||
Discontinued operations | (5 | ) | (141 | ) | ||||
Net cash used in financing activities | (12,785 | ) | (15,772 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,929 | ) | (6,870 | ) | ||||
Cash and cash equivalents, beginning of period, includes cash | ||||||||
from discontinued operations of $(198) and $4,650 | ||||||||
for December 31, 2006 and 2005, respectively | 27,659 | 25,727 | ||||||
Cash and cash equivalents, end of period, includes cash | ||||||||
from discontinued operations of $(269) and $2,329 | ||||||||
for March 31, 2007 and 2006, respectively | $ | 24,730 | $ | 18,857 | ||||
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) |
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Three Months Ended March 31, | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
Reconciliation of net income (loss) to net cash provided by operating activities: | ||||||||
Net income (loss) | $ | (30 | ) | $ | 1,273 | |||
Adjustments to reconcile net income (loss) | ||||||||
to net cash provided by operating activities | ||||||||
Minority interest in consolidated income | 9,509 | 10,356 | ||||||
Depreciation and amortization | 2,816 | 2,689 | ||||||
Provision for uncollectible accounts | 71 | (22 | ) | |||||
Provision for deferred income taxes | 96 | 446 | ||||||
Non-cash share based compensation | 813 | 94 | ||||||
Other | 74 | (366 | ) | |||||
Discontinued Operations | 90 | (1,664 | ) | |||||
Changes in operating assets and liabilities, | ||||||||
net of effect of purchase transactions | ||||||||
�� Accounts receivable | 59 | (516 | ) | |||||
Other receivables | 39 | 597 | ||||||
Other assets | 87 | 552 | ||||||
Accounts payable | (234 | ) | 1,312 | |||||
Accrued expenses | (2,008 | ) | (2,505 | ) | ||||
Total adjustments | 11,412 | 10,973 | ||||||
Net cash provided by operating activities | $ | 11,382 | $ | 12,246 | ||||
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
1.General
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of March 31, 2007 and the results of operations and cash flows for the periods presented. Such adjustments are of a normal recurring nature unless otherwise noted herein. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
2.Debt
In March 2005, we refinanced our then existing revolving credit facility with a $175 million senior credit facility comprised of a five year $50 million revolver and a $125 million senior secured term loan B (“term loan B”), due 2011. In April 2005, we used the proceeds from the new term loan B to redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005 related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005. |
3.Earnings per share
Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options and warrants. A reconciliation of such EPS data is as follows: |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2007 | ||||||||
Net loss | $ | (30 | ) | $ | (30 | ) | ||
Weighted average shares outstanding | 35,406 | 35,406 | ||||||
Effect of dilutive securities | -- | 11 | ||||||
Shares for EPS calculation | 35,406 | 35,417 | ||||||
Net loss per share | $ | -- | $ | -- | ||||
Three Months Ended March 31, 2006 | ||||||||
Net income | $ | 1,273 | $ | 1,273 | ||||
Weighted average shares outstanding | 34,906 | 34,906 | ||||||
Effect of dilutive securities | -- | 345 | ||||||
Shares for EPS calculation | 34,906 | 35,251 | ||||||
Net income per share | $ | 0.04 | $ | 0.04 | ||||
We did not include in our computation of diluted EPS unexercised stock options to purchase 3,922,000 and 720,000 shares of our common stock as of March 31, 2007 and 2006, respectively, because the effect would be antidilutive. In May 2005, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 450,000 shares the number of shares available for issuance thereunder (from 500,000 to 950,000 shares). In June 2006, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 2 million shares the number of shares available for issuance thereunder (from 950,000 to 2,950,000 shares). |
4.Segment Reporting
We now have two reportable segments: urology services and medical products. Our specialty vehicle manufacturing division, which was sold on July 31, 2006, was also considered a reportable segment prior to its sale. The urology services segment provides services related to the operation of lithotripters and lasers, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. Our medical products segment manufactures, sells and maintains lithotripters and their related consumables, and markets fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics. Our specialty vehicle manufacturing designed, constructed and engineered mobile trailers, coaches and special purpose mobile units that transport high technology medical devices, equipment designed for mobile command and control centers, and equipment for broadcasting and communications applications. |
-10- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
We measure performance based on the pretax income or loss from our operating segments, which does not include unallocated corporate general and administrative expenses or corporate interest income and expense. |
($ in thousands) | Urology Services | Medical Products | ||||||
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Three Months Ended March 31, 2007 | ||||||||
Revenue from external customers | $ | 28,385 | $ | 4,239 | ||||
Intersegment revenues | -- | 2,570 | ||||||
Segment profit | 1,670 | 120 | ||||||
Three Months Ended March 31, 2006 | ||||||||
Revenue from external customers | $ | 30,754 | $ | 6,200 | ||||
Intersegment revenues | -- | 2,676 | ||||||
Segment profit (loss) | 3,175 | (88 | ) |
The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the condensed consolidated statements of income: |
Three Months ended March 31, | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
Total segment profit | $ | 1,790 | $ | 3,087 | ||||
Unallocated corporate revenues | 127 | 152 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (1,816 | ) | (1,585 | ) | ||||
Net interest income (expense) | 151 | (50 | ) | |||||
Other, net | (189 | ) | (191 | ) | ||||
Total unallocated corporate expenses | (1,854 | ) | (1,826 | ) | ||||
Income before income taxes | $ | 63 | $ | 1,413 | ||||
5. Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock option grants based on estimated fair values. SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior to the adoption of SFAS No. 123(R), we accounted for share-based awards to employees and directors using the intrinsic valued method in accordance with Accounting Principles Board Opinion (“APB”) No. 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method, share-based compensation expense was only recognized by us if the exercise price of the stock option was less than the fair market value of the underlying stock at the date of grant. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
As of March 31, 2007, total unrecognized share-based compensation cost related to unvested stock options was approximately $4.9 million, which is expected to be recognized over a weighted average period of approximately 2.2 years. We have included approximately $389,000 and $94,000 for share-based compensation cost in the accompanying condensed consolidated statement of income for the three months ended March 31, 2007 and 2006, respectively. |
6. Inventory
As of March 31, 2007 and December 31, 2006, inventory consisted of the following: |
($ in thousands) | March 31, 2007 | December 31, 2006 | ||||||
---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 8,851 | $ | 7,070 | ||||
Finished Goods | 2,980 | 4,404 | ||||||
$ | 11,831 | $ | 11,474 | |||||
7. Discontinued Operations
In November, 2006, we announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the exclusive rights to distribute such device in the United States, when and if a Pre-Market Approval of such device is granted by the FDA and forfeits our rights to vest in additional warrants to EDAP common stock. We have accordingly included our costs related to the clinical trials of High Intensity Focused Ultrasound (“HIFU”) in discontinued operations in the accompanying condensed consolidated statements of income. |
-12- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
During the second quarter 2006, we committed to a plan to sell our specialty vehicle manufacturing segment. On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006, and recognized a gain on the sale totaling $53.6 million. This gain utilized approximately $20.4 million of our deferred tax assets. We have included the operations of this business in discontinued operations in the accompanying condensed consolidated statements of income. |
Condensed Consolidated Statements of Income | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
For the Three Months Ended March 31 | ||||||||
Revenue | ||||||||
Specialty Vehicle Manufacturing | $ | -- | $ | 25,679 | ||||
CryoSurgery | -- | 453 | ||||||
Rocky Mountain Prostate Thermotherapies | 1,138 | 1,215 | ||||||
HIFU | -- | -- | ||||||
Cost of services | ||||||||
Specialty Vehicle Manufacturing | -- | (22,442 | ) | |||||
CryoSurgery | -- | (444 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (1,165 | ) | (1,202 | ) | ||||
HIFU | (146 | ) | (171 | ) | ||||
Depreciation and amortization | ||||||||
Specialty Vehicle Manufacturing | -- | (332 | ) | |||||
CryoSurgery | -- | (144 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | (38 | ) | |||||
HIFU | (3 | ) | (4 | ) | ||||
Other | ||||||||
Specialty Vehicle Manufacturing | -- | (22 | ) | |||||
Interest expense allocated to discontinued operations | -- | (1,904 | ) | |||||
CryoSurgery | -- | (16 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | -- | ||||||
HIFU | -- | -- | ||||||
Income tax benefit (expense) | 68 | (163 | ) | |||||
Income (loss) from discontinued operations | $ | (108 | ) | $ | 465 | |||
Assets and liabilities held for sale as of March 31, 2007 and December 31, 2006 relate entirely to our RMPT operations and primarily consist of accounts receivable, supplies and accrued expenses. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
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 $1,904,000 for the three months ended March 31, 2006. |
8. Income Taxes
Effective January 1, 2007, we adopted Financial Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. Adoption of FIN 48 on January 1, 2007, did not result in a cumulative effect adjustment to our retained earnings. At January 1, 2007, our unrecognized tax benefits totaled $2.4 million and are included in deferred and other tax liabilities, none of which, if recognized in total, would impact the effective income tax rate. There have been no additions or subtractions to the total unrecognized tax benefits during the quarter ended March 31, 2007. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. In addition to any risks and uncertainties specifically identified below and in the text surrounding forward-looking statements in this report, you should review the risk factors described in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from those presented. |
• | uncertainties in our establishing or maintaining relationships with physicians and hospitals; | |
• | the impact of current and future laws and governmental regulations; | |
• | uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement; | |
• | the effects of competition and technological changes; | |
• | the availability (or lack thereof) of acquisition or combination opportunities; and | |
• | general economic, market or business conditions. |
General
We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. We now have two reportable segments: urology services and medical products. Our specialty vehicle manufacturing division, which was sold on July 31, 2006, was also considered a reportable segment prior to its sale. |
-15- |
Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Urology Services. 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. |
• | 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. |
-16- |
Item 2 — Management’s Discussion and Analysis of Financial Condition and |
• | Fees for operating our lithotripters and laser devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and lasers 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, and are the exclusive distribution of the Revolix branded laser. |
• | 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 distribute the Revolix laser and, we also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. |
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. |
-17- |
Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Recent Developments
On February 13, 2007, we entered into a Stock Purchase Agreement and an Interest Purchase Agreement pursuant to which we agreed to purchase all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), all of the outstanding capital stock of Keystone Kidney Associates, PC, and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $8,100,000 plus an earnout. The transaction is subject to certain closing conditions and we can give no assurances that it will close. |
Critical Accounting Policies and Estimates.
Management has identified the following critical accounting policies and estimates: |
-18- |
Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Three months ended March 31, 2007 compared to the three months ended March 31, 2006 |
Our total revenues for the three months ended March 31, 2007 decreased $4,355,000 (12%) as compared the same period in 2006. Revenues from our urology services segment decreased $2,369,000 (8%) in the quarter. Revenues from our lithotripsy business decreased $2,245,000 for the first quarter of 2007 as compared to the same period in 2006, while revenues from our prostate business decreased $124,000 in 2007 as compared to the same period in 2006. The actual number of lithotripsy procedures performed in the first quarter of 2007 decreased by 12% compared to 2006, primarily due to partnership and mobile route closures in late 2006 and continued weak performance across our western region partnerships in early 2007. The average rate per procedure increased by 2% in the first quarter of 2007 as compared to the same period in 2006. Revenues for our medical products segment decreased by $1,961,000 (32%) as of March 31, 2007 compared to the same period in 2006. Medical products revenues before intersegment eliminations totaled $6,809,000 for the first quarter of 2007 and $8,876,000 for 2006. We sold 1 device and 24 tables in the first quarter of 2007 compared to 8 devices and 24 tables during the same period in 2006. Revenues from our service operations and consumable sales decreased $837,000 in the first quarter of 2007 as compared to 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations which we closed in late 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $616,000 and $266,000 for the quarters ended March 31, 2007 and 2006, respectively. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Depreciation and amortization expense increased $127,000 in the first quarter of 2007 as compared to the same period in 2006, due to an increase in our fixed assets from March 31, 2006 to March 31, 2007. |
Liquidity and Capital Resources
Cash Flows
Our cash and cash equivalents were $24,999,000 and $27,857,000 at March 31, 2007 and December 31, 2006, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the three months ended March 31, 2007 and 2006, our subsidiaries distributed cash of approximately $11,810,000 and $14,196,000, respectively, to minority interest holders. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Accounts receivable as of March 31, 2007 decreased $349,000 from December 31, 2006. This decrease relates primarily to lower urology revenues as well as to the timing of collections. Bad debt expense was less than $75,000 for the three months ended March 31, 2007. |
Senior Credit Facility
Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of March 31, 2007, there were no amounts drawn on the revolver. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. We were in compliance with the covenants under our senior credit facility as of March 31, 2007. |
Other
Other long term debt. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas. As of March 31, 2007, we had notes totaling $10.7 million related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years. |
Other long term obligations. At March 31, 2007, we had an obligation totaling $300,000 related to payments to the previous owner of Aluminum Body Corporation, a wholly owned subsidiary of ours that we sold as part of the sale of our specialty vehicles manufacturing segment (“ABC”), for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at March 31, 2007, as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation totaling $96,000 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of the Prime-HSS merger, two obligations totaling $88,000 related to payments to two previous employees of HSS. One obligation is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement. |
General |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
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) | $ | 10,681 | $ | 5,425 | $ | 4,352 | $ | 872 | $ | 32 | |||||||
Operating Leases (2) | 7,049 | 1,608 | 2,798 | 1,828 | 815 | ||||||||||||
Non-compete contracts (3) | 483 | 437 | 46 | - | - | ||||||||||||
Total | $ | 18,213 | $ | 7,470 | $ | 7,196 | $ | 2,700 | $ | 847 | |||||||
(1) | Represents long term debt as discussed above. | ||||
(2) | Represents operating leases in the ordinary course of our business. | ||||
(3) | Represents an obligation of $300 due to the previous owner of ABC, at a rate of $75 per quarter, an obligation of $96 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 $58 due to a previous employee of HealthTronics, at a rate of $8 per month until October 31, 2007 and an obligation of $29 due to a previous employee of HealthTronics, at a rate of $4 per month until October 31, 2007. |
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) as described in Note 8 to the condensed consolidated financial statements. As of January 1, 2007 and March 31, 2007, our total liabilities for unrecognized tax benefits amounted to $2.4 million. We do not believe that our adoption of FIN 48 has a material effect on the schedule of cash contractual obligations included in our most recent Annual Report on Form 10-K because we cannot make a reasonably reliable estimate of the amount and period of related future payment of our FIN 48 liabilities. |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2007 | $ | 5,425 | ||||
2008 | 2,520 | |||||
2009 | 1,832 | |||||
2010 | 754 | |||||
2011 | 118 | |||||
Thereafter | 32 | |||||
Total | $ | 10,681 | ||||
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. 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 credit facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our credit facility with our lenders. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
We intend to increase our urology services operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We plan to increase our medical products segment by offering new equipment and expanding our customer base. We intend to fund the purchase price for future acquisitions and developments using borrowings under our senior credit facility and cash flows from our operations. In addition, we may use shares of our common stock in such acquisitions where appropriate. |
Inflation
Our operations are not significantly affected by inflation because we are not required to make large investments in fixed assets. However, the rate of inflation will affect certain of our expenses, such as employee compensation and benefits. |
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) finalized Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from FASB No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48, effective January 1, 2007 and this adoption did not have a material effect on our financial position or results of operations. |
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Item 3 — Quantitative and Qualitative Disclosures |
Interest Rate Risk
As of March 31, 2007, we had long-term debt (including current portion) totaling $10,681,000, of which $6,908,000 had fixed rates of 1% to 11%, and $3,773,000 incurred interest at a variable rate equal to a specified prime rate. We are exposed to some market risk due to the remaining floating interest rate debt totaling $3,773,000. We make monthly or quarterly payments of principal and interest on $2,128,000 of the floating rate debt. An increase in interest rates of 1% would result in a $37,700 annual increase in interest expense on this existing principal balance. |
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Item 4 – Controls and Procedures |
As of March 31, 2007, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2007, our disclosure controls and procedures were effective. |
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PART IIOTHER INFORMATION |
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Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. |
Item 6. Exhibits
10.1 10.2 10.3 10.4 31.1* 31.2* 32.1* 32.2* | Stock Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., Keystone ABG Inc., Keystone Kidney Associates, PC, David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2007). Interest Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2007). Amended and Restated Distribution Agreement, dated as of February 28, 2007, by and among HealthTronics, Inc., Lisa Laser USA, Inc., and LISA laser products OHG (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2007). Amended and Restated Executive Employment Agreement, effective as of January 1, 2007, by and between the Company and Christopher B. Schneider (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 March 23, 2007). Certification of Chief Executive Officer Certification of Chief Financial Officer Certification of Chief Executive Officer Certification of Chief Financial Officer |
* Filed herewith. |
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SIGNATURES |
Pursuant to the requirements 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. |
Date: May 7, 2007 | HEALTHTRONICS, INC. By:/s/ Ross A. Goolsby Ross A. Goolsby, Chief Financial Officer |
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