_______________________________________________________
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 June 30, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
______ to ______
Commission File Number: 000-30406
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
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 August 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 June 30, | Six Months Ended June 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2007 | 2006 | 2007 | 2006 | ||||||||||||||
Revenue: | |||||||||||||||||
Urology Services | $ | 30,836 | $ | 31,113 | $ | 59,221 | $ | 61,867 | |||||||||
Medical Products | 4,586 | 5,210 | 8,825 | 11,410 | |||||||||||||
Other | 141 | 151 | 268 | 303 | |||||||||||||
Total revenue | 35,563 | 36,474 | 68,314 | 73,580 | |||||||||||||
Cost of services and general and administrative expenses: | |||||||||||||||||
Salaries, wages and benefits | 11,323 | 10,292 | 22,254 | 21,099 | |||||||||||||
Other costs of services | 4,936 | 3,590 | 9,550 | 8,489 | |||||||||||||
General and administrative | 1,791 | 2,080 | 3,800 | 4,189 | |||||||||||||
Legal and professional | 486 | 1,432 | 1,093 | 1,937 | |||||||||||||
Manufacturing costs | 1,785 | 2,749 | 3,848 | 6,444 | |||||||||||||
Advertising | 381 | 581 | 556 | 807 | |||||||||||||
Other | 11 | 5 | 15 | 220 | |||||||||||||
Depreciation and amortization | 2,776 | 2,755 | 5,592 | 5,444 | |||||||||||||
23,489 | 23,484 | 46,708 | 48,629 | ||||||||||||||
Operating income | 12,074 | 12,990 | 21,606 | 24,951 | |||||||||||||
Other income (expenses): | |||||||||||||||||
Interest and dividends | 311 | 111 | 588 | 243 | |||||||||||||
Interest expense | (212 | ) | (322 | ) | (448 | ) | (646 | ) | |||||||||
99 | (211 | ) | 140 | (403 | ) | ||||||||||||
Income from continuing operations before provision | |||||||||||||||||
for income taxes and minority interest | 12,173 | 12,779 | 21,746 | 24,548 | |||||||||||||
Minority interest in consolidated income | 11,275 | 11,293 | 20,784 | 21,649 | |||||||||||||
Provision for income taxes | 581 | 667 | 566 | 1,272 | |||||||||||||
Income from continuing operations | 317 | 819 | 396 | 1,627 | |||||||||||||
Income (loss) from discontinued operations, net of tax | (138 | ) | 549 | (247 | ) | 1,014 | |||||||||||
Net income | $ | 179 | $ | 1,368 | $ | 149 | $ | 2,641 | |||||||||
Basic earnings per share: | |||||||||||||||||
Income from continuing operations | $ | 0.01 | $ | 0.02 | $ | 0.01 | $ | 0.05 | |||||||||
Income (loss) from discontinued operations | $ | -- | $ | 0.02 | $ | (0.01 | ) | $ | 0.03 | ||||||||
Net income | $ | 0.01 | $ | 0.04 | $ | -- | $ | 0.08 | |||||||||
Weighted average shares outstanding | 35,425 | 35,056 | 35,416 | 34,981 | |||||||||||||
Diluted earnings per share: | |||||||||||||||||
Income from continuing operations | $ | 0.01 | $ | 0.02 | $ | 0.01 | $ | 0.04 | |||||||||
Income (loss) from discontinued operations | $ | -- | $ | 0.02 | $ | (0.01 | ) | $ | 0.03 | ||||||||
Net income | $ | 0.01 | $ | 0.04 | $ | -- | $ | 0.07 | |||||||||
Weighted average shares outstanding | 35,426 | 35,361 | 35,422 | 35,306 | |||||||||||||
See accompanying notes to condensed consolidated financial statements. |
-3- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
($ in thousands) | June 30, 2007 | December 31, 2006 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,864 | $ | 27,857 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,147 in 2007 and $2,166 in 2006 | 23,104 | 22,752 | ||||||
Other receivables | 849 | 1,201 | ||||||
Deferred income taxes | 7,148 | 6,825 | ||||||
Prepaid expenses and other current assets | 2,268 | 1,716 | ||||||
Inventory | 11,543 | 11,474 | ||||||
Total current assets | 63,776 | 71,825 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 45,034 | 46,155 | ||||||
Building and leasehold improvements | 12,374 | 12,710 | ||||||
57,408 | 58,865 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (25,057 | ) | (24,595 | ) | ||||
Property and equipment, net | 32,351 | 34,270 | ||||||
Assets held for sale | 701 | 1,258 | ||||||
Other investments | 1,384 | 1,348 | ||||||
Goodwill, at cost | 233,700 | 229,261 | ||||||
Intangible assets | 5,652 | 5,669 | ||||||
Other noncurrent assets | 5,282 | 3,102 | ||||||
$ | 342,846 | $ | 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) | June 30, 2007 | December 31, 2006 | ||||||
---|---|---|---|---|---|---|---|---|
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 5,152 | $ | 5,664 | ||||
Accounts payable | 5,975 | 6,295 | ||||||
Accrued distributions to minority interests | 126 | 7,687 | ||||||
Accrued expenses | 7,089 | 10,477 | ||||||
Total current liabilities | 18,342 | 30,123 | ||||||
Liabilities held for sale | 92 | 258 | ||||||
Long-term debt, net of current portion | 4,743 | 5,673 | ||||||
Other long term obligations | 118 | 134 | ||||||
Deferred income taxes | 28,482 | 24,924 | ||||||
Total liabilities | 51,777 | 61,112 | ||||||
Minority interest | 34,228 | 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 | ||||||||
and 35,425,097 outstanding in 2007; 35,475,236 issued and 35,379,831 | ||||||||
outstanding in 2006 | 201,691 | 200,941 | ||||||
Accumulated earnings | 55,622 | 55,473 | ||||||
Treasury stock, at cost, 50,139 shares in 2007 and 95,405 shares in 2006 | (472 | ) | (897 | ) | ||||
Total stockholders' equity | 256,841 | 255,517 | ||||||
$ | 342,846 | $ | 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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Six Months Ended June 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | 2006 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Fee and other revenue collected | $ | 68,403 | $ | 76,334 | ||||
Cash paid to employees, suppliers of goods and others | (40,768 | ) | (44,557 | ) | ||||
Interest received | 588 | 242 | ||||||
Interest paid | (438 | ) | (649 | ) | ||||
Taxes paid | (573 | ) | (389 | ) | ||||
Discontinued operations | (114 | ) | (6,055 | ) | ||||
Net cash provided by operating activities | 27,098 | 24,926 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of entities, net of cash acquired | (7,004 | ) | -- | |||||
Purchases of equipment and leasehold improvements | (3,466 | ) | (6,464 | ) | ||||
Proceeds from sales of assets | 974 | 474 | ||||||
Distributions from investments | -- | 191 | ||||||
Other | (18 | ) | (40 | ) | ||||
Discontinued operations | (39 | ) | (660 | ) | ||||
Net cash used in investing activities | (9,553 | ) | (6,499 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on notes payable | 1,096 | 2,047 | ||||||
Payments on notes payable, exclusive of interest | (2,670 | ) | (3,459 | ) | ||||
Distributions to minority interest | (25,079 | ) | (29,800 | ) | ||||
Contributions by minority interest, net of buyouts | (28 | ) | (775 | ) | ||||
Exercise of stock options | -- | 973 | ||||||
Purchase of treasury stock | -- | (73 | ) | |||||
Discontinued operations | (8 | ) | (294 | ) | ||||
Net cash used in financing activities | (26,689 | ) | (31,381 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (9,144 | ) | (12,954 | ) | ||||
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 $(349) and $832 | ||||||||
for June 30, 2007 and 2006, respectively | $ | 18,515 | $ | 12,773 | ||||
See accompanying notes to condensed consolidated financial statements. |
-6- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) |
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Six Months Ended June 30, | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 149 | $ | 2,641 | ||||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities | ||||||||
Minority interest in consolidated income | 20,784 | 21,649 | ||||||
Depreciation and amortization | 5,592 | 5,444 | ||||||
Provision for uncollectible accounts | 254 | 67 | ||||||
Provision for deferred income taxes | 3,233 | (463 | ) | |||||
Income on equity investments | -- | (134 | ) | |||||
Non-cash share based compensation | 1,176 | 1,019 | ||||||
Other | (32 | ) | (396 | ) | ||||
Discontinued Operations | 286 | (5,902 | ) | |||||
Changes in operating assets and liabilities, | ||||||||
net of effect of purchase transactions | ||||||||
Accounts receivable | (729 | ) | 1,375 | |||||
Other receivables | 732 | 1,269 | ||||||
Other assets | (450 | ) | 729 | |||||
Accounts payable | (439 | ) | 88 | |||||
Accrued expenses | (3,458 | ) | (2,460 | ) | ||||
Total adjustments | 26,949 | 22,285 | ||||||
Net cash provided by operating activities | $ | 27,098 | $ | 24,926 | ||||
See accompanying notes to condensed consolidated financial statements. |
-7- |
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 June 30, 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. |
-8- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
2.Debt
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%. We were required to make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments would have increased to $29.7 million. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. At June 30, 2007, there were no amounts drawn on the revolver. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. Our assets and the stock of our subsidiaries collateralize the revolving credit facility. We were in compliance with the covenants under our senior credit facility as of June 30, 2007. |
3.Earnings per share
Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options and warrants. A reconciliation of such EPS data is as follows: |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2007 | ||||||||
Net income | $ | 149 | $ | 149 | ||||
Weighted average shares outstanding | 35,416 | 35,416 | ||||||
Effect of dilutive securities | -- | 6 | ||||||
Shares for EPS calculation | 35,416 | 35,422 | ||||||
Net income per share | $ | -- | $ | -- | ||||
Six Months Ended June 30, 2006 | ||||||||
Net income | $ | 2,641 | $ | 2,641 | ||||
Weighted average shares outstanding | 34,981 | 34,981 | ||||||
Effect of dilutive securities | -- | 325 | ||||||
Shares for EPS calculation | 34,981 | 35,306 | ||||||
Net income per share | $ | 0.08 | $ | 0.07 | ||||
-9- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2007 | ||||||||
Net income | $ | 179 | $ | 179 | ||||
Weighted average shares outstanding | 35,425 | 35,425 | ||||||
Effect of dilutive securities | -- | 1 | ||||||
Shares for EPS calculation | 35,425 | 35,426 | ||||||
Net income per share | $ | 0.01 | $ | 0.01 | ||||
Three Months Ended June 30, 2006 | ||||||||
Net income | $ | 1,368 | $ | 1,368 | ||||
Weighted average shares outstanding | 35,056 | 35,056 | ||||||
Effect of dilutive securities | -- | 305 | ||||||
Shares for EPS calculation | 35,056 | 35,361 | ||||||
Net income per share | $ | 0.04 | $ | 0.04 | ||||
We did not include in our computation of diluted EPS unexercised stock options to purchase 3,881,000 and 1,015,000 shares of our common stock as of June 30, 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. The operations of our Claripath pathology laboratory are also included in our medical products segment at this time. Our specialty vehicle manufacturing segment 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 | ||||||
---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2007 | ||||||||
Revenue from external customers | $ | 59,221 | $ | 8,825 | ||||
Intersegment revenues | -- | 4,801 | ||||||
Segment profit | 4,442 | 17 | ||||||
Six Months Ended June 30, 2006 | ||||||||
Revenue from external customers | $ | 61,867 | $ | 11,410 | ||||
Intersegment revenues | -- | 5,190 | ||||||
Segment profit (loss) | 7,960 | (763 | ) |
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: |
Six Months ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | 2006 | |||||||||
Total segment profit | $ | 4,459 | $ | 7,197 | |||||||
Unallocated corporate revenues | 268 | 303 | |||||||||
Unallocated corporate expenses: | |||||||||||
General and administrative | (3,701 | ) | (4,125 | ) | |||||||
Net interest income (expense) | 302 | (94 | ) | ||||||||
Other, net | (366 | ) | (382 | ) | |||||||
Total unallocated corporate expenses | (3,765 | ) | (4,601 | ) | |||||||
Income before income taxes | $ | 962 | $ | 2,899 | |||||||
-11- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands) | Urology Services | Medical Products | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2007 | ||||||||
Revenue from external customers | $ | 30,836 | $ | 4,586 | ||||
Intersegment revenues | -- | 2,232 | ||||||
Segment profit (loss) | 2,772 | (103 | ) | |||||
Three Months Ended June 30, 2006 | ||||||||
Revenue from external customers | $ | 31,113 | $ | 5,210 | ||||
Intersegment revenues | -- | 2,513 | ||||||
Segment profit (loss) | 4,794 | (684 | ) |
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 June 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | 2006 | ||||||
Total segment profit | $ | 2,669 | $ | 4,110 | ||||
Unallocated corporate revenues | 141 | 151 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (1,884 | ) | (2,539 | ) | ||||
Net interest income (expense) | 150 | (45 | ) | |||||
Other, net | (178 | ) | (191 | ) | ||||
Total unallocated corporate expenses | (1,912 | ) | (2,775 | ) | ||||
Income before income taxes | $ | 898 | $ | 1,486 | ||||
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. |
-12- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
As of June 30, 2007, total unrecognized share-based compensation cost related to unvested stock options was approximately $4.3 million, which is expected to be recognized over a weighted average period of approximately 2.1 years. We have included approximately $752,000 and $381,000 for share-based compensation cost in the accompanying condensed consolidated statements of income for the six months ended June 30, 2007 and 2006, respectively. |
6. Inventory
As of June 30, 2007 and December 31, 2006, inventory consisted of the following: |
($ in thousands) | June 30, 2007 | December 31, 2006 | ||||||
---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 8,600 | $ | 7,070 | ||||
Finished Goods | 2,943 | 4,404 | ||||||
$ | 11,543 | $ | 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”). As a result of this decision and a termination agreement we entered into with EDAP, we forfeited 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 forfeited our rights to vest in additional warrants to acquire 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. |
-13- |
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 $20.4 million of our deferred tax assets. We have included the operations of this business in discontinued operations in the accompanying condensed consolidated statements of income. |
Condensed Consolidated Statements of Income | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | 2006 | ||||||
For the Six Months Ended June 30 | ||||||||
Revenue | ||||||||
Specialty Vehicle Manufacturing | $ | -- | $ | 51,993 | ||||
CryoSurgery | -- | 869 | ||||||
Rocky Mountain Prostate Thermotherapies | 2,237 | 2,206 | ||||||
HIFU | -- | -- | ||||||
Cost of services | ||||||||
Specialty Vehicle Manufacturing | -- | (45,233 | ) | |||||
CryoSurgery | -- | (893 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (2,440 | ) | (2,274 | ) | ||||
HIFU | (198 | ) | (321 | ) | ||||
Depreciation and amortization | ||||||||
Specialty Vehicle Manufacturing | -- | (541 | ) | |||||
CryoSurgery | -- | (285 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | (82 | ) | |||||
HIFU | -- | (8 | ) | |||||
Other | ||||||||
Specialty Vehicle Manufacturing | -- | (42 | ) | |||||
Interest expense allocated to discontinued operations | -- | (4,049 | ) | |||||
CryoSurgery | -- | (3 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | -- | ||||||
HIFU | -- | -- | ||||||
Income tax benefit (expense) | 154 | (323 | ) | |||||
Income (loss) from discontinued operations | $ | (247 | ) | $ | 1,014 | |||
-14- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Income | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | 2006 | ||||||
For the Three Months Ended June 30 | ||||||||
Revenue | ||||||||
Specialty Vehicle Manufacturing | $ | -- | $ | 26,314 | ||||
CryoSurgery | -- | 416 | ||||||
Rocky Mountain Prostate Thermotherapies | 1,099 | 991 | ||||||
HIFU | -- | -- | ||||||
Cost of services | ||||||||
Specialty Vehicle Manufacturing | -- | (22,791 | ) | |||||
CryoSurgery | -- | (435 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (1,274 | ) | (1,072 | ) | ||||
HIFU | (49 | ) | (150 | ) | ||||
Depreciation and amortization | ||||||||
Specialty Vehicle Manufacturing | -- | (210 | ) | |||||
CryoSurgery | -- | (141 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | (44 | ) | |||||
HIFU | -- | (4 | ) | |||||
Other | ||||||||
Specialty Vehicle Manufacturing | -- | (20 | ) | |||||
Interest expense allocated to discontinued operations | -- | (2,145 | ) | |||||
CryoSurgery | -- | (1 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | -- | ||||||
HIFU | -- | -- | ||||||
Income tax benefit (expense) | 86 | (159 | ) | |||||
Income (loss) from discontinued operations | $ | (138 | ) | $ | 549 | |||
Assets and liabilities held for sale as of June 30, 2007 and December 31, 2006 relate entirely to our RMPT operations and primarily consist of accounts receivable, supplies and accrued expenses. |
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 June 30, 2007. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
Our continuing practice is to recognize interest and penalties related to income tax matters in interest expense. We had approximately $150,000 of accrued interest and no accrued interest penalties at December 31, 2006. The accrued interest is included as a component of the unrecognized tax benefit noted above. |
9. Aquisitions
Effective April 28, 2007, we acquired a 21% general partner interest in Keystone Mobile Partners, L.P. (“Keystone”) and an additional 14% limited partner interest in Keystone for an aggregate purchase price of approximately $6.8 million plus certain additional cash consideration to be paid depending on the number of limited partner units sold by us in a post-closing offering of such units, plus certain earnouts. Keystone provides lithotripsy services to the Greater Philadelphia and eastern Pennsylvania area. We recorded approximately $7 million of goodwill related to this transaction, all of which is tax deductible. |
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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. |
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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. |
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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 U.S. distributor of the Revolix branded laser. The operations of our Claripath pathology laboratory are also included in our medical products segment at this time. |
• | 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. In some cases, we lease certain equipment to our partnerships as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed. |
• | Fees for Claripath anatomical pathology services. We provide anatomical pathology services primarily to the urology market place. Revenues from these services are recorded when the related laboratory procedures are performed. |
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. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
On June 22, 2006, we and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation (“Oshkosh”), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006 and have classified this segment as discontinued operations in the accompanying condensed consolidated financial statements. |
Recent Developments
Effective April 28, 2007, we acquired all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $6.8 million, plus certain additional cash consideration to be paid depending on the number of limited partner units sold by us in a post-closing offering of such units, plus an earnout. |
Critical Accounting Policies and Estimates.
Management has identified the following critical accounting policies and estimates: |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts and circumstances relating to these matters and certain negotiations with related payors. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Our costs of services and general and administrative expenses for the first half of 2007 decreased $1,921,000 compared to first half of 2006. Our costs associated with salaries, wages and benefits increased $1,155,000 (5%) in the first half of 2007 as compared to the same period in 2006, primarily due to performance merit increases and variable compensation and strategic resource additions related to our laboratory operations and Revolix technology, which were partially offset by decreases from our restructuring efforts in late 2006. Our costs associated with other costs of services for the six months ended June 30, 2007 increased $1,061,000 (12%) compared to the same period in 2006. This increase is primarily due to several large gains on the sales of certain partnership interests in 2006, which were recorded against this expense category. Our general and administrative costs decreased $389,000 (9%) over the first half of 2006, primarily due to decreased costs related to our restructuring efforts in late 2006. Costs associated with legal and professional fees decreased $844,000 (44%) in the first half of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006. Manufacturing costs decreased $2,596,000 (40%) in the six month period ending June 30, 2007 as compared to the same period in 2006. This decrease is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs decreased $251,000 (31%) in the first half of 2007 as compared to the same period in 2006. This relates primarily to payments for product endorsement in 2006. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Our costs of services and general and administrative expenses for the second quarter of 2007 was consistent with such costs during the second quarter of 2006. Our costs associated with salaries, wages and benefits increased $1,031,000 (10%) in the second quarter of 2007 as compared to the same period in 2006, primarily due to performance merit increases and variable compensation, strategic resource additions related to our laboratory operations, Revolix technology, and corporate marketing, which were partially offset by decreases from our restructuring efforts in late 2006. Our costs associated with other costs of services for the quarter ended June 30, 2007 increased $1,346,000 (37%) compared to the same period in 2006. This increase is primarily due to gains on the sales of certain partnership interests in 2006 and increased costs for repairs and maintenance, partially offset by lower costs for medical supplies. Our general and administrative costs decreased $289,000 (14%) over the second quarter of 2006, primarily due to decreased costs related to our restructuring efforts in late 2006. Costs associated with legal and professional fees decreased $946,000 (66%) in the second quarter of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006. Manufacturing costs decreased $964,000 (35%) in the three month period ending June 30, 2007 as compared to the same period in 2006. This decrease is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs decreased $200,000 (34%) in the second quarter of 2007 as compared with the same period in 2006. This relates primarily to payments for product endorsement in 2006. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
In July 2006, we entered into a purchase agreement to sell the RMPT business for $1.35 million. The closing of such sale is subject to customary closing conditions. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
Accounts receivable as of June 30, 2007 increased $352,000 from December 31, 2006. This increase relates primarily to purchased receivables in our new Keystone partnership offset by lower urology revenues as well as to the timing of collections. Bad debt expense was less than $275,000 for the six months ended June 30, 2007. |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and |
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) | $ | 9,907 | $ | 5,162 | $ | 4,026 | $ | 686 | $ | 33 | |||||||
Operating Leases (2) | 6,723 | 1,694 | 2,693 | 1,627 | 709 | ||||||||||||
Non-compete contracts (3) | 478 | 365 | 113 | -- | -- | ||||||||||||
Total | $ | 17,108 | $ | 7,221 | $ | 6,832 | $ | 2,313 | $ | 742 | |||||||
(1) | Represents long term debt as discussed above. | ||||
(2) | Represents operating leases in the ordinary course of our business. | ||||
(3) | Represents an obligation of $225 due to the previous owner of ABC, at a rate of $75 per quarter, an obligation of $83 due to a previous 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 $50 due to previous employees of HSS, at a rate of $13 per month until October 31, 2007, and an obligation of $120 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010. |
In addition, the scheduled principal repayments for all long term debt as of June 30, 2007 are payable as follows: |
($ in thousands) | |||||
---|---|---|---|---|---|
2007 | $ | 5,162 | |||
2008 | 2,368 | ||||
2009 | 1,658 | ||||
2010 | 617 | ||||
2011 | 69 | ||||
Thereafter | 33 | ||||
Total | $ | 9,907 | |||
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 June 30, 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. |
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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. |
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Item 3 — Quantitative and Qualitative Disclosures |
Interest Rate Risk
As of June 30, 2007, we had long-term debt (including current portion) totaling $9,907,000, of which $6,371,000 had fixed rates of 1% to 11%, and $3,536,000 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 $3,536,000. We make monthly or quarterly payments of principal and interest on $1,802,000 of the floating rate debt. An increase in interest rates of 1% would result in a $35,400 annual increase in interest expense on this existing principal balance. |
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Item 4 – Controls and Procedures |
As of June 30, 2007, under the supervision and with the participation of our management, including our acting 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 acting Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 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 4. Submission of Matters to a Vote of Security Holders
On May 3, 2007, we held an annual meeting of our stockholders to consider and vote on the election of our board of directors. Management solicited proxies for this meeting. |
Nominee | Votes For | Votes Against | Votes Withheld | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R. Steven Hicks | 30,764,823 | 783,796 | - | ||||||||
Sam B. Humphries | 30,602,129 | 946,490 | - | ||||||||
Donny R. Jackson | 29,722,486 | 1,826,133 | - | ||||||||
Timothy J. Lindgren | 29,880,164 | 1,668,455 | - | ||||||||
Kevin A. Richardson, II | 30,456,117 | 1,092,502 | - | ||||||||
Kenneth S. Shifrin | 29,961,868 | 1,586,751 | - | ||||||||
Perry M. Waughtal | 30,181,885 | 1,366,734 | - | ||||||||
Argil J. Wheelock, M.D. | 30,464,872 | 1,083,747 | - | ||||||||
Mark G. Yudof | 30,773,857 | 774,762 | - |
Item 6. Exhibits
10.1 10.2 10.3 | Agreement and Release, dated as of April 3, 2007, by and among HealthTronics, Inc., HT Prostate Therapy Management Company, LLC, EDAP TMS S. A., EDAP S. A. and Technomed Medical Systems S. A. (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 April 10, 2007). First Amendment to Stock Purchase Agreement, dated as of May 25, 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 May 31, 2007). First Amendment to Interest Purchase Agreement, dated as of May 25, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 31, 2007). |
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10.4 10.5 31.1* 31.2* 32.1* 32.2* | Letter agreement, dated as of July 9, 2007, by and among HealthTronics, Inc., HT Prostate Therapy Management Company, LLC, EDAP TMS S. A., EDAP S. A. and Technomed Medical Systems S. A. (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 12, 2007). Termination and Consulting Agreement, dated July 9, 2007, by and between HealthTronics, Inc. and Christopher B. Schneider. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 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: August 6, 2007 | HEALTHTRONICS, INC. By:/s/ Ross A. Goolsby Ross A. Goolsby Chief Financial Officer |
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