_______________________________________________________
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, 2008
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller reporting company ¨(Do not check if a smaller reporting company) |
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, 2008 38,272,888 |
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, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2008 | 2007 | |||||||||||
Revenue: | ||||||||||||||
Urology Services | $ | 37,865 | $ | 30,836 | $ | 67,415 | $ | 59,221 | ||||||
Medical Products | 4,584 | 4,586 | 8,831 | 8,825 | ||||||||||
Other | 131 | 141 | 288 | 268 | ||||||||||
Total revenue | 42,580 | 35,563 | 76,534 | 68,314 | ||||||||||
Cost of services and general and administrative expenses: | ||||||||||||||
Urology Services | 17,399 | 13,281 | 30,390 | 26,966 | ||||||||||
Medical Products | 1,736 | 2,839 | 3,913 | 5,243 | ||||||||||
Selling, general & administrative | 5,269 | 4,593 | 9,586 | 8,907 | ||||||||||
Depreciation and amortization | 3,069 | 2,776 | 5,697 | 5,592 | ||||||||||
27,473 | 23,489 | 49,586 | 46,708 | |||||||||||
Operating income | 15,107 | 12,074 | 26,948 | 21,606 | ||||||||||
Other income (expenses): | ||||||||||||||
Interest and dividends | 101 | 311 | 292 | 588 | ||||||||||
Interest expense | (246 | ) | (212 | ) | (409 | ) | (448 | ) | ||||||
(145 | ) | 99 | (117 | ) | 140 | |||||||||
Income from continuing operations before provision | ||||||||||||||
for income taxes and minority interest | 14,962 | 12,173 | 26,831 | 21,746 | ||||||||||
Minority interest in consolidated income | 13,781 | 11,275 | 24,828 | 20,784 | ||||||||||
Provision for income taxes | 471 | 581 | 841 | 566 | ||||||||||
Income from continuing operations | 710 | 317 | 1,162 | 396 | ||||||||||
Loss from discontinued operations, net of tax | -- | (138 | ) | -- | (247 | ) | ||||||||
Net income | $ | 710 | $ | 179 | $ | 1,162 | $ | 149 | ||||||
Basic earnings per share: | ||||||||||||||
Income from continuing operations | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||
Loss from discontinued operations | -- | -- | -- | (0.01 | ) | |||||||||
Net income | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | -- | ||||||
Weighted average shares outstanding | 37,059 | 35,425 | 36,242 | 35,416 | ||||||||||
Diluted earnings per share: | ||||||||||||||
Income from continuing operations | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||
Loss from discontinued operations | -- | -- | -- | (0.01 | ) | |||||||||
Net income | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | -- | ||||||
Weighted average shares outstanding | 37,165 | 35,426 | 36,295 | 35,422 | ||||||||||
See accompanying notes to condensed consolidated financial statements. |
-3- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
($ in thousands) | June 30, 2008 | December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,207 | $ | 25,198 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,537 in 2008 and $2,368 in 2007 | 24,021 | 21,889 | ||||||
Other receivables | 1,117 | 2,703 | ||||||
Deferred income taxes | 12,967 | 12,547 | ||||||
Prepaid expenses and other current assets | 3,525 | 1,656 | ||||||
Inventory | 8,880 | 10,221 | ||||||
Total current assets | 68,717 | 74,214 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 53,159 | 47,751 | ||||||
Building and leasehold improvements | 5,769 | 12,437 | ||||||
58,928 | 60,188 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (27,777 | ) | (27,169 | ) | ||||
Property and equipment, net | 31,151 | 33,019 | ||||||
Other investments | 1,799 | 1,353 | ||||||
Goodwill, at cost | 233,244 | 217,505 | ||||||
Intangible assets | 6,095 | 5,220 | ||||||
Other noncurrent assets | 4,357 | 4,745 | ||||||
$ | 345,363 | $ | 336,056 | |||||
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, 2008 | December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 3,886 | $ | 4,332 | ||||
Accounts payable | 7,409 | 5,859 | ||||||
Accrued distributions to minority interests | 95 | 226 | ||||||
Accrued expenses | 6,389 | 7,275 | ||||||
Total current liabilities | 17,779 | 17,692 | ||||||
Long-term debt, net of current portion | 3,206 | 4,194 | ||||||
Other long term obligations | 52 | 75 | ||||||
Deferred income taxes | 31,371 | 30,024 | ||||||
Total liabilities | 52,408 | 51,985 | ||||||
Minority interest | 40,831 | 41,653 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | ||||||||
Common stock, no par value, 70,000,000 authorized: 38,272,888 issued in 2008 | ||||||||
and 38,194,495 outstanding in 2008; 35,610,236 issued in 2007 and | ||||||||
35,560,097 outstanding in 2007 | 210,696 | 202,049 | ||||||
Accumulated earnings | 42,003 | 40,841 | ||||||
Treasury stock, at cost, 78,393 shares in 2008 and 50,139 shares in 2007 | (575 | ) | (472 | ) | ||||
Total stockholders' equity | 252,124 | 242,418 | ||||||
$ | 345,363 | $ | 336,056 | |||||
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) | 2008 | 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Fee and other revenue collected | $ | 79,750 | $ | 68,403 | ||||
Cash paid to employees, suppliers of goods and others | (44,896 | ) | (40,768 | ) | ||||
Interest received | 292 | 588 | ||||||
Interest paid | (388 | ) | (438 | ) | ||||
Taxes paid | (644 | ) | (573 | ) | ||||
Discontinued operations | -- | (114 | ) | |||||
Net cash provided by operating activities | 34,114 | 27,098 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of entities, net of cash acquired | (10,197 | ) | (7,004 | ) | ||||
Purchases of equipment and leasehold improvements | (5,615 | ) | (3,466 | ) | ||||
Proceeds from sales of assets | 7,753 | 974 | ||||||
Other | (190 | ) | (18 | ) | ||||
Discontinued operations | -- | (39 | ) | |||||
Net cash used in investing activities | (8,249 | ) | (9,553 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on notes payable | 7,341 | 1,096 | ||||||
Payments on notes payable, exclusive of interest | (9,351 | ) | (2,670 | ) | ||||
Distributions to minority interest | (30,132 | ) | (25,079 | ) | ||||
Contributions by minority interest, net of buyouts | (611 | ) | (28 | ) | ||||
Purchase of treasury stock | (103 | ) | -- | |||||
Discontinued operations | -- | (8 | ) | |||||
Net cash used in financing activities | (32,856 | ) | (26,689 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (6,991 | ) | (9,144 | ) | ||||
Cash and cash equivalents, beginning of period, includes cash | ||||||||
from discontinued operations of $(198) for December 31, 2006 | 25,198 | 27,659 | ||||||
Cash and cash equivalents, end of period, includes cash | ||||||||
from discontinued operations of $(349) for June 30, 2007 | $ | 18,207 | $ | 18,515 | ||||
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, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | ||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 1,162 | $ | 149 | ||||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities | ||||||||
Minority interest in consolidated income | 24,828 | 20,784 | ||||||
Depreciation and amortization | 5,697 | 5,592 | ||||||
Provision for uncollectible accounts | (54 | ) | 254 | |||||
Provision for deferred income taxes | 422 | 3,233 | ||||||
Non-cash share based compensation | 1,909 | 1,176 | ||||||
Other | (446 | ) | (32 | ) | ||||
Discontinued Operations | -- | 286 | ||||||
Changes in operating assets and liabilities, | ||||||||
net of effect of purchase transactions | ||||||||
Accounts receivable | 1,239 | (729 | ) | |||||
Other receivables | 1,712 | 732 | ||||||
Other assets | (8 | ) | (450 | ) | ||||
Accounts payable | (217 | ) | (439 | ) | ||||
Accrued expenses | (2,130 | ) | (3,458 | ) | ||||
Total adjustments | 32,952 | 26,949 | ||||||
Net cash provided by operating activities | $ | 34,114 | $ | 27,098 | ||||
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, 2008 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. |
2.Debt
Senior Credit Facility |
-8- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
On April 14, 2008, we amended our senior credit facility to (1) increase the revolving line of credit from $50 million to $60 million, (2) create an exception to the restricted payments negative covenant of the senior credit facility to enable us to repurchase up to $10 million of our common stock, through a stock repurchase program or otherwise, (3) increase the dollar amount of permitted acquisitions under the acquisitions negative covenant of the senior credit facility from $25 million to $30 million during any twelve month period beginning after April 14, 2008 and (4) create an exception from the calculation of such permitted acquisitions basket for our previously-announced acquisition of Advanced Medical Partners, Inc. (“AMPI”). |
3.Earnings per share
Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options, non-vested stock awards and warrants. A reconciliation of such EPS data is as follows: |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2008 | ||||||||
Net income | $ | 1,162 | $ | 1,162 | ||||
Weighted average shares outstanding | 36,242 | 36,242 | ||||||
Effect of dilutive securities | -- | 53 | ||||||
Shares for EPS calculation | 36,242 | 36,295 | ||||||
Net income per share | $ | 0.03 | $ | 0.03 | ||||
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 | $ | -- | $ | -- | ||||
-9- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2008 | ||||||||
Net income | $ | 710 | $ | 710 | ||||
Weighted average shares outstanding | 37,059 | 37,059 | ||||||
Effect of dilutive securities | -- | 106 | ||||||
Shares for EPS calculation | 37,059 | 37,165 | ||||||
Net income per share | $ | 0.02 | $ | 0.02 | ||||
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 | ||||
We did not include in our computation of diluted EPS unexercised stock options and non-vested stock awards to purchase 3,090,000 and 3,881,000 shares of our common stock as of June 30, 2008 and 2007, respectively, because the effect would be antidilutive. In May 2008, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 2,850,000 shares the number of shares available for issuance thereunder from 2,950,000 to 5,800,000 shares. |
4.Segment Reporting
We have two reportable segments: urology services and medical products. The urology services segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) photo-selective vaporization of the prostate (PVP), (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy (TUMT) in certain partnerships. All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancers cells. Our medical products segment sells and maintains lithotripters and their related consumables. We are also 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. |
-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, 2008 | ||||||||
Revenue from external customers | $ | 67,415 | $ | 8,831 | ||||
Intersegment revenues | -- | 5,229 | ||||||
Segment profit | 5,469 | 1,876 | ||||||
Six Months Ended June 30, 2007 | ||||||||
Revenue from external customers | $ | 59,221 | $ | 8,825 | ||||
Intersegment revenues | -- | 4,801 | ||||||
Segment profit | 4,442 | 17 |
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) | 2008 | 2007 | ||||||
Total segment profit | $ | 7,345 | $ | 4,459 | ||||
Unallocated corporate revenues | 288 | 268 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (5,372 | ) | (3,701 | ) | ||||
Net interest income (expense) | (32 | ) | 302 | |||||
Other, net | (226 | ) | (366 | ) | ||||
Total unallocated corporate expenses | (5,630 | ) | (3,765 | ) | ||||
Income before income taxes | $ | 2,003 | $ | 962 | ||||
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands) | Urology Services | Medical Products | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2008 | ||||||||
Revenue from external customers | $ | 37,865 | $ | 4,584 | ||||
Intersegment revenues | -- | 2,785 | ||||||
Segment profit | 3,223 | 1,121 | ||||||
Three Months Ended June 30, 2007 | ||||||||
Revenue from external customers | $ | 30,836 | $ | 4,586 | ||||
Intersegment revenues | -- | 2,232 | ||||||
Segment profit | 2,772 | (103 | ) |
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) | 2008 | 2007 | ||||||
Total segment profit | $ | 4,344 | $ | 2,669 | ||||
Unallocated corporate revenues | 131 | 141 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (3,095 | ) | (1,884 | ) | ||||
Net interest income (expense) | (82 | ) | 150 | |||||
Other, net | (117 | ) | (178 | ) | ||||
Total unallocated corporate expenses | (3,294 | ) | (1,912 | ) | ||||
Income before income taxes | $ | 1,181 | $ | 898 | ||||
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 value 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 |
In the first quarter of 2008, we granted a total of 675,166 of non-vested shares under our 2004 Equity Incentive Plan. 80,000 shares vest 25% on each of the first four anniversaries of the grant date. 386,857 shares vest based on the achievement of the performance targets outlined below. 208,309 shares vest 25% on each of the first four anniversaries of the grant date; however, their vesting can be accelerated if the following performance targets are reached. |
Percent of Grant Vesting | Performance Target (% increase over grant price) | |||
---|---|---|---|---|
25% | 15% | |||
25% | 30% | |||
25% | 45% | |||
25% | 60% |
On May 5, 2008, the first performance target was met and as a result 92,862 of the non-vested stock awards vested, which resulted in the recognition of approximately $307,000 in share based compensation cost. |
6. Inventory
As of June 30, 2008 and December 31, 2007, inventory consisted of the following: |
($ In thousands) | June 30, 2008 | December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 6,089 | $ | 6,144 | ||||
Finished Goods | 2,791 | 4,077 | ||||||
$ | 8,880 | $ | 10,221 | |||||
-13- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
7. Discontinued Operations
In November 2006, we announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device (HIFU) manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the exclusive rights in the United States, when and if a Pre-Market Approval is granted by the FDA and forfeiting our rights to earn additional warrants to acquire EDAP common stock. We have accordingly included our costs related to the clinical trials in discontinued operations in the accompanying condensed consolidated statements of income. |
Condensed Consolidated Statements of Income | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | |||||||||
For the Six Months Ended June 30 | ||||||||||
Revenue | ||||||||||
Rocky Mountain Prostate Thermotherapies | $ | 2,237 | ||||||||
HIFU | -- | |||||||||
Cost of services | ||||||||||
Rocky Mountain Prostate Thermotherapies | (2,440 | ) | ||||||||
HIFU | (198 | ) | ||||||||
Income tax benefit | 154 | |||||||||
Discontinued operations, net of tax | $ | (247 | ) | |||||||
Condensed Consolidated Statements of Income | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | |||||||||
For the Three Months Ended June 30 | ||||||||||
Revenue | ||||||||||
Rocky Mountain Prostate Thermotherapies | $ | 1,099 | ||||||||
HIFU | -- | |||||||||
Cost of services | ||||||||||
Rocky Mountain Prostate Thermotherapies | (1,274 | ) | ||||||||
HIFU | (49 | ) | ||||||||
Income tax benefit | 86 | |||||||||
Discontinued operations, net of tax | $ | (138 | ) | |||||||
-14- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
8. New Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), "Business Combinations", (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date. |
-15- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
9. Acquisitions
On April 17, 2008, we completed the acquisition of AMPI pursuant to the Stock Purchase Agreement dated March 18, 2008 between us, Litho Management, Inc., AMPI and the stockholders of AMPI. Founded in 2003, AMPI is a leading provider of urological cryosurgery services in the U.S. with operations in 46 states. We acquired the outstanding shares of capital stock of AMPI (other than shares already held by us) for a purchase price of approximately $6.9 million in cash and approximately 1.8 million shares of our common stock, plus a two-year earn-out based on the future achievement of EBITDA. We determined the value of our common stock by using an average closing price for the two trading days prior to and after the public announcement of the merger. Based upon our preliminary allocation of the purchase price, we recognized $12.8 million of goodwill related to this transaction, all of which is not tax deductible. |
Six Months Ended June 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands, except per share data) | 2008 | 2007 | ||||||
Total revenues | $ | 83,876 | $ | 83,879 | ||||
Total expenses | (82,298 | ) | (82,458 | ) | ||||
Discontinued Operations | -- | (247 | ) | |||||
Net income | $ | 1,578 | $ | 1,174 | ||||
Diluted earnings per share | $ | 0.04 | $ | 0.03 | ||||
10. Subsequent Events
On July 15, 2008, we acquired UroPath, LLC (“UroPath”) for $7.5 million in cash. Founded in 2003, UroPath is a leading provider of anatomical pathology laboratory services in the U.S. with locations in Florida, Texas, and Pennsylvania. |
-16- |
Item 2 — Management’s Discussion and Analysis |
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 medical devices, primarily to the urology marketplace. We have two reportable segments: urology services and medical products. |
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Item 2 — Management’s Discussion and Analysis |
We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy services. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater portion of the total non-physician fee. |
• | Fees for urology treatments. 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 or other entities, which we manage. |
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Item 2 — Management’s Discussion and Analysis |
• | Fees for managing the operation of 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 sell and maintain lithotripters and related spare parts and consumables. We are also 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. |
• | 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 contractual rate, payable monthly, quarterly, or annually. Revenues from these services are recorded when the related maintenance services are performed. |
• | Fees for equipment sales, consumable sales and licensing applications. We sell and maintain lithotripters and 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 marketplace. Revenues from these services are recorded when the related laboratory procedures are performed. |
Recent Developments
On April 17, 2008, we completed the acquisition of Advanced Medical Partners, Inc. (“AMPI”) pursuant to the Stock Purchase Agreement dated March 18, 2008 between us, Litho Management, Inc., AMPI and the stockholders of AMPI. We acquired the outstanding shares of capital stock of AMPI (other than shares already held by us) for a purchase price of approximately $6.9 million in cash and approximately 1.8 million shares of common stock, plus a two-year earn-out based on the future achievement of EBITDA. |
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Item 2 — Management’s Discussion and Analysis |
On July 15, 2008, we acquired UroPath, LLC (“UroPath”) for $7.5 million in cash. Founded in 2003, UroPath is a leading provider of anatomical pathology laboratory services in the U.S. with locations in Florida, Texas, and Pennsylvania. |
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 |
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 |
In the first half of 2007, we had a loss from discontinued operations of $247,000 attributable to our RMPT and HIFU operations. Our RMPT business, was sold on September 28, 2007. |
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Item 2 — Management’s Discussion and Analysis |
Our costs of services and general and administrative expenses for the three months ended June 30, 2008 increased $3,984,000 (17%) compared to the same period in 2007. Our cost of services associated with our urology services operations increased $4,118,000 (31%) in the second quarter of 2008 as compared to the same period in 2007. The primary cause of this increase relates to cost of services related to our new AMPI entities, whose costs totaled $4,156,000 in the second quarter of 2008. Our cost of services associated with our medical products operations for the second three months of 2008 decreased $1,103,000 (39%) compared to the same period in 2007. The primary cause of this decrease is due to lower cost of sales on fewer device sales in the quarter, partially offset by approximately $345,000 in increased expenses at our new lab which experienced significant growth year over year. A significant portion of medical products costs relate to providing maintenance services to our urology services segment and are allocated to the urology services segment. In the future, we expect margins in medical products to continue to vary significantly from period to period based on the mix of intercompany and third-party sales. Our selling, general and administrative costs as of June 30, 2008 increased $676,000 compared to the same period in 2007. This increase primarily relates to compensation expenses related to restricted stock grants to employees which vested as performance goals were reached in the second quarter of 2008 partially offset by a gain of $415,000 realized in the sale of the building that houses our corporate headquarters. |
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Item 2 — Management’s Discussion and Analysis |
Cash provided by our operations, before minority interest, was $34,114,000 for the six months ended June 30, 2008 and $27,098,000 for the six months ended June 30, 2007. For the six months ended June 30, 2008 compared to the same period in 2007, fee and other revenue collected increased by $11,347,000 due primarily to our increased revenues and a decrease in our overall accounts receivable balances. Cash paid to employees, suppliers of goods and others for the six months ended June 30, 2008 increased by $4,128,000 compared to the same period in 2007. This fluctuation is primarily attributable to expenses incurred at our new AMPI partnerships. |
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Item 2 — Management’s Discussion and Analysis |
On April 14, 2008, we amended our senior credit facility to (1) increase the revolving line of credit from $50 million to $60 million, (2) create an exception to the restricted payments negative covenant of the senior credit facility to enable us to repurchase up to $10 million of our common stock, through a stock repurchase program or otherwise, (3) increase the dollar amount of permitted acquisitions under the acquisitions negative covenant of the senior credit facility from $25 million to $30 million during any twelve month period beginning after April 14, 2008 and (4) create an exception from the calculation of such permitted acquisitions basket for our previously-announced acquisition of AMPI. |
Payments due by period | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
Long Term Debt | $ | 7,092 | $ | 3,886 | $ | 2,640 | $ | 183 | $ | 383 | |||||||
Operating Leases (1) | 10,927 | 2,052 | 4,072 | 2,801 | 2,002 | ||||||||||||
Non-compete contracts (2) | 113 | 73 | 40 | - | - | ||||||||||||
Unrecognized tax benefit | 2,294 | - | - | - | 2,294 | ||||||||||||
Total | $ | 20,426 | $ | 6,011 | $ | 6,752 | $ | 2,984 | $ | 4,679 | |||||||
(1) | Represents operating leases in the ordinary course of our business. | ||||
(2) | Represents an obligation of $33 due to an employee of Medstone, at a rate of $4 per month continuing until February 28, 2009, and an obligation of $80 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010. |
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Item 2 — Management’s Discussion and Analysis |
In addition, the scheduled principal repayments for all long term debt as of June 30, 2008 are payable as follows: |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2008 | $ | 3,886 | ||||
2009 | 1,927 | |||||
2010 | 713 | |||||
2011 | 155 | |||||
2012 | 28 | |||||
Thereafter | 383 | |||||
Total | $ | 7,092 | ||||
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 or possible future share repurchases, 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 |
Recently Issued Accounting Pronouncements |
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Item 2 — Management’s Discussion and Analysis |
FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations for the second quarter. |
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Item 3 — Quantitative and Qualitative Disclosures |
Interest Rate Risk
As of June 30, 2008, we had long-term debt (including current portion) totaling $7,092,000, of which $5,051,000 had fixed rates of 5% to 9%, and $2,041,000 incurred interest at a variable rate equal to a specified prime rate. We are exposed to some market risk due to the remaining floating interest rate debt totaling $2,041,000. We make monthly or quarterly payments of principal and interest on $848,000 of the floating rate debt. An increase in interest rates of 1% would result in a $20,000 annual increase in interest expense on this existing principal balance. |
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Item 4 – Controls and Procedures |
As of June 30, 2008, 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 June 30, 2008, 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, 2007, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In June 2008, with respect to the vesting of restricted stock awards based on the achievement of performance criteria, three of our officers used some of the vested shares of the restricted stock awards (under the terms of the restricted stock awards) to pay their tax withholding obligations associated with such vesting. A total of 28,254 shares of our common stock were paid to us in respect of the tax withholding obligations. The terms of the restricted stock awards provide that the value of the restricted shares used to pay the tax withholding obligations will be based on the closing price per share of our common stock on the trading day immediately preceding the vesting date, as reported on the Nasdaq Global Select Market. |
Item 4. Submission of Matters to a Vote of Security Holders.
On May 8, 2008, we held an annual meeting of our shareholders to consider and vote on the election of our board of directors and a proposed amendment to our 2004 equity incentive plan. Management solicited proxies for this meeting. |
Nominee | Votes For | Votes Against | ||||||
---|---|---|---|---|---|---|---|---|
R. Steven Hicks | 30,521,594 | 733,794 | ||||||
Donny R. Jackson | 30,471,139 | 784,249 | ||||||
Timothy J. Lindgren | 30,529,149 | 726,239 | ||||||
Kevin A. Richardson, II | 30,451,463 | 803,925 | ||||||
Kenneth S. Shifrin | 29,249,965 | 2,005,423 | ||||||
Perry M. Waughtal | 30,178,299 | 1,077,089 | ||||||
Argil J. Wheelock, M.D. | 30,451,913 | 803,475 | ||||||
James S. B. Whittenburg | 30,560,786 | 694,602 | ||||||
Mark G. Yudof | 30,528,797 | 726,621 |
2) We proposed to amend our 2004 Equity Incentive Plan to increase by 2,850,000 shares the number of shares available for issuance thereunder (from 2,950,000 to 5,800,000 shares). The “votes for” were 24,468,436, the “votes against” were 1,578,461, the “abstentions” were 13,054, and “broker non-votes” were 5,195,437. |
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Item 6. Exhibits.
10.1 10.2 10.3 10.4 10.5 31.1* 31.2* 32.1* 32.2* | First Amendment to Credit Agreement, dated as of April 14, 2008, by and among HealthTronics, Inc., the lenders party thereto, JPMorgan Chase Bank, National Association, and the other parties thereto (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 16, 2008). Piggy-Back Registration Rights Agreement, dated as of April 17, 2008, by and among HealthTronics, Inc., Robert A. Yonke, Christopher J. Ringel and Kevin Bentley. (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 22, 2008). Third Amendment to the 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 14, 2008). Earnest Money Contract—Commercial Improved Property (Office Condominiums) dated as of April 1, 2008 (as amended on each of April 15, 2008 and May 12, 2008) by and between HealthTronics, Inc. and HPI Acquisition Company, LLC. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2008). Lease Agreement dated May 19, 2008, by and between HealthTronics, Inc. and HEP-Davis Spring, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2008). 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 7, 2008 | HEALTHTRONICS, INC. By:/s/ Ross A. Goolsby Ross A. Goolsby Chief Financial Officer |
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