_______________________________________________________
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 September 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.) |
9825 Spectrum Drive, Building 3, Austin, TX 78717
(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 November 1, 2008 36,468,096 |
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 September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2008 | 2007 | |||||||||||
Revenue: | ||||||||||||||
Urology Services | $ | 39,135 | $ | 31,625 | $ | 106,550 | $ | 90,846 | ||||||
Medical Products | 5,636 | 4,176 | 14,467 | 13,002 | ||||||||||
Other | -- | 154 | 288 | 421 | ||||||||||
Total revenue | 44,771 | 35,955 | 121,305 | 104,269 | ||||||||||
Cost of services and general and administrative expenses: | ||||||||||||||
Urology Services | 16,899 | 13,160 | 47,289 | 40,126 | ||||||||||
Medical Products | 3,055 | 2,834 | 6,968 | 8,077 | ||||||||||
Selling, general & administrative | 4,600 | 4,052 | 14,186 | 12,959 | ||||||||||
Depreciation and amortization | 3,073 | 2,747 | 8,770 | 8,339 | ||||||||||
27,627 | 22,793 | 77,213 | 69,501 | |||||||||||
Operating income | 17,144 | 13,162 | 44,092 | 34,768 | ||||||||||
Other income (expenses): | ||||||||||||||
Interest and dividends | 806 | 247 | 1,098 | 835 | ||||||||||
Interest expense | (182 | ) | (196 | ) | (591 | ) | (644 | ) | ||||||
624 | 51 | 507 | 191 | |||||||||||
Income from continuing operations before provision | ||||||||||||||
for income taxes and minority interest | 17,768 | 13,213 | 44,599 | 34,959 | ||||||||||
Minority interest in consolidated income | 15,552 | 12,214 | 40,380 | 32,998 | ||||||||||
Provision for income taxes | 889 | 389 | 1,730 | 956 | ||||||||||
Income from continuing operations | 1,327 | 610 | 2,489 | 1,005 | ||||||||||
Gain (loss) from discontinued operations, net of tax | -- | 135 | -- | (111 | ) | |||||||||
Net income | $ | 1,327 | $ | 745 | $ | 2,489 | $ | 894 | ||||||
Basic earnings per share: | ||||||||||||||
Income from continuing operations | $ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.03 | ||||||
Gain (loss) from discontinued operations | -- | -- | -- | -- | ||||||||||
Net income | $ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.03 | ||||||
Weighted average shares outstanding | 37,503 | 35,425 | 36,666 | 35,419 | ||||||||||
Diluted earnings per share: | ||||||||||||||
Income from continuing operations | $ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.03 | ||||||
Gain (loss) from discontinued operations | -- | -- | -- | -- | ||||||||||
Net income | $ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.03 | ||||||
Weighted average shares outstanding | 37,604 | 35,425 | 36,734 | 35,423 |
See accompanying notes to condensed consolidated financial statements. |
-3- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
($ in thousands) | September 30, 2008 | December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,434 | $ | 25,198 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,415 in 2008 and $2,368 in 2007 | 26,782 | 21,889 | ||||||
Other receivables | 6,132 | 2,703 | ||||||
Deferred income taxes | 13,459 | 12,547 | ||||||
Prepaid expenses and other current assets | 2,291 | 1,656 | ||||||
Inventory | 9,980 | 10,221 | ||||||
Total current assets | 77,078 | 74,214 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 53,912 | 47,751 | ||||||
Building and leasehold improvements | 6,060 | 12,437 | ||||||
59,972 | 60,188 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (28,740 | ) | (27,169 | ) | ||||
Property and equipment, net | 31,232 | 33,019 | ||||||
Other investments | 1,844 | 1,353 | ||||||
Goodwill, at cost | 234,796 | 217,505 | ||||||
Intangible assets | 5,852 | 5,220 | ||||||
Other noncurrent assets | 2,918 | 4,745 | ||||||
$ | 353,720 | $ | 336,056 |
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) |
($ in thousands, except share data) | September 30, 2008 | December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|---|
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 2,804 | $ | 4,332 | ||||
Accounts payable | 5,225 | 5,859 | ||||||
Accrued distributions to minority interests | 95 | 226 | ||||||
Accrued expenses | 8,171 | 7,275 | ||||||
Total current liabilities | 16,295 | 17,692 | ||||||
Long-term debt, net of current portion | 9,308 | 4,194 | ||||||
Other long term obligations | 53 | 75 | ||||||
Deferred income taxes | 29,911 | 30,024 | ||||||
Total liabilities | 55,567 | 51,985 | ||||||
Minority interest | 44,249 | 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 38,168,096 outstanding in 2008; 35,610,236 issued in 2007 and | ||||||||
35,560,097 outstanding in 2007 | 211,257 | 202,049 | ||||||
Accumulated earnings | 43,330 | 40,841 | ||||||
Treasury stock, at cost, 104,792 shares in 2008 and 50,139 shares in 2007 | (683 | ) | (472 | ) | ||||
Total stockholders' equity | 253,904 | 242,418 | ||||||
$ | 353,720 | $ | 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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Nine Months Ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Fee and other revenue collected | $ | 122,803 | $ | 108,005 | ||||
Cash paid to employees, suppliers of goods and others | (70,125 | ) | (61,433 | ) | ||||
Interest received | 374 | 835 | ||||||
Interest paid | (560 | ) | (642 | ) | ||||
Taxes paid | (1,187 | ) | (903 | ) | ||||
Discontinued operations | -- | (298 | ) | |||||
Net cash provided by operating activities | 51,305 | 45,564 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of entities, net of cash acquired | (17,270 | ) | (7,976 | ) | ||||
Purchases of equipment and leasehold improvements | (8,762 | ) | (6,838 | ) | ||||
Proceeds from sales of assets | 8,755 | 1,017 | ||||||
Other | (236 | ) | (18 | ) | ||||
Discontinued operations | -- | 1,335 | ||||||
Net cash used in investing activities | (17,513 | ) | (12,480 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on notes payable | 13,547 | 2,546 | ||||||
Payments on notes payable, exclusive of interest | (10,561 | ) | (4,483 | ) | ||||
Distributions to minority interest | (42,797 | ) | (35,697 | ) | ||||
Contributions by minority interest, net of buyouts | (534 | ) | 168 | |||||
Purchase of treasury stock | (211 | ) | -- | |||||
Discontinued operations | -- | (20 | ) | |||||
Net cash used in financing activities | (40,556 | ) | (37,486 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (6,764 | ) | (4,402 | ) | ||||
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 | $ | 18,434 | $ | 23,257 |
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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Nine Months Ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | ||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 2,489 | $ | 894 | ||||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities | ||||||||
Minority interest in consolidated income | 40,380 | 32,998 | ||||||
Depreciation and amortization | 8,770 | 8,339 | ||||||
Provision for uncollectible accounts | (42 | ) | (8 | ) | ||||
Provision for deferred income taxes | 918 | 3,200 | ||||||
Non-cash share based compensation | 2,470 | 1,204 | ||||||
Other | (910 | ) | 7 | |||||
Discontinued Operations | -- | (117 | ) | |||||
Changes in operating assets and liabilities, | ||||||||
net of effect of purchase transactions | ||||||||
Accounts receivable | (493 | ) | 1,764 | |||||
Other receivables | 1,106 | (512 | ) | |||||
Other assets | (98 | ) | 1,656 | |||||
Accounts payable | (2,534 | ) | (639 | ) | ||||
Accrued expenses | (751 | ) | (3,222 | ) | ||||
Total adjustments | 48,816 | 44,670 | ||||||
Net cash provided by operating activities | $ | 51,305 | $ | 45,564 |
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
1.General
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of September 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 $30 million during any twelve month period beginning after April 14, 2008 and (4) create an exception from the calculation of such permitted acquisitions basket for our acquisition of Advanced Medical Partners, Inc. (“AMPI”). |
3.Earnings per share
Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options, non-vested stock awards and warrants. A reconciliation of such EPS data is as follows: |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Nine Months Ended September 30, 2008 | ||||||||
Net income | $ | 2,489 | $ | 2,489 | ||||
Weighted average shares outstanding | 36,666 | 36,666 | ||||||
Effect of dilutive securities | -- | 68 | ||||||
Shares for EPS calculation | 36,666 | 36,734 | ||||||
Net income per share | $ | 0.07 | $ | 0.07 | ||||
Nine Months Ended September 30, 2007 | ||||||||
Net income | $ | 894 | $ | 894 | ||||
Weighted average shares outstanding | 35,419 | 35,419 | ||||||
Effect of dilutive securities | -- | 4 | ||||||
Shares for EPS calculation | 35,419 | 35,423 | ||||||
Net income per share | $ | 0.03 | $ | 0.03 |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended September 30, 2008 | ||||||||
Net income | $ | 1,327 | $ | 1,327 | ||||
Weighted average shares outstanding | 37,503 | 37,503 | ||||||
Effect of dilutive securities | -- | 101 | ||||||
Shares for EPS calculation | 37,503 | 37,604 | ||||||
Net income per share | $ | 0.04 | $ | 0.04 | ||||
Three Months Ended September 30, 2007 | ||||||||
Net income | $ | 745 | $ | 745 | ||||
Weighted average shares outstanding | 35,425 | 35,425 | ||||||
Effect of dilutive securities | -- | -- | ||||||
Shares for EPS calculation | 35,425 | 35,425 | ||||||
Net income per share | $ | 0.02 | $ | 0.02 |
We did not include in our computation of diluted EPS unexercised stock options and non-vested stock awards to purchase 2,997,000 and 3,487,000 shares of our common stock as of September 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 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 pathology laboratories 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 | ||||||
---|---|---|---|---|---|---|---|---|
Nine Months Ended September 30, 2008 | ||||||||
Revenue from external customers | $ | 106,550 | $ | 14,467 | ||||
Intersegment revenues | -- | 7,711 | ||||||
Segment profit | 8,776 | 2,456 | ||||||
Nine Months Ended September 30, 2007 | ||||||||
Revenue from external customers | $ | 90,846 | $ | 13,002 | ||||
Intersegment revenues | -- | 6,895 | ||||||
Segment profit | 7,210 | 64 |
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: |
Nine Months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | ||||||
Total segment profit | $ | 11,232 | $ | 7,274 | ||||
Unallocated corporate revenues | 288 | 421 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (7,661 | ) | (5,599 | ) | ||||
Net interest income (expense) | 639 | 408 | ||||||
Other, net | (279 | ) | (543 | ) | ||||
Total unallocated corporate expenses | (7,301 | ) | (5,734 | ) | ||||
Income before income taxes | $ | 4,219 | $ | 1,961 |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands) | Urology Services | Medical Products | ||||||
---|---|---|---|---|---|---|---|---|
Three Months Ended September 30, 2008 | ||||||||
Revenue from external customers | $ | 39,135 | $ | 5,636 | ||||
Intersegment revenues | -- | 2,481 | ||||||
Segment profit | 3,307 | 580 | ||||||
Three Months Ended September 30, 2007 | ||||||||
Revenue from external customers | $ | 31,625 | $ | 4,176 | ||||
Intersegment revenues | -- | 2,093 | ||||||
Segment profit | 2,768 | 47 |
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 September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | ||||||
Total segment profit | $ | 3,887 | $ | 2,815 | ||||
Unallocated corporate revenues | -- | 154 | ||||||
Unallocated corporate expenses: | ||||||||
General and administrative | (2,288 | ) | (1,898 | ) | ||||
Net interest income (expense) | 670 | 105 | ||||||
Other, net | (53 | ) | (177 | ) | ||||
Total unallocated corporate expenses | (1,671 | ) | (1,970 | ) | ||||
Income before income taxes | $ | 2,216 | $ | 999 |
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 related to one of the grants 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. On August 25, 2008, the second performance target was met resulting in the vesting of an additional 92,862 shares and the recognition of approximately $118,000 in share based compensation cost. |
6. Inventory
As of September 30, 2008 and December 31, 2007, inventory consisted of the following: |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ In thousands) | September 30, 2008 | December 31, 2007 | |||||||
---|---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 6,486 | $ | 6,144 | |||||
Finished Goods | 3,494 | 4,077 | |||||||
$ | 9,980 | $ | 10,221 | ||||||
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 Nine Months Ended September 30 | ||||||||||
Revenue | ||||||||||
Rocky Mountain Prostate Thermotherapies | $ | 3,268 | ||||||||
HIFU | -- | |||||||||
Cost of services | ||||||||||
Rocky Mountain Prostate Thermotherapies | (3,694 | ) | ||||||||
HIFU | (209 | ) | ||||||||
Gain on sale of Rocky Mountain Prostate | ||||||||||
Thermotherapies | 454 | |||||||||
Income tax benefit | 70 | |||||||||
Discontinued operations, net of tax | $ | (111 | ) | |||||||
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Income | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2007 | |||||||||
For the Three Months Ended September 30 | ||||||||||
Revenue | ||||||||||
Rocky Mountain Prostate Thermotherapies | $ | 1,031 | ||||||||
HIFU | -- | |||||||||
Cost of services | ||||||||||
Rocky Mountain Prostate Thermotherapies | (1,255 | ) | ||||||||
HIFU | (10 | ) | ||||||||
Gain on sale of Rocky Mountain Prostate | ||||||||||
Thermotherapies | 454 | |||||||||
Income tax benefit | (85 | ) | ||||||||
Discontinued operations, net of tax | $ | 135 | ||||||||
8. New Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS No. 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Based on our current operations, we do not expect that the adoption of SFAS 162 will have a material impact on our financial position or results of operations. |
-15- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” ("SFAS 159"). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our financial position or results of operations. |
9. Acquisitions
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. Based on our preliminary allocation of the purchase price, we recorded approximately $6.3 million of goodwill related to this transaction, all of which is tax deductible. |
-16- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
In 2008, we increased our ownership in two partnerships and purchased a small service company for an aggregate purchase price of approximately $3.7 million. We recorded approximately $2.9 million of goodwill related to these transactions, all of which is tax deductible. |
Nine Months Ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
($ in thousands, except per share data) | 2008 | 2007 | ||||||
Total revenues | $ | 132,078 | $ | 131,637 | ||||
Total expenses | (129,065 | ) | (128,728 | ) | ||||
Discontinued Operations | -- | (111 | ) | |||||
Net income | $ | 3,013 | $ | 2,798 | ||||
Diluted earnings per share | $ | 0.08 | $ | 0.08 |
10. Unrecognized Tax Benefits
As a result of the merger in 2004 in which Prime Medical Services, Inc. (“Prime”) completed a merger with HealthTronics Surgical Services, Inc. (“HSS”) pursuant to which Prime merged with and into HSS, with HealthTronics, Inc. as the surviving corporation, we acquired certain tax benefits, a portion of which were subject to limitations imposed by Section 382 of the Internal Revenue Code. Due to the uncertainty of our ability to realize these tax benefits, there was no recognition of them in our purchase accounting at that time. |
-17- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
The tax benefits mentioned above in the first paragraph of this note 10 include built-in losses that are available to offset future taxable income of approximately $12.4 million and net operating loss carry forwards that are available to offset future taxable income through 2027 of approximately $67.9 million. As a result of the completion of the IRS examination during the quarter, the tax affected amount of these tax benefits, which totals $30.6 million, has been recorded as deferred tax assets on our balance sheet. In accordance with the provisions of Statement of Financial Accounting Standards No. 109, a valuation allowance of $30.6 million was established in the third quarter of 2008 due to the uncertainty in our ability to realize these tax benefits. |
11. Subsequent Events
On October 10, 2008, we entered into a Stock Purchase Agreement with Atlantic Urological Associates (“AUA”), pursuant to which we purchased the outstanding shares of capital stock of Ocean Radiation Therapy, Inc., a wholly-owned subsidiary of AUA (“Ocean”), for a purchase price of approximately $35 million in cash. Ocean provides image guided radiation therapy (“IGRT”) technical services to AUA’s IGRT cancer treatment center. We borrowed $35 million under the revolver under our senior credit facility to finance the acquisition. |
-18- |
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 pathology laboratories 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 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 October 10, 2008, we entered into a Stock Purchase Agreement with Atlantic Urological Associates (“AUA”), pursuant to which we purchased the outstanding shares of capital stock of Ocean Radiation Therapy, Inc., a wholly-owned subsidiary of AUA (“Ocean”), for a purchase price of approximately $35 million in cash. Ocean provides image guided radiation therapy (“IGRT”) technical services to AUA’s IGRT cancer treatment center. Also on October 10, 2008, we drew $35 million under our revolving line of credit to finance this acquisition. |
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Item 2 — Management’s Discussion and Analysis |
Effective September 30, 2008, Ross Goolsby resigned his position as our Chief Financial Officer. Richard A. Rusk assumed the duties of interim Chief Financial Officer effective on September 30, 2008. Mr. Rusk continues to retain his responsibilities as Vice President, Controller, Treasurer, and Secretary. |
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 nine months of 2007, we had a loss from discontinued operations of $111,000 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 September 30, 2008 increased $4,834,000 (21%) compared to the same period in 2007. Our cost of services associated with our urology services operations increased $3,739,000 (28%) in the third 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 $4,464,000 in the third quarter of 2008 partially offset by savings in numerous other cost categories, including gains on sales of assets. Our cost of services associated with our medical products operations for the third quarter of 2008 increased $221,000 (8%) compared to the same period in 2007. The primary cause of this increase is due to approximately $637,000 in increased expenses at our Claripath lab which experienced significant growth year over year as well as $652,000 in expenses at our new Uropath labs, partially offset by lower cost of sales due to fewer device sales in the quarter. 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 September 30, 2008 increased $548,000 compared to the same period in 2007. This increase primarily relates to $561,000 in compensation expenses related to restricted stock grants to employees. |
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Item 2 — Management’s Discussion and Analysis |
Provision for income taxes in the third quarter of 2008 increased $500,000 compared to the same period in 2007 due to an increase in our taxable income in 2008. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carry forwards to offset any current taxes payable. |
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Item 2 — Management’s Discussion and Analysis |
Inventory as of September 30, 2008, totaled $9,980,000 and decreased $241,000 from December 31, 2007. |
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Item 2 — Management’s Discussion and Analysis |
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 | $ | 12,112 | $ | 2,804 | $ | 8,785 | $ | 139 | $ | 384 | |||||||
Operating Leases (1) | 10,928 | 2,596 | 3,953 | 2,675 | 1,704 | ||||||||||||
Non-compete contracts (2) | 91 | 61 | 30 | - | - | ||||||||||||
Total | $ | 23,131 | $ | 5,461 | $ | 12,768 | $ | 2,814 | $ | 2,088 | |||||||
(1) | Represents operating leases in the ordinary course of our business. | ||||
(2) | Represents an obligation of $21 due to an employee of Medstone, at a rate of $4 per month continuing until February 28, 2009, and an obligation of $70 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010. |
In addition, the scheduled principal repayments for all long term debt as of September 30, 2008 are payable as follows: |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2008 | $ | 2,804 | ||||
2009 | 7,905 | |||||
2010 | 880 | |||||
2011 | 125 | |||||
2012 | 14 | |||||
Thereafter | 384 | |||||
Total | $ | 12,112 | ||||
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. Our ability to borrow under our senior credit facility also depends on the ability and willingness of lenders under our senior credit facility to meet their funding commitments, especially in light of the current turmoil in the credit markets. If any of the lenders under our senior credit facility fail to meet such commitments, we could be required to borrow from other sources at a higher cost or we may be required to sell some of our assets to meet our liquidity requirements. |
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Item 2 — Management’s Discussion and Analysis |
We continue to look at strategic acquisition opportunities and believe conditions in the market favor our strong financial position, national platform of urologist relationships, and diversification within the urology services space. |
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Item 2 — Management’s Discussion and Analysis |
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" (“SFAS 160”). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires companies to report a noncontrolling interest in a subsidiary as equity. Additionally, companies are required to include amounts attributable to both the parent and the noncontrolling interest in the consolidated net income and provide disclosure of net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income. This Statement clarifies that after control is obtained, transactions which change ownership but do not result in a loss of control are accounted for as equity transactions. Prior to this Statement being issued, decreases in a parent’s ownership interest in a subsidiary could be accounted for as equity transactions or as transactions with gain or loss recognition in the income statement. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation would result in a gain or loss in net income. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The adoption of SFAS 160 will revise our presentation of consolidated financial statements and further impact will be dependent on our future changes in ownership in subsidiaries after the effective date. |
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Item 3 — Quantitative and Qualitative Disclosures |
Interest Rate Risk
As of September 30, 2008, we had long-term debt (including current portion) totaling $12,112,000, of which $5,242,000 had fixed rates of 5% to 9%, and $6,870,000 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 $6,870,000. We make monthly or quarterly payments of principal and interest on $681,000 of the floating rate debt. An increase in interest rates of 1% would result in a $7,000 annual increase in interest expense on this existing principal balance. |
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Item 4 – Controls and Procedures |
As of September 30, 2008, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Interim 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 Interim Chief Financial Officer concluded that, as of September 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. There are no material changes from the risk factors disclosed in our 2007 Form 10-K, except as set forth below. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In September 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 26,399 shares of our common stock were paid to us in respect of such 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. |
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In October 2008, our Board of Directors approved up to $10 million of repurchases of our common stock. Under the repurchase program, we anticipate that the stock will be repurchased through privately negotiated transactions or on the open market. We intend to comply with the SEC’s Rule 10b-18, and the repurchases will be subject to market conditions, applicable legal requirements, and other factors. We are not obligated to purchase any shares under the repurchase program. On October 8, 2008, pursuant to the stock repurchase program, in a private transaction, we repurchased 1.7 million shares of our common stock from Prides Capital Partners, L.L.C. for an aggregate purchase price of $3,740,000. |
Item 6. Exhibits.
10.1 10.2* 31.1* 31.2* 32.1* 32.2* | Termination and Consulting Agreement, dated September 19, 2008, by and between HealthTronics, Inc. and Ross A. Goolsby (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2008). Form of director restricted stock award agreement. 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: November 6, 2008 | HEALTHTRONICS, INC. By:/s/ Richard A. Rusk Richard A. Rusk Interim Chief Financial Officer |
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