_______________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-30406
_____________________________
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA | 58-2210668 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9825 Spectrum Drive, Building 3, Austin, Texas (Address of principal executive office) | 78717 (Zip Code) | (512) 328-2892 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES __ NO X |
Large accelerated filer __ | Accelerated filer X | Non-accelerated filer __ (do not check if a smaller reporting company) | Smaller reporting company __ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES __ NO X Aggregate Market Value at June 30, 2008: $ 87,066,000 |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. |
Title of Each Class Common Stock, no par value | Number of Shares Outstanding at February 28, 2009 37,619,384 |
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant’s definitive proxy material for the 2009 annual meeting of stockholders are incorporated by reference into Part III of the Form 10-K. |
HEALTHTRONICS, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 PART I |
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ITEM 1. BUSINESS
General |
2 |
As the general partner of limited partnerships or the manager of other types of entities, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers. |
• | Fees for urology treatments . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. For Lithotripsy and prostate treatment services, we, through our partnerships and 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. We recognize revenue for these services when the services are provided. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided. | |
• | Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services. |
Medical Products |
3 |
| • | 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 manufacture and sell consumables related to the lithotripters. We distribute the Revolix laser and consumables related to the laser. 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 community. Revenues from these services are recorded when the related laboratory procedures are performed. |
Specialty Vehicle Manufacturing |
4 |
Competition |
5 |
Government Regulation and Supervision |
• | the federal False Claims Act; | |
• | the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions; | |
• | federal and state billing and claims submission laws and regulations; | |
• | the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to patient privacy; | |
• | the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law; | |
• | state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; and | |
• | state and federal laws affecting the ownership and operation of the equipment we use and the manner in which we provide services; and | |
• | federal and state laws governing the equipment we use in our business concerning patient safety and equipment operating specifications. | |
Practices prohibited by these statutes include, but are not limited to, the payment, receipt, offer, or solicitation of money or other consideration in connection with the referral of patients for services covered by a federal or state health care program and, in certain other cases, other payors. We contract with physicians under a variety of financial arrangements, and physicians have ownership interests in some entities in which we also have an interest. If our operations are found to be in violation of any of the laws and regulations to which we or our Customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare, Medicaid, and other governmental healthcare programs, loss of licenses, and the curtailment of our operations. While we believe that we are in compliance with all applicable laws, we cannot assure that our activities will be found to be in compliance with these laws if scrutinized by regulatory authorities. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of us being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or in the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we were to successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. |
6 |
In addition, this new rule may make physician investment in our partnerships less attractive. As a result, it may be more difficult to retain physician partners in our partnerships and attract new physician partners to our partnerships. At this time we are unable to assess the extent to which the new rule will affect relationships with our existing physician partners and our ability to attract new physician partners. However, if the new rule has a negative effect on our physician partner relationships, then our operations and results of operations could be materially adversely affected. |
7 |
Employees |
8 |
New and proposed federal and state laws and regulatory initiatives relating to various initiatives in health care reform (such as improving privacy and the security of patient information and combating health care fraud) could require us to expend substantial sums to appropriately respond to and comply with this broad variety of legislation (such as acquiring and implementing new information systems for privacy and security protection), which could negatively impact our financial results. |
9 |
Competition in our lab business is also intense. We compete with national, regional and local anatomical pathology labs. Certain of our lab competitors have significantly greater resources than us and some have nationally-recognized reputations. In addition, regional and local labs may have regionally-recognized reputations. In addition, these regional and local labs may have pre-established long-term relationships with physicians and practice groups whereby the physicians and practice groups are comfortable with the level of expertise of the labs and therefore place a high value on the relationships. |
10 |
• | future announcements concerning us, our competition or the health care services market generally; | |
• | developments relating to our relationships with hospitals, other health care facilities, or physicians; | |
• | developments relating to our sources of supply; | |
• | claims made or litigation filed against us; | |
• | changes in, or new interpretations of, government regulations; | |
• | changes in operating results from quarter to quarter; | |
• | sales of stock by insiders; | |
�� | news reports relating to trends in our markets; | |
• | acquisitions and financings in our industry; and | |
• | overall volatility of the stock market. |
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock. |
• | diversion of management’s attention; | |
• | the need to integrate acquired operations; | |
• | potential loss of key employees of the acquired companies; and | |
• | an increase in our expenses and working capital requirements. |
11 |
Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquired businesses or realize other anticipated benefits from those acquisitions. |
• | the need to comply with applicable federal Food and Drug Administration and foreign regulations relating to good manufacturing practices and medical device approval requirements, and with state licensing requirements; | |
• | the need for special non-governmental certifications and registrations regarding product safety, product quality and manufacturing procedures in order to market products in the European Union; | |
12 |
• | potential product liability claims for any defective goods that are distributed; and | |
• | the need for research and development expenditures to develop or enhance products and compete in the equipment markets. |
Our indebtedness may limit our financial and operating flexibility. |
• | incur additional debt or liens; | |
• | make payments in respect of or redeem or acquire any debt or equity issued by us; | |
• | sell assets; | |
• | make loans or investments; | |
• | acquire or be acquired by other companies; and | |
• | amend some of our contracts. |
We currently have $41 million drawn on our $60 million revolving line of credit, which could have important consequences to you. For example, it could: |
• | increase our vulnerability to general adverse economic and industry conditions; | |
• | limit our ability to fund future working capital and capital expenditures, to engage in future acquisitions, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a portion of our cash flow from operations to payments on our debt or to comply with any restrictive terms of our debt; | |
• | limit our flexibility in planning for, or reacting to, changes in the industry in which we operate; and | |
13 |
• | place us at a competitive disadvantage as compared to our competitors that have less debt. |
In addition, if we fail to comply with the terms of any of our debt, our lenders will have the right to accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt. Realization of any of these factors could adversely affect our business, financial condition and results of operations. |
14 |
Executive Officers |
Name | Age | Position | |
---|---|---|---|
James S.B. Whittenburg | 37 | Chief Executive Officer and President | |
Richard A. Rusk | 47 | Vice President, Corporate Controller, Treasurer, Secretary and Interim Chief Financial Officer | |
Robert A. Yonke | 48 | President, Urology Services | |
Clayton H. Duncan | 36 | Vice President-Radiation Therapy | |
Scott A. Herz | 32 | Vice President-Corporate Development | |
The foregoing does not include positions held in our subsidiaries. Our officers are elected for annual periods. There are no family relationships between any of our executive officers and/or directors. |
15 |
Mr. Herz joined us in February 2005 in our Specialty Vehicles division as Associate Vice President-Finance. In June 2006, Mr. Herz was appointed Associate Vice President – Corporate Development and in December 2007 he was appointed Vice President – Corporate Development. Prior to joining us, Mr. Herz served as an associate investment banker at RSM Equico from 2004 to 2005. Prior to that time, Mr. Herz worked as a mechanical engineer at Colorado MEDtech, Inc. from 1999 to 2002. From 2002 to 2004, Mr. Herz obtained his MBA from Pepperdine University and also holds a BS in Mechanical Engineering from Michigan State University. |
16 |
PART II |
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the high and low closing prices per share for our common stock on the Nasdaq Global Select Market for the years ended December 31, 2008 and 2007 (NASDAQ Symbol “HTRN”). |
2008 | 2007 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
High | Low | High | Low | ||||||||||||
First Quarter | $ | 4 | .47 | $ | 3 | .12 | $ | 6 | .60 | $ | 5 | .06 | |||
Second Quarter | $ | 4 | .30 | $ | 2 | .68 | $ | 5 | .47 | $ | 4 | .35 | |||
Third Quarter | $ | 4 | .50 | $ | 2 | .83 | $ | 5 | .25 | $ | 3 | .66 | |||
Fourth Quarter | $ | 3 | .04 | $ | 1 | .03 | $ | 5 | .30 | $ | 4 | .03 |
On February 24, 2009, we had 568 holders of record of our common stock. |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares That May Yet to be Purchased Under the Plans or Programs | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Month 1 (10/1/2008 – 10/31/2008) | 1,700,000 | $ | 2 | .20 | 1,700,000 | $ | 6,260,000 | |||||||
Month 2 (11/1/2008 – 11/30/2008) | 8,927 | (b) | $ | 2 | .25 | -- | -- | |||||||
Month 3 (12/1/2008 – 12/31/2008) | -- | -- | -- | -- | ||||||||||
Total | 1,708,927 | $ | 2 | .20 | 1,700,000 |
_____________________ |
(a) | On October 6, 2008, our Board of Directors authorized the repurchase of up to $10 million of our common stock. 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 repurchase shares under the program, and our Board of Directors may suspend or terminate the program at any time. The repurchase program has no expiration date. We have no repurchase plans or programs that expired during the period covered by the above table, and we have no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases. | |
(b) | Represents shares used by Mr. Whittenburg to pay his federal tax withholding obligation related to the vesting of a restricted stock award in November 2008. |
17 |
Equity Compensation Plan Information |
(a) | (b) | (c) | ||||||||||
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Plan Category | Number of shares of our common stock to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of shares of our common stock remaining available for future issuance under equity compensation plans (exceeding securities reflected in column (a)) | |||||||||
Prime 1993 stock option plan | 65,666 | $ | 7 | .79 | -- | |||||||
Prime 2003 stock option plan | 94,000 | $ | 5 | .63 | -- | |||||||
HSS equity incentive plan and stock | ||||||||||||
option plans | 2,399,099 | $ | 7 | .06 | 2,582,141 | |||||||
Other equity compensation plans | ||||||||||||
approved by our security holders | N/A | N/A | N/A |
In 2004, in connection with the merger of HSS and Prime, we assumed in the merger stock options to acquire approximately 2,154,000 shares of common stock. |
18 |
Performance Graph |
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our summary consolidated historical financial information that has been derived from (a) our audited consolidated statements of income and cash flows for each of the years ended December 31, 2008, 2007, 2006, 2005 and 2004, (b) our audited consolidated balance sheets as of December 31, 2008, 2007, 2006, 2005, and 2004, and (c) our unaudited consolidated statements of income and cash flows for each of the three months ended December 31, September 30, June 30, and March 31, for 2008 and 2007. The November 10, 2004 merger of Prime and HSS was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with U.S. generally accepted accounting principles. As a result, the financial information presented below reflects the results of operations of Prime and HSS on a consolidated basis after November 10, 2004 and the results of operations of Prime for the periods prior to November 10, 2004. You should read this financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected in any future period. |
19 |
(In thousands, except per share data) | Years Ended December 31, | ||||||||||||||||
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2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||
Revenues: | |||||||||||||||||
Urology Services | $ | 145,265 | $ | 122,736 | $ | 123,265 | $ | 133,360 | $ | 75,361 | |||||||
Medical Products | 20,389 | 17,101 | 19,080 | 18,202 | 10,846 | ||||||||||||
Other | 288 | 581 | 546 | 705 | 936 | ||||||||||||
Revenues from continuing operations | $ | 165,942 | $ | 140,418 | $ | 142,891 | $ | 152,267 | $ | 87,143 | |||||||
Income (loss) from: | |||||||||||||||||
Continuing Operations | $ | (128,693 | ) | $ | (14,485 | ) | $ | (16,446 | ) | $ | 10,933 | $ | 5,261 | ||||
Discontinued Operations | -- | (147 | ) | 25,129 | (1,745 | ) | (3,908 | ) | |||||||||
Net income (loss) | $ | (128,693 | )(1) | $ | (14,632 | )(2) | $ | 8,683 | (3) | $ | 9,188 | $ | 1,353 | (4) | |||
Diluted earnings (loss) per share: | |||||||||||||||||
Continuing Operations | $ | (3.53 | ) | $ | (0.41 | ) | $ | (0.47 | ) | $ | 0.31 | $ | 0.24 | ||||
Discontinued Operations | -- | -- | 0.72 | (0.05 | ) | (0.18 | ) | ||||||||||
Total | $ | (3.53 | ) | $ | (0.41 | ) | $ | 0.25 | $ | 0.26 | $ | 0.06 | |||||
Dividends per share | None | None | None | None | None | ||||||||||||
Total assets | $ | 234,386 | $ | 336,056 | $ | 346,733 | $ | 483,037 | $ | 474,158 | |||||||
Long-term obligations (a) | $ | 45,662 | $ | 4,269 | $ | 6,063 | $ | 129,980 | $ | 114,442 |
_____________________ |
(a) | Includes long term debt, other long term obligations and deferred compensation liability. |
Quarterly Data | Quarter Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share data) | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||
2008 | (unaudited) | |||||||||||||
Revenues | $ | 33,954 | $ | 42,580 | $ | 44,771 | $ | 44,637 | ||||||
Net income (loss) | $ | 452 | $ | 710 | $ | 1,327 | $ | (131,182 | )(1) | |||||
Per share amounts (basic): | ||||||||||||||
Net income (loss) | $ | 0.01 | $ | 0.02 | $ | 0.04 | $ | (3.64 | ) | |||||
Weighted average shares outstanding | 35,425 | 37,059 | 37,503 | 36,004 | ||||||||||
Per share amounts (diluted): | ||||||||||||||
Net income (loss) | $ | 0.01 | $ | 0.02 | $ | 0.04 | $ | (3.64 | ) | |||||
Weighted average shares outstanding | 35,425 | 37,165 | 37,604 | 36,004 |
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Quarterly Data | Quarter Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share data) | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||
2007 | (unaudited) | |||||||||||||
Revenues | $ | 32,751 | $ | 35,563 | $ | 35,955 | $ | 36,149 | ||||||
Net income (loss) | $ | (30 | ) | $ | 179 | $ | 745 | $ | (15,526 | )(2) | ||||
Per share amounts (basic): | ||||||||||||||
Net income (loss) | $ | -- | $ | 0.01 | $ | 0.02 | $ | (0.44 | ) | |||||
Weighted average shares outstanding | 35,406 | 35,425 | 35,425 | 35,425 | ||||||||||
Per share amounts (diluted): | ||||||||||||||
Net income (loss) | $ | -- | $ | 0.01 | $ | 0.02 | $ | (0.44 | ) | |||||
Weighted average shares outstanding | 35,417 | 35,426 | 35,425 | 35,425 |
_____________________ |
1) In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. |
21 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements |
• | uncertainties in our establishing or maintaining relationships with physicians and hospitals; | |
• | the impact of current and future laws and governmental regulations; | |
• | uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement; | |
• | the effects of competition and technological changes; | |
• | the availability (or lack thereof) of acquisition or combination opportunities; and | |
• | general economic, market or business conditions. |
General |
22 |
Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $2,100, respectively, for both 2008 and 2007. At this time, we do not anticipate a material shift between our retail and wholesale arrangements, or a material change in our share of the 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. For lithotripsy and prostate treatment services, we, through our partnerships and 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. We recognize revenue for these services when the services are provided. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided. | |
• | Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services. |
23 |
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. We also provide anatomical pathology services primarily to the urology community. We have one pathology lab located in Georgia, Claripath Laboratories, that provides laboratory detection and diagnosis services to urologists throughout the United States. In addition, in July 2008, we acquired Uropath LLC, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through Uropath, we continue to manage in-office pathology labs for practice groups and provide pathology services to physicians and practice groups with our lab equipment and personnel at our Uropath laboratory sites. |
• | 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 manufacture and sell consumables related to the lithotripters. We distribute the Revolix laser and consumables related to the laser. 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 community. Revenues from these services are recorded when the related laboratory procedures are performed. | |
Recent Developments |
24 |
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. |
25 |
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. |
26 |
In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations. |
27 |
Our costs of services and general and administrative expenses for 2007 decreased $7,726,000 (6%) compared to 2006. Our cost of services associated with our urology services operations increased $2,228,000 (4%) in 2007 as compared with 2006. The cause of this increase relates primarily to increased rental expenses paid on Revolix units leased from our medical products division of $1,500,000 and a decrease in gains resulting from sales of various partnership interests in 2007 as compared to 2006 of $969,000 which are recorded against operating expenses. This was partially offset by lower laser supply costs of $1,087,000, which corresponds to more partnerships utilizing the Revolix laser as compared to the greenlight laser. Our cost of services associated with our medical products operations for 2007 decreased $5,572,000 (33%) compared to 2006. The primary cause of this decrease relates to significant decreases in external sales of lithotripters and tables in 2007, a cost reduction recorded as a result of the receipt of lease payments from our urology services division on Revolix units noted above, partially offset by approximately $900,000 in increased expenses at our new lab. 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 decreased $4,414,000 (22%) in 2007 as compared to 2006. This is primarily attributable to approximately $1,850,000 in costs paid to strategic consultants, $1 million in severance payments, $500,000 in higher share based compensation costs which were incurred in 2006 compared to 2007, as well as approximately $516,000 in decreased personnel, insurance, marketing, recruiting and other costs. In addition we received approximately $900,000 as a result of our former Swiss manufacturing subsidiary’s insolvency proceedings in 2007, which was recorded against selling, general and administrative expenses. |
28 |
Depreciation and amortization expense decreased $168,000 in 2007 compared to 2006. |
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Senior Credit Facility |
30 |
General |
Payments due by period | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long Term Debt (1) | $ | 46,387 | $ | 2,490 | $ | 43,359 | $ | 154 | $ | 384 | ||||||||||
Operating Leases (2) | 11,410 | 2,629 | 4,607 | 2,971 | 1,203 | |||||||||||||||
Non-compete contracts (3) | 68 | 48 | 20 | -- | -- | |||||||||||||||
Total | $ | 57,865 | $ | 5,167 | $ | 47,986 | $ | 3,125 | $ | 1,587 |
_____________________ |
(1) | Represents long term debt as discussed above. |
(2) | Represents operating leases in the ordinary course of our business. |
(3) | Represents an obligation of $8 due to an employee of Medstone, at a rate of $4 per month continuing until February 28, 2009, and an obligation of $60 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010. |
In addition, the scheduled principal repayments for all long term debt as of December 31, 2008 are payable as follows: |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2009 | $ | 2,490 | ||||
2010 | 42,680 | |||||
2011 | 679 | |||||
2012 | 145 | |||||
2013 | 9 | |||||
Thereafter | 384 | |||||
Total | $ | 46,387 |
Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility which is due in March 2010. Our cash flows from operations and therefore our ability to make scheduled payments of principal, or to pay the interest on, or to refinance, our indebtedness, or to fund planned capital expenditures, will depend on our future performance, which is subject to general economic, financial competitive, legislative, regulatory and other factors discussed under “Risk Factors” under Part I. Likewise, our ability to borrow under our senior credit facility will depend on these factors, which will affect our ability to comply with the covenants in our facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our facility with our lenders. |
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Inflation |
32 |
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. |
33 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Appendix A attached hereto. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None. |
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures |
34 |
Ernst & Young, LLP, our independent registered public accounting firm, has audited our internal controls over financial reporting. The attestation report of Ernst & Young, LLP is included herein. |
ITEM 9B. OTHER INFORMATION
In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. For further discussion of this impairment, see footnote C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. |
35 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
The Board of Directors and Shareholders |
/s/ Ernst & Young LLP |
Austin, Texas |
36 |
PART III |
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2009 annual meeting of stockholders, except for the information regarding our executive officers, which is presented in Part I of this Form 10-K. The information required by this item contained in our definitive proxy statement is incorporated herein by reference. |
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2009 annual meeting of stockholders and is incorporated herein by reference. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2009 annual meeting of stockholders and is incorporated herein by reference. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2009 annual meeting of stockholders and is incorporated herein by reference. |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2009 annual meeting of stockholders and is incorporated herein by reference. |
37 |
PART IV |
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1.Financial Statements. The information required by this item is contained in Appendix A attached hereto. |
(b)Exhibits. (1)
3.1 3.2 3.3 4.1 10.1 10.2 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13 | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to Annex D to the Rule 424(b)(3) joint proxy statement/prospectus, dated October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004) Amended and Restated Bylaws of the Company (Incorporated by reference to Annex E to the Rule 424(b)(3) joint proxy statement/prospectus, dated October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004) First Amendment to Bylaws of HealthTronics, Inc. (incorporated by reference to Exhibit 3.1 of HealthTronics’ Current Report Form 8-K filed on December 17, 2007.) Specimen of Common Stock Certificate (Filed as an Exhibit to the HSS Registration Statement on Form S-4 (Registration No. 33-56900)) Form of Indemnification Agreement dated October 11, 1993 between the Company and certain of its officers and directors (Filed as an Exhibit to the Current Report on Form 8-K of Prime dated October 18, 1993) Release and Severance Agreement dated December 30, 2001 by and between Prime Medical Services Inc. and Kenneth S. Shifrin (Filed as an Exhibit to the Annual Report on Form 10-K of Prime for the year ended December 31, 2001) Amended and Restated 1993 Stock Option Plan, as amended June 18, 2002 (Filed as an Exhibit to the Annual Report on Form 10-K of Prime for the year ended December 31, 2002) Prime Medical Services, Inc., 2003 Stock Option Plan (Incorporated by reference to Annex D of the Rule 424(b)(3) joint proxy statement/prospectus, dated January 7, 2004, filed by Prime with the SEC on January 8, 2004) HealthTronics 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to HealthTronics’ Current Report on Form 8-K filed on January 25, 2005) Form of Board Service and Release Agreement by and between HealthTronics and Argil J. Wheelock, M.D. (Filed as Exhibit 10.22 to the HSS Registration Statement on Form S-4 (Registration No. 333-117102)) Board Service, Amendment and Release Agreement by and between HealthTronics and Kenneth S. Shifrin (Incorporated by reference to the HSS Registration Statement on Form S-4 (Registration No. 333-117102)) HSS Stock Option Plan - 2002 (Incorporated by reference to Exhibit 10.1 of HealthTronics’ Current Report on Form 8-K filed on January 25, 2005) HSS Stock Option Plan - 2001 (Incorporated by reference to Appendix A to HSS’ proxy statement filed with the SEC on April 18, 2001) HSS Stock Option Plan - 2000 (Incorporated by reference to Appendix A to HSS’ proxy statement filed with the SEC on April 25, 2000) Form of Incentive Stock Option Agreement Form of Nonstatutory Stock Option Agreement Credit Agreement, dated as of March 23, 2005, among HealthTronics, Inc. the lenders party thereto, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank, National Association, as Administrative Agent for the lenders (Incorporated by reference to Exhibit 10.1 of the Company’s 10-Q filed with the Securities and Exchange Commission on November 8, 2005). |
38 |
10.14* 10.15* 10.16 10.17* 10.18* 10.19* 10.20* 10.21 10.22 10.23 10.24 10.25* 10.26 | Executive Employment Agreement, effective October 1, 2005, by and between HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2005). First Amendment to the HealthTronics, Inc. 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to HealthTronics’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed on August 5, 2005). Form of Indemnification Agreement for directors and certain officers of HealthTronics (incorporated by reference to Exhibit 99.1 to HealthTronics’ Current Report on Form 8-K filed on June 1, 2005). First Amendment to Board Service and Release Agreement, dated as of March 2, 2006, by and between HealthTronics and Argil J. Wheelock, M.D. (incorporated by reference to Exhibit 10.1 of HealthTronics’ Current Report on Form 8-K filed on March 8, 2006.) Second Amendment to the Company’s 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2006.) Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 filed with the Securities and Exchange Commission on May 12, 2008). Second Amendment to Executive Employment Agreement, dated as of October 26, 2007, by and between HealthTronics, Inc. and James S. B. Whittenburg (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 12, 2008). Stock Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., Keystone ABG Inc., Keystone Kidney Associates, PC, David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2007). Interest Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2007). Amended and Restated Distribution Agreement, dated as of February 28, 2007, by and among HealthTronics, Inc., Lisa Laser USA, Inc., and LISA laser products OHG (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2007). First Amendment to Interest Purchase Agreement, dated as of May 25, 2007, by and among HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 31, 2007). First Amendment to Executive Employment Agreement, dated as of August 10, 2007, by and between HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2007). Stock Purchase Agreement, dated as of March 18, 2008, by and among HealthTronics, Inc., Litho Management, Inc., Advanced Medical Partners, Inc. and the stockholders of Advanced Medical Partners, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2008). |
39 |
10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35* 10.36 21.1 23.1 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). 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). Stock Purchase Agreement, dated as of October 10, 2008, by and between HealthTronics, Inc. and Atlantic Urological Associates, P.A (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 15, 2008). Second Amendment to Credit Agreement, dated as of October 10, 2008, by and among HealthTronics, Inc., the lenders party thereto, and JPMorgan Chase Bank, National Association (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 October 15, 2008). Executive Employment Agreement, effective August 15, 2007, by and between HealthTronics, Inc. and Clayton H. Duncan (filed herewith). Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on November 7, 2008). List of subsidiaries of the Company. (Filed herewith) Consent of Independent Registered Public Accounting Firm. (Filed herewith) Certification of Chief Executive Officer. (Filed herewith) Certification of Chief Financial Officer. (Filed herewith) Certification of Chief Executive Officer. (Filed herewith) Certification of Chief Financial Officer. (Filed herewith) |
_____________________ |
(1) | The exhibits listed above will be furnished to any security holder upon written request for such exhibit to Richard A. Rusk, HealthTronics, Inc., 9825 Spectrum Drive, Austin, Texas 78717. The Securities and Exchange Commission (the “SEC”) maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at “http://www.sec.gov”. |
40 |
SIGNATURES |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| HEALTHTRONICS, INC. By:/s/ James S. B. Whittenburg James S. B. Whittenburg, Chief Executive Officer and President (Principal Executive Officer) Date: March 10, 2009 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
By: Date: By: Date: By: Date: By: Date: By: Date: By: Date: | /s/ James S. B. Whittenburg James S. B. Whittenburg, Chief Executive Officer and President (Principal Executive Officer) and Director March 10, 2009 /s/ Richard A. Rusk Richard A. Rusk, Interim Chief Financial Officer (Principal Financial and Accounting Officer) March 10, 2009 /s/ R. Steven Hicks R. Steven Hicks, Non-executive Chairman of the Board March 10, 2009 /s/ Donny R. Jackson Donny R. Jackson, Director March 10, 2009 /s/ Timothy J. Lindgren Timothy J. Lindgren, Director March 10, 2009 /s/ Ken S. Shifrin Ken S. Shifrin, Director March 10, 2009 |
41 |
By: Date: | /s/ Argil J. Wheelock, M.D. Argil J. Wheelock, M.D., Director March 10, 2009 |
42 |
APPENDIX A |
INDEX |
Page | |
---|---|
Report of Independent Registered Public Accounting Firm Consolidated Financial Statements: Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006. Consolidated Balance Sheets at December 31, 2008 and 2007. Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006. Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006. Notes to Consolidated Financial Statements. | A-2 A-3 A-4 A-6 A-7 A-10 |
A-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
The Board of Directors and Stockholders /s/: Ernst & Young LLP Austin, Texas |
A-2 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME |
---|
($ in thousands, except per share data) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2006 | |||||||||
Revenue: | |||||||||||
Urology Services | $ | 145,265 | $ | 122,736 | $ | 123,265 | |||||
Medical Products | 20,389 | 17,101 | 19,080 | ||||||||
Other | 288 | 581 | 546 | ||||||||
Total revenue | 165,942 | 140,418 | 142,891 | ||||||||
Cost of services and general and administrative expenses: | |||||||||||
Urology Services | 65,185 | 53,490 | 51,262 | ||||||||
Medical Products | 10,494 | 11,225 | 16,797 | ||||||||
Selling, general and administrative | 20,006 | 15,884 | 20,298 | ||||||||
Impairment charges | 144,000 | 20,800 | 20,600 | ||||||||
Depreciation and amortization | 12,363 | 11,107 | 11,275 | ||||||||
252,048 | 112,506 | 120,232 | |||||||||
Operating income | (86,106 | ) | 27,912 | 22,659 | |||||||
Other income (expenses): | |||||||||||
Interest and dividends | 1,233 | 1,146 | 755 | ||||||||
Interest expense | (1,077 | ) | (829 | ) | (1,146 | ) | |||||
156 | 317 | (391 | ) | ||||||||
Income from continuing operations before provision | |||||||||||
for income taxes and minority interest | (85,950 | ) | 28,229 | 22,268 | |||||||
Minority interest in consolidated income | 54,259 | 45,568 | 43,277 | ||||||||
Provision (benefit) for income taxes | (11,516 | ) | (2,854 | ) | (4,563 | ) | |||||
Income (loss) from continuing operations | (128,693 | ) | (14,485 | ) | (16,446 | ) | |||||
Income (loss) from discontinued operations, net of tax | -- | (147 | ) | 25,129 | |||||||
Net income (loss) | $ | (128,693 | ) | $ | (14,632 | ) | $ | 8,683 | |||
Basic earnings per share: | |||||||||||
Income (loss) from continuing operations | $ | (3.53 | ) | $ | (0.41 | ) | $ | (0.47 | ) | ||
Income (loss) from discontinued operations | $ | -- | $ | -- | $ | 0.72 | |||||
Net income (loss) | $ | (3.53 | ) | $ | (0.41 | ) | $ | 0.25 | |||
Weighted average shares outstanding | 36,499 | 35,421 | 35,157 | ||||||||
Diluted earnings per share: | |||||||||||
Income (loss) from continuing operations | $ | (3.53 | ) | $ | (0.41 | ) | $ | (0.47 | ) | ||
Income (loss) from discontinued operations | $ | -- | $ | -- | $ | 0.72 | |||||
Net income (loss) | $ | (3.53 | ) | $ | (0.41 | ) | $ | 0.25 | |||
Weighted average shares outstanding | 36,499 | 35,421 | 35,347 |
See accompanying notes to consolidated financial statements. |
A-3 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS |
($ in thousands) | December 31, | |||||||
---|---|---|---|---|---|---|---|---|
2008 | 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 22,854 | $ | 25,198 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,485 in 2008 and $2,368 in 2007 | 27,687 | 21,889 | ||||||
Other receivables | 1,410 | 2,703 | ||||||
Deferred income taxes | -- | 12,547 | ||||||
Prepaid expenses and other current assets | 2,895 | 1,656 | ||||||
Inventory | 8,843 | 10,221 | ||||||
Total current assets | 63,689 | 74,214 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 55,050 | 47,751 | ||||||
Building and leasehold improvements | 8,254 | 12,437 | ||||||
63,304 | 60,188 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (30,535 | ) | (27,169 | ) | ||||
Property and equipment, net | 32,769 | 33,019 | ||||||
Other investments | 1,819 | 1,353 | ||||||
Goodwill, at cost | 93,620 | 217,505 | ||||||
Intangible assets | 40,278 | 5,220 | ||||||
Other noncurrent assets | 2,211 | 4,745 | ||||||
$ | 234,386 | $ | 336,056 |
See accompanying notes to consolidated financial statements. |
A-4 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) |
($ in thousands, except share data) | December 31, | |||||||
---|---|---|---|---|---|---|---|---|
2008 | 2007 | |||||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 2,490 | $ | 4,332 | ||||
Accounts payable | 6,468 | 5,859 | ||||||
Accrued distributions to minority interests | 95 | 226 | ||||||
Accrued expenses | 9,221 | 7,275 | ||||||
Total current liabilities | 18,274 | 17,692 | ||||||
Long-term debt, net of current portion | 43,897 | 4,194 | ||||||
Other long term obligations | 1,765 | 75 | ||||||
Deferred income taxes | 3,355 | 30,024 | ||||||
Total liabilities | 67,291 | 51,985 | ||||||
Minority interest | 47,723 | 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: 39,494,314 issued | ||||||||
and 37,618,206 outstanding in 2008; 35,610,236 issued and 35,560,097 | ||||||||
outstanding in 2007 | 211,667 | 202,049 | ||||||
Accumulated earnings (deficit) | (87,852 | ) | 40,841 | |||||
Treasury stock, at cost, 1,876,108 shares in 2008 and 50,139 shares in 2007 | (4,443 | ) | (472 | ) | ||||
Total stockholders' equity | 119,372 | 242,418 | ||||||
$ | 234,386 | $ | 336,056 |
See accompanying notes to consolidated financial statements. |
A-5 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2008, 2007 and 2006 |
---|
($ in thousands, except share data) | Issued Common Stock | Accumulated | Treasury Stock | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | Earnings (Deficit) | Shares | Amount | Total | |||||||||||||||||||
Balance, December 31, 2005 | 35,010,656 | $ | 196,080 | $ | 46,790 | (143,921 | ) | $ | (1,388 | ) | $ | 241,482 | ||||||||||||
Net income | -- | -- | 8,683 | -- | -- | 8,683 | ||||||||||||||||||
Purchase of treasury stock | -- | -- | -- | (10,000 | ) | (73 | ) | (73 | ) | |||||||||||||||
Contribution of treasury stock | -- | -- | -- | 58,516 | 564 | 564 | ||||||||||||||||||
Issuance of stock for acquisitions | 166,666 | 1,095 | -- | -- | -- | 1,095 | ||||||||||||||||||
Exercise of stock options, including | ||||||||||||||||||||||||
tax benefit totaling $69 | 297,914 | 1,978 | -- | -- | -- | 1,978 | ||||||||||||||||||
Share-based compensation | -- | 1,788 | -- | -- | -- | 1,788 | ||||||||||||||||||
Balance, December 31, 2006 | 35,475,236 | 200,941 | 55,473 | (95,405 | ) | (897 | ) | 255,517 | ||||||||||||||||
Net loss | -- | -- | (14,632 | ) | -- | -- | (14,632 | ) | ||||||||||||||||
Contribution of treasury stock | -- | -- | -- | 45,266 | 425 | 425 | ||||||||||||||||||
Share-based compensation | 135,000 | 1,108 | -- | -- | -- | 1,108 | ||||||||||||||||||
Balance, December 31, 2007 | 35,610,236 | 202,049 | 40,841 | (50,139 | ) | (472 | ) | 242,418 | ||||||||||||||||
Net loss | -- | -- | (128,693 | ) | -- | -- | (128,693 | ) | ||||||||||||||||
Purchase of treasury stock | -- | -- | -- | (1,763,580 | ) | (3,971 | ) | (3,971 | ) | |||||||||||||||
Issuance of stock for acquisitions | 1,987,486 | 6,737 | -- | -- | -- | 6,737 | ||||||||||||||||||
Share-based compensation | 1,896,592 | 2,881 | -- | (62,389 | ) | -- | 2,881 | |||||||||||||||||
Balance, December 31, 2008 | 39,494,314 | $ | 211,667 | $ | (87,852 | ) | (1,876,108 | ) | $ | (4,443 | ) | $ | 119,372 |
See accompanying notes to consolidated financial statements. |
A-6 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS |
---|
($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2006 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Fee and other revenue collected | $ | 167,865 | $ | 144,821 | $ | 146,658 | |||||
Cash paid to employees, suppliers of goods and others | (95,939 | ) | (82,361 | ) | (83,235 | ) | |||||
Interest received | 1,233 | 1,146 | 755 | ||||||||
Interest paid | (990 | ) | (835 | ) | (1,296 | ) | |||||
Taxes paid | (1,324 | ) | (538 | ) | (475 | ) | |||||
Discontinued operations | -- | (356 | ) | (13,515 | ) | ||||||
Net cash provided by operating activities | 70,845 | 61,877 | 48,892 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Purchase of entities, net of cash acquired | (49,487 | ) | (11,829 | ) | -- | ||||||
Purchases of equipment and leasehold improvements | (11,779 | ) | (9,469 | ) | (11,902 | ) | |||||
Proceeds from sales of assets | 9,165 | 1,224 | 1,365 | ||||||||
Other | (210 | ) | (18 | ) | (25 | ) | |||||
Discontinued operations | -- | 1,335 | 138,971 | ||||||||
Net cash (used in) provided by investing activities | (52,311 | ) | (18,757 | ) | 128,409 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Borrowings on notes payable | 51,747 | 2,546 | 4,657 | ||||||||
Payments on notes payable, exclusive of interest | (14,508 | ) | (5,760 | ) | (134,257 | ) | |||||
Distributions to minority interest | (53,757 | ) | (42,736 | ) | (46,969 | ) | |||||
Contributions by minority interest, net of buyouts | (389 | ) | 389 | (314 | ) | ||||||
Exercise of stock options | -- | -- | 1,907 | ||||||||
Purchase of treasury stock | (3,971 | ) | -- | (73 | ) | ||||||
Discontinued operations | -- | (20 | ) | (320 | ) | ||||||
Net cash used in financing activities | (20,878 | ) | (45,581 | ) | (175,369 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,344 | ) | (2,461 | ) | 1,932 | ||||||
Cash and cash equivalents, beginning of period, includes cash | |||||||||||
from discontinued operations of $(198) and $4,650 | |||||||||||
for 2007 and 2006, respectively | 25,198 | 27,659 | 25,727 | ||||||||
Cash and cash equivalents, end of period, includes cash | |||||||||||
from discontinued operations of $(198) for 2006 | $ | 22,854 | $ | 25,198 | $ | 27,659 |
See accompanying notes to consolidated financial statements. |
A-7 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
---|
($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2006 | |||||||||
Reconciliation of net income to net cash | |||||||||||
provided by operating activities: | |||||||||||
Net income (loss) | $ | (128,693 | ) | $ | (14,632 | ) | $ | 8,683 | |||
Adjustments to reconcile net income (loss) to cash provided | |||||||||||
by operating activities: | |||||||||||
Minority interest in consolidated income | 54,259 | 45,568 | 43,277 | ||||||||
Depreciation and amortization | 12,363 | 11,107 | 11,275 | ||||||||
Provision for uncollectible accounts | 145 | (108 | ) | 581 | |||||||
Provision for deferred income taxes | (12,180 | ) | (624 | ) | (4,997 | ) | |||||
Non-cash share-based compensation | 2,881 | 1,534 | 2,352 | ||||||||
Impairment charges | 144,000 | 20,800 | 20,600 | ||||||||
Other | (1,112 | ) | 70 | (636 | ) | ||||||
Discontinued Operations | -- | (117 | ) | (38,643 | ) | ||||||
Changes in operating assets and liabilities, | |||||||||||
net of effect of purchase transactions: | |||||||||||
Accounts receivable | (1,360 | ) | 1,008 | 1,821 | |||||||
Other receivables | 1,399 | (1,124 | ) | 2,094 | |||||||
Other assets | 1,142 | 2,026 | 1,036 | ||||||||
Accounts payable | (1,314 | ) | (579 | ) | 482 | ||||||
Accrued expenses | (685 | ) | (3,052 | ) | 967 | ||||||
Total adjustments | 199,538 | 76,509 | 40,209 | ||||||||
Net cash provided by operating activities | $ | 70,845 | $ | 61,877 | $ | 48,892 |
See accompanying notes to consolidated financial statements. |
A-8 |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
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($ in thousands) | Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2007 | 2006 | |||||||||
SUPPLEMENTAL INFORMATION OF NON-CASH | |||||||||||
INVESTING AND FINANCING ACTIVITIES: | |||||||||||
At December 31, the Company had accrued distributions payable | |||||||||||
to minority interests. The effect of this transaction was as follows: | |||||||||||
Current liabilities increased by | $ | 95 | $ | 226 | $ | 7,687 | |||||
Minority interest decreased by | 95 | 226 | 7,687 | ||||||||
In 2008, the Company acquired three lithotripsy partnerships, | |||||||||||
a cryosurgical company, a pathology lab and an IGRT | |||||||||||
services operation. The net assets and | |||||||||||
liabilities acquired/sold were as follows: | |||||||||||
Current assets increased by | 6,456 | -- | -- | ||||||||
Noncurrent assets increased by | 3,812 | -- | -- | ||||||||
Goodwill increased by | 26,995 | -- | -- | ||||||||
Current liabilities increased by | 4,941 | -- | -- | ||||||||
Other long-term obligations decreased by | 906 | -- | -- | ||||||||
Minority interest increased by | 5,825 | -- | -- | ||||||||
In 2007, the Company acquired two lithotripsy partnerships and sold | |||||||||||
three lithotripsy partnerships. The net assets and | |||||||||||
liabilities acquired/sold were as follows: | |||||||||||
Current assets increased by | -- | 580 | -- | ||||||||
Noncurrent assets increased by | -- | 1,816 | -- | ||||||||
Goodwill increased by | -- | 9,044 | -- | ||||||||
Current liabilities increased by | -- | 380 | -- | ||||||||
Other long-term obligations decreased by | -- | 354 | -- | ||||||||
Minority interest increased by | -- | 802 | -- |
See accompanying notes to consolidated financial statements. |
A-9 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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A. ORGANIZATION AND OPERATION OF THE COMPANY |
A-10 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Impairment of long-lived assets |
A-11 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Our fees for urology services are recorded when the procedure is performed and are based on a contracted rate with a hospital (wholesale contract) or based on a contractual rate with commercial insurance carriers (retail contract), individual or state and federal health care agencies, net of contractual fee reduction. Management fees from limited partnerships are recorded monthly when earned. Distributions from cost basis investments are recorded when received and totaled $1,508,000, $1,321,000 and $1,005,000 in 2008, 2007 and 2006, respectively. |
A-12 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Accounts Receivable |
($ in thousands) | Balance at Beginning of Year | Costs and Expenses | Deductions | Other | Balance at End of Year | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for Doubtful Accounts: | ||||||||||||||||||||
2008 | $ | 2,368 | $ | 285 | $ | (140 | ) | $ | (28 | ) | $ | 2,485 | ||||||||
2007 | $ | 2,166 | $ | 329 | $ | (437 | ) | $ | 310 | $ | 2,368 | |||||||||
2006 | $ | 1,491 | $ | 776 | $ | (195 | ) | $ | 94 | $ | 2,166 |
Inventory |
2008 | 2007 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 5,993 | $ | 6,144 | |||||||
Finished Goods | 2,850 | 4,077 | |||||||||
$ | 8,843 | $ | 10,221 |
Stock-Based Compensation |
A-13 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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We have elected to use the modified prospective application method whereby SFAS No. 123(R) applies to new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled after the effective date. |
(In thousands, except per share data) | Net Income (loss) | Wtd. Avg. No. of Shares | Per Share Amounts | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
For the year ended December 31, 2008 | |||||||||||||||
Basic | $ | (128,693 | ) | 36,499 | $ | (3.53 | ) | ||||||||
Effect of dilutive securities: | |||||||||||||||
Options and non-vested shares | |||||||||||||||
Diluted | $ | (128,693 | ) | 36,499 | $ | (3.53 | ) | ||||||||
For the year ended December 31, 2007 | |||||||||||||||
Basic | $ | (14,632 | ) | 35,421 | $ | (0.41 | ) | ||||||||
Effect of dilutive securities: | |||||||||||||||
Options and non-vested shares | -- | ||||||||||||||
Diluted | $ | (14,632 | ) | 35,421 | $ | (0.41 | ) | ||||||||
For the year ended December 31, 2006 | |||||||||||||||
Basic | $ | 8,683 | 35,157 | $ | 0.25 | ||||||||||
Effect of dilutive securities: | |||||||||||||||
Options | 190 | ||||||||||||||
Diluted | $ | 8,683 | 35,347 | $ | 0.25 |
A-14 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Unexercised employee stock options and non-vested shares to purchase 2,783,000, 3,329,000 and 3,223,000 shares of our common stock as of December 31, 2008, 2007 and 2006, respectively, were not included in the computations of diluted EPS because the exercise prices were greater than the average market price of our common stock during the respective periods or we had a net loss in the respective period. |
A-15 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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. |
(in thousands) | Total | Urology Services | Medical Products | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2006 | $ | 229,261 | $ | 220,142 | $ | 9,119 | |||||||||||
Additions | 11,735 | 11,735 | -- | ||||||||||||||
Deletions | (2,691 | ) | (2,691 | ) | -- | ||||||||||||
Impairments | (20,800 | ) | (20,800 | ) | -- | ||||||||||||
Balance, December 31, 2007 | $ | 217,505 | $ | 208,386 | $ | 9,119 | |||||||||||
Additions | 26,995 | 19,164 | 7,831 | ||||||||||||||
Deletions | (6,880 | ) | (6,880 | ) | -- | ||||||||||||
Impairments | (144,000 | ) | (144,000 | ) | -- | ||||||||||||
Balance, December 31, 2008 | $ | 93,620 | $ | 76,670 | $ | 16,950 |
A-16 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations. |
A-17 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The significant assumptions used in determining fair values of reporting units using comparable company market values include the determination of appropriate market comparables, the estimated multiples of revenue, EBIT, and EBITDA a willing buyer is likely to pay, and the estimated control premium a willing buyer is likely to pay. |
Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2008 | ||||||||||||||
Urology Services | $ | 36,655 | $ | 1,493 | $ | 35,162 | ||||||||
Medical Products | 2,341 | 1,225 | 1,116 | |||||||||||
Total | $ | 38,996 | $ | 2,718 | $ | 36,278 | ||||||||
December 31, 2007 | ||||||||||||||
Urology Services | $ | 2,590 | $ | 1,759 | $ | 831 | ||||||||
Medical Products | 2,776 | 2,387 | 389 | |||||||||||
Total | $ | 5,366 | $ | 4,146 | $ | 1,220 |
Amortization expense for other intangible assets with finite lives was $1,286,000, $1,028,000 and $1,431,000 for the years ended December 31, 2008, 2007 and 2006, respectively. We estimate annual amortization expense for each of the five succeeding fiscal years as follows (in thousands): |
Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2009 | $ | 2,392 | ||||||
2010 | 2,241 | |||||||
2011 | 1,971 | |||||||
2012 | 1,905 | |||||||
2013 | 1,753 | |||||||
Thereafter | 26,016 |
D. ACQUISITIONS |
A-18 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 $7.4 million of goodwill related to this transaction, all of which is tax deductible. |
($ in thousands, except per share data) | 2008 | 2007 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues | $ | 182,750 | $ | 185,904 | |||||||
Total expenses | 309,942 | 196,977 | |||||||||
Discontinued Operations | -- | (147 | ) | ||||||||
Net income (loss) | $ | (127,192 | ) | $ | (11,220 | ) | |||||
Diluted earnings per share | $ | (3.42 | ) | $ | (0.30 | ) |
A-19 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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E. FAIR VALUE OF FINANCIAL INSTRUMENTS |
2008 | 2007 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
( $ in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 22,854 | $ | 22,854 | $ | 25,198 | $ | 25,198 | |||||||||
Warrants/Common Stock | 290 | 290 | 450 | 360 | |||||||||||||
Financial liabilities: | |||||||||||||||||
Debt | $ | 46,387 | $ | 46,387 | $ | 8,526 | $ | 8,526 | |||||||||
Other long-term obligations | 1,765 | 1,727 | 75 | 67 |
The following methods and assumptions were used by us in estimating our fair value disclosures for financial instruments. |
A-20 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Limitations |
December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | |||||||||
Accrued group insurance costs | $ | 304 | $ | 393 | |||||||
Compensation and payroll related expense | 3,339 | 3,840 | |||||||||
Accrued interest | 94 | 7 | |||||||||
Accrued taxes | 613 | 871 | |||||||||
Accrued professional fees | 317 | 170 | |||||||||
Unearned revenues | 1,181 | 913 | |||||||||
Deferred Rent | 396 | -- | |||||||||
Other | 2,977 | 1,081 | |||||||||
$ | 9,221 | $ | 7,275 |
G. INDEBTEDNESS |
($ in thousands) | December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest Rates | Maturities | 2008 | 2007 | ||||||||||||||
Floating | 2007-2012 | $ | 41,528 | $ | 2,394 | ||||||||||||
4%-9% | 2007-2012 | $ | 4,859 | 6,132 | |||||||||||||
$ | 46,387 | $ | 8,526 | ||||||||||||||
Less current portion of long-term debt | $ | 2,490 | 4,332 | ||||||||||||||
$ | 43,897 | $ | 4,194 |
Senior Credit Facility |
A-21 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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This loan bore interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. We were required to make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments would have increased to $29.7 million. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of December 31, 2008, we have drawn $41 million on the revolver. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. Our assets and the stock of our subsidiaries collateralize the revolving credit facility. We were in compliance with the covenants under our senior credit facility as of December 31, 2008. |
Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2009 | $ | 2,490 | ||||||
2010 | 42,680 | |||||||
2011 | 679 | |||||||
2012 | 145 | |||||||
2013 | 9 | |||||||
Thereafter | 384 |
H. COMMITMENTS AND CONTINGENCIES |
A-22 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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We lease office space in several locations. Rent expense totaled $2,445,000, $1,757,000 and $1,491,000 for the years ended December 31, 2008, 2007 and 2006. Future annual minimum lease payments under all noncancelable operating leases are as follows: |
($ in thousands) Year | Amount | |||||||
---|---|---|---|---|---|---|---|---|
2009 | $ | 2,629 | ||||||
2010 | 2,483 | |||||||
2011 | 2,124 | |||||||
2012 | 1,511 | |||||||
2013 | 1,460 | |||||||
Thereafter | 1,203 |
I. STOCK BASED COMPENSATION |
A-23 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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. |
A-24 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The following table sets forth certain information as of December 31, 2008 about our equity compensation plans: |
(a) | (b) | (c) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Plan Category | Number of shares of our common stock to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of shares of our common stock remaining available for future issuance under equity compensation plans (exceeding securities reflected in column (a)) | ||||||||
Prime 1993 stock option plan | 65,666 | $ | 7 | .79 | -- | ||||||
Prime 2003 stock option plan | 94,000 | $ | 5 | .63 | -- | ||||||
HSS equity incentive plan and stock | |||||||||||
option plans | 2,399,099 | $ | 7 | .06 | 2,582,141 | ||||||
Other equity compensation plans | |||||||||||
approved by our security holders | N/A | N/A | N/A |
To calculate the compensation cost that was recognized under SFAS No. 123(R) for the three years ended December 31, 2008, 2007, and 2006, we used the Black-Scholes option-pricing model with the following weighted-average assumptions for equity awards granted. For December 31, 2007 and 2006, respectively: risk-free interest rates were 4.6% and 4.9%; dividend yields were 0%; volatility factors of the expected market price of our common stock were 47%; and a weighted-average expected life of the option of 6 years. There were no options granted in the year ended December 31, 2008. |
A-25 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Activity and pricing information regarding all stock options to purchase shares of our common stock are summarized as follows: |
2008 | 2007 | 2006 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Options (000) | Weighted Average Exercise Price | Options (000) | Weighted Average Exercise Price | Options (000) | Weighted Average Exercise Price | |||||||||||||||
Outstanding at beginning of year | 3,194 | $ | 7.07 | 3,908 | $ | 7.32 | 3,048 | $ | 7.65 | |||||||||||
Granted | -- | -- | 245 | 5.82 | 1,992 | 7.05 | ||||||||||||||
Exercised | -- | -- | -- | -- | (298 | ) | 6.40 | |||||||||||||
Cancelled | (399 | ) | 7.60 | (552 | ) | 8.07 | (588 | ) | 8.78 | |||||||||||
Forfeited | (236 | ) | 6.61 | (407 | ) | 7.38 | (246 | ) | 6.94 | |||||||||||
Outstanding at end of year | 2,559 | $ | 7.03 | 3,194 | $ | 7.07 | 3,908 | $ | 7.32 | |||||||||||
Exercisable at end of year | 2,182 | $ | 7.13 | 2,049 | $ | 7.35 | 2,450 | $ | 7.51 | |||||||||||
Weighted-average fair value of | ||||||||||||||||||||
options granted during the period | N/A | $2.99 | $ | 3.38 |
During the year ended December 31, 2008, there were no exercises of options to purchase common stock and the total fair value of shares vested during 2008 was $1,153,000. During the year ended December 31, 2007, there were no exercises of options to purchase common stock and the total fair value of shares vested during 2007 was $966,000. |
Outstanding Options | Exercisable Options | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Options (000) | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Options (000) | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | ||||||||||||||
$4.49 - $6.49 | 326 | 5.4 years | $ | 5 | .83 | 243 | 4.4 years | $ | 5 | .98 | ||||||||||
$6.50 - $6.99 | 1,412 | 5.7 years | 6 | .65 | 1,167 | 5.2 years | 6 | .64 | ||||||||||||
$7.00 - $7.50 | 455 | 6.7 years | 7 | .37 | 406 | 6.7 years | 7 | .39 | ||||||||||||
$7.51 - $9.50 | 180 | 4.3 years | 7 | .98 | 180 | 4.3 years | 7 | .98 | ||||||||||||
$9.51 - $13.69 | 186 | 4.5 years | 10 | .26 | 186 | 4.5 years | 10 | .26 | ||||||||||||
2,559 | $ | 7 | .03 | 2,182 | $ | 7 | .13 | |||||||||||||
Aggregate intrinsic value (in thousands) | $ | -- | $ | -- |
The aggregate intrinsic value in the table above is based on our closing stock price of $2.25 per share as of December 31, 2008. |
A-26 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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A summary of the status of the our nonvested shares as of December 31, 2008 and changes during the years ended December 31, 2008 and 2007 is as follows: |
Nonvested Shares | Shares (000) | Weighted-Average Grant-Date Fair Value | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Nonvested at January 1, 2007 | -- | $ | -- | ||||||||
Granted | 135 | 4.75 | |||||||||
Vested | -- | -- | |||||||||
Forfeited | -- | -- | |||||||||
Nonvested at December 31, 2007 | 135 | $ | 4.75 | ||||||||
Granted | 1,897 | 2.52 | |||||||||
Vested | (220 | ) | 3.52 | ||||||||
Forfeited | (62 | ) | 3.22 | ||||||||
Nonvested at December 31, 2008 | 1,750 | $ | 2.55 |
J. INCOME TAXES |
Years Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
United States | $ | (139,959 | ) | $ | (17,881 | ) | $ | (19,947 | ) | |||||
Foreign | (250 | ) | 542 | (1,062 | ) | |||||||||
$ | (140,209 | ) | $ | (17,339 | ) | $ | (21,009 | ) |
Income tax expense (benefit) consists of the following: |
Years Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
Federal: | ||||||||||||||
Current | $ | -- | $ | -- | $ | 681 | ||||||||
Deferred | (8,147 | ) | (2,878 | ) | (4,877 | ) | ||||||||
State: | ||||||||||||||
Current | 202 | 212 | 456 | |||||||||||
Deferred | (3,643 | ) | (401 | ) | (582 | ) | ||||||||
Foreign | ||||||||||||||
Current | -- | -- | -- | |||||||||||
Deferred | 72 | 213 | (241 | ) | ||||||||||
$ | (11,516 | ) | $ | (2,854 | ) | $ | (4,563 | ) |
A-27 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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A reconciliation of expected income tax expense (benefit), computed by applying the United States statutory income tax rate of 35% to earnings before income taxes, to total income tax expense in the accompanying consolidated statements of income follows: |
Years Ended December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
Expected federal income tax | $ | (49,073 | ) | $ | (6,069 | ) | $ | (7,353 | ) | |||||
State taxes | (2,238 | ) | (123 | ) | (82 | ) | ||||||||
Foreign rate differential | 73 | 17 | 130 | |||||||||||
Goodwill impairment | 24,672 | 3,589 | 3,090 | |||||||||||
Affect of valuation allowance | 14,776 | -- | -- | |||||||||||
Other | 274 | (268 | ) | (348 | ) | |||||||||
$ | (11,516 | ) | $ | (2,854 | ) | $ | (4,563 | ) |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: |
($ in thousands) | 2008 | 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred tax assets: | ||||||||
Net operating loss carryforward | $ | 34,395 | $ | 9,193 | ||||
Allowance for bad debts | 32 | 123 | ||||||
State deferred tax | 3,792 | -- | ||||||
FAS 123(R) expense | 1,129 | 552 | ||||||
AMT Credit | 789 | 578 | ||||||
HTRN acquired built-in losses | 4,331 | -- | ||||||
Capitalized costs | 1,384 | 1,105 | ||||||
Accrued expenses deductible for tax purposes when paid | 733 | 996 | ||||||
Total gross deferred tax assets | 46,585 | 12,547 | ||||||
Less valuation allowance | (46,585 | ) | -- | |||||
Net deferred tax assets | -- | 12,547 | ||||||
Deferred tax liabilities: | ||||||||
Property and equipment, principally due to differences in depreciation | (1,212 | ) | (894 | ) | ||||
Intangible assets, principally due to differences in amortization periods for tax purposes | (2,143 | ) | (26,683 | ) | ||||
Total gross deferred tax liability | (3,355 | ) | (27,577 | ) | ||||
Net deferred tax liability | $ | (3,355 | ) | $ | (15,030 | ) |
In assessing the realizablity of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax planning strategies in making this assessment. Based on these criteria, management believes it will not realize the benefits of these deductible differences; accordingly, we have recorded a full valuation allowance at December 31, 2008. The valuation allowance was zero at December 31, 2007. |
A-28 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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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 HeathTronics, 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. |
($ in thousands) | ||||||||
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Balance at beginning of year | $ | 2,294 | ||||||
Additions based on tax positions related to the current year | -- | |||||||
Additions for tax positions of prior years | -- | |||||||
Reductions for tax provisions for prior years | -- | |||||||
Settlements | (2,294 | ) | ||||||
Reductions for lapse of statute of limitations | -- | |||||||
Balance at end of year | $ | -- |
Our continuing practice is to recognize interest and penalty expense in operating expenses. For the years ended December 31, 2008 and 2007, we expensed no penalties and interest and $153,000 of penalties and interest, respectively. The $153,000 of interest expensed in 2007 was reversed in 2008 due to the completion of the IRS examination. |
A-29 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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Deferred taxes are not provided on undistributed earnings of foreign subsidiaries because such earnings are expected to be indefinitely reinvested outside the United States. If these amounts were not considered permanently reinvested, a cumulative deferred tax liability approximating $87,000 and $118,000 would be provided for in 2008 and 2007, respectively. |
A-30 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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($ in thousands) | Urology Services | Medical Products | ||||||
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2008 | ||||||||
Revenue from external customers | $ | 145,265 | $ | 20,389 | ||||
Intersegment revenues | -- | 10,175 | ||||||
Interest income | 297 | 49 | ||||||
Interest expense | 529 | 1 | ||||||
Depreciation and amortization | 8,261 | 3,678 | ||||||
Impairment of Goodwill | 144,000 | -- | ||||||
Segment profit (loss) | (132,002 | ) | 1,384 | |||||
Segment assets | 181,847 | 47,938 | ||||||
Capital expenditures | 2,485 | 7,573 | ||||||
2007 | ||||||||
Revenue from external customers | $ | 122,736 | $ | 17,101 | ||||
Intersegment revenues | -- | 9,039 | ||||||
Interest income | 523 | 38 | ||||||
Interest expense | 767 | -- | ||||||
Depreciation and amortization | 8,116 | 2,322 | ||||||
Impairment of Goodwill | 20,800 | -- | ||||||
Segment profit (loss) | (10,991 | ) | 738 | |||||
Segment assets | 285,239 | 37,732 | ||||||
Capital expenditures | 3,321 | 5,775 | ||||||
2006 | ||||||||
Revenue from external customers | $ | 123,265 | $ | 19,080 | ||||
Intersegment revenues | -- | 9,296 | ||||||
Interest income | 294 | 55 | ||||||
Interest expense | 872 | 1 | ||||||
Depreciation and amortization | 8,535 | 1,972 | ||||||
Impairment of Goodwill | 12,200 | 8,400 | ||||||
Segment profit (loss) | 1,346 | (11,586 | ) | |||||
Segment assets | 293,119 | 37,065 | ||||||
Capital expenditures | 8,743 | 4,315 |
The following is a reconciliation of revenues per above to the consolidated revenues per the consolidated statements of income: |
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
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Total revenues for reportable segments | $ | 175,829 | $ | 148,876 | $ | 151,641 | ||||||||
Corporate revenue | 288 | 581 | 546 | |||||||||||
Elimination of intersegment revenues | (10,175 | ) | (9,039 | ) | (9,296 | ) | ||||||||
Total consolidated revenues | $ | 165,942 | $ | 140,418 | $ | 142,891 |
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HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The following is a reconciliation of profit per above to income before taxes per the consolidated statements of income: |
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
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Total profit (loss) for reportable segments | $ | (130,618 | ) | $ | (10,253 | ) | $ | (10,240 | ) | |||||
Corporate revenue | 288 | 581 | 546 | |||||||||||
Unallocated corporate expenses: | ||||||||||||||
General and administrative | (9,794 | ) | (7,519 | ) | (10,680 | ) | ||||||||
Net interest expense | 339 | 522 | 133 | |||||||||||
Other, net | (424 | ) | (670 | ) | (768 | ) | ||||||||
Unallocated corporate expenses total | (9,879 | ) | (7,667 | ) | (11,315 | ) | ||||||||
Income (loss) before income taxes | $ | (140,209 | ) | $ | (17,339 | ) | $ | (21,009 | ) |
The following is a reconciliation of segment assets per above to the consolidated assets per the consolidated balance sheets: |
($ in thousands) | 2008 | 2007 | 2006 | |||||||||||
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Total assets for reportable segments | $ | 229,785 | $ | 322,971 | $ | 330,184 | ||||||||
Unallocated corporate assets | 4,601 | 13,085 | 16,549 | |||||||||||
Consolidated total | $ | 234,386 | $ | 336,056 | $ | 346,733 |
The reconciliation of the other significant items to the amounts reported in the consolidated financial statements is as follows: |
($ in thousands) | Segments | Corporate | Eliminating Entries | Consolidated | ||||||||||
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2008 | ||||||||||||||
Interest and dividends | $ | 346 | $ | 887 | $ | -- | $ | 1,233 | ||||||
Interest expense | 530 | 547 | -- | 1,077 | ||||||||||
Depreciation and amortization | 11,939 | 424 | -- | 12,363 | ||||||||||
Capital expenditures | 10,058 | 1,721 | -- | 11,779 | ||||||||||
2007 | ||||||||||||||
Interest and dividends | $ | 561 | $ | 585 | $ | -- | $ | 1,146 | ||||||
Interest expense | 767 | 62 | -- | 829 | ||||||||||
Depreciation and amortization | 10,438 | 669 | -- | 11,107 | ||||||||||
Capital expenditures | 9,096 | 373 | -- | 9,469 | ||||||||||
2006 | ||||||||||||||
Interest and dividends | $ | 349 | $ | 406 | $ | -- | $ | 755 | ||||||
Interest expense | 873 | 273 | -- | 1,146 | ||||||||||
Depreciation and amortization | 10,507 | 768 | -- | 11,275 | ||||||||||
Capital expenditures | 13,058 | 202 | (1,358 | ) | 11,902 |
A-32 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The amounts in 2008, 2007 and 2006 for interest income and expense, depreciation and amortization and capital expenditures represent amounts recorded by the operations of our corporate functions, which have not been allocated to the segments. |
A-33 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The following table details selected financial information included in income (loss) from discontinued operations in the consolidated statements of income for December 31, 2007 and 2006. |
Consolidated Statements of Income | ||||||||
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($ in thousands) | 2007 | 2006 | ||||||
For the Year Ended December 31 | ||||||||
Revenue | ||||||||
Specialty Vehicles Manufacturing | $ | -- | $ | 57,526 | ||||
CryoSurgery | -- | 1,490 | ||||||
Rocky Mountain Prostate Thermotherapies | 3,268 | 4,289 | ||||||
HIFU | -- | -- | ||||||
Cost of services | ||||||||
Specialty Vehicles Manufacturing | -- | (51,616 | ) | |||||
CryoSurgery | -- | (1,235 | ) | |||||
Rocky Mountain Prostate Thermotherapies | (3,739 | ) | (4,587 | ) | ||||
HIFU | (216 | ) | (1,233 | ) | ||||
Depreciation and amortization | ||||||||
Specialty Vehicles Manufacturing | -- | (542 | ) | |||||
CryoSurgery | -- | (512 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | (224 | ) | |||||
HIFU | (3 | ) | (17 | ) | ||||
Other | ||||||||
Specialty Vehicles Manufacturing | -- | (72 | ) | |||||
CryoSurgery | -- | (118 | ) | |||||
Rocky Mountain Prostate Thermotherapies | -- | (4 | ) | |||||
HIFU | -- | -- | ||||||
Income (loss) from discontinued operations | $ | (690 | ) | $ | 3,145 |
Year Ended December 31, | |||||||||||
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($ in thousands) | 2007 | 2006 | |||||||||
Gain on sale of specialty vehicle manufacturing | $ | -- | $ | 53,551 | |||||||
Gain on Sale of Rocky Mountain Prostate Thermotherapy | 451 | -- | |||||||||
Loss from disposal of cryosurgery operations | -- | (3,729 | ) | ||||||||
Impairment of Rocky Mountain Prostate Thermotherapy | -- | (4,263 | ) | ||||||||
Income from discontinued operations | (690 | ) | 3,145 | ||||||||
Interest allocated to discontinued operations | -- | (4,830 | ) | ||||||||
Income tax (expense) benefit on discontinued operations | 92 | (18,745 | ) | ||||||||
Income (loss) from discontinued operations, net of tax | $ | (147 | ) | $ | 25,129 |
Pursuant to EITF 87-24 “Allocation of Interest to Discontinued Operations,” we have allocated certain interest and the related fees incurred to refinance our senior credit facility that was required to be repaid as a result of the disposal of our specialty vehicle manufacturing segment. Accordingly, we have included in discontinued operations interest expense totaling $4,830,000 for the year ended December 31, 2006. |
A-34 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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The gain on sale of our specialty vehicle manufacturing operations, the loss from disposal of our cryosurgery operations, and the impairment of Rocky Mountain Prostate Thermotherapy, noted above, include charges to goodwill of $50.4 million, $2.7 million and $3.25 million, respectively. |
A-35 |
HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) |
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On July 27, 2006, John Q. Barnidge resigned, effective August 10, 2006, from his positions as our Senior Vice President and Chief Financial Officer. In connection with his departure, we entered into a severance and non-competition agreement with Mr. Barnidge whereby (1) we agreed to make a severance payment of $310,000 to Mr. Barnidge and (2) Mr. Barnidge agreed to a four-year non-competition provision in exchange for a payment from us equal to $150,000 for each year under the non-competition provision. Such Payment totaled $910,000 was expensed when paid on August 10, 2006. |
A-36 |