_______________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2009
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 78717
(Address of principal executive office) (Zip code)
(512) 328-2892
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ |
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 |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
Title of Each Class Common Stock, no par value | Number of Shares Outstanding at August 1, 2009 44,659,560 |
PART IFINANCIAL INFORMATIONItem 1 - Financial Statements |
-2- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
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($ in thousands, except per share data) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
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2009 | 2008 | 2009 | 2008 | |||||||||||
Revenues | $ | 44,156 | $ | 42,580 | $ | 87,768 | $ | 76,534 | ||||||
Cost of revenues (exclusive of depreciation and | ||||||||||||||
amortization shown separately below) | 21,256 | 19,135 | 42,563 | 34,303 | ||||||||||
Gross profit | 22,900 | 23,445 | 45,205 | 42,231 | ||||||||||
Operating expenses | ||||||||||||||
Selling, general and administrative | 4,860 | 5,269 | 9,416 | 9,586 | ||||||||||
Depreciation and amortization | 3,398 | 3,069 | 6,876 | 5,697 | ||||||||||
Total operating expenses | 8,258 | 8,338 | 16,292 | 15,283 | ||||||||||
Operating income | 14,642 | 15,107 | 28,913 | 26,948 | ||||||||||
Other income (expenses): | ||||||||||||||
Interest and dividends | 32 | 101 | 82 | 292 | ||||||||||
Interest expense | (298 | ) | (246 | ) | (588 | ) | (409 | ) | ||||||
(266 | ) | (145 | ) | (506 | ) | (117 | ) | |||||||
Income from operations before provision | ||||||||||||||
for income taxes | 14,376 | 14,962 | 28,407 | 26,831 | ||||||||||
Provision for income taxes | 306 | 471 | 619 | 841 | ||||||||||
Consolidated net income | 14,070 | 14,491 | 27,788 | 25,990 | ||||||||||
Less: Net income attributable to noncontrolling interest | (13,741 | ) | (13,781 | ) | (27,069 | ) | (24,828 | ) | ||||||
Net income attributable to HealthTronics, Inc. | $ | 329 | $ | 710 | $ | 719 | $ | 1,162 | ||||||
Basic earnings per share attributable to HealthTronics, Inc.: | ||||||||||||||
Net income attributable to HealthTronics, Inc. | $ | 0.01 | $ | 0.02 | $ | 0.02 | $ | 0.03 | ||||||
Weighted average shares outstanding | 36,006 | 37,059 | 35,949 | 36,242 | ||||||||||
Diluted earnings per share attributable to HealthTronics, Inc.: | ||||||||||||||
Net income attributable to HealthTronics, Inc. | $ | 0.01 | $ | 0.02 | $ | 0.02 | $ | 0.03 | ||||||
Weighted average shares outstanding | 36,161 | 37,165 | 36,064 | 36,295 |
See accompanying notes to condensed consolidated financial statements. |
-3- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
($ in thousands) | June 30, 2009 | December 31, 2008 | ||||||
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ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,173 | $ | 22,854 | ||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $2,812 in 2009 and $2,485 in 2008 | 28,731 | 27,687 | ||||||
Other receivables | 943 | 1,410 | ||||||
Prepaid expenses and other current assets | 3,508 | 2,895 | ||||||
Inventory | 8,689 | 8,843 | ||||||
Total current assets | 54,044 | 63,689 | ||||||
Property and equipment: | ||||||||
Equipment, furniture and fixtures | 55,879 | 55,050 | ||||||
Building and leasehold improvements | 8,288 | 8,254 | ||||||
64,167 | 63,304 | |||||||
Less accumulated depreciation and | ||||||||
amortization | (33,886 | ) | (30,535 | ) | ||||
Property and equipment, net | 30,281 | 32,769 | ||||||
Other investments | 1,840 | 1,819 | ||||||
Goodwill | 94,141 | 93,620 | ||||||
Intangible assets | 39,248 | 40,278 | ||||||
Other noncurrent assets | 4,297 | 2,211 | ||||||
$ | 223,851 | $ | 234,386 |
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) |
($ in thousands, except share data) | June 30, 2009 | December 31, 2008 | ||||||
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LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 37,954 | $ | 2,490 | ||||
Accounts payable | 7,467 | 6,468 | ||||||
Accrued expenses | 7,299 | 9,316 | ||||||
Total current liabilities | 52,720 | 18,274 | ||||||
Long-term debt, net of current portion | 2,456 | 43,897 | ||||||
Other long term obligations | 1,664 | 1,765 | ||||||
Deferred income taxes | 4,797 | 3,355 | ||||||
Total liabilities | 61,637 | 67,291 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | ||||||||
Common stock, no par value, 70,000,000 authorized: 39,932,411 | ||||||||
issued and 38,040,462 outstanding in 2009 and | ||||||||
39,494,314 issued and 37,618,206 outstanding in 2008 | 211,952 | 211,667 | ||||||
Accumulated deficit | (87,133 | ) | (87,852 | ) | ||||
Treasury stock, at cost, 1,891,949 shares in 2009 and 1,876,108 shares in 2008 | (4,464 | ) | (4,443 | ) | ||||
Total HealthTronics, Inc. shareholders' equity | 120,355 | 119,372 | ||||||
Noncontrolling interest | 41,859 | 47,723 | ||||||
Total Equity | 162,214 | 167,095 | ||||||
$ | 223,851 | $ | 234,386 |
See accompanying notes to condensed consolidated financial statements. |
-5- |
HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Period ended June 30, 2009 (Unaudited) |
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($ in thousands, except share data) | Issued Common Stock | Accumulated | Treasury Stock | Non- Controlling | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares | Amount | Deficit | Shares | Amount | Interest | Total | |||||||||||||||||
Balance, December 31, 2008 | 39,494,314 | $ | 211,667 | $ | (87,852 | ) | (1,876,108 | ) | $ | (4,443 | ) | $ | 47,723 | $ | 167,095 | ||||||||
Net income | -- | -- | 719 | -- | -- | 27,069 | $ | 27,788 | |||||||||||||||
Distributions paid to | |||||||||||||||||||||||
noncontrolling interest | -- | -- | -- | -- | -- | (32,051 | ) | $ | (32,051 | ) | |||||||||||||
Sale of subsidiary interest to | |||||||||||||||||||||||
noncontolling interest | -- | -- | -- | -- | -- | 2,434 | $ | 2,434 | |||||||||||||||
Purchase of subsidiary interest from | |||||||||||||||||||||||
noncontrolling interest | -- | (1,471 | ) | -- | -- | -- | (3,316 | ) | $ | (4,787 | ) | ||||||||||||
Stock issued for acquisitions | 134,356 | 214 | -- | -- | -- | -- | $ | 214 | |||||||||||||||
Purchase of treasury stock | -- | -- | -- | (15,841 | ) | (21 | ) | -- | $ | (21 | ) | ||||||||||||
Stock option expense 123R | 303,741 | 1,542 | -- | -- | -- | -- | $ | 1,542 | |||||||||||||||
Balance, June 30, 2009 | 39,932,411 | $ | 211,952 | $ | (87,133 | ) | (1,891,949 | ) | $ | (4,464 | ) | $ | 41,859 | $ | 162,214 |
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
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($ in thousands) | Six Months Ended June 30, | |||||||
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2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Fee and other revenue collected | $ | 87,373 | $ | 79,000 | ||||
Cash paid to employees, suppliers of goods and others | (52,911 | ) | (44,146 | ) | ||||
Interest received | 82 | 292 | ||||||
Interest paid | (605 | ) | (388 | ) | ||||
Taxes paid | 489 | (644 | ) | |||||
Net cash provided by operating activities | 34,428 | 34,114 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of entities, net of cash acquired | (433 | ) | (10,197 | ) | ||||
Purchases of equipment and leasehold improvements | (4,426 | ) | (5,615 | ) | ||||
Proceeds from sales of assets | 229 | 7,753 | ||||||
Other | (21 | ) | (190 | ) | ||||
Net cash used in investing activities | (4,651 | ) | (8,249 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on notes payable | 3,396 | 7,341 | ||||||
Payments on notes payable, exclusive of interest | (9,401 | ) | (9,351 | ) | ||||
Distributions to noncontrolling interest | (32,076 | ) | (30,132 | ) | ||||
Contributions by noncontrolling interest, net of buyouts | (2,356 | ) | (611 | ) | ||||
Purchase of treasury stock | (21 | ) | (103 | ) | ||||
Net cash used in financing activities | (40,458 | ) | (32,856 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (10,681 | ) | (6,991 | ) | ||||
Cash and cash equivalents, beginning of period | 22,854 | 25,198 | ||||||
Cash and cash equivalents, end of period | $ | 12,173 | $ | 18,207 |
See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) |
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($ in thousands) | Six Months Ended March 31, | |||||||
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2009 | 2008 | |||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 27,788 | $ | 25,990 | ||||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities | ||||||||
Depreciation and amortization | 6,876 | 5,697 | ||||||
Provision for uncollectible accounts | 194 | (54 | ) | |||||
Provision for deferred income taxes | 1,442 | 422 | ||||||
Non-cash share based compensation | 1,542 | 1,909 | ||||||
Other | 220 | (446 | ) | |||||
Changes in operating assets and liabilities, | ||||||||
net of effect of purchase transactions | ||||||||
Accounts receivable | (1,238 | ) | 1,239 | |||||
Other receivables | 467 | 1,712 | ||||||
Inventory | 154 | 184 | ||||||
Other assets | (1,899 | ) | (192 | ) | ||||
Accounts payable | 999 | (217 | ) | |||||
Accrued expenses | (2,117 | ) | (2,130 | ) | ||||
Total adjustments | 6,640 | 8,124 | ||||||
Net cash provided by operating activities | $ | 34,428 | $ | 34,114 |
See accompanying notes to condensed consolidated financial statements. |
-8- |
HEALTHTRONICS, INC. AND SUBSIDIARIES |
1.General
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of financial position as of June 30, 2009 and the results of operations and cash flows for the periods presented. Such adjustments are of a normal recurring nature unless otherwise noted herein. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. |
2.Debt
Senior Credit Facility |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
Other |
3.Earnings per share
Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options, non-vested stock awards, and warrants. A reconciliation of such EPS data is as follows: |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | |||||||
---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 | |||||||||
Net income attributable to HealthTronics, Inc. | $ | 719 | $ | 719 | |||||
Weighted average shares outstanding | 35,949 | 35,949 | |||||||
Effect of dilutive securities | -- | 115 | |||||||
Shares for EPS calculation | 35,949 | 36,064 | |||||||
Net income per share | $ | 0.02 | $ | 0.02 | |||||
Six Months Ended June 30, 2008 | |||||||||
Net income attributable to HealthTronics, Inc. | $ | 1,162 | $ | 1,162 | |||||
Weighted average shares outstanding | 36,242 | 36,242 | |||||||
Effect of dilutive securities | -- | 53 | |||||||
Shares for EPS calculation | 36,242 | 36,295 | |||||||
Net income per share | $ | 0.03 | $ | 0.03 |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
($ in thousands, except per share data) | Basic earnings per share | Diluted earnings per share | |||||||
---|---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2009 | |||||||||
Net income attributable to HealthTronics, Inc. | $ | 329 | $ | 329 | |||||
Weighted average shares outstanding | 36,006 | 36,006 | |||||||
Effect of dilutive securities | -- | 155 | |||||||
Shares for EPS calculation | 36,006 | 36,161 | |||||||
Net income per share | $ | 0.01 | $ | 0.01 | |||||
Three Months Ended June 30, 2008 | |||||||||
Net income attributable to HealthTronics, Inc. | $ | 710 | $ | 710 | |||||
Weighted average shares outstanding | 37,059 | 37,059 | |||||||
Effect of dilutive securities | -- | 106 | |||||||
Shares for EPS calculation | 37,059 | 37,165 | |||||||
Net income per share | $ | 0.02 | $ | 0.02 |
We did not include in our computation of diluted EPS unexercised stock options and non-vested stock awards to purchase 2,424,000 and 3,090,000 shares of our common stock as of June 30, 2009 and 2008, respectively, because the effect would be antidilutive. |
4.Segment Reporting
In the fourth quarter of 2008, our Medical Products division relocated from Kennesaw, Georgia to our corporate headquarters in Austin, Texas. Concurrent with this relocation, we made certain changes within our Medical Products management team so that these operations now report to the President of our Urology Services operations. After making these changes, we redesigned our internal financial reporting materials provided to our chief operating decision maker, as well as our executive management team. As of the first quarter of 2009, we do not have any operating segments, except our Urology Services operations, that meet the quantitative requirements of SFAS 131, Disclosures about Segments of an Enterprise and Related Information. |
5. Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock option grants based on estimated fair values. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior to the adoption of SFAS 123(R), we accounted for share-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method, share-based compensation expense was only recognized by us if the exercise price of the stock option was less than the fair market value of the underlying stock at the date of grant. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
Under SFAS 123(R), nonvested stock awards are awards that the employee has not yet earned the right to sell and are subject to forfeiture if the terms of service are not satisfied. These awards should be measured based on the market prices of otherwise identical (i.e., identical except for the vesting condition) common stock at the grant date. A nonvested equity share awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date. The vesting restrictions are taken into account by recognizing compensation cost only for awards for which the employee has rendered the requisite service (i.e., vested). |
6. Inventory
As of June 30, 2009 and December 31, 2008, inventory consisted of the following: |
($ In thousands) | June 30, 2009 | December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
Raw Materials | $ | 6,377 | $ | 5,993 | |||||
Finished Goods | 2,312 | 2,850 | |||||||
$ | 8,689 | $ | 8,843 | ||||||
7. New Pronouncements
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“FAS 168”). The Codification will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of FAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. FAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect that the adoption of FAS 168 will have a material impact on our financial position or results of operations. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 retains the scope of Interpretation 46(R), Consolidation of Variable Interest Entities, with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. FAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. We do not expect that the adoption of SFAS 167 will have a material impact on our financial position or results of operations. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP concluded that instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, with prior period retrospective application. Our adoption of this FSP on January 1, 2009 had no material impact on our consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
8. Acquisitions
On October 10, 2008, we entered into a Stock Purchase Agreement with Atlantic Urological Associates (“AUA���), pursuant to which we purchased the outstanding shares of capital stock of Ocean Radiation Therapy, Inc., a wholly-owned subsidiary of AUA (“Ocean”), for a purchase price of approximately $35 million in cash. Ocean provides image guided radiation therapy (“IGRT”) technical services to AUA’s IGRT cancer treatment center. The Ocean entity was formed concurrent with and as a result of the purchase. Ocean’s only asset was the IGRT services agreement valued at approximately $35 million which is recorded in intangible assets. We have estimated that this service agreement has a 20 year useful life and we are amortizing that asset over that life. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
In 2008, we purchased three partnerships, increased our ownership in three existing partnerships and purchased a small service company for an aggregate purchase price of approximately $6.4 million. We recorded approximately $7.2 million of goodwill related to these transactions, all of which is tax deductible. |
Six Months Ended | ||||||
---|---|---|---|---|---|---|
($ in thousands, except per share data) | June 30, 2008 | |||||
Total revenues | $ | 89,784 | ||||
Total expenses | (87,710 | ) | ||||
Net income attributable to HealthTronics, Inc. | $ | 2,074 | ||||
Diluted earnings per share | $ | 0.05 |
9. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of our significant financial instruments as of June 30, 2009 and December 31, 2008 are as follows: |
June 30, 2009 | December 31, 2008 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
( $ in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 12,173 | $ | 12,173 | $ | 22,854 | $ | 22,854 | |||||||||
Warrants/Common Stock | 290 | 290 | 290 | 290 | |||||||||||||
Financial liabilities: | |||||||||||||||||
Debt | $ | 40,410 | $ | 40,410 | $ | 46,387 | $ | 46,387 | |||||||||
Other long-term obligations | 1,787 | 1,737 | 1,765 | 1,727 |
The following methods and assumptions were used by us in estimating our fair value disclosures for financial instruments. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
Debt |
10. Subsequent Events
On July 27, 2009, we completed our acquisition of all of the outstanding shares of common stock, $0.001 par value per share (and the related preferred stock purchase rights) (the “Shares”), of Endocare, Inc., a Delaware corporation (“Endocare”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 7, 2009, among us, HT Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of ours (“Offeror”), and Endocare. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
In accordance with the terms and conditions of the Merger Agreement, on June 17, 2009, Offeror commenced an exchange offer (the “Offer”) to acquire all of the outstanding Shares in which each validly tendered Share would be exchanged, at the election of the holder, for the following consideration: (i) $1.35 in cash, without interest (the “Cash Consideration”), or (ii) 0.7764 of a share of our common stock (the “Stock Consideration”), in each case subject to proration. The Offer expired at 5:00 p.m., New York City time, on July 21, 2009. A total of 11,363,630 Shares were tendered and not withdrawn, reflecting approximately 91.1 percent of the 12,475,081 Shares outstanding. |
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Item 2 — Management’s Discussion and Analysis |
Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. In addition to any risks and uncertainties specifically identified below and in the text surrounding forward-looking statements in this report, you should review the risk factors described in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from those presented. |
• | uncertainties in our establishing or maintaining relationships with physicians and hospitals; | |
• | the impact of current and future laws and governmental regulations; | |
• | uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement; | |
• | the effects of competition and technological changes; | |
• | the availability (or lack thereof) of acquisition or combination opportunities; and | |
• | general economic, market or business conditions. |
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Item 2 — Management’s Discussion and Analysis |
Segment Reporting |
-20- |
Item 2 — Management’s Discussion and Analysis |
Prostate treatment services. We provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) photo-selective vaporization of the prostate (PVP), (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy (TUMT) in certain partnerships. All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancers cells. In April 2008, we acquired Advanced Medical Partners, Inc. (“AMPI”), which significantly expanded our cryosurgery partnership base. Our prostate treatment services are also provided principally through limited partnerships and other entities that we manage, which use equipment to perform the treatments. Benign prostate disease and cryosurgery cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. We also provide services relating to operating the equipment, including scheduling, training, quality assurance, regulatory compliance, and contracting. |
• | Fees for urology treatments . A substantial majority of our 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. |
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Item 2 — Management’s Discussion and Analysis |
• | 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. |
• | 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 |
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Item 2 — Management’s Discussion and Analysis |
Cash Consideration was elected with respect to 2,596,962 tendered Shares. Holders of these Shares received, in exchange for each such Share tendered, $1.35 per Share in cash. Stock Consideration was elected with respect to 8,766,668 tendered Shares. Pursuant to the terms of the Offer, the maximum aggregate number of shares of our common stock issuable pursuant to the Offer is 0.7764 of a share of our common stock multiplied by 75% of the total number of Shares tendered and accepted for exchange pursuant to the Offer, or 6,617,042 shares of our common stock (the “Maximum Stock Consideration”). Endocare stockholders elected to receive Stock Consideration in excess of the Maximum Stock Consideration. As a result, those Endocare stockholders who elected Stock Consideration had their elections prorated such that they received, on a per Share basis, approximately 0.7548 of a share of our common stock and approximately $0.04 in cash. The aggregate amount of cash paid for Shares exchanged pursuant to the Offer is approximately $3.8 million and the aggregate number of shares of our common stock issued pursuant to the Offer is approximately 6.6 million shares. |
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Item 2 — Management’s Discussion and Analysis |
A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts, and circumstances relating to these matters and certain negotiations with related payors. |
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Item 2 — Management’s Discussion and Analysis |
Our cost of revenues increased $8,260,000 (24%) in the first half of 2009 as compared to the same period in 2008. The primary causes of this increase relate to the cost of revenues attributable to our AMPI and IGRT operations, which resulted in increased costs totaling $4,228,000, and our Lab operations, which had increased costs totaling $3,138,000 in the first half of 2009, $2,695,000 of which was attributable to our new Uropath operations. Our selling, general and administrative costs for the six months ended June 30, 2009 decreased $170,000 over the same period in 2008. |
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Item 2 — Management’s Discussion and Analysis |
Net income attributable to noncontrolling interest for the three month period ended June 30, 2009 decreased $40,000 compared to the same period in 2008. |
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Item 2 — Management’s Discussion and Analysis |
Accounts receivable as of June 30, 2009 has increased $1,044,000 from December 31, 2008. This increase relates primarily to a $1,262,000 increase at our Uropath and Claripath labs related to significant growth across our lab operations. |
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Item 2 — Management’s Discussion and Analysis |
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) | $ | 40,410 | $ | 37,954 | $ | 2,020 | $ | 51 | $ | 385 | |||||||
Operating Leases (2) | 9,749 | 2,447 | 4,101 | 2,714 | 487 | ||||||||||||
Non-compete contracts (3) | 40 | 40 | - | - | - | ||||||||||||
Total | $ | 50,199 | $ | 40,441 | $ | 6,121 | $ | 2,765 | $ | 872 | |||||||
(1) | Represents long term debt as discussed above. | ||||
(2) | Represents operating leases in the ordinary course of our business. | ||||
(3) | Represents an obligation of $40 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010. |
In addition, the scheduled principal repayments for all long term debt as of June 30, 2009 are payable as follows: |
($ in thousands) | ||||||
---|---|---|---|---|---|---|
2010 | $ | 37,954 | ||||
2011 | 1,426 | |||||
2012 | 594 | |||||
2013 | 51 | |||||
2014 | - | |||||
Thereafter | 385 | |||||
Total | $ | 40,410 | ||||
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” in our most recent Annual Report on Form 10-K. 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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Item 2 — Management’s Discussion and Analysis |
Based upon the current level of our operations and anticipated cost savings and revenue growth, we believe that cash flows from our operations and available cash, together with available borrowings under our senior credit facility, will be adequate to meet our future liquidity needs both for the short term and for at least the next several years. However, there can be no assurance that our business will generate sufficient cash flows from operations, that we will realize our anticipated revenue growth and operating improvements or that future borrowings will be available under our senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. |
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Item 2 — Management’s Discussion and Analysis |
In May 2009, the FASB issued Statement No. 165, Subsequent Events (“FAS 165”). FAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. FAS 165 was effective for interim or annual financial periods ending after June 15, 2009. We adopted FAS 165 during the second quarter of 2009 and its application did not affect our consolidated financial position, results of operations, or cash flows. We evaluated subsequent events through the date the accompanying financial statements were issued, which was August 7, 2009. |
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Item 2 — Management’s Discussion and Analysis |
In December 2007, the FASB issued Statement SFAS No. 141 (revised 2007), Business Combinations, (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141(R) will continue to be dependent on the future business combinations that we may pursue after its effective date. We expensed approximately $452,000 in the second quarter of 2009 and approximately $686,000 year to date in 2009, of costs related to acquisitions. |
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Item 3 – Quantitative and Qualitative Disclosures |
Interest Rate Risk
As of June 30, 2009, we had long-term debt (including current portion) totaling $40,410,000, of which $4,759,000 had fixed rates of 5% to 9%, and $35,651,000 incurred interest at a variable rate equal to a specified prime rate. We are exposed to some market risk due to the remaining floating interest rate debt totaling $35,651,000. We make monthly or quarterly payments of principal and interest on $266,000 of the floating rate debt. An increase in interest rates of 1% would result in a $357,000 annual increase in interest expense on this existing principal balance. |
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Item 4 – Controls and Procedures |
As of June 30, 2009, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Interim Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Interim Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures were effective. |
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PART IIOTHER INFORMATION |
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Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On May 20, 2009, we issued a total of 134,356 shares of our common stock pursuant to the terms of the definitive stock purchase agreement pursuant to which we acquired Advanced Medical Partners, Inc. (“AMPI”) on April 17, 2008. We issued these shares in payment of earn-out consideration due to the former stockholders of AMPI. This issuance was exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) and Rule 506 of the Securities Act of 1933. |
Item 4. Submission of Matters to a Vote of Security Holders.
On May 7, 2009, we held an annual meeting of our shareholders to consider and vote on the election of our board of directors. Management solicited proxies for this meeting. |
(1) | The following six individuals were nominated to serve on our board of directors: R. Steven Hicks, Donny R. Jackson, Timothy J. Lindgren, Kenneth S. Shifrin, Argil J. Wheelock, M.D., and James S.B. Whittenburg. |
All nominees were elected. The voting was as follows: |
Nominee | Votes For | Votes Against | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R. Steven Hicks | 29,608,094 | 1,393,877 | |||||||||
Donny R. Jackson | 24,752,343 | 6,249,628 | |||||||||
Timothy J. Lindgren | 28,141,021 | 2,860,950 | |||||||||
Kenneth S. Shifrin | 24,102,767 | 6,899,204 | |||||||||
Argil J. Wheelock, M.D. | 30,296,593 | 705,378 | |||||||||
James S. B. Whittenburg | 30,056,627 | 945,344 |
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Item 6. Exhibits.
10.1 10.2 10.3 31.1* 31.2* 32.1* 32.2* | Agreement and Plan of Merger, dated as of June 7, 2009, by and among Endocare, Inc., HT Acquisition, Inc., and HealthTronics, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2009). Tender and Voting Agreement, dated as of June 7, 2009, by and among HealthTronics, Inc. and the other parties thereto (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on June 8, 2009). Termination and Consulting Agreement, dated June 16, 2009, by and between HealthTronics, Inc. and Robert A. Yonke (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 17, 2009). Certification of Chief Executive Officer Certification of Chief Financial Officer Certification of Chief Executive Officer Certification of Chief Financial Officer |
* Filed herewith. |
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SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
Date: August 7, 2009 | HEALTHTRONICS, INC. By:/s/ Richard A. Rusk Richard A. Rusk Interim Chief Financial Officer |
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