_______________________________________________________
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 March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the transition period from
______ to ______
Commission File Number: 000-30406
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
| GEORGIA | 58-2210668 | ||||
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
1301 Capitol of Texas
Highway, Suite 200B, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
(512) 328-2892
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |
|
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act). YES X NO |
| 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 April 30, 2005 33,838,178 |
PART IITEM 1 — FINANCIAL INFORMATION |
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-2- |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) |
|---|
| Three Months Ended March 31, |
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|---|---|---|---|---|---|---|---|---|
| ($ in thousands, except per share data) |
2005 |
2004 | ||||||
| Revenue: | ||||||||
| Urology | $ | 33,360 | $ | 14,395 | ||||
| Medical Device Sales and Service | 2,698 | 1,824 | ||||||
| Specialty Vehicle Manufacturing | 26,974 | 23,757 | ||||||
| Other | 194 | 237 | ||||||
| Total revenue | 63,226 | 40,213 | ||||||
| Cost of services and general and administrative expenses: | ||||||||
| Urology | 14,561 | 5,931 | ||||||
| Medical Device Sales and Service | 678 | 1,048 | ||||||
| Specialty Vehicle Manufacturing | 24,030 | 21,706 | ||||||
| Corporate | 1,537 | 952 | ||||||
| Depreciation and amortization | 3,277 | 1,620 | ||||||
| 44,083 | 31,257 | |||||||
| Operating income | 19,143 | 8,956 | ||||||
| Other income (expenses): | ||||||||
| Interest and dividends | 142 | 88 | ||||||
| Interest expense | (2,929 | ) | (2,289 | ) | ||||
| Loan fees | (1,183 | ) | -- | |||||
| (3,970 | ) | (2,201 | ) | |||||
| Income from continuing operations before provision | ||||||||
| for income taxes and minority interest | 15,173 | 6,755 | ||||||
| Minority interest in consolidated income | 11,433 | 4,891 | ||||||
| Provision for income taxes | 1,425 | 683 | ||||||
| Income from continuing operations | 2,315 | 1,181 | ||||||
| Loss from discontinued operations, net of $355 tax benefit | (576 | ) | -- | |||||
| Net income | $ | 1,739 | $ | 1,181 | ||||
| Basic earnings per share: | ||||||||
| Income from continuing operations | $ | 0.07 | $ | 0.06 | ||||
| Discontinued operations | $ | (0.02 | ) | $ | -- | |||
| Net income | $ | 0.05 | $ | 0.06 | ||||
| Weighted average shares outstanding | 33,315 | 18,670 | ||||||
| Diluted earnings per share: | ||||||||
| Income from continuing operations | $ | 0.07 | $ | 0.06 | ||||
| Discontinued operations | $ | (0.02 | ) | $ | -- | |||
| Net income | $ | 0.05 | $ | 0.06 | ||||
| Weighted average shares outstanding | 34,316 | 18,873 | ||||||
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See accompanying notes to condensed consolidated financial statements. |
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-3- |
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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS |
| ($ in thousands) |
March 31, 2005 (Unaudited) |
December 31, 2004 (Audited) | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 16,403 | $ | 21,960 | ||||
| Accounts receivable, less allowance for doubtful | ||||||||
| accounts of $522 in 2005 and $513 in 2004 | 38,770 | 30,242 | ||||||
| Other receivables | 2,218 | 447 | ||||||
| Deferred income taxes | 17,229 | 17,295 | ||||||
| Prepaid expenses and other current assets | 3,010 | 2,259 | ||||||
| Inventory | 30,069 | 30,332 | ||||||
| Total current assets | 107,699 | 102,535 | ||||||
| Property and equipment: | ||||||||
| Equipment, furniture and fixtures | 51,148 | 51,383 | ||||||
| Building and leasehold improvements | 17,702 | 17,638 | ||||||
| 68,850 | 69,021 | |||||||
| Less accumulated depreciation and | ||||||||
| amortization | (25,179 | ) | (26,678 | ) | ||||
| Property and equipment, net | 43,671 | 42,343 | ||||||
| Assets held for sale | 16,644 | 16,169 | ||||||
| Other investments | 1,770 | 1,820 | ||||||
| Goodwill, at cost | 295,916 | 296,454 | ||||||
| Intangible assets | 6,948 | 7,307 | ||||||
| Other noncurrent assets | 7,354 | 7,645 | ||||||
| $ | 480,002 | $ | 474,273 | |||||
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See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) |
| ($ in thousands, except share data) |
March 31, 2005 (Unaudited) |
December 31, 2004 (Audited) | ||||||
|---|---|---|---|---|---|---|---|---|
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 9,104 | $ | 39,754 | ||||
| Accounts payable | 13,737 | 11,383 | ||||||
| Accrued distributions to minority interests | 6,248 | 8,429 | ||||||
| Accrued expenses | 19,250 | 19,263 | ||||||
| Customer deposits | 6,182 | 5,945 | ||||||
| Total current liabilities | 54,521 | 84,774 | ||||||
| Liabilities held for sale | 7,014 | 6,352 | ||||||
| Deferred compensation liability | -- | 2,721 | ||||||
| Long-term debt, net of current portion | 142,226 | 110,304 | ||||||
| Other long term obligations | 1,167 | 1,417 | ||||||
| Deferred income taxes | 23,360 | 22,201 | ||||||
| Total liabilities | 228,288 | 227,769 | ||||||
| Minority interest | 30,846 | 29,277 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding | ||||||||
| Common stock, no par value, 70,000,000 authorized: 33,485,879 issued | ||||||||
| and outstanding in 2005; 33,196,565 issued and outstanding in 2004 | 181,413 | 179,510 | ||||||
| Accumulated earnings | 39,455 | 37,717 | ||||||
| Total stockholders' equity | 220,868 | 217,227 | ||||||
| $ | 480,002 | $ | 474,273 | |||||
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See accompanying notes to condensed consolidated financial statements. |
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-5- |
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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
|---|
| Three Months Ended March 31, |
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|---|---|---|---|---|---|---|---|---|
| ($ in thousands) |
2005 |
2004 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Fee and other revenue collected | $ | 55,724 | $ | 50,222 | ||||
| Cash paid to employees, suppliers of goods and others | (47,358 | ) | (37,584 | ) | ||||
| Interest received | 144 | 88 | ||||||
| Interest paid | (882 | ) | (151 | ) | ||||
| Taxes (paid) refunded | (380 | ) | 161 | |||||
| Net cash provided by operating activities | 7,248 | 12,736 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of entities, net of cash acquired | 195 | 3,843 | ||||||
| Purchases of equipment and leasehold improvements | (5,471 | ) | (3,381 | ) | ||||
| Distributions from investments | 147 | 143 | ||||||
| Proceeds from sales of assets | 1,184 | 197 | ||||||
| Discontinued operations | 186 | -- | ||||||
| Other | 23 | 3 | ||||||
| Net cash (used in) provided by investing activities | (3,736 | ) | 805 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings on notes payable | 35,890 | 722 | ||||||
| Payments on notes payable, exclusive of interest | (34,817 | ) | (3,921 | ) | ||||
| Distributions to minority interest | (12,825 | ) | (7,163 | ) | ||||
| Contributions by minority interest, net of buyouts | 780 | 343 | ||||||
| Exercise of stock options | 1,903 | 123 | ||||||
| Net cash used in financing activities | (9,069 | ) | (9,896 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (5,557 | ) | 3,645 | |||||
| Cash and cash equivalents, beginning of period | 21,960 | 9,780 | ||||||
| Cash and cash equivalents, end of period | $ | 16,403 | $ | 13,425 | ||||
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See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) |
|---|
| Three Months Ended March 31, |
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|---|---|---|---|---|---|---|---|---|
| ($ in thousands) |
2005 |
2004 | ||||||
| Reconciliation of net income to net cash provided by operating activities: | ||||||||
| Net income | $ | 1,739 | $ | 1,181 | ||||
| Adjustments to reconcile net income | ||||||||
| to net cash provided by operating activities | ||||||||
| Minority interest in consolidated income | 11,433 | 4,891 | ||||||
| Depreciation and amortization | 3,277 | 1,620 | ||||||
| Provision for uncollectible accounts | 4 | (34 | ) | |||||
| Provision for deferred income taxes | 1,225 | 9 | ||||||
| Equity in earnings of affiliates | (120 | ) | (22 | ) | ||||
| Stock buyback agreements | -- | (322 | ) | |||||
| Other | (11 | ) | (293 | ) | ||||
| Changes in operating assets and liabilities, | ||||||||
| net of effect of purchase transactions | ||||||||
| Accounts receivable | (8,532 | ) | 9,152 | |||||
| Other receivables | (1,772 | ) | (530 | ) | ||||
| Other assets | (2,916 | ) | (3,048 | ) | ||||
| Accounts payable | 2,592 | (1,757 | ) | |||||
| Accrued expenses | 329 | 1,889 | ||||||
| Total adjustments | 5,509 | 11,555 | ||||||
| Net cash provided by operating activities | $ | 7,248 | $ | 12,736 | ||||
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See accompanying notes to condensed consolidated financial statements. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
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The accompanying unaudited 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 consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of March 31, 2005 and the results of operations and cash flows for the periods presented. These statements have not been audited by our independent registered public accounting firm. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year. |
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The notes to consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in the information reported in those notes other than from normal business activities and as discussed herein. |
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On November 10, 2004, Prime Medical Services, Inc. (“Prime”) completed a merger with HealthTronics Surgical Services, Inc. (“HSS”) pursuant to which Prime merged with and into HSS, with HealthTronics, Inc. (“HealthTronics”) as the surviving corporation. Under the terms of the merger agreement, as a result of the merger, Prime’s stockholders received one share of HealthTronics common stock for each share of Prime common stock they owned. Immediately following the merger, Prime’s stockholders owned approximately 62% of the outstanding shares of HealthTronics common stock, and Prime’s directors and senior management represented a majority of the combined company’s directors and senior management. As a result, Prime was deemed to be the acquiring company for accounting purposes and the merger was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. The consideration paid (purchase price) was allocated to the tangible and intangible net assets of HSS based on their fair values, and the net assets of HSS were recorded at their fair values as of the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed were deemed to be those of HealthTronics because HealthTronics was the surviving legal entity. The purchase price has been allocated to the assets and liabilities acquired on a preliminary basis and may change as additional information becomes available. The fair value of accounts receivable, leases, deferred taxes, and assets held for sale remains preliminary. Upon resolution of any amounts which existed as of the date of acquisition, we will reflect any settlements as an adjustment to goodwill. |
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In March 2005, we refinanced our existing revolving credit facility with a $175 million senior credit facility comprised of a five year $50 million revolver and a $125 million senior secured term loan B (“term loan B”), due 2011. In April 2005, we used the proceeds from the new term loan B to redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005 related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005. |
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-8- |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
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Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options and warrants. A reconciliation of such EPS data is as follows: |
| ($ in thousands, except per share data) |
Basic earnings per share |
Diluted earnings per share |
||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, 2005 | ||||||||
| Net income | $ | 1,739 | $ | 1,739 | ||||
| Weighted average shares outstanding | 33,315 | 33,315 | ||||||
| Effect of dilutive securities | -- | 1,001 | ||||||
| Shares for EPS calculation | 33,315 | 34,316 | ||||||
| Net income per share | $ | 0.05 | $ | 0.05 | ||||
| Three Months Ended March 31, 2004 | ||||||||
| Net income | $ | 1,181 | $ | 1,181 | ||||
| Weighted average shares outstanding | 18,670 | 18,670 | ||||||
| Effect of dilutive securities | -- | 203 | ||||||
| Shares for EPS calculation | 18,670 | 18,873 | ||||||
| Net income per share | $ | 0.06 | $ | 0.06 | ||||
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We did not include in our computation of diluted EPS unexercised stock options and warrants to purchase 281,000 and 2,567,000 shares of our common stock as of March 31, 2005 and 2004, respectively, because the effect would be antidilutive. |
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We have three reportable segments: urology, specialty vehicle manufacturing and medical device sales and service. The urology segment provides services related to the operation of lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance and contracting with payors, hospitals and surgery centers. The specialty vehicle manufacturing segment provides manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical service providers and the mobile broadcast and communication industry. The medical device sales and service segment manufactures, sells, and maintains lithotripters, and markets fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
4. Segment Reporting (continued)
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We measure performance based on the pretax income or loss from our operating segments, which does not include unallocated corporate general and administrative expenses or corporate interest income and expense. |
| ($ in thousands) |
Urology |
Specialty Vehicle Manufacturing |
Medical Device Sales and Service | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, 2005 | |||||||||||
| Revenue from external customers | $ | 33,360 | 26,974 | $ | 2,698 | ||||||
| Intersegment revenues | -- | -- | 3,890 | ||||||||
| Segment profit | 4,655 | 2,669 | 1,838 | ||||||||
| Three Months Ended March 31, 2004 | |||||||||||
| Revenue from external customers | $ | 14,395 | $ | 23,757 | $ | 1,824 | |||||
| Intersegment revenues | -- | -- | 907 | ||||||||
| Segment profit | 2,368 | 1,746 | 706 | ||||||||
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The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the consolidated statements of income: |
| Three Months ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousands) |
2005 |
2004 |
||||||
| Total segment profit | $ | 9,162 | $ | 4,820 | ||||
| Corporate revenues | 194 | 237 | ||||||
| Unallocated corporate expenses: | ||||||||
| General and administrative | (1,537 | ) | (976 | ) | ||||
| Net interest expense | (2,643 | ) | (2,103 | ) | ||||
| Loan fees | (1,183 | ) | -- | |||||
| Other, net | (253 | ) | (114 | ) | ||||
| Total unallocated corporate expenses | (5,616 | ) | (3,193 | ) | ||||
| Income before income taxes | $ | 3,740 | $ | 1,864 | ||||
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Upon adoption of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), in 1996, we have continued to measure compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. We have provided proforma disclosures of net income and earnings per share as if the fair value-based method prescribed by Statement 123 had been applied in measuring compensation expense. |
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-10- |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
5. Stock-Based Compensation (continued)
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For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Our proforma information follows (in thousands except for earnings per share information): |
| Three Months ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 |
|||||||
| Net income, as reported | $ | 1,739 | $ | 1,181 | ||||
| Stock-based employee compensation | ||||||||
| expense, net of tax | 1,195 | 308 | ||||||
| Pro forma net income | $ | 544 | $ | 873 | ||||
| Pro forma earning per share: | ||||||||
| Basic | $ | 0.02 | $ | 0.05 | ||||
| Diluted | $ | 0.02 | $ | 0.05 | ||||
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As of March 31, 2005 and December 31, 2004, inventory consists of the following: |
| March 31, 2005 |
December 31, 2004 |
|||||||
|---|---|---|---|---|---|---|---|---|
| Raw Materials | $ | 12,293,000 | $ | 11,326,000 | ||||
| Work in Progress | 17,776,000 | 19,006,000 | ||||||
| $ | 30,069,000 | $ | 30,332,000 | |||||
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In 2004, we decided to divest our orthopaedics business unit and accordingly have shown all assets and liabilities related to these operations as held for sale in the accompanying consolidated financial statements. We continue to believe that our infrastructure, installed base, and the clinical benefits of a physician-directed, high energy product have a distinct advantage in the marketplace. However, the resources required to fully develop this market would detract from our focused efforts to improve our other core business lines and efficiently integrate Prime and HSS operations. We will, of course, maintain our managerial commitments to our partnerships and continue to provide maintenance, parts and consumables to the installed base until a sale is consummated. For the quarter ended March 31, 2005, we have not recorded depreciation in the amount of $398,000 related to the orthopaedics business. |
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HEALTHTRONICS, INC. AND SUBSIDIARIES |
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As part of the merger between Prime and HSS in November 2004, HSS had a minority owned Swiss subsidiary, HMT Holding AG (“HMT”), which was in a net liability position at the date of acquisition. In December 2004, we decided to no longer fund the operations of HMT as part of our plan to rationalize its acquired manufacturing activities. Also in December 2004, the directors of HMT received a letter from their external auditors informing them HMT was over-indebted. Based on this action, the directors had a statutory obligation to initiate insolvency proceedings and in January 2005 filed for relief under Swiss insolvency laws. We deconsolidated the operations of HMT in December 2004. We recorded the assets and liabilities of HMT at the value of the net liabilities at the time of bankruptcy. In the first quarter of 2005, we paid $1.6 million in return for assignment of a $5.1 million claim against HMT held by a foreign bank. In addition to the claim, we also received an assignment from the bank of a pledge of HMT’s accounts receivable that secured the $5.1 million claim. |
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Item 2 —
Management’s Discussion and Analysis
|
Forward-Looking Statements
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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 consult our reports 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. |
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Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “will”, “would”, “should”, “plans”, “likely”, “expects”, “anticipates”, “intends”, “believes”, “estimates”, “thinks”, “may”, and similar expressions, are forward-looking statements. The following important factors, in addition to those referred to above, could affect the future results of the health care industry in general, and us in particular, and could cause those results to differ materially from those expressed in such forward-looking statements: |
| • | unexpected difficulties in integrating the operations of Prime and HSS; | |
| • | the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences; | |
| • | 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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-13- |
Item 2 —
Management’s Discussion and Analysis
|
General
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We provide healthcare services and manufacture medical devices, primarily for the urology community, as well as design and manufacture trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. We have three reportable segments: urology, specialty vehicle manufacturing, and medical device sales and service. |
Urology. Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2004, physicians who are affiliated with us used our lithotripters to perform approximately 36,700 procedures in the U.S. We do not render any medical services. Rather, the physicians do. |
We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy services. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater proportion of the total non-physician fee. |
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 and $2,000, respectively, for the first quarter of 2005 and 2004. At this time, we do not anticipate a material shift between our retail and wholesale arrangements. |
As the general partner of the limited partnerships, 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. |
Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we use a technology called transurethral microwave therapy, a process in which heat therapy is used to treat the enlarged prostate, or we may use a green light laser. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells. |
We recognize urology revenue primarily from the following sources: |
| • | Fees for urology services. A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. These services are also primarily performed through limited partnerships, which we manage. |
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-14- |
Item 2 —
Management’s Discussion and Analysis
|
| • | Fees for operating our lithotripters. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and receive a management fee for performing these services. |
|
Medical Device Sales and Service. We manufacture, sell and maintain lithotripters and their related consumables, and market fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics. |
| • | Fees for maintenance services. We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate. |
| • | Fees for equipment sales, consumable sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables. We also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price we receive for such sales, 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 devices and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. |
|
Specialty Vehicle Manufacturing. We design, construct and engineer mobile trailers, coaches, and special purpose mobile units that transport high technology medical devices such as magnetic resonance imaging, or MRI, cardiac catheterization labs, CT scanware, lithotripters and positron emission tomography, or PET, and equipment designed for mobile command and control centers, and broadcasting and communications applications. |
|
A significant portion of our revenue has been derived from our specialty vehicle manufacturing operations. Specialty vehicle manufacturing revenue is recognized at the time we fulfill the terms of the contract under which we have sold the equipment. |
Recent Developments
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In the fourth quarter of 2004, we decided to divest our orthopaedics business unit. We continue to believe that our infrastructure, installed base, and the clinical benefits of a physician-directed, high energy product have a distinct advantage in the marketplace. However, the resources required to fully develop this market would detract from our focused efforts to improve our other core business lines and efficiently integrate the Prime and HSS operations. We intend to maintain our managerial commitments to our partnerships and continue to provide maintenance, parts and consumables to the installed base until a sale is consummated. |
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Item 2 —
Management’s Discussion and Analysis
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In March 2005, we refinanced our existing revolving credit facility with a $175 million senior credit facility comprised of a five year $50 million revolver and a $125 million senior secured term loan B (“term loan B”), due 2011. In April 2005, we used the proceeds from the new term loan B to redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005 related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005. |
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We purchased debt of HMT AG in the first quarter of 2005. We paid $1.3 million and incurred certain contingent obligations in the amount of $350,000 in return for assignment of a $5.1 million claim against HMT AG held by a foreign bank. In addition to the claim, we also received an assignment from the bank of a pledge of HMT AG’s accounts receivable that secured the $5.1 million claim. |
Critical Accounting Policies and Estimates.
Management has identified the following critical accounting policies and estimates:
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Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We have three reporting units, urology, medical device sales and service, and specialty vehicle manufacturing. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. As of March 31, 2005, we had goodwill of $296 million. |
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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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A third critical accounting policy is consolidation of our investment in partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The related partnership agreements provide for broad powers by the general partner. The limited partners do not participate in the management of the partnership and do not have the substantial ability to remove the general partner. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20% - 50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity. |
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Item 2 —
Management’s Discussion and Analysis
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Three months ended March 31, 2005 compared to the three months ended March 31, 2004 |
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Our total revenues for the three months ended March 31, 2005 increased $23,013,000 (57%) as compared to the same period in 2004. Revenues from our urology operations increased by $18,965,000 (132%) in the quarter primarily related to our merger with HSS in November 2004 and significant growth in our greenlight laser operations. Urology revenues associated with legacy HSS entities totaled $18.2 million for the first quarter of 2005, while greenlight laser revenues from our organic operations increased from $6,000 in 2004 to $1,216,000 in 2005. The actual number of procedures performed in the three months ended March 31, 2005 increased by 88% compared to the same period in 2004. The average rate per procedure increased by 1% for the first quarter of 2005 as compared to the same period a year ago. Revenues for our medical device sales and services segment increased by $874,000 (48%) compared to the same period in 2004 due primarily to our merger with HSS. Medical device sales and service revenues before intersegment eliminations totaled $6.6 million. We sold 5 lithotripers and 15 tables in the first quarter of 2005 compared to 1 lithotripter and 12 tables in the same period in 2004. Our specialty vehicle manufacturing revenues increased $3,217,000 (14%) compared to the same period in 2004 due to the number of units shipped increasing from 78 during 2004 to 102 during 2005. |
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Our costs of services and general and administrative expenses for the three months ended March 31, 2005 increased $12,826,000 in absolute terms, but decreased from 78% to 70% as a percentage of revenues compared to the same period in 2004. Our costs of services associated with our urology operations for the first quarter of 2005 increased $8,630,000 (146%) in absolute terms and increased from 41% to 44% of our urology revenues compared to the same period in 2004. Urology costs associated with legacy HSS entities were $9.1 million for the first quarter 2005. Costs from our organic urology operations actually decreased by $479,000 in the first quarter of 2005 as compared to same period in 2004. Our costs of services associated with our medical device sales and services operations for the first quarter 2005 decreased $370,000 (35%) in absolute terms and decreased from 57% to 25% of the segment revenues compared to the same period in 2004. A significant portion of medical device sales and services costs relate to providing maintenance services to our urology segment. The intersegment eliminations of these maintenance charges were the primary reason for decrease in medical device sales and service costs. Our cost of services associated with our specialty vehicle manufacturing operations increased $2,324,000 (11%) in absolute terms for the first quarter 2005 but decreased from 91% to 89% of our specialty vehicle manufacturing revenues compared to the same period in 2004 due to increased sales on the medical side of the specialty vehicle manufacturing segment which historically has higher product margins. Our corporate expenses remained consistent at 2% of revenues compared to the same period in 2004, increasing $585,000 (61%) in absolute terms for the first quarter 2005 due to our merger with HSS in November 2004. Our corporate expenses decreased $678,000 from the fourth quarter of 2004 as we have made significant progress in integrating our combined operations. |
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Depreciation and amortization expense increased $1,657,000 for the three months ended March 31, 2005 compared to the same period in 2004 due primarily to our merger with HSS. Legacy HSS entities had depreciation and amortization totaling $1.8 million for the three month ended March 31, 2005. |
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Item 2 —
Management’s Discussion and Analysis
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Minority interest in consolidated income for the three months ended March 31, 2005 increased $6,542,000 (134%) compared to the same period in 2004, as a result of an increase in income from our urology segment due primarily to the HSS merger. Legacy HSS entities had minority interest expense totaling $5.6 million for the three month ended March 31, 2005. |
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Provision for income taxes for the three months ended March 31, 2005 increased $742,000 compared to the same period in 2004 due to an increase in taxable income. |
Liquidity and Capital Resources
Cash Flows
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Our cash and cash equivalents were $16,403,000 and $21,960,000 at March 31, 2005 and December 31, 2004, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the three months ended March 31, 2005 and 2004, our subsidiaries distributed cash of approximately $12,825,000 and $7,163,000, respectively, to minority interest holders. |
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Cash provided by our operations, after minority interest, was $7,248,000 for the quarter ended March 31, 2005 and $12,736,000 for the quarter ended March 31, 2004. For the three months ended March 31, 2004 compared to the three months ended 2005, fee and other revenue collected increased by $5,502,000 due primarily to the HSS merger discussed previously, partially offset by a $7.1 million increase in specialty vehicle manufacturing accounts receivable. Cash paid to employees, suppliers of goods and others for the first quarter 2005 increased by $9,774,000 compared to the same period in 2004. These fluctuations are attributable to the HSS merger as well as the timing of accounts payable and accrued expense payments. An increase in interest payments of $731,000 for the first quarter 2005 was due primarily to our increase in the line of credit balance. Loan fees of $1,184,000 were paid in the first quarter of 2005 related to our debt refinancing discussed previously. |
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Cash used by our investing activities for the quarter ended March 31, 2005, was $3,736,000. We purchased equipment and leasehold improvements totaling $5,471,000 during that quarter. Cash provided by our investing activities for the quarter ended March 31, 2004, was $805,000 primarily due to $3,843,000 net cash received from our acquisition of Medstone International, Inc., partially offset by equipment and leasehold improvements purchases totaling $3,381,000. |
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Cash used in our financing activities for the quarter ended March 31, 2005, was $9,069,000, primarily due to distributions to minority interests of $12,825,000 and payments on notes payable of $34,817,000 partially offset by borrowings on notes payable of $35,890,000. Cash used in our financing activities for the quarter ended March 31, 2004, was $9,896,000, primarily due to distributions to minority interests of $7,163,000 and net payments on notes payable of $3,199,000. |
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Accounts receivable as of March 31, 2005 has increased $8,528,000 from December 31, 2004. This increase is primarily related to an increase in receivables in our specialty vehicle manufacturing segment which totaled $7.1 million. Bad debt expense was less than $10,000 for the quarter ended March 31, 2005 compared to approximately $70,000 for the same period in 2004. |
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Item 2 —
Management’s Discussion and Analysis
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Inventory as of March 31, 2005 totaled $30,069,000 and decreased $263,000 from December 31, 2004. Total backlog for the manufacturing segment was $28,448,000 and $32,391,000 as of March 31, 2005 and 2004, respectively. |
Senior Credit Facility
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Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan due 2011. We entered into a new senior credit facility in March 2005. At March 31, 2005, $33 million was drawn on the revolver. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. |
8.75% Notes
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In addition, we had $100 million of unsecured senior subordinated notes at March 31, 2005. The notes were subject to an 8.75% rate of interest and interest was payable semi-annually on April 1st and October 1st. Principal was due April 2008. |
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In April 2005, our $125 million term loan was funded and we used the proceeds to redeem the $100 million of unsecured senior subordinated notes. |
Other
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Interest Rate Swap .. In August 2002, we entered into an interest rate swap which was designated as a fair value hedge pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133. This swap was executed to convert $50 million of the 8.75% notes from a fixed to floating rate instrument. The floating rate was based on LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. In August 2003, we entered into two new interest rate swaps for $25 million each which were also designated as fair value hedges. The floating rates of these two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000. As of March 31, 2005, approximately $564,000 in proceeds from these swaps was capitalized and was being amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In April 2005, the remaining amount was recognized when the 8.75% notes were redeemed as described above. |
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Other long term debt. At March 31, 2005, we had approximately $3.8 million of mortgage debt related to our building in Austin, Texas which bears interest at prime plus 1% and is due in monthly installments until November 2006. We also had notes totaling $13.9 million as of March 31, 2005 related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years. |
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Item 2 —
Management’s Discussion and Analysis
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Other long term obligations. At March 31, 2005, we had an obligation totaling $900,000 related to payments to the previous owner of Aluminum Body Corporation (“ABC”), an entity we acquired in January 2003, for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at March 31, 2005, as part of our Medstone acquisition, we had an obligation totaling $580,000 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of our HSS merger, two obligations totaling $387,000 related to payments to two former employees of HSS. One obligation is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement. |
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General |
| Payments due by period |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations |
Total |
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
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| Long Term Debt (1) | $ | 151,330 | $ | 9,104 | $ | 11,720 | $ | 36,756 | $ | 93,750 | |||||||
| Operating Leases (2) | 12,842 | 3,054 | 4,766 | 2,796 | 2,226 | ||||||||||||
| Non-compete contracts (3) | 1,867 | 700 | 1,121 | 46 | -- | ||||||||||||
| Total | $ | 166,039 | $ | 12,858 | $ | 17,607 | $ | 39,598 | $ | 95,976 | |||||||
| (1) | Represents long term debt as discussed above. | ||||
| (2) | Represents operating leases in the ordinary course of our business. | ||||
| (3) | Represents other long term obligations as discussed above. | ||||
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In addition, the scheduled principal repayments for all long term debt as of March 31, 2005 are payable as follows: |
| ($ in thousands) | ||||||
|---|---|---|---|---|---|---|
| 2005 | $ | 9,104 | ||||
| 2006 | 8,430 | |||||
| 2007 | 3,290 | |||||
| 2008 | 2,061 | |||||
| 2009 | 34,695 | |||||
| Thereafter | 93,750 | |||||
| Total | $ | 151,330 | ||||
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Item 2 —
Management’s Discussion and Analysis
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Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility. Our cash flows from operations and therefore our ability to make scheduled payments of principal, or to pay the interest on, or to refinance our indebtedness, or to fund planned capital expenditures, will depend on our future performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors. Likewise, our ability to borrow under our senior credit facility will depend on these factors, which will affect our ability to comply with the covenants in our credit facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our credit facility with our lenders. |
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We intend to increase our urology operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our specialty vehicle manufacturing operations through acquisitions, expanding our product lines and by selling to a broader customer base. We plan to increase our medical device sales and services segment by offering new devices and expanding our customer base. We intend to fund the purchase price for future acquisitions and developments using borrowings under our senior credit facility and cash flows from our operations. In addition, we may use shares of our common stock in such acquisitions where appropriate. |
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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. |
Inflation
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Our operations are not significantly affected by inflation because we are not required to make large investments in fixed assets. However, the rate of inflation will affect certain of our expenses, such as employee compensation and benefits. |
Recently Issued Accounting Pronouncements
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In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payments (SFAS 123R). The statement requires that we record stock option expense in our financial statements based on a fair value methodology. In April 2005, this statement was delayed until the first annual period starting after June 15, 2005 or our first quarter of 2006. We are evaluating the impact of the new standard and the method and timing of adoption. |
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Item 3 — Quantitative and Qualitative Disclosures |
Interest Rate Risk
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As of March 31, 2005, we had long-term debt (including current portion) totaling $151,330,000, of which $100 million had a fixed rate of interest of 8.75%, $9,260,000 had fixed rates of 1% to 11%, $3,772,000 incurred interest at a variable rate equal to a specified prime rate, and $37,734,000 incurred interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. The remaining $564,000 related to interest rate swaps which are discussed below. We are exposed to some market risk due to the floating interest rate debt totaling $41,506,000. We make monthly or quarterly payments of principal and interest on $8,506,000 of the floating rate debt. An increase in interest rates of 1% would result in a $415,000 annual increase in interest expense on this existing principal balance. |
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Additionally, in August 2002, we entered into an interest rate swap, which was designated as a fair value hedge pursuant to the provisions of FAS No. 133 and FAS No. 138. This swap had the effect of converting $50 million of our 8.75% notes from a fixed to floating rate instrument with a rate of LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. Approximately $1.2 million in proceeds from the swaps was capitalized and will be amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In August 2003, we entered into two new interest rate swaps for $25 million each which were designated as fair value hedges. The floating rates of the two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000. |
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In April 2005, the $100 million of 8.75% notes were redeemed and replaced with a new $125 million senior secured term loan B, due 2011. This new loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + ..25 to 1.25%. We will make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments will increase to $29.7 million. We may also make an annual payment of either 25% or 50% of Excess Cash Flow as defined in the loan agreement based on the level of the Total Leverage Ratio as calculated per the loan agreement. |
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Item 4 – Controls and Procedures |
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At March 31, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were effective. |
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There have been no significant changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. |
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PART IIOTHER INFORMATION |
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| (a) |
Exhibits 10.1 Executive Employment Agreement, dated April 15, 2004, by and between Prime and Joseph M. Jenkins, M.D. 10.2 Deferred Compensation Plan for HealthTronics, Inc. adopted December 1, 2004. 12.1 Computation of ratio of earnings to fixed charges. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer 32.2 Certification of Chief Financial Officer |
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SIGNATURES |
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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: May 6, 2005 |
HEALTHTRONICS, INC. By: /s/ John Q. Barnidge John Q. Barnidge, Senior Vice President and Chief Financial Officer |
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