UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
ý QUARTERLY REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2004
or
o TRANSITION REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-30406
HealthTronics Surgical Services, Inc.
(Exact name of registrant as specified in its charter)
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Georgia |
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58-2210668 |
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(State or other
jurisdiction of |
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(I.R.S. Employer |
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1841
West Oak Parkway, Suite A |
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30062 |
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(Address of principal executive offices) |
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(Zip Code) |
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(770) 419-0691 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock.
12,384,000 Shares of No Par Value Common Stock as of April 30, 2004
HEALTHTRONICS SURGICAL SERVICES, INC.
INDEX TO FORM 10-Q
2
Part 1. Financial Information
HealthTronics Surgical Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(000’s omitted)
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March 31, |
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December
31, |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
10,399 |
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$ |
9,040 |
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Trade accounts receivable, less allowance for doubtful accounts of $1,743 and $1,669 at March 31, 2004 and December 31, 2003, respectively |
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15,831 |
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14,484 |
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Other receivables |
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706 |
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— |
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Inventory |
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13,550 |
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7,819 |
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Prepaid expenses and other current assets |
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2,667 |
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1,224 |
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Deferred income taxes |
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800 |
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774 |
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Total current assets |
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43,953 |
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33,341 |
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Property and equipment, at cost: |
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Land |
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349 |
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349 |
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Building and leasehold improvements |
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2,039 |
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1,182 |
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Medical devices placed in service |
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25,872 |
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24,420 |
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Office equipment, furniture and fixtures |
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1,895 |
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1,646 |
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Vehicles and accessories |
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3,605 |
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3,604 |
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33,760 |
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31,201 |
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Less accumulated depreciation |
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(11,076 |
) |
(11,768 |
) |
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Net property and equipment |
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22,684 |
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19,433 |
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Investments in unconsolidated entities |
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2,265 |
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2,207 |
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Goodwill |
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59,613 |
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48,317 |
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Other assets |
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3,333 |
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3,585 |
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Total assets |
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$ |
131,848 |
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$ |
106,883 |
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3
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March 31, |
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December
31, |
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(Unaudited) |
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Liabilities and shareholders’ equity |
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Current liabilities: |
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Trade accounts payable |
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$ |
6,375 |
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$ |
5,035 |
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Income taxes payable |
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1,517 |
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1,605 |
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Other accrued expenses |
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9,840 |
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5,507 |
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Deferred profit on service contracts |
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542 |
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375 |
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Short-term borrowings |
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22,054 |
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11,714 |
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Current portion of capital lease obligations |
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278 |
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281 |
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Current portion of long-term debt |
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1,227 |
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5,906 |
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Total current liabilities |
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41,833 |
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30,423 |
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Deferred profit on medical device sales to related parties (subject to debt guarantees) |
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256 |
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248 |
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Noncurrent deferred income taxes |
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623 |
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669 |
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Capital lease obligations, less current portion |
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362 |
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409 |
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Long-term debt, less current portion |
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9,382 |
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4,718 |
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Minority interest in consolidated subsidiaries |
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30,309 |
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28,085 |
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Other liabilities |
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3,237 |
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1,953 |
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Total liabilities |
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86,002 |
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66,505 |
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Shareholders’ equity: |
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Common stock – no par value, voting: |
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Authorized – 30,000 shares at March 31, 2004 and December 31, 2003; Issued – 12,386 and 11,639 shares at March 31, 2004 and December 31, 2003, respectively; Outstanding – 12,384 and 11,584 at March 31, 2004 and December 31, 2003, respectively |
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24,120 |
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19,034 |
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Accumulated other comprehensive expense |
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— |
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(32 |
) |
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Retained earnings |
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21,726 |
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21,376 |
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Total shareholders’ equity |
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45,846 |
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40,378 |
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Total liabilities and shareholders’ equity |
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$ |
131,848 |
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$ |
106,883 |
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See accompanying notes.
4
HealthTronics Surgical Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(000’s omitted except per share information)
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Three months ended March 31, |
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2004 |
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2003 |
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Net revenue |
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$ |
23,740 |
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$ |
20,888 |
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Cost of devices, service parts and consumables |
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4,974 |
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4,260 |
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Salaries, general and administrative expenses |
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11,351 |
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9,580 |
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Depreciation and amortization |
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1,562 |
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1,380 |
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5,853 |
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5,668 |
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Equity in earnings of unconsolidated entities |
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329 |
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259 |
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Partnership distributions from cost basis investments |
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202 |
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118 |
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Gain on sale of partnership investment interest |
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245 |
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2,075 |
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Gain on sale of fixed assets |
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147 |
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5 |
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Interest expense |
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(588 |
) |
(533 |
) |
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Interest income |
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15 |
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35 |
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Income before minority interest and income taxes |
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6,203 |
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7,627 |
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Minority interest of consolidated subsidiaries |
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(5,549 |
) |
(4,129 |
) |
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Income before income taxes |
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654 |
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3,498 |
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Provision for income taxes |
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(304 |
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(1,369 |
) |
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Net income |
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$ |
350 |
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$ |
2,129 |
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Income per common share: |
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Basic |
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$ |
0.03 |
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$ |
0.19 |
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Diluted |
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$ |
0.03 |
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$ |
0.18 |
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Weighted average common shares outstanding: |
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Basic |
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11,814 |
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11,328 |
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Diluted |
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11,836 |
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11,542 |
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See accompanying notes.
5
HealthTronics Surgical Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(000’s omitted)
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Three months ended March 31, |
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2004 |
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2003 |
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|
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Operating activities |
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|
|
|
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Net income |
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$ |
350 |
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$ |
2,129 |
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|
Adjustments to reconcile net income to cash provided by (used in) operating activities: |
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|
|
|
|
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Net change in fair value of interest rate swap |
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32 |
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53 |
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Depreciation and amortization |
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1,562 |
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1,380 |
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Amortization of loan costs |
|
504 |
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71 |
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Provision for doubtful accounts |
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25 |
|
50 |
|
||
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Deferred profit on service contracts |
|
175 |
|
465 |
|
||
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Deferred income taxes |
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(72 |
) |
— |
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Equity in earnings of unconsolidated partnerships, net of dividends |
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(58 |
) |
52 |
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Minority interest in subsidiaries, net of distributions to minority interests |
|
530 |
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(724 |
) |
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Gain on sale of subsidiary and investment interest |
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(246 |
) |
(2,075 |
) |
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Gain on sale of fixed assets |
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(147 |
) |
(5 |
) |
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Changes in operating assets and liabilities, net of businesses acquired: |
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|
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Trade accounts receivable |
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1,617 |
|
346 |
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Other receivables |
|
304 |
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115 |
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Inventory |
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(1,403 |
) |
(199 |
) |
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Prepaid expenses and other assets |
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(546 |
) |
38 |
|
||
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Trade accounts payable |
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(1,195 |
) |
(257 |
) |
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Income taxes payable |
|
221 |
|
(1,468 |
) |
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Accrued expenses and other liabilities |
|
(1,560 |
) |
(849 |
) |
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Net cash provided by (used in) operating activities |
|
$ |
93 |
|
$ |
(878 |
) |
6
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Three months ended March 31, |
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2004 |
|
2003 |
|
||
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|
|
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Investing activities |
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|
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Purchases of property and equipment, net of businesses acquired |
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$ |
(1,205 |
) |
$ |
(1,664 |
) |
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Proceeds from sales of investment interest |
|
845 |
|
3,670 |
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Proceeds from sale of property and equipment |
|
262 |
|
77 |
|
||
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Acquisition of businesses, net of cash acquired |
|
341 |
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(33 |
) |
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Net cash provided by investing activities |
|
243 |
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2,050 |
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||
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|
|
|
|
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|
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Financing activities |
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|
|
|
|
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Proceeds from issuance of common stock |
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— |
|
526 |
|
||
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Proceeds from issuance of long-term debt |
|
1,772 |
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— |
|
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Principal payments on long-term debt and capital leases |
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(2,563) |
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(8,161 |
) |
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Proceeds from issuance of short-term borrowings |
|
4,591 |
|
— |
|
||
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Principal payments on short-term borrowings |
|
(2,777 |
) |
(1,000 |
) |
||
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Net cash provided by (used in) financing activities |
|
1,023 |
|
(8,635 |
) |
||
|
|
|
|
|
|
|
||
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Net increase (decrease) in cash and cash equivalents |
|
1,359 |
|
(7,463 |
) |
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Cash and cash equivalents at beginning of period |
|
9,040 |
|
16,808 |
|
||
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Cash and cash equivalents at end of period |
|
$ |
10,399 |
|
$ |
9,345 |
|
See accompanying notes.
7
HealthTronics Surgical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of HealthTronics Surgical Services, Inc. (“HealthTronics” or the “Company”) and its subsidiaries. All significant intercompany transactions have been eliminated.
In the opinion of HealthTronics management, the accompanying consolidated financial statements include all the necessary adjustments (consisting of normal recurring adjustments) for a fair presentation of its consolidated financial position and results of operations for the interim periods presented. The information presented in these financial statements was prepared in conformity with accounting principles generally accepted in the United States for interim financial information and instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Although management believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.
Preparation of these interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The interim results may not be indicative of the results that may be expected for the year.
Certain prior year balances have been reclassified to conform to the 2004 presentation.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Revenue Recognition, Gain Recognition and Allowance for Doubtful Accounts
Net revenue includes treatment fees for medical procedures in the clinical setting. Treatment revenue is primarily “wholesale” or “retail”. Wholesale revenue is generated primarily from fixed fee contracts with various medical facilities and is recorded in the month the related treatments are performed. Retail revenue, when third party payors are billed directly for medical facility and technical fees, is recorded at the time services are rendered. These third party billings may or may not be contractual. Adjustments that
8
reduce revenue from established contractual or estimated non-contractual billing rates to amounts estimated to be reimbursable are recognized in the period the services are rendered. Differences in estimates recorded and final settlements are reported during the period final settlements are made. The Company has certain negotiated agreements with third party payors that provide for payments to the Company or its subsidiaries. These payment arrangements may be based upon negotiated rates or per diem payments. Revenues are reported at the estimated net realizable amounts from medical facilities, contracted and non-contracted third party payors and individual patients for services rendered.
For sales of medical devices to unaffiliated entities, revenue is recognized upon delivery at the customer’s destination and customer acceptance.
Revenue generated from service contracts is recognized ratably over the life of the related contract.
Accounts receivable consist primarily of amounts due from the medical facilities or partnerships, managed care health plans, commercial insurance companies and individual patients. The Company does not charge interest on its accounts receivable. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected. In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of accounts by payor type, the status of ongoing negotiations with third party payors and general industry conditions. Changes in these estimates are charged or credited to the results of operations in the period of the change. The Company writes off accounts receivable when all collection efforts have been exhausted.
Inventory
Inventory is carried at the lower of historical cost (first-in, first-out) or market and consists of medical devices, spare parts, assemblies and consumables.
Consolidation and Partnership Investments
Historically, the Company has made a number of investments in various entities including general and limited partnerships. The majority of these investments are consolidated based upon the Company’s ability to exercise control. The remaining
9
investments are recorded using the cost or equity method of accounting, depending upon the Company’s ability to exercise significant influence over the operating and financial policies of the partnership.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest. The Company does not have any significant variable interests in a VIE and the Company does not consolidate any VIEs.
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, management reviews long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates the carrying amount of the asset may not be recoverable and
10
the future undiscounted cash flows expected to be generated by the asset are less than its carrying amount. If such assets are considered to be impaired, the Company records impairment losses and reduces the carrying amount of impaired assets to an amount that reflects the fair value of the assets at the time impairment is evident. The Company’s impairment review process relies on management’s judgment regarding the indicators of impairment, the remaining lives of assets used to generate assets’ undiscounted cash flows, and the fair value of assets at a particular point in time. Management uses historical experience, current market appraisals and various other assumptions to form the basis for making judgments about the impairment of real estate assets. Under different assumptions or conditions, the asset impairment analysis may yield a different outcome, which would alter the gain or loss on the eventual disposition of the asset.
Property and Equipment
Property and equipment is stated at cost. Depreciation (which includes amortization of assets under capital leases) is computed based on the straight-line method over three to seven years based on the estimated useful lives of the related equipment or over the term of the related lease or over 39 years for buildings.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled.
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon projected future taxable income and the expected timing of the reversals of existing temporary differences.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for employee stock options and adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation
11
(“SFAS 123”) as amended by Statements of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transitional Disclosure, an Amendment to SFAS No. 123, (“SFAS 148”) for option grants to employees. The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant and, accordingly, recognizes no compensation expense for the employee stock option grants.
The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 as amended by SFAS 148.
|
|
|
Three months ended March 31, |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Net income — as reported |
|
$ |
350 |
|
$ |
2,129 |
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(366 |
) |
(165 |
) |
||
|
Net (loss) income — pro forma |
|
$ |
(16 |
) |
$ |
1,964 |
|
|
|
|
|
|
|
|
||
|
Earnings per share — as reported: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.03 |
|
$ |
0.19 |
|
|
Diluted |
|
$ |
0.03 |
|
$ |
0.18 |
|
|
Earnings per share — pro forma: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.00 |
|
$ |
0.17 |
|
|
Diluted |
|
$ |
0.00 |
|
$ |
0.17 |
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences may be material.
Transactions between related parties and between different subsidiaries of the Company occur in the normal course of business. The Company eliminates transactions with its consolidated subsidiaries and appropriately discloses significant related party transactions.
12
Concentrations of Credit Risk
The Company sells its products primarily in the United States. Credit is extended based on an evaluation of the customer’s financial condition and collateral is generally not required. Accounts receivable are generally receivable from medical facilities, insurance companies or patients.
Fair Value of Financial Instruments
The Company’s financial instruments are comprised principally of cash and cash equivalents, trade accounts receivable, amounts due from affiliated partnerships, trade accounts payable, customer deposits, short-term borrowings and long-term debt. The carrying amounts of these financial instruments approximate their fair values.
Long-Lived Assets
The Company has recorded property, plant and equipment and intangible assets at cost less accumulated depreciation and amortization. The determination of useful lives and whether or not these assets are impaired involves significant judgment. The Company reviews long-lived assets, including identifiable intangible assets whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Goodwill is subject to annual testing for impairment at the reporting unit level unless events or circumstances indicate the carrying amount is impaired.
Effective February 12, 2002, the Company entered into two two-year interest rate swap agreements which qualified as cash flow hedges and matured on February 12, 2004. These hedges were highly effective and, thus, the change in fair values for the three months ended March 31, 2004 and 2003 are reported as other comprehensive income of $32,000 and $53,000, respectively.
3. Description of Business
HealthTronics Surgical Services, Inc. (the “Company”) was incorporated in the state of Georgia in 1995. On July 21, 1997, the Company received FDA approval to market the LithoTron®, a kidney lithotripsy device manufactured by HMT High Medical Technologies AG (“HMT”). On October 12, 2000, the Company received FDA approval to market the OssaTron®, an HMT manufactured orthopaedic shock wave medical device, for treatment of chronic plantar fasciitis. On March 13, 2003, HealthTronics also received FDA approval to market the OssaTron® for treatment of chronic lateral
13
epicondylitis. The Company is currently establishing additional test sites for OssaTron FDA clinical trials for additional applications.
In October 2000, with the FDA approval of the OssaTron the Company began establishing orthopaedic partnerships for the purpose of purchasing, owning and operating OssaTron devices. HealthTronics contributed certain capital to partnerships and offered equity interests to third parties. As sole general partner, through its subsidiary, HT Orthotripsy Management Company, LLC, the Company maintains control and, therefore, consolidates the second tier orthopaedic partnerships. The Company has equity interests in these partnerships ranging from 5% to 100%.
The Company operates under the terms of distribution agreements with HMT that grant the Company the exclusive right to use, sell and lease the OssaTron and related devices and parts in the United States, Canada and Mexico. On March 5, 2004, the Company purchased the outstanding capital stock of HMT Holding AG (“HMT Holding”) which holds a 72.4% voting interest and a 39.7% financial interest in HMT.
It is the Company’s intent to generate revenues from four sources: 1) fees for clinical services provided by consolidated subsidiaries; 2) recurring revenues from sales of consumable products and maintenance of equipment; 3) sales of medical devices including related accessories; and 4) management, leasing and licensing fees. The Company also generates gains from sales of partnership investment interests.
In December 2001, the Company purchased 100% of the outstanding stock of Litho Group, Inc. (“LGI”) for $42,500,000 in cash. Through its various 100% subsidiaries, LGI is the sole general partner of several separate second and third tier lithotripsy partnerships with equity interests ranging from 15% to 100%, operating in the northern, eastern and southern United States. As sole general partner, LGI consolidates the second and third tier partnerships. The Company is also general partner or managing partner in various separate lithotripsy partnerships, which it controls and, therefore, consolidates.
The accompanying consolidated financial statements include the accounts of each of the Company’s subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
4. Business Acquisitions and Dispositions
On March 5, 2004, the Company, through a wholly owned subsidiary, purchased all of the issued and outstanding capital shares of HMT Holding, a Swiss company, from its five individual shareholders for $1,000 and 800,000 of the Company’s shares valued at $5,091,000. The purchase price was determined and negotiated by the parties based on
14
the expected annual cash flow to be generated by HMT Holding and upon the value of certain licenses, patents and manufacturing rights to medical devices. The fair value of the Company’s common stock issued to acquire all of HMT Holding’s outstanding common stock was determined based on the average market price of the Company’s common stock over the periods just prior to and following the date of the acquisition agreement, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-12. HMT Holding owns 72.4% of the voting shares and 39.7% of the financial interest shares of HMT, the primary supplier of the medical devices sold by the Company. HMT consolidates its Swiss manufacturing operations and its wholly owned distributorships in Japan, Germany and the United States of America. The Company, through its voting share interest, has the ability to exercise control over the operating and financial policies of HMT and its subsidiaries and therefore, the Company has consolidated the financial position and results of operations of HMT. The Company has consolidated the operations of HMT Holding and its subsidiaries since the date of acquisition as part of the Company’s manufacturing sales and service reporting unit and business segment. The Company also contributed approximately $1,550,000 to HMT Holding which HMT Holding used to repay its bank debt.
The total estimated purchase price of the acquisition has been allocated on a preliminary basis to assets and liabilities based on management’s estimate of their fair values. These allocations are subject to change pending the completion of the final analysis of the total purchase price and the fair values of the assets acquired and the liabilities assumed. The impact of any of these changes could be material.
The table below represents pro forma financial information for the three months ended March 31, 2004 and 2003 as if HMT Holding had been acquired on January 1, 2004 and 2003, respectively.
(UNAUDITED)
|
|
|
AS REPORTED |
|
PRO FORMA |
|
||
|
|
|
(000’s omitted except per share amounts) |
|
||||
|
Net revenues |
|
$ |
23,740 |
|
$ |
26,212 |
|
|
Income before income taxes |
|
$ |
654 |
|
$ |
619 |
|
|
Net income |
|
$ |
350 |
|
$ |
331 |
|
|
Income per common share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.03 |
|
$ |
0.03 |
|
|
Diluted |
|
$ |
0.03 |
|
$ |
0.03 |
|
15
|
|
|
AS REPORTED |
|
PRO FORMA |
|
||
|
|
|
(000’s omitted except per share amounts) |
|
||||
|
Net revenues |
|
$ |
20,888 |
|
$ |
24,529 |
|
|
Income before income taxes |
|
$ |
3,498 |
|
$ |
3,392 |
|
|
Net income |
|
$ |
2,129 |
|
$ |
2,072 |
|
|
Income per common share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.19 |
|
$ |
0.18 |
|
|
Diluted |
|
$ |
0.18 |
|
$ |
0.18 |
|
As a result of the March 5, 2004 business combination with HMT Holding, the Company has begun to establish a restructuring plan whereby it will consolidate certain of its administrative, sales and distribution activities. This may require the closing of certain facilities and the relocation or termination of certain employees employed in such activities acquired at March 5, 2004. The Company has accrued approximately $4,500,000 as a liability assumed in purchase of HMT Holding representing its best estimate to date of these costs. The Company is in the process of finalizing its estimates of the related costs which are expected to impact the final aggregate purchase price.
5. Inventory
Inventory is carried at the lower of cost (first-in, first-out) or market and consists of the following:
|
|
|
March 31, 2004 |
|
December 31, 2003 |
|
||
|
|
|
(000’s omitted) |
|
||||
|
|
|
|
|
|
|
||
|
Medical devices / other equipment |
|
$ |
8,590 |
|
$ |
5,994 |
|
|
Spare parts and assemblies |
|
3,588 |
|
738 |
|
||
|
Consumables |
|
1,372 |
|
1,087 |
|
||
|
|
|
$ |
13,550 |
|
$ |
7,819 |
|
6. Gain on Sale of Subsidiary and Investment Interest
The Company sold partnership investment interests in certain limited partnerships and recognized gains of $245,000 and $2,075,000 for the three months ended March 31, 2004 and 2003, respectively. The gains represent the excess of the sales price over the Company’s investment basis in the partnership interest.
16
7. Interest Rate Swaps
In order to protect the Company from interest rate volatility, effective February 12, 2002, the Company entered into two two-year interest rate swap agreements (“the swaps”) that matured on February 12, 2004. The total notional amount of swap agreements was $0 and $12,600,000 at March 31, 2004 and December 31, 2003, respectively. The swaps effectively converted a portion of the Company’s floating-rate debt to a fixed-rate basis through February 12, 2004, thus reducing the impact of interest-rate changes on interest expense. This fixed rate was 3.2525% plus the applicable percentage (2.25% and 2.50% during the first quarter of 2004 and 2003, respectively). The swaps qualified as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and expired on February 12, 2004. The Company believes that its hedges were effective with changes in fair value to be reported in other comprehensive income. As of March 31, 2004 and December 31, 2003, the market value of the derivatives was a liability of approximately $0 and $32,000, respectively, which is included on the accompanying balance sheet. The change in fair values for the three months ended March 31, 2004 and 2003 is reported as other comprehensive income of approximately $32,000 and $53,000, respectively.
The counterparty to the interest rate swap agreements was a major commercial bank. The Company was exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates.
8. Comprehensive Income
The components of comprehensive income are as follows for the three months ended March 31, 2004 and 2003:
|
|
|
Three months ended March 31, |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
|
|
(000’s omitted) |
|
||||
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
350 |
|
$ |
2,129 |
|
|
Net change in fair value of interest rate swap |
|
32 |
|
53 |
|
||
|
Comprehensive income |
|
$ |
382 |
|
$ |
2,182 |
|
17
9. Earnings Per Share Information
The following table sets forth the computation of earnings per share:
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Numerator: Net income |
|
$ |
350 |
|
$ |
2,129 |
|
|
Weighted average shares outstanding |
|
11,814 |
|
11,328 |
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
||
|
Stock options |
|
22 |
|
214 |
|
||
|
Denominator for diluted earnings per share |
|
11,836 |
|
11,542 |
|
||
|
Basic earnings per share |
|
$ |
0.03 |
|
$ |
0.19 |
|
|
Diluted earnings per share |
|
$ |
0.03 |
|
$ |
0.18 |
|
10. Segment Information
The Company applies the disclosure provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. Effective April 1, 2003, the Company internally reorganized its operating structure and as a result the Company’s business units have been aggregated into three reportable operating segments: Lithotripsy; Orthopaedics; and Manufacturing, Sales and Service. The factors for determining the reportable segments were based on the distinct nature of their operations. They are disclosed as separate operating segments because these business units each have different marketing strategies due to differences in types of consumers, different market conditions and different capital requirements. Asset information by segment, including capital expenditures, and net income beyond operating margins are not provided to the Company’s chief operating decision maker. In fiscal 2003, the Company changed from one reportable segment to three reportable segments. For all periods presented, the corresponding items of segment information have been reclassified to conform to the current presentation.
The Lithotripsy segment provides lithotripsy services to physicians and medical facilities. The Orthopaedics segment provides non-invasive surgical solutions for a variety of orthopaedic conditions. The Manufacturing, Sales and Service segment represents manufacturing, sales and service of medical devices and related products. The “Other” category includes the Company’s non-reportable segments.
The Company primarily evaluates segment performance based on the income or loss before income taxes from its operating segments, which do not include unallocated corporate overhead and intersegment eliminations.
18
|
|
For the Three Months Ended March 31, 2004 |
|
|
(000’s omitted) |
|
|
|
Lithotripsy |
|
Orthopaedics |
|
Manufacturing, |
|
Other |
|
Total |
|
|||||
|
Net revenue from segment |
|
$ |
14,438 |
|
$ |
4,184 |
|
$ |
5,059 |
|
$ |
1,897 |
|
$ |
25,578 |
|
|
Less intersegment revenue |
|
353 |
|
— |
|
1,485 |
|
— |
|
1,838 |
|
|||||
|
Total consolidated net revenues by segment |
|
$ |
14,085 |
|
$ |
4,184 |
|
$ |
3,574 |
|
$ |
1,897 |
|
$ |
23,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment depreciation and amortization |
|
$ |
856 |
|
$ |
448 |
|
$ |
88 |
|
$ |
142 |
|
$ |
1,534 |
|
|
Plus unallocated depreciation and amortization |
|
|
|
|
|
|
|
|
|
28 |
|
|||||
|
Total consolidated depreciation and amortization |
|
|
|
|
|
|
|
|
|
$ |
1,562 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity in earnings of unconsolidated entities |
|
$ |
329 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment income (loss) before income taxes |
|
$ |
1,987 |
|
$ |
(534 |
) |
$ |
62 |
|
$ |
285 |
|
$ |
1,800 |
|
|
Less unallocated corporate expenses and intersegment eliminations |
|
|
|
|
|
|
|
|
|
(1,146 |
) |
|||||
|
Total consolidated income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
654 |
|
||||
|
|
For
the Three Months Ended March 31, 2003 |
|
|
(000’s omitted) |
|
|
|
Lithotripsy |
|
Orthopaedics |
|
Manufacturing, |
|
Other |
|
Total |
|
|||||
|
Net revenue from segment |
|
$ |
13,539 |
|
$ |
4,136 |
|
$ |
3,024 |
|
$ |
1,186 |
|
$ |
21,885 |
|
|
Less intersegment revenue |
|
249 |
|
— |
|
748 |
|
— |
|
997 |
|
|||||
|
Total consolidated net revenues by segment |
|
$ |
13,290 |
|
$ |
4,136 |
|
$ |
2,276 |
|
$ |
1,186 |
|
$ |
20,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment depreciation and amortization |
|
$ |
835 |
|
$ |
406 |
|
$ |
4 |
|
$ |
50 |
|
$ |
1,295 |
|
|
Plus unallocated depreciation and amortization |
|
|
|
|
|
|
|
|
|
85 |
|
|||||
|
Total consolidated depreciation and amortization |
|
|
|
|
|
|
|
|
|
$ |
1,380 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity in earnings of unconsolidated entities |
|
$ |
259 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Segment income (loss) before income taxes |
|
$ |
4,728 |
|
$ |
(113 |
) |
$ |
93 |
|
$ |
64 |
|
$ |
4,772 |
|
|
Less unallocated corporate expenses and intersegment eliminations |
|
|
|
|
|
|
|
|
|
(1,274 |
) |
|||||
|
Total consolidated income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
3,498 |
|
||||
19
11. Line of Credit
On March 5, 2004 the Company amended and restated its primary bank term loan and line of credit facility (“New Facility”). The revised agreement provides for a $25.0 million line of credit, which is renewable every 90 days and matures on March 5, 2007. The New Facility is secured by certain accounts receivable, inventory and equipment and the Company’s equity interest in its subsidiaries and bears interest at the stated bank rate (3.34% at March 31, 2004). At March 31, 2004 there was $19,500,000 outstanding under the New Facility.
12. Subsequent Events
As of March 31, 2004, the Company through its wholly owned subsidiary, HT Lithotripsy Management Company, LLC, owned 30% of Tenn-Ga Stone Group Three (“Tenn-Ga III”), a Tennessee general partnership. On April 1, 2004, the Company increased its ownership interest in Tenn-Ga III from 30% to 97% for $967,800. In conjunction with this acquisition, Tenn-Ga III purchased all of the partnership interests in NGST, Inc. (“NGST”) a Tennessee limited liability company, for $1,116,000. The Company’s CEO owned approximately 9% of NGST prior to the Company’s acquisition of NGST.
The purchase price was determined and negotiated by the parties based on the expected annual cash flow to be generated by the company purchased. The Company financed the acquisitions under its current bank financing arrangement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of HealthTronics Surgical Services to be materially different from any future results, performance or achievements express or implied by such forward-looking statements. As always, these expectations and projections are based on currently available competitive, financial, and economic data, along with operating plans, and are subject to future events and uncertainties. Among the events and uncertainties which could adversely affect future periods are: inability to establish or maintain relationships with physicians and hospitals; health care regulatory developments that prevent certain transactions with health care professionals or facilities; inability of the Company or health care providers to obtain reimbursement for use of the Company’s current or future products; competition or technological change that impacts the market for the Company’s products; difficulty integrating HMT and realizing projected cost savings; unanticipated regulatory and clinical costs related to FDA clinical trials and application for approval of High-Intensity Focused Ultrasound (“HIFU”); and difficulty in managing the Company’s growth. Additional factors that might cause such a difference, include, but are not limited to the items identified under the caption “Risk Factors” in Item 1 of the Company’s
20
Annual Report on Form 10-K for the year ended December 31, 2003, and in subsequent documents filed by HealthTronics Surgical Services with the Securities and Exchange Commission
We provide equipment as well as technical and administrative services to physicians, hospitals, and surgery centers performing minimally invasive surgical procedures in the urologic and orthopaedic markets, including lithotripsy and orthopaedic extracorporeal shock wave surgery. We were formed in December 1995 and began offering lithotripsy services in mid-1997. In October 2000, we received FDA approval to market an orthopaedic extracorporeal shock wave surgery device, the OssaTron, and since then we have invested significant resources in developing our orthopaedic services network while expanding our lithotripsy operations. As a result of our recent acquisition of controlling interest of HMT High Medical Technologies AG, we also develop and manufacture minimally-invasive medical devices.
Our services are provided principally through limited partnerships or other entities that we manage which use lithotripsy devices or OssaTron orthopaedic shock wave devices. Many of these partnerships were formed by us, and we have retained an equity interest ranging from 5% to 100% while selling any remaining interests primarily to physicians. We generally retain the sole managing interest in the entities and manage their daily operations. We also provide equipment maintenance services to some of the partnerships and supply them with various consumables used in lithotripsy and orthopaedic extracorporeal shock wave surgery procedures. To date we have expanded our operations by securing additional facility contracts in our existing partnerships, forming partnerships in new geographic markets and acquiring interests in partnerships from third parties, and we expect to continue to do so in the future.
As a result of the control we exert over certain entities by virtue of our sole managing interest, management contract and otherwise, for financial reporting purposes we consolidate the results of operations of certain partnerships with our own even though we own less than all (and in many cases less than 50%) of their outstanding equity interests. We reflect the equity of third party partners in the partnerships’ results of operations in our consolidated statements of income and on our consolidated balance sheet as minority interest.
In other instances, we do not control partnerships or other entities in which we have ownership interests. We account for our interests in these entities either on the equity or cost basis, depending on the degree of influence we exert over the entity.
We recognize revenue in our consolidated statements of income from the following four principal sources:
• Fees for clinical services provided by the Company or partnerships. A substantial majority of our consolidated revenues is derived from technical fees relating to treatments performed using our equipment and related services. We bill for these fees under two different models. Under the “wholesale” billing model, we charge a fee to the hospital or other surgery center at which the treatment is performed. Our fee might be a set fee per
21
procedure, a set fee per month based on a specified number of days of service at the facility per month, or set as a percentage of revenue derived. Under the “retail” billing model, we charge the patient’s insurer, HMO or other responsible party, and we pay a fee to the health care facility for access to its premises. Under either model, the professional fee payable to the physician performing the procedure is generally billed and collected by the physician. The billing and collection cycle for wholesale fees is typically significantly shorter than for retail fees, although the gross margin for retail billing is moderately higher than for wholesale billing.
• Technical services, equipment maintenance and sale of consumables to affiliated and unaffiliated third parties. We charge fees to third parties who own or operate lithotripsy and orthopaedic shock wave surgical devices for equipment maintenance, technical support and related services. We also sell a variety of consumables used in lithotripsy, orthopaedic extracorporeal shock wave surgery, transurethral microwave therapy and cryosurgery procedures to unaffiliated third parties.
• Equipment and parts sales to third parties. We generate revenue from the sale of shock wave devices and parts to third parties.
• Providing partnership management, leasing and licensing services. We generate revenue from managing lithotripsy and cryosurgical partnerships and by entering into leasing or licensing arrangements with third parties.
We measure results in each of our areas in part based upon the number of procedures performed. The number of total kidney stone procedures in the United States should grow slightly with the aging population. Growth for the Company in lithotripsy procedures will come from new facility contracts in existing partnerships and the acquisition or affiliation of partners or partnerships. Procedures performed with the OssaTron for orthopaedic conditions have significant potential for growth as many patients currently are treated with invasive surgery or continue to suffer pain without receiving treatment. The Company believes procedures for chronic plantar fasciitis and chronic lateral epicondylitis will continue to grow as the modality is accepted by patients, physicians, and third party payors. The procedure growth for treatment of benign prostatic hyperplasia has potential for growth due to the aging population and the fact that many patients currently are treated with drugs or other alternative treatments. The number of procedures for cryosurgical treatment of prostate and other cancers should increase during the year, but such growth will be tempered by the slow process of educating and training physicians on the treatment.
We are dependent, both directly in the case of “retail” billing and indirectly in the case of “wholesale” billing, on the reimbursement policies of governmental and private third party payors. While the reimbursement status of lithotripsy is well established, orthopaedic extracorporeal shock wave surgery is a relatively new procedure in the U.S., and the reimbursement policies of third party payors for this treatment are still developing. Reimbursement for transurethral microwave therapy (“TUMT”) of benign prostatic hyperplasia (“BPH”) is currently established and favorable for in-office treatments. Cryosurgery for prostate cancer is a hospital-based procedure and reimbursement is established but was
22
recently adjusted by Medicare to exclude certain pass-through charges. Our results of operations could be significantly affected by changes in reimbursement policies regarding lithotripsy or by decisions made regarding the reimbursement status of orthopaedic extracorporeal shock wave surgery.
Results of Consolidated Operations
Revenues for the first three months of 2004 totaled $23.7 million, up 13.4% from $20.9 million for the first three months of 2003. Lithotripsy revenue for the first quarter of 2004 was $14.1 million compared to $13.3 million in the first quarter of 2003, a 6.0% increase. Consolidated lithotripsy procedures for the first quarter of 2004 increased 8.6% over the first quarter of 2003. We anticipate that our lithotripsy business will remain strong and continue to generate good cash flow for the Company.
Our orthopaedic business demonstrated moderate growth in revenues year over year. In what remains a challenging reimbursement climate, we performed 1,694 orthopaedic procedures during the first three months of 2004 compared to 1,693 procedures performed in the first three months of 2003; however, revenues for the orthopaedic business in the first quarter of 2004 increased 2.4% to $4.2 million from $4.1 million in the same period of 2003. We continue to make progress in training physicians and educating insurance companies.
Revenue from the equipment sales and service division was $3.6 million for the first quarter of 2004 compared to $2.3 million for the first quarter of 2003, an increase of 56.5%. The growth was due, in part, to our acquisition of HMT.
As our Company has grown, our salaries, general and administrative expenses have increased year over year from $9.6 million for the first quarter of 2003 to $11.4 million for the first quarter of 2004. The expansion of our orthopaedic business and the acquisition of HMT Holding are primarily responsible for the 18.8% increase.
Our depreciation and amortization expense increased 14.3% from $1.4 million during the first quarter of 2003 to $1.6 million during the first quarter of 2004 as a result of the addition of several cryosurgical devices consolidated upon the acquisition of certain cryosurgical partnerships in the last three quarters of 2003.
Our business strategy is to partner with physicians and healthcare providers in each of our local markets. Often we will sell equity interest in our partnerships to these strategic partners. In 2003, we commenced planned sales of portions of equity in certain lithotripsy partnerships in LGI. As a result, gains on sale of subsidiary and investment interest in 2003 were $4.5 million, of which $2.1 million was in the first quarter. We anticipate that equity sales will continue throughout 2004, although not at the levels of previous years. In the first quarter of 2004, gains on sale decreased to $0.2 million.
Our subsidiary partners’ equity in the current year net income is represented by the minority interest in consolidated subsidiaries. This minority interest will grow in total as we continue to sell interest in our subsidiaries. Our partners’ minority interest in consolidated subsidiaries grew from $4.1 million in the first quarter of 2003 to $5.5 million in the first quarter of 2004, an increase of 34.1%.
23
Critical Accounting Policies
Our consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Estimates and assumptions are reviewed periodically and the effects of the revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates, and any such differences may be material to the financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
Consolidation
Our consolidated financial statements include the accounts of those significant subsidiaries that we control. They also include our undivided interests in these subsidiaries’ assets and liabilities. Amounts representing our percentage interest in the underlying net assets of other significant affiliates that we do not control, but over which we exercise significant influence, are included in “Investments in unconsolidated entities”; our share of the net income of these companies is included in the consolidated statement of income caption “Equity in earnings of unconsolidated partnerships”. The accounting for these non-consolidated companies is based upon the equity method of accounting. Our investments in other companies that we do not control and for which we do not have the ability to exercise significant influence as discussed above are carried at the lower of cost or fair value, as appropriate.
Revenue Recognition, Gain Recognition and Allowance for Doubtful Accounts
Net revenue includes treatment fees for medical devices in the clinical setting. Treatment revenue is primarily “wholesale” or “retail”. Wholesale revenue is generated primarily from fixed fee contracts with various medical facilities and is recorded in the month the related treatments are performed. Retail revenue, generated when we bill third party payors for medical facility and technical fees, is recorded at the time services are rendered. These third party billings may or may not be contractual. Adjustments which reduce revenue from established contractual or estimated non-contractual billing rates to amounts estimated to be reimbursable are recognized in the period the services are rendered. Differences in estimates recorded and final settlements are reported during the period final settlements are made.
We may sell medical devices to certain entities in which we have an interest and may have guaranteed a portion of the long-term obligations related to such purchases. We eliminate profits on such transactions where the purchaser is a consolidated subsidiary of ours. A pro rata portion of the profit representing our percentage of ownership will be deferred on sales to unconsolidated subsidiaries where we have accounted for our investment interest using the equity or cost basis methods of accounting (depending on our ability to exercise significant influence over the operating and financial policies of the joint venture).
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Revenue is recognized upon delivery at the customer’s destination for sales of medical devices to unaffiliated entities.
Revenue generated from service contracts is recognized ratably over the life of the related contract.
We form wholly owned limited partnerships in which we are the general partner and then contribute a medical device to the partnership. We may sell interests in these partnerships to other investors. We generally recognize a gain on the interest sold as non-operating income at the time the subscription agreement is signed. Certain gains on the sale of partnership interests are deferred when payment terms exceed one year.
In order to record our accounts receivable at their net realizable value, we must assess their collectibility. A considerable amount of judgment is required in order to make this assessment including the analysis of historical bad debts and other adjustments, a review of the aging of our receivables and the current creditworthiness of our customers. We have recorded allowances for receivables which we believe are uncollectible. However, depending upon how such potential issues are resolved, or if the financial condition of any of our customers was to deteriorate and their ability to make required payments became impaired, increases in these allowances may be required.
Inventory
We are required to state our inventories at the lower of cost or market. Our inventories include medical devices, parts for servicing the medical equipment and consumables for the medical equipment. We continually evaluate the inventory for excess and obsolescence. At this time we believe that no inventory reserve is required to reduce the carrying value of our inventory to its net realizable value. However, if the demand for our products were to decline we might be required to establish such reserves.
Long-Lived Assets
We have recorded property, plant and equipment and intangible assets at cost less accumulated depreciation and amortization. The determination of useful lives and whether or not these assets are impaired involves significant judgment. We review long-lived assets, including identifiable intangible assets whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Goodwill is subject to annual testing for impairment at the reporting unit level unless events or circumstances indicate the carrying amount is impaired. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount.
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Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. They are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We have established a valuation allowance for that portion of the deferred tax asset for which it is more likely than not that it will not be realized.
Derivative Instruments and Hedging
We manage risks associated with interest rates and we may use derivative instruments to hedge these risks. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure and, therefore, we do not use derivative instruments for trading or speculative purposes. The evaluation of hedge effectiveness is subject to assumptions based on the terms and timing of the underlying exposures. All derivative instruments are recognized in our consolidated balance sheet at fair value. The fair value of our derivative instruments is generally based on quoted market prices.
Transactions between related parties occur in the normal course of business. We provide services and products to our subsidiaries; our subsidiaries provide services and products to other subsidiaries. We eliminate transactions with our consolidated subsidiaries and appropriately disclose other significant related party transactions.
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In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest. We do not have any significant variable interests in a VIE and we do not consolidate any VIEs.
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We have funded our working capital requirements and capital expenditures from net cash provided by operating activities and borrowings under bank credit facilities. In conjunction with the purchase of Litho Group, we obtained a $50,000,000 credit facility. Concurrent with the acquisition of the controlling interest in HMT AG, we amended and restated the $50,000,000 credit facility to a $25,000,000 credit facility. At March 31, 2004 and December 31, 2003, we had approximately $19,500,000 and $17,737,000, respectively, outstanding under the credit facility plus additional debt of approximately $13,803,000 and $5,291,000, respectively, primarily at the subsidiary level. Under the new $25,000,000 credit facility $5,500,000 was available at March 31, 2004. Debt at the subsidiary level is typically related to 1) financing needs of our foreign operations and 2) equipment purchased and operated by our US subsidiaries and is secured by that equipment. Cash and cash equivalents increased from $9,040,000 at December 31, 2003 to $10,399,000 at March 31, 2004.
Net cash provided by operating activities for the three months ended March 31, 2004 was $93,000 compared to $878,000 used in operating activities for the three months ended March 31, 2003. This change was primarily the result of improved accounts receivable collections and the timing of distributions from subsidiaries and income tax payments offset by a decrease in after tax net income. Net cash provided by investing activities was $243,000 for the three months ended March 31, 2004 compared to $2,050,000 for the three months ended March 31, 2003. The change is due primarily to a decrease in proceeds from the sale of partnership investment interests. Net cash provided by financing activities aggregated $1,023,000 in the three months ended March 31, 2004 as compared to net cash used in financing activities of $8,635,000 for the three months ended March 31, 2003 and consisted primarily of an increase in borrowings and a decrease in payments made.
Our capital expenditures, primarily for the purchase of medical devices, aggregated $1,205,000 in the three months ended March 31, 2004. We currently estimate that our capital expenditures will aggregate approximately $4,000,000 to $5,000,000 for the year ended December 31, 2004 and will be used to purchase additional medical devices for partnerships. We continuously review new investment opportunities and believe that our financial position can support higher levels of capital expenditures, if justified by opportunities to increase revenue or decrease recurring costs. Accordingly, it is possible that our capital expenditures in 2004 could be higher than anticipated. We plan to use our cash generated from operations and borrowings under our revolving credit facility to fund these expenditures.
We believe that our cash generated from operations and borrowings under our revolving credit facility will be sufficient to meet our liquidity and capital spending needs at least through the end of 2004.
We are subject to market risk from exposure to changes in interest rates on our variable rate debt. Although there can be no assurances that interest rates will not change significantly,
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we do not expect changes in interest rates to have a material effect on income or cash flows in 2004. As of March 31, 2004 and December 31, 2003, our corporate-level fixed-rate debt was $0 and $12,600,000, respectively, and our corresponding corporate-level variable-rate debt was $19,500,000 and $5,100,000, respectively. Based on our variable-rate debt at March 31, 2004 and December 31, 2003, in the absence of the swaps discussed below, a one-percent change in interest rates would result in an annual change in interest rate expense calculated on a simple interest basis of approximately $195,000 and $51,000, respectively.
In order to protect us from interest rate volatility, effective February 12, 2002, we entered into two two-year interest rate swap agreements (“the swaps”) that matured on February 12, 2004. The total notional amount of swap agreements was $0 and $12,600,000 at March 31, 2004 and December 31, 2003, respectively. The swaps effectively converted a portion of our floating-rate debt to a fixed-rate basis through February 12, 2004, thus reducing the impact of interest-rate changes on interest expense. This fixed rate was 3.2525% plus the applicable percentage (2.25% and 2.50% during the first quarter of 2004 and 2003, respectively). The swaps qualified as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and expired on February 12, 2004. We believe that our hedges were effective with changes in fair value to be reported in other comprehensive income. As of March 31, 2004 and December 31, 2003, the market value of the derivatives was a liability of approximately $0 and $32,000, respectively, which is included on the accompanying balance sheet. The change in fair values for the three months ended March 31, 2004 and 2003 is reported as other comprehensive income of approximately $32,000 and $53,000, respectively.
The counterparty to the interest rate swap agreements was a major commercial bank. We were exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates.
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievements of HealthTronics Surgical Services to be materially different from any future results, performance or achievements express or implied by such forward-looking statements. As always, these expectations and projections are based on currently available competitive, financial, and economic data, along with operating plans, and are subject to future events and uncertainties. Among the events and uncertainties which could adversely affect future periods are: inability to establish or maintain relationships with physicians and hospitals; health care regulatory developments that prevent certain transactions with health care professionals or facilities; inability of the Company or health care providers to obtain reimbursement for use of the Company’s current or future products; competition or technological change that impacts the market for the Company’s products; difficulty integrating HMT and realizing projected cost savings; unanticipated regulatory and clinical costs related to FDA clinical trials and application for approval of HIFU; and difficulty in managing the Company’s growth. Additional factors that might cause such a difference, include, but are not limited to those discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this
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report and the items identified under the caption “Risk Factors” in Item 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosure of Market Risk” under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period required by the United States Securities and Exchange Commission’s rules and forms.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 12a-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is periodically involved as a plaintiff or defendant in various legal actions. Management believes that those claims in which the Company is a defendant are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company’s financial condition. The Company is aware that certain class action lawsuits have been filed against it alleging securities fraud. The Company believes the claims alleged in each lawsuit are without merit. The Company will vigorously defend against these claims. Given the early stage of the litigation, the Company is not in a position to determine any potential liability but it currently does not believe the lawsuits will have a significant financial impact on the Company.
The Company issued 800,000 shares of its common stock on March 5, 2004 in exchange for all of the shares of HMT Holding AG which gave the Company controlling interest in HMT
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High Medical Technologies AG. This transaction was exempt from registration pursuant to Section 4(2) under the Securities Act of 1933.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Distribution Agreement between HT Prostate Therapy Management Company, LLC, EDAP TMS, S.A., EDAP S.A. and Technomed Medical Systems, S.A. dated February 5, 2004 (portions of this agreement have been omitted and marked confidential [*****] and filed separately with the Commission)
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
32.1 Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Chief Executive Officer and Chief Financial Officer
(b) Reports on Form 8-K
During the first quarter of 2004, the Company filed the following current reports on Form 8-K:
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Date of Report |
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Description |
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February 2, 2004 |
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Furnished presentation slides of an investor presentation |
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February 23, 2004 |
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Furnished text of press release announcing an agreement to purchase HMT Holding AG |
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March 9, 2004 |
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Furnished text of press release reporting the Company’s financial results for the fourth quarter and full year 2004 |
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March 12, 2004 |
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Announced acquisition of HMT Holding AG, which holds a 72.4% voting interest in HMT High Medical Technologies AG |
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March 23, 2004 |
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Furnished presentation slides of an investor presentation |
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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.
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HEALTHTRONICS SURGICAL SERVICES, INC. |
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By: |
/s/ Victoria W. Beck |
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Victoria W. Beck |
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Chief Accounting Officer |
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Date: |
May 7, 2004 |
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Exhibit Index
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Exhibit No. |
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Description |
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10.1 |
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Distribution Agreement between HT Prostate Therapy Management Company, LLC, EDAP TMS, S.A., EDAP S.A. and Technomed Medical Systems, S.A. dated February 5, 2004 (portions of this agreement have been omitted and marked confidential [*****] and filed separately with the Commission) |
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31.1 |
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Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Chief Executive Officer and Chief Financial Officer |
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