<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-66977
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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HealthTronics, Inc.
(Name of small business issuer in its charter)
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<TABLE>
<CAPTION>
GEORGIA 3845 58-221066
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<S> <C> <C>
(State or other (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization) ----------------------------
</TABLE>
<TABLE>
<S> <C>
425 FRANKLIN ROAD, SUITE 545 425 FRANKLIN ROAD, SUITE 545
MARIETTA, GEORGIA 30067 MARIETTA, GEORGIA 30067
(770) 419-0691 (770) 419-0691
(Address and telephone number (Name, address and telephone number of
of principal executive offices and principal agent for service)
place of business)
</TABLE>
Copies to:
UGO F. IPPOLITO, ESQ.
W. SCOTT MCGINNESS, JR., ESQ.
FRANK M. WILLIAMS, ESQ.
MILLER & MARTIN LLP
1275 PEACHTREE STREET, N.E.
SEVENTH FLOOR
ATLANTA, GEORGIA 30309-3576
(404) 942-6100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
<PAGE> 2
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INITIAL PUBLIC OFFERING
PROSPECTUS
MINIMUM OF 83,334 SHARES OF COMMON STOCK
MAXIMUM OF 1,000,000 SHARES OF COMMON STOCK
$6.00 PER SHARE
HEALTHTRONICS, INC.
HealthTronics, Inc. was founded to obtain Food and Drug
Administration approval for medical devices that use shock wave therapies to
treat kidney stones and various orthopedic problems. The minimum subscription
amount is 100 shares per investor. The offering will be open for an initial
period of 90 days. If the minimum shares are sold, the offering will be open for
9 months from the date of this prospectus or until ____________, 2000.
The common stock will be marketed through Capital Growth
Management, Inc. as sales agent for HealthTronics on a best efforts basis, which
means that Capital Growth is not required to sell the minimum number of shares
but must use its best efforts to sell the shares. The money paid for shares will
be held in a non-interest bearing escrow account and will be returned promptly
if the minimum offering period ends and the minimum number of shares are not
sold.
This is our initial public offering and there is no public
market for our shares.
<TABLE>
<CAPTION>
The Offering Per Share Total Minimum Total Maximum
------------ --------- ------------- -------------
<S> <C> <C> <C>
Public Price $6.00 $500,004.00 $6,000,000.00
Underwriting Discounts and
Commissions $ .60 $ 50,000.40 $ 600,000.00
Proceeds, before expenses to
HealthTronics, Inc. $5.40 $450,003.60 $5,400,000.00
</TABLE>
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. WE URGE YOU TO READ CAREFULLY THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 3, ALONG WITH THE REST OF THIS PROSPECTUS,
BEFORE YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
CAPITAL GROWTH MANAGEMENT, INC.
The date of this prospectus is *****, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Our Offering...............................................................1
Risk Factors..........................................................................2
Forward-Looking Statements............................................................4
Terms of the Offering.................................................................4
History And Business..................................................................5
Management ..........................................................................18
Securities Ownership of Certain Beneficial Owners and Management.....................24
Certain Relationships And Related Transactions.......................................28
Dilution ............................................................................30
Capitalization.......................................................................31
Description of Common Stock..........................................................31
Use of Proceeds......................................................................33
Plan of Distribution.................................................................34
Experts ............................................................................35
</TABLE>
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<TABLE>
<S> <C>
Legal Matters........................................................................35
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................35
Additional Information That Is Available to You......................................40
Index To Financial Statement.........................................................42
</TABLE>
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SUMMARY OF OUR OFFERING
<TABLE>
<S> <C>
WHO WE ARE: We are a Georgia corporation founded for the purpose of obtaining
Food and Drug Administration approval for products
manufactured by HMT High Medical Technologies GmbH, a
Swiss corporation. These products, which use shock wave
therapies to treat ailments, are called the LithoTron(R)lithotripter
and the OssaTron(R)orthopedic lithotripter. Our complete mailing
address and telephone number of our principal executive offices
are:
HealthTronics, Inc.
425 Franklin Road, Suite 545
Marietta, Georgia 30067
(770) (419-0691)
FAX: (770) (419-9490)
Attention: Roy S. Brown, president
OUR BUSINESS: Our business is the sales and servicing of LithoTron lithotripters
and, upon FDA approval, OssaTron orthopedic lithotripters. We
also rent, lease and provide services with LithoTron lithotripters.
OUR OFFERING:
Securities offered 83,334 shares minimum, 1,000,000 shares maximum
Shares outstanding at date 9,665,342 shares
of prospectus
Shares to be outstanding 9,748,676 shares minimum, 10,665,342 shares maximum
after offering
Options outstanding at date 454,000 options
of prospectus
Total public offering price $500,004 minimum, $6,000,000 maximum
Net proceeds $450,004 minimum, $5,400,000 maximum
Use of proceeds Primarily the purchase of capital equipment for lease, the
purchase of inventory, FDA study expense and working capital
</TABLE>
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RISK FACTORS
You should give careful consideration to the following facts
concerning HealthTronics and the risks involved in the purchase of our shares.
You are cautioned to read all of the documents furnished or made available by
us, including our financial statements and the footnotes. Please refer to
"additional information that is available to you" on page 43 of this prospectus
to see how to obtain additional information and documents that may help you to
better understand HealthTronics and the risks of purchasing our shares.
WE HAVE A HISTORY OF LOSSES FROM OPERATIONS AND MAY NOT HAVE PROFITS IN THE
FUTURE
We have incurred net losses from operations in 1996 and 1997.
In 1996 we lost $432,572, and in 1997 we lost $418,028. While we did have a net
profit for fiscal year ended 1998, there can be no assurance that HealthTronics
will have profits in the future. Continued net losses could cause an investor to
lose some or all of his or her entire investment.
PROPOSED REGULATIONS MAY PREVENT PHYSICIANS FROM INVESTING IN LITHOTRIPTERS
WHICH MAY NEGATIVELY EFFECT OUR PROFITABILITY
The Medicare and Medicaid statutes prohibit some referrals by
doctors to entities with which they have a financial relationship. Comments
accompanying proposed regulations under the Medicare and Medicaid statutes
indicate that lithotripsy may come within the scope of these regulations. As a
result, physicians may become reluctant to own lithotripters or invest in
partnerships that own lithotripters. Because the limited partnerships with which
we and US Lithotripsy have established working arrangements are at least
partially owned by physicians, we might have to seek other arrangements for
marketing our products.
HEALTHTRONICS HOLDS A NON-EXCLUSIVE LICENSE FOR THE OSSATRON ORTHOPEDIC
LITHOTRIPTER
VISSH Voennomedicinsky Institute of Bulgaria holds the
Bulgarian patent for the OssaTron orthopedic lithotripter. In addition, the
license granted from HMT to HealthTronics is only for the U.S., Mexican and
Canadian patents. This means that products produced in Bulgaria by VISSH or its
licensee or by other licensees of HMT in other countries in which the invention
is licensed, such as China, South Korea and Japan, could effectively compete
with our products in the world market outside of the U.S., Mexico and Canada.
Our license with HMT is not effective until we gain pre-market approval from the
FDA and is not renewable unless we sell an average of 20 OssaTron orthopedic
lithotripters a year.
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BECAUSE WE DO NOT HAVE PATENT PROTECTION FOR THE LITHOTRON LITHOTRIPTER WE COULD
BE FORCED TO CEASE USE OF THIS DEVICE
We do not have patent protection for the LithoTron
lithotripter, and we do not anticipate filing for protection. This means that if
one of our competitors achieved patent protection on a similar device, we could
be forced to cease use of the LithoTron lithotripter.
HEALTHTRONICS MAY BE AFFECTED BY A TREND OF LOWER RATES OF REIMBURSEMENT
Lower reimbursement rates for health care services or
resistance by insurance companies to reimburse for treatments could restrict the
potential market for our products and have an adverse effect on our business.
Over the last several years, there has been a trend towards lower reimbursement
rates for health care services by cost-conscious third-party payors such as
health maintenance organizations.
IF HMT, OUR SOLE PRODUCT SUPPLIER, CEASED TO MANUFACTURE OUR PRODUCTS, WE MIGHT
NOT FIND A SUITABLE ALTERNATIVE MANUFACTURER
Our products are manufactured by HMT. HMT is privately held
and does not publish any financial information. If HMT encountered financial
problems and ceased to manufacture our products, we might not find an
alternative manufacturer, or the terms of any manufacturing agreement with an
alternative manufacturer might not be as favorable to us as our current
agreement with HMT. Our current manufacturing agreement with HMT expires on July
21, 2002. We do not own or operate any manufacturing facilities and we have no
plans to manufacture any of our products for at least the next 12 months.
HEALTHTRONICS HAS POTENTIAL LIABILITY FOR THE DEBTS OF AFFILIATED COMPANIES
We have guaranteed the debts of some of our subsidiaries. In
addition, because we act as general partner to several limited partnerships, we
have unlimited liability for the payment of the debts of these limited
partnerships. As of December 31, 1998, our consolidated debt aggregated
$3,634,418, which includes our obligations for limited partnerships. If these
limited partnerships are unable or unwilling to repay their debts, we could be
liable for the entire amount of these debts.
IF SERVICETRENDS CEASES TO SERVICE OUR PRODUCTS, WE MIGHT BE UNABLE TO FIND A
SUITABLE ALTERNATIVE SERVICE COMPANY
Our products are serviced exclusively by Servicetrends, Inc.
Servicetrends is a subsidiary of a publicly held corporation that is a major
competitor of HealthTronics. Some of Servicetrends' officers and employees are
also shareholders of HealthTronics. If Servicetrends encountered financial
problems and ceased the servicing of our products, we might not be able to find
an alternative service company that would enter into a servicing agreement on
terms as
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<PAGE> 9
favorable to us as our current agreement with Servicetrends. This could have an
adverse effect on our business.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which
involve risks and uncertainties. The words "expects", "intends", "believes",
"anticipates", "estimates", "may", "could", "should", "would", "will", "plans",
"hopes" and similar expressions identify forward- looking statements. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of many factors, including those described in this
prospectus. The risk factors in the previous section and other factors noted
throughout this prospectus could cause our actual results to differ materially
from those contained in any forward- looking statement.
TERMS OF THE OFFERING
HealthTronics is offering a minimum of 83,334 shares and a
maximum of 1,000,000 shares of its common stock for cash at a price of $6.00 per
share. Each investor must purchase a minimum of 100 shares. The purchase price
of $6.00 per share must be paid in full upon execution and delivery of the
subscription agreement. HealthTronics reserves the absolute and unqualified
right to reject any subscription for any reason prior to acceptance. Rejected
subscriptions will be returned promptly to the subscriber without interest.
The initial term of the offering is 90 days from the date of
this prospectus. If the minimum shares are not purchased during the initial
term, then all proceeds raised will be promptly returned to you without paying
interest and without deducting any sales commissions or expenses of the
offering. If the minimum number of shares is sold, this offering will continue,
without notice to subscribers or investors, until nine months from the date of
this prospectus or _____________, 2000, or until all offered shares are sold,
whichever event first occurs. Your checks should be made payable to "Charter
Bank as escrow agent for HealthTronics, Inc." and proceeds from the sale of the
shares will be escrowed with Charter Bank in Atlanta, Georgia, no later than
noon of the next business day following receipt. No interest will be paid to us
on funds held in the escrow account. Subscribers will not have the use of their
funds and will not earn interest on funds placed in the escrow account unless
and until the minimum offering period expires, which may be as late as 90 days
from the date of this prospectus. Officers, directors, and controlling
shareholders are not prohibited from purchasing shares in this offering. These
purchases will not be counted towards the minimum offering, but the maximum
offering will be 1,000,000 shares, including these purchases.
The offering price of $6.00 per share was determined
arbitrarily by our management. This offering price has no relationship to book
value, market value or any other indications of valuation, and there can be no
assurance of any resale value for our shares.
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HISTORY AND BUSINESS
HISTORY
HealthTronics was incorporated in the State of Georgia on
December 1, 1995. On April 29, 1996, OssaTronics, Inc., an affiliated Georgia
corporation formed on December 23, 1994, merged into HealthTronics. All
references to HealthTronics include OssaTronics, unless otherwise noted.
BUSINESS AND PROPOSED BUSINESS - PAST ACTIVITIES
HealthTronics was founded for the purpose of obtaining FDA
approval for products manufactured by HMT High Medical Technologies; in
particular, medical devices utilizing shock wave therapies known as the
LithoTron lithotripter and the OssaTron orthopedic lithotripter. Upon FDA
approval, we will have exclusive rights to market the OssaTron orthopedic
lithotripter. Both products are currently being used outside of the United
States and Canada.
BUSINESS AND PROPOSED BUSINESS - PRESENT AND FUTURE BUSINESS
We generate revenues from the following sources:
- Sales of the LithoTron lithotripter and, upon FDA
approval, the OssaTron orthopedic lithotripter;
- Recurring revenues from licensing fees, sales of the
NewTrode spark plug which is used in the lithotripter
and the maintenance of equipment;
- Investment income generated from partnerships and
joint ventures with physicians, dealerships and
hospitals that purchase equipment from us, as well as
management fees from these entities; and
- Income generated from equipment we own or that is
owned by consolidated subsidiaries through rental,
leasing or providing patient treatment services.
As of April 15, 1999, we had sold, leased or placed in service
on our behalf approximately 45 LithoTron lithotripters in the United States. We
market the LithoTron throughout the United States, Canada and Mexico. Our
marketing is done either by distributors or employees of HealthTronics. As a
marketer/distributor of the LithoTron, we have no costs associated with research
and development.
MARKET OVERVIEW
Many persons each year suffer from kidney stones in the United
States. Of these, some will be treated with lithotripsy, a nonsurgical therapy
developed in Germany. There are currently active lithotripter systems in
operation in the United States that are either installed in hospitals or
outpatient centers or in mobile operation.
Publicly available information provides that a majority of
machines now in use in the United States were manufactured by Dornier Medical
Systems, Siemens or Medstone
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<PAGE> 11
International, Inc. The retail price of a new lithotripter made by these
companies ranges from $250,000 to $800,000.
Chronic heel pain syndrome and chronic tennis elbow are
orthopedic conditions that are the subject of two OssaTron clinical studies and
occur in a number of patients in the United States. If the FDA approves the
OssaTron for either or both of these conditions, it will mean that the FDA has
found the OssaTron is safe and effective for treatment of that condition.
MARKETING STRATEGY
We market the LithoTron lithotripter primarily to hospitals
and to physician groups that provide mobile lithotripsy services. With respect
to ownership by physician groups, proposed regulations could have a severe
impact upon the ability of these groups to own lithotripsy devices. Four medical
centers have already purchased OssaTron orthopedic lithotripters to conduct
our clinical studies. The purchases of these OssaTrons were completed under FDA
regulations which allow clinical study devices to be sold for investigational
purposes only, known as an investigational device exemption.
We provide lithotripsy services to several unaffiliated
medical centers, hospitals and physician groups in Georgia, Tennessee and
Kentucky. We charge a pre-arranged, fixed fee per patient for each treatment
performed at each facility. A typical contract requires us to transport a
LithoTron into the customer facility's operating/treatment room one day per week
to treat the hospital or doctor's kidney stone patients. We are also responsible
for providing someone to operate the equipment during the treatments and for
removing the equipment at the end of the treatment day.
GEOGRAPHIC MARKETS
Our geographic markets and potential markets consist of the
United States and its possessions, Canada and Mexico. These are the only
countries for which we have a license to market the products of HMT. As of the
date of this prospectus, no sales have been made in Canada or Mexico.
PRODUCTS AND PROPOSED PRODUCTS
The LithoTron Lithotripter
The LithoTron lithotripter was developed by HMT. A
lithotripter is a medical device that uses shock waves to fragment kidney stones
into small pieces so that the stones may pass from the body.
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After completing a four site investigatory device exemption
study for kidney and upper ureter stones, the LithoTron lithotripter pre-market
approval application was submitted to the FDA on May 15, 1997. The FDA requires
that a company or person seeking to introduce a medical treatment device must
first go through an investigational device exemption study and must afterwards
go through a pre-market approval application. The FDA will not approve any
lithotripsy device for sale that has not received pre-market approval. On July
21, 1997, we received FDA notice that the pre-market approval was approved and
that we could begin commercial distribution of the LithoTron lithotripter.
The OssaTron Orthopedic Lithotripter
An orthopedic lithotripter is a medical device that uses shock
waves to treat some orthopedic problems. Orthotripsy(R), or orthopedic
lithotripsy, is the name for this process. It is an extension of the principle
used to treat kidney stones. Physiologically, Orthotripsy is believed to
stimulate bone, tendon and ligament healing by inducing microscopic injuries at
the site of the chronic injury. Subsequently, a generation of new blood vessels
enters into the area and causes bone-healing cells or tissue-healing cells to
invade the area and stimulate the healing process.
We believe, based upon the early findings of our clinical
studies, that orthopedic lithotripsy is an effective treatment in some cases
involving:
- Chronic heel pain syndrome, also known as heel spurs.
- Fractures that have failed to heal for nine months or
more since the initial injury, also known as
non-union fractures.
- Lateral epicondylitis, also known as tennis elbow.
On May 29, 1996, we received approval from the FDA to begin
preliminary patient investigations with the OssaTron orthopedic lithotripter.
HealthTronics' clinical studies, including feasibility studies, are
FDA-regulated studies conducted according to approved investigational device
exemptions.
- Treatment of the first patient with non-union
fracture was performed on July 18, 1996.
- Treatment of the first patient with tennis elbow was
performed on September 19, 1996
- Treatment of the first patient with heel spurs was
performed on February 27, 1997.
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We are currently the sponsor of three clinical studies
involving the OssaTron orthopedic lithotripter. These include studies involving
the OssaTron orthopedic lithotripter for treating chronic heel pain syndrome,
tennis elbow, and nonunion fractures. On February 13, 1998, we received FDA
permission to expand our tennis elbow study and our heel spur study to multiple
sites.
All three studies are being regulated by the FDA, and are
being conducted in two stages. The initial feasibility study is a small,
20-patient series intended to provide preliminary safety and effectiveness
information. The second stage is a multi-center pivotal study that includes 100
or more patients and is intended to provide the clinical data needed to obtain
FDA approval for marketing. The studies will terminate when, under study
protocol, the data to support the study hypotheses is collected. We are unable
to predict when these studies will be completed.
Stage one feasibility studies of the OssaTron orthopedic
lithotripter for heel pain syndrome and for tennis elbow have been completed.
The FDA reviewed the results of these two feasibility studies and approved the
expansion of both studies to stage two pivotal investigations on February 13,
1998. Patient enrollment for the stage one feasibility study of the treatment of
nonunion fractures is nearly complete, and we plan to submit findings to the FDA
and request expansion to the stage two pivotal study once all 20 patients have
been treated.
The findings from the stage one feasibility studies of
OssaTron orthopedic lithotripter treatment of heel pain syndrome and tennis
elbow closely resembled findings from clinical use of the OssaTron orthopedic
lithotripter in Europe. Our findings were that approximately 85%, seventeen out
of twenty, of the feasibility study patients treated for heel pain syndrome had
a successful response to initial treatment, and that approximately 85% of the
tennis elbow patients had a successful response to treatment. The study
protocols for the OssaTron orthopedic lithotripter, as approved by the FDA,
contain defined success/fail criteria according to which a final status for each
study subject is assigned. The term "successful response to treatment" means
that a study subject met the pre-defined criteria identified in the study
protocol.
About 50% of the feasibility study patients treated for tennis
elbow required two treatments, as had been reported from European clinical
studies of OssaTron orthopedic lithotripsy treatments of tennis elbow. The
feasibility trials and our current studies reflect lower retreatment rates for
the OssaTron orthopedic lithotripter than the retreatment rates reflected by
published clinical results in Europe for orthopedic shock wave devices based on
a different energy source, electromagnetic technology. Early findings from our
stage two pivotal studies for heel pain indicate that patients do gain clinical
benefit from the orthotripsy treatment and that the treatment is safe.
Obsolescence
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The OssaTron orthopedic lithotripter and LithoTron
lithotripter both may become obsolete with the development of less expensive
alternatives, new technologies, or drugs, or refinements of existing ones.
MALPRACTICE AND PRODUCT LIABILITY RISKS
Physicians and technicians who use our products are exposed to
the risk of liability and malpractice claims. Those claims could also name us,
based on a theory of malpractice or product liability. Although we have not
experienced any malpractice or product liability claims, an award for damages
could exceed the limits of our applicable insurance coverage. Successful
liability claims asserted against us, to the extent not covered by insurance,
could affect our ability to operate profitably. While management believes our
current level of insurance is adequate, there can be no assurance of this.
EMPLOYEES
We employ, on a consolidated basis, forty-one persons on a
full-time basis in administration and operations. None of our employees is a
member of a labor union, and we believe labor relations to be good.
POTENTIAL MANUFACTURING
We do not currently own or operate any manufacturing
facilities and have no plans to manufacture any of our products in the immediate
future. We currently import our products from the manufacturer, HMT. We have the
right to purchase manufacturing rights from HMT for the OssaTron orthopedic
lithotripter based upon:
- Payment of a one-time fee of $1,000,000 for the
manufacturing know-how, technical drawings,
descriptions and other paperwork and associated
documents necessary for the manufacture of the
OssaTron orthopedic lithotripter, and
- A licensing fee of 10% of the net selling price for
each OssaTron orthopedic lithotripter manufactured by
us.
We have the right to manufacture the LithoTron lithotripter.
We intend, however, for at least the next 12 months, to continue to purchase
both LithoTron lithotripters and OssaTron orthopedic lithotripters from HMT.
SUPPLIERS
Currently we acquire all of our inventory from HMT. We have no
plans to change this arrangement.
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MAINTENANCE SERVICES
Maintenance services for our products are performed by
Servicetrends, a subsidiary of Integrated Healthcare Services. Integrated
Healthcare Services is the second largest provider of lithotripsy services in
the United States and, therefore, is a competitor of HealthTronics. However, we
are satisfied with the level of service performed by Servicetrends and have no
plans to change our arrangements with them.
GOVERNMENTAL REGULATION
We must comply with federal, state and local statutes,
ordinances, regulations and codes in many facets of our business. This
regulation includes licenses, permits, safety codes, zoning, truth-in-lending,
workmen's compensation and related laws, as well as various consumer sales
statutes and regulations. Our proposed products must be approved by the FDA
prior to marketing. In addition, we must comply with acts and regulations of the
Drug Enforcement Administration and the Health Care Financing Administration. We
must also comply with regulations of various regulatory agencies of the states
in which we intend to sell our shares. The states impose various regulations
upon the activities of health care providers such as our customers and us. Our
compliance with any changes in these laws and regulations may have an adverse
effect upon our business. Although we presently believe that our operations will
be in compliance with applicable laws and regulations, there can be no assurance
that we will continue to be able to comply with all applicable laws and
regulations, or to do so without adverse consequences to our business.
As an importer of lithotripters we must comply with specific
medical device reporting requirements that require us to report any serious
injuries or deaths that have occurred associated with the LithoTron.
Additionally, we must annually update the FDA regarding any changes or
improvements made to the LithoTron, as well as the results of new clinical
studies.
We have received clearance from the FDA to begin clinical
trials of the OssaTron orthopedic lithotripter and have been granted FDA
approval for commercial distribution of the LithoTron lithotripter. There are,
however, regulatory conditions on the uses, methods, controls, labeling and the
training of operators. These restrictions involve the following:
- The sale, distribution, and use of the device are
restricted to prescription use;
- Labeling on the device must specify the requirements
that apply to the training of practitioners who may
use the device;
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- We agreed to collect long-term data to study the
effect of the device on hypertension. The study was
completed and submitted to the FDA. We were notified
on November 13, 1998, that the FDA completed their
review of the study and agreed with our findings that
hypertension is not a long-term risk of shock wave
lithotripsy; and
- We are required to submit progress reports regarding
the completion of post-approval study requirements.
We believe we are in full compliance with these requirements.
Federal law regulates physician ownership of, and referral to,
health care service providers for services reimbursable under the Medicare or
Medicaid programs through two federal acts: the Medicare and Medicaid Fraud
Prevention Act and the Omnibus Budget Reconciliation Acts. The Medicare and
Medicaid Fraud Prevention Act, generally prohibits the payment of any
remuneration to induce or encourage the referral of patients for services
reimbursable under the Medicare or Medicaid programs. The Omnibus Budget
Reconciliation Acts, prohibit referrals by physicians to entities with which the
physicians have a financial relationship for designated health services,
including inpatient and outpatient hospital services.
On January 9, 1998 the Health Care Financing Administration
published proposed regulations applicable to all designated health services.
While lithotripsy is not mentioned in the proposed regulations, accompanying
comments indicate that lithotripsy is included within the definition of
inpatient and outpatient hospital services. While there are several exceptions
and safe harbors within these federal acts and regulations, the effect may be to
limit our ability to contract with limited partnerships controlled by
physicians, because physicians would generally not be allowed to refer patients
for treatment with lithotripters in which the physicians have an ownership
interest.
The government regulations described in this section may
directly affect our profitability. If FDA approval is denied, our earnings may
be negatively impacted. Our compliance with any changes in these laws and
regulations may increase our expenses or limit income and have an adverse effect
upon our business.
COMPETITION
Our competitors, including Dornier Medical Systems, Siemens
GmbH, Medstone International, Inc., Integrated Healthcare Services, Prime
Medical Services, Inc. and Storz Medical Systems, are larger and better financed
than we are. They also enjoy a high degree of international name recognition for
other products they manufacture. It is possible that one or more of these
companies could corner the market for lithotripters through the use of extensive
advertising and product discounts, even if our products prove to be superior.
11
<PAGE> 17
We are aware that Dornier, Siemens, Medstone and Storz, among
others, are currently working on an orthotripsy devices; however, to the best of
our knowledge, we are the only company currently undergoing clinical trials in
the United States. Siemens and Dornier have received patents for the use of
shock wave therapy in orthopedics and for pain management. We, however, believe
that our technique is different from the Siemens and Dornier patents and that
VISSH's patent 4,979,501, HMT's patent 5,595,178 and our pending patent claims
covering multiple pathologies or indications of use for orthopedic shockwave
therapy do not encroach upon either the Siemens or Dornier patents.
Our pending claims were originally filed in two separate
patent applications. The first is currently being examined by the United States
Patent and Trademark Office, and the second application should undergo
examination later this year. None of the awarded patents or pending claims
attempt to patent the OssaTron; however, they focus on patenting the use of high
energy shock waves to promote healing in orthopedic problems.
Prime Medical Services owns approximately 16% of the kidney
lithotripters currently in operation in the United States, making this entity
the leading provider of lithotripsy services. Integrated Healthcare Services
holds the second position with approximately 8% of the estimated lithotripters
in the United States. The next four largest lithotripsy providers operate only
about 11% of the lithotripsy units currently in operation in the United States.
We also compete with local private facilities and medical
centers that offer lithotripsy services, including hospitals that own their own
machines and local mobile service providers.
PROPERTY, EQUIPMENT AND INVENTORY
As of December 31, 1998, we owned property, equipment and
inventory, on a consolidated basis, with a net book value of $6,113,915. We
currently lease 6,275 square feet of office space in Marietta, Georgia at a
monthly rental of $3,921. Our lease expires on May 15, 2000. We intend to
perform all of our administrative functions from our current facility. We
believe this space is adequate to meet our foreseeable future needs.
Servicetrends, our current repair service provider for LithoTron and OssaTron
customers, utilizes its own facility in Kennesaw, Georgia to support our
logistics operations including final assembly of the product, warehousing
inventory units and repair parts, and shipping repair parts and complete
systems.
JOINT VENTURES, SUBSIDIARIES AND DISTRIBUTORS
US Lithotripsy, a subsidiary of HealthTronics, organizes
entities to own and operate lithotripters. These entities are usually limited
partnerships or limited liability companies. US Lithotripsy generally retains
an ownership interest in the entities and typically acts as a manager of the
entities. US Lithotripsy receives revenues from management fees, for providing
day to day operations and administrative functions, and distributions because
of its ownership interests in the entities. HealthTronics receives revenues
through its ownership interest in US Lithotripsy.
As an example of how US Lithotripsy markets and sells
lithotripters, US Lithotripsy identifies a market in need of a lithotripter.
It identifies investors, typically physicians, and facilitates the formation of
an entity to allow the investors to invest. Once the entity is formed, it
typically purchases the lithotripter from HealthTronics, but it is not required
to do so. HealthTronics then distributes the lithotripter to the entity. The
entity retains ownership of the lithotripter and either installs it at a
specific facility or moves it between locations to provide lithotripsy
services. The entity receives revenue from fees paid by medical facilities
for the use of the lithotripter in providing patient treatments.
On March 7, 1997 HealthTronics entered into a distributorship
agreement with US Lithotripsy. This agreement granted US Lithotripsy an
exclusive license to sell, lease and distribute our products in multiple states,
initially. This agreement is now limited to Colorado, Oklahoma, Texas and
Missouri in order to focus its marketing and sales activities.
On March 7, 1997 HealthTronics also entered into an entity
interest agreement with US Lithotripsy and Litho Management, Inc., the sole
general partner of US Lithotripsy. According to the entity interest agreement,
we received a 40% interest
12
<PAGE> 18
in US Lithotripsy, a 39.6% limited partnership interest plus a .4% general
partner interest, in return for 200,000 shares of HealthTronics stock. Our stock
transfer was accomplished through a private placement memorandum on June 1,
1997.
On May 1, 1998 HealthTronics became the sole general partner
of US Lithotripsy by purchasing 100% of the outstanding common stock of Litho
Management for 700,000 shares of our common stock.
On September 9, 1998 we exchanged 300,000 of our shares with
three shareholders of ours, Messrs. H. Patrick Hezmall, David Ellis and Wade
Lowery, who were also the sole shareholders of HLE Corp., a Texas corporation,
in exchange for all of the issued and outstanding shares of HLE Corp. The assets
of HLE Corp. consist of a 30% limited partnership interest in Metro I Stone
Management, Ltd., a Texas limited partnership. Because we, as sole general
partner of US Lithotripsy, have already consolidated Metro I Stone Management,
Ltd., this transaction effectively represents an acquisition of additional
interest in the operations of Metro I Stone Management, Ltd.
Florida Lithology, Inc., was incorporated in Florida on
September 15, 1998. On October 23, 1998, HealthTronics became a 45.5%
shareholder in Florida Lithology, Inc. Florida Lithology, Inc. is a 55%
co-general partner in Florida Lithology, Ltd., a Florida limited partnership
that provides lithotripsy services in the state of Florida. We are also a 20%
limited partner in Florida Lithology, Ltd. Argil Wheelock, MD, our chairman and
CEO, serves as the chairman and as the president of Florida Lithology, Inc.
Each of the HealthTronics subsidiaries or consolidated
entities are shown on the following chart:
[SEE CHART ON FOLLOWING PAGE]
13
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HealthTronics, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bone & Joint Treatment
US LITHOTRIPSY, LP Litho Management, Inc. HLE, Inc. Centers of South FL
HealthTronics Interest 100% HealthTronics Interest 100% HealthTronics Interest 60%
--------------------------
USL has an interest in the LMI is a General Partner in the HLE is a Limited Partner in
following entities: Following partnership: the following Partnership:
- --------------------------------------- ------------------------------- ----------------------------
Metro I Stone Management, Ltd 10% US Lithotripsy, LP 0.6% Metro I Stone Management,
- --------------------------------------- ------------------------------- Ltd. 30%
Mississippi Valley I Stone Mississippi Valley I Stone ----------------------------
Management Limited 30% Management Limited 1%
- --------------------------------------- -------------------------------
AESL Limited Partnership 20%
- ---------------------------------------
East Texas Stone Management,
Ltd. 10%
- ---------------------------------------
Dallas Stone Management, LP 10%
- ---------------------------------------
Tulsa Stone Management, LP 99%
- ---------------------------------------
Tyler Stone Management, LP 31%
- ---------------------------------------
Tyler Stone Services. LP 99%
- ---------------------------------------
South Central Missouri
Management, LP 10%
- ---------------------------------------
SE Colorado Lithotripsy, LP 10%
- ---------------------------------------
Mississippi Valley II Stone
Management, LP 10%
- ---------------------------------------
Missouri Valley Lithotripsy, LP 10%
- ---------------------------------------
North Central Texas Lithotripsy,
LP 99%
- ---------------------------------------
White River Lithotripsy, LP 10%
- ---------------------------------------
Central Texas Lithotripsy, LP 99%
- ---------------------------------------
Central Dallas Lithotripsy, LP 10%
- ---------------------------------------
Western Colorado Lithotripsy, LP 99%
- ---------------------------------------
Oklahoma Lithotripsy, LP 10%
- ---------------------------------------
Central Missouri Lithotripsy, LLC 31%
- ---------------------------------------
Continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HealthTronics, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tenn-Ga Prostate Lithowest, LLC Florida Lithology, Inc. Lithowest, LLC
Therapies, LLC HealthTronics Interest 50% HealthTronics Interest 45.5% HealthTronics Interest 60%
HealthTronics Interest 67%
- ---------------------------- ---------------------------- FLI is a General Partner --------------------------
in the following
partnership:
-----------------------------
Florida Lithology, Ltd.
55%
(HealthTronics is also a 20%
Limited Partner in this
partnership)
-----------------------------
</TABLE>
14
<PAGE> 20
Of the eighteen partnerships listed in the chart above in
which US Lithotripsy has an interest, the following summarizes US Lithotripsy's
types of ownership interests.
USL is a general partner only in the following partnerships:
- East Texas Stone Management, Ltd.
- Dallas Stone Management, LP
- Tyler Stone Management, LP
- South Central Missouri Management, LP
- SE Colorado Lithotripsy, LP
- Missouri Valley Lithotripsy, LP
- White River Lithotripsy, LP
- Central Dallas Lithotripsy, LP
- Oklahoma Lithotripsy, LP
- Mississippi Valley II Stone Management, LP
USL is a limited partner only in the following partnerships:
- Mississippi Valley I Stone Management, LP
- ESL Limited Partnership
USL is both a general partner and a limited partner in the
following partnerships:
- Metro I Stone Management, Ltd.
- Tulsa Stone Management, LP
- Tyler Stone Services, LP
- North Central Texas Lithotripsy, LP
- Central Texas Lithotripsy, LP
- Western Colorado Lithotripsy, LP
We are currently a 67% owner of Tenn-Ga Prostate Therapies,
L.L.C., a Tennessee limited liability company that owns and operates a mobile
Prostatron device. A Prostatron is a medical device that uses microwave energy
to treat prostate enlargement. The remaining 33% of Tenn-Ga Prostate is owned by
physicians who practice in the market served by Tenn-Ga Prostate. Tenn-Ga
Prostate provides prostate therapy services to various hospitals in the
Southeast. Argil Wheelock, M.D., our chairman and CEO, is the chief manager of
Tenn-Ga Prostate.
On December 14, 1998, we became a 60% owner of Lithowest, LLC,
an Arizona limited lability company formed on December 4, 1998, to provide
Lithotripsy services in Arizona.
15
<PAGE> 21
PATENTS, TRADEMARKS AND LICENSES
The OssaTron orthopedic lithotripter, the invention for which
we have patents and patent applications, is an apparatus used, among other
considerations, for the medical treatment of the pathological state of bones.
VISSH was the holder of a patent entitled: "Method and Apparatus for Medical
Treatment of the Pathological State of Bones", U.S. Patent Number 4,979,501. The
patents and patent applications for Australia, Canada, Hungary, South Korea,
Russia, Japan, China and the United States were sold by VISSH to HMT High
Medical Technologies. VISSH retained the Bulgarian patent. On January 21, 1997,
a U.S. Patent for a "System, Method and Apparatus for Treatment of Degenerative
Bone" was awarded to the principals of HMT, and assigned to HMT, U.S. Patent
Number 5,595,178. There is no patent for the LithoTron lithotripter.
HMT granted a license regarding U.S. Patent Number 4,979,501
and Canadian Patent Number 1,330,580, the original license, to HealthTronics on
June 3, 1995. The original license provides HealthTronics with a non-exclusive
license to make, use, lease, or sell shock wave equipment for medical treatment.
The original license was acquired for $100,000. HMT reserved the patents and
patent applications for Australia, Hungary, South Korea, Russia, Japan and
China. The original license could be terminated by either party upon default
after 30 days written notice. On August 7, 1996 the original license was amended
to specifically grant to us an exclusive license to make, use, lease or sell
shock wave equipment for medical purposes. This amended license is effective for
a term of 5 years beginning on the date pre-market approval is granted by the
FDA and is automatically renewable for subsequent 5 year terms provided that we
have met an average annual sales commitment over the preceding five years of 20
OssaTron orthopedic lithotripters. If we fail to meet this sales commitment, the
amended license may be terminated by HMT upon 12 months notice given at least 12
months prior to the expiration of the 5 year term then in effect. The amended
license also grants to us the exclusive rights to manufacture the OssaTron
orthopedic lithotripter and its accessories, spare parts, consumables and
disposables, upon payment of a fee of $1,000,000 and a licensing fee not to
exceed 10% of our net selling price for each Company manufactured unit sold.
Subsequently, we entered into an agreement with HMT entitled:
"Second Amendment to Patent License Agreement". This agreement added Patent
Number 5,595,178 to the original license and the amended license.
Messrs. John F. Warlick, Roy S. Brown, Argil Wheelock, MD and
John Ogden, MD, a consultant to, and shareholder of, HealthTronics, have filed a
patent application with the United States Patent and Trademark Office for an
invention entitled "Method for Using Acoustic Shock Waves in the Treatment of
Medical, Dental and Veterinary Conditions." The application is still under
review. This filing is for additional uses for the OssaTron orthopedic
lithotripter and has been assigned to us for no consideration. In addition, in
1998 we filed seventy-two patent claims for additional uses for the OssaTron
orthopedic lithotripter.
16
<PAGE> 22
On November 22, 1994 HMT entered into a distributorship
agreement with HealthTronics granting HealthTronics exclusive distribution
rights for the OssaTron orthopedic lithotripter and related parts and
consumables for the United States, including Puerto Rico, the U.S. Virgin
Islands and Guam, Canada and Mexico. As part of this agreement, HealthTronics
committed to purchase 10 OssaTron orthopedic lithotripter units per year over
the life of the agreement after FDA pre-market approval, and HMT agreed to
warrant the OssaTron orthopedic lithotripters for 12 months at no cost to
HealthTronics. This distributorship agreement is for an indefinite period of
time and may be terminated at any time for cause, such as bankruptcy, default in
payment, failure to perform or failure of HealthTronics to meet its purchase
commitment, or upon 12 months notice by either party, after November 11, 2000.
Both Siemens and Dornier Medical Systems have had patents
approved for the use of shock wave therapy in orthopedics, as well as to treat
pain. It is possible that a court could determine that we have infringed upon
either patent, and this could lead to our having to cease use of the OssaTron
orthopedic lithotripter, which is our product that uses shock wave therapy to
treat orthopedic problems.
On January 24, 1996 HMT entered into an agreement with us
granting us exclusive distribution rights for the LithoTron lithotripter and
related parts and consumables for the United States, including Puerto Rico, the
U.S. Virgin Islands and Guam, Canada and Mexico. As part of this agreement, we
committed to purchase 12 LithoTron lithotripter units per year over the life of
the agreement after FDA pre-market approval, and HMT agreed to warrant the
LithoTron lithotripters for 12 months at no cost to us. This distributorship
agreement is for an indefinite period of time and may be terminated at any time
for cause, such as bankruptcy, default in payment, failure to perform or our
failure to meet our purchase commitment or, upon 12 months notice by either
party, after January 22, 2001. Both we and HMT have been and remain in full
compliance with this agreement.
On June 20, 1996 we received from HMT a right to manufacture
both the LithoTron lithotripter and the OssaTron orthopedic lithotripter,
including all drawings, technical descriptions, supplies and all other
information requested by us to enable us to manufacture both the LithoTron
lithotripter and the OssaTron orthopedic lithotripter. While this right does not
require us to make additional payments with respect to the LithoTron
lithotripter, manufacturing of the OssaTron orthopedic lithotripter require the
one-time payment of $1,000,000 and a licensing fee not to exceed 10% of our net
selling price for each company-manufactured unit sold. We have no present plans
to engage in manufacturing activities.
Both Siemens and Dornier Medical Systems have had patents
approved for the use of shock wave therapy in orthopedics, as well as to treat
pain. It is possible that a court could determine that we have infringed upon
either patent, and this could lead to our having to cease use of the OssaTron
orthopedic lithotripter, which is our product that uses shock wave therapy to
treat orthopedic problems.
We have pending trademark registrations for "Ossatripsy" and
"Osteotripsy". In addition, we have been awarded the trademark registration for
"Orthotripter", "OssaTron" orthopedic lithotripter, "Orthotripsy", "NewTrode"
and "LithoTron" lithotripter.
17
<PAGE> 23
MANAGEMENT
OFFICERS AND DIRECTORS
The name and positions of our executive officers and directors
as of the date of this prospectus are set forth below. The term of office of
each director is for a period of one year, or until the next annual
shareholders, meeting, whichever occurs first.
<TABLE>
<CAPTION>
Name Position Held
<S> <C>
Argil J. Wheelock, MD chairman and CEO, since July 1,
1996.
Director, since December 23,
1994.
Roy S. Brown president and COO, since May
31, 1996.
Director, since December 31,
1995.
Scott Cochran secretary/treasurer, since
December 23, 1994.
Director, since December 23,
1994.
John F. Warlick executive vice president, since
December 1, 1996.
Marie Marlow vice president of clinical and
regulatory affairs, since
September 1, 1996.
Joachim Voss director, since December 23,
1994.
Victoria Beck chief financial officer, since
August 1, 1997.
Jon Burke director, since February 1, 1998.
</TABLE>
BIOGRAPHICAL INFORMATION
ARGIL J. WHEELOCK, M.D., age 51 - Dr. Wheelock was a practicing, board-certified
urologist in Chattanooga, Tennessee from 1979 until 1996. Since July 1, 1996 he
has worked exclusively as chief executive officer of HealthTronics. From
November, 1994 until June 30, 1996, he worked for Phymatrix, a NASDAQ listed
company that specializes in physician practice management, in the Lithotripsy
Division. From July, 1991, until November, 1994, he was vice president in charge
of Lithotripsy Services at Coram Healthcare, a NYSE listed company engaged in
home health care. Dr. Wheelock is the president, a director and a shareholder of
NGST, a Tennessee corporation engaged in mobile Lithotripsy through
partnerships; a shareholder of Cobb Regional Lithotripter Services, Inc.; the
managing general partner of TennGa Stone Group Two; the Chief Manager of Tenn-Ga
Prostate; a minority partner in TennGa Stone Group Two; and the chairman and
president of Florida Lithology, Inc., a Florida corporation engaged in providing
Lithotripsy services through a limited partnership.
18
<PAGE> 24
ROY S. BROWN, age 51 - Mr. Brown was the president of Servicetrends, Inc., a
company that services equipment for us, until May 30, 1996. Prior to this he
served as: vice president of Sales and Marketing for Intra-Sonix of Burlington,
Massachusetts, a medical equipment manufacturing company, 1994 to 1995; as the
owner of Andex products, an international business consulting firm in
Lawrenceville, Georgia, 1992 through 1994; and as executive vice president of
Sales and Marketing for Dornier Medical Systems, a manufacturer of medical
equipment located in Munich, Germany, from 1984 to 1992. Mr. Brown holds the
equivalent of a B.A. in International Business from Industry and Trade School in
Hannover, Germany.
JOHN F. WARLICK, age 37 - Mr. Warlick, who holds a B.S. in Financial Management
from Clemson University, was the vice president of Sales for, the past president
of and a director of Servicetrends, Inc., from April, 1991 until September,
1996. Prior to this, he was the Sales operations manager of Dornier Medical
Systems, from 1985 until 1988, the vice president of Sales for Energy Four,
from 1989 until 1991, and the president of OssaTronics, our predecessor, from
its inception.
JOACHIM VOSS, age 60 - Mr. Voss, a resident of Germany, has an engineering
degree from the Engineering School of Bielefeld, Germany. With a background of
twenty-five years in marketing and engineering of high technology products for
aerospace and medical application, he worked from 1989 through 1996 as managing
director and as marketing director of HMT, the corporation that developed and
manufactures both the LithoTron lithotripter and the OssaTron orthopedic
lithotripter. Mr. Voss has now retired from his active role in HMT, but still
works as a consultant to HMT and its German affiliate company.
SCOTT COCHRAN, age 37 - Mr. Cochran is a partner with the law firm of Cochran,
Camp and Snipes in Smyrna, Georgia, and has held this position since 1988. He
received an A.A. degree from Young Harris College, a B.A. from Emory University
and a J.D. from Mercer Law School. Mr. Cochran's law firm also serves as outside
counsel to us.
MARIE MARLOW, age 45 - From May of 1995 until August, 1996, she served as a
Technical Advisor for Quintiles/BRI of Rockville, Maryland, a leading consultant
and evaluation entity to the medical industry with respect to FDA regulatory and
product study issues. Prior to this she served as: director of Regulatory and
Clinical Affairs for Cambridge Heart, Inc. of Bedford, Massachusetts, February
of 1994 to May, 1995; director of Regulatory Affairs for Bard Electrophysiology,
a division of C.R. Bard, Inc. of Billerica, Massachusetts, a NYSE traded company
primarily engaged in the field of medical equipment and related technology;
September, 1993 until February, 1994; and director of Clinical and Regulatory
Affairs for Intra-Sonix, Inc. of Burlington, Massachusetts, a Massachusetts
based start-up company which developed an integrated ultrasound and laser device
for medical purposes, June, 1989 to August, 1993. Ms. Marlow holds a diploma in
Nursing from the California Hospital School of Nursing - Now the USC School of
Nursing.
19
<PAGE> 25
VICTORIA BECK, age 43 - Ms. Beck graduated from Georgia State University in 1981
with a degree in accounting. From 1982 until mid 1987 she worked for the
international accounting firm of Price Waterhouse. From mid 1987 until mid 1994
she was the controller of Miller/Zell, a Georgia company engaged in the
manufacturing and design of visual merchandising systems. From mid 1994 until
July of 1997, Ms. Beck was an independent certified public accountant practicing
in, and certified in, the state of Georgia.
JON BURKE, age 52 - Mr. Burke has served as a director of HealthTronics since
February, 1998. He is presently the managing member of Capital Appreciation
Management Company, L.L.C., which is the managing general partner of an
Atlanta-based merchant banking fund specializing in acquiring controlling
interests in companies located in the southeastern United States. Mr. Burke is
also a principal with Brown Burke Capital Partners, Inc., which provides
financial advisory services to middle market companies in connection with
mergers and acquisitions and financing. Mr. Burke also serves as a director of
United Companies Financial Corporation, a financial services holding company
engaged in consumer lending. From 1973 to 1996, Mr. Burke was employed by the
Robinson-Humphrey Company, Inc., most recently serving as a senior vice
president and the head of its financial institutions/banking research.
20
<PAGE> 26
EXECUTIVE COMPENSATION
The following table sets forth the aggregate direct annual
remuneration paid to our executive officers and directors. We do not have any
long-term incentive plans or stock appreciation rights:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Awards
Securities
Name & Principal Other Annual Underlying
Position Year Salary ($) Bonus ($) Compensation Options
($) (#)
<S> <C> <C> <C> <C> <C>
Argil J. Wheelock, MD Fiscal Year $ 97,440 $ 6,062 $ 0 0
Chairman & CEO Ended
12/31/98
Roy S. Brown Fiscal Year 97,440 5,675 7,000 0
President & COO Ended
12/31/98
John F. Warlick Fiscal Year 97,440 6,081 3,500 0
Executive Vice Ended
President 12/31/98
Marie Marlow Fiscal Year 108,882 1,710 0 75,000
Vice President Ended
12/31/98
Scott Cochran Fiscal Year 0 0 0 0
Secretary Ended
12/31/98
Victoria Beck Fiscal Year 85,131 2,521 0 75,000
Chief Financial Officer Ended
12/31/98
Jon Burke Fiscal Year 0 0 0 0
Director Ended
12/31/98
</TABLE>
In addition to their annual remuneration, executive officers
of ours who are also employees may be entitled to participate in our 401(K)
plan. These amounts are shown in the "Bonus" Column above. Also shown in the
"Bonus" column are valuations for insurance paid by us for Messrs. Wheelock,
$1,776 and Brown, $1,389.
Mr. Cochran, as counsel to us, will also bill us for legal
services rendered to HealthTronics. Mr. Brown receives the use of a
Healthtronics automobile. We have valued this use at approximately $7,000 per
annum.
21
<PAGE> 27
Options that may be available to Ms. Beck premised upon her
continued service to us have not been included in this table. Mr. Warlick began
receiving a car allowance of $500 per month in 1998.
Option exercise
On December 23, 1996 the board of directors approved the
issuance of up to 350,000 shares of stock at prices and terms to be determined
at the discretion of the board. Subsequently, the board increased the authorized
options to 550,000 shares at an exercise price from $1.00 to $3.00 per Share.
While no formal written option plan exists, as of the date of this prospectus,
the board has issued options for an aggregate of 454,000 shares to 31 persons,
including promoters, officers, directors, employees and consultants to us.
Except as noted in the table below, all options expire on December 31, 2000 or
December 31, 2001. All but 108,000 of these options are currently exercisable.
On April 14, 1997 the board of directors granted stock
options, exercisable at $1.00 per share, to Messrs. Wheelock, 65,000 shares,
Brown, 9,000 shares, and Warlick, 9,000 shares, in exchange for personal payment
guarantees provided by these officers on our behalf. Our management has valued
these shares underlying the stock options at a price of $1.00 per share, being
the fair market value of the shares at issuance as determined by our management
in the absence of a readily trading market.
We have not issued any stock appreciation rights and do not
have a long-term incentive plan. The options held by our management as of the
date of this prospectus are exercisable as shown by the following table:
22
<PAGE> 28
OPTION GRANT TABLE
<TABLE>
<CAPTION>
Name and Title Number of Percent of Total
Securities Options Granted to
Underlying Options Employees and
Granted (#) Others Exercise Price ($) Expiration Date
<S> <C> <C> <C> <C>
Argil Wheelock, 90,000 19.82% $1.00 12/31/2000
MD (Chairman and
CEO)
Roy S. Brown 29,000 6.39% $1.00 12/31/2000
(President, COO and
Director)
John F. Warlick 19,000 4.18% $1.00 12/31/2000
(Executive Vice
President)
Marie Marlow (Vice 10,000 2.20% $1.00 12/31/2000
President of Clinical 5,000 1.10% $3.00 12/31/2001
and Regulatory 50,000 11.01% $3.00 12/31/2002
Affairs) 25,000 5.51% $3.00 12/31/2003
Victoria Beck (CFO) 15,000 3.30% $1.00 12/31/2000
10,000 2.20% $1.00 12/31/2001
5,000 1.10% $3.00 12/31/2001
Jon Burke (Director) 50,000 11.01% $1.00 12/31/2000
</TABLE>
On March 25, 1998 we entered into an incentive option
agreement with Marie Marlow, our vice president of regulatory and clinical
affairs. As an incentive to Ms. Marlow, she received additional options to
purchase 75,000 shares at $3.00 per share. The full 75,000 shares will vest on
December 31, 2002. However, if we receive FDA approval of the OssaTron
orthopedic lithotripter prior to December 31, 2002, we will accelerate the
vesting of these options as follows:
- if approval by December 31, 1999, then we will
accelerate options on 60,000 shares
- if approval between January 1 and March 31, 2000,
then we will accelerate options on 45,000 shares
- if approval between April 1 and June 30, 2000, then
we will accelerate options on 30,000 shares
- if approval between July 1 and September 30, 2000,
then we will accelerate options on 15,000 shares
In the event that any options vest early, any remaining
options will vest on December 31, 2002.
Under Victoria Beck's employment agreement, Ms. Beck was
provided with options to purchase up to 25,000 shares at $1.00 per share,
contingent upon Ms. Beck's continued
23
<PAGE> 29
employment with us at the time the options become vested. This vesting schedule
is as follows: 10,000 shares on July 11, 1997; 5,000 shares on July 31, 1998;
5,000 shares on July 31, 1999 and 5,000 shares on July 31, 2000.
The following chart details the exercise of any outstanding options and the
number and value of unexercised stock options.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Option/SARs
Shares at FY-End at FY-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Argil J. Wheelock, MD.
chairman & CEO 0 0 90,000/0 $450,000/$0
Roy S. Brown,
president & COO 0 0 29,000/0 $145,000/$0
John F. Warlick,
executive vice president 0 0 19,000/0 $95,000/$0
Marie Marlow,
vice president 0 0 15,000/75,000 $65,000/$225,000
Scott Cochran,
secretary 0 0 0/0 $0/$0
Victoria Beck,
chief financial officer 0 0 15,000/15,000 $75,000/$65,000
John Burke,
director 0 0 50,000/0 $250,000/$0
</TABLE>
Employment agreements
On July 11, 1997, HealthTronics entered into an employment
agreement with Ms. Victoria Beck to be HealthTronics Chief Financial Officer at
an annual salary of $85,000. The agreement also provided Ms. Beck with 25,000
options at $1.00 per share awarded according to a schedule of continued
employment to July 31, 2000.
On September 1, 1996, HealthTronics entered into an employment
agreement with Ms. Marie Marlow to be HealthTronics Vice President of Clinical
and Regulatory Affairs at an annual salary of $108,000. The agreement also
provided Ms. Marlow with a $25,000 signing bonus.
Retirement plan
On January 1, 1996 we adopted a 401(K) retirement plan. The
plan provides that eligible employees may authorize us to withhold from 1% up to
12% of compensation including up to 100% of cash bonuses paid by us, as defined
in the plan. However, the total amount withheld by us on behalf of each employee
may not exceed $10,000 for any taxable year. The plan provides that we may make
a matching contribution not to exceed 6% of the employee's compensation for
employees that have been employed for at least six months with us. We
contributed $28,111 to the plan in 1998 and $10,300 in 1997.
Compensation of directors
Directors do not currently receive any compensation.
Key Personnel
Our success in the next few years is materially dependent upon the
abilities of our executive officers. We could lose any of our executive
officers, and our business might be hurt as a result. We currently have key
person insurance in the total amount of $1,000,000 on both Agril Wheelock, MD,
our chairman and CEO, and Marie Marlow, vice president of clinical and
regulatory affairs, but not on any of our other officers or employees. While we
believe this amount of insurance to be helpful, the loss of the services of any
one or more of our key employees could still adversely affect us. In addition,
Victoria Beck, our chief financial officer, and Marie Marlow are the only
officers who have entered into employment agreements with us and a state court
could determine not to enforce, or only to partially enforce, the terms of any
employment agreement.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of
HealthTronics' stock, as of March 31, 1999 and as adjusted to reflect the sale
of the shares in this offering, of each person known by us to beneficially own
more than five percent of HealthTronics' outstanding stock, each current
director, each executive officer and all directors and executive officers of
HealthTronics as a group. "Beneficial ownership" is defined by the regulations
issued by the SEC as having or sharing, directly or indirectly, voting power,
which includes the power to vote or to direct the voting, and/or investment
power, which includes the power to dispose of or to direct the disposition of
the shares of the stock indicated. Shares of common stock under options that are
currently exercisable or exercisable within 60 days of March 31, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
or entity holding the options, but are not treated as outstanding for the
purpose of computing the percentage ownership of any
24
<PAGE> 30
other person or entity. Applicable percentage ownership in the table is based on
9,665,342 shares outstanding as of March 31, 1999 and 10,665,342 shares
outstanding immediately following completion of this offering.
Each person is the record owner of the shares indicated and
possesses the sole voting and investment power with respect to shares unless
otherwise indicated.
[SEE TABLE ON FOLLOWING PAGE]
25
<PAGE> 31
<TABLE>
<CAPTION>
Percentage of class
Name of Owner and Current Address Amount of Beneficial Ownership Current As Adjusted
<S> <C> <C> <C>
Argil Wheelock, MD 1,508,800 shares 15.47% 14.03%
425 Franklin Road, Suite 545
Marietta, GA 30067
John F. Warlick 1,348,800 shares 13.93% 12.62%
425 Franklin Road, Suite 545
Marietta, GA 30067
Ty Warlick 1,348,800 shares 13.93% 12.62%
425 Franklin Road, Suite 545
Marietta, GA 30067
Roy S. Brown 1,002,200 shares 10.34% 9.37%
425 Franklin Road, Suite 545
Marietta, GA 30067
Werner Schwarze 500,000 shares 5.17% 4.69%
High Medical Tech., Bachstrasse 8
CH-8280 Kreuzlingen
Switzerland
Walter Uelbelacker 500,000 shares 5.17% 4.69%
High Medical Tech., Bachstrasse 8
CH-8280 Kreuzlingen
Switzerland
Joachim Voss 500,000 shares 5.17% 4.69%
Garlstorfer Str. 5, Egestorf, D-21272
Germany
Karl Heinz Restle 500,100 shares 5.17% 4.69%
High Medical Tech., Bachstrasse 8
CH-8280 Kreuzlingen
Switzerland
Jon Burke 75,000 shares 0.77% 0.70%
425 Franklin Road, Suite 545
Marietta, GA 30067
Scott Cochran 166,000 shares 1.72% 1.56%
425 Franklin Road, Suite 545
Marietta, GA 30067
Victoria Beck 15,000 shares 0.15% 0.14%
425 Franklin Road, Suite 545
Marietta, GA 30067
Marie Marlow 38,000 shares 0.39% 0.36%
613 7th Street, NE
Washington, DC 20002
HMT Group 2,000,100 shares 20.70% 18.75%
Bachstrasse 8, CH-8280 Kreuzlingen
Switzerland
House Group 1,140,400 shares 11.80% 10.69%
800N. Arbrook Blvd.
Suite 320
Arlington, TX 76015
All officers and directors as a group- 4,653,800 shares 47.09% 42.76%
8 persons
</TABLE>
26
<PAGE> 32
Dr. Wheelock's beneficial ownership includes presently
exercisable options to purchase up to 90,000 shares of our stock at a purchase
price of $1.00 per share.
Mr. Warlick's beneficial ownership includes presently
exercisable options to purchase up to 19,000 shares of our stock at a purchase
price of $1.00 per share. 1,328,800 of the shares shown in the table are owned
of record by Ty Warlick, Mr. Warlick's wife. Mr. Warlick disclaims beneficial
ownership of any of the shares owned by Ty Warlick.
Ms. Warlick's beneficial ownership includes presently
exercisable options to purchase up to 19,000 shares our stock at a purchase
price of $1.00 per share held by her spouse, Mr. Warlick. 1,000 of the shares
shown in the table are also owned of record by Ms. Warlick's spouse. Ms. Warlick
disclaims beneficial ownership of any of the shares owned by Mr. Warlick.
Mr. Brown's beneficial ownership includes presently
exercisable options to purchase up to 29,000 shares of our stock at a purchase
price of $1.00 per share.
Mr. Burke's beneficial ownership includes presently
exercisable options to purchase up to 50,000 shares of our stock at a purchase
price of $1.00 per share.
Ms. Beck's beneficial ownership includes options to purchase
up to 15,000 shares of our stock at a purchase price of $1.00 per share, all of
which are exercisable within 60 days of March 31, 1999.
Ms. Marlow's beneficial ownership includes options to purchase
up to 10,000 shares of our stock at a purchase price of $1.00 per share and
5,000 shares at a purchase price of $3.00 per share, all of which are
exercisable within 60 days of March 31, 1999.
The HMT Group consists of a group of shareholders who are
party to a stock voting agreement. The agreement was entered into on March 15,
1999, amended and restated as of April 26, 1999 and has no termination date. The
agreement provides that each member shall vote his shares as a block with the
other members, as determined by vote of a majority of the members. The following
are the members of the HMT Group: Karl Heinz Restle, Werner Schwarze, Walter
Uelbelacker and Joachim Voss and each can be contacted at the address listed in
the table.
The House Group consists of a group of shareholders who are
party to a stock voting agreement. The agreement was entered into on September
30, 1998 and terminates on September 30, 2003. The agreement appoints John
House, M.D. as voting trustee and gives him the exclusive right to vote any and
all shares received or to be received by the members. No other voting rights or
powers are given.
27
<PAGE> 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following persons may be deemed promoters of
HealthTronics: Joachim Voss, Werner Schwarze, Walter Uelbelacker, John Warlick,
Karl Heinz Restle, Argil Wheelock, Scott Cochran and Roy Brown. Each of the
promoters either has received, or is receiving, a salary from HealthTronics
except Karl Heinz Restle, Joachim Voss, Werner Schwarze, Walter Uelbelacker and
Scott Cochran. Each of the promoters has received, or beneficially owns, the
following amounts of shares, including currently exercisable options to purchase
shares, of HealthTronics and has delivered to HealthTronics the indicated
consideration:
<TABLE>
<CAPTION>
Promoter Shares Consideration
-------- ------ -------------
<S> <C> <C>
John Warlick 1,348,800 $155,000 and services
Karl Heinz Restle 500,100 $ 24,280 and services
Joachim Voss 500,000 $ 23,980 and services
Argil Wheelock 1,508,800 $181,480 and services
Scott Cochran 166,000 $10,000 and services
Roy Brown 1,002,200 $37,000 and services
Werner Schwarze 500,000 $23,980
Walter Uelbelacker 500,000 $23,980
</TABLE>
Karl Heinz Restle, a major shareholder of HealthTronics, is
the president of HMT. HMT owns the United States and Canadian patents that have
been licensed to us. HMT is also the supplier of LithoTron lithotripters and
OssaTron orthopedic lithotripters to us. Joachim Voss, a director of ours, works
as a consultant to HMT. During the year ended December 31, 1997 we paid
$2,993,226 to HMT and during the year ended December 31, 1998 this amount was
$6,069,877.
John Warlick, executive vice president and a major shareholder
of HealthTronics, is a former director and the former president of
Servicetrends, Inc., a Georgia corporation that has contracted with us to
provide installation and maintenance service for the LithoTron lithotripter and
OssaTron orthopedic lithotripter. All of our installation and maintenance is
currently performed by Servicetrends. In addition, Roy S. Brown, our president,
is also a past-president of Servicetrends. Several officers and employees of
Servicetrends are shareholders of ours. During the year ended December 31, 1997
we paid $136,242 to Servicetrends and during the year ended December 31, 1998
this amount was $542,344.
On April 19, 1996 John F. Warlick agreed to transfer 499,800
shares to Dr. Wheelock. This transfer primarily formalized a previous verbal
agreement between Dr. Wheelock and HealthTronics to increase the ownership level
of Dr. Wheelock to be consistent with his holdings in HealthTronics of
HealthTronics. In addition, Dr. Wheelock agreed to the following:
28
<PAGE> 34
o The purchase by an investor group of an OssaTron
orthopedic lithotripter at a price of not less than $250,000 and the entering
into of an investigatory device exemption agreement within 90 days.
o The raising of a minimum of $300,000 by purchasing
or causing outside investors to purchase 3% of the then outstanding shares at a
price of $300,000.
o A commitment to an ongoing participation in our
business.
As of the date of this prospectus, all of these conditions
have been performed by Dr. Wheelock and he continues in an ongoing participation
in our business. However, Dr. Wheelock is not contractually obligated to us
under these agreements.
In addition, on April 19, 1996 Mr. Warlick received 100,000
shares in exchange for the cancellation of an initial loan of $100,000 to us.
On April 1, 1997 Dr. Wheelock loaned $650,000 to Tenn-Ga
Prostate in order to allow Tenn-Ga Prostate to purchase a Prostatron, a medical
device that uses microwave energy to treat prostate enlargement, and a vehicle
to transport the Prostatron. This loan was subsequently repaid to Dr. Wheelock.
Dr. Wheelock is a general partner of TennGa Stone Group Two
and a shareholder of Cobb Regional Lithotripter Services, Inc., a corporation
providing mobile lithotripsy services in Cobb County, Georgia. Dr. Wheelock is
also the chairman and president of Florida Lithology, Inc., a Florida
corporation that is a general partner in a limited partnership offering
lithotripsy services in Florida.
Atlanta Medical Center, formerly Georgia Baptist Hospital, is
currently testing the OssaTron orthopedic lithotripter. One of our shareholders
is a director of that hospital.
US Lithotripsy is a Texas limited partnership that has entered
into a distributor agreement with us. We exchanged 200,000 shares of our stock,
issued to 4 owners of US Lithotripsy, in exchange for a 40% interest in US
Lithotripsy. This 40% interest consisted of a .4% general partnership interest
and a 39.6% limited partnership interest. This exchange was effected by a
private placement memorandum dated June 1, 1997.
On May 1, 1998, we acquired 100% of the outstanding shares of
Litho Management, Inc., the other corporate general partner of US Lithotripsy
for 700,000 of our shares and thus became the sole general partner of US
Lithotripsy. In addition to distributing our products, US Lithotripsy has, along
with Litho Management, Inc., organized, and US Lithotripsy shall continue to
organize, limited partnerships with practicing urologists as limited partners
for the ownership and operation of LithoTron lithotripters. As of the date of
this prospectus, US Lithotripsy has formed eighteen limited partnerships with
various urologists in exchange for
29
<PAGE> 35
limited partnership and/or general partnership interests and a 7.5% management
fee. It should be noted that proposed FDA regulations could inhibit physician
ownership of these limited partnerships. Several shareholders of HealthTronics
are limited partners in US Lithotripsy and the limited partnerships of which US
Lithotripsy is the general partner.
On September 9, 1998 we exchanged 300,000 of our shares with
three shareholders of HealthTronics, Messrs. H. Patrick Hezmall, David Ellis and
Wade Lowery, who were also the sole shareholders of HLE Corp., a Texas
corporation, for all of the issued and outstanding shares of HLE Corp. The
assets of HLE Corp. consist of a 30% limited partnership interest in Metro I
Stone Management, Ltd., a Texas limited partnership.
We, as well as some executive officers of HealthTronics,
Messrs. Wheelock, Brown and Warlick, have guaranteed approximately $2, 231,215
in debt owed by the limited partnerships in which US Lithotripsy is the general
partner and a $650,000 line of credit to us extended by First Tennessee Bank
National Association. Of this amount, Messrs. Wheelock, Brown and Warlick may be
personally liable on our line of credit from First Tennessee Bank National
Association for up to $108,333 each, plus interest and some expenses. Messrs.
Wheelock, Brown and Warlick received options of HealthTronics in exchange for
their personal guarantees.
We paid consulting fees totaling $144,000 and $21,800 during
1998 and 1997, respectively, to individuals in the medical field that are
shareholders of our Company.
We believe that all of our transactions with related parties
were conducted on terms no less favorable to us than terms that were available
from unaffiliated third parties.
Any future dealings between HealthTronics and related parties
will be on terms that are no less favorable to us than those that could be
obtained from unaffiliated third parties. All future transactions with related
parties must be approved in advance by a majority of the independent,
disinterested members of our board of directors.
DILUTION
"Dilution" means the difference between the public offering
price and the pro forma net tangible book value per share after giving effect to
this offering. Net tangible book value per share is determined by dividing our
tangible net worth, consisting of tangible assets less total liabilities, by the
number of shares outstanding. The following table illustrates the dilution of a
new investor's equity as of December 3, 1998.
As of December 31, 1998, we had issued 9,665,342 shares to our
current officers, directors and shareholders in exchange for: $4,203,226 in
cash, an average of approximately $0.43 per share; the officers and directors
efforts in organizing our Company; the exchange of a 40% ownership interest in
US Lithotripsy; a 100% ownership interest in Litho Management, Inc.; and a 100%
ownership interest in HLE Corp.
The net tangible book value of HealthTronics as of December
31, 1998 was $4,437,753 or approximately $.46 per share. If the minimum offering
is sold, our pro forma net
30
<PAGE> 36
tangible book value, after deducting offering expenses estimated at $360,000,
would be approximately $4,577,757, or approximately $.47 per share, which
represents an increase of approximately $.01 in the net tangible book value per
share to present shareholders and an immediate dilution of $5.53 to public
investors. If the maximum offering is sold, pro forma net tangible book value
would be approximately $9,417,753 after deducting estimated offering expenses of
$1,020,000, or approximately $.88 per share which represents an increase of .42
in net tangible book value per share to present shareholders and an immediate
dilution of 5.12 to public investors.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Minimum Maximum
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price per share $6.00 $6.00
- ---------------------------------------------------------------------------------------------------
Net tangible book value per share before offering $0.46 $0.46
- ---------------------------------------------------------------------------------------------------
Increase per share attributable to public investors $0.01 $0.42
- ---------------------------------------------------------------------------------------------------
Pro forma net tangible book value per share after offering $0.47 $0.88
- ---------------------------------------------------------------------------------------------------
Dilution per share to public investors $5.53 $5.12
- ---------------------------------------------------------------------------------------------------
</TABLE>
These numbers do not assume the exercise of any of our
outstanding stock options. If the 454,000 outstanding options were exercised,
dilution would be substantially increased.
CAPITALIZATION
The following table illustrates the capitalization of
HealthTronics as of the date of this prospectus and as adjusted to reflect the
sale of all the securities offered:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Title of class Amount authorized Amount outstanding as the Amount to be outstanding
date of this prospectus if this entire offering is
sold
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock no par value 30,000,000 9,665,342 10,665,342
- --------------------------------------------------------------------------------------------------------------------------
Stock options to purchase
stock 550,000 454,000 454,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts outstanding and options authorized and outstanding do
not reflect warrants that may be granted to the sales agent to purchase up to
100,000 shares.
DESCRIPTION OF COMMON STOCK
GENERAL
We are currently authorized to issue 30,000,000 shares of no
par value common stock. We currently have 9,665,342 shares of our stock issued
and outstanding, held by approximately 135 persons, as well as options
exercisable on or before December 31, 2000,
31
<PAGE> 37
December 31, 2001, December 31, 2002 or December 31, 2003 for an aggregate of
454,000 shares at prices ranging from $1.00 to $3.00 per share. We have not
issued any other class of securities. All shares of stock to be issued in this
offering will be fully paid and non-assessable.
Our stock does not have cumulative voting power and each share
is entitled to one vote, either in person or by proxy.
There are no current provisions in our charter or by-laws that
would delay, defer or prevent a change in control of HealthTronics. Our
officers and directors, as a group, are the beneficial owners of approximately
47.09% of the outstanding shares. Even if this entire offering is sold, that
percentage will only decrease to 42.76%. Accordingly, if you invest in this
offering you will not have the ability to control HealthTronics.
Holders of stock are entitled on liquidation to share pro rata
in assets available for distribution to shareholders after payment of corporate
debt.
SunTrust will act as the transfer agent for our stock.
MARKET
There is currently no market for our shares and there may
never be a market for our shares, even if this entire offering is sold.
Therefore, an investor may be unable to sell the HealthTronics shares purchase
in this offering. If a market does develop, the sale of currently outstanding
shares and the sale of shares from exercised options for shares could have a
negative impact on the market or the market price.
If our common stock comes within the penny stock rules, you
may find it more difficult to sell your shares. Penny stocks are generally
equity securities with a price of less than $5.00 per share, with exceptions not
relevant to our offering. A per share price of $5.00 is only $1.00 per share
below our public offering price, and less than $1.00 below the anticipated
tangible book value per share after this offering.
Transactions in penny stocks require broker-dealers to comply
with rules concerning disclosure of risk and the compensation of the
broker-dealers and their salesmen and to determine that the transactions are
suitable investments for the purchasers. These requirements may have the effect
of reducing the level of trading activity in the secondary market for
HealthTronics' stock.
DIVIDENDS
We have not paid any dividends on our stock. We do not plan to
declare any dividends in the near future, but plan instead to allocate future
earnings, if any, to the continued operations and expansion of our business.
However, in the event that we should, in the future, adopt a policy of paying
dividends, declaration and payment will be dependent on future earnings, if any,
as well as our financial condition and other relevant factors.
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<PAGE> 38
OPTIONS
We have granted options to promoters, officers, directors,
employees and consultants to purchase up to 454,000 shares. In addition to the
outstanding options, the board of directors may issue additional options to
purchase up to 96,000 shares to employees. The sales agent may also receive
warrants to purchase up to 100,000 shares at $9.90 per share at the rate of one
warrant for every ten shares sold in this offering. None of the holders of our
options to purchase up to 454,000 shares have entered into any agreement to
limit or restrict the exercise of these options. We shall not issue options or
warrants in excess of 10% of the shares of common stock then outstanding and
these options or warrants will not have an exercise price of less than 85% of
the fair market value of the underlying common stock on the date of grant.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our articles of incorporation provide that no director shall
have any personal liability to us or our shareholders for monetary damages for
breach of duty of care or the other duties of a director except for any
appropriation of any business opportunity, for acts or omissions that involve
intentional misconduct or a knowing violation of law, or for any transaction
from which the director derived an improper personal benefit. Because of these
provisions, we and our shareholders may have a more limited right of action
against a director than we would have absent these provisions. In the event that
a claim for indemnification, other than the payment by us of expenses incurred
or paid by a director, officer or controlling person of ours in the successful
defense of any action, suit or proceeding, is asserted by an officer, director
or controlling person in connection with these securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of the issue.
Our articles of incorporation and bylaws are attached as exhibits to this
registration statement and may be obtained electronically or on paper upon
request.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING
PERSONS OF OURS PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, WE HAVE BEEN
ADVISED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT OF
1933 AND IS, THEREFORE, UNENFORCEABLE.
USE OF PROCEEDS
The following table illustrates the use of the proceeds of
this offering in the event the minimum, 83,334 shares, or maximum, 1,000,000
shares, offerings are sold. If more than the minimum but less than the maximum
offering are sold, the proceeds will be used in approximately the following
order of priority.
33
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Description of Proposed Use Minimum Maximum
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Offering Expenses $300,000 $ 300,000
- --------------------------------------------------------------------------------------------------
Commissions $ 50,000 $ 600,000
- --------------------------------------------------------------------------------------------------
Sales agent Expense Allowance $ 10,000 $ 120,000
- --------------------------------------------------------------------------------------------------
FDA Study Expenses $140,004 $ 503,000
- --------------------------------------------------------------------------------------------------
Purchase of Capital Equipment for Lease $ 0 $2,000,000
- --------------------------------------------------------------------------------------------------
Purchase of Inventory $ 0 $2,000,000
- --------------------------------------------------------------------------------------------------
Working Capital $ 0 $ 477,000
- --------------------------------------------------------------------------------------------------
TOTAL APPLICATION OF PROCEEDS $500,004 $6,000,000
- --------------------------------------------------------------------------------------------------
</TABLE>
PLAN OF DISTRIBUTION
Through a placement agent agreement we have engaged Capital
Growth Management, Inc. as our agent to sell up to 1,000,000 shares to the
public on a "best efforts" basis. This means that Capital Growth is only
obligated to use good faith efforts to sell the shares offered. Capital Growth
is not obligated to sell all or any portion of the offerings. There can be no
assurance that any of these shares will be sold.
If Capital Growth fails to sell at least 83,334 of the offered
shares within the minimum offering period of 90 days from the date of this
prospectus, the offering will be terminated and the subscription payments will
be promptly refunded in full to subscribers, without paying interest or
deducting expenses.
If the minimum number of shares is sold, the offering will
continue until nine months from the date of this prospectus or until all offered
shares are sold, whichever event first occurs. In no event will this offering
continue beyond nine months from the date of this prospectus.
We have paid Capital Growth the sum of $25,000 as an advance
against an accountable expense allowance of 1% of the aggregate amount of
securities sold by Capital Growth and other brokers who contract with Capital
Growth to sell this offering. This amount was paid upon the signing of the
placement agent agreement. In addition, we shall pay Capital Growth a selling
commission of eight percent of the gross funds raised by Capital Growth and its
selected dealers. Capital Growth may reallot any or all of the commission to its
selected dealers. Capital Growth is also entitled to receive a non-accountable
expense allowance of up to one percent of the gross funds raised by Capital
Growth and its selected dealers. Accountable expenses include reasonable
offering expenses for this offering such as telephone expenses, postage, travel
expenses, copying and printing charges, legal and accounting costs. In no event
will the accountable expense allowance exceed 1% of the gross funds raised by
Capital Growth. In the event this offering is terminated prior to the sale of
the minimum offering, Capital Growth shall be reimbursed only for its actual
accountable out-of-pocket expenses. Any portion of the advance on the
accountable expense allowance not accounted for will be promptly refunded to us.
We have also granted Capital Growth warrants to purchase our
shares of HealthTronics at a rate of one warrant, exercisable for one share of
stock, for each ten shares sold in
34
<PAGE> 40
this offering. The exercise price of the warrants is equal to 165% of the public
offering price of this offering, $9.90 per share. The warrants are not
exercisable for a period of one year from the effective date of this offering.
After that, however, they are and thereafter become exercisable for a period of
four years. During the first year after the effective date of this offering, the
warrants may only be transferred by Capital Growth to its officers or to
officers or partners of its selected dealers.
We and Capital Growth have also agreed to indemnify each other
against various liabilities, including those arising under the Securities Act.
In the opinion of the Securities and Exchange Commission, this indemnification
is against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable. If a claim for indemnification against these
liabilities, other than the payment by us of expenses incurred or paid by
Capital Growth in the successful defense of any action, suit or proceeding is
asserted by Capital Growth in connection with these securities being registered,
we will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of the issue.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our
consolidated financial statements at December 31, 1998 and 1997 and for the
years then ended as set forth in their report. They have also audited the
consolidated financial statements of Litho Management, Inc. and subsidiaries as
of and for the year ended December 31, 1997 as set forth in their report. Our
consolidated financial statements and the financial statements of Litho
Management, Inc. and subsidiaries, are included in this prospectus and
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
LEGAL MATTERS
Christopher J. Moran, Jr. of Atlanta, Georgia has rendered an
opinion on the legality of our no par value shares. Miller & Martin LLP acts as
our special securities counsel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
We are a provider and distributor of extracorporeal shock wave
devices and participate in limited partnerships that market the services of
these products on a per procedure basis. To date, our consolidated revenues have
come primarily from sales of the LithoTron lithotripter.
35
<PAGE> 41
IMPACT OF YEAR 2000
COMPLIANCE
Many currently installed computer systems and software
products are coded to accept or recognize only two digit entries in the date
code field. These systems and software products will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with year 2000 requirements or risk
system failure or miscalculations causing disruptions of normal business
activities. In addition, year 2000 problems that occur with third parties with
which a company does business, such as suppliers, computer vendors, distributors
and others, may also adversely affect any given company.
STATE OF READINESS
We are in the process of evaluating the potential impact of
the year 2000 issue. We are taking steps to ensure that our business systems
software and equipment will continue to function properly after December 31,
1999. In doing so, we have formed a committee, chaired by our executive vice
president, which will work directly with management to:
o assess and test all internal information systems and
other systems that may be affected by the year 2000
date change;
o assess and test our products that may be affected by
the year 2000 date change;
o communicate with third parties that supply our
products to ensure they are addressing the year 2000
issue; and
o compose a contingency and disaster recovery plan to
ensure resolution of problems that may arise as a
result of the year 2000 date change.
We expect to complete this assessment by September 30, 1999.
Until then, we will not be able to determine the ultimate costs of becoming
year 2000 compliant, the risks of non-compliance and our ability to conduct
our business under a contingency plan.
HMT, our sole inventory supplier, has provided documentation
certifying that the software for the LithoTron and OssaTron systems contain no
date-dependent functions. Therefore, our products themselves do not appear to
present any year 2000 issues. With respect to our information regarding
technology business systems, the assessment of equipment and software was
started in September 1998. Many vendors of material hardware and software
components of our systems have indicated that the products used by us are
currently year 2000 compliant.
We will commence testing shortly to determine that our
internal systems are year 2000 compliant. We expect to complete testing and
establish compliance with respect to all of our
36
<PAGE> 42
systems and products by September 30, 1999, although there may be possible
equipment upgrades during 1999 and ongoing communications with third parties. We
believe that this time frame will allow internal auditing and testing of our
systems, as well as further remediation, if necessary.
COSTS
To date, we have not incurred any material expenditures in
connection with identifying, evaluating or addressing year 2000 compliance
issues. Most of our past and anticipated expenses relate to the operating costs
associated with time spent by employees in the evaluation process and year 2000
compliance matters generally. At this time, we do not possess the information
necessary to estimate the potential costs of revisions to our systems should
revisions be required or of the replacement of third-party software, hardware or
services that are determined not to be year 2000 compliant. Although we do not
anticipate that the expenses will be material, the expenses, if higher than
anticipated, could adversely affect our financial performance.
RISKS
We are not currently aware of any year 2000 compliance
problems relating to our products and systems that would have a material adverse
effect on our business, results of operations and financial condition, taking
into account our efforts to avoid or fix the problems. There can be no assurance
that we will not discover year 2000 compliance problems in our systems that will
require substantial revision. Our specific year 2000 risks are the inability of
HMT to supply inventory and the failure of our service provider to perform
necessary services. These specific risks could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition. Regardless of the year
2000 compliance of our internal systems and products, we may be adversely
affected by disruptions in the operations of the enterprises with which we
interact. These business enterprises include suppliers, both domestic and
international, clinical research organizations, joint venture partners,
governmental agencies, hospitals, physicians and other third parties. We cannot
reasonably predict the impact on our operations and financial condition if any
businesses are adversely affected by the year 2000 issues.
Statements made above about the implementation of various
phases of our year 2000 program, the costs expected to be associated with that
program and the results we expect to achieve constitute forward-looking
information. There are many uncertainties involved in the year 2000 issue and
the following important factors, among others, could affect the impact of the
year 2000 issue:
o the inherent uncertainty of the costs and timing of
achieving compliance on the systems used by us;
o the reliance on the efforts of vendors, customers,
government agencies and other third parties beyond
our control to achieve adequate compliance and avoid
disruption of our business in early 2000; and
37
<PAGE> 43
o the uncertainty of the ultimate costs and
consequences of any unanticipated disruption of our
business resulting from the failure of one of our
applications or of a third party's systems.
CONTINGENCY PLAN
As discussed above, we are engaged in an ongoing year 2000
assessment and have not yet developed any contingency plans. The results of
internal testing and the responses received from third-party vendors and service
providers will be taken into account in determining the nature and extent of our
contingency plans, if any.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since our inception in December 1995, we have devoted our
principal efforts toward obtaining FDA approval for medical devices,
specifically the LithoTron lithotripter, a kidney lithotripter, and the OssaTron
orthopedic lithotripter, an orthopedic lithotripter. On receipt of the July 21,
1997 FDA pre-market approval, we began marketing the LithoTron lithotripter and
refocusing our regulatory efforts on the pursuit of the FDA pre-market approval
for the OssaTron orthopedic lithotripter.
Effective April 1, 1997 we became a co-general partner with
Litho Management, Inc., as well as a 39.6% limited partner, in US Lithotripsy, a
limited partnership formed for the purpose of developing and managing mobile
lithotripsy partnerships in the Southwest. From inception through the date of
this prospectus, US Lithotripsy has formed eighteen lithotripter partnerships in
which USL is the sole general partner and/or a limited partner.
We were unprofitable from inception through December 31, 1997
as a result of our investment in the FDA process. After obtaining the LithoTron
lithotripter pre-market approval in July, 1997, we experienced a significant
increase in the number of devices sold. However, in accordance with generally
accepted accounting principles, we deferred sales made to partnerships where we
have a general partnership interest and have co-signed on the related debt. On
this basis, we deferred profits of $509,000 and $465,000 for the year ended
December 31, 1997 and for the year ended December 31, 1998, respectively, to
future periods and incurred a net loss of $418,028 for the year ended December
31, 1997.
On May 1, 1998 we acquired 100% of the outstanding common
stock of Litho Management, Inc., our co-general partner in US Lithotripsy. We,
as sole general partner, consolidate the Litho Management, Inc. partnership
interests in our financial statements as of the acquisition date. On a
consolidated basis, the deferred profits discussed previously have been
eliminated against the related partnership assets.
HealthTronics had net income of $1,205,048 for the year ended
December 31, 1998.
38
<PAGE> 44
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Net Revenue: Net revenue increased from $5,062,104 for the
year ended December 31, 1997 to $14,681,941 for the year ended December 31,
1998, an increase of 190%. This is attributable to (1) additional sales as a
result of the FDA pre-market approval for the LithoTron lithotripter, received
on July 21, 1997; (2) the 1998 acquisition of the remaining general partnership
interest in US Lithotripsy and the required consolidation of the related
partnerships' operations; and (3) our expansion into medical device leasing.
Cost of Goods Sold, Rentals and Services Provided: Cost of
goods sold, rentals and services provided increased from $3,263,233 for the year
ended December 31, 1997 to $6,863,506 for the year ended December 31, 1998, an
increase of 110%. This increase is directly attributable to (1) additional sales
as a result of the FDA pre-market approval for the LithoTron lithotripter,
received on July 21, 1997; (2) the 1998 acquisition of the remaining general
partnership interest in US Lithotripsy and the required consolidation of the
related partnerships' operations; and (3) our expansion into medical device
leasing.
Salaries, Wages and Benefits: Salaries, wages and benefits
increased from $723,748 for the year ended December 31, 1997 to $1,495,364 for
the year ended December 31, 1998, an increase of 107%. This increase is
primarily attributable to the 1998 acquisition of the remaining general
partnership interest in US Lithotripsy and the required consolidation of the
related partnerships' operations as well as our expansion into medical leasing.
General and Administrative Expenses: General and
administrative expenses increased from $1,463,683 for the year ended December
31, 1997 to $2,480,012 for the year ended December 31, 1998, an increase of 69%.
This increase is primarily due to the increase in LithoTron lithotripter
marketing and expenses related to the OssaTron orthopedic lithotripter
investigatory device exemption studies in progress throughout 1998.
Equity in Earnings of Unconsolidated Partnerships: Equity in
earnings of unconsolidated partnerships increased from $4,669 for the year ended
December 31, 1997 to $102,655 for the year ended December 31, 1998. This
increase is attributable to our investment in two additional partnerships
accounted for on the equity basis.
Interest Expense: Interest expense increased from $59,517 for
the year ended December 31, 1997 to $169,247 for the year ended December 31,
1998, an increase of 184%. This increase is primarily attributable to the
increase in debt resulting from the consolidation of the subsidiary
partnerships.
Interest Income: Interest income increased from $21,083 for
the year ended December 31, 1997 to 24,517 for the year ended December 31, 1998,
an increase of 16%. This increase is due primarily to the earnings on funds
obtained during the July 31, 1997 private placement, which closed during the
first quarter of 1998.
39
<PAGE> 45
Minority Interest: Minority interest increased from a $4,297
credit for the year ended December 31, 1997 to a $2,291,675 debit for the year
ended December 31, 1998. This increase is primarily attributable to the
significant minority interest arising in the 1998 acquisition of the remaining
general partnership interest in US Lithotripsy and the required consolidation of
the related partnerships' operations.
Provision for Income Taxes: Provision for income taxes
increased from $0 for the year ended December 31, 1997 to $304,261 for the year
ended December 31, 1998. As of December 31, 1998, we utilized all of the
available net operating tax loss carryforwards. In conjunction with the
application of these net operating tax losses, we adjusted the net deferred tax
asset valuation allowance to zero, resulting in a reduced effective tax rate for
the year ended December 31, 1998. In assessing the likelihood of utilization of
existing net deferred tax assets, management considered (a) our current
operating environment and (b) results of future operations to generate
sufficient taxable income and accordingly, has determined that it is more likely
than not that the deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital and
capital spending needs through private placements and the sales of medical
devices. The subsidiary partnership equipment financing has been provided by
term bank debt secured by the related device and guarantees from the various
partners, including officers of our Company. In July, 1998, we obtained a
$650,000 line of credit and a $1,000,000 equipment financing line with a
Tennessee bank. As of December 31, 1998 we have $566,863 outstanding under the
equipment financing line and no outstanding balances under the line of credit.
We intend to use net proceeds to us from this offering, our
existing cash and cash equivalents, cash generated from operations and available
credit facilities to fund future purchases of inventory, capital equipment for
lease, FDA study expenses and working capital requirements. We believe the
proceeds of this offering will satisfy our cash requirements for at least the
next 12 months.
Under employment agreements with Victoria Beck and Marie
Marlow, HealthTronics must pay annual total compensation in the amount of
$198,244.
In connection with the original distributorship agreements
between HealthTronics and HMT, HealthTronics is committed to purchase ten
OssaTron orthopedic lithotriptor and twelve LithoTron lithotripter units per
year over the life of the agreement after FDA pre-market approval is received by
HealthTronics. Aggregate funding needed for this commitment is approximately
$7,000,000 per year based upon current market prices.
ADDITIONAL INFORMATION THAT IS AVAILABLE TO YOU
We have filed a statement registering these securities with
the Securities and Exchange Commission as required by the Securities Act of
1933. This prospectus, which is part of the registration statement, does not
contain all the information in the registration statement and its
40
<PAGE> 46
exhibits. According to the rules and regulations of the commission, there are
items omitted. For further information about us and the securities, reference is
made to the registration statement and its exhibits, which may be inspected,
without charge, at the public reference section of the commission located at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or any portion of the registration statement may be obtained from
the public reference section of the commission, Washington, D.C. 20549,
1-800-SEC-0330, upon payment of the prescribed fees. These materials are also
available for inspection and copying at the regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. The commission maintains a Web
site, HTTP://WWW.SEC.GOV, that contains our complete registration statement.
Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
You may be referred to an exhibit for a more complete description of the matter
involved, and each statement shall be deemed qualified in its entirety by the
reference. We will provide without charge to each person who receives this
prospectus, upon written or oral request, a copy of any information referred to
in this prospectus. Requests should be mailed or phoned to us at the address
below.
HealthTronics, INC.
425 Franklin Road, Suite 545
Marietta, Georgia 30067
(770) (419-0691)
FAX: (770) (419-9490)
Attention: Roy S. Brown, president
Upon effectiveness of the registration statement, we will become a reporting
company under Section 15 of the Securities Exchange Act of 1934. As a reporting
company, we shall file quarterly, annual and special reports with the
commission. We will provide copies of future reports and of reports filed by us
during the course of the offering period at no charge. You may also obtain this
information from the public reference section of the commission at the address,
web site or telephone number shown above.
41
<PAGE> 47
INDEX TO FINANCIAL STATEMENT
<TABLE>
<CAPTION>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHTRONICS, INC. AND SUBSIDIARIES
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
CONSOLIDATED FINANCIAL STATEMENTS OF LITHO MANAGEMENT, INC. AND SUBSIDIARIES
Report of the Independent Auditors F-28
Consolidated Balance Sheet as of December 31, 1997 F-29
Consolidated Statement of Income for the year ended December 31, 1997 F-31
Consolidated Statement of Shareholders' Equity for the year ended December 31, 1997 F-32
Consolidated Statement of Cash Flows for the year ended December 31, 1997 F-33
Notes to Consolidated Financial Statements F-34
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF HEALTHTRONICS,
INC. AND SUBSIDIARIES
Combined Condensed Statement of Operations for the year ended December 31, 1998
(Unaudited) F-43
Combined Condensed Statement of Operations for the year ended December 31, 1997
(Unaudited) F-44
</TABLE>
42
<PAGE> 48
Report of Independent Auditors
The Board of Directors and Shareholders
HealthTronics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of HealthTronics,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthTronics,
Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
February 26, 1999
F-1
<PAGE> 49
HealthTronics, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 801,563 $ 1,796,694
Trade accounts receivable, less allowance for doubtful
accounts of $142,682 and $0 at December 31, 1998 and
1997, respectively 2,796,351 1,058,396
Inventory 1,179,298 1,465,887
Due from affiliated equity partnerships 126,102 1,142,143
Vendor deposits -- 42,458
Prepaid expenses 256,353 22,969
Deferred income taxes 253,273 --
-------------------------------
Total current assets 5,412,940 5,528,547
Property and equipment, at cost:
Medical devices placed in service 5,434,293 902,945
Medical devices not yet placed in service -- 207,829
Office equipment, furniture and fixtures 56,095 7,198
Vehicles and accessories 263,986 --
-------------------------------
5,754,374 1,117,972
Less accumulated depreciation (819,757) (143,090)
-------------------------------
Net property and equipment 4,934,617 974,882
Deferred income taxes 297,699 --
Partnership investments 241,848 368,502
Goodwill (net of accumulated amortization of
$124,280 at December 31, 1998) 3,121,960 --
Patent license (net of accumulated amortization of
$35,000 and $25,000 for December 31, 1998 and 1997, respectively) 65,000 75,000
Other assets 40,803 --
===============================
Total assets $ 14,114,867 $ 6,946,931
===============================
</TABLE>
F-2
<PAGE> 50
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 655,840 $ 1,477,065
Customer deposits -- 460,000
Short-term borrowings 193,256 200,000
Warranty accrual 295,829 175,600
Other accrued expenses 434,389 156,463
Current portion of long-term debt 1,209,947 145,885
-------------------------------
Total current liabilities 2,789,261 2,615,013
Deferral of profit on medical device sales to
related parties -- 508,576
Long-term debt, less current portion 2,231,215 467,974
Minority interest 1,469,678 (4,297)
-------------------------------
Total liabilities 6,490,154 3,587,266
Shareholders' equity:
Common stock - no par value, voting:
Authorized - 30,000,000 shares at
December 31, 1998 and 1997
Issued and outstanding - 9,665,342 and
8,645,342 shares at December 31, 1998 and 1997,
respectively 7,403,226 4,343,226
Retained earnings (deficit) 221,487 (983,561)
-------------------------------
7,624,713 3,359,665
-------------------------------
Total liabilities and shareholders' equity $ 14,114,867 $ 6,946,931
===============================
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
Net revenue $ 14,681,941 $ 5,062,104
Cost of goods sold, rentals and services
provided 6,863,506 3,263,233
-------------------------------
7,818,435 1,798,871
Salaries, wages and benefits 1,495,364 723,748
General and administrative expenses 2,480,012 1,463,683
-------------------------------
3,843,059 (388,560)
Equity in earnings of unconsolidated
partnerships 102,655 4,669
Interest expense (169,247) (59,517)
Interest income 24,517 21,083
-------------------------------
Income (loss) before minority
interest and income taxes 3,800,984 (422,325)
Minority interest (2,291,675) 4,297
-------------------------------
Income (loss) before income taxes 1,509,309 (418,028)
Provision for income taxes 304,261 --
-------------------------------
Net income (loss) $ 1,205,048 $ (418,028)
===============================
Basic and diluted net income (loss) per
common share:
Basic $ 0.13 $ (0.05)
===============================
Diluted $ 0.13 $ (0.05)
===============================
Weighted average common shares
outstanding:
Basic 9,223,671 8,010,068
===============================
Diluted 9,445,537 8,010,068
===============================
</TABLE>
See accompanying notes.
F-4
<PAGE> 52
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------- RETAINED TOTAL
NUMBER OF EARNINGS SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 7,706,600 $1,927,000 $ (565,533) $ 1,361,467
Common stock issued in
exchange for partnership
investment 200,000 200,000 -- 200,000
Common stock issued via private
placement memorandum 738,742 2,216,226 -- 2,216,226
Net loss -- -- (418,028) (418,028)
-----------------------------------------------------------------------
Balance at December 31, 1997 8,645,342 4,343,226 (983,561) 3,359,665
Common stock issued via private
placement memorandum 20,000 60,000 -- 60,000
Common stock issued in
connection with the acquisition
of businesses 1,000,000 3,000,000 -- 3,000,000
Net income -- -- 1,205,048 1,205,048
-----------------------------------------------------------------------
Balance at December 31, 1998 9,665,342 $7,403,226 $ 221,487 $ 7,624,713
=======================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 53
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,205,048 $ (418,028)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization 814,670 153,090
Provision for doubtful accounts 142,682 --
Deferred income taxes (550,972) --
Deferral of profit on medical device sales
to related parties 464,803 508,576
Equity in earnings of unconsolidated
partnerships (102,655) (4,669)
Minority interest in subsidiaries, net of
distributions to minority interests 904,098 (4,297)
Changes in operating assets and
liabilities, net of businesses acquired:
Trade accounts receivable (1,216,104) (591,396)
Due from affiliated equity
partnerships 983,522 (1,142,143)
Inventory 286,589 (1,335,887)
Vendor deposits 42,458 331,792
Prepaid expenses (223,119) (10,824)
Trade accounts payable (1,810,961) 1,135,867
Customer deposits (460,000) (40,000)
Warranty accrual 120,229 155,600
Accrued expenses 217,056 125,264
-------------------------------
Net cash provided by (used in) operating
activities 817,344 (1,137,055)
</TABLE>
F-6
<PAGE> 54
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-------------------------------
<S> <C> <C>
INVESTING ACTIVITIES
Purchases of property and equipment (3,175,630) (865,889)
Acquisition of partnership interest (34,853) (163,833)
Acquisition of businesses, net of cash
acquired 345,552 --
Other assets (40,077) --
-------------------------------
Net cash used in investing activities (2,905,008) (1,029,722)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 60,000 2,216,226
Proceeds from long-term debt 1,965,204 650,000
Principal payments on long-term debt (925,927) (36,141)
Proceeds from short-term borrowings 1,943,256 625,000
Principal payments on short-term
borrowings (1,950,000) (425,000)
-------------------------------
Net cash provided by financing activities 1,092,533 3,030,085
-------------------------------
Net (decrease) increase in cash and cash equivalents
(995,131) 863,308
Cash and cash equivalents at beginning of year
1,796,694 933,386
===============================
Cash and cash equivalents at end of year $ 801,563 $ 1,796,694
===============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 169,247 $ 59,000
===============================
Cash paid for taxes $ 762,626 $ --
===============================
</TABLE>
See accompanying notes
F-7
<PAGE> 55
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
HealthTronics, Inc. (the "Company") was incorporated in the State of Georgia in
1995. The Company was founded for the purpose of obtaining approval (Pre-Market
Approval - "PMA") from the Food & Drug Administration ("FDA") for certain
products manufactured by HMT High Medical Technologies GmbH ("HMT"), a Swiss
corporation, in particular, certain medical devices utilizing shock wave
therapies, known as the LithoTron and the OssaTron. Both products are already
being used outside the United States and Canada. During 1997, the Company
received approval for the LithoTron. The Company is currently establishing test
sites for the OssaTron FDA clinical trials.
In 1996, HMT granted to the Company the right to purchase the manufacturing
rights to the LithoTron and OssaTron medical devices. The Company also operates
under the terms of a distribution agreement with HMT that grants the Company
the exclusive right to make, use, sell and lease the LithoTron and OssaTron and
related parts in the United States, Canada and Mexico.
With each FDA approval, it is the Company's intent to generate revenues from
three sources: 1) sales of medical devices including related accessories; 2)
recurring revenues from licensing fees, sales of consumable products and
maintenance of equipment; and 3) investment income generated from partnerships
and joint ventures with physicians, dealerships and hospitals that purchase
equipment from the Company, as well as management fees from such entities.
In January 1997, the Company formed a wholly-owned subsidiary, Tenn-Ga Prostate
Therapies, LLC ("TGP"), a Georgia limited liability company. TGP owns and
leases a prostate therapy medical device to various hospitals in the Southeast.
During September 1997, the Company transferred 33% of TGP to certain
individuals in exchange for the personal guarantees of such individuals of
TGP's long-term debt.
Effective April 1, 1997, the Company entered into a Distributor Agreement and
an Entity Interest Agreement with U.S. Lithotripsy, LP ("USL"), a Texas limited
partnership, and with Litho Management, Inc. ("LMI"). This Distributorship
Agreement grants USL an exclusive right to sell, use, lease and distribute the
Company's products in a 19 state area and a non-exclusive right (subject to
approvals by the Company) to sell, use, lease and distribute the Company's
products in other states. The Entity Interest Agreement granted the Company a
40% ownership interest (0.4% general partnership ownership interest and
F-8
<PAGE> 56
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
39.6% limited partnership ownership interest) in USL in return for the issuance
of 200,000 no par value shares of the Company's common stock valued at $1.00
per share as determined by management in absence of a readily trading market.
The Entity Interest Agreement also granted LMI a 0.6% general partnership
ownership interest in USL (the remaining 59.4% limited partnership interest in
USL is owned by independent shareholders).
The April 1, 1997 Entity Interest Agreement constituted the formation of USL as
a limited partnership entity. Subsequent to April 1, 1997, USL made a number of
investments as the sole general partner in several separate partnerships with
equity interests ranging from 10% to 99% (the "second tier partnerships"),
formed for the purpose of purchasing, owning and operating certain medical
devices utilizing shock wave therapies. As the sole general partner, USL
consolidates the second tier partnerships. The Company used the equity method
of accounting for their investment in USL as the Company was not the majority
general partner.
On May 1, 1998, the Company purchased 100% of the outstanding stock of LMI in
exchange for 700,000 no par value shares of the Company's common stock valued
at $3.00 per share as determined by management in absence of a readily trading
market. The acquisition has been recorded using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed of LMI (consolidated with USL as LMI is
the majority general partner of USL) based on their estimated fair values as of
the date of acquisition. The total purchase price (including the value of the
200,000 shares previously issued to USL) in excess of the market value of net
tangible assets and identifiable intangible assets acquired of approximately
$2,352,000 was recorded as goodwill and is being amortized over 15 years.
In order to appropriately reflect the nature of the Company's operations and
its relationship to its subsidiaries, Tenn-Ga Prostate Therapies, LLC, LMI, USL
and the second tier partnerships, the accompanying consolidated statements of
operations include the Company's majority equity ownership interest in the net
revenues and expenses of
F-9
<PAGE> 57
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
TGP, the Company's minority equity interest in USL and the second tier
partnerships for the four months ended April 30, 1998, and the Company's
majority interest in the net revenues and expenses of LMI and USL and the
second tier partnerships for the eight months ended December 31, 1998. All
significant intercompany accounts and transactions have been eliminated in
consolidation. See Note 4 for discussion of minority interests.
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1998
presentation.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
For sales of medical devices to unaffiliated entities, revenue is recognized
upon arrival at the destination; for miscellaneous sales of consumables,
revenue is recognized at the time of shipment by the Company. As discussed in
Note 4 and Note 5, sales of medical devices to certain equity partnerships in
which the Company was a minority general partner and has guaranteed certain
long-term obligations of the partnerships were deferred at the time of the
sale. The Company deferred approximately $465,000 and $509,000 of gross profit
related to the sale of medical devices to equity partnerships during the years
ended December 31, 1998 and 1997, respectively. As a result of the additional
acquisition of LMI and resulting consolidation of LMI, USL and the second tier
partnerships, the deferred profit and the difference between retail and cost of
the medical devices at the partnership level have been eliminated in
consolidation for the year ended December 31, 1998.
F-10
<PAGE> 58
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (CONTINUED)
Net revenue also includes leasing fees for the rental of the LithoTron and
other medical devices in the clinical setting. Revenue is generated primarily
from rental contracts with various medical facilities; the Company does not
contract directly with any third party payors including governmental programs
or health maintenance organizations. Net revenue under these facility
agreements is recorded at established billing rates reduced by an allowance for
contractual adjustments. Contractual adjustments arise due to the terms of
certain facility agreements which reduce revenue from established billing rates
to amounts estimated to be reimbursable under the individual facility
agreement. Such adjustments 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.
An allowance for doubtful accounts is established for revenue estimated to be
uncollectible and is adjusted periodically based upon management's evaluation
of current economic conditions, historical collection experience, and other
relevant factors which, in the opinion of management, deserve recognition in
estimating such allowance.
INVENTORY
Inventory is carried at the lower of cost (first-in, first-out) or market and
consists of medical devices and consumables.
PARTNERSHIP INVESTMENTS
During 1997 and 1998, the Company made a number of investments in various
general and limited partnerships. The majority of these investments are
consolidated (See Note 4). The remaining investments totaling $241,848 at
December 31, 1998 were 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 investment partnership.
F-11
<PAGE> 59
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENT LICENSE
The original cost of the patent license is being amortized on a straight-line
basis over a period of ten years, which approximates the life of the patent.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed based on the
straight-line method over the five-year estimated useful lives of the related
equipment. Accelerated depreciation methods are generally used for tax
purposes.
WARRANTY ACCRUAL
The Company accrues a full year of service and parts warranty expense on the
sale of each medical device.
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
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.
COMMON STOCK
In the absence of a readily traded market, management estimates the fair value
of the common stock of the Company. Such estimates were used to record the
value of common stock transactions in the accompanying consolidated financial
statements.
F-12
<PAGE> 60
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily in the United States, Canada and
Mexico. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised principally of cash and cash
equivalents, trade accounts receivable, vendor deposits, 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
Goodwill represents the excess of cost over the market value of net tangible
assets and identifiable intangible assets acquired and is amortized using the
straight-line method over fifteen years.
The Company periodically evaluates the recoverability of non-current tangible
and intangible assets and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
F-13
<PAGE> 61
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Under Share ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted income (loss) per share with basic and
diluted income (loss) per share. Unlike primary income (loss) per share, the
calculation of basic income (loss) per share excludes the dilutive effects of
options, warrants, and convertible securities. Diluted income (loss) per share
is very similar to the previously reported fully diluted income (loss) per
share.
The Company's per share amounts for all periods have been presented in
accordance with the provisions of SFAS No. 128. Basic and diluted income (loss)
per share are computed based on the weighted average number of common shares
outstanding. Common share equivalents (which may consist of options, warrants
and convertible debentures) are excluded from the computation of diluted income
(loss) per share if the effect would be antidilutive.
3. INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Medical devices $1,091,498 $1,400,000
Consumables 87,800 65,887
================================
$1,179,298 $1,465,887
================================
</TABLE>
F-14
<PAGE> 62
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS
As discussed in Note 1, as a result of the Company's May 1, 1998 acquisition of
LMI, the Company maintains a 40.6% interest in USL (1.0% general partnership
ownership interest and a 39.6% limited partnership ownership interest) and is
the sole general partner of USL. USL also maintains the sole general
partnership interest in several second tier partnerships. Based upon the
Company's ability to exercise control over the operating and financial policies
of USL and the second tier partnerships through its acquisition of LMI, the
Company has consolidated the majority financial position and results of
operations of the individual partnerships for the eight months ended December
31, 1998.
On September 9, 1998, the Company exchanged 300,000 of its no par value shares
of common stock valued at $3.00 per share as determined by the Board of
Directors in absence of a readily traded market with three shareholders of the
Company who were also the sole shareholders of HLE Corporation ("HLE"), a Texas
corporation, in exchange for all of the issued and outstanding shares of HLE.
The assets of HLE consists of a 30% limited partnership interest in Metro I
Stone Management, Ltd., a Texas limited partnership. Because the Company, as
sole general partner of USL, was already consolidating Metro I Stone
Management, Ltd., this transaction effectively represents an acquisition of
additional interest in the earnings of Metro I Stone Management, Ltd. The total
purchase price in excess of the market value of net tangible assets and
identifiable intangible assets acquired of approximately $900,000 was recorded
as goodwill and is being amortized over 15 years.
F-15
<PAGE> 63
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
The partnerships and the Company's effective ownership at December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
EFFECTIVE EFFECTIVE
OWNERSHIP VOTING
PARTNERSHIP DATE OF FORMATION INTEREST INTEREST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Lithotripsy, L.P. April 1, 1997 40.6% 100%
Metro I Stone Management, Ltd. May 28, 1996 34.1% 100%
Mississippi Valley I Stone
Management, L.P. November 1, 1996 12.6% 100%
East Texas I Stone Management, Ltd. July 29, 1997 4.1% 100%
Dallas Stone Management, L.P. December 1, 1997 4.1% 100%
S.C. Missouri Stone Management, L.P. April 1, 1998 4.1% 100%
Tulsa Stone Management, L.P. February 1, 1998 40.2% 100%
Tyler Stone Services, L.P. March 1, 1998 40.2% 100%
SE Colorado Lithotripsy, L.P. September 30, 1998 4.1% 100%
AESL, L.P. (unconsolidated) May 5, 1998 8.1% 0%
Tyler Stone Management, L.P. September 15, 1998 16.2% 100%
Missouri Valley Stone
Management, L.P. October 25, 1998 4.1% 100%
Mississippi Valley II
Stone Management, L.P. October 25, 1998 4.1% 100%
North Central Texas
Stone Management, L.P. October 15, 1998 40.2% 100%
</TABLE>
F-16
<PAGE> 64
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
Condensed individual financial information of the partnerships accounted for
under the equity method of accounting, before eliminations, as of December 31,
1997 is summarized below:
<TABLE>
<CAPTION>
TOTAL TOTAL NET GROSS NET INCOME
PARTNERSHIP ASSETS LIABILITIES REVENUE PROFIT (LOSS)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Lithotripsy, L.P. ............ $ 177,872 $441,200 $138,133 $ -- $(129,911)
Metro I Stone Management, Ltd. .... 1,179,520 646,225 976,866 833,017 665,590
Mississippi Valley I Stone
Management, L.P. ............... 502,303 384,810 418,924 381,924 225,230
East Texas I Stone Management, Ltd. 48,750 23,156 29,250 29,250 25,594
Dallas Stone Management, L.P. ..... 608,338 599,003 10,238 10,238 9,336
</TABLE>
F-17
<PAGE> 65
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
The following unaudited condensed pro forma information for the years ended
December 31, 1998 and 1997 is presented as if LMI (consolidated with USL) and
HLE Corporation had been acquired on January 1, 1997. This information does not
purport to be indicative of the results that would have actually been obtained
if the acquisitions had occurred on such dates.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
----------------------------------
<S> <C> <C>
Net revenue $ 15,911,792 $ 6,498,859
Net income (loss) 1,422,576 (413,307)
Net income (loss) per common share
Basic 0.15 (0.05)
Diluted 0.14 (0.05)
</TABLE>
During 1997, the Company purchased partnership interests in Bone & Joint
Treatment Centers of South Florida, Ltd. (48.5%), Lithotripsy Leasing (6 of 45
partnership "units") and Chesapeake Lithotripsy - West (5 of 65 partnership
"units"). As of December 31, 1998, operations of these partnerships were not
significant, and no distributions were made to the partners. The Company is
using the equity method of accounting for the investment in Bone & Joint
Treatment Centers of South Florida, Ltd. and the cost method of accounting for
the investments in Lithotripsy Leasing and Chesapeake Lithotripsy.
Lithowest, LLC, an Arizona Limited Liability Corporation, was formed on
December 4, 1998. On December 14, 1998 the Company entered into an Operating
Agreement whereby the Company contributed equipment, a one year warranty and
the exclusive rights of the use of the LithoTron in the state of Arizona to
Lithowest, LLC in exchange for a 60% interest. Florida Lithology, Inc. ("FLI")
was incorporated in Florida on September 15, 1998. On October 23, 1998, the
Company became a 45.5% shareholder in FLI. FLI is a 55% co-general partner in
Florida Lithology, Ltd. ("FLL"), a Florida limited partnership that provides
lithotripsy services in the state of Florida. The Company is also a 20% limited
partner in FLL. As of December 31, 1998, operations of these partnerships had
not fully commenced.
F-18
<PAGE> 66
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1998 and 1997, the Company recorded sales
of medical devices to the second tier partnerships. The second tier
partnerships obtained third party financing, payable generally over five years
or less, to satisfy their obligations to the Company under these sales.
However, as the Company is a general partner of USL, and USL is the sole
general partner of the second tier partnerships, the Company could be required
to support the obligations of USL and the second tier partnerships to an extent
greater than the Company's proportionate interest in the second tier
partnerships. Thus, the Company has not transferred substantially all of the
risks and rewards of ownership related to the medical devices sold to the
second tier partnerships. As a result, the Company has not recorded the sales
or the related cost of goods sold and has deferred approximately $465,000 and
$509,000 of gross profit related to these sales for the years ended December
31, 1998 and 1997, respectively. As a result of the additional acquisition of
LMI and resulting consolidation of LMI, USL and the second tier partnerships,
the deferred profit and the difference between retail and cost of the medical
devices at the partnership level have been eliminated in consolidation for the
year ended December 31, 1998. Depreciation expense is recognized in
consolidation based upon the cost of the asset over the estimated useful life
of five years.
Several of the Company's major shareholders are also the officers of the
Company's supplier, HMT. Other shareholders of the Company are also limited
partners in USL and the second tier partnerships.
Several of the Company's shareholders are employees of a company that
contracted with the Company to provide installation and warranty service.
Payments to this company were $542,000 and $137,000 for 1998 and 1997,
respectively.
Trade accounts payable due to the Company's supplier, HMT, totaled $406,000 and
$965,000 as of December 31, 1998 and 1997, respectively. During 1998 and 1997,
the Company made payments totaling $6,070,000 and $2,993,000, respectively, to
HMT for medical devices, related parts and consumables purchases.
Consulting fees totaling $144,000 and $21,800 were paid during 1998 and 1997,
respectively, to individuals in the medical field that were shareholders of the
Company.
F-19
<PAGE> 67
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1997 consisted of a line credit agreement
with a Georgia bank that provided for borrowings up to $500,000. Such line of
credit agreement expired July 10, 1998 and was secured by the Company's
accounts receivable, inventory, property and equipment, and personal guarantees
from certain officers of the Company. Amounts outstanding under the line of
credit agreement bore interest at 9.75%. The line of credit was paid off in
May, 1998.
Short-term borrowings at December 31, 1998 consist of a line of credit
agreement with a Texas bank that provides for borrowings up to $100,000. Such
line of credit agreement requires monthly interest payments on outstanding
balances and expires on October 28, 1999 with principal and accrued interest
due on that date. The interest rate on the line of credit is variable. At
December 31, 1998, the Company has drawn $80,604 on the line of credit.
Short-term borrowings at December 31, 1998 also include a $112,652 note payable
to a Missouri bank, with principal and interest due in monthly installments of
$4,761 through July 1999 and a balloon payment of the remaining principal and
interest balance due in August 1999. The interest rate on the note payable is
8.75% and the note is secured by all accounts receivable, equipment and
inventory of USL.
On July 1, 1998, the Company obtained a $650,000 line of credit with a
Tennessee bank. The Company had no outstanding balances under this line as of
December 31, 1998.
7. LONG-TERM DEBT
On July 1, 1998, the Company obtained a $1,000,000 equipment financing line
with a Tennessee bank. The $650,000 line of credit and the $1,000,000 equipment
financing line are personally guaranteed by certain officers of the Company for
amounts representing up to 50% of the outstanding indebtedness plus interest.
Interest under these lines are variable. At December 31, 1998, the Company has
drawn $566,863 under the equipment financing line.
The line of credit and the equipment financing line contain various financial
and non-financial covenants that must be met by the Company (excluding USL and
the second tier partnerships). The Company was in compliance with such
covenants at December 31, 1998.
F-20
<PAGE> 68
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Term loan, interest at 8.35%, principal and interest payments of $15,975 due
monthly through September, 2001, secured by personal guarantees of
certain TGP shareholders $ 467,782 $613,859
Equipment note payable, variable interest rate (7.75% at December 31, 1998),
principal and interest due in monthly installments of $16,000 through
December 2000, secured by the equipment under loan, and through
guarantees from the general partner and personal guarantees from
certain limited partners 424,526 -
Equipment note payable, variable interest rate (7.75% at December 31, 1998),
principal and interest due in monthly installments of $9,287 through
November 1999, balloon payment of remaining principal and interest balance
due December 1999, secured by the equipment under loan, and through
guarantees from the general partner and personal guarantees from certain
limited partners 307,592 -
Equipment note payable, variable interest rate (7.75% at December 31, 1998),
principal and interest due in monthly installments of $16,250 through May
2001, secured by the equipment under loan, and through guarantees from the
general partner and personal guarantees from certain limited partners and
the Company 463,076 -
Equipment note payable, interest at 12%, principal and interest due in monthly
installments of $14,200 through March, 2004, secured by the equipment under
loan, and through guarantees from the general partner and personal guarantees
from certain limited partners 627,918 -
Equipment note payable to bank, interest at 8.25%, principal and interest due in
monthly installments of $9,583 through December 2001, secured by the
equipment under loan 304,682 -
Equipment note payable to bank, interest at 8.25%, principal and interest due in
monthly installments of $8,246 through December 2001, secured by the
equipment under loan 262,181 -
Note payable to bank, interest at 8.25%, principal and interest due in monthly
installments of $14,025 through November, 2002, secured by the equipment
under loan 540,000 -
Other 43,405 -
------------------------------
3,441,162 613,859
Less current portion 1,209,947 145,885
------------------------------
$2,231,215 $467,974
==============================
</TABLE>
F-21
<PAGE> 69
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $1,209,947
2000 1,040,023
2001 746,987
2002 285,608
2003 and thereafter 158,597
-----------------
$3,441,162
=================
</TABLE>
8. INCOME TAXES
A reconciliation of the provision (credit) for income taxes to the federal
statutory rate of 34% for 1998 and 1997 is:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Statutory federal income tax expense
(benefit) $1,292,335 $ (145,051)
State income taxes, net of federal benefit 150,519 (16,894)
Other 104,121 6,818
Change in valuation allowance for deferred
tax assets (372,793) 155,127
Minority interest (869,921) -
----------------------------------
$ 304,261 $ -
==================================
</TABLE>
F-22
<PAGE> 70
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Current deferred tax assets:
Accrued liabilities and other $134,648 $ 10,586
Warranty reserve 118,625 66,658
Operating loss carryforwards - 103,307
----------------------------------
253,273 180,551
Valuation allowance - (372,793)
Long term deferred tax assets:
Property and equipment 294,748 190,051
Other 2,951 2,191
----------------------------------
297,699 192,242
----------------------------------
Net deferred tax asset $550,972 $ -
==================================
</TABLE>
Included in net long term deferred tax assets associated with property and
equipment is approximately $310,000 of temporary differences as a result of
deferred revenue on sales to the second tier partnerships. The amount of the
deferred tax asset associated with the minority shareholders will be allocated
directly to tax expense over the life of the asset.
For financial reporting purposes, a valuation allowance was recognized at
December 31, 1997 to reduce the net deferred tax asset to zero to reflect
limitations on the Company's ability to currently utilize net operating loss
carryforwards. At December 31, 1997, the Company had a net operating loss
carryforward available to offset future taxable income of approximately $304,000
which expires through the year 2011.
F-23
<PAGE> 71
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
As of December 31, 1998, the Company has applied all remaining net operating tax
loss carryforwards. In conjunction with the application of the net operating tax
losses, the Company adjusted the tax asset valuation allowance to zero,
resulting in a reduced effective tax rate for the year ended December 31, 1998.
In assessing the likelihood of utilization of existing net deferred tax assets,
management considered (a) its current operating environment and (b) results of
future operations to generate sufficient taxable income and, accordingly, has
determined that it is more likely than not that the deferred tax assets will be
realized.
9. EMPLOYEE BENEFIT PLAN
In 1996, the Company established a defined contribution 401(k) plan for all
eligible employees. The plan provides for a deferral of up to 12% of the
employee's qualifying compensation under Section 401(k) of the Internal Revenue
Code. The Company provides a discretionary match up to a maximum of 6% of
employee compensation. The Company recognized $28,111 and $10,300 in expense
related to the 401(k) plan in 1998 and 1997, respectively.
10. SHAREHOLDERS' EQUITY
During June 1997, the Company issued 200,000 shares of no par value common stock
valued at $1.00 per share as determined by management in absence of a readily
trading market in exchange for a 40% ownership interest US Lithotripsy (USL), a
Texas limited partnership.
During July 1997, subsequent to the notice of FDA approval of the LithoTron, the
Company conducted a Private Placement of its common stock. Pursuant to this
Private Placement, the Company sold an aggregate of 758,742 shares at $3 per
share through December 31, 1998.
During May 1998, the Company issued 700,000 shares of no par value common stock
in exchange for 100% of the outstanding stock of LMI. During September 1998, the
Company issued 300,000 shares of no par value common stock in exchange for 100%
of the outstanding stock of HLE. Both of these issuances were valued at $3.00
per share as determined by management in absence of a readily trading market.
F-24
<PAGE> 72
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTIONS
During 1996, the Company initiated a Warrants and Options Program. As of
December 31, 1998, the Board of Directors has approved options to purchase up to
550,000 shares of common stock.
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" ("FAS 123") 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.
Certain stock options have been granted to non-employees. In accordance with the
requirements of FAS 123, which requires the accounting recognition of the fair
value of options granted to non-employees, the Company recorded $13,900 and
$21,000 in expense during 1998 and 1997, respectively.
A total of 50,000 options, expiring on December 31, 2000 and exercisable at $1
per share, were granted during 1996 to a non-employee and were exercisable as of
December 31, 1996. During 1997, 218,000 options were granted to employees and
79,000 were granted to non-employees. Such 1997 grants expire on December 31,
2000 and 2001 and have exercise prices of $1 or $3. 335,000 options were
exercisable as of December 31, 1997.
During 1998, 108,000 options were granted to employees. 75,000 of such options
vest through 2003 but can accelerate upon the obtainment of certain performance
goals. Options granted in 1998 expire on December 31, 2001 or 2003 and have
exercise prices of $3.00 or $6.00. Options vest at various dates through
December 31, 2003. No options were exercised or terminated during 1998 or 1997.
The weighted-average exercise price and remaining contractual life for the
options granted in 1998 and 1997 are approximately $1.22 and $3.11 per share and
2.22 and 4.40 years, respectively. The weighted-average exercise price for the
options outstanding at December 31, 1998 and 1997 are approximately $1.76 and
$1.46, respectively.
F-25
<PAGE> 73
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
For the Company, pro forma information regarding net income is required by FAS
123 and has been determined as if the Company had accounted for its employee
stock options granted under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1998
and 1997: risk-free interest rate of 5.55% and 7%, expected life of the option
of three or four years, and no dividend yield. The weighted-average fair value
of options granted under the Warrants and Options Program was $0.43 and $0.23
for 1998 and 1997. Had the employee option grants been accounted for under the
fair value method of FAS 123, net loss would have been $467,442 or $49,414 more
than recorded in the accompanying 1997 consolidated statement of operations,
resulting in a $0.06 basic and diluted net loss per share. Net income would be
$1,180,898, or $24,150 less than recorded in the accompanying 1998 consolidated
statements of operations, and would have no effect on basic or diluted income
per share.
The pro forma disclosures above are not likely to be representative of the
effects on net income in future years.
The effect of dilutive stock options represented an increase of 221,866 in the
denominator for the calculation of earnings per share for the year ended
December 31, 1998.
12. OPERATING LEASES
The Company leases office space at a monthly rental of $3,900 under a lease
agreement that expires May 2000. The lease is personally guaranteed by certain
shareholders of the Company. Rental expense for 1998 and 1997 was $55,700 and
$41,800, respectively.
Aggregate future minimum lease payments under operating lease agreements for
terms greater than one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $ 85,600
2000 34,400
2001 and thereafter 2,500
-----------------
$122,500
=================
</TABLE>
F-26
<PAGE> 74
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES
In connection with the original distributorship agreements between the Company
and HMT, the Company committed to purchase ten OssaTron orthopedic lithotriptor
and twelve LithoTron lithotripter units per year over the life of the agreement
after FDA PMA approval is received by the Company. Aggregate funding needed for
this commitment is approximately $7,000,000 per year based upon current market
prices.
Physicians and technicians who use the Company's products are exposed to the
risk of liability and malpractice claims. Those claims could also name the
Company, based on a theory of malpractice or product liability. Although the
Company has not experienced any malpractice or product liability claims, an
award for damages could exceed the limits of its applicable insurance coverage.
Successful liability claims asserted against the Company, to the extent not
covered by insurance, could affect the Company's ability to operate profitably.
While management believes the Company's current level of insurance is adequate,
there can be no assurance of this.
F-27
<PAGE> 75
Report of Independent Auditors
The Board of Directors and Shareholders
Litho Management, Inc.
We have audited the accompanying consolidated balance sheet of Litho Management,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Litho Management,
Inc. and Subsidiaries at December 31, 1997 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/S/ Ernst & Young LLP
Atlanta, Georgia
August 7, 1998
F-28
<PAGE> 76
Litho Management, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 97,296
Accounts receivable, less allowance for doubtful accounts
of $7,500 315,521
Inventory 100,000
Prepaid expenses 11,463
-----------
Total current assets 524,280
Property and equipment, at cost:
Medical devices placed in service 2,200,480
Vehicles and accessories 48,894
-----------
2,249,374
Less accumulated depreciation (294,380)
-----------
Net property and equipment 1,954,994
Other assets 4,726
===========
Total assets $ 2,484,000
===========
</TABLE>
F-29
<PAGE> 77
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accounts payable $ 28,395
Accrued expenses 18,689
Accrued interest 4,897
Amounts due to related parties 833,862
Current portion of long-term debt 952,383
----------
Total current liabilities 1,838,226
Long-term debt, less current portion 217,000
Minority interest 423,151
Commitments and contingencies
Shareholders' equity:
Common stock - $1 par value, voting:
Authorized shares- 1,000; Issued and outstanding shares 1,000
1,000
Retained earnings 4,623
----------
Total shareholders' equity 5,623
==========
Total liabilities and shareholders' equity $2,484,000
==========
</TABLE>
See accompanying notes.
F-30
<PAGE> 78
Litho Management, Inc. and Subsidiaries
Consolidated Statement of Income
Year ended December 31, 1997
<TABLE>
<S> <C>
Net revenue $ 1,436,755
Cost of revenue 245,326
-----------
1,191,429
Operating expenses:
Salaries 81,102
Professional fees 59,616
Insurance expense 22,275
Provision for bad debts 7,500
General and administrative expenses 140,461
-----------
Total operating expenses 310,954
Income from operations 880,475
Other income (expense):
Interest expense (82,041)
Interest income 272
-----------
Income before minority interest 798,706
Minority interest (796,975)
-----------
Net income $ 1,731
===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 79
Litho Management, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
Year ended December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- TOTAL
NUMBER OF RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 1,000 $1,000 $2,892 $3,892
Net income - - 1,731 1,731
==========================================================================
Balance at December 31, 1997 1,000 $1,000 $4,623 $5,623
==========================================================================
</TABLE>
See accompanying notes.
F-32
<PAGE> 80
Litho Management, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31, 1997
OPERATING ACTIVITIES
<TABLE>
<S> <C>
Net income $ 1,731
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 245,326
Minority interest in subsidiaries' net income, net of
distributions 297,528
Provision for bad debts 7,500
Changes in operating assets and liabilities:
Accounts receivable (171,544)
Prepaid expenses (6,408)
Inventory (100,000)
Other assets (1,113)
Accounts payable 18,569
Accrued interest and other accrued expenses 16,229
Amounts due to related parties 672,462
-----------
Net cash provided by operating activities 980,280
INVESTING ACTIVITIES
Purchases of property and equipment (1,249,373)
Purchases of partnership investments, net of cash acquired
18,639
-----------
Net cash used in investing activities (1,230,734)
FINANCING ACTIVITIES
Proceeds from issuance of debt 696,394
Principal payments on debt (348,644)
-----------
Net cash provided by financing activities 347,750
-----------
Net increase in cash and cash equivalents 97,296
Cash and cash equivalents at beginning of year --
-----------
Cash and cash equivalents at end of year $ 97,296
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 82,067
===========
</TABLE>
See accompanying notes.
F-33
<PAGE> 81
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Litho Management, Inc. (the "Company") was incorporated in the State of Texas on
October 25, 1996. Prior to April 1, 1997, The Company's primary activity
included ownership of a 1% general partnership interest in Mississippi Valley I
Stone Management, L.P. ("Mississippi Valley"), a limited partnership formed for
the purpose of purchasing, owning and operating certain medical devices
utilizing shock wave therapies, specifically the LithoTron. On April 1, 1997,
the Company entered into a Distributor Agreement and an Entity Interest
Agreement with U.S. Lithotripsy, L.P. ("USL"), a Texas limited partnership, and
with HealthTronics, Inc. ("HealthTronics"). The Distributorship Agreement
(entered into between USL and Healthtronics) grants USL an exclusive right to
sell, use, lease and distribute HealthTronics' products in a 19 state area and a
non-exclusive right (subject to approvals by HealthTronics) to sell, use, lease
and distribute HealthTronics' products in other states. The Entity Interest
Agreement granted the Company a 0.6% general partnership ownership interest in
USL (0.4% general partnership interest and 39.6% limited partnership interest is
owned by HealthTronics and the remaining 59.4% limited partnership interest is
owned by independent partners). Through its general partnership interest, the
Company effectively controls USL.
The April 1, 1997 Entity Interest Agreement constituted the formation of USL as
a limited partnership entity. Concurrent with the formation of USL, USL acquired
the 1% general partnership interest in Mississippi Valley from the Company.
Subsequent to April 1, 1997, USL made a number of investments as the sole
general partner in several separate partnerships with equity interests ranging
from 10% to 99% (the "second tier partnerships"), also formed for the purpose of
purchasing, owning and operating certain medical devices utilizing shock wave
therapies. Each of the partnership agreements are for terms of 40 years. As USL
is the sole general partner of these second tier partnerships, it will
consolidate these entities.
As the majority-owned general partner of USL, the Company provides exclusive
management and administration of USL and the second tier partnerships'
day-to-day business operations. Authority retained by the Company as
majority-owned general partner includes exclusive authority over all
decision-making for ongoing major or central operations, including (i) the scope
of services, (ii) pricing of services, (iii) negotiation and execution of
contracts, (iv) issuance of debt and (v) establishment and approval of operating
and capital budgets. Each of the partnership agreements grants the majority
F-34
<PAGE> 82
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
general partner sole and absolute discretion over the actions of the partnership
and do not provide for the existence of any super majority voting rights,
unanimous approval, or limited partner veto power.
In order to appropriately reflect the nature of the Company's operations and its
relationship to USL and the second tier partnerships, the accompanying
consolidated financial statements include the accounts of USL and the second
tier partnerships from the date of the formation of USL, April 1, 1997. The
operations of Mississippi Valley have been included for the full year ended
December 31, 1997 as the Company was the general partner prior to the purchase
of the general partnership interest by USL. All significant intercompany
accounts and transactions have been eliminated in consolidation. See Note 3 for
discussion of minority interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
NET REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Net revenue includes leasing fees for the rental of the LithoTron and other
medical devices in the clinical setting. Revenue is generated primarily from
rental contracts with various medical facilities; the Company does not contract
directly with any third party payors including governmental programs or health
maintenance organizations. Net revenue under these facility agreements is
recorded at established billing rates reduced by an allowance for contractual
adjustments. Contractual adjustments arise due to the terms of certain facility
agreements which reduce revenue from established billing rates to amounts
estimated to be reimbursable under the individual facility agreement. Such
adjustments 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.
F-35
<PAGE> 83
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (CONTINUED)
An allowance for doubtful accounts is established for revenue estimated to be
uncollectible and is adjusted periodically based upon management's evaluation of
current economic conditions, historical collection experience, and other
relevant factors which, in the opinion of management, deserve recognition in
estimating such allowance.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORY
Inventory is carried at the lower of cost (first-in, first-out) or market and
consists of a medical device.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed based on the
straight-line method over the five-year estimated useful lives of the related
equipment and is included in cost of revenue in the accompanying consolidated
statement of income. Accelerated depreciation methods are generally used for tax
purposes.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between 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 reverse. The Company has not recorded a
provision for income taxes in the accompanying consolidated income statement as
earnings and losses from the partnerships are passed through to the individual
partners for income tax purposes. In addition, there were no significant
differences between financial reporting and tax bases of assets and liabilities
for the year ended December 31, 1997.
F-36
<PAGE> 84
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
The Company made no payments for income taxes during 1997.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located throughout the
Southeastern United States, Texas and Missouri and the Company's policy is
designed to limit its exposure at any one institution. The Company performs
periodic evaluations of the relative credit standings of those financial
institutions that are considered in the Company's investment strategy. At
December 31, 1997, substantially all of the Company's cash and cash equivalents
are invested in non-interest bearing depository cash accounts.
Substantially all revenue is earned in the Southeastern United States, Texas and
Mississippi. The Company generally does not require collateral or other security
in extending credit to facilities under contract. The Company's two largest
facility contracts accounted for approximately 67% and 29%, respectively of net
revenue during 1997.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that such assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less that the assets'
net book values. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. SFAS No. 121 had no impact on the
accompanying consolidated financial statements.
F-37
<PAGE> 85
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. SFAS 130 establishes guidelines for the reporting and
display of comprehensive income and its components in financial statements.
Management does not believe the adoption of SFAS 130 will have a significant
impact on the Company's consolidated financial statements.
3. PARTNERSHIP INVESTMENTS
As discussed in Note 1, at December 31, 1997, the Company maintained a 0.6%
general partnership interest in USL; while USL maintained general partnership
interests in several second tier partnerships. Based upon the Company's ability
to exercise control over the operating and financial policies of USL and the
second tier partnerships, the Company has consolidated the financial position
and results of operations of the individual partnerships for the year ended
December 31, 1997. The partnerships and the Company's effective ownership at
December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
EFFECTIVE EFFECTIVE
DATE OF OWNERSHIP VOTING
PARTNERSHIP FORMATION INTEREST INTEREST
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Lithotripsy, L.P. April 1, 1997 0.6% 60%
Metro I Stone Management, Ltd. May 28, 1996 0.06% 60%
Mississippi Valley I Stone Management, L.P.
November 1, 1996 0.186% 60%
East Texas I Stone Management, Ltd. July 29, 1997 0.06% 60%
Dallas Stone Management, L.P. December 1, 1997 0.06% 60%
</TABLE>
The consolidated statements of operations include the operating results of the
above partnerships from the date of formation of each partnership, except for
Metro I Stone Management Ltd. which is included from April 1, 1997 (the date USL
acquired the 1.0% general partnership interest and a 9.0% limited partnership
interest) through December 31, 1997, and Mississippi Valley which is included at
a 1.0% effective
F-38
<PAGE> 86
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PARTNERSHIP INVESTMENTS (CONTINUED)
ownership interest from January 1, 1997 through March 31, 1997 (as the Company
was the 1.0% general partner during this time period) and at 0.186% from April
1, 1997 through December 31, 1997 (as USL purchased the 1.0% general partnership
interest from the Company and an additional 30% limited partnership interest on
April 1, 1997).
USL's purchase of the additional equity interests in Metro I Stone Management,
Ltd. and Mississippi Valley was accounted for under the purchase method of
accounting. There was no goodwill recognized in these transactions as the
purchase price approximated the fair value of the partnerships' net assets at
the date of purchase.
Condensed individual financial information of the Company and the consolidated
partnerships as of December 31, 1997 is summarized below:
<TABLE>
<CAPTION>
TOTAL TOTAL NET NET INCOME
PARTNERSHIP ASSETS LIABILITIES REVENUE (LOSS)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Lithotripsy, L.P. $ 177,872 $441,200 $138,133 $(129,911)
Metro I Stone Management, Ltd. 1,179,520 646,225 976,866 665,590
Mississippi Valley I Stone
Management, L.P. 502,303 384,810 418,924 225,230
East Texas I Stone Management,
Ltd. 48,750 23,156 29,250 25,594
Dallas Stone Management, L.P. 608,338 599,003 10,238 9,336
</TABLE>
As general partner, USL provides exclusive management and administration of the
second tier partnerships' day-to-day business operations. For the year ended
December 31, 1997 fees charged to the second tier partnerships by USL were
$131,641 and were based upon approximately 7.5% of the partnerships' net
revenues. Management fee receivables of $41,983 have been recorded by USL at
December 31, 1997. In addition, USL recognized revenue of $14,476 on sales of
certain consumables to the second tier partnerships. Each of these transactions
have been fully eliminated in consolidation.
F-39
<PAGE> 87
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS
Several of the Company's major shareholders are also limited partners in USL and
the second tier partnerships. USL leases space from one of the Company's
shareholders. Total rental expense charged by the shareholder amounted to $6,174
for the year ended December 31, 1997.
Concurrent with the formation of USL, a limited partner of USL contributed a
medical device held as inventory, valued at $100,000 based upon current market
conditions, and a $296,595 note payable. The difference between the value of the
inventory and the total notes payable is included in minority interest in the
accompanying statement of income.
Accounts payable through the consolidated partnerships to HealthTronics relating
to purchases of medical devices and related parts totaled $796,100 as of
December 31, 1997. Amounts owed to HealthTronics at December 31, 1997 were paid
in full through March 1998 as the consolidated partnerships obtained long-term
financing with third party banks. During 1997, the Company, through its
consolidated partnerships made payments totaling $382,000 to HealthTronics, Inc.
for medical devices, related parts and consumables purchases.
Amounts due to related parties include a $26,000 unsecured note payable to one
of the Company's major shareholders. The note bears interest monthly at 8.50%
and was paid in full in April 1998. In addition, amounts due to related parties
of $11,762 represent net non-interest bearing borrowings from certain
shareholders for expenses paid on behalf of the individual partnerships.
Subsequent to December 31, 1997, USL entered into a $250,000 unsecured note
payable to HealthTronics. The note includes interest at 8.5% and is due in
monthly installments through September, 2003.
F-40
<PAGE> 88
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Equipment note payable, variable interest rate (8.50% at December 31, 1997),
principal and interest due in monthly installments through December 2000,
secured by the equipment under loan, and through guarantees from the general
partner and personal guarantees from certain limited partners $ 409,000
Equipment note payable, variable interest rate (8.50% at December 31, 1997),
principal and interest due in monthly installments of $9,287 through November
1998, balloon payment of remaining principal and interest balance due
December 1998, secured by the equipment under loan, and through guarantees
from the general partner and personal guarantees from certain limited
partners 381,788
Equipment note payable, interest at 8.75%, principal and interest due in monthly
installments of $4,743 through July 1998, balloon payment of remaining
principal and interest balance due August 1998, secured by all accounts
receivable, equipment and inventory of the partnership 148,121
Note payable to bank, interest at 8.75%, principal and interest due in monthly
installments of $4,761 through July 1998, balloon payment of remaining
principal and interest balance due August 1998, secured by all accounts
receivable, equipment and inventory of the partnership 148,474
Line of credit, variable interest rate (8.50% at December 31, 1997), interest
payable monthly, principal due in full on October 28, 1998, unsecured 80,000
Other 2,000
----------
1,169,383
Less current portion (952,383)
----------
$ 217,000
==========
</TABLE>
F-41
<PAGE> 89
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
Aggregate future principal payments for all short term borrowings and long-term
debt as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 952,383
1999 192,000
2000 25,000
----------
$1,169,383
==========
</TABLE>
7. SUBSEQUENT EVENTS
On May 4, 1998, HealthTronics entered into an Agreement and Plan of Share
Exchange with the Company and the sole shareholders of the Company, whereby
HealthTronics acquired all of the issued and outstanding capital stock of the
Company in exchange for 700,000 shares of voting capital stock of HealthTronics.
The effective date of the transaction is May 1, 1998. The HealthTronics shares
issued in the Share Exchange have been valued at approximately $2,100,000, as
determined by management and the Board of Directors of HealthTronics in absence
of a readily trading market.
F-42
<PAGE> 90
HealthTronics, Inc. and Subsidiaries
Pro Forma Combined Condensed Statements of Operations
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
LITHO HLE
HEALTHTRONICS, MANAGEMENT, CORPORATION PRO FORMA PRO FORMA
INC. INC. (1) (2) ADJUSTMENTS COMBINED
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $ 14,681,941 $ 1,229,851 $ -- 15,911,792
Cost of goods sold, rentals and
services provided 6,863,506 403,283 -- (56,053)(4) 7,210,736
--------------------------------------------------------- ------------
7,818,435 826,568 -- 56,053 8,701,056
Operating costs and expenses:
Salaries, wages and benefits 1,495,364 94,781 -- 1,590,145
Corporate, general and 2,480,012 139,986 -- 97,139 (3) 2,717,137
administrative --------------------------------------------------------- ------------
Income/(loss) from operations 3,843,059 591,801 -- (41,086) 4,393,774
Equity in earnings of
unconsolidated partnerships 102,655 28,672 258,109 (258,109)(5) 131,327
Interest income (expense) (144,730) (40,420) -- (185,150)
--------------------------------------------------------- ------------
Net income/(loss) before minority
interest and income taxes 3,800,984 580,053 258,109 (299,195) 4,339,951
Minority interest (2,291,675) (579,548) -- 258,109 (5) (2,613,114)
--------------------------------------------------------- ------------
Net income/(loss) before income 1,509,309 505 258,109 (41,086) 1,726,837
taxes
Provision for income taxes 304,261 -- -- 304,261
--------------------------------------------------------- ------------
Net income/(loss) $ 1,205,048 $ 505 $258,109 $ (41,086) $ 1,422,576
========================================================= ============
Net income per share/(loss) per share:
Basic $ 0.13 $ 0.15
============ ============
Diluted $ 0.13 $ 0.14
============ ============
Weighted average number of common
and common equivalent shares
Basic 9,223,671 9,662,849
============ ============
Diluted 9,445,537 9,884,716
============ ============
</TABLE>
- --------------------
1. The historical results for Litho Management, Inc. are for the period
January 1, 1998 to May 1, 1998 adjusted to conform with HealthTronics'
presentation of revenue and expenses.
2. The historical results for HLE Corporation are for the period from
January 1, 1998 to September 9, 1998. However, historical results for
Florida Lithology, Inc. ("FLI") and Lithowest, LLC ("Lithowest") have
not been included on the basis of materiality.
3. Adjustment represents additional amortization arising from goodwill
recorded as part of the purchases of Litho Management, Inc. on May 1,
1998 and HLE Corporation on September 9, 1998.
4. Adjustment represents the reduction in depreciation expense from retail
to cost for equipment sold to related party partnerships.
5. Adjustment represents the reclassification of HLE Corporation's
recognition of equity interest in Metro I Stone Management, Ltd. as a
reduction in minority interest as the operations of HealthTronics, Inc.
and Subsidiaries presently includes Metro I Stone Management, Ltd.
F-43
<PAGE> 91
HealthTronics, Inc. and Subsidiaries
Pro Forma Combined Condensed Statements of Operations
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------
LITHO HLE
HEALTHTRONICS, MANAGEMENT, CORPORATION PRO FORMA PRO FORMA
INC. INC. (1) (1) ADJUSTMENTS COMBINED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $5,062,104 $1,436,755 $ - 6,498,859
Cost of goods sold and services
provided 3,263,233 245,326 - (19,729) (3) 3,488,830
------------------------------------------------------ ---------------
1,798,871 1,191,429 19,729 3,010,029
Operating costs and expenses:
Salaries, wages and benefits 723,748 81,102 - 804,850
Corporate, general and
administrative 1,463,683 229,852 - 216,416 (2) 1,909,951
------------------------------------------------------ ---------------
Income/(loss) from operations (388,560) 880,475 - (196,687) 295,228
Equity in earnings of
unconsolidated partnerships 4,669 199,677 (199,677) (4)
Interest income (expense) -
Other income (expense): (38,434) (81,769) - (115,534)
------------------------------------------------------ ---------------
Net income/(loss) before minority
interest and income taxes (422,325) 798,706 199,677 (396,364) 179,694
Minority interest 4,297 (796,975) - 199,677 (4) (593,001)
------------------------------------------------------ ---------------
Net income/(loss) before income
taxes (418,028) 1,731 199,677 (196,687) (413,307)
------------------------------------------------------ ---------------
Provision for income taxes - - - -
====================================================== ===============
Net income/(loss) $ (418,028) $ 1,731 199,677 $(196,687) $ (413,307)
====================================================== ===============
Basic net income per share/(loss)
per share $ (0.05) $ (0.05)
Weighted average number of common
and common equivalent shares 8,010,068 9,010,068
=============== ===============
</TABLE>
- --------------------
1. The historical results for Litho Management, Inc. and HLE Corporation
are for the period January 1, 1997 to December 31, 1997 adjusted to
conform with HealthTronics' presentation of revenue and expenses.
However, historical results for Florida Lithology, Inc. ("FLI") and
Lithowest, LLC ("Lithowest") have not been included in the pro forma on
the basis of materiality of operations.
2. Adjustment represents additional amortization arising from goodwill
recorded as part of the purchase of Litho Management, Inc.
3. Adjustment represents the reduction in depreciation expense from retail
to cost for equipment sold to related party partnerships.
4. Adjustment represents the reclassification of HLE Corporation's
recognition of equity interest in Metro I Stone Management, Ltd. as a
reduction in minority interest as the operations of HealthTronics, Inc.
and Subsidiaries presently includes Metro I Stone Management, Ltd.
F-44
<PAGE> 92
UNTIL __________, 1999 (90 DAYS AFTER THE EFFECTIVE DATE OF
THIS PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR
SUBSCRIPTIONS.
CAPITAL GROWTH MANAGEMENT, INC.
1827 POWERS FERRY ROAD, BUILDING #2
ATLANTA, GEORGIA 30339
The date of this prospectus is ___________, 1999.
<PAGE> 93
PART II
Information Not Required in Prospectus
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The HealthTronics' articles of incorporation provide that no director shall have
any personal liability to HealthTronics or its shareholders for monetary damages
for breach of duty of care or the other duties of a director except for any
appropriation of any business opportunity, for acts or omissions that involve
intentional misconduct or a knowing violation of law, or for any transaction
from which the director derived an improper personal benefit. Copies of
HealthTronics' articles of incorporation and bylaws are available for inspection
by any potential investor or his representative. (See "ADDITIONAL INFORMATION"
in HealthTronics' prospectus). Because of these provisions, HealthTronics and
its shareholders may have a more limited right of action against a director than
they would have absent these provisions. INSOFAR AS INDEMNIFICATION FOR
LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933 MAY BE PERMITTED TO
DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF HEALTHTRONICS PURSUANT TO THE
FOREGOING PROVISIONS, OR OTHERWISE, HEALTHTRONICS HAS BEEN ADVISED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS, THEREFORE,
UNENFORCEABLE. In the event that a claim for indemnification against such
liabilities (other than the payment by HealthTronics of expenses incurred or
paid by a director, officer or controlling person of HealthTronics in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director or controlling person in connection with these securities
being registered, HealthTronics will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The cross-indemnification provisions contained in Article 9 of the
Sales agent Agreement filed as Exhibit 1.1 to the Registration Statement may
limit the liability of controlling persons, officers or directors of
HealthTronics to Capital Growth Management, Inc.
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth the anticipated costs and expenses to
be incurred in connection with the issuance and distribution of the securities
to be registered.
Each amount, except for SEC and NASD fees, is estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ............... $ 1,668.00
Blue Sky fees (excluding legal fees) $ 15,000.00
</TABLE>
II-1
<PAGE> 94
<TABLE>
<CAPTION>
<S> <C>
NASD fee ................... $ 1,625.00
Accounting fees and expenses $170,000.00
Legal fees and expenses .... $ 70,000.00
Printing and engraving ..... $ 30,000.00
Escrow Agent fee ........... $ 500.00
Miscellaneous expenses ..... $ 11,207.00
-----------
Total ...................... $300,000.00
===========
</TABLE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Registrant sold the following
unregistered securities (all of these securities were no par value shares):
(a)(1) On December 31, 1995 OssaTronics, Inc., an
affiliated Georgia corporation formed on
December 23, 1994 was merged into
HealthTronics. The plan of merger was
approved by the shareholders of both
OssaTronics and HealthTronics on March 4,
1995 and was finalized with the Office of
the Secretary of State of Georgia on April
29, 1996. Pursuant to the plan of merger,
100,000 shares were issued to 5 investors,
all of whom were existing shareholders of
HealthTronics.
(a)(2) Between June 24 and December 4, 1996,
1,407,000 shares were sold at $1.00 per
Share to 75 investors pursuant to a private
placement memorandum.
(a)(3) On November 22, 1996, HealthTronics granted
Jon Burke stock options to purchase 50,000
shares of HealthTronics, exercisable at
$1.00 per share for consulting services to
HealthTronics.
(a)(4) On January 1, 1997, HealthTronics granted
Thomas Johnson stock options to purchase
10,000 shares of HealthTronics, exercisable
at $1.00 per share for consulting services
to HealthTronics.
(a)(5) On January 1, 1997, HealthTronics granted
Rubye Davis stock options to purchase 1,000
shares of HealthTronics, exercisable at
$1.00 per share for consulting services to
HealthTronics.
(a)(6) On January 28, 1997, HealthTronics granted
Kei Leyson stock options to purchase 10,000
shares of HealthTronics, exercisable at
$1.00 and $3.00 per share for consulting
services to HealthTronics.
II-2
<PAGE> 95
(a)(7) On March 13, 1997, HealthTronics granted
Richard Thiele MD stock options to purchase
10,000 shares of HealthTronics, exercisable
at $2.50 per share for consulting services
to HealthTronics.
(a)(8) On March 13, 1997, HealthTronics granted Dr.
Reiner Schultheiss stock options to purchase
10,000 shares of HealthTronics, exercisable
at $2.50 per share for consulting services
to HealthTronics.
(a)(9) On March 13, 1997, HealthTronics granted
Wolfgang Schaden stock options to purchase
10,000 shares of HealthTronics, exercisable
at $2.50 per share for consulting services
to HealthTronics.
(a)(10) On May 22, 1997, HealthTronics granted
Suzanne Setzer stock options to purchase
5,000 shares of HealthTronics, exercisable
at $1.00 per share as additional
compensation for services to HealthTronics.
(a)(11) On May 27, 1997, HealthTronics granted Kim
Butler stock options to purchase 3,000
shares of HealthTronics, exercisable at
$1.00 per share as additional compensation
for services to HealthTronics.
(a)(12) On May 22, 1997, HealthTronics granted
Suzanne Setzer stock options to purchase
5,000 shares of HealthTronics, exercisable
at $1.00 per share as additional
compensation for services to HealthTronics.
(a)(13) On June 1, 1997, HealthTronics offered an
aggregate of 200,000 shares in an exchange
offer to the owners of US Lithotripsy, a
limited partnership that is a distributor of
HealthTronics' products, in exchange for a
40% interest in US Lithotripsy. The exchange
offer was accepted by the 6 owners of US
Lithotripsy.
(a)(14) On June 10, 1997, HealthTronics granted
Devonne Pavlak stock options to purchase
3,000 shares of HealthTronics, exercisable
at $1.00 per share as additional
compensation for services to HealthTronics.
(a)(15) On July 11, 1997, HealthTronics granted Carl
Frisina MD stock options to purchase 5,000
shares of HealthTronics, exercisable at
$1.00 per share for consulting services to
HealthTronics.
II-3
<PAGE> 96
(a)(16) On July 11, 1997, HealthTronics granted
Victoria Beck stock options to purchase
25,000 shares of HealthTronics, exercisable
at $1.00 per share pursuant to her
employment agreement as compensation for
services to HealthTronics.
(a)(17) On July 14, 1997, HealthTronics granted John
Jedrosko stock options to purchase 1,000
shares of HealthTronics, exercisable at
$1.00 per share as additional compensation
for services to HealthTronics.
(a)(18) On July 15, 1997, HealthTronics granted John
Harris stock options to purchase 1,000
shares of HealthTronics, exercisable at
$1.00 per share as additional compensation
for services to HealthTronics.
(a)(19) Between July 31, 1997 and February 12, 1998,
HealthTronics sold an aggregate of 758,742
shares at $3.00 per share to 67 investors
pursuant to a private placement memorandum.
(a)(20) On September 16, 1997, HealthTronics granted
Kathy Marshall stock options to purchase
1,000 shares of HealthTronics, exercisable
at $3.00 per share as additional
compensation for services to HealthTronics.
(a)(21) On November 28, 1997, HealthTronics granted
Cascade Lithotripsy stock options to
purchase 33,000 shares of HealthTronics,
exercisable at $3.00 per share in
conjunction with Cascade's purchase of a
LithoTron lithotripter.
(a)(22) On December 25, 1997, HealthTronics granted
Julie Dodd, Kim Butler, John Harris, John
Jedrosko, Kei Leyson, Devonne Pavlak and
Suzy Setzer each stock options to purchase
2,000 shares of HealthTronics, exercisable
at $3.00 per share as additional
compensation for services to HealthTronics.
(a)(23) On December 25, 1997, HealthTronics granted
Kathy Marshall and James Lanham each stock
options to purchase 1,000 shares of
HealthTronics, exercisable at $3.00 per
share as additional compensation for
services to HealthTronics.
(a)(24) On December 25, 1997, HealthTronics granted
Marie Marlow stock options to purchase 5,000
shares of HealthTronics, exercisable at
$3.00 per share as additional compensation
for services to HealthTronics.
II-4
<PAGE> 97
(a)(25) On January 15, 1998, HealthTronics granted
Willie Davis and Herbert Stansbury each
stock options to purchase 500 shares of
HealthTronics, exercisable at $3.00 per
share for consulting services to
HealthTronics.
(a)(26) On March 25, 1998, HealthTronics granted
Marie Marlow stock options to purchase
75,000 shares of HealthTronics, exercisable
at $3.00 per share as additional
compensation for services to HealthTronics.
(a)(27) On April 1, 1998, HealthTronics granted Brad
Devine stock options to purchase 2,000
shares of HealthTronics, exercisable at
$3.00 per share for consulting services to
HealthTronics.
(a)(28) On April 14, 1998, HealthTronics granted
stock options to purchase shares of
HealthTronics, exercisable at $1.00 per
share to Argil Wheelock (65,000 shares), Roy
Brown (9,000 shares) and John Warlick (9,000
shares) in exchange for payment guarantees
on behalf of HealthTronics.
(a)(29) On May 1, 1998 HealthTronics acquired Litho
Management, Inc. in exchange for 700,000
shares.
(a)(30) On June 1, 1998, HealthTronics granted John
Rudnik stock options to purchase 2,000
shares of HealthTronics, exercisable at
$3.00 per share as additional compensation
for services to HealthTronics.
(a)(31) On July 1, 1998, HealthTronics granted Julie
Dodd, Devonne Pavlak, Denise Ballew, Suzanne
Setzer, Kim Butler and Kathy Marshall each
stock options to purchase 2,000 shares of
HealthTronics, exercisable at $3.00 per
share as additional compensation for
services to HealthTronics.
(a)(32) On July 1, 1998, HealthTronics granted Jim
Lanham, Robert DeBord and Paula Willingham
each 1,000 shares of HealthTronics,
exercisable at $3.00 per share as additional
compensation for services to HealthTronics.
(a)(33) On September 9, 1998, HealthTronics executed
an Agreement and Plan of Share Exchange (the
"Exchange Offer") with the three
shareholders of HLE Corp., a Texas
corporation. Pursuant to the Exchange Offer,
the shareholders of HLE Corp. Exchanged all
of
II-5
<PAGE> 98
the issued and outstanding shares of HLE
for 300,000 shares of HealthTronics.
(a)(34) On October 1, 1998, HealthTronics granted
Steve Normal and Greg Dehnert each stock
options to purchase 2,000 shares of
HealthTronics, exercisable at $6.00 per
share as additional compensation for
services to HealthTronics.
(a)(35) Pursuant to this offering, HealthTronics is
granting warrants to Capital Growth
Management, Inc. equal to one warrant for
one share of HealthTronics for each ten
shares of HealthTronics' stock subscribed in
this offering as additional compensation for
Capital Growth's services as sales agent.
(a)(36) On January 15, 1998, HealthTronics granted
two technicians each 500 shares of
HealthTronics, exercisable at $3.00 per
share for consulting services to
HealthTronics.
(a)(37) On May 27, 1997, HealthTronics granted Roy
Brown 20,000 shares of HealthTronics,
exercisable at $1.00 per share as additional
compensation for services.
(a)(38) On May 27, 1998, HealthTronics granted John
Warlick 10,000 shares of HealthTronics,
exercisable at $1.00 per share as additional
compensation for services.
(a)(39) On May 27, 1997, HealthTronics granted Marie
Marlow 10,000 shares of HealthTronics,
exercisable at $1.00 per share as additional
compensation for services.
(a)(40) On May 30, 1997, HealthTronics granted Argil
Wheelock 25,000 shares of HealthTronics,
exercisable at $1.00 per share as additional
compensation for services.
(b) No underwriter was involved in any of these offerings.
HealthTronics sold these Shares or granted or issued these options to its
officers, directors, promoters, employees, distributors (including the officers,
directors and certain employees of its distributors), doctors, family and
friends of HealthTronics' officers and directors.
(c) The Shares described in (a)(1), (a)(10), (a)(29) and
(a)(33) above were sold to the promoters and existing shareholders of
HealthTronics for their interest in OssaTronics, Inc. and the interest of the
owners of US Lithotripsy in US Lithotripsy, and the interest of the owners of
Litho Management, Inc. in Litho Management, Inc. and the interest of
II-6
<PAGE> 99
the owners of HLE Corp. in HLE Corp., as well as for the services of the
promoters of, and consultants to, HealthTronics in organizing HealthTronics. The
Shares described in (a)(2) and (a)(19) above were sold for an aggregate of
$3,682,826 in cash.
(d) Exemption for the transactions described in paragraphs
(a)(1) through (a)(40) above is claimed pursuant to Section (4)(2) of the
Securities Act of 1933. In the transactions described in paragraphs (a)(2),
(a)(10) and (a)(19), the Registrant relied on Rule 506 of Regulation D
promulgated pursuant to Section (4)(2). Each of the Company's investors received
a private placement memorandum containing the information that would be
contained in a Regulation A filing or in a registration statement. Each of the
investors executed an appropriate subscription agreement/letter of investment
intent. Each share issued bears the appropriate restrictive legend. In addition,
Form D was filed with the Securities and Exchange Commission for the
transactions described in paragraphs (a)(2) through (a)(4) above. Furthermore,
the Company's shares were sold to no more than 35 non-accredited investors in
any single private offering and no advertising or public solicitation was
employed by the Company in the sale of its shares.
<TABLE>
<S> <C> <C>
ITEM 27 EXHIBITS
Exhibit Number Description of Exhibit
-------------- -----------------------
1.1 Sales agent Agreement. (1)
3.1 Articles of Incorporation of HealthTronics, Inc. (1)
3.2 Restated By Laws of HealthTronics, Inc. (1)
3.3 By Laws of OssaTronics, Inc. (1)
3.4 Specimen Stock Certificate.(1)
3.5 Agreement and Plan of Merger of OssaTronics, Inc. into
HealthTronics, Inc. (1)
3.6 Amended Articles of Incorporation of HealthTronics, Inc.
(1)
3.7 Subscription Agreement (1)
5 Opinion of Christopher J, Moran, Jr., as to the
legality of the securities being registered. (1)
</TABLE>
II-7
<PAGE> 100
<TABLE>
<S> <C>
9.1 House Group Stock Voting Agreement.
9.2 HMT Group Stock Voting Agreement.(1)
10.1 Escrow Agreement.(1)
10.2 Entity Interest Agreement between HealthTronics and USL.
(1)
10.3 Distributorship Agreement between HealthTronics and USL
and amendments thereto. (1)
10.4 Patent License Agreement dated June 3, 1995 between
OssaTronics, Inc. and HMT High Medical Technologies
GmbH along with amendments thereto. (1)
10.4 (a) Patent Purchase Agreement between VISSH
Voennomedicinsky Institute and HMT. (1)
10.4 (b) U.S. Patent Number 4.979.501 for a method and an
apparatus for medical treatment of the pathological state of
bones. (1)
10.4 (c) Provisional Patent Application for the use of acoustic shock
waves, in the treatment of medical, dental and veterinary
conditions. (1)
10.4 (d) U.S. Patent Number 5,595,178 for a system and an
apparatus for treatment of degenerative bone. (1)
10.4 (e) Second Amendment to Patent License Agreement. (1)
10.5 Distributorship and Manufacturing Agreements between
HealthTronics and HMT for both the OssaTron(R) (11/22/94)
and the LithoTron(R) (1/24/96) and amendments to both
agreements dated March 1, 1996 and August 7, 1996. (1).
10.6 HealthTronics' 401(k) plan. (1)
</TABLE>
II-8
<PAGE> 101
<TABLE>
<S> <C>
10.7 Agreement dated February 15, 1995 between OssaTronics,
Inc., John Warlick, Argil Wheelock, M.D., Karl-Heinz
Restle and Scott A. Cochran. (1)
10.8 Manufacturing Agreement dated June 20, 1996 between
HealthTronics and HMT. (1).
10.9 Agreement and Plan of Share Exchange with HLE Corp. (1)
10.10 Limited Partnership Agreement of US Lithotripsy, L.P. (1)
10.11 Employment Agreement with Ms. Beck. (1)
10.12 LithoTron Service Agreement with Servicetrends. (1)
10.13 Employment Agreement with Ms. Marlow. (1)
10.14 OssaTron Service Contract with Servicetrends. (1)
10.15 Manufacturer's Service Representative Agreement with
Servicetrends. (1)
21.1 Subsidiaries of the Registrant. (1)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Christopher J. Moran, Jr. (contained in his
opinion filed as Exhibit 5). (1)
24.1 Power of Attorney. (1)
27.1 Financial Data Schedule. (1)
99.1 Letter from FDA dated 6/13/97 approving the PMA for the
LithoTron(R) Lithotripsy System, subject to certain
conditions. (1)
</TABLE>
(1) Previously filed.
II-9
<PAGE> 102
ITEM 28 UNDERTAKINGS
The undersigned HealthTronics hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective amendment to this Registration
Statement: (i) to include any prospectus required by Section 10(a)(3) of the
Act; (ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any
liability under the Act, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) To remove from registration by means of
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of
HealthTronics pursuant to the foregoing provisions (See Item 24), or otherwise,
HealthTronics has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
HealthTronics of expenses incurred or paid by a director, officer or controlling
person of HealthTronics in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, HealthTronics will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-10
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Marietta, and the state of Georgia, on May 11,
1999.
(Registrant) HealthTronics, Inc.
By (Signature and Title) /S/ Roy S. Brown
----------------------------
Roy S. Brown
President and Director
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities indicated on May 11, 1999.
<TABLE>
<CAPTION>
Signature Date Title
- --------- ---- -----
<S> <C> <C>
/S/Argil J. Wheelock, M.D. May 11, 1999 Chairman and CEO
- --------------------------------- (principal executive officer)
Argil J. Wheelock, M.D.
/S/Victoria Beck May 11, 1999 Chief Financial Officer (principal financial
- --------------------------------- and accounting officer)
Victoria Beck
/S/Roy S. Brown May 11, 1999 Director
- ---------------------------------
Roy S. Brown
Scott Cochran* May 11, 1999 Director
- ---------------------------------
Scott Cochran
Joachim Voss* May 11, 1999 Director
- ---------------------------------
Joachim Voss
Jon Burke* May 11, 1999 Director
- ---------------------------------
Jon Burke
</TABLE>
*By: /s/ Roy S. Brown
------------------------------------
Roy S. Brown, attorney-in-fact
II-11
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Page Number
- ----------- ---------------------- -----------
<S> <C> <C>
9.1 House Group Stock Voting Agreement.
23.1 Consent of Ernst & Young LLP.
</TABLE>
II-12
<PAGE> 1
EXHIBIT 9.1
STOCK VOTING AGREEMENT
The undersigned, constituting all of the former shareholders of Litho
Management, Inc. and all of the limited partners of U.S. Lithotripsy, L.P.
("USL"), do hereby appoint John House, M.D., as voting agent for the
undersigned and do convey to John House, M.D. the exclusive right to vote any
and all shares that have been received, and are to be received by the
undersigned from HealthTronics, Inc., for a period not to exceed five (5) years.
The purpose of this Stock Voting Agreement is to ensure consistency in the
vote of the former shareholders of Litho Management, Inc. and of the limited
partners of USL.
This Stock Voting Agreement was originally entered into in the city of
Arlington, State of Texas, on September 30, 1998.
/s/ Steven K. House
------------------------------
Steven K. House
/s/ John M. House, M.D.
------------------------------
John M. House, M.D.
------------------------------
Scott Spoerl, CPA
H. Patterson Hezmall, M.D.
------------------------------
/s/ David Ellis, M.D.
------------------------------
David Ellis, M.D.
------------------------------
Paul Thompson, M.D.
<PAGE> 2
STOCK VOTING AGREEMENT
The undersigned, constituting all of the former shareholders of Litho
Management, Inc. and all of the limited partners of U.S. Lithotripsy, L.P.
("USL"), do hereby appoint John House, M.D., as voting agent for the undersigned
and do convey to John House, M.D. the exclusive right to vote any and all shares
that have been received, and are to be received by the undersigned from
HealthTronics, Inc. for a period not to exceed five (5) years.
The purpose of this Stock Voting Agreement is to ensure consistency in the
vote of the former shareholders of Litho Management, Inc. and of the limited
partners of USL.
This Stock Voting Agreement was originally entered into in the city of
Arlington, State of Texas, on September 30, 1998.
-----------------------------------
Steven K. House
/s/ John M. House, M.D.
-----------------------------------
John M. House, M.D.
-----------------------------------
Scott Spoerl, CPA
/s/ H. Patterson Hezmall, M.D.
-----------------------------------
H. Patterson Hezmall, M.D.
-----------------------------------
David Ellis, M.D.
-----------------------------------
Paul Thompson, M.D.
<PAGE> 3
STOCK VOTING AGREEMENT
The undersigned, constituting all of the former shareholders of Litho
Management, Inc. and all of the limited partners of U.S. Lithotripsy, L.P.
("USL"), do hereby appoint John House, M.D., as voting agent for the
undersigned and do convey to John House, M.D. the exclusive right to vote any
and all shares that have been received, and are to be received by the
undersigned from HealthTronics, Inc., for a period not to exceed five (5)
years.
The purpose of this Stock Voting Agreement is to ensure consistency in
the vote of the former shareholders of Litho Management, Inc. and of the
limited partners of USL.
This Stock Voting Agreement was originally entered into in the city of
Arlington, State of Texas, on September 30, 1998.
----------------------------------
Steven K. House
/s/ JOHN M. HOUSE, M.D.
----------------------------------
John M. House, M.D.
----------------------------------
Scott Spoeri, CPA
----------------------------------
H. Patterson Hezmall, M.D.
----------------------------------
David Ellis, M.D.
/s/ PAUL THOMPSON, M.D.
----------------------------------
Paul Thompson, M.D.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 26, 1999 and August 7, 1998, with respect to
the consolidated financial statements of HealthTronics, Inc. and Subsidiaries
and of Litho Management, Inc. and Subsidiaries, respectively, included in
Amendment #3 to the Registration Statement Form SB-2 (No. 333-66977) and the
related Prospectus of HealthTronics, Inc. for the registration of 1,000,000
shares of its common stock.
Ernst & Young LLP
-----------------
Atlanta, Georgia
May 10, 1999
