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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-14921
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-221066
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 FRANKLIN ROAD, SUITE 545
MARIETTA, GEORGIA 30067
(Address of principal executive (Zip Code)
offices)
(770) 419-0691
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock.
10,715,742 SHARES OF NO PAR VALUE COMMON STOCK AS OF NOVEMBER 10, 1999
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HEALTHTRONICS, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Unaudited Income Statement for the three
months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1999 and 1998 5
Consolidated Unaudited Statements of Cash Flows
for the three months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
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Part 1. Financial Information
Item 1. Financial Statements
HealthTronics, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,306,270 $ 801,563
Trade accounts receivable, less allowance for doubtful
accounts of $29,237 and $142,682 at September 30, 1999
and December 31, 1998, respectively 4,612,349 2,796,351
Inventory 1,449,384 1,179,298
Due from affiliated equity partnerships 175,606 126,102
Vendor deposits 517,220 --
Prepaid expenses 67,511 256,353
Deferred income taxes 253,273 253,273
------------ ------------
Total current assets 12,381,613 5,412,940
Property and equipment, at cost:
Medical devices placed in service 7,278,140 5,434,293
Office equipment, furniture and fixtures 93,304 56,095
Vehicles and accessories 1,006,222 263,986
------------ ------------
8,377,666 5,754,374
Less accumulated depreciation (1,856,242) (819,757)
------------ ------------
Net property and equipment 6,521,424 4,934,617
Deferred income taxes 297,699 297,699
Partnership investments 411,067 241,848
Goodwill (net of accumulated amortization of $286,595 and
$124,280 at September 30, 1999 and December 31, 1998,
respectively) 2,959,645 3,121,960
Patent license (net of accumulated amortization of $42,494
and $35,000 at September 30, 1999 and December 31, 1998,
respectively) 57,506 65,000
Other assets 42,460 40,803
------------ ------------
Total assets $ 22,671,414 $ 14,114,867
============ ============
</TABLE>
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<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,301,575 $ 655,840
Customer deposits 594,352 --
Short-term borrowings 288,394 193,256
Income taxes payable 205,494 --
Warranty accrual 396,833 295,829
Other accrued expenses 1,005,902 434,389
Deferred profit 60,000 --
Current portion of long-term debt 998,562 1,209,947
------------ ------------
Total current liabilities 4,851,112 2,789,261
Long-term debt, less current portion 1,699,987 2,231,215
Long-term deferred profit 178,680 --
Minority interest 2,218,547 1,469,678
------------ ------------
Total liabilities 8,948,326 6,490,154
Shareholders' equity:
Common stock - no par value, voting:
Authorized - 30,000,000 shares at September 30,
1999 and December 31, 1998
Issued and outstanding - 10,715,742 and 9,665,342
shares at September 30, 1999 and
December 31, 1998, respectively 12,250,305 7,403,226
Retained earnings 1,472,783 221,487
------------ ------------
13,723,088 7,624,713
------------ ------------
Total liabilities and shareholders' equity $ 22,671,414 $ 14,114,867
============ ============
</TABLE>
See accompanying notes.
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HealthTronics, Inc. and Subsidiaries
Consolidated Income Statement
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue $ 6,849,538 $ 4,175,001 $ 18,504,550 $ 10,944,033
Cost of goods sold, rentals and
services provided 2,369,713 1,398,008 7,587,020 5,377,347
------------ ------------ ------------ ------------
4,479,825 2,776,993 10,917,530 5,566,686
Salaries, wages and benefits 747,689 425,093 2,064,169 1,050,591
General and administrative
expenses 1,138,407 875,589 3,021,850 1,781,980
------------ ------------ ------------ ------------
2,593,729 1,476,311 5,831,511 2,734,115
Equity in earnings of unconsolidated
partnerships 38,865 -- 83,728 62,105
Minority interest (1,743,993) (927,797) (3,604,390) (1,400,389)
Interest expense (76,590) (62,063) (250,627) (111,411)
Interest income -- 3,423 1,321 23,136
Partnership distributions 41,143 43,896 95,376 60,646
------------ ------------ ------------ ------------
Net income before income taxes 853,154 533,770 2,156,919 1,368,202
Provision for income taxes (365,437) (106,754) (905,623) (273,640)
------------ ------------ ------------ ------------
Net income $ 487,717 $ 427,016 $ 1,251,296 $ 1,094,562
============ ============ ============ ============
Basic and diluted income per
common share:
Basic $ 0.05 $ 0.05 $ 0.13 $ 0.12
============ ============ ============ ============
Diluted $ 0.05 $ 0.04 $ 0.13 $ 0.12
============ ============ ============ ============
Weighted average common shares
outstanding:
Basic 10,074,038 9,437,081 9,808,199 9,074,829
============ ============ ============ ============
Diluted 10,263,704 9,614,748 9,997,866 9,252,496
============ ============ ============ ============
</TABLE>
See accompanying notes.
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HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 487,717 $ 427,016 $ 1,251,296 $ 1,094,562
Adjustments to reconcile net
income to cash provided by
(used in) operating activities:
Depreciation and
amortization 422,725 253,268 1,206,294 469,545
Deferred profit 184,680 362,584 238,680 362,584
Equity in earnings of
unconsolidated partnerships (38,865) -- (83,728) (62,105)
Minority interest in
subsidiaries, net of
distributions 522,864 278,247 748,869 652,339
Changes in operating assets
and liabilities, net of
businesses acquired:
Trade accounts receivable (583,463) (165,587) (1,815,998) (591,719)
Due from affiliated
partnerships (17,725) (63,369) (49,504) 913,597
Inventory (511,635) (757,926) (270,086) (755,092)
Vendor deposits (497,303) 220,438 (517,220) 19,396
Prepaid expenses 464,714 (84,666) 188,842 (155,326)
Deferred income taxes -- (45,822) -- (536,958)
Trade accounts payable 288,434 53,763 645,735 (1,551,272)
Customer deposits 564,352 (131,400) 594,352 (462,000)
Income taxes payable (6,075) (105,126) 205,494 219,972
Warranty accrual (28,125) (30,854) 101,004 182,286
Accrued expenses 133,031 77,064 571,513 99,962
--------- --------- ----------- -----------
Net cash used in (provided by)
operating activities 1,385,326 287,630 3,015,543 (100,229)
</TABLE>
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HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property and
equipment $(1,104,918) $ (461,121) $(2,623,292) $(1,044,539)
Other assets (6,520) (10,648) (1,657) (34,647)
Purchases of partnership
investments, net of cash
acquired (73,155) (410,111) (85,491) 251,847
----------- ----------- ----------- -----------
Net cash used in investing
activities (1,184,593) (881,880) (2,710,440) (827,339)
FINANCING ACTIVITIES
Proceeds from issuance of common
stock, net of issue costs 4,797,079 -- 4,847,079 60,000
Proceeds from issuance of
long-term debt 613,797 695,000 781,672 746,000
Principal payments on long-term
debt (823,031) (243,209) (1,524,285) (488,136)
Proceeds from short-term
borrowings 863,714 500,000 3,988,714 500,000
Principal payments on short-term
borrowings (1,196,443) (500,000) (3,893,576) (700,000)
----------- ----------- ----------- -----------
Net cash provided by financing
activities 4,255,116 451,791 4,199,604 117,864
----------- ----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents 4,455,849 (142,459) 4,504,707 (809,704)
Cash and cash equivalents at
beginning of period 850,421 1,129,449 801,563 1,796,694
----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period $ 5,306,270 $ 986,990 $ 5,306,270 $ 986,990
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
7
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HealthTronics, Inc and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the
accounts of HealthTronics, Inc. and its subsidiaries. All significant
intercompany transactions have been eliminated.
In the opinion of HealthTronics management, the accompanying
unaudited consolidated financial statements include all the necessary
adjustments (consisting of normal recurring adjustments) for a fair
presentation of its consolidated financial position and results of
operations for the interim periods presented. The information presented
in these financial statements has not been audited but was prepared in
conformity with generally accepted accounting principles for interim
financial information and instructions for Form 10-QSB and Item 310(b)
of Regulation S-B. Although management believes that the disclosures in
these financial statements are adequate to make the information
presented not misleading, certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
financial statements should be read in conjunction with HealthTronics'
Form SB-2 filed with the Securities and Exchange Commission on May 12,
1999.
Preparation of these interim consolidated financial statements
in accordance with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
The interim results may not be indicative of the results that may be
expected for the year.
2. Description of Business
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.
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<PAGE> 9
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 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 other HealthTronics 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.
3. Inventory
Inventory is carried at the lower of cost (first-in, first-out) or
market and consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Medical devices and accessories $1,341,236 $1,091,498
Consumables 108,148 87,800
----------- ----------
$1,449,384 $1,179,298
=========== ==========
</TABLE>
9
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4. Earnings Per Share Information
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share. SFAS No. 128 replaced the
calculation of primary and fully diluted income per share with basic
and diluted income per share. Unlike primary income per share, the
calculation of basic income per share excludes the dilutive effects of
options, warrants, and convertible securities. Diluted income per share
is very similar to the previously reported fully diluted income per
share.
HealthTronics' per share amounts for all periods have been
presented in accordance with the provisions of SFAS No. 128. Basic and
diluted income per share are computed based on the weighted average
number of common shares outstanding. Common share equivalents (which
consist of options) are excluded from the computation of diluted income
per share if the effect would be dilutive.
The following table sets forth the computation of earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
--------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Numerator: Net income $ 487,717 $ 427,016 $ 1,251,296 $ 1,094,562
=============== ============= =========== =============
Denominator for weighted average
shares outstanding 10,074,038 9,437,081 9,808,199 9,074,829
Basic earnings per share 0.05 0.05 0.13 0.12
Effect of dilutive securities:
Weighted average shares
outstanding 10,074,038 9,437,081 9,808,199 9,074,829
Stock options 189,667 177,667 189,667 177,667
Denominator for diluted earnings per
share 10,263,704 9,614,748 9,997,866 9,252,496
Diluted earnings per share 0.05 0.04 0.13 0.12
</TABLE>
5. Use of Proceeds
HealthTronics, Inc. filed a Registration Statement on Form
SB-2 (Registration No. 333-66977) for the offer and sale of a minimum
of 83,334 shares and a maximum of 1,000,000 shares of common stock at
$6.00 per share. The Registration Statement was declared effective on
May 17, 1999, and the offering commenced May 20, 1999.
On August 31, 1999, we completed an initial public offering
("IPO") of our common stock, in which we sold the maximum available,
1,000,000 shares of common stock, at $6 per share. Net proceeds from
the IPO were $4,797,080, of which approximately $568,725 was used to
repay indebtedness used to finance capital assets.
On September 1, 1999, we filed our application with The NASDAQ
Stock Market. Our application is currently under review. On October 15,
1999 we began public trading on the NASDAQ OTC Bulletin Board Market.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of consolidated operations should be read in conjunction with the
unaudited financial statements included elsewhere in this Form 10-QSB.
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RESULTS OF CONSOLIDATED OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net Revenue: Net revenue increased from $10,944,033 for the nine months
ended September 30, 1998 to $18,504,550 for the nine months ended September 30,
1999, an increase of 69%. This increase is attributable to (1) the May 1998
acquisition of the remaining general partnership interest in US Lithotripsy and
the required consolidation of the related partnerships' operations (five months
of consolidated results in 1998 as compared to nine months of consolidated
results in 1999), (2) the growth in US Lithotripsy partnerships and (3)
HealthTronics' increase in lease revenues from corporate-owned equipment.
Cost of Goods Sold, Rentals and Services Provided: Cost of goods sold,
rentals and services provided increased from $5,377,347 for the nine months
ended September 30, 1998 to $7,587,020 for the nine months ended September 30,
1999, an increase of 41%. This increase is attributable to the May 1998
acquisition of the remaining general partnership interest in US Lithotripsy
(five months of consolidated results in 1998 as compared to nine months of
consolidated results in 1999) and the required consolidation of the related
partnerships' operations and increased leasing activity.
Salaries, Wages and Benefits: Salaries, wages and benefits increased
from $1,050,591 for the nine months ended September 30, 1998 to $2,064,169 for
the nine months ended September 30, 1999, an increase of 97%. This increase is
attributable to (1) the May 1998 acquisition of the remaining general
partnership interest in US Lithotripsy (five months of consolidated results in
1998 as compared to nine months of consolidated results in 1999) and the
required consolidation of the related partnerships' operations, (2) the hiring
of additional technicians for expanding leasing operations and (3) the
September, 1999 hiring of field service engineers for the start up of
HealthTronic's new service department.
General and Administrative Expenses: General and administrative
expenses increased from $1,781,980 for the nine months ended September 30, 1998
to $3,021,850 for the nine months ended September 30, 1999, an increase of 70%.
This increase is attributable to (1) the May 1998 acquisition of the remaining
general partnership interest in US Lithotripsy and the required consolidation of
the related partnerships' operations (five months of consolidated results in
1998 as compared to nine months of consolidated results in 1999) and (2) the
increase in expenses incurred in the clinical trials of the OssaTron, over the
corresponding period.
Equity in Earnings of Unconsolidated Partnerships: Equity in earnings
of unconsolidated partnerships increased from $62,105 for the nine months ended
September 30, 1998 to $83,728 for the nine months ended September 30, 1999, a
increase of 35%. This increase is attributable to the 1999 addition of two
equity-based US Lithotripsy partnerships.
Minority Interest: Minority interest increased from $1,400,389 for the
nine months ended September 30, 1998 to $3,604,390 for the nine months ended
September 30, 1999, an increase of 157%. This increase is attributable to the
May 1998 acquisition of the remaining general partnership interest in US
Lithotripsy and the required consolidation of the related partnerships'
operations (five months of consolidated results in 1998 as compared to nine
months of consolidated results in 1999) and the subsequent growth of the
consolidated partnerships.
Interest Expense: Interest expense increased from $111,411 for the nine
months ended September 30, 1998 to $250,627 for the nine months ended September
30, 1999, an increase of 125%. This increase is attributable to the increase in
debt resulting from the consolidation of subsidiary partnerships due to the
acquisition of the remaining interest in US Lithotripsy (five months of
consolidated results in 1998 as compared to nine months of consolidated results
in 1999) and to additional equipment financing of leased capital assets.
Interest Income: Interest income decreased from $23,136 for the nine
months ended September 30, 1998 to $1,321 for the nine months ended September
30, 1999, a decrease of 94%. This decrease is due to the use of available cash
balances to fund capital investment and working capital requirements.
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Partnership Distributions: Partnership distributions increased from
$60,646 for the nine months ended September 30, 1998, to $95,376 for the nine
months ended September 30, 1999, an increase of 57%. This increase is
attributable to the addition of four cost-based partnership investments and the
growth in distributions made by existing partnerships accounted for on the cost
method basis.
Provision for Income Taxes: Provision for income taxes increased from
$273,640 for the nine months ended September 30, 1998 to $905,623 for the nine
months ended September 30, 1999, an increase of 231%. During 1998,
HealthTronics, Inc. applied all of its remaining net operating tax loss
carryforwards against the earnings of the Company. 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
nine months ended September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Revenue: Net revenue increased from $4,175,001 for the three months
ended September 30, 1998 to $6,849,538 for the three months ended September 30,
1999, an increase of 64%. The 1999 third quarter revenues include revenues
generated by ten additional US Lithotripsy partnerships and eleven additional
corporate-owned leased medical devices.
Cost of Goods Sold, Rentals and Services Provided: Cost of goods sold,
rentals and services provided increased from $1,398,008 for the three months
ended September 30, 1998 to $2,369,713 for the three months ended September 30,
1999, an increase of 70%. The 1999 third quarter cost of goods sold, rentals and
services provided includes expenses generated by ten additional US Lithotripsy
partnerships and eleven additional corporate-owned leased medical devices.
Salaries, Wages and Benefits: Salaries, wages and benefits increased
from $425,093 for the three months ended September 30, 1998 to $747,689 for the
three months ended September 30, 1999, an increase of 76%. This increase is
attributable to the addition of approximately 20 employees over the
corresponding period in 1998.
General and Administrative Expenses: General and administrative
expenses increased from $875,589 for the three months ended September 30, 1998
to $1,138,407 for the three months ended September 30, 1999, an increase of 30%.
This increase is primarily attributable to an increase in OssaTron study
expenses and commission expenses over the corresponding quarter in 1998.
Equity in Earnings of Unconsolidated Partnerships: Equity in earnings
of unconsolidated partnerships increased from $0 for the three months ended
September 30, 1998 to $38,865 for the three months ended September 30, 1999.
This increase is attributable to the 1999 addition of two equity-based US
Lithotripsy partnerships.
Minority Interest: Minority interest increased from $927,797 for the
three months ended September 30, 1998 to $1,743,993 for the three months ended
September 30, 1999, an increase of 88%. This increase is primarily attributable
to the addition of ten new US Lithotripsy consolidated partnerships and the
growth of existing consolidated partnerships.
Interest Expense: Interest expense increased from $62,063 for the three
months ended September 30, 1998 to $76,590 for the three months ended September
30, 1999, an increase of 23%. This increase is primarily attributable to
additional equipment financing of leased capital assets.
Interest Income: Interest income decreased from $3,423 for the three
months ended September 30, 1998 to $0 for the three months ended September 30,
1999. This decrease is due to the use of available cash balances to fund capital
investment and working capital requirements.
Partnership Distributions: Partnership distributions decreased from
$43,896 for the three months ended September 30, 1998 to $41,143 for the three
months ended September 30, 1999, a decrease of 6%. This decrease is
attributable to the timing of distributions made by existing partnerships
accounted for on the cost method basis.
12
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Provision for Income Taxes: Provision for income taxes increased from
$106,754 for the three months ended September 30, 1998 to $365,437 for the three
months ended September 30, 1999, an increase of 242%. During 1998,
HealthTronics, Inc. applied all of its remaining net operating tax loss
carryforwards against the earnings of the Company. 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
three months ended September 30, 1998.
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 HealthTronics. In July, 1998 we obtained a $650,000 line
of credit and a $1,000,000 equipment financing line with a Tennessee bank. On
July 31, 1999 HealthTronics renewed the Tennessee bank financing through June
30, 2000 with an increase in the line of credit availability from $650,000 to
$1,200,000. As of September 30, 1999 we have $0 outstanding under the equipment
financing line and $129,637 outstanding under the line of credit. All other
borrowings are similar to those in place at December 31, 1998.
On August 31, 1999, we completed an initial public offering ("IPO") of
our common stock, in which we sold 1,000,000 shares of common stock at $6 per
share. Net proceeds from the IPO were $4,797,080, of which approximately
$568,725 was used to repay indebtedness used to finance capital assets.
CAUTIONARY STATEMENTS
Included in this report are forward-looking statements that reflect
management's current outlook for future periods. As always, these expectations
and projections are based on currently available competitive, financial, and
economic data, along with operating plans, and are subject to future events and
uncertainties.
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 continue to evaluate the potential impact of the year 2000 issue. We
have taken steps to ensure that our business systems software and equipment will
continue to function properly after December 31, 1999.
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
completed in September 1999. Many vendors of material hardware and software
components of our systems have indicated that the products used by us are
currently year 2000 compliant.
13
<PAGE> 14
COSTS
To date, we have not incurred any material expenditures in connection
with identifying, evaluating or addressing year 2000 compliance issues. Most of
our 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 anticipate that any additional expenses will be
material. However, 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 department 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:
- the inherent uncertainty of the costs and timing of achieving
compliance on the systems used by us;
- 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
- 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.
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.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds.
On August 31, 1999, HealthTronics, Inc. completed the initial
public offering of its common stock. The placement agent in the offering was
Capital Growth Management, Inc. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form SB-2 (No. 333-66977). The Registration Statement was declared
effective by the Securities and Exchange Commission on May 17, 1999.
The offering commenced on May 20, 1999. The offering
terminated on August 31, 1999 after we had sold all of the 1,000,000 shares of
common stock registered under the Registration Statement. The initial public
offering price was $6 per share for an aggregate initial public offering of
$6,000,000.
We incurred offering expenses in connection with the offering
as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 600,000
Other Expenses 602,920
-----------
Total Expenses $ 1,202,920
===========
</TABLE>
None of the amounts shown were paid directly or indirectly to
any director, officer, general partner of HealthTronics, Inc. or their
associates, persons owning 10 percent or more of any class of equity securities
of HealthTronics, Inc. or an affiliate of HealthTronics, Inc.
Through September 30, 1999, we have applied net offering
proceeds as follows:
<TABLE>
<S> <C>
Repayment of capital equipment debt(1) $ 568,725
</TABLE>
(1) Prior to completion of the offering, the Company borrowed under its
equipment financing line to purchase capital equipment that was
intended to be purchased with the proceeds of the offering.
The remaining $4,228,355 of net offering proceeds has been
reserved for FDA Study expenses, purchase of capital equipment, purchases of
inventory and working capital.
None of the amounts shown were paid directly or indirectly to
any director, officer, general partner of HealthTronics, Inc. or their
associates, persons owning 10 percent or more of any class of equity securities
of HealthTronics, Inc. or an affiliate of HealthTronics, Inc.
Item 5. Other Information
On September 1, 1999, we filed our application with The NASDAQ
Stock Market. Our application is currently under review. On October 15, 1999 we
began public trading on the NASDAQ OTC Bulletin Board Market.
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index on Page 17
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the nine months ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HEALTHTRONICS, INC.
By: /s/ Victoria W. Beck
------------------------------------
Victoria W. Beck
Chief Financial Officer
Date: November 12, 1999
16
<PAGE> 17
HEALTHTRONICS, INC.
INDEX TO EXHIBITS
No. Exhibit
27 Financial Data Schedule, September 30, 1999 (for SEC use only)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHTRONICS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,306,270
<SECURITIES> 0
<RECEIVABLES> 4,641,586
<ALLOWANCES> 29,237
<INVENTORY> 1,449,384
<CURRENT-ASSETS> 12,381,613
<PP&E> 8,377,666
<DEPRECIATION> 1,856,242
<TOTAL-ASSETS> 22,671,414
<CURRENT-LIABILITIES> 4,851,112
<BONDS> 0
0
0
<COMMON> 12,250,305
<OTHER-SE> 1,472,783
<TOTAL-LIABILITY-AND-EQUITY> 22,671,414
<SALES> 18,504,550
<TOTAL-REVENUES> 18,504,550
<CGS> 7,587,020
<TOTAL-COSTS> 12,673,039
<OTHER-EXPENSES> 3,273,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249,306
<INCOME-PRETAX> 2,156,919
<INCOME-TAX> 905,623
<INCOME-CONTINUING> 763,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,251,296
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
