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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 June 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 NO X
----- -----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock.
9,715,342 SHARES OF NO PAR VALUE COMMON STOCK AS OF JULY 31, 1999
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HEALTHTRONICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Unaudited Income Statement
for the three months ended June 30, 1999 and 1998
and for the six months ended June 30, 1999 and 1998 5
Consolidated Unaudited Statements of Cash Flows for
the three months ended June 30, 1999 and 1998 and for
the six months ended June 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 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
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Part 1. Financial Information
Item 1. Financial Statements
HealthTronics, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 850,421 $ 801,563
Trade accounts receivable, less allowance for doubtful
accounts of $23,988 and $142,682 at June 30, 1999 and
December 31, 1998, respectively 4,028,886 2,796,351
Inventory 937,749 1,179,298
Due from affiliated equity partnerships 157,881 126,102
Vendor deposits 19,917 --
Prepaid expenses 532,225 256,353
Deferred income taxes 253,273 253,273
--------------------------------
Total current assets 6,780,352 5,412,940
Property and equipment, at cost:
Medical devices placed in service 6,339,872 5,434,293
Office equipment, furniture and fixtures 86,820 56,095
Vehicles and accessories 846,056 263,986
--------------------------------
7,272,748 5,754,374
Less accumulated depreciation (1,490,120) (819,757)
--------------------------------
Net property and equipment 5,782,628 4,934,617
Deferred income taxes 297,699 297,699
Partnership investments 299,047 241,848
Goodwill (net of accumulated amortization of $232,490 and
$124,280 at June 30, 1999 and December 31, 1998,
respectively) 3,013,750 3,121,960
Patent license (net of accumulated amortization of $39,996
and $35,000 at June 30, 1999 and December 31, 1998,
respectively) 60,004 65,000
Other assets 35,940 40,803
--------------------------------
Total assets $ 16,269,420 $ 14,114,867
================================
</TABLE>
3
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,013,141 $ 655,840
Customer deposits 30,000 --
Short-term borrowings 621,123 193,256
Income taxes payable 211,569 --
Warranty accrual 424,958 295,829
Other accrued expenses 872,871 434,389
Deferred profit 54,000 --
Current portion of long-term debt 1,098,208 1,209,947
--------------------------------
Total current liabilities 4,325,870 2,789,261
Long-term debt, less current portion 1,809,575 2,231,215
Minority interest 1,695,683 1,469,678
--------------------------------
Total liabilities 7,831,128 6,490,154
Shareholders' equity:
Common stock - no par value, voting:
Authorized - 30,000,000 shares at June 30, 1999 and
December 31, 1998
Issued and outstanding - 9,715,342 and 9,665,342
shares at June 30, 1999 and December 31, 1998,
respectively 7,453,226 7,403,226
Retained earnings 985,066 221,487
--------------------------------
8,438,292 7,624,713
--------------------------------
Total liabilities and shareholders' equity $ 16,269,420 $ 14,114,867
================================
</TABLE>
See accompanying notes.
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HealthTronics, Inc. and Subsidiaries
Consolidated Income Statement
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 7,008,685 $ 4,346,613 $ 11,655,012 $ 6,769,032
Cost of goods sold, rentals and
services provided 3,359,262 2,426,619 5,217,307 3,979,339
---------------------------------------------------------
3,649,423 1,919,994 6,437,705 2,789,693
Salaries, wages and benefits 804,751 343,958 1,316,480 625,498
General and administrative
expenses 1,052,038 532,735 1,883,443 906,391
---------------------------------------------------------
1,792,634 1,043,301 3,237,782 1,257,804
Equity in earnings of unconsolidated
partnerships 24,076 62,105 44,863 62,105
Minority interest (965,071) (463,579) (1,860,397) (472,592)
Interest expense (76,046) (37,090) (176,323) (49,348)
Interest income -- 7,224 3,607 19,713
Partnership distributions 34,992 16,750 54,233 16,750
---------------------------------------------------------
Net income before income taxes 810,585 628,711 1,303,765 834,432
Provision for income taxes (363,045) (166,886) (540,186) (166,886)
---------------------------------------------------------
Net income $ 447,540 $ 461,825 $ 763,579 $ 667,546
=========================================================
Basic and diluted income per common share:
Basic $ 0.05 $ 0.05 $ 0.08 $ 0.08
=========================================================
Diluted $ 0.05 $ 0.05 $ 0.08 $ 0.07
=========================================================
Weighted average common shares outstanding:
Basic 9,680,727 9,134,573 9,673,077 8,892,359
=========================================================
Diluted 9,944,227 9,312,240 9,936,577 9,070,026
=========================================================
</TABLE>
See accompanying notes.
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HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 447,540 $ 461,825 $ 763,579 $ 667,546
Adjustments to reconcile net
income to cash used in
operating activities:
Depreciation and
amortization 403,938 156,036 783,569 216,277
Deferred profit 54,000 -- 54,000 --
Equity in earnings of
unconsolidated partnerships (24,076) (62,105) (44,863) (62,105)
Minority interest in
subsidiaries, net of
distributions (68,465) 356,485 226,005 374,092
Changes in operating assets
and liabilities, net of
businesses acquired:
Trade accounts
receivable (1,015,513) 1,031,905 (1,232,535) (426,132)
Due from affiliated
partnerships (12,213) (165,372) (31,779) 976,966
Inventory 168,499 (399,848) 241,549 2,834
Vendor deposits 300,308 64,198 (19,917) (201,042)
Prepaid expenses (148,998) 24,558 (275,872) (70,660)
Deferred income taxes -- (491,136) -- (491,136)
Trade accounts payable 249,399 (649,605) 357,301 (1,605,035)
Customer deposits -- (85,700) 30,000 (330,600)
Deferral of profit on
medical device sales to
related parties -- (410,061) -- --
Income taxes payable 97,495 325,098 211,569 325,098
Warranty accrual 138,115 80,490 129,129 213,140
Accrued expenses 381,226 62,817 438,482 22,898
---------------------------------------------------------
Net cash used in (provided by)
operating activities 971,255 299,585 1,630,217 (387,859)
</TABLE>
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HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property and
equipment $ (803,311) $ (544,856) $(1,518,374) $ (583,418)
Other assets 4,863 (23,999) 4,863 (23,999)
Purchases of partnership
investments, net of cash
acquired (3,029) 674,458 (12,336) 661,958
---------------------------------------------------------
Net cash provided by (used in)
investing activities (801,477) 105,603 (1,525,847) 54,541
FINANCING ACTIVITIES
Proceeds from issuance of
common stock 50,000 -- 50,000 60,000
Proceeds from issuance of long-
term debt 167,875 86,560 167,875 51,000
Principal payments on long-term
debt (545,124) (44,927) (701,254) (244,927)
Proceeds from short-term
borrowings 1,350,000 -- 3,125,000 --
Principal payments on short-term
borrowings (1,385,927) (200,000) (2,697,133) (200,000)
---------------------------------------------------------
Net cash used in financing
activities (363,176) (158,367) (55,512) (333,927)
---------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (193,398) 246,821 48,858 (667,245)
Cash and cash equivalents at
beginning of period 1,043,819 882,628 801,563 1,796,694
---------------------------------------------------------
Cash and cash equivalents at end
of period $ 850,421 $ 1,129,449 $ 850,421 $ 1,129,449
=========================================================
</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 principals 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.
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,
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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>
JUNE 30, DECEMBER 31,
1999 1998
-------------------------------
(UNAUDITED)
<S> <C> <C>
Medical devices $889,749 $1,091,498
Consumables 48,000 87,800
------------------------------
$937,749 $1,179,298
==============================
</TABLE>
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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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator: Net income $ 447,540 $ 461,825 $ 763,579 $ 667,546
========== ========== ========== ==========
Denominator for weighted average
shares outstanding 9,680,727 9,134,573 9,673,077 8,892,359
Basic earnings per share 0.05 0.05 0.08 0.08
Effect of dilutive securities:
Weighted average shares
outstanding 9,680,727 9,134,573 9,673,077 8,892,359
Stock options 263,500 177,667 263,500 177,667
Denominator for diluted earnings per
share 9,944,227 9,312,240 9,936,577 9,070,026
Diluted earnings per share 0.05 0.05 0.08 0.07
</TABLE>
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.
RESULTS OF CONSOLIDATED OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Revenue: Net revenue increased from $6,769,032 for the six months
ended June 30, 1998 to $11,655,012 for the six months ended June 30, 1999, an
increase of 72%. 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 (two months of
consolidated results in 1998 as compared to six 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 $3,979,339 for the six months ended
June 30, 1998 to $5,217,307 for the six months ended June 30, 1999, an increase
of 31%. This is attributable to the May 1998 acquisition of the remaining
general partnership interest in US Lithotripsy (two months of consolidated
results in 1998 as compared to six months of consolidated results in 1999) and
the required consolidation of the related partnerships' operations and increased
leasing activity.
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Salaries, Wages and Benefits: Salaries, wages and benefits increased
from $625,498 for the six months ended June 30, 1998 to $1,316,480 for the six
months ended June 30, 1999, an increase of 110%. This is attributable to (1) the
May 1998 acquisition of the remaining general partnership interest in US
Lithotripsy (two months of consolidated results in 1998 as compared to six
months of consolidated results in 1999) and the required consolidation of the
related partnerships' operations and (2) the hiring of additional technicians
for expanding leasing operations.
General and Administrative Expenses: General and administrative
expenses increased from $906,391 for the six months ended June 30, 1998 to
$1,883,443 for the six months ended June 30, 1999, an increase of 108%. This 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 (two months of consolidated results in 1998 as
compared to six 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 Subsidiaries: Equity in earnings
of unconsolidated subsidiaries decreased from $62,105 for the six months ended
June 30, 1998 to $44,863 for the six months ended June 30, 1999, a decrease of
28%. This decrease is attributable to the change from the equity method of
accounting for the US Lithotripsy partnerships (for the first four months of
1998) to the consolidation method after the May 1998 acquisition.
Minority Interest: Minority interest increased from $472,592 for the
six months ended June 30, 1998 to $1,860,397 for the six months ended June 30,
1999, an increase of 294%. 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 (two months
of consolidated results in 1998 as compared to six months of consolidated
results in 1999) and the subsequent growth of the consolidated partnerships.
Interest Expense: Interest expense increased from $49,348 for the six
months ended June 30, 1998 to $176,323 for the six months ended June 30, 1999,
an increase of 257%. This 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 (two months of consolidated results in 1998
as compared to six months of consolidated results in 1999).
Interest Income: Interest income decreased from $19,713 for the six
months ended June 30, 1998 to $3,607 for the six months ended June 30, 1999, a
decrease of 82%. This decrease is due to the use of available cash balances to
fund capital investment and working capital requirements.
Partnership Distributions: Partnership distributions increased from
$16,750 for the six months ended June 30, 1998 to $54,233 for the six months
ended June 30, 1999, an increase of 224%. This increase is attributable to the
growth in distributions made by partnerships accounted for on the cost method
basis.
Provision for Income Taxes: Provision for income taxes increased from
$166,886 for the six months ended June 30, 1998 to $540,186 for the six months
ended June 30, 1999, an increase of 224%. During 1998 HealthTronics, Inc.
applied all 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 six months ended June
30, 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Revenue: Net revenue increased from $4,346,613 for the three months
ended June 30, 1998 to $7,008,685 for the three months ended June 30, 1999, an
increase of 61%. 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 and (2) 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 $2,426,619 for the three months
ended June 30, 1998 to $3,359,262 for the three months ended June
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30, 1999, an increase of 38%. 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 and increased
leasing activity.
Salaries, Wages and Benefits: Salaries, wages and benefits increased
from $343,958 for the three months ended June 30, 1998 to $804,751 for the three
months ended June 30, 1999, an increase of 134%. 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 and the required consolidation of the related partnerships'
operations and (2) the hiring of additional technicians for expanding leasing
operations.
.
General and Administrative Expenses: General and administrative
expenses increased from $532,735 for the three months ended June 30, 1998 to
$1,052,038 for the three months ended June 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 and the required consolidation of
the related partnerships' operations and (2) the increase in expenses incurred
in the clinical trials of the OssaTron, over the corresponding period.
Equity in Earnings of Unconsolidated Subsidiaries: Equity in earnings
of unconsolidated subsidiaries decreased from $62,105 for the three months ended
June 30, 1998 to $24,076 for the three months ended June 30, 1999, a decrease of
61%. This decrease is attributable to the change from the equity method of
accounting for the US Lithotripsy partnerships (for the first four months of
1998) to the consolidation method after the May 1998 acquisition.
Minority Interest: Minority interest increased from $463,579 for the
three months ended June 30, 1998 to $965,071 for the three months ended June 30,
1999, an increase of 108%. This is 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 (two months
of consolidated results in 1998 as compared to three months of consolidated
results in 1999) and the subsequent growth of the consolidated partnerships.
Interest Expense: Interest expense increased from $37,090 for the three
months ended June 30, 1998 to $76,046 for the three months ended June 30, 1999,
an increase of 105%. 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.
Interest Income: Interest income decreased from $7,224 for the three
months ended June 30, 1998 to $0 for the three months ended June 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 increased
from $16,750 for the three months ended June 30, 1998 to $34,992 for the three
months ended June 30, 1999, an increase of 109%. This increase is attributable
to the growth in distributions made by partnerships accounted for on the cost
method basis.
Provision for Income Taxes: Provision for income taxes
increased from $166,886 for the three months ended June 30, 1998 to $363,045 for
the three months ended June 30, 1999, an increase of 118%. During 1998
HealthTronics, Inc. applied all 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 June 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 June 30, 1999 we have $418,278 outstanding
12
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under the equipment financing line and $450,000 outstanding under the line of
credit. All other borrowings are similar to those in place at December 31, 1998.
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. Among the events and uncertainties which could adversely affect
future periods is the inability to complete the initial public offering
(discussed below) at the maximum level.
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:
- assess and test all internal information systems and other
systems that may be affected by the year 2000 date change;
- assess and test our products that may be affected by the year
2000 date change;
- communicate with third parties that supply our products to
ensure they are addressing the year 2000 issue; and
- 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 have begun testing to determine that our internal systems
are year 2000 compliant. We expect to complete testing and establish compliance
with respect to all of our 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.
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 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:
- 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 and have not yet developed a complete contingency plan. 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 5. Other Information
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 June 16, 1999 subscriptions had been received for more than the minimum
number of shares offered. The offering will be open for an initial period ending
August 15, 1999. If the maximum number of shares has not been sold the offering
may be open until February 20, 2000. The proceeds will be held in escrow
according to the terms of the offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index on Page 16
(b) Reports on Form 8-K - No reports on Form 8-K were
filed during the six months ended June 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: August 6, 1999
15
<PAGE> 16
HEALTHTRONICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
No. Exhibit
<S> <C>
3 Amendment to Restated Bylaws of HealthTronics, Inc., July 9, 1999
27 Financial Data Schedule, June 30, 1999 (for SEC use only)
</TABLE>
16
<PAGE> 1
EXHIBIT 3
AMENDMENT TO RESTATED BYLAWS
OF
HEALTHTRONICS, INC.
Article Two, Section 2.3 of the Restated Bylaws of
HealthTronics, Inc. is amended as follows:
ARTICLE TWO
2.3 Special Meetings. Special meetings of the shareholders may be
called at any time by the Board of Directors, the President, or by any holder or
holders of at least 10% of all the votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting. Notice of any special
meeting of shareholders shall state the purpose or purposes for which the
meeting is called.
All remaining provisions of the Restated Bylaws shall remain unchanged.
I hereby certify that the foregoing is a true and correct copy of the
Amendment to Restated Bylaws of HealthTronics, Inc. duly adopted by the Board of
Directors of the Corporation on the 9th day of July, 1999.
-----------------------------------
SCOTT A. COCHRAN, Secretary
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHTRONICS, INC. FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 850,421
<SECURITIES> 0
<RECEIVABLES> 4,028,886
<ALLOWANCES> 23,988
<INVENTORY> 937,749
<CURRENT-ASSETS> 6,780,352
<PP&E> 7,272,748
<DEPRECIATION> 1,490,120
<TOTAL-ASSETS> 16,269,420
<CURRENT-LIABILITIES> 4,325,870
<BONDS> 0
0
0
<COMMON> 7,453,226
<OTHER-SE> 984,966
<TOTAL-LIABILITY-AND-EQUITY> 16,269,420
<SALES> 11,655,012
<TOTAL-REVENUES> 11,655,012
<CGS> 5,217,307
<TOTAL-COSTS> 3,237,782
<OTHER-EXPENSES> 1,761,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,323
<INCOME-PRETAX> 1,303,765
<INCOME-TAX> 540,186
<INCOME-CONTINUING> 763,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 763,579
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
