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As filed with the Securities and Exchange Commission on January 26, 1998
Registration No. 333-66977
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NUMBER ONE TO FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Georgia 3845 58-2210668
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
SEC File Number 333-66977
425 Franklin Road, Suite 545, Marietta, Georgia 30067 (770) 419-0691
(Address and telephone number of principal executive offices)
425 Franklin Road, Suite 545, Marietta, Georgia 30067 (770) 419-0691
(Address of principal place of business or intended principal place of
business)
Christopher J. Moran, Jr., 4625 Clary Lakes Drive, Roswell, Georgia
30075 Telephone Number: (770) 518-9542 FAX: (770) 518-9640
(Name, address and telephone number of agent for service)
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Copies of all communications to:
Christopher J. Moran, Esq.
4625 Clary Lakes Drive
Roswell, Georgia 30075
(770) 518-9542
Fax: (770) 518-9640
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Dollar Amount Maximum Offering Maximum
Class of Securities to be Price Per Aggregate Amount of
to be Registered Registered Security Offering Price Registration Fee*
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<S> <C> <C> <C> <C>
No Par Value $6,000,000 $6.00 per $6,000,000 $1,668
Common Stock Share
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* Previously paid on November 9, 1998.
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.
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 of
1933, check the following box. [X]
<PAGE> 2
INITIAL PUBLIC OFFERING PROSPECTUS (SUBJECT TO COMPLETION)
HEALTHTRONICS, INC.
COMMON STOCK
PURCHASE PRICE: $6.00 PER SHARE
83,334 SHARE MINIMUM
1,000,000 SHARE MAXIMUM
MINIMUM INVESTMENT = 100 SHARES ($600)
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK, AND YOU SHOULD CONSIDER A
PURCHASE OF THESE SHARES ONLY IF YOU CAN AFFORD THE LOSS OF YOUR ENTIRE
INVESTMENT (SEE "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS).
This is our Initial Public Offering and there is no public market for our
Shares and there is no assurance that any will develop or continue. (See note 3
below).
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
UNITS OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Discounts and Proceeds to
Public Commissions (1)(2)(3) Company (2)
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<S> <C> <C> <C>
Per Share $ 6.00 $ .60 $ 5.40
Total Minimum $ 500,004.00 $ 50,000.40 $ 450,003.60
Total Maximum $6,000,000.00 $600,000.00 $5,400,000.00
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</TABLE>
(See notes below)
CAPITAL GROWTH MANAGEMENT, INC.
1827 POWERS FERRY ROAD, BUILDING #2
ATLANTA, GEORGIA 30339
The date of this Prospectus is *****, 1999
(1) These figures include compensation to be paid to Capital Growth Management,
Inc. (the "Placement Agent") totaling ten percent.
(2) The proceeds to us do not reflect the deduction of expenses of this
offering, estimated at $198,793, including printing, accounting, legal,
stock transfer, filing, and miscellaneous costs and fees (See "USE OF
PROCEEDS").
(3) This offering is being conducted on a "best-efforts, 83,334 Share minimum
- 1,000,000 Share maximum" basis. In the event that the minimum number of
Shares (83,334) having a gross subscription price of $500,004 is not sold
by 60 days from the date of this Prospectus (Unless extended by us for an
additional 30 days, which extension we would grant if we deemed the 60 day
period after effectiveness of this initial public offering was not a good
time to sell an initial public offering or if our effectiveness with
certain states is delayed until after our effectiveness with the
Securities and Exchange Commission), 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
are sold, this offering will continue until nine months from the date of
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this Prospectus or until all offered Shares are sold, whichever event first
occurs. Your checks should be made payable to"***** as Escrow Agent for
HealthTronics, Inc." and proceeds from the sale of the Shares will be
escrowed with ***** in Atlanta, Georgia, no later than noon of the next
business day following receipt thereof. No interest will be paid to us on
funds held in the Escrow Account. Subscribers will not have the use of
their funds, will not earn interest on funds in the Escrow Account, and
will not be able to obtain return of 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. (See "UNDERWRITING").
Officers, directors and controlling shareholders are not prohibited from
purchasing Shares pursuant to this offering, however any such purchases
will not be counted towards the minimum offering.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
UNTIL *****, 1999 (90 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS PLACEMENT AGENTS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
ADDITIONAL INFORMATION THAT IS AVAILABLE TO YOU
We have filed with the Securities and Exchange Commission (the
"Commission") a registration statement (hereinafter, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), with
respect to the securities offered hereby. This prospectus (hereinafter, the
"Prospectus"), which is part of the Registration Statement, does not contain all
the information set forth in the Registration Statement and the exhibits
thereto, certain items of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to us and
the securities, reference is hereby made to the Registration Statement and such
exhibits filed as a part thereof, 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. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. We will provide without
charge to each person who receives this Prospectus, upon written or oral
request, a copy of any information incorporated by reference in this Prospectus.
Such request 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 pursuant to 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 shall provide our security holders with copies of our annual
reports containing financial statements audited by independent public
accountants for each year that our securities are outstanding, at no charge,
provided that the number of our shareholders exceeds 300. Copies of future
reports and of reports filed by us during the course of the offering period may
be obtained from us, at no charge, or from the Public Reference Section of the
Commission at the address, web site or telephone number shown above.
<PAGE> 4
SUMMARY OF OUR OFFERING
This summary highlights certain information from the remainder of our
Prospectus. It does not contain all of the information that is important to you
in making a decision whether or not to invest in our offering. To understand
this offering fully, you should read the entire Prospectus carefully, including
the risk factors beginning on page 5 and the financial statements beginning on
page F-1. 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 certain factors, including those set forth under "RISK
FACTORS" and elsewhere in this Prospectus.
Who we are: We are a Georgia corporation founded for the purpose
of obtaining Food and Drug Administration ("FDA")
approval for certain products manufactured and
patented by HMT High Medical Technologies GmbH
("HMT"), a Swiss corporation. These products, which
use shock wave therapies to treat certain ailments,
are called the LithoTron(R)lithotripter and the
OssaTron(R)orthopedic lithotripter.
Our Business: It is our intent to attempt to generate revenues
from:
- Sales of the LithoTron(R) lithotripter and
the OssaTron(R) orthopedic lithotripter as
well as related medical devices;
- Recurring revenues from licensing fees,
sales of our Newtrode(R) spark plug and the
maintenance of equipment;
- Investment income generated from
partnerships and joint ventures with third
parties that purchase equipment from us, as
well as management fees from such entities;
and
- Income generated from equipment we own or
that is owned by consolidated subsidiaries
through rental or leasing.
Our Market: Management believes that approximately 600,000
persons a year suffer from kidney stones in the
United States. Of these, approximately 180,000 will
be treated with lithotripsy, a non-surgical therapy
developed in Germany around 1980. Based upon average
charges of
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$6,000 per patient (These average charges include the
use of equipment, physician charges, anaesthesia and
other normal charges incidental to this therapy),
management believes that over $1,000,000,000 is spent
on this technology per year.
There are approximately 380 active lithotripter
systems in operation in the United States, with
approximately 210 of these installed in hospitals or
outpatient centers. The remaining 170 are mobile,
with most of these owned by groups of urologists
except for 62 machines owned by Prime Medical and 30
machines controlled by Integrated Healthcare
Services, formerly owned by Coram Healthcare. Almost
half of the lithotripters now in use are older than
10 years.
Our Products and
Proposed Products: - The LithoTron(R) Lithotripter
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. It is also
used in the treatment of certain bone problems. The
LithoTron(R) lithotripter is our proprietary
Lithotripter.
- The OssaTron(R) Orthopedic Lithotripter
Orthotripsy(R) is the application of shock wave
technology to certain orthopedic problems. It is an
extension of the principle used to treat kidney
stones. Physiologically, Orthotripsy(R) 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 (osteoblasts) or tissue-healing
cells (fibroblasts) to invade the area and stimulate
the healing process. Another name for Orthotripsy(R)
is orthopedic lithotripsy.
The Patent and Our
License to Use It: The OssaTron(R) orthopedic lithotripter, the
invention subject to our patents and patent
applications, was developed and patented by
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VISSH Voennomedicinsky Institut of Bulgaria
("VISSH"). 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 GmbH ("HMT"). 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(R) lithotripter.
HMT granted an exclusive license to us to make, use,
lease or sell shock wave equipment for medical
purposes. This 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 meet certain
sales commitments. ("Pre-market Approval" or "PMA" is
a request to the FDA for approval of a medical
device. Based upon such application, the FDA decides
if the medical device is to be approved for marketing
or if the application should be declined.) If we fail
to meet these sales commitments, the License provides
that it may be terminated by HMT upon 12 months
notice at least 12 months prior to the expiration of
the 5 year term then in effect. The Amended License
further grants to us the exclusive rights to
manufacture the OssaTron(R) orthopedic lithotripter,
as well as accessories, spare parts, consumables and
disposables related thereto, 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.
HMT entered into a distributorship agreement with us
granting us the exclusive distribution
rights for the OssaTron(R) orthopedic lithotripter
and related parts and consumables for the United
States, Canada and Mexico. This distributorship
agreement is for an indefinite period of time and may
be terminated at any time for cause.
HMT entered into a distributorship agreement with us
granting us exclusive distribution
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rights for the LithoTron(R) lithotripter and related
parts and consumables for the United States
(including Puerto Rico, the U.S. Virgin Islands and
Guam), Canada and Mexico. This distributorship
agreement is for an indefinite period of time and may
be terminated at any time for cause.
Our Offering:
Securities Offered.......................... 1,000,000 Shares
Shares Outstanding at date of Prospectus.... 9,665,342 Shares
Shares to be Outstanding after Offering..... 10,665,342 Shares
Options Outstanding at date of Prospectus... 454,000 Options
Total Public Offering Price................. $6,000,000
Placement Agent ("Underwriter") Discount.... $600,000
Net Proceeds................................ $5,400,000
Estimated Offering Expenses................. $198,793
Use of Proceeds............................. Primarily: the purchase of capital
equipment for lease, the purchase
of inventory, FDA study expense
and working capital.
Risks of Our Offering ("Risk Factors")...... Investing in our Shares is very
risky and you should be able to
bear a complete loss of your
investment.
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RISK FACTORS
You should give careful consideration to the following facts concerning
our Company 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 the inside front cover page
of this Prospectus to see how to obtain additional information and documents
that may help you in better understanding our company and the risks of
purchasing our Shares. 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 certain factors, including those set forth below and
elsewhere in this Prospectus.
LOSSES FROM OPERATIONS. We have incurred net losses from operations since we
started. In 1996 we lost $432,572 and in 1997 we lost $418,028. (See
"MANAGEMENT'S DISCUSSION AND ANALYSIS").
BEST EFFORTS OFFERING. We are offering, on a "best efforts 83,334 Share Minimum,
1,000,000 Share Maximum" basis, up to 1,000,000 Shares. (This means that the
Placement Agent is not required to sell any portion of this offering and must
only use its best efforts to sell this offering). Accordingly, there can be no
assurance that any or all of the Shares will be sold. There is no provision for
the return of funds to subscribers if more than 83,334 but less than 1,000,000
of the Shares offered are sold, and in that event, we may have insufficient
funds to carry out to the fullest our proposed business activities. (See "USE OF
PROCEEDS" and "UNDERWRITING").
SUBSTANTIAL AND IMMEDIATE DILUTION. We have previously issued Shares at prices
ranging from $.01 to $3.00 per Share. If you purchase Shares in this offering
you will incur an immediate dilution in the net tangible book value of your
Shares of from $5.10 per Share if the maximum offering is sold to $5.53 per
Share if only the minimum offering is sold. (See "DILUTION"). We also have
454,000 options currently outstanding which are exercisable at prices well below
the public offering price of our Shares. The exercise of any or all of these
options could substantially decrease the net tangible book value of your Shares.
(See "OPTION EXERCISE TABLE").
LACK OF MARKET FOR OUR SECURITIES. There is currently no market for our Shares
and there may never be a market for our Shares,
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even if this entire offering is sold. Certain of our officers, directors,
employees, consultants and suppliers hold options to purchase, in the aggregate,
up to 454,000 of our Shares at prices ranging from $1.00 to $3.00 per Share as
of the date of this Prospectus. If all of these options were to be exercised,
outstanding Shares would be increased by 4.3% if the maximum offering is sold
and by approximately 4.7% if only the minimum offering is sold. The exercise of
any or all of these outstanding options would have a negative impact on the
market price, if any, of our Shares.
Even if a market for our Shares did develop, we have 9,665,342 Shares currently
outstanding as of the date of this Prospectus. All of these Shares are
"restricted" Shares, of which 5,934,900 of these Shares are both "restricted"
and "control" Shares within the meaning of the Securities Act of 1933 and Rule
144 promulgated thereunder. Any or all of these restricted and control Shares
could be resold to the public if registered pursuant to the Securities Act of
1933, as amended or pursuant to an exemption from registration thereunder such
as Rule 144. Rule 144 provides for the resale, subject to certain limitations
with respect to quantity, holding period, matter of resale and certain filing
requirements, of restricted securities to the public. Any resale of the
securities currently held by our present shareholders could have a negative
impact on any market for our Shares that might develop.
COMPETITION. We face strong competition from other companies, some of which have
substantially more experience and financial resources than we have. Several of
these larger companies are currently working on an orthotripsy device that will
directly compete with our orthotripter. (See "HISTORY AND BUSINESS -
COMPETITION").
INDEMNIFICATION. 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. Copies of our
Articles of Incorporation and By-Laws have been filed as exhibits to our
Registration Statement and may be accessed electronically or obtained in paper
by any potential investor or his representative (See "ADDITIONAL INFORMATION
THAT IS AVAILABLE TO YOU" on the inside front cover of this Prospectus). 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. INSOFAR AS
INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933 (THE
"ACT") MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF OURS
PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, WE HAVE
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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 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 such 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 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.
GOVERNMENTAL REGULATION. We will be subject to various local ordinances, county,
state and federal laws and regulations, including laws and regulations that may
directly affect our profitability. Our proposed products must be approved by the
FDA prior to marketing these products. In addition, we are subject to
regulations promulgated by the Drug Enforcement Administration and the
Healthcare Financing Administration. Our compliance with any changes in such
laws and regulations may have an adverse effect upon our business.
We have received clearance from the FDA to begin clinical trials of the
OssaTron(R) orthopedic lithotripter and we have been granted FDA approval for
commercial distribution of the LithoTron(R) lithotripter subject to certain
conditions (See "HISTORY AND BUSINESS - GOVERNMENTAL REGULATION").
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 and certain regulations proposed
thereunder. The Medicare and Medicaid Fraud Prevention Act (referred to
hereinafter as the "Anti-kickback Statute") 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 (referred to hereinafter as the "Stark Act") expanded
restrictions imposed upon physician ownership and referral activities to include
"hospital outpatient 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 hospital outpatient services. While there are
several exceptions and safe harbors within the above federal acts and
regulations, strict compliance with these acts and regulations would limit the
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ability of our Company and of USL to contract with limited partnerships
controlled by physicians, since physicians would generally not be allowed to own
lithotripters. Inasmuch as the limited partnerships with which we and USL have
established working arrangements are at least partially owned by physicians, we
might have to seek other arrangements for marketing our products. (See "HISTORY
AND BUSINESS - GOVERNMENTAL REGULATIONS").
NEED TO RETAIN KEY PERSONNEL AND LACK OF "KEY PERSON" INSURANCE. Our success in
the next few years is materially dependent upon the abilities of our executive
officers. We have "Key Person" insurance in the total amount of $1,000,000 on
both Argil Wheelock, M.D., our Chairman and CEO and on Marie Marlow, Vice
President of Clinical and Regulatory Affairs, but not currently on any of our
other officers or employees. While we believe this amount of insurance to be
adequate, the loss of the services of any one or more of our present employees
could adversely affect us. In addition, Victoria Beck, our Chief Financial
Officer, and Marie Marlow, our Vice President of Clinical and Regulatory Affairs
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.
SECONDARY TRADING MARKET ONLY A POSSIBILITY. The owners of our restricted
securities may begin reselling these securities pursuant to the provisions of
Rule 144 (See RISK FACTOR entitled "LACK OF MARKET FOR OUR SECURITIES", above).
The viability of a secondary market for our securities is based upon, among
other requirements, our being current in filing reports with the Securities and
Exchange Commission pursuant to the reporting requirements mandated by the
Securities Exchange Act of 1934 (The "Exchange Act"). If we become delinquent in
filing reports pursuant to the Exchange Act it may become impossible for any
investor to resell his Shares.
ARBITRARY OFFERING PRICE. 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.
BROAD DISCRETION OVER USE OF PROCEEDS. Once we have reached our minimum sales
level of 83,334 Shares ($500,004), we have broad discretion over the use of
proceeds of this offering. (See "USE OF PROCEEDS").
NON-EXCLUSIVE LICENSE. VISSH Voennomedicinsky Institut of Bulgaria ("VISSH"),
the developer of the patent, retained the rights to the Bulgarian patent of its
invention. In addition, the license granted from HMT to the Predecessor (now us)
is only for the US, 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,
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South Korea and Japan), could effectively compete with our products in the world
market outside of the US, Mexico and Canada. Our Amended License with HMT is not
effective until we gain PMA approval from the FDA and is not renewable unless we
sell an average of 20 Ossatron(R) orthopedic lithotripters a year. (See
"PATENTS, TRADEMARKS AND LICENSES").
PATENT AND TRADEMARK APPLICATIONS NOT A GUARANTEE OF PROTECTION. While we have
obtained or have filed for certain patents or trademarks for our various
products, processes, technology, trademarks and logos, this protection does not
guarantee that other persons will not use or employ patents, processes,
technology, trademarks or logos substantially identical to ours. If another
person were to successfully patent a product manufactured by us or to obtain a
trademark or copyright on a logo, process or trade name used by us, it is
possible that we would be required to pay royalties to such person or to cease
such use. In addition, the cost of patent or trademark litigation may prove
prohibitively expensive to us, even if we were to prevail in such litigation. We
do not have patent protection for the LithoTron(R) lithotripter and we do not
anticipate filing for such protection. This means that if one of our competitors
were to achieve patent protection on a similar device, we would be subject to
the same risks shown in the next paragraph. (See "HISTORY AND BUSINESS -
COMPETITION").
We are aware that both Siemens GmbH ("Siemens") and Dornier Medical Systems
("Dornier") have had patents approved for the use of shock wave therapy in
orthopedics as well as to treat pain. We believe that the Siemens and Dornier
patents do not apply to the OssaTron(R) orthopedic lithotripter because our
technique is different from the technique employed in the Siemens and Dornier
applications and because of our indications of use and our earlier filed patent
application. However, it is always possible that a court could determine that we
have infringed upon either the Siemens or Dornier patents, and such a
determination could lead to our having to cease use of the OssaTron(R)
orthopedic lithotripter. (See "HISTORY AND BUSINESS - COMPETITION").
CHANGING REGULATORY CLIMATE. Federal and state laws regulate physician ownership
of, and referrals to, health care service providers. On January 9, 1998,
proposed regulations were published applicable to the services provided by the
limited partnerships in which we are an investor. If these regulations are
adopted, the profitability and viability of some of our operations may be
endangered. (See "HISTORY AND BUSINESS - GOVERNMENTAL REGULATION").
Hospitals and centers to which we sell our products are reimbursed for
lithotripsy under various federal and state programs, including Medicare and
Medicaid, primarily at fixed rates. These programs are always subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy and governmental
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funding restrictions, all of which could affect our ability to market our
products.
LOWER RATES OF REIMBURSEMENT AND OTHER UNCERTAINTIES. Over the last several
years, there has been a trend towards lower reimbursement rates for health care
services and prescription drugs by cost-conscious third-party payors such as
health maintenance organizations. There has also been increased resistance by
insurance companies and others to reimburse for certain treatments that may be
considered experimental or optional or to reimburse when a less-expensive
alternative is deemed to be available. We do not believe that any of our
services are considered experimental or optional or that other less-expensive
alternatives currently exist, and we have not incurred any increase in our labor
and supply costs due to such factors. However, such reimbursement reductions or
resistance to treatments could affect the potential market for our products.
In addition, these lower rates of reimbursement are occurring at a time when
labor and supply costs are gradually increasing due to inflation.
RISK RELATING TO CHANGES IN TECHNOLOGY. The OssaTron(R) orthopedic lithotripter
and LithoTron(R) lithotripter are both subject to rapid technological changes
and face the risk of product obsolescence and the development of less expensive
alternatives. The development of new technologies or drugs or refinements of
existing ones might render our products technologically or economically
obsolete.
MALPRACTICE AND OTHER LIABILITY RISKS. Physicians and technicians who use our
products are exposed to the risk of liability and malpractice claims. Any such
claims could also name us. While we have not experienced any such 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.
DEPENDENCE UPON HMT. Our products are manufactured by HMT High Medical
Technologies GmbH ("HMT"), a Swiss corporation. HMT is a privately-held concern
and does not publish any resulting financial information. If HMT were to
encounter financial problems and cease the manufacture of our products, it is
possible that we may not find an alternative manufacturer or that the terms of
any manufacturing agreement with an alternative manufacturer would not be on
terms 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. Inasmuch as HMT is located in
Switzerland, all of
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the risks normally associated with imported technology apply, these risks
include:
- - The possibility of currency fluctuations that may make the exchange
rate between the dollar and the Swiss franc disadvantageous to us;
- - The possibility of government imposed restrictions on the sharing of
various technologies;
- - The possibility that HMT may incur substantial problems in meeting year
2000 compliance and that these problems will be increased because of
communication problems; and
- - The difficulty in interpreting various contracts entered between persons
who are residents of separate nations.
UNLIMITED LIABILITY AS GENERAL PARTNER. We have guaranteed the debts of certain
of our subsidiaries. In addition, since we act as general partner to thirteen
limited partnerships, we have unlimited liability for the payment of the debts
of these limited partnerships. As of September 30, 1998, our consolidated debt
aggregated $2,659,749, which includes our obligations for the thirteen 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 (See "JOINT
VENTURES, SUBSIDIARIES AND DISTRIBUTORSHIPS").
SALE OF PRODUCT TO RELATED ENTITIES. We have sold many of our LithoTron(R)
lithotripters to partnerships in which we have a general partnership interest
and we have co-signed on the related debt. As discussed in the preceding
paragraph, this means, in essence, that if these partnerships are unable or
unwilling to pay the complete purchase price, we may be compelled to repay
lenders for the sale of our own products. (See "JOINT VENTURES, SUBSIDIARIES AND
DISTRIBUTORSHIPS").
YEAR 2000 COMPLIANCE. We are aware of the issues associated with the programming
of existing computer systems as the year 2000 approaches, and recognize the need
to ensure that our operations will not be disrupted by Year 2000 hardware and
software issues. This problem will affect us since virtually every computer
operation will be affected in some way by the rollover of two-digit year values.
The central issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or could fail.
We have appointed a committee chaired by John Warlick, our Executive Vice
President, and he is in the process of confirming compliance regarding Year 2000
issues for both internal and external (suppliers, vendors) information systems.
This process, which shall continue on an ongoing basis, involves communicating
with significant suppliers, HMT, financial institutions, and other parties that
provide significant services to us. We have updated all internal computer
systems and software to ensure we will not have any internal Year
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2000 problems. In addition, one of our leading vendors has provided
documentation certifying that the software for the LithoTron(R) and OssaTron(R)
systems contain no date-dependent functions. There can be no assurance that all
of our primary service providers will properly address such Year 2000 issues.
Expenditures to make us Year 2000 compliant are not expected to be material to
our financial position or results of operations, however, there can be no
assurance in that regard. Mr. Warlick anticipates that all Year 2000 issues will
be resolved by June of 1999 (See MANAGEMENT'S DISCUSSION AND ANALYSIS").
DEPENDENCE UPON SERVICETRENDS. Our products are serviced exclusively by
Servicetrends, Inc. ("Servicetrends"), a Georgia corporation. Servicetrends is a
subsidiary of a publicly held corporation that is a major competitor of our
Company and certain of its officers and employees are also Shareholders of our
company. If Servicetrends were to encounter financial problems and cease the
servicing of our products, it is possible that we may not find an alternative
service company or that the terms of any servicing agreement with an alternative
service company would not be on terms as favorable to us as our current
agreement with Servicetrends.
THE REGULATION OF PENNY STOCKS. When a broker-dealer conducts transactions in
"Penny Stocks" (Also known as "Designated Securities"), they are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission.
Penny stocks are generally equity securities with a price of less than $5.00 per
share (with certain exceptions not relevant to our offering). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the penny stock rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risk in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that, prior to a transaction in a penny stock not
otherwise exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If our Common Stock becomes subject to the penny stock rules, you
may find it more difficult to sell your Shares.
CONTROL OF OUR COMPANY. Our officers and directors, as a group, are the
beneficial owners of approximately 48.20% of the outstanding Shares of our
Company. Even if this entire offering is
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sold, that percentage will only decrease to 43.68%. Accordingly, if you invest
in this offering you will not have the ability to control our Company. (See
"PRINCIPAL SHAREHOLDERS").
RISK OF LOSS. In view of the risk involved in our business operations, the
Shares offered hereby should not be purchased by any person who cannot afford to
risk the loss of his investment.
HISTORY AND BUSINESS
HISTORY.
HealthTronics, Inc. (the "Company") was incorporated in the State of
Georgia on December 1, 1995. On December 31, 1995, OssaTronics, Inc. (the
"Predecessor"), an affiliated Georgia corporation formed on December 23, 1994,
was merged into our Company. The Agreement and Plan of Merger was finalized with
the Office of the Secretary of State of Georgia on April 29, 1996. All
references to our Company shall include, unless otherwise noted, our
Predecessor.
On April 19, 1996 our shareholders voted to split our stock at a rate of 60
new Shares for each old Share held, resulting in 6,000,000 Shares outstanding at
that time.
BUSINESS AND PROPOSED BUSINESS - PAST ACTIVITIES.
We were founded for the purpose of obtaining Food and Drug Administration
("FDA") approval 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(R) lithotripter
and the OssaTron(R) orthopedic lithotripter. Upon FDA approval we will have
exclusive rights to market the OssaTron(R). Both products are currently being
used outside of the United States and Canada.
BUSINESS AND PROPOSED BUSINESS - PRESENT AND FUTURE BUSINESS.
It is our intent to attempt to generate revenues from four sources:
1) Sales of the LithoTron(R) lithotripter and the OssaTron(R)
orthopedic lithotripter as well as related medical devices;
2) Recurring revenues from licensing fees, sales of the Newtrode(R) spark
plug (This is a special spark plug developed by HMT that powers the shock wave
given by the LithoTron(R) lithotripter) and the maintenance of equipment;
3) Investment income generated from partnerships and joint ventures with
physicians, dealerships and hospitals that purchase
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equipment from us, as well as management fees from such entities; and
4) Income generated from equipment we own or that is owned by consolidated
subsidiaries through rental or leasing.
MARKET OVERVIEW
Management believes that approximately 600,000 persons a year suffer from
kidney stones in the United States. Of these, approximately 180,000 will be
treated with lithotripsy, a nonsurgical therapy developed in Germany around
1980. Based upon average charges of $6,000 per patient (These average charges
include the use of equipment, physician charges, anaesthesia and other normal
charges incidental to this therapy), we believe that over $1,000,000,000 is
spent on this technology per year.
There are approximately 380 active lithotripter systems in operation in the
United States, with approximately 210 of these installed in hospitals or
outpatient centers. The remaining 170 are mobile, with most of these owned by
groups of urologists except for 62 machines owned by Prime Medical and 30
machines controlled by Integrated Healthcare Services, formerly owned by Coram
Healthcare. Almost half of the lithotripters now in use are older than 10 years.
The majority of machines now in use in the United States were manufactured
by Dornier Medical Systems, Siemens GmbH or Medstone International, Inc. The
retail price of a new lithotripter made by these companies ranges from $300,000
to $800,000.
MARKETING STRATEGY
We market the LithoTron(R) lithotripter primarily to hospitals and to
certain 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 such groups to own lithotripsy devices - See
"GOVERNMENTAL REGULATION", below.) Four medical centers have already purchased
an OssaTron(R) orthopedic lithotripter under the conditions of the IDE
regulations, and have begun investigational studies. An additional
investigational site is leasing a unit and has also begun an IDE study.
We currently have several customers who purchase our LithoTron(R)
lithotripter and Newtrode(R) spark plug. In addition, we use U.S. Lithotripsy,
L.P., A Texas limited partnership of which we are the sole general partner,
Signal Medical, IHS, HealthSouth and Mobile One Medical for assistance in
marketing our products. No single customer accounts for more than 10% of our
business.
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We have entered into several 12 month contracts to provide lithotripsy
services to several unaffiliated medical centers in Georgia and Tennessee. These
contracts generally provide for a pre-arranged, fixed fee per patient for each
treatment to be performed at the respective facility.
GEOGRAPHIC MARKETS.
Our geographic markets and potential markets consist of the United States
and it's 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. (See "PRODUCTS AND
PROPOSED PRODUCTS").
PRODUCTS AND PROPOSED PRODUCTS.
I) The LithoTron(R) Lithotripter
The LithoTron(R) lithotripter was developed by HMT. We believe the
LithoTron(R) lithotripter to be superior to the other lithotripters currently
available for the following reasons:
1) Higher power and lower retreatment rates than competing lithotripters.
2) The LithoTron(R) lithotripter causes minimal discomfort and as few
complications as any currently marketed lithotripter.
3) The machine is very easy for doctors and technicians to use. The
LithoTron(R) lithotripter is readily transferable from one treatment room to
another, as opposed to older machines that may require a dedicated, specially
prepared operating suite costing in excess of $100,000.
4) Increased reliability and lower maintenance costs compared with older,
currently installed machines.
5) Versatility, since the X-ray system used for imaging the kidney stones
can be removed and used for other medical procedures.
6) Optimum X-ray resolution compared to older devices currently in use.
7) More cost-efficient mobile service, since the machine can be transported
in a smaller vehicle than most of the machines currently in use.
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The main components of the LithoTron(R) lithotripter are:
1) A "C-arm Fluoroscopy Unit" which consists of a flexible "arm" that is
connected to a double monitor unit. The C-arm fluoroscopy unit is used to find
the kidney stones. The dual monitors provide the surgeon the capability of
viewing the last image captured as well as the current view.
2) A "Patient Table" which is a motorized, mobile, 4-way table operated by
a remote hand switch. The table has an IV pole, arm support, belt restraint,
optional stirrups and an optional urine basin, and is configured to allow
comfortable treatment of the patient.
3) An "Electrocardiagram Recorder" or "ECG" to monitor the patients vital
signs.
4) The "Shock Wave Unit", consisting of a control cabinet and the therapy
head and test device.
After completing a four (4) site Investigatory Device Exemption ("IDE")
study for kidney and upper ureter stones, the LithoTron(R) lithotripter
Pre-Market Approval ("PMA") application was submitted to the FDA on May 15,
1997. The United States Food and Drug Administration ["FDA"] requires that a
company or person seeking to introduce a medical treatment device must first go
through an IDE study and must afterwards go through a PMA application. The FDA
will not approve any lithotripsy device for sale that has not received PMA
approval. On July 21, 1997, we received FDA notice that the PMA is approved and
that we may begin commercial distribution of the LithoTron(R) lithotripter,
subject to certain restrictions on the uses, methods, controls, labeling and the
training of operators in compliance with the Code of Federal Regulations. These
restrictions involve the following: 1) The sale, distribution, and use of the
device are restricted to prescription use; (2) Labeling on the device must
specify the requirements that apply to the training of practitioners who may use
the device; (3) We agreed to develop a protocol to collect long-term data to
study the effect of the device on hypertension; 4) We are required to submit
progress reports regarding the completion of post-approval study requirements.
We are in full compliance with these requirements. We are conducting additional
investigations to allow the promotion of additional LithoTron(R) lithotripter
features. Once the FDA grants PMA approval and the PMA applicant meets all
conditions of approval, a medical device may immediately be sold.
II) The OssaTron(R) Orthopedic Lithotripter
Orthotripsy(R) is the application of shock wave technology to certain
orthopedic problems. It is an extension of the principle
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used to treat kidney stones. Physiologically, Orthotripsy(R) 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 (osteoblasts) or
tissue-healing cells (fibroblasts) to invade the area and stimulate the healing
process. Another name for Orthotripsy(R) is orthopedic lithotripsy.
In a progress report submitted to, and reviewed by, the FDA, we stated that
we believe that in Europe, orthopedic lithotripsy has been shown to be an
effective treatment in 60 - 90% of cases involving chronic heel pain syndrome
("heel spurs"), non-union fractures (fractures that have failed to heal for nine
months or more since the initial injury) and lateral epicondylitis ("tennis
elbow").
In a progress report submitted to, and reviewed by, the FDA, we stated that
we believe the OssaTron(R) orthopedic lithotripter to be one of a few
commercially available orthopedic shock wave devices in the world. We further
stated in this report that we believe our product is superior to potential
competitors who utilize a different energy source. The OssaTron(R) orthopedic
lithotripter is typically referred to as a "high energy" orthopedic device and
we believe the higher power enables the OssaTron(R) orthopedic lithotripter to
promote healing with fewer treatment sessions.
On May 29, 1996, we received approval from the FDA to begin preliminary
patient investigations with the OssaTron(R) orthopedic lithotripter. None of
these investigations are pre-IDE studies; all study protocols have been reviewed
and approved by the FDA. Treatment of the first nonunion patient (A "nonunion
patient" is a patient whose bone injury is not healing normally within nine
months of the injury) was performed on July 18, 1996; treatment of the first
tennis elbow patient on September 19, 1996 and the first heel spur patient on
February 27, 1997. On February 13, 1998, we received FDA permission to expand
the elbow study to a multi-site study and to expand the heel spur study to
multiple sites. We are currently the sponsor of three clinical studies involving
the OssaTron(R) orthopedic lithotripter. These include studies involving this
product for treating chronic heel pain syndrome (also called plantar fasciitis),
for treating tennis elbow, and for treating nonunion fractures. All three
studies are being regulated by the FDA, and are being conducted in two stages:
an initial feasibility study, which is a small, 20 patient series intended to
provide preliminary safety and effectiveness information, followed by a second
stage 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. Stage one feasibility studies of the
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OssaTron(R) orthopedic lithotripter for heel pain syndrome and for tennis elbow
have been completed; the FDA has 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 phase one feasibility studies of OssaTron(R)
orthopedic lithotripter treatment of heel pain syndrome and of tennis elbow
closely resembled findings from clinical use of the OssaTron(R) orthopedic
lithotripter in Europe. Management believes 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(R) 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(R) orthopedic lithotripsy treatments for this indication of use. We
believe the feasibility study results from our phase one FDA clinical trials and
our current studies to be superior to published results for European clinical
experience with orthopedic shock wave devices based on a different energy source
(electromagnetic technology), which appear to be associated with higher
retreatment rates than have been demonstrated in the OssaTron(R) orthopedic
lithotripter studies. Findings from the stage two pivotal studies are not yet
available, since these are double-blinded, placebo-controlled studies (this
means that neither the patient nor the doctor know whether the patient is
receiving an actual treatment or a placebo). Early study findings to be
submitted to the FDA in February, 1999 suggest that pivotal study results will
not differ significantly from feasibility study findings. (These clinical
studies were specifically designed to include a single-site feasibility study
that would test the study protocol for the multisite study conducted to support
the PMA. Therefore, the pivotal studies are extensions of the feasibility
studies, not new studies with new objectives or new hypotheses). We believe that
retreatment rates may be a significant factor not only in the FDA approval
process, but also concerning reimbursement for orthopedic shock wave treatments.
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EMPLOYEES.
We employ twenty-two persons on a full-time basis in administration and
operation. None of our employees are members of labor unions 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(R) orthopedic lithotripter: 1)
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(R) orthopedic lithotripter; and 2)
A licensing fee of 10% of the net selling price for each OssaTron(R) orthopedic
lithotripter manufactured by us. We have the right to manufacture the
LithoTron(R) lithotripter. We intend, however, for at least the next 12 months,
to continue to purchase both LithoTron(R) lithotripters and OssaTron(R)
orthopedic lithotripters from HMT. (See "RISK FACTOR - DEPENDANCE ON HMT",
above).
SUPPLIERS.
Currently we acquire all of our inventory from HMT. We have no plans to
change this arrangement.
MAINTENANCE SERVICES.
Maintenance services for our products are performed by Servicetrends, Inc.,
a subsidiary of Integrated Healthcare Services ("IHS"), and formerly a
subsidiary of Coram Healthcare Corporation. While IHS is believed by our
management to be the second largest provider of lithotripsy services in the
United States and therefore may be deemed a competitor of our Company, we are
satisfied with the level of service performed by Servicetrends, Inc., and have
no plans to change our arrangements with Servicetrends, Inc. Several of the
officers and employees of Servicetrends, Inc. are Shareholders in our Company.
GOVERNMENTAL REGULATION.
We will be subject to regulation by federal, state and local statutes,
ordinances, regulations and codes in many facets of our business. Such
governmental 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
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by the FDA prior to marketing these products. In addition, we are subject to
acts and regulations promulgated by the Drug Enforcement Administration and the
Healthcare Financing Administration. We will also be subject to regulation by
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 us and our customers. Our compliance with any changes in such
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. (See also "RISK FACTORS").
We have received clearance from the FDA to begin clinical trials of the
OssaTron(R) orthopedic lithotripter and have been granted FDA approval for
commercial distribution of the LithoTron(R) lithotripter subject to certain
conditions on the uses, methods, controls, labeling and the training of
operators in compliance with the Code of Federal Regulations. These restrictions
involve the following: 1) The sale, distribution, and use of the device are
restricted to prescription use; (2) Labeling on the device must specify the
requirements that apply to the training of practitioners who may use the device;
(3) We agreed to develop a protocol to collect long-term data to study the
effect of the device on hypertension (this study has been completed as of the
date of this Prospectus); 4) We are required to submit progress reports
regarding the completion of post-approval study requirements. 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 and certain regulations proposed
thereunder. The Medicare and Medicaid Fraud Prevention Act (referred to
hereinafter as the "Anti-kickback Statute") 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 (referred to hereinafter as the "Stark Act") expanded
restrictions imposed upon physician ownership and referral activities to include
"hospital outpatient 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 hospital outpatient services. While there are
several exceptions
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and safe harbors within the above federal acts and regulations, strict
compliance with these acts and regulations would limit our ability to contract
with limited partnerships controlled by physicians since physicians would
generally not be allowed to own lithotripters.
COMPETITION.
Our competitors, including Dornier Medical Systems, ("Dornier") Siemens
GmbH ("Siemens"), Medstone International, Inc. ("Medstone"), IHS, Prime Medical
Services, Inc. ("Prime") and Storz Medical Systems ("Storz"), are larger and
better-financed than us, and 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.
We are aware that Dornier, Siemens, Medstone and Storz are all currently
working on an orthotripsy device. We believe the OssaTron(R) orthopedic
lithotripter to be superior. 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
believe that our earlier filed patent application and 72 pending claims covering
multiple pathologies or indications of use do not encroach upon either the
Siemens or Dornier patents.
We believe that Prime owns approximately 16% of the estimated 380
lithotripters currently in operation in the United States, making this entity
the leading provider of lithotripsy services. IHS is believed to hold the second
position with approximately 8% of the estimated lithotripters in the United
States. We estimate that the next four largest lithotripsy providers operate
only 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 September 30, 1998, we owned property, equipment and inventory, on a
consolidated basis, with a net book value of $5,413,961. We currently lease
6,275 square feet of office space in Marietta, Georgia at a monthly rental of
$3,921.88. Our lease expires on May 15, 2000. We intend to perform all of our
administrative, marketing, assembly, inspection, warehousing and shipping
functions from our current facility. We deem this space adequate to meet our
foreseeable future needs.
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JOINT VENTURES, SUBSIDIARIES AND DISTRIBUTORS.
On March 7, 1997, we entered into a distributorship agreement with U.S.
Lithotripsy, L.P. ("USL") a Texas limited partnership of which we were one of
the corporate general partners, and with Litho Management, Inc., USL's other
corporate general partner. (As described below - we are currently the sole
general partner in USL). The distributorship agreement (as amended) granted USL
an exclusive license to sell, use, lease and distribute our products in a 19
state area and a non-exclusive right (subject to approval by us) to sell, use,
lease and distribute our LithoTron(R) lithotripter and related urology products
in other states. We, pursuant to a private placement memorandum dated June 1,
1997, acquired a 40% ownership interest in USL, consisting of a .4% general
partnership interest and a 39.6% limited partnership interest, pursuant to an
Entity Interest Agreement. On May 1, 1998 we acquired 100% of the outstanding
common shares of Litho Management, Inc. in exchange for 700,000 Shares of our
Common Stock; we, therefore, became the sole general partner of USL. As of
September 30, 1998, USL is the general partner in eight limited partnerships and
a limited partner in four limited partnerships, all of which provide lithotripsy
services. Subsequent to September 30, 1998, USL formed five additional limited
partnerships.
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 USL, 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. (''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 55.5% co-general partner in Florida Lithology, Ltd. ("FLL"), a Florida
limited partnership that provides lithotripsy services in the state of Florida.
We are also a 20% limited partner in FLL. Argil Wheelock, MD, our Chairman and
CEO, serves as the chairman and as the president of FLI.
The ownership share of USL, of HLE Corp. and of FLI in these various
limited partnerships, as of the date of this Prospectus, (hereinafter referred
to as the "Second Tier Limited Partnerships") is discussed below:
22
<PAGE> 26
<TABLE>
<CAPTION>
Name of Entity USL Interest in Partnership (2) Type of Ownership
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Metro I Stone Management, Ltd. (1) 10% Sole General Partnership Interest
Mississippi Valley I Stone 01% Sole General Partnership Interest
Management Limited (1) 30% Limited Partnership Interest
AESL Limited Partnership 20% Limited Partnership Interest
East Texas I Stone Management, Ltd. (1) 10% Sole General Partnership Interest
Dallas Stone Management, LP (1) 10% Sole General Partnership Interest
Tulsa Stone Management, LP (1) 10% Sole General Partnership Interest
30% Limited Partnership Interest
Tyler Stone Management, L.P. (1) 10% Sole General Partnership Interest
30% Limited Partnership Interest
Tyler Stone Services, L.P. (1) 10% Sole General Partnership Interest
89% Limited Partnership Interest
S.C. Missouri Stone Management, L.P. (1) 10% Sole General Partnership Interest
SE Colorado Lithotripsy, LP (1) 10% Sole General Partnership Interest
Mississippi Valley II Stone
Management, LP (1) 10% Sole General Partnership Interest
Missouri Valley Lithotripsy, L.P. (1) 10% Sole General Partnership Interest
North Central Texas Lithotripsy, L.P. (1) 99% Sole General Partnership Interest
<CAPTION>
Name of Entity HLE Interest in Partnership Type of Ownership
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Metro I Stone Management, Ltd. (1) 30% Limited Partnership Interest
Name of Entity FLI Interest in Partnership Type of Ownership
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Florida Lithology, Ltd. 45.5% General Partnership Interest (3)
</TABLE>
We are also a limited partner in the following entities (hereinafter referred to
as the "First Tier Limited Partnerships"):
<TABLE>
<CAPTION>
Name of Entity Company Interest in Partnership Type of Ownership
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bone and Joint Treatment
Centers of South Florida, 49% Limited Partnership Interest
Limited Partnership
Lithotripsy Leasing 13% Limited Partnership Interest
Limited Partnership
Chesapeake Lithotripsy-West,
Limited Partnership 5% Limited Partnership Interest
Lithotripsy Association of Texas 5% Limited Partnership Interest
- ----------------------------
</TABLE>
(1) The above entities pay USL a management fee of 7.5% of gross receipts,
subject to certain minimums or other limitations.
23
<PAGE> 27
(2) We, through our general partnership interests, guaranteed the debts of USL
and all of the Second Tier Limited Partnerships (See "CERTAIN TRANSACTIONS WITH
MANAGEMENT AND OTHERS").
(3) We are also a 20% limited partner in this entity.
We are currently a 67% owner of Tenn-Ga Prostate Therapies, L.L.C.
("Tenn-Ga Prostate"), 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 4, 1998 we became a 60% owner of Lithowest, LLC, an Arizona
limited liability company formed on December 4, 1998 to provide lithotripsy
services in Arizona and parts of Colorado.
PATENTS, TRADEMARKS AND LICENSES.
The OssaTron(R) orthopedic lithotripter, the invention subject to our
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 GmbH ("HMT"). 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(R) lithotripter.
HMT granted a license regarding U.S. Patent Number 4,979,501 and Canadian
Patent Number 1,330,580 (the "Original License") to the Predecessor on June 3,
1995. The Original License provides the Predecessor (us since the merger) 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 (the "Amended License") 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 PMA is
24
<PAGE> 28
granted by the FDA and is automatically renewable for subsequent 5 year terms
provided that we meet a sales commitment of not less than an average of 20
OssaTron(R) orthopedic lithotripters a year, as averaged over the preceding 5
year term. If we fail to meet this sales commitment, the Amended License
provides that it may be terminated by HMT upon 12 months notice at least 12
months prior to the expiration of the 5 year term then in effect. The Amended
License further grants to us the exclusive rights to manufacture the OssaTron(R)
orthopedic lithotripter, as well as accessories, spare parts, consumables and
disposables related thereto, 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 (our Executive Vice President), Roy S. Brown (our
President), Argil Wheelock, MD and John Ogden, MD (a consultant to, and
shareholder of, our Company) 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." This filing is for additional uses for the OssaTron(R) 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(R)
orthopedic lithotripter.
On November 22, 1994 HMT entered into a distributorship agreement with the
Predecessor granting the Predecessor exclusive distribution rights for the
OssaTron(R) orthopedic lithotripter and related parts and consumables for the
United States, Canada and Mexico. As part of this agreement: the Predecessor
committed to purchase 10 OssaTron(R) orthopedic lithotripter units per year over
the life of the agreement after FDA PMA approval; and HMT agreed to warrant the
OssaTrons(R) orthopedic lithotripter for 12 months at no cost to the
Predecessor. This distributorship agreement is for an indefinite period of time
and may be terminated at any time for cause, as defined in the contract to
include bankruptcy, default in payment, failure to perform or failure of the
Predecessor to meet its purchase commitment, or upon 12 months notice by either
party, after November 11, 2000. On March 1, 1996 this distributorship agreement
was assigned to us.
On January 24, 1996 HMT entered into a distributorship agreement with us
granting us exclusive distribution rights for the LithoTron(R) 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:
25
<PAGE> 29
We committed to purchase 12 LithoTron(R) lithotripter units per year over the
life of the agreement ,after FDA PMA approval; and HMT agreed to warrant the
LithoTron(R) 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, as defined in the contract to include 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(R) lithotripter and the OssaTron(R) orthopedic lithotripter, including
all drawings, technical descriptions, supplies and all other information
requested by us in order to enable us to manufacture both the LithoTron(R)
lithotripter and the OssaTron(R) orthopedic lithotripter. While this right does
not subject us to additional payments with respect to the LithoTron(R)
lithotripter, manufacturing of the OssaTron(R) orthopedic lithotripter is
subject to 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, as
described in the second paragraph of this sub-section. We have no present plans
to engage in manufacturing activities.
We currently have pending trademark registrations for "Ossatripsy" and
"Osteotripsy". In addition, we have been awarded the trademark registration for
"Orthotripter(R)", "OssaTron(R)" orthopedic lithotripter, "Orthotripsy(R)",
"Newtrode(R)" and "LithoTron(R)" lithotripter.
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>
- --------------------------------------------------------------------------------
BENEFICIAL
NAME POSITION HELD (2) COMMON STOCK
OWNERSHIP
(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Argil J. Wheelock, M.D. Chairman and CEO 1,508,800 Shares (3)
(Since June 1, 1996)
Roy S. Brown President and COO 1,002,200 Shares (4)
(Since May 1, 1996)
Director
(Since May 1, 1996)
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BENEFICIAL
NAME POSITION HELD (2) COMMON STOCK
OWNERSHIP
(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Scott Cochran Secretary/Treasurer 166,000 Shares
(Since December 23, 1994)
Director
(Since December 23, 1994)
John F. Warlick Executive Vice President 1,348,800 Shares (5)
(Since December 1, 1995)
Marie Marlow Vice President of Clinical 38,000 Shares (6)
and Regulatory Affairs
(Since September 1, 1996)
Joachim Voss Director 500,000 Shares
(Since December, 1997)
Victoria Beck Chief Financial Officer 15,000 Shares (7)
(Since August 1, 1997)
John Burke Director 75,000 Shares (8)
(Since December, 1997)
- --------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to the beneficial ownership rules of the Securities and Exchange
Commission: Common Stock owned of record by close relatives of officers and
directors has been aggregated with stock held of record by officers and
directors and vested options held by each of these persons have been treated as
though such options were exercised as of the date of this Prospectus.
(2) Messrs. John F. Warlick, Argil Wheelock and Joachim Voss may be deemed to be
"Parents" and "Promoters" of our Company and of the Predecessor, as those terms
are defined in the Securities Act of 1933.
(3) Dr. Wheelock has been issued options to purchase up to 90,000 Shares of our
Common Stock at a purchase price of $1.00 per Share. These Shares have been
included in this table pursuant to the beneficial ownership rules of the SEC.
(4) Mr. Brown has been issued options to purchase up to 29,000 Shares of our
Common Stock at a purchase price of $1.00 per Share. These Shares have been
included in this table pursuant to the beneficial ownership rules of the SEC.
(5) John F. Warlick has been issued options to purchase up to 19,000 Shares of
our Common Stock at a purchase price of $1.00 per Share. These Shares have been
included in this table pursuant to the beneficial ownership rules of the SEC.
1,328,800 of the Shares shown in this table are owned of record by Ty Warlick,
Mr. Warlick's wife. Mr. Warlick disclaims record or beneficial ownership of any
of the shares owned by Ty Warlick.
(6) Ms. Marlow has been issued options to purchase up to 10,000 Shares of our
Common Stock at a purchase price of $1.00 per Share and 5,000 Shares at a
purchase price of $3.00 per Share. These Shares have been included in this table
pursuant to the beneficial ownership rules of the SEC. Certain incentive
options, totaling up to 75,000 Shares that may be issued to Ms. Marlow pursuant
to an incentive option agreement dated March 24, 1998 have not been included in
this table . (See "OPTION EXERCISE TABLE").
(7) Ms. Beck has been issued options to purchase up to 15,000 Shares of our
Common Stock at a purchase price of $1.00 per Share. These Shares have been
included in this table pursuant to the beneficial ownership rules of the SEC.
Certain incentive options, totaling up to 15,000 Shares that may be issued to
Ms. Beck pursuant to an employment agreement dated July 11, 1997 have not
27
<PAGE> 31
vested and have not been included in this table . (See "OPTION EXERCISE TABLE").
(8) Mr. Burke has been issued options to purchase up to 50,000 Shares of our
Common Stock at a purchase price of $1.00 per Share. These Shares have been
included in this table pursuant to the beneficial ownership rules of the SEC.
BIOGRAPHICAL INFORMATION.
ARGIL J. WHEELOCK, M.D. (50) - 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 our Company. From November,
1994 until June, 1996, he was CEO of Phymatrix's (a NASDAQ listed company that
specializes in physician practice management) 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.
ROY S. BROWN (50) - 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 Hannover University in
Hannover, Germany.
JOHN F. WARLICK (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, 1996 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 (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
28
<PAGE> 32
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(R)
lithotripter and the OssaTron(R) orthopedic lithotripter. Mr. Voss has now
retired from his active role in HMT, but still works as a consultant to HMT and
it's German affiliate company.
SCOTT COCHRAN (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 (45) - Ms. Marlow is Vice President of Clinical and Regulatory
Affairs for us, a position she has held since September of 1996. 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).
VICTORIA BECK (43) - Ms. Beck graduated from Georgia State University in 1981
with a degree in accounting. From 1992 until mid 1997 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.
JOHN BURKE (52) - Mr. Burke has served as a director of our Company 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
29
<PAGE> 33
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.
REMUNERATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate direct annual
remuneration to be paid to our executive officers and directors.
We do not have any long-term incentive plans or stock appreciation rights.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Long Term Compensation Awards
- -----------------------------------------------------------------------------------------------------------------------------
Annual compensation
- -----------------------------------------------------------------------------------------------------------------------------
Name and Other
Principal Annual
Position Year Salary Bonus(1) Compensation Stock Options(2)
($) ($) ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Argil J. Wheelock, M.D. Fiscal Year $ 89,000 $3,334 0 $90,000 90,000
Chairman and CEO Ended 12/31/97
Roy S. Brown Fiscal Year $ 89,000 $4,021 $ 7,000(4) $29,000 29,000
President and COO Ended 12/31/97
John F. Warlick Fiscal Year $ 89,000 0 (7) $19,000 19,000
Executive Vice President Ended 12/31/97
Marie Marlow Fiscal Year $ 108,000 $ 405 0 $25,000 15,000(5)
Vice President Ended 12/31/97
Scott Cochran Fiscal Year 0(3) 0 0 0 0
Secretary/Treasurer Ended 12/31/97
Victoria Beck Fiscal Year $ 65,968 0 0 15,000 15,000(6)
Chief Financial Officer Ended 12/31/97
John Burke Fiscal Year 0 0 0 $50,000 50,000
Director Ended 12/31/97
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 above in the "Bonus" Column above. Also shown in the "Bonus" column
are certain valuations for insurance paid by us for Messrs. Wheelock ($1,493)
and Brown ($1,334) (See "OUR RETIREMENT PLAN", below).
(2) We have valued the Shares underlying the stock options at a price of from
$1.00 to $3.00 per Share, the fair market value of the Shares at issuance as
determined by our management in the absence of a readily trading market, solely
for the purposes of Rule 402 of Regulation S-B promulgated under the Securities
Act of 1933. If these Shares were valued at the public offering
30
<PAGE> 34
price of $6.00 per Share, this would constitute additional consideration to our
executive officers in the amount of $1,080,000. These Shares are, however,
restricted and any resale would be subject to the registration provisions of the
Securities Act of 1933 or the provisions of Rule 144 or a similar exemption from
registration under the Securities Act of 1933.
(3) Mr. Cochran, as counsel to us, will also bill us for legal services rendered
to our Company.
(4) Mr. Brown receives the use of a Company automobile. We have valued this use
at approximately $7,000 per annum.
(5) Certain incentive options that may be available to Ms. Marlow upon FDA
approval of the OssaTron(R) orthopedic lithotripter have not been valued in this
table. (See "OPTION EXERCISE TABLE", below).
(6) Certain options that may be available to Ms. Beck premised upon her
continued service to us have not been valued in this table. This includes
options to purchase up to 5,000 Shares at $1.00 per Share that were granted in
1997 to vest in July of 1999, an option to purchase up to 5,000 Shares at
$1.00 per Share that were granted in July of 1998 to vest in July of 2000 and
an option to purchase up to 5,000 shares at $1.00 per share that vests in July
of 2000. (See "OPTION EXERCISE TABLE", below).
(7) Mr. Warlick began receiving a car allowance of $500 per month in 1998.
OPTION EXERCISE TABLE
On December 23, 1996 the Board of Directors instituted an options program
to issue up to 350,000 Shares at prices to be determined by 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. As of the date of this Prospectus,
the Board has issued options for an aggregate of 454,000 Shares to 31 persons,
including certain promoters, officers, directors, employees and consultants to
us. Except as noted in the table below, all such 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 (Our management has valued these Shares underlying the stock
options at a price of $1.00 per Share, the fair market value of the Shares at
issuance as determined by our management in the absence of a readily trading
market) to Messrs. Wheelock (65,000 Shares), Brown (9,000 Shares) and Warlick
(9,000 Shares) in exchange for personal payment guarantees provided by these
officers on our behalf.
We have not issued any stock appreciation rights and do not have a
long-term incentive plan. The options held by our management as of the date of
this Prospectus are exercisable pursuant to the following table:
31
<PAGE> 35
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees and Price Expiration
Name and Title Granted (#) Others ($) Date
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Argil Wheelock, MD 90,000 19.82% $1.00 12/31/2000
(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 10,000 2.20% $1.00 12/31/2000
(Vice President of 5,000 1.10% $3.00 12/31/2001
Clinical and 50,000(1) 11.01% $3.00 12/31/2003
Regulatory Affairs) 25,000(1) 5.51% $3.00 12/31/2003
Victoria Beck 15,000 3.30% $1.00 12/31/2000
(CFO) 10,000(2) 2.20% $1.00 12/31/2001
5,000 1.10% $3.00 12/31/2001
John Burke 50,000 11.01% $1.00 12/31/2000
(Director)
- -------------------------------------------------------------------------------------
</TABLE>
(1) On March 24, 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's placing the highest priority on the OssaTron(R) orthopedic
lithotripter project, 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 or if
we receive FDA approval of the OssaTron(R) orthopedic lithotripter earlier,
otherwise they vest on December 31, 2002. The early acceleration vests according
to the following table:
<TABLE>
<CAPTION>
DATE OF FDA APPROVAL OPTIONS ACCELERATED
- -------------------------------------------------------------------------------
<S> <C>
Before 9/30/1999 75,000
By 12/31/1999 60,000
By 3/31/2000 45,000
By 6/30/2000 30,000
By 12/31/2000 15,000
No FDA approval
or approval after 12/31/2002 75,000
</TABLE>
(2) On July 11, 1997 we entered into an employment agreement with Victoria Beck
to become our Chief Financial Officer. Pursuant to this 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 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.
32
<PAGE> 36
OUR RETIREMENT PLAN
On January 1, 1996 we adopted a 401(K) retirement plan (the "Plan"). The
Plan provides that eligible employees may authorize us to withhold from 1% up to
12% of compensation, as defined in the Plan, plus up to 100% of cash bonuses
paid by us. However, the total amount withheld by us on behalf of each employee
may not exceed $7,000 for any taxable year. The Plan provides that we may make a
matching contribution not to exceed 3% of the employee's compensation for
employees that have been employed for at least one year with us. We contributed
$10,300 to the Plan in 1997 and $3,800 in 1996.
PRINCIPAL SHAREHOLDERS
SECURITIES OWNERSHIP OF MAJORITY SHAREHOLDERS.
The following table sets forth certain information as of the date of this
Prospectus regarding each person known by us to own more than five (5%) percent
of the issued and outstanding Shares of Common Stock of our Company, each
current director, each executive officer and all directors and executive
officers of our Company as a group. "Beneficial Ownership" is defined pursuant
to the regulations promulgated 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 Common Stock indicated. Each person
is the record owner of the Shares indicated and possesses the sole voting and
investment power with respect to such Shares unless otherwise indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NAME OF OWNER AND AMOUNT OF BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
CURRENT ADDRESS (1) (CURRENT) AS ADJUSTED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Argil Wheelock, MD 1,508,800 Shares 15.61% 14.15%
425 Franklin Road
Suite 545
Marietta, GA 30067
John F. Warlick 1,348,800 Shares (2) 13.96% 12.64%
425 Franklin Road
Suite 545
Marietta, GA 30067
Roy S. Brown 1,002,200 Shares 10.37% 9.40%
425 Franklin Road
Suite 545
Marietta, GA 30067
Werner Schwarze 500,000 Shares 5.17% 4.69%
High Medical Technologies
Bachstrasse 8
CH-8280 Kreuzlingen
Switzerland
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NAME OF OWNER AND AMOUNT OF BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
CURRENT ADDRESS (1) (CURRENT) AS ADJUSTED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Walter Uelbelacker 500,000 Shares 5.17% 4.69%
High Medical Technologies
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 Technologies
Bachstrasse 8
CH-8280 Kreuzlingen
Switzerland
John Burke 75,000 Shares 0.78% 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 20,000 Shares 0.02% 0.02%
425 Franklin Road
Suite 545
Marietta, GA 30067
Marie Marlow 38,000 Shares 0.04% 0.04%
613 7th street, NE
Washington, DC 20002
All Officers & Directors 4,658,800 Shares 48.20% 43.68%
As a group. (8 persons)
</TABLE>
- --------------------------------------------------------------------------------
(1) Pursuant to the beneficial ownership rules of the Securities and Exchange
Commission, common Stock owned of record by certain close relatives of these
persons has been aggregated with stock held of record by these persons; and
options held by each of these persons have been treated as though such options
were exercised.
(2) These Shares are owned of record by Ty Warlick, the wife of John F. Warlick,
and Mr. Warlick disclaims record or beneficial ownership of all but 20,000 of
these Shares.
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
Karl Heinz Restle, a major shareholder of our Company, 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(R) lithotripters and OssaTron(R)
orthopedic lithotripters to us. Joaquim 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. We
have paid HMT $4,934,261 during the nine month period ending September 30, 1998.
John Warlick, Executive Vice President and a major shareholder of our
Company, is a former director and the former president of Servicetrends,
Inc.("Servicetrends"), a Georgia corporation that
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<PAGE> 38
has contracted with us to provide installation and maintenance service for the
LithoTron(R) lithotripter and OssaTron(R) 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
and 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. We have paid
Servicetrends $389,341 during the nine month period ended September 30, 1998.
On April 19, 1996 John F. Warlick agreed to transfer 499,800 (post-split)
Shares to Dr. Wheelock. This transfer primarily formalized a previous verbal
agreement between Dr. Wheelock and the Company to increase the ownership level
of Dr. Wheelock to be consistent with his holdings in the Predecessor Company.
In addition, Dr. Wheelock agreed to the following:
1) The purchase by an investor group of an OssaTron(R) orthopedic
lithotripter at a price of not less than $250,000 and the entering into of an
IDE agreement within 90 days;
2) 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;
and
3) A commitment by Dr Wheelock 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
pursuant to these agreements.
Also on April 19, 1996 our shareholders voted to split our stock at a rate
of 60 new Shares for each old Share held.
In addition to the foregoing, on April 19, 1996 Mr. Warlick received
100,000 Shares in exchange for the cancellation of an initial loan of $100,000
to us.
We conducted a private placement of our Common Stock from June 24, 1996
through December 4, 1996. Pursuant to this private placement we sold an
aggregate of 1,407,000 Shares at $1.00 per Share to 75 investors. During the
course of this private placement, we sold Shares to three residents of the State
of Alabama prior to the filing of a notice with such state. Pursuant to an
agreement with the state: we offered rescission to the three Alabama investors;
and reimbursed the state $2,000 as an administrative assessment and for the
costs of the state investigation.
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
35
<PAGE> 39
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 lithotriptic 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.
Scott Cochran, our secretary and a director of our Company, renders legal
services to us and bills us for those services.
Georgia Baptist Medical Center is currently testing the OssaTron(R)
orthopedic lithotripter. One of our Shareholders is a director of that hospital.
USL is a Texas limited partnership that has entered into a distributor
agreement with us (See "HISTORY AND BUSINESS"). As of September 30, 1998, we are
the sole general partner of USL pursuant to an Entity Interest Agreement dated
March 7, 1997 (effective April 1, 1997). We exchanged 200,000 Shares of our
Common Stock, issued to 4 owners of USL, in exchange for a 40% interest in USL
(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 USL for 700,000 of our Shares and thus became the sole general
partner of USL. In addition to distributing our products, USL has, along with
Litho Management, Inc., its former other corporate general partner, organized,
and USL shall continue to organize, limited partnerships with practicing
urologists as limited partners for the ownership and operation of LithoTron(R)
lithotripters in a 19 state area. As of the date of this Prospectus, USL has
formed thirteen limited partnerships with certain urologists (See "JOINT
VENTURES, SUBSIDIARIES AND DISTRIBUTORSHIPS") in exchange for limited
partnership and/or general partnership interests and a 7.5% management fee. It
should be noted that certain proposed FDA regulations could inhibit physician
ownership of these limited partnerships (See "GOVERNMENTAL REGULATION"). Several
Shareholders of our Company are limited partners in USL and the Second Tier
Partnerships.
We conducted a private placement of our Common Stock from July 31, 1997
through February 12, 1998. Pursuant to this private placement we sold an
aggregate of 739,000 Shares at $3.00 per Share to approximately 67 investors.
Messrs. Wheelock and Warlick own minority interests (3% and
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<PAGE> 40
2%, respectively) in Lincolnland, an S corporation in the mobile lithotripsy
business. Lincolnland has purchased two LithoTron(R) lithotripters from an
authorized distributor of our products.
On September 9, 1998 we exchanged 300,000 of our Shares with three
shareholders of our Company (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.
We, as well as certain executive officers of our Company (Messrs. Wheelock,
Brown and Warlick), have guaranteed approximately $2,207,958 in debt owed by the
Second Tier Limited Partnerships 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
certain expenses.
We paid consulting fees totaling $21,800 and $218,000 during 1997 and 1996,
respectively, to individuals in the medical field that were Shareholders of our
Company.
On December 8, 1998 we guaranteed a $540,000 loan to SE Colorado
Lithotripsy, LP. US Lithotripsy, LP is the general partner of SE Colorado
Lithotripsy, LP.
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.
FUTURE TRANSACTIONS WITH AFFILIATES:
Other than as described in this Prospectus, we do not presently contemplate
any other material transactions with Messrs. Warlick, Wheelock and Voss
(Collectively referred to as the "Promoters") or with any of our officers or
directors.
Any future dealings between the Company and its promoters, officers,
directors, principal shareholders, affiliates or any of them, will be made or
entered into on terms that are no less favorable to us than those that can be
obtained from unaffiliated third parties; and all future affiliated
transactions, and any forgiveness of loans, must be approved in advance by a
majority of the independent, disinterested members of our Board of Directors who
do not have an interest in the transaction. Common Stock owned by the promoters
or by their "Affiliates" or "Associates" (as those terms are defined in
Paragraph II of the Statement Of Policy Regarding Loans And Other Material
Affiliated
37
<PAGE> 41
Transactions as adopted and effective October 24, 1991 by the North American
Securities Administrators Association, Inc.) shall not be counted in determining
said majority. There will be no dealings with insiders at any time that the
Company has no independent directors.
DILUTION
"Dilution" means the difference between the public offering price ($6.00 per
Share) 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 under the
above assumptions the dilution of a new investor's equity as of September 30,
1998.
As of September 30, 1998, we had issued 9,665,342 Shares to our current
officers, directors and Shareholders in exchange for $6,503,000 in cash (an
average of approximately $0.69 per Share) as well as the officers and directors
activities in organizing our Company and the exchange of a 40% ownership
interest in USL; a 100% ownership interest in Litho Management, Inc.; and a 100%
ownership interest in HLE Corp. (See "CERTAIN TRANSACTIONS WITH MANAGEMENT AND
OTHERS"). The net tangible book value of our Company as of September 30, 1998
was $4,349,260 or approximately $.45 per Share. Giving effect to the sale by us
of all Shares offered for cash, our pro forma net tangible book value after
deducting expenses of this offering estimated at $258,793 if the minimum
offering is sold and estimated at $775,793 if the maximum offering is sold,
would be approximately $4,590,471 if only the minimum offering is sold or
approximately $.47 per Share, which represents an increase of approximately $.02
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 $9,573,467 or
approximately $.90 per Share (See "DESCRIPTION OF COMMON STOCK").
<TABLE>
<CAPTION>
Minimum Maximum
<S> <C> <C>
Public offering price per Share $6.00 $6.00
Net tangible book value per Share before offering $0.45 $0.45
Increase per Share attributable to public investors $0.02 $0.45
Pro forma net tangible book value per Share after offering $0.47 $0.90
Dilution per Share to public investors $5.53 $5.10
</TABLE>
The numbers in the table above 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.
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<PAGE> 42
CAPITALIZATION
The following table illustrates the capitalization of our Company as of the
date of this Prospectus and as adjusted to reflect the sale of all the
securities offered hereby:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
TITLE OF AMOUNT AMOUNT OUTSTANDING AMOUNT TO BE
CLASS AUTHORIZED AS OF THE DATE OF OUTSTANDING
THIS PROSPECTUS IF THIS ENTIRE
OFFERING IS SOLD
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock 30,000,000 9,665,342 (1) 10,665,342 (1)
No Par Value
Stock Options
to 550,000 454,000 454,000 (2)
purchase Stock
- --------------------------------------------------------------------------------
</TABLE>
(1) This amount does not include Shares that are subject to the exercise of
options or warrants that have been granted to the Placement Agent to purchase up
to 100,000 Shares.
(2) The Board of Directors may issue options or warrants to purchase up to an
additional 96,000 Shares of Common Stock at a price to be determined by the
Board to employees to be designated by the Board.
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 Common Stock issued and
outstanding, held of record by approximately 135 persons (See "PRINCIPAL
SHAREHOLDERS") as well as options exercisable on or before December 31, 2000,
December 31, 2001 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 Common Stock to be issued in this offering shall be
fully paid and non-assessable.
Our Common 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 our Company.
Holders of Common Stock are entitled on liquidation to share pro rata in
assets available for distribution to shareholders after payment of corporate
debt.
We act as our own transfer agent; in the future, however, we may engage an
independent registrar and transfer agent.
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<PAGE> 43
DIVIDENDS.
We have not paid any dividends on our Common 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.
OPTIONS
We have granted options to certain 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 and the Placement Agent shall 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 (See "UNDERWRITING"). The
options held by our executive officers and directors are shown in the "SUMMARY
COMPENSATION TABLE" and in the "OPTION EXERCISE TABLE". 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
such 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.
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description of Proposed Use Minimum Maximum
- --------------------------------------------------------------------------------
<S> <C> <C>
Offering Expenses $ 198,793 $ 198,793
Commissions $ 50,000 $ 600,000
Placement Agent Expense Allowance $ 10,000 $ 120,000
FDA Study Expenses $ 241,211 $ 604,207
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>
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<PAGE> 44
UNDERWRITING
PLAN OF DISTRIBUTION
Pursuant to a placement agent agreement (the "Placement Agent Agreement"),
we have engaged Capital Growth Management, Inc. (the "Placement Agent") as our
agent to sell up to 1,000,000 Shares to the public on a "best efforts" basis
(This means that the Placement Agent [who may also be referred to as the
"Underwriter"] is only obligated to use good faith efforts to form a selling
group and to sell this offering and is not obligated to sell all or any portion
of it). There can be no assurance that any of these Shares will be sold. If the
Placement Agent fails to sell at least 83,334 of the offered Shares within the
minimum offering period (60 days from the date of this Prospectus, unless
extended by us for an additional 30 days, which extension we would grant if we
deemed the 60 day period after effectiveness of this initial public offering was
not a good time to sell an initial public offering or if our effectiveness with
certain states is delayed until after our effectiveness with the Securities and
Exchange Commission), 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 are 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.
All subscription payments should be made payable to "***** as Escrow Agent
for HealthTronics, Inc.". The subscription payments will be transmitted by the
Placement Agent no later than noon of the next business day following receipt,
to an escrow account maintained by ***** in Atlanta, Georgia. The escrow agent
will hold all subscription payments pending the sale of the minimum number of
Shares within the specified period. Subscription payments will only be withdrawn
from the escrow account for the purpose of paying us for the Shares hereunder,
if at least 83,334 of the Shares offered hereunder are sold, or for the purpose
of refunding subscription payments to subscribers. Neither we nor subscribers
will earn interest on funds held in the escrow account, and subscribers will not
have use or right to return of such funds during this period, which may last as
long as 90 days for the minimum offering. In any event, the offering will
terminate nine months from the date of this Prospectus unless the minimum
offering is not sold or the entire offering sells out earlier. If the minimum
Shares are sold within 90 days, all funds collected will be disbursed to us.
The public offering price of the Shares offered hereby was determined by us
based arbitrarily upon considerations including
41
<PAGE> 45
market conditions and other factors. The public offering price does not bear any
relationship to assets, book value, or other traditionally recognized criteria
or indicia of value.
We have paid the Placement Agent the sum of $25,000 as an advance against
the Placement Agent's accountable expense allowance of 1% of the aggregate
amount of securities sold by the Placement Agent and other brokers who contract
with the Placement Agent to sell this offering ("Selected Dealers"). This amount
was paid upon the signing of the Placement Agent Agreement. In addition, we
shall pay the Placement Agent a selling commission of eight percent (8%) of the
gross funds raised by the Placement Agent and Selected Dealers. The Placement
Agent may reallot any or all of the Commission to Selected Dealers. The
Placement Agent is also entitled to receive a non-accountable expense allowance
of up to one percent (1%) of the gross funds raised by the Placement Agent and
by Selected Dealers. Accountable expenses include any and all reasonable
offering expenses for this offering including, but not limited to: 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 the Placement Agent. In the event this offering is
terminated prior to the sale of the minimum offering, the Placement Agent shall
be reimbursed only for its actual accountable out-of-pocket expenses and any
portion of any advance on the accountable expense allowance not accounted for
will be promptly refunded to us.
We have also granted the Placement Agent warrants (the "Warrants") to
purchase our Shares at a rate of one Warrant (equaling one share of Stock) for
each ten Shares sold in 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 and thereafter become exercisable for a period of four
years from the effective date. During the first year after the effective date of
this offering, the Warrants may only be transferred by the Placement Agent to
its officers or to officers or partners of the Selected Dealers.
We and the Placement Agent have also agreed to indemnify each other against
certain liabilities, including liabilities arising under the Securities Act. 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. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
the Placement Agent in the successful defense of any action, suit or proceeding)
is asserted by the Placement Agent in connection with these securities being
registered, we will, unless in the opinion of our counsel the
42
<PAGE> 46
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. Copies of our Articles of Incorporation
and ByLaws are available for inspection by any potential investor or his
representative (See "ADDITIONAL INFORMATION THAT IS AVAILABLE TO YOU" on the
inside front cover of this Prospectus).
The foregoing is a summary of the principle terms of the Placement Agent
Agreement, which summary does not purport to be complete. For all of the terms
of the Placement Agent Agreement, reference is made to a copy thereof which is
on file as an exhibit to the Registration Statement. (See "ADDITIONAL
INFORMATION THAT IS AVAILABLE TO YOU" on the inside front cover of this
Prospectus).
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1996 and for each of the two years
in the period ended December 31, 1997 and 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 reports which are included in this Prospectus
and Registration Statement. 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 their 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. Mr. Moran is also securities counsel
to us in connection with this offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF CONSOLIDATED OPERATIONS
GENERAL
We are a provider and distributor of extracorporeal shockwave 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(R) lithotripter.
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<PAGE> 47
YEAR 2000 COMPLIANCE
We are aware of the issues associated with the programming of existing
computer systems as the year 2000 approaches, and recognize the need to ensure
that our operations will not be disrupted by Year 2000 hardware and software
issues. This problem will affect us since virtually every computer operation
will be affected in some way by the rollover of two-digit year values. The
central issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or could fail. We are
in the process of confirming compliance regarding Year 2000 issues for both
internal and external (suppliers, vendors) information systems. This process,
which shall continue on an ongoing basis, involves communicating with
significant suppliers, HMT, financial institutions, and other parties that
provide significant services to us. We have appointed a committee chaired by
John Warlick, our Executive Vice President and he is in the process of
confirming compliance regarding Year 2000 issues for both internal and external
(suppliers, vendors) information systems. This process, which shall continue on
an ongoing basis, involves his communicating with significant suppliers, HMT,
financial institutions, and other parties that provide significant services to
us. We have updated all internal computer systems and software to ensure we will
not have any internal Year 2000 problems. In addition, one of the leading
vendors of HMT has provided documentation certifying that the software for the
LithoTron(R) and OssaTron(R) systems contain no date-dependent functions. There
can be no assurance that all of our primary service providers will properly
address such Year 2000 issues. Expenditures to make us Year 2000 compliant are
not expected to be material to our financial position or results of operations,
however, there can be no assurance in that regard. Mr. Warlick estimates that
the Company shall be Year 2000 compliant by June of 1999.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since our inception in December 1995, we have devoted our principle efforts
toward obtaining FDA approval for certain medical devices, specifically the
LithoTron(R) lithotripter ,a kidney lithotripter and the OssaTron(R) orthopedic
lithotripter, an orthopedic lithotripter. On receipt of the July 21, 1997 FDA
PMA, we began marketing the LithoTron(R) lithotripter and refocusing our
regulatory efforts on the pursuit of the FDA PMA for the OssaTron(R) orthopedic
lithotripter.
44
<PAGE> 48
Effective April 1, 1997 we became a co-general partner with Litho Management,
Inc. ("LMI"), as well as a 39.6% limited partner, in US Lithotripsy ("USL"), a
Texas limited partnership formed for the purpose of developing and managing
mobile lithotripsy partnerships in the Southwest. Since inception through the
date of this prospectus, USL has formed fourteen 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. Subsequent to obtaining the LithoTron(R)
lithotripter PMA in July, 1997, we experienced a significant increase in the
number of devices sold. However, in accordance with generally accepted
accounting principles, we defer sales made to certain partnerships where we have
a general partnership interest and have co-signed on the related debt. On this
basis, we deferred profits of $508,576 and $433,000 for the year ended December
31, 1997 and for the nine months ended September 30, 1998, respectively, to
future periods. As a result we reported a net loss of $418,028 for the year
ended December 31, 1997. In conjunction with the acquisition of LMI and the
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
nine months ended September 30, 1998. The Company recorded net income of
$1,173,390 for the nine months ended September 30, 1998.
On April 30, 1998 we acquired 100% of the outstanding common stock of LMI,
our co-general partner in USL. We, as sole general partner, consolidate the LMI
partnership interests in our financial statements as of the acquisition date. On
a consolidated basis, the aforementioned deferred profit on medical device sales
to certain of these partnerships for 1997 ($508,576), for the nine months ended
September 30, 1998 ($433,000) and for future periods has been eliminated against
the related partnership assets.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue: Net revenue increased from $2,870,000 for the year ended
December 31, 1996 to $5,062,104 for the year ended December 31, 1997, an
increase of 76%. This increase is attributable to additional sales as a result
of the FDA PMA for the LithoTron(R) lithotripter, received on July 21, 1997.
Cost of Goods Sold, Rentals and Services Provided: Cost of goods sold,
rentals and services provided increased from $2,073,697 for the year ended
December 31, 1996 to $3,263,233 for the year ended December 31, 1997, an
increase of 57%. This
45
<PAGE> 49
increase is attributable to additional sales as a result of the FDA PMA for the
LithoTron(R) lithotripter, received on July 21, 1997.
Salaries, Wages and Benefits: Salaries, wages and benefits increased from
$309,663 for the year ended December 31, 1996 to $723,748 for the year ended
December 31, 1997, an increase of 134%. This increase is due to the addition of
corporate officers, additional regulatory medical monitors and technicians as we
entered our second year of operations.
General and Administrative Expenses: General and administrative expenses
increased from $935,588 for the year ended December 31, 1996 to $1,463,683 for
the year ended December 31, 1997, an increase of 56%. This increase is primarily
attributable to our move to larger office space in May, 1997, to the increase in
marketing efforts in the last half of 1997, and to the increase in regulatory
costs relative to the completion and submission of the LithoTron(R) lithotripter
FDA PMA studies in 1997.
Interest Expense: Interest expense increased from $0 for the year ended
December 31, 1996 to $59,517 for the year ended December 31, 1997. This is
solely attributable to the debt associated with the Prostatron purchased in 1997
by Tenn-Ga Prostate Therapies, LLC.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net revenue: Net revenue increased from $2,169,952 for the nine months ended
September 30, 1997 to $10,944,033 for the nine months ended September 30, 1998,
an increase of 404%. This is attributable to (1) additional sales as a result of
the FDA PMA for the LithoTron(R) lithotripter, received on July 21, 1997; (2)
the acquisition of the remaining general partnership interest in USL 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 $1,465,462 for the nine months
ended September 30, 1997 to $4,326,630 for the nine months ended September 30,
1998, an increase of 195%. This increase is directly attributable to (1)
additional sales as a result of the FDA PMA for the LithoTron(R) lithotripter,
received on July 21, 1997; (2) the acquisition of the remaining general
partnership interest in USL and the required consolidation of the related
partnerships' operations; and (3) our expansion into medical device leasing.
46
<PAGE> 50
Salaries, Wages and Benefits: Salaries, wages and benefits increased from
$471,599 for the nine months ended September 30, 1997 to $1,050,591 for the nine
months ended September 30, 1998, an increase of 123%. This increase is primarily
attributable to the acquisition of the remaining general partnership interest in
USL 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 $992,688 for the nine months ended September 30, 1997 to
$2,832,697 for the nine months ended September 30, 1998, an increase of 185%.
This increase is primarily due to the increase in LithoTron(R) lithotripter
marketing and expenses related to the OssaTron(R) orthopedic lithotripter IDE
studies in progress in 1998.
Equity in Earnings of Unconsolidated Partnerships: Equity in earnings of
unconsolidated partnerships increased from $0 for the nine months ended
September 30, 1997 to $62,105 for the nine months ended September 30, 1998. We
acquired minority interest positions in certain partnerships in the fourth
quarter of 1997 and the first quarter, 1998.
Minority Interest: Minority interest increased from $0 for the nine months
ended September 30, 1997 to $1,400,389 for the nine months ended September 30,
1998. This increase is directly attributable to the consolidation and subsequent
growth of First and Second Tier Partnerships, with significant minority
interests held by various partnerships or individuals.
Interest Expense: Interest expense increased from $42,507 for the nine
months ended September 30, 1997 to $111,411 for the nine months ended September
30, 1998, an increase of 162%. This increase is primarily attributable to the
increase in debt resulting from the consolidation of the First and Second Tier
Partnerships.
Interest Income: Interest income increased from $7,375 for the nine months
ended September 30, 1997 to $23,136 for the nine months ended September 30,
1998, an increase of 214%. 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.
Provision for Income Taxes: Provision for income taxes increased from $0
for the nine months ended September 30, 1997 to $194,812 for the nine months
ended September 30, 1998. As of September 30, 1998, we have utilized all of the
available net operating tax loss ("NOL") carryforwards. In conjunction with the
application of these NOL's, we adjusted the net deferred tax asset valuation
allowance to zero, resulting in a reduced
47
<PAGE> 51
effective tax rate for the nine months ended September 30, 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 First and
Second Tier Partnership equipment financing has been provided by term bank debt
secured by the related device and guarantees from the various partners,
including certain 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.
We had no outstanding balances under these lines as of September 30, 1998.
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.
48
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHTRONICS, INC. AND SUBSIDIARIES
Report of Independent Auditors F1
Consolidated Balance Sheets as of December 31, 1996 and 1997, and
September 30, 1998 (Unaudited) F2
Consolidated Statements of Operations for the years ended December 31, 1996
and 1997, and the nine months ended September 30, 1997 (Unaudited) and
September 30, 1998 (Unaudited) F4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1997, and the nine months ended September 30, 1998
(Unaudited) F5
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 (Unaudited)
and September 30, 1998 (Unaudited) F6
CONSOLIDATED FINANCIAL STATEMENTS OF LITHO MANAGEMENT, INC. AND SUBSIDIARIES
Report of the Independent Auditors F29
Consolidated Balance Sheet as of December 31, 1997 F30
Consolidated Statements of Income for the year ended December 31, 1997 and
the three months ended March 31, 1997 (Unaudited) and March 31, 1998
(Unaudited) F32
Consolidated Statement of Shareholders' Equity for the year ended December
31, 1997 F33
Consolidated Statements of Cash Flows for the year ended December 31, 1997
and the three months ended March 31, 1997 (Unaudited) and March 31, 1998
(Unaudited) F34
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF HEALTHTRONICS,
INC. AND SUBSIDIARIES
Combined Condensed Statements of Operations for the nine months ended
September 30, 1998 (Unaudited) F44
Combined Condensed Statements of Operations for the year ended December
31, 1997 (Unaudited) F45
</TABLE>
<PAGE> 53
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, 1997 and 1996, 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Atlanta, Georgia
March 6, 1998
F1
<PAGE> 54
HealthTronics, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1998 1997 1996
-------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 986,990 $1,796,694 $ 933,386
Trade accounts receivable, less
allowance for doubtful accounts of
$110,000 at September 30, 1998 and $0
at December 31, 1997 and 1996
2,314,648 1,058,396 467,000
Inventory 2,220,979 1,465,887 130,000
Due from affiliated partnerships 196,027 1,142,143 --
Vendor deposits 23,062 42,458 374,250
Prepaid expenses 188,560 22,969 12,145
-------------------------------------------------------
Total current assets 5,930,266 5,528,547 1,916,781
Property and equipment, at cost:
Medical devices placed in service 3,471,288 902,945 --
Medical devices not yet placed in service -- 207,829 252,083
Office equipment, furniture and fixtures 56,761 7,198 --
Vehicles and accessories 197,174 -- --
-------------------------------------------------------
3,725,223 1,117,972 252,083
Less accumulated depreciation (532,241) (143,090) --
-------------------------------------------------------
Net property and equipment 3,192,982 974,882 252,083
Deferred income taxes 536,958 -- --
Partnership investments 260,100 368,502 --
Goodwill (net of accumulated amortization
of $70,175 at September 30, 1998) 3,176,065 -- --
Patent license (net of accumulated
amortization of $32,498, $25,000
and $15,000 for September 30,
1998, December 31, 1997 and
1996, respectively) 67,502 75,000 85,000
Other assets 36,477 -- --
-------------------------------------------------------
Total assets $ 13,200,350 $6,946,931 $2,253,864
=======================================================
</TABLE>
F2
<PAGE> 55
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1998 1997 1996
--------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Trade accounts payable $ 915,630 $ 1,477,065 $ 341,198
Customer deposits - 460,000 500,000
Short-term borrowings - 200,000 -
Warranty accrual 357,886 175,600 20,000
Accrued income taxes payable 141,144 - -
Other accrued expenses 315,193 156,689 31,199
Current portion of long-term debt 1,250,208 145,885 -
------------------------------------------------------------
Total current liabilities 2,980,061 2,615,239 892,397
Deferral of profit on medical device sales to
related parties - 508,576 -
Long-term debt, less current portion 1,409,541 467,974 -
Minority interest 1,217,919 (4,297) -
------------------------------------------------------------
Total liabilities 5,607,521 3,587,492 892,397
Shareholders' equity:
Common stock - no par value, voting:
Authorized - 30,000,000,
30,000,000 and 10,000,000 shares
for September 30, 1998,
December 31, 1997 and 1996,
respectively
Issued and outstanding - 9,666,000,
8,646,000 and 7,707,000 shares at
September 30, 1998,
December 31, 1997 and 1996,
respectively 7,403,000 4,343,000 1,927,000
Retained earnings (deficit) 189,829 (983,561) (565,533)
-----------------------------------------------------------
7,592,829 3,359,439 1,361,467
-----------------------------------------------------------
Total liabilities and shareholders' equity $13,200,350 $ 6,946,931 $2,253,864
===========================================================
See accompanying notes.
</TABLE>
F3
<PAGE> 56
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
1998 1997 1997 1996
-------------------------------------------------------------------------
(Unaudited)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 10,944,033 $ 2,169,952 $ 5,062,104 $ 2,870,000
Cost of goods sold, rentals
and services provided 4,326,630 1,465,462 3,263,233 2,073,697
-------------------------------------------------------------------------
6,617,403 704,490 1,798,871 796,303
Salaries, wages and benefits 1,050,591 471,599 723,748 309,663
General and administrative
expenses 2,832,697 992,688 1,463,683 935,588
-------------------------------------------------------------------------
2,734,115 (759,797) (388,560) (448,948)
Equity in earnings of
unconsolidated
partnerships 62,105 -- 4,669 --
Interest expense (111,411) (42,507) (59,517) --
Interest income 23,136 7,375 21,083 16,376
Other 60,646 -- -- --
-------------------------------------------------------------------------
Net income (loss) before
minority interest and
income taxes 2,768,591 (794,929) (422,325) (432,572)
Minority interest (1,400,389) -- 4,297 --
-------------------------------------------------------------------------
Net income (loss) before
income taxes 1,368,202 (794,929) (418,028) (432,572)
Provision for income taxes 194,812 -- -- --
-------------------------------------------------------------------------
Net income (loss) $ 1,173,390 $ (794,929) $ (418,028) $ (432,572)
=========================================================================
Basic and diluted income
(loss) per common share:
Basic $ 0.13 $ (0.10) $ (0.05) $ (0.09)
=========================================================================
Diluted $ 0.13 $ (0.10) $ (0.05) $ (0.09)
=========================================================================
Weighted average common
shares outstanding:
Basic 9,074,829 7,804,379 8,010,068 4,952,743
=========================================================================
Diluted 9,252,496 7,804,379 8,010,068 4,952,743
=========================================================================
</TABLE>
See accompanying notes.
F4
<PAGE> 57
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, 1996 100,000 $ 200,000 $ (132,961) $ 67,039
Common stock split 60:1 5,900,000 - -- --
Common stock issued 300,000 320,000 -- 320,000
Common stock issued via private
placement memorandum 1,407,000 1,407,000 -- 1,407,000
Net loss -- -- (432,572) (432,572)
-----------------------------------------------------------------------------
Balance at December 31, 1996 7,707,000 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 739,000 2,216,000 -- 2,216,000
Net loss -- -- (418,028) (418,028)
-----------------------------------------------------------------------------
Balance at December 31, 1997 8,646,000 4,343,000 (983,561) 3,359,439
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 -- -- 1,173,390 1,173,390
-----------------------------------------------------------------------------
Balance at September 30, 1998 (unaudited)
9,666,000 $7,403,000 $ 189,829 $7,592,829
=============================================================================
</TABLE>
See accompanying notes.
F5
<PAGE> 58
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
1998 1997 1997 1996
---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,173,390 $ (794,929) $ (418,028) $ (432,572)
Adjustments to reconcile net income
(loss) to cash provided by (used
in) operating activities:
Depreciation and amortization 469,545 98,588 153,090 10,000
Deferred income taxes (536,958) -- -- --
Deferral of profit on medical
device sales to related parties 362,584 265,331 508,576 --
Equity in earnings of
unconsolidated
partnerships (62,105) -- (4,669) --
Minority interest in
subsidiaries, net of
distributions 652,339 -- (4,297) --
Changes in operating
assets and
liabilities, net of
businesses acquired:
Trade accounts
receivable (591,719) (1,001,877) (591,396) (467,000)
Due from affiliated
partnerships 913,597 (27,524) (1,142,143) --
Inventory (755,092) (521,424) (1,335,887) 110,000
Vendor deposits 19,396 (70,500) 331,792 (374,250)
Prepaid expenses (155,326) (30,781) (10,824) (12,145)
Trade accounts
payable (1,551,272) 545,393 1,135,867 136,471
Customer deposits (462,000) 1,515,226 (40,000) 500,000
Income taxes payable 141,144 -- -- --
Warranty accrual 182,286 (20,000) 155,600 20,000
Accrued expenses 99,962 119,151 125,490 31,199
---------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (100,229) 76,654 (1,136,829) (478,297)
</TABLE>
F6
<PAGE> 59
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
1998 1997 1997 1996
--------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property and
equipment $(1,044,539) $ (607,729) $ (865,889) $ (252,083)
Acquisition of partnership
interest (93,655) (351,333) (163,833) --
Acquisition of LMI, net of
cash acquired 345,552 -- -- --
Other assets (34,697) (4,491) -- --
--------------------------------------------------------------------------
Net cash used in investing
activities (827,339) (963,553) (1,029,722) (252,083)
FINANCING ACTIVITIES
Proceeds from issuance of
common stock 60,000 200,000 2,216,000 1,627,000
Proceeds from long-term
debt 746,000 650,000 650,000 --
Principal payments on long-term
debt (488,136) (36,141)
Proceeds from short-term
debt 500,000 625,000
Principal payments on
short-term debt (700,000) -- (425,000)
--------------------------------------------------------------------------
Net cash provided by
financing activities 117,864 850,000 3,029,859 1,627,000
--------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (809,704) (36,899) 863,308 896,620
Cash and cash equivalents
at beginning of period 1,796,694 933,386 933,386 36,766
--------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 986,990 $ 896,487 $ 1,796,694 $ 933,386
==========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for interest $ 116,863 $ 37,057 $ 59,000 $ --
==========================================================================
Cash paid for taxes $ 590,626 $ -- $ -- $ --
==========================================================================
</TABLE>
See accompanying notes.
F7
<PAGE> 60
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997 and 1996 and September 30, 1998 (unaudited)
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
F8
<PAGE> 61
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 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 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 $2,320,000
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 TGP, the Company's equity interest in its
unconsolidated subsidiary 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
five months ended September 30, 1998. All significant intercompany accounts and
transactions have been eliminated in consolidation. See Note 4 for discussion
of minority interests.
F9
<PAGE> 62
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
REVENUE RECOGNITION 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 is a general partner and has guaranteed certain long-term
obligations of the partnerships are deferred at the time of the sale. The
Company deferred approximately $433,000 and $509,000 of gross profit related to
the sale of medical devices to equity partnerships during the nine month period
ended September 30, 1998 and during the year ended December 31, 1997,
respectively. No sales or cost of goods sold on these devices will be
recognized until such time as cash payments applied to the principal balance of
the second tier's third party debt obligations, which the Company has
guaranteed, exceed the Company's cost on the equipment sold. Once the second
tier partnership has satisfied the cost of the device under the debt
obligation, 100% of the sales and related cost of goods sold will be recognized
ratably over the remaining life of the asset. 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 nine months ended September 30, 1998.
F10
<PAGE> 63
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, related spare parts and consumables.
PARTNERSHIP INVESTMENTS
During 1997 and 1998, the Company made a number of investments in various
general and limited partnerships. Such investments 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. See also Note 4.
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.
F11
<PAGE> 64
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reverse.
The Company has not recorded a provision for income taxes in the accompanying
consolidated statements of operations for the years ended December 31, 1997 and
1996 as accumulated losses have been experienced since the inception of the
Company. The Company made no payments for income taxes during 1997 or 1996.
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.
F12
<PAGE> 65
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. The Company's two largest
customers accounted for approximately 10% and 68% of sales during 1997 and
1996, respectively.
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.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." FAS 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. FAS 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The adoption of FAS 121 had no impact on the accompanying
consolidated financial statements.
F13
<PAGE> 66
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share ("FAS 128"). FAS 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 FAS 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income," which is effective for 1998. FAS 130 establishes guidelines for the
reporting and display of comprehensive income and its components in financial
statements. Management does not believe the adoption of FAS 130 to have a
significant impact on the Company's consolidated financial statements.
UNAUDITED FINANCIAL STATEMENTS
The Company has made all adjustments it considers necessary for a fair
presentation of the financial position of the Company as of September 30, 1998
and the results of operations, shareholders' equity, and cash flows for the
nine month periods ended September 30, 1998 and 1997 as presented in the
accompanying unaudited condensed consolidated financial statements. Operating
results for the nine month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year 1998.
F14
<PAGE> 67
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
<S> <C> <C>
Medical devices $1,400,000 $ 80,000
Consumables 65,887 50,000
---------------------------------------------
$1,465,887 $130,000
=============================================
</TABLE>
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 five months ended September
30, 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, a Texas
corporation, in exchange for all of the issued and outstanding shares of HLE
Corporation. The assets of HLE Corporation 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, has already
consolidated Metro I Stone Management, Ltd., this transaction effectively
represents an acquisition of additional interest in the earnings of Metro I
Stone Management, Ltd.
F15
<PAGE> 68
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
The partnerships and the Company's effective ownership at September 30, 1998
(unaudited) are summarized as follows:
<TABLE>
<CAPTION>
EFFECTIVE EFFECTIVE
DATE OF FORMATION OWNERSHIP VOTING
PARTNERSHIP 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 16.2% 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 5.5% 100%
S.C. Missouri Stone Management, L.P. April 1, 1998 4.1% 100%
Tulsa Stone Management, L.P. February 1, 1998 16.2% 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 8.12% 0%
</TABLE>
F16
<PAGE> 69
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Condensed individual financial information of the Company and the consolidated
partnerships before eliminations is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- -----------------
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. 502,303 384,810 418,924 318,924 225,230
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>
F17
<PAGE> 70
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 (unaudited)
TOTAL TOTAL NET GROSS NET INCOME
PARTNERSHIP ASSETS LIABILITIES REVENUE PROFIT (LOSS)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Lithotripsy,
L.P. $ 453,218 $545,891 $ 663,147 $ -- $(156,754)
Metro I Stone
Management, Ltd. 1,016,398 500,342 1,383,650 1,213,177 860,363
Mississippi Valley I
Stone Manage-
ment, L.P. 644,410 415,015 520,112 440,955 244,901
East Texas I Stone
Management, Ltd. 43,497 18,231 196,350 196,350 99,272
Dallas Stone
Management, L.P. 1,032,424 602,129 1,048,792 953,126 670,960
S. C. Missouri Stone
Management, L.P. 29,989 18,383 89,000 89,000 25,107
Tulsa Stone
Management, L.P. 740,029 604,217 324,000 252,135 175,812
Tyler Stone
Services, L.P. 110,708 88,045 226,800 226,800 57,664
SE Colorado
Lithotripsy, L.P. 590,962 533,642 35,600 25,683 16,820
</TABLE>
F18
<PAGE> 71
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
The following unaudited pro forma information for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 is presented as if
LMI (consolidated with USL) and HLE Corporation had been acquired on January 1,
1997. For the year ended December 31, 1996, the acquisition did not have a
significant impact on a pro forma basis. 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>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------------------------------
<S> <C> <C>
Net revenue $ 12,173,884 $ 6,498,859
Net income (loss) 1,390,918 (413,307)
Net income (loss) per common share
Basic 0.14 (0.05)
Diluted 0.14 (0.05)
</TABLE>
F19
<PAGE> 72
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
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, 1997, operations of these partnerships had not
fully commenced, 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.
5. RELATED PARTY TRANSACTIONS
During the nine month period ended September 30, 1998 and the year ended
December 31, 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 $433,000 and $509,000 of gross profit related to these sales for
the nine month period ended September 30, 1998 and the year ended December 31,
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
nine months ended September 30, 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.
F20
<PAGE> 73
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
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 $137,000 and $159,000 for 1997 and 1996,
respectively.
Trade accounts payable due to the Company's supplier, HMT, totaled $965,000 and
$272,000 as of December 31, 1997 and 1996, respectively. During 1997 and 1996,
the Company made payments totaling $2,993,000 and $1,655,000, respectively, to
HMT for medical devices, related parts and consumables purchases.
Consulting fees totaling $21,800 and $218,000 were paid during 1997 and 1996,
respectively, to individuals in the medical field that were shareholders of the
Company.
6. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1997 consist of a line of credit
agreement that provides for borrowings up to $500,000. Such line of credit
agreement expires July 10, 1998 and is 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 bear interest at 9.75% for the first year of the agreement; the
interest rate changes to prime plus 1.25% if the Company renews the agreement
to extend after July 10, 1998. The line of credit was paid off in May, 1998.
On July 1, 1998, the Company obtained a $650,000 line of credit and a
$1,000,000 equipment financing line with a Tennessee bank. The lines are
personally guaranteed by certain officers of the Company for amounts
representing up to 50% of the outstanding indebtedness plus interest. The
Company had no outstanding balances under these lines as of September 30, 1998.
F21
<PAGE> 74
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
<S> <C> <C>
Term loan, interest at 8%, principal and interest payments of
$13,542 due monthly through October 2002, secured by
personal guarantees of certain TGP shareholders $ 505,465 $ 613,859
Equipment note payable, variable interest rate (8.25% at
September 30, 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 471,819 --
Equipment note payable, variable interest rate (8.25% at September 30, 1998),
principal and interest due in monthly installments of $9,287 through
November 1998, balloon payment of remaining principle 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 320,434 --
Equipment note payable, variable interest rate (8.25% at
September 30, 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 515,668 --
Equipment note payable, interest at 8.25%, principal and interest due in monthly
installments of $14,200 through September, 2003, secured by the equipment
under loan, and through guarantees from the general partner and personal
guarantees from certain limited partners 595,000 --
Note payable to bank, interest at 8.75%, principal and interest
due in monthly installments of $4,761 through July 1999, balloon payment of
remaining principle and interest balance due August 1999, secured by all
accounts receivable, equipment and inventory of USL 124,115 --
Line of credit, variable interest rate (8.25% at September 30, 1998), interest
payable monthly, principal due in full on October 28, 1998, unsecured 80,000 --
Other 47,248 --
-------------------------------
2,659,749 613,859
Less current portion (1,250,208) (145,885)
-------------------------------
$ 1,409,541 $ 467,974
===============================
</TABLE>
F22
<PAGE> 75
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt at September 30, 1998 are as follows:
<TABLE>
<S> <C>
Fiscal Year
1999 $1,250,208
2000 532,885
2001 585,354
2002 185,753
2003 and thereafter 105,549
-----------
$2,659,749
===========
</TABLE>
8. INCOME TAXES
A reconciliation of the provision (credit) for income taxes to the federal
statutory rate of 34% for 1997 and 1996 is:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Statutory federal income tax expense (benefit) $(145,051) $(147,074)
State income taxes, net of federal benefit (16,894) (17,130)
Other 6,818 4,933
Valuation allowance 155,127 159,271
-------------------------------
$ -- $ --
===============================
</TABLE>
F23
<PAGE> 76
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>
1997 1996
--------------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 103,000 $ 206,000
Accrued liabilities and other 82,000 11,000
Deferred revenue 193,000 --
--------------------------------
378,000 217,000
Valuation allowance (372,000) (217,000)
Deferred tax liability:
Property and equipment (6,000) --
--------------------------------
Net deferred tax asset $ -- $ --
================================
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized 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 and 1996, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $272,000 and
$542,000, respectively, which expire in years 2011 and 2012.
As of September 30, 1998, the Company has utilized 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 nine months ended September
30, 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.
F24
<PAGE> 77
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 3% of
employee compensation. The Company recognized $10,300 and $3,800 in expense
related to the 401(k) plan in 1997 and 1996, respectively.
10. SHAREHOLDERS' EQUITY
In April 1996, the Company authorized a 60:1 stock split, resulting in an
increase in outstanding shares from 100,000 shares to 6,000,000 shares.
The Company conducted a Private Placement of its common stock from June 24,
1996 through December 4, 1996. Pursuant to this Private Placement, the Company
sold an aggregate of 1,407,000 shares at $1 per share to approximately 75
investors.
In 1996, a major shareholder forgave a $100,000 note payable in exchange for
the issuance of 100,000 shares.
During June 1997, the Company issued 200,000 shares of common stock 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 739,000 shares at $3 per
share.
11. STOCK OPTIONS
During 1996, the Company initiated the Warrants and Options Program. As of
December 31, 1997, the Board of Directors has approved options to purchase up
to 550,000 shares of common stock.
F25
<PAGE> 78
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
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 $21,000
and $9,000 in expense during 1997 and 1996, 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, 200,000 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. 329,000 options were
exercisable as of December 31, 1997. Options vest at various future dates
through December 31, 2003. No options were exercised during 1997 or 1996. The
weighted-average exercise price and remaining contractual life for the 329,000
options outstanding at December 31, 1997 are approximately $1.50 per share and
three years, respectively.
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 assumptions for 1997: risk-free
interest rate of 7%, expected life of the option of three or four years, and
0.50% dividend yield. The weighted-average fair value of options granted under
the Warrants and Options Program was $0.23 for 1997. Had the employee option
grants been accounted for under the fair value method of FAS 123, net loss
would be $465,028, or approximately $47,000 more than recorded in the
accompanying 1997 consolidated statement of operations.
F26
<PAGE> 79
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTIONS (CONTINUED)
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 177,667 in the
denominator for the calculation of earnings per share for the nine-month period
ended September 30, 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 1997 and 1996 was $41,800 and
$6,900, respectively.
Aggregate future minimum lease payments under operating lease agreements for
terms greater than one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Fiscal Year
1998 $ 62,000
1999 59,000
2000 and thereafter 20,000
---------------
$141,000
===============
</TABLE>
13. COMMITMENTS
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.
F27
<PAGE> 80
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. SUBSEQUENT EVENTS
At December 31, 1998, the Company has drawn approximately $567,000 on its
equipment financing line. The balance is due in monthly principal and interest
(at 8.25%) installments of $17,829 through December, 2001.
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
the sole 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.
Subsequent to September 30, 1998, USL, of which the Company is the sole general
partner, formed four additional limited partnerships.
F28
<PAGE> 81
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.
Atlanta, Georgia
August 7, 1998
F29
<PAGE> 82
Litho Management, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
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>
F30
<PAGE> 83
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
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.
F31
<PAGE> 84
Litho Management, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
1998 1997 1997
------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net revenue $ 961,548 $ 77,265 $ 1,436,755
Cost of revenue 197,229 16,988 245,326
------------------------------------------------------------
764,319 60,277 1,191,429
Operating expenses:
Salaries 63,076 -- 81,102
Professional fees 20,231 1,390 59,616
Insurance expense 6,071 2,177 22,275
Provision for bad debts 12,058 -- 7,500
General and administrative expenses 179,566 25,476 140,461
------------------------------------------------------------
Total operating expenses 281,002 29,043 310,954
Income from operations 483,317 31,234 880,475
Other income (expense):
Equity in earnings of unconsolidated
subsidiary 21,622 -- --
Interest expense (20,073) (12,593) (82,041)
Interest income 32 -- 272
------------------------------------------------------------
Income before minority interest 484,898 18,641 798,706
Minority interest (484,305) (15,963) (796,975)
------------------------------------------------------------
Net income $ 593 $ 2,678 $ 1,731
============================================================
</TABLE>
See accompanying notes.
F32
<PAGE> 85
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.
F33
<PAGE> 86
Litho Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
1998 1997 1997
(Unaudited)
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 593 $ 2,678 $ 1,731
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 124,454 25,000 245,326
Minority interest in subsidiaries' net
income, net of distributions 107,409 15,963 297,528
Provision for bad debts 6,071 -- 7,500
Changes in operating assets and liabilities:
Accounts receivable (226,737) (5,670) (171,544)
Prepaid expenses (109) -- (6,408)
Inventory 100,000 -- (100,000)
Other assets 3,559 24 (1,113)
Accounts payable 87,596 26,741 18,569
Accrued interest and other accrued expenses 19,204 11,384 16,229
Amounts due to related parties 218,361 (28,215) 672,462
------------------------------------------
Net cash provided by operating activities 440,401 47,905 980,280
INVESTING ACTIVITIES
Purchases of property and equipment (648,832) -- (1,249,373)
Purchases of partnership investments, net of cash
acquired -- -- 18,639
------------------------------------------
Net cash used in investing activities (648,832) -- (1,230,734)
FINANCING ACTIVITIES
Proceeds from issuance of debt 580,000 -- 696,394
Principal payments on debt (43,362) (38,984) (348,644)
------------------------------------------
Net cash provided by (used in) financing activities 536,638 (38,984) 347,750
------------------------------------------
Net increase in cash and cash equivalents 328,207 8,921 97,296
Cash and cash equivalents at beginning of period 97,296 -- --
------------------------------------------
Cash and cash equivalents at end of period $ 425,503 $ 8,921 $ 97,296
==========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 18,290 $ 13,256 $ 82,067
==========================================
</TABLE>
See accompanying notes
F34
<PAGE> 87
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
F35
<PAGE> 88
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
majority 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.
F36
<PAGE> 89
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.
F37
<PAGE> 90
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.
F38
<PAGE> 91
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
F39
<PAGE> 92
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.
F40
<PAGE> 93
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.
F41
<PAGE> 94
Litho Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt at December 31, 1997 consists of the following:
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>
F42
<PAGE> 95
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>
<S> <C>
Year ending December 31,
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.
F43
<PAGE> 96
HealthTronics, Inc. and Subsidiaries
Pro Forma Combined Condensed Statements of Operations
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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> <C>
Net revenue $ 10,944,033 $ 1,229,851 $ -- 12,173,884
Cost of goods sold, rentals and services
provided 4,326,630 403,283 -- (56,053) (4) 4,673,860
------------------------------------------------------ ------------
6,617,403 826,568 -- 56,053 7,500,024
Operating costs and expenses:
Salaries, wages and benefits 1,050,591 94,781 -- 1,145,372
Corporate, general and administrative 2,832,697 139,986 -- 97,139 (3) 3,069,822
------------------------------------------------------ ------------
Income/(loss) from operations
2,734,115 591,801 -- (41,086) 3,284,830
Equity in earnings of unconsolidated
partnerships
Interest income (expense) 62,105 28,672 258,109 (258,109) (5) 90,777
Other income (expense): (88,275) (40,420) -- (128,695)
60,646 -- -- 60,646
Net income/(loss) before minority interest ------------------------------------------------------ ------------
and income taxes
Minority interest 2,768,591 580,053 258,109 (299,195) 3,307,558
(1,400,389) (579,548) -- 258,109 (5) (1,721,828)
Net income/(loss) before income taxes ------------------------------------------------------ ------------
Provision for income taxes 1,368,202 505 258,109 (41,086) 1,585,730
Net income/(loss) (194,812) -- -- (194,812)
------------------------------------------------------ ------------
$ 1,173,390 $ 505 $ 258,109 $ (41,086) $ 1,390,918
Net income per share/(loss) per share: ====================================================== ============
Basic
$ 0.13 $ 0.14
============== ===========
Diluted
$ 0.13 $ 0.14
============== ===========
Weighted average number of common
and common equivalent shares
Basic 9,074,829 9,662,009
============== =============
Diluted 9,252,496 9,839,676
============== =============
</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.
F44
<PAGE> 97
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> <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) 3,488,830
------------------------------------------------------------ (3) ----------
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 8,710,068
=========== ==========
</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") 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. on May 1,
1998 and HLE Corporation on September 9, 1998.
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.
F45
<PAGE> 98
INITIAL PUBLIC OFFERING OF HEALTHTRONICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Additional information that is available to You..........................Inside Front Cover Page
Summary of Our Offering .......................................................................1
Risk Factors...................................................................................5
History and Business..........................................................................13
History.......................................................................................13
Business and Proposed Business - Past Activities...................................13
Business and proposed Business - Present and Future Business.......................13
Market Overview....................................................................14
Marketing Strategy.................................................................14
Geographic Markets.................................................................15
Products and Proposed Products.....................................................15
Employees..........................................................................19
Potential Manufacturing............................................................19
Suppliers..........................................................................19
Maintenance Services...............................................................19
Governmental Regulation............................................................19
Competition........................................................................21
Property, Equipment and Inventory..................................................21
Joint Ventures, Subsidiaries and Distributors......................................22
Patents, Trademarks and Licenses...................................................24
Management....................................................................................26
Officers and Directors.............................................................26
Biographical Information...........................................................28
Remuneration (Summary Compensation Table)..........................................30
Option Exercise Table..............................................................31
Our Retirement Plan................................................................33
Principal Shareholders........................................................................33
Securities Ownership of Majority Shareholders......................................33
Certain Transactions with Management and Others...............................................34
Dilution......................................................................................38
Capitalization................................................................................39
Description of Common Stock...................................................................39
General............................................................................39
Dividends..........................................................................40
Options............................................................................40
Use of Proceeds...............................................................................40
Underwriting..................................................................................41
Plan of Distribution...............................................................41
Experts.......................................................................................43
Legal Matters.................................................................................43
Management's Discussion and Analysis..........................................................43
Financial Statements..........................................................................F1
</TABLE>
UNTIL *****, 1999 (90 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS PLACEMENT AGENTS 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> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that no director shall have any
personal liability to the Company 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 the
Company's Articles of Incorporation and ByLaws are available for inspection by
any potential investor or his representative. (See "ADDITIONAL INFORMATION" in
the Company's PROSPECTUS). Because of these provisions, the Company 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 (THE "ACT") MAY BE
PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, THE COMPANY 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 the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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, the Company 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
Placement Agent Agreement filed as Exhibit 1.1 to the Registration Statement
may limit the liability of controlling persons, officers or directors of the
Company to the Placement Agent.
II-1
<PAGE> 100
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>
<S> <C>
SEC registration fee......................... $ 1,668.00
Blue Sky fees (excluding legal fees)......... 15,000.00
NASD fee..................................... 1,625.00
Accounting fees and expenses................. 90,000.00
Legal fees and expenses...................... 60,000.00
Printing and engraving....................... 20,000.00
Escrow Agent fee............................. 500.00
Miscellaneous expenses....................... 10,000.00
-----------
Total .............................. $198,793.00
===========
</TABLE>
II-2
<PAGE> 101
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. (The
"Predecessor"), an affiliated Georgia corporation formed on December 23, 1994
was merged into the Company. The plan of merger was approved by the
shareholders of both the Predecessor and the Company 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 the Company.
(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 June 1, 1997, the Company offered an aggregate of 200,000
Shares in an exchange offer to the owners of USL, a Texas limited partnership
that is a distributor of the Company's products, in exchange for a 40% interest
in USL. The exchange offer was accepted by the 6 owners of USL.
(a) (4) Between July 31, 1997 and February 12, 1998, the Company sold
an aggregate of 739,000 Shares at $3.00 per Share to 67 investors pursuant to a
private placement memorandum.
(a) (5) On May 1, 1998 the Company acquired LMI in exchange for
700,000 Shares.
(a) (6) On September 9, 1998, the Company 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 the issued and outstanding shares of
HLE for 300,000 Shares of the Company.
(b) No underwriter was involved in any of these offerings. The Company
sold these Shares to its officers, directors, promoters, employees,
distributors (including the officers, directors and certain employees of its
distributors), doctors family and friends of the Company's officers and
directors.
II-3
<PAGE> 102
(c) The Shares described in (a) (1), (a) (3), (a) (5) and (a) (6)
above were sold to the promoters and existing shareholders of the Company for
their interest in OssaTronics, Inc. and the interest of the owners of USL in
USL, and the interest of the owners of LMI in LMI and the interest of the
owners of HLE Corp. in HLE Corp., as well as as for the services of the
promoters of, and consultants to, the Company in organizing the Company. The
Shares described in (a) (2) and (a) (4) above were sold for an aggregate of
$3,682,826 in cash.
(d) Exemption for the transactions described in paragraphs (a) (1)
through (a) (6) above is claimed pursuant to Section (4) (2) of the Securities
Act of 1933 and 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 have been sold
to no more than 32 non-accredited investors and no advertising or public
solicitation was employed by the Company in the sale of its Shares.
ITEM 27 EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
1.1 Placement 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 (To be filed by amendment)
3.5 Agreement and Plan of Merger of OssaTronics, Inc. into
HealthTronics, Inc. (1)
3.6 Amended Articles of Incorporation of HealthTronics, Inc.
3.7 Subscription Agreement
5 Opinion of Christopher J, Moran, Jr., as to the legality of
the securities being registered. (1)
</TABLE>
II-4
<PAGE> 103
<TABLE>
<S> <C>
10.1 Draft Form of Escrow Agreement between Registrant and
__________ as Escrow Agent. (Executed copy will be filed by
amendment)
10.2 Entity Interest Agreement between the Company and USL. (1)
10.3 Distributorship Agreement between the Company 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
Institut 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
shockwaves, 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 the
Company 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 The Company's 401 (k) plan. (1)
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 the
Company and HMT. (1)
10.9 Agreement and Plan of Share Exchange with HLE Corp. (1)
10.10 Limited Partnership Agreement of US Lithotripsey, L.P. (1)
10.11 Employment Agreement with Ms. Beck
10.12 Service Agreement with Servicetrends
10.13 Employment Agreement with Ms. Marlow.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Ernst & Young LLP. (1)
24.2 Consent of Christopher J. Moran, Jr. (contained in his
opinion filed as Exhibit 5). (1)
25.1 Power of Attorney (located on page II-7).
27.1 Financial Data Schedule. (1)
</TABLE>
II-5
<PAGE> 104
<TABLE>
<S> <C>
99.1 Letter from FDA dated 6/13/97 approving the PMA for the
LithoTron(TM) Lithotripsy System, subject to certain
conditions. (1)
</TABLE>
- -------------------------------------------------------------------
(1) Filed on November 9, 1998 and incorporated herein by reference.
ITEM 28 UNDERTAKINGS
The undersigned Company 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 the Company
pursuant to the foregoing provisions (See Item 24), or otherwise, the Company
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 the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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, the Company 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-6
<PAGE> 105
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 January 26, 1999.
<TABLE>
<S> <C>
(Registrant).......................................HealthTronics, Inc.
By (Signature and Title)...........................Roy S. Brown
------------
Roy S. Brown
President and Director
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Roy S. Brown as
his true and lawful attorney-in-fact and agent with full power of substitution,
for him and in his name, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the SB-2 Registration
Statement filed by HealthTronics, Inc., to file the same with the Securities
and Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue
hereof.
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 January 26, 1999.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
Argil J. Wheelock, M.D. January 26, 1999 Chairman and CEO
- --------------------------------
Argil J. Wheelock, M.D.
Roy S. Brown January 26, 1999 President, COO
- -------------------------------- and Director
Roy S. Brown
John F. Warlick January 26, 1999 Executive Vice
- -------------------------------- President
John F. Warlick
Scott Cochran January 26, 1999 Secretary/Treasurer
- -------------------------------- and Director
Scott Cochran
Marie Marlow January 26, 1999 Vice President
- --------------------------------
Marie Marlow
Joachim Voss January 26, 1999 Director
- --------------------------------
Joachim Voss
Victoria Beck January 26, 1999 Chief Accounting
- -------------------------------- Officer
Victoria Beck
John Burke January 26, 1999 Director
- --------------------------------
John Burke
</TABLE>
II-7
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Rule 403(d) Page Number
- ------ ---------------------- -----------------------
<S> <C> <C>
1.1 Placement 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 (To be filed by amendment)
3.5 Agreement and Plan of Merger of OssaTronics, Inc. into
HealthTronics, Inc. (1)
3.6 Amended Articles of Incorporation of HealthTronics, Inc.
3.7 Subscription Agreement
5 Opinion of Christopher J, Moran, Jr., as to the legality of
the securities being registered. (1)
10.1 Draft Form of Escrow Agreement between Registrant and
__________ as Escrow Agent. (Executed copy will be filed by
amendment)
10.2 Entity Interest Agreement between the Company and USL. (1)
10.3 Distributorship Agreement between the Company 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
Institut 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
shockwaves, 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 the
Company 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 The Company's 401 (k) plan. (1)
</TABLE>
II-8
<PAGE> 107
<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 the
Company and HMT. (1)
10.9 Agreement and Plan of Share Exchange with HLE Corp. (1)
10.10 Limited Partnership Agreement of US Lithotripsey, L.P. (1)
10.11 Employment Agreement with Ms. Beck.
10.12 Service Agreement with Servicetrends, Inc.
10.13 Employment Agreement with Ms. Marlow.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Ernst & Young LLP. (1)
24.2 Consent of Christopher J. Moran, Jr. (contained in his
opinion filed as Exhibit 5). (1)
25.1 Power of Attorney (located on page II-7).
27.1 Financial Data Schedule. (1)
99.1 Letter from FDA dated 6/13/97 approving the PMA for the
LithoTron(TM) Lithotripsy System, subject to certain
conditions. (1)
</TABLE>
- ------------------------------------------------------------------
(1) Filed on November 9, 1998 and incorporated herein by reference.
II-9
<PAGE> 1
EXHIBIT 3.6
Secretary of State DOCKET NUMBER : 980210286
Corporations Division CONTROL NUMBER: 9535640
Suite 315, West Tower EFFECTIVE DATE: 01/02/1998
2 Martin Luther King Jr. Dr. REFERENCE : 0093
Atlanta, Georgia 30334-1530 PRINT DATE : 01/21/1998
FORM NUMBER : 111
COCHRAN CAMP & SNIPES
SCOTT A. COCHRAN
2950 ATLANTA ST., SE
SMYRNA, GA 30080-3692
CERTIFICATE OF AMENDMENT
I, Lewis A. Massey, the Secretary of State and the Corporation Commissioner of
the State of Georgia, do hereby certify under the seal of my office that
HEALTHTRONICS, INC.
A DOMESTIC PROFIT CORPORATION
has filed articles of amendment in the office of the Secretary of State and has
paid the required fees as provided by Title 14 of the Official Code of Georgia
Annotated. Attached hereto is a true and correct copy of said articles of
amendment.
WITNESS my hand and official seal in the City of Atlanta and the State of
Georgia on the date set forth above.
/s/ Lewis A. Massey
------------------------------
LEWIS A. MASSEY
SECRETARY OF STATE
[SEAL]
<PAGE> 2
ARTICLES OF AMENDMENT
OF
HEALTHTRONICS, INC.
Pursuant to O.C.G.A. ss. 14-2-1006 (CGA ss. 22-1006) of the Georgia
Business Corporation Code, HealthTronics, Inc., a Georgia corporation, hereby
submits the following Articles of Amendment:
1.
The name of the corporation is HealthTronics, Inc. (the "Corporation")
and the charter number of the Corporation is 9535640.
2.
The Articles of Incorporation are hereby amended (the "Amendment") as
follows:
II. The corporation is authorized to issue 30 million shares of common
stock, with no par value.
VII. No shareholder shall have preemptive rights. To the extent that
preemptive rights existed prior to this amendment the same are
abolished.
3.
The Amendment was duly adopted on December 5, 1997.
4.
The foregoing Amendment was duly approved by the shareholders of the
Corporation in accordance with the provisions of O.C.G.A. ss. 14-2-1003 (GCA
ss. 22-1003) of the Georgia Corporation Code.
IN WITNESS WHEREOF, HealthTronics, Inc. has caused these Articles of
Amendment to be executed by its duly authorized officers on the 5th day of
December, 1997.
HEALTHRONICS, INC.
By: /s/ Scott A. Cochran
-----------------------------------
SCOTT A. COCHRAN
Secretary
<PAGE> 1
EXHIBIT 3.7
HEALTHTRONICS, INC.
SUBSCRIPTION AGREEMENT
I hereby subscribe to _________ (Number of Shares) of Common Stock at $6.00
per Share for a Total Purchase Price of $______ (Total Purchase Price = Number
of Shares x $6.00). Minimum Subscription = 100 Shares ($600).
I have enclosed a check for the Total Purchase Price made payable to "
(Name of Bank) as Escrow Agent for HealthTronics, Inc.".
REGISTRATION (type or print):
Name(s) in which Shares are to be registered:
________________________________________________________________________________
Street Address:
________________________________________________________________________________
City, State, Zip Code and Telephone Number:
________________________________________________________________________________
Ownership Form (check one only):
___ Individual ___ Tenants in Common
___ Community Property ___ Corporation
___ Partnership ___ Pension or Profit Sharing Plan
___ Joint Tenants with ___ Custodian under Uniform Gift to
Right of Minors Act
Survivorship ___ Other (Specify)________________
TAXPAYER IDENTIFICATION NUMBER, CERTIFICATION AND SIGNATURE:
Social Security Number or Taxpayer Identification Number:
_______________________________________________________________________________
<PAGE> 2
Certification: I certify that I have received a copy of the Prospectus with
respect to the Shares and have reviewed it.
Signature:
- -------------------------------------------------------------------------------
Signature of Subscriber Signature of Co-Subscriber
- -------------------------------------------------------------------------------
Indicate Status of Subscriber and Co-Subscriber (Custodian, Trustee, Officer or
Partner) if not signing as Individual(s).
Date:
, 1999.
- -----------------
<PAGE> 1
EXHIBIT 10.1
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated the _______ day of __________ 1999, by and
between HealthTronics, a Georgia corporation (the "Company"), Capital Growth
Management, Inc. as Placement Agent (the "Placement Agent"), and (Name of
bank), (the "Escrow Agent"), a banking association.
W I T N E S S:
WHEREAS, the Company proposes to offer and sell up to 1,000,000 Shares
of Common Stock (referred to as the "Shares") to investors pursuant to Section
5 of the Securities Act of 1933, as amended and Form SB-2 promulgated
thereunder; and
WHEREAS, the Company will agree with subscribers for such shares that
the subscription price paid in cash by such subscribers will be refunded to
them if less than an aggregate of $500,004 has been raised from the sale of
Shares, and payments therefore received, by _________________, 1999, (the
"Closing Date") or by _____________, 1999, if the offering is extended by the
Company and you receive written notice to that effect on or before the Closing
Date (the "Extended Closing Date") and
WHEREAS, the Company desires to establish an escrow for such funds,
and the Escrow Agent is willing to serve as Escrow Agent upon the terms and
conditions herein set forth:
NOW, THEREFORE, in consideration of the promises and other good and
valuable considerations, the receipt and sufficiency of which is hereby
acknowledged by the parties, the parties covenant and agree as follows:
1. DEPOSIT WITH ESCROW AGENT: The Escrow Agent agrees that it
will from time to time accept as Escrow Agent funds (the "Escrow Deposit")
received by it representing the subscription amount paid in cash by subscribers
for the Company's Shares. Subscription Agreements for the Shares and
accompanying checks received by the Placement Agent at its offices shall be
reviewed for accuracy by the Placement Agent and, immediately thereafter, the
Placement Agent shall deliver such checks to Escrow Agent pursuant to this
Agreement. Accompanying each such check shall be information describing (1) the
name, address and Federal Tax Identification
1
<PAGE> 2
Number of the Subscriber, (2) the number of Shares subscribed for, and (3) the
subscription price.
2. DISTRIBUTION OF ESCROW DEPOSIT: The Escrow Agent shall
distribute the Escrow Deposit in the amounts, at the times, and upon the
conditions hereinafter set out:
2.1 If at any time on or prior to the Closing Date or
the Extended Closing Date, said $500,004 in aggregate amount of Shares have
been sold, then upon the happening of such event, the Escrow Agent shall
deliver 90% of the Escrow Deposit by a certified or cashier's check made
payable to "HealthTronics, Inc." or by wire transfer to said account which
shall be maintained at (Name of bank). At the same time, the Escrow Agent shall
deliver 10% of the Escrow Deposit by a certified or cashier's check made
payable to "Capital Growth Management, Inc." or by wire transfer to said
account which shall be maintained at (Name of bank). An Affidavit or
certification from the Company that an aggregate of $500,004 of Shares have
been timely sold and the receipt by Escrow Agent of $500,004 hereunder shall
constitute sufficient evidence for the purposes of this Agreement that such
event has occurred.
2.2 If the Escrow Deposit does not, on or prior to the
or the Extended Closing Date, become deliverable to the Company pursuant to
Paragraph 2.1 above, the Escrow Agent shall return the Escrow Deposit to the
respective subscribers in amounts equal to the subscription amount theretofore
paid by each of them without interest and without deductions.
3. LIABILITY OF ESCROW AGENT:
3.1 In performing any of its duties under this Escrow
Agreement, or upon the claimed failure to perform its duties hereunder, Escrow
Agent shall not be liable to anyone for any damages, losses, or expenses which
they may incur as a result of the Escrow Agent so acting, or failing to act;
provided, however, Escrow Agent shall be liable for damages arising out of its
willful default or gross negligence under this Agreement. Accordingly, Escrow
Agent shall not incur any such liability with respect to (I) any action taken
or omitted to be taken in good faith upon advise of its counsel or counsel for
the Company given with respect to any questions relating to the duties and
responsibilities of the Escrow Agent hereunder or (ii) to any action taken or
omitted to be taken in reliance upon any document, including any written notice
or
2
<PAGE> 3
instructions provided for in this Escrow Agreement, not only as to its due
execution and to the validity and effectiveness of its provisions but also as
to the truth and accuracy of any information contained therein, which the
Escrow Agent shall in good faith believe to be genuine, to have been signed or
presented by proper person or persons and to conform with the provisions of
this Agreement.
3.2 The Company hereby agrees to indemnify and hold
harmless Escrow Agent against any and all losses, claims, damages, liabilities
and expenses, including, without limitation, reasonable costs of investigation
and counsel fees and disbursements which may be incurred by it resulting from
any act or omission of the Company; except, that if Escrow Agent shall be found
guilty of willful default or gross negligence under this Agreement by any court
of competent jurisdiction, then, in that event, Escrow Agent shall bear all
such losses, claims, damages and expenses.
3.3 In the event of the breach by the Company of any
covenant contained herein or a dispute between any of the parties hereto
sufficient in the discretion of Escrow Agent to justify its doing so, the
Escrow Agent shall be entitled to tender into the registry or custody of any
court of competent jurisdiction all money or property in its hands under the
terms of this Agreement, together with such legal proceedings as it deems
appropriate, and thereupon to be discharged from all further duties under this
Agreement. Any such legal action may be brought in any such court as Escrow
Agent shall determine to have jurisdiction thereof. The filing of any such
legal proceedings shall not deprive Escrow Agent of its compensation earned
prior to such filing or after the filing of such legal proceedings if the
Escrow Agreement remains effective; and the Company shall indemnify Escrow
Agent against its court costs and attorneys' fees incurred in filing such legal
proceedings.
4. INABILITY TO DELIVER: In the event that checks for
subscriptions delivered to the Escrow Agent by the Placement Agent pursuant to
this Escrow Agreement are not cleared, the Escrow Agent shall deliver such
uncleared checks to the Company unless the Escrow Deposit is returned to
subscribers pursuant to 2.2 above, in which case Escrow Agent shall mail such
uncleared checks to the subscribers. Escrow Agent shall have no responsibility
to collect, or to institute any action with respect to, any checks.
3
<PAGE> 4
5. NOTICES: All notices, requests, demands and other
communications or deliveries required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given if delivered
personally, given by prepaid telegram or deposited for mailing, first class,
postage prepaid, registered or certified mail, as follows:
A) If to the subscribers for the Company's Shares:
To their respective addresses as specified in their
Subscription Agreements or as furnished to Escrow Agent
pursuant to Paragraph 1 of this Agreement.
B) If to the Company:
HealthTronics, Inc.
425 Franklin Road, Suite 545
Marietta, Georgia 30067
Attention: Roy S. Brown,
President
C) If to the Placement Agent:
Capital Growth Management, Inc.
1827 Powers Ferry Road, Building #2
Atlanta, Georgia 30339
Attention: Charles G.
Maton, President
D) If to the Escrow Agent:
(Name of bank)
________________________________________________
________________________________________________
Attention:______________________________________
6. GENERAL:
6.1 This Escrow Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Georgia.
6.2 The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning of
interpretation of this Escrow Agreement.
4
<PAGE> 5
6.3 This escrow agreement sets forth the entire
agreement and understanding of the parties in respect to this escrow
transaction except as to fees and out-of-pocket expenses of escrow agent which
are referred to in Section 7 below and supersedes all prior agreements,
arrangements and understandings relating to the subject matter hereof.
6.4 This Escrow Agreement may be amended, modified,
superseded or canceled, and any of the terms or conditions hereof may be
waived, only by a written instrument executed by each party hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver of any
party of any condition, or of the breach of any term contained in this Escrow
Agreement, whether by conduct or otherwise, in any one or more instances shall
be deemed to be or construed as a further or continuing waiver of any such
condition or breach of a waiver of any other condition or of the breach of any
other terms of this Escrow Agreement.
6.5 This Escrow Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
6.6 This Escrow Agreement shall inure to the benefit of
the several parties and their respective executors, administrators, successors,
heirs and assigns.
7. FEES OF ESCROW AGENT: The Company agrees to pay the Escrow
Agent as compensation for services hereunder by separate agreement. (See
Exhibit "A", attached.)
8. REPRESENTATION OF THE COMPANY: The Company hereby
acknowledges that the status of the Escrow Agent with respect to the offering
of the Shares is that of agent only for the limited purposes herein set forth,
and hereby agrees it will not represent or imply that Escrow Agent, by serving
as Escrow Agent hereunder or otherwise, has investigated the desirability or
advisability of investment in the Company, or has approved, endorsed or passed
upon the merits of the Shares of the Company, nor shall the Company use the
name of Escrow Agent in any manner whatsoever in connection with the offer or
sale of the Shares other than by acknowledgment
5
<PAGE> 6
that it has agreed to serve as Escrow Agent for the limited purposes herein set
forth.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
HealthTronics, Inc.
"COMPANY"
By:
-----------------------------------------
Roy S. Brown, President
Capital Growth Management, Inc.
"PLACEMENT AGENT"
By:
-----------------------------------------
Charles G. Maton, President
(Name of bank)
"ESCROW AGENT"
By:
-----------------------------------------
6
<PAGE> 1
EXHIBIT 10.11
[HEALTHTRONICS LETTERHEAD]
July 11, 1997
Ms. Victoria W. Beck, CPA
8351 Roswell Road, Suite 162
Atlanta, GA 30350
Dear Vikki:
Following up on our discussions, we would like to herewith officially offer you
the position as CFO within HealthTronics, effective August 1, 1997.
As discussed, you will receive an annual salary of $78,000. Upon satisfactory
job performance, your annual salary will be increased to $85,000 in six months
(February 1, 1998). The company will also reimburse you for continuing
professional education costs. In addition, you are eligible for the
HealthTronics standard benefits package as outlined in your HealthTronics
Policies and Procedures Manual, including:
- Paid Time Off (PTO)
- Holidays
- Medical Insurance
- Dental Insurance
- Life Insurance
- Accidental Death and Dismemberment Insurance
- Short and Long Term Disability
- 401(K) Plan
Of course, you will also be reimbursed for all travel and related expenses.
In addition, we are providing you with twenty-five thousand (25,000) Options at
one dollar ($1.00) per share, which will be awarded to you as follows,
contingent, of course, upon your continued employment with HealthTronics at the
time the Options are due:
- 10,000 at time of acceptance of this offer
- 5,000 on July 31, 1998
- 5,000 on July 31, 1999
- 5,000 on July 31, 2000
A general job description for the position is attached.
<PAGE> 2
Ms. Victoria W. Beck, CPA
8351 Roswell Road, Suite 162
Atlanta, GA 30350
Page 2
This letter is being provided to you in duplicate. For the sake of good order,
please countersign this letter in the space provided below, indicating your
acceptance of this offer. Please return one document to me and retain the other
for your records.
Vikki, welcome aboard. Everyone here at HealthTronics is looking forward to
working with you in this exciting new venture.
Sincerely,
/s/ ROY S. BROWN
- ----------------------------
Roy S. Brown
RSB/km
Attachment
Accepted and Agreed to:
/s/ VICTORIA W. BECK 7/11/97
- ----------------------------
Victoria W. Beck Date
<PAGE> 3
[HEALTHTRONICS LETTERHEAD]
July 11, 1997
Ms. Victoria W. Beck, CPA
8351 Roswell Road, Suite 162
Atlanta, GA 30350
Dear Vikki:
As agreed upon in your employment letter dated July 11, 1997, enclosed please
find you Option for ten thousand (10,000) shares of HealthTronics, Inc. Common
Stock. Please complete page 5 of this Option, have it notarized, and return
the original document to me. I will obtain the necessary signatures and return
the original document to you. Also enclosed for your review is the Private
Placement Memorandum dated June 24, 1996.
As discussed and agreed upon in your employment letter, you will receive
additional Options as outlined below, subject to your continued employment with
the Company on the dates the Options are to be awarded:
<TABLE>
<CAPTION>
No. of Options Date to be Awarded
- -------------- ------------------
<S> <C>
5,000 July 31, 1998
5,000 July 31, 1999
5,000 July 31, 2000
</TABLE>
Vikki, if you have any questions regarding these Options, please let me know.
Sincerely,
/s/ Roy S. Brown
Roy S. Brown
RSB/km
Enclosures
<PAGE> 1
EXHIBIT 10.12
[HealthTronics Letterhead]
July 20, 1998
Mr. Steven DeBrock
Servicetrends, Inc.
2130 Barrett Park Drive, NE
Suite 103
Kennesaw, GA 30144
Dear Steven:
Per our recent conversation, please allow me to reiterate in writing the
revised terms of the service agreement between Servicetrends and HealthTronics
According to the original LithoTron Service Agreement (970076) signed and dated
October 14, 1997, paragraph F of Exhibit A states that both HealthTronics and
Servicetrends must provide ninety (90) days notice of cancellation after the
first quarter of the contract period has elapsed. Under the REVISED
cancellation policy, Servicetrends is still required to provide 90 days written
notification of its intent to cancel the service agreement, however
HealthTronics is only required to provide thirty (30) days written notice of
cancellation.
Should Servicetrends choose to cancel the service agreement with HealthTronics,
Servicetrends GUARANTEES that the quality of service being provided to
HealthTronics will not decrease during the final 90 days. If during the final
90 days of the service agreement, HealthTronics judges the quality of service
provided by Servicetrends to be unsatisfactory (as determined by its LithoTron
and OssaTron customers), Servicetrends agrees to refund HealthTronics'
quarterly service payment.
Also, if Servicetrends cancels the service agreement with HealthTronics,
Servicetrends agrees to return the entire inventory of LithoTron and OssaTron
parts to HealthTronics within 24 hours at no charge. Servicetrends acknowledges
that the stock of LithoTron and OssaTron parts in inventory at Servicetrends'
facility is the property of HealthTronics and that the $11,000 annually per
machine which Servicetrends pays to HMT is solely to cover the cost of HMT
repairing, replacing and replenishing inventory used by Servicetrends to
maintain the LithoTron and OssaTron units in North America.
Should these terms be suitable to you, please sign and date below and return at
your earliest convenience. Please keep a copy for your records. If you have any
questions, please feel free to call me.
Kindest regards, Accepted by Servicetrends
/s/ John Warlick /s/ Steven DeBrock
- ------------------------ --------------------------
John Warlick Signature
Executive Vice President C00 7/21/98
--------------------------
Title Date
<PAGE> 1
EXHIBIT 10.13
[HEALTHTRONICS LOGO]
July 3, 1996
Ms. Marie Marlow
613 7th Street, NE
Washington, DC 20002
RE: Employment Agreement
Dear Marie:
The purpose of this letter is to officially firm up the agreement made between
us concerning your employment with HealthTronics.
It was agreed that you will assume the position of Vice President of Clinical
and Regulatory Affairs at HealthTronics, effective September 1, 1996. Your
annual salary has been set at $108,000. You will also be entitled to the
HealthTronics standard benefits package which includes medical and dental
coverage, as well as life insurance. A 401(K) plan is also part of the standard
HealthTronics benefits package.
As you know, initially we wanted to provide you with a sign-up bonus of $10,000
which was to be transferred into HealthTronics stock. In addition, we intended
to provide you with a bonus plan which would enable you to earn more stock
based upon achieving certain milestones within the FDA approval process.
However, based upon our latest information and working within the rules of the
SEC, we find that our original plan cannot be adhered to. Given this situation,
it has been decided to provide you up front with a $25,000 sign-up bonus. You
will then be required to complete the relevant forms in the Private Placement
Memorandum which is enclosed and send us a check for $25,000 made payable to
HealthTronics, Inc. -- Escrow Account, thus securing 25,000 shares of
HealthTronics stock We trust this is acceptable to you.
Marie, it is our mutual understanding that it will not be necessary for you to
be on-site in Marietta on a permanent basis at this time. However, you will be
required to spend that amount of time in Marietta as is needed to ensure
successful completion of your duties and responsibilities.
Furthermore, in order for you to carry out your work, HealthTronics will
purchase for you a complete computer system and printer, as well as a fax
machine for installation at your home.
For the sake of good order, would you please sign in the space provided below
to acknowledge your acceptance of this position. Return the original to us and
keep a copy for your records.
Marie, welcome aboard. Everyone here at HealthTronics is looking forward to
working with you.
Sincerely,
/s/ ARGIL J. WHEELOCK 7/9/96 /s/ ROY S. BROWN 7/5/96
- ------------------------------------- ------------------------------------
Argil J. Wheelock Date Roy S. Brown Date
Accepted by:
/s/ MARIE MARLOW 7/16/96
- -------------------------------------
Marie Marlow Date
AW/RSB/km
Enclosure
<PAGE> 1
EXHIBIT 21.1
HEALTHTRONICS, INC.
SCHEDULE OF SUBSIDIARIES
(as of the date of this Prospectus)
<TABLE>
<S> <C> <C>
Tenn-Ga Prostate Therapies, LLC Limited Liability Corporation TN
Litho Management, Inc. Corporation TX
HLE Corporation Corporation TX
U.S. Lithotripsy, L.P. Limited Partnership TX
Metro I Stone Management, Ltd. Limited Partnership TX
Mississippi Valley I Stone Management, L.P. Limited Partnership MO
East Texas I Stone Management, Ltd. Limited Partnership TX
Dallas Stone Management, L.P. Limited Partnership TX
S.C. Missouri Stone Management, L.P. Limited Partnership MO
Tulsa Stone Management, L.P. Limited Partnership OK
Tyler Stone Services, L.P. Limited Partnership TX
Tyler Stone Management, L.P. Limited Partnership TX
SE Colorado Lithotripsy, L.P. Limited Partnership CO
Mississippi Valley II Stone Management, L.P. Limited Partnership MO
Missouri Valley Lithotripsy, L.P. Limited Partnership MO
North Central Texas Lithotripsy, L.P. Limited Partnership TX
AESL Limited Partnership Limited Partnership AK
Central Missouri Lithotripsy, LLC Limited Liability Corporation MO
Lithowest, LLC Limited Liability Corporation AZ
Florida Lithology, Inc. Corporation FL
Florida Lithology, Ltd. Limited Partnership FL
</TABLE>
