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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30406
HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-221066
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1841 WEST OAK PARKWAY, SUITE A
MARIETTA, GEORGIA 30062
(Address of principal executive (Zip Code)
offices)
(770) 419-0691
(Registrant's telephone number, including area code)
Securities registered under section 12(b) of the Exchange Act:
NONE
Securities registered under section 12(g) of the Exchange Act:
COMMON STOCK
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Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year.
$ 24,414,179
As of February 10, 2000 the aggregate market value of the voting and
non-voting common equity held by non-affiliates was $ 63,433,456.
State the number of shares outstanding of each of the issuer's classes
of common stock.
10,716,271 SHARES OF NO PAR VALUE COMMON STOCK AS OF FEBRUARY 10, 2000
Transitional Small Business Disclosure Format: YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 15, 2000 are incorporated by reference in Part III.
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Cautionary Statements
Included in this report are forward-looking statements that reflect
management's current outlook for future periods. As always, these expectations
and projections are based on currently available competitive, financial, and
economic data, along with operating plans, and are subject to future events and
uncertainties.
Item 1: Description of Business.
General
HealthTronics, Inc. (the Company, may be referred to as we, us or our)
was founded in 1995 for the purpose of obtaining approval from the Food
and Drug Administration (FDA) and the subsequent marketing and service
of products manufactured by High Medical Technologies (HMT), in
particular, medical devices utilizing shock wave technology known as
the LithoTron(R) lithotripter, the LithoTron Ultra(TM) endourological
workstation, and the OssaTron(R) orthopedic lithotripter. In a number
of states we also provide therapy services. Currently the OssaTron
device is under an Investigational Device Exemption (IDE) and as such,
has not been approved for use in the United States. All products listed
above are currently being used in various countries outside of the
United States.
Our home page on the internet is at www.healthtronics.com. You can
learn more about us by visiting that site.
Target Markets
We currently operate in two specific medical fields as outlined below,
and provide technology services, as well:
- Urology
In the field of urology we both sell and operate LithoTron kidney
lithotripter devices. Moreover, we sell LithoTron Ultra endourological
workstations.
We also provide benign prostate hyperplasia (BPH) therapy service using
the Prostatron and Urologix device.
- Orthopedics
We are currently conducting IDE studies with the OssaTron lithotripter
for various applications in the field of orthopedics. The OssaTron
device has not yet received FDA approval and is classified as an
investigational device.
- Technology Services
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HealthTronics has formed its own technology services division, which is
responsible for the installation, maintenance and service of its
products.
Urology - Kidney Lithotripsy
Market Overview
It is estimated that approximately 600,000 patients per year are
diagnosed with kidney stones in the United States. Of these,
approximately 220,000 will be treated with lithotripsy, a non-surgical
therapy for the disintegration of kidney stones that was developed in
Germany in the late 1970's to early 1980's. At the end of 1999 it is
estimated that there were approximately 425 active lithotripter systems
in operation in the United States that were either installed in
hospitals or outpatient centers, or were operating as
mobile/transportable devices. The majority of these lithotripsy devices
were distributed by companies other than HealthTronics.
At the end of 1999 HealthTronics had approximately 65 LithoTron units
installed in the United States.
HealthTronics' Marketing Strategy
Our marketing strategy for kidney lithotripsy is multi faceted and
includes the sale of machines to hospitals and independent mobile
lithotripsy operators, as well as providing the therapy through
company-owned mobile operations and participation/management of mobile
lithotripsy therapy services.
Products
LithoTron
The LithoTron lithotripter was developed by HMT of Switzerland
and HealthTronics has the exclusive rights of this device for
the United States, Canada, and Mexico. HealthTronics received
FDA approval for the LithoTron lithotripter in July 21, 1997
after completion of a four-site IDE study.
The LithoTron lithotripter uses the so-called electro
hydraulic principle for generating the shock waves. The
LithoTron lithotripter comprises four key elements - the
treatment table, the c-arm fluoroscopy device, the shock wave
generating system and
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the control cabinet. All elements are wheel - mounted for easy
maneuverability.
The majority of LithoTron devices in the United States are
operated on a mobile/transportable basis.
LithoTron Ultra
The LithoTron Ultra endourological workstation was developed
by HMT of Switzerland and Philips Medical Systems of Germany.
HealthTronics has the exclusive rights for this device for the
United States, Canada and Mexico, and received supplemental
approval from the FDA to begin marketing this device in 1999.
The LithoTron Ultra was designed to be installed in a fixed
site in hospitals and large surgery centers. The device has
the capability not only to disintegrate kidney stones in the
same manner as the LithoTron device but also has significant
diagnostic capabilities.
Competition
Our competitors in the field of kidney lithotripsy include
such companies as Dornier Medical Systems, Siemens GmbH,
Medstone International, Inc., Storz Medical Systems, Prime
Medical Services, Inc., Integrated Health Care Services, and
American Kidney Stone Management. All of these companies have
been operating in the kidney lithotripsy business longer than
HealthTronics, and in many cases are better financed than us.
They also enjoy a high degree of name recognition for their
products and service.
In addition to these major competitors there are a number of
local private facilities and medical centers as well as
independent mobile operators that provide kidney stone therapy
services.
Joint ventures, subsidiaries and distributors
US Lithotripsy, a subsidiary of HealthTronics, organizes
entities to own and operate lithotripters. These entities are
usually limited partnerships or limited liability companies.
US Lithotripsy generally retains an ownership interest in and
manages the entities. US Lithotripsy receives management fees
for providing day-to-day operations and administrative
functions, and distributions because of its ownership
interests in the entities. HealthTronics receives revenues
through its ownership interest in US Lithotripsy.
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As an example of how US Lithotripsy markets and sells
lithotripters, US Lithotripsy identifies a market in need of a
lithotripter. It identifies investors and facilitates the
formation of an entity to allow the investors to invest. Once
the entity is formed, it typically purchases the lithotripter
from HealthTronics, but it is not required to do so. The
entity retains ownership of the lithotripter and either
installs it at a specific facility or moves it between
locations to provide lithotripsy services. The entity receives
revenue from fees paid by medical facilities for the use of
the lithotripter in providing patient treatments.
Urology - Thermotherapy
HealthTronics owns and operates or manages, together with
investors, a thermotherapy device, for the treatment of benign
prostate hyperplasia (BPH). HealthTronics was the first
company to provide this service on a mobile basis to hospitals
and health care centers in eastern Tennessee and Georgia.
This type of therapy offers an alternative to a select group
of patients that do not wish to undergo traditional surgery.
However, this segment of our business has not yet produced
material numbers. The company is currently reviewing its
strategy for this business segment.
Orthopedics
Market Overview
The initial target market for the OssaTron orthopedic
lithotripter device is those patients suffering from chronic
heel pain. There is no verifiable data on the number of cases
of heel pain, but estimates vary between 6,000,000 and
8,000,000 patients per year presenting with this affliction.
Of these, HealthTronics believes that at as many as
twenty-five percent could be candidates for treatment with the
OssaTron.
Additional soft tissue indications for the OssaTron might be
lateral epicondylitis, achilles tendinitis, patella tendinitis
and shoulder tendinitis. Again, for these indications there do
not appear to any verifiable numbers but it is estimated that
an additional 3,000,000 - 4,000,000 people each year present
with indications as described herein.
In addition to the soft tissue indications described above,
the company believes there are a significant number of
non-union fractures that could be treated with the OssaTron as
well as other potential osseous applications.
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The OssaTron device has not received FDA pre - market
approval, and as such is not permitted to be used in the
United States outside of FDA -sanctioned studies.
OssaTron Trials
HealthTronics has completed a multi-site, double blinded trial
for chronic heel pain and submitted a PMA application to the
FDA on December 30, 1999.
Additionally, HealthTronics continues with its double-blinded
trial for lateral epicondylitis. Furthermore, HealthTronics
has completed phase one studies at a single site for the
treatment of non-union fractures. It has not been determined
if the OssaTron offers a safe and effective treatment for
these indications. Additional FDA studies will be necessary to
evaluate these and other indications.
OssaTron Device
The OssaTron orthopedic lithotripter is a medical device that
has not yet been approved by the FDA, which uses shock waves
to treat certain orthopedic problems. Orthotripsy(R), or
orthopedic lithotripsy is the name for this process. It is an
extension of the principle used to treat kidney stones.
Physiologically, Orthotripsy is believed to stimulate bone,
tendon and ligament healing by inducing microscopic injuries
at the site of the chronic injury. Subsequently, a generation
of new blood vessels enters into the area and causes
bone-healing cells or tissue-healing cells to invade the area
and stimulate the healing process.
We believe, based upon the early findings of our clinical
studies, that orthopedic lithotripsy is an effective treatment
in some cases involving:
- Chronic heel pain syndrome, also known as heel spurs.
- Fractures that have failed to heal for nine months or
more since the initial injury, also known as
non-union fractures.
- Lateral epicondylitis, also known as tennis elbow.
Competition
At this time HealthTronics knows of no company that has
received FDA approval to market an orthopedic lithotripsy
device or of any company that has submitted a PMA to the FDA.
However, both Dornier Medical
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Systems and Siemens GmbH are in the process of
conducting clinical studies with their respective orthopedic
lithotripsy devices for the treatment of heel pain.
Technology Services
HealthTronics began providing installation, service, and ongoing
technical support for its devices during 1999. The service provided
includes warranty on new equipment as well as post-warranty service.
These services are provided on a contractual or on a time and materials
basis.
The equipment service business is very competitive and it is entirely
possible that other national or local medical device service companies
will also attempt to capture a share of this business.
Item 2: Description of Property.
Our corporate office and warehouse operations currently occupy a 6,250 square
foot facility in Marietta, Georgia, under a three - year operating lease
expiring May 2000. The monthly rent is $3,925.
In January 2000, we negotiated a seven-year lease on a 28,000 square foot
facility also located in Marietta, Georgia. We expect to take occupancy in the
new facility in April 2000. The monthly rental is calculated on a graduating
scale beginning at $8,500 per month for the first year and ending with $18,600
per month for the last year. The straight-line expense is $17,800 per month for
the life of the lease. The property is in good condition and is sufficient to
meet our current operating needs.
Item 3: Legal Proceedings.
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5: Market for Common Equity and Related Shareholder Matters.
We began trading on the NASDAQ Stock Market on November 16, 1999 under the
symbol HTRN. During the fourth quarter of 1999 the high and low stock prices of
our common stock were $10.50 and $6.25, respectively.
The stock markets have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors may adversely
affect the market price of our common stock. Any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
significant adverse effect on the trading price
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of our common stock in any given period. Additionally, we may not learn of such
shortfalls until late in the fiscal quarter, which could result in an even more
immediate and adverse effect on the trading price of our common stock. Finally,
we participate in a highly dynamic industry, which often results in significant
volatility of the common stock price.
At March 15, 2000, there were approximately 382 shareholders of record.
We have not paid dividends on common stock since our inception in December 1995.
Our Board of Directors does not anticipate that any cash dividends will be paid
in the foreseeable future.
Item 6: Management's Discussion and Analysis or Plan of Operation.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Costs incurred in 1999 for
remediation of the Company's systems are considered immaterial. The Company is
not aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
Segment Reporting
During 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 uses a management approach to
report financial and descriptive information about the Company's operating
segments. The Company operated during all periods in a single segment when
applying the management approach defined in SFAS 131.
Results of Consolidated Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenue: Net revenue increased from $14,681,941 for the year ended
December 31, 1998 to $24,414,179 for the year ended December 31, 1999, an
increase of 66%. This increase is attributable to (1) the May 1998 acquisition
of the remaining general partnership interest in US Lithotripsy and the required
consolidation of the related partnerships' operations (eight months of
consolidated results in 1998 as
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compared to twelve months of consolidated results in 1999), (2) the addition of
US Lithotripsy partnerships as well as the growth of existing US Lithotripsy
partnerships and (3) increase in our lease revenues from corporate-owned
equipment.
Cost of Goods Sold, Rentals and Services Provided: Cost of goods sold,
rentals and services provided increased from $6,863,506 for the year ended
December 31, 1998 to $10,213,821 for the year ended December 31, 1999, an
increase of 49%. This increase is attributable to the May 1998 acquisition of
the remaining general partnership interest in US Lithotripsy and the required
consolidation of the related partnerships' operations (eight months of
consolidated results in 1998 as compared to twelve months of consolidated
results in 1999) and increased leasing activity.
Salaries, Wages and Benefits: Salaries, wages and benefits increased
from $1,495,364 for the year ended December 31, 1998 to $2,367,836 for the year
ended December 31, 1999, an increase of 58%. This increase is attributable to
(1) the May 1998 acquisition of the remaining general partnership interest in US
Lithotripsy (eight months of consolidated results in 1998 as compared to twelve
months of consolidated results in 1999) and the required consolidation of the
related partnerships' operations, (2) the hiring of additional technicians for
expanding leasing operations and (3) the September 1999 hiring of field service
engineers for the start up of HealthTronic's new service department.
General and Administrative Expenses: General and administrative
expenses increased from $2,537,180 for the year ended December 31, 1998 to
$4,125,074 for the year ended December 31, 1999 , an increase of 66%. This
increase is attributable to (1) the May 1998 acquisition of the remaining
general partnership interest in US Lithotripsy and the required consolidation of
the related partnerships' operations (eight months of consolidated results in
1998 as compared to twelve months of consolidated results in 1999) and (2) the
increase in expenses incurred in the clinical trials of the OssaTron over the
corresponding period.
Equity in Earnings of Unconsolidated Partnerships: Equity in earnings
of unconsolidated partnerships increased from $102,655 for the year ended
December 31, 1998 to $117,711 for the year ended December 31, 1999 , a increase
of 15%. This increase is attributable to the 1999 addition of two equity-based
US Lithotripsy partnerships.
Partnership Distributions: Partnership distributions increased from $0
for the year ended December 31, 1998 to $147,252 for the year ended December
31, 1999. This increase is attributable to the addition of four cost-based
partnership investments and the growth in distributions made by existing
partnerships accounted for on the cost method basis.
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Gain on Sale of Investment Interest: Gain on sale of investment
interest increased from $0 for the year ended December 31, 1998 to $151,637 for
the year ended December 31, 1999. This increase is attributable to the 1999 sale
of a portion of partnership interests in excess of basis.
Interest Expense: Interest expense increased from $169,247 for the year
ended December 31, 1998 to $315,694 for the year ended December 31, 1999, an
increase of 87%. This increase is attributable to the increase in debt resulting
from the consolidation of subsidiary partnerships due to the acquisition of the
remaining interest in US Lithotripsy (eight months of consolidated results in
1998 as compared to twelve months of consolidated results in 1999) and to
additional equipment financing of leased capital assets.
Interest Income: Interest income increased from $24,517 for the year
ended December 31, 1998 to $54,546 for the year ended December 31, 1999, a
increase of 122%. This increase is primarily due to excess cash balances
resulting from the initial public offering.
Minority Interest: Minority interest increased from $2,291,675 for the
year ended December 31, 1998 to $5,076,045 for the year ended December 31, 1999,
an increase of 121%. This increase is attributable to the May 1998 acquisition
of the remaining general partnership interest in US Lithotripsy and the required
consolidation of the related partnerships' operations (eight months of
consolidated results in 1998 as compared to twelve months of consolidated
results in 1999) and the subsequent growth of the consolidated partnerships.
Provision for Income Taxes: Provision for income taxes increased from
$304,261 for the year ended December 31, 1998 to $1,189,638 for the year ended
December 31, 1999, an increase of 291%. During 1998, HealthTronics, Inc. applied
all of its remaining net operating tax loss carryforwards against the earnings
of the Company. In conjunction with the application of the net operating tax
losses, the Company adjusted the tax asset valuation allowance to zero,
resulting in a reduced effective tax rate for the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Revenue: Net revenue increased from $5,062,104 for the
year ended December 31, 1997 to $14,681,941 for the year ended December 31,
1998, an increase of 190%. This is attributable to (1) additional sales as a
result of the FDA pre-market approval for the LithoTron lithotripter, received
on July 21, 1997; (2) the 1998 acquisition of the remaining general partnership
interest in US Lithotripsy and the required consolidation of the related
partnerships' operations; and (3) our expansion into medical device leasing.
Cost of Goods Sold, Rentals and Services Provided: Cost of
goods sold, rentals and services provided increased from $3,263,233 for the year
ended December 31, 1997 to $6,863,506 for the year ended December 31, 1998, an
increase of 110%. This increase is directly attributable to (1) additional sales
as a result of the FDA pre-market
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approval for the LithoTron lithotripter, received on July 21, 1997; (2) the 1998
acquisition of the remaining general partnership interest in US Lithotripsy and
the required consolidation of the related partnerships' operations; and (3) our
expansion into medical device leasing.
Salaries, Wages and Benefits: Salaries, wages and benefits
increased from $723,748 for the year ended December 31, 1997 to $1,495,364 for
the year ended December 31, 1998, an increase of 107%. This increase is
primarily attributable to the 1998 acquisition of the remaining general
partnership interest in US Lithotripsy and the required consolidation of the
related partnerships' operations as well as our expansion into medical leasing.
General and Administrative Expenses: General and
administrative expenses increased from $1,463,683 for the year ended December
31, 1997 to $2,480,012 for the year ended December 31, 1998, an increase of 69%.
This increase is primarily due to the increase in LithoTron lithotripter
marketing and expenses related to the OssaTron orthopedic lithotripter
investigatory device exemption studies in progress throughout 1998.
Equity in Earnings of Unconsolidated Partnerships: Equity in
earnings of unconsolidated partnerships increased from $4,669 for the year ended
December 31, 1997 to $102,655 for the year ended December 31, 1998. This
increase is attributable to our investment in two additional partnerships
accounted for on the equity basis.
Interest Expense: Interest expense increased from $59,517 for
the year ended December 31, 1997 to $169,247 for the year ended December 31,
1998, an increase of 184%. This increase is primarily attributable to the
increase in debt resulting from the consolidation of the subsidiary
partnerships.
Interest Income: Interest income increased from $21,083 for
the year ended December 31, 1997 to 24,517 for the year ended December 31, 1998,
an increase of 16%. This increase is due primarily to the earnings on funds
obtained during the July 31, 1997 private placement, which closed during the
first quarter of 1998.
Minority Interest: Minority interest increased from a $4,297
credit for the year ended December 31, 1997 to a $2,291,675 debit for the year
ended December 31, 1998. This increase is primarily attributable to the
significant minority interest arising in the 1998 acquisition of the remaining
general partnership interest in US Lithotripsy and the required consolidation of
the related partnerships' operations.
Provision for Income Taxes: Provision for income taxes
increased from $0 for the year ended December 31, 1997 to $304,261 for the year
ended December 31, 1998. As of December 31, 1998, we utilized all of the
available net operating tax loss carryforwards. In conjunction with the
application of these net operating tax losses, we adjusted the net deferred tax
asset valuation allowance to zero; resulting in a reduced effective tax rate for
the year ended December 31, 1998. In assessing the likelihood of
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utilization of existing net deferred tax assets, management considered (a) our
current operating environment and (b) results of future operations to generate
sufficient taxable income and accordingly, has determined that it is more likely
than not that the deferred tax assets will be realized.
Liquidity and Capital Resources
Historically, we have satisfied our working capital and capital
spending needs through private placements and the sales of medical devices. The
subsidiary partnership equipment financing has been provided by term bank debt
secured by the related device and guarantees from the various partners,
including HealthTronics. In July 1998 we obtained a $650,000 line of credit and
a $1,000,000 equipment financing line with a Tennessee bank. On July 31, 1999
HealthTronics renewed the Tennessee bank financing through June 30, 2000 with an
increase in the line of credit availability from $650,000 to $1,200,000. As of
December 31, 1999 we have $0 outstanding under the equipment financing line and
$0 outstanding under the line of credit.
On August 31, 1999, we completed an initial public offering ("IPO") of
our common stock, in which we sold 1,000,000 shares of common stock at $6 per
share. Net proceeds from the IPO were $4,788,389, of which approximately
$568,725 was used to repay indebtedness used to finance capital assets.
Cautionary Statements
Included in this report are forward-looking statements that reflect
management's current outlook for future periods. As always, these expectations
and projections are based on currently available competitive, financial, and
economic data, along with operating plans, and are subject to future events and
uncertainties.
Item 7: Financial Statements.
HealthTronics, Inc. and Subsidiaries
Consolidated Financial Statements
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statements
Report of Independent Auditors.................................................................. 15
Consolidated Balance Sheets as of December 31, 1999 and 1998....................................16
Consolidated Statements of Income for the years
ended December 31, 1999 and 1998 ....................................................... 18
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999 and 1998.........................................................19
Consolidated Statements of Cash Flows for the years
ended December 31, 1999 and 1998 ........................................................20
Notes to Consolidated Financial Statements ......................................................22
</TABLE>
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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, 1999 and 1998, and the related
consolidated statements of income, 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HealthTronics, Inc. and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 1, 2000
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HealthTronics, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,024,890 $ 801,563
Trade accounts receivable, less allowance for doubtful
accounts of $129,237 and $142,682 at December 31, 1999
and 1998, respectively 4,426,973 2,796,351
Inventory 1,195,743 1,179,298
Due from affiliated partnerships 162,523 126,102
Vendor deposits 802,009 --
Prepaid expenses 48,778 256,353
Deferred income taxes 375,751 253,273
---------------------------------------
Total current assets 12,036,667 5,412,940
Property and equipment, at cost:
Medical devices placed in service 9,085,000 5,434,293
Office equipment, furniture and fixtures 129,942 56,095
Vehicles and accessories 1,340,420 263,986
---------------------------------------
10,555,362 5,754,374
Less accumulated depreciation (2,376,510) (819,757)
---------------------------------------
Net property and equipment 8,178,852 4,934,617
Deferred income taxes -- 297,699
Partnership investments 318,150 241,848
Goodwill (net of accumulated amortization of $340,700 and
$124,280 at December 31, 1999 and 1998, respectively) 2,905,540 3,121,960
Patent license (net of accumulated amortization of $44,993
and $35,000 for December 31, 1999 and 1998, respectively)
55,007 65,000
Other assets 40,465 40,803
---------------------------------------
Total assets $ 23,534,681 $ 14,114,867
=======================================
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Trade accounts payable $ 1,131,142 $ 655,840
Customer deposits 903,352 --
Short-term borrowings -- 193,256
Income taxes payable 141,652 --
Warranty accrual 513,305 295,829
Other accrued expenses 1,099,751 418,389
Deferred profit on service contracts 90,155 16,000
Current portion of long-term debt 1,287,054 1,209,947
---------------------------------------
Total current liabilities 5,166,411 2,789,261
Deferred income taxes 12,977 --
Deferral of profit on medical device sales to
related parties 244,194 --
Long-term debt, less current portion 1,759,126 2,231,215
Minority interest 2,224,087 1,469,678
---------------------------------------
Total liabilities 9,406,795 6,490,154
Shareholders' equity:
Common stock - no par value, voting:
Authorized - 30,000,000 shares at December 31,
1999 and 1998
Issued and outstanding - 10,716,271 and 9,665,342
shares at December 31, 1999 and 1998,
respectively
12,309,181 7,403,226
Retained earnings 1,818,705 221,487
---------------------------------------
14,127,886 7,624,713
---------------------------------------
Total liabilities and shareholders' equity $ 23,534,681 $ 14,114,867
=======================================
</TABLE>
See accompanying notes.
17
<PAGE> 17
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
---------------------------------------
<S> <C> <C>
Net revenue $ 24,414,179 $ 14,681,941
Cost of goods sold, rentals and services provided
10,213,821 6,863,506
---------------------------------------
14,200,358 7,818,435
Salaries, wages and benefits 2,367,836 1,495,364
General and administrative expenses 4,125,073 2,537,180
---------------------------------------
7,707,449 3,785,891
Equity in earnings of unconsolidated partnerships
117,711 102,655
Partnership distributions from cost based investments 147,252 57,168
Gain on sale of partnership investment interest 151,637 --
Interest expense (315,694) (169,247)
Interest income 54,546 24,517
---------------------------------------
Income before minority
interest and income taxes 7,862,901 3,800,984
Minority interest (5,076,045) (2,291,675)
---------------------------------------
Income before income taxes 2,786,856 1,509,309
Provision for income taxes 1,189,638 304,261
---------------------------------------
Net income $ 1,597,218 $ 1,205,048
=======================================
Basic and diluted income per common share:
Basic $ 0.16 $ 0.13
=======================================
Diluted $ 0.16 $ 0.13
=======================================
Weighted average common shares outstanding:
Basic 10,036,851 9,223,671
=======================================
Diluted 10,238,379 9,445,537
=======================================
</TABLE>
See accompanying notes.
18
<PAGE> 18
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, 1998 $ 8,645,342 $ 4,343,226 $ (983,561) $ 3,359,665
Common stock issued via private
placement memorandum 20,000 60,000 -- 60,000
Common stock issued in connection with
the acquisition of businesses
1,000,000 3,000,000 -- 3,000,000
Net income -- -- 1,205,048 1,205,048
----------- ----------- ----------- -----------
Balance at December 31, 1998 9,665,342 7,403,226 221,487 7,624,713
Common stock issued via initial public
offering, net of issue costs of
$1,211,611 1,000,000 4,788,389 -- 4,788,389
Common stock issued on exercise of stock
options 50,000 115,671 -- 115,671
Common stock issued to consultants
929 1,895 -- 1,895
Net income -- -- 1,597,218 1,597,218
=========== =========== =========== ===========
Balance at December 31, 1999 10,716,271 $12,309,181 $ 1,818,705 $14,127,886
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
19
<PAGE> 19
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
---------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,597,218 $ 1,205,048
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,783,166 814,670
Provision for doubtful accounts 108,846 142,682
Deferred income taxes 188,198 (550,972)
Deferral of profit on medical device sales to
related parties 244,194 464,803
Deferred profit on service contracts 74,155 16,000
Equity in earnings of unconsolidated partnerships
(117,711) (102,655)
Minority interest in subsidiaries, net of
distributions to minority interests 754,409 904,098
Changes in operating assets and liabilities,
net of businesses acquired:
Trade accounts receivable (1,739,468) (1,216,104)
Due from affiliated equity partnerships
(36,421) 983,522
Inventory (16,445) 286,589
Vendor deposits (802,009) 42,458
Prepaid expenses 207,575 (223,119)
Trade accounts payable 475,302 (1,810,961)
Customer deposits 903,352 (460,000)
Income taxes payable 141,652 --
Warranty accrual 217,476 120,229
Accrued expenses 681,362 201,056
---------------------------------------
Net cash provided by operating activities 4,664,851 817,344
</TABLE>
20
<PAGE> 20
HealthTronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
---------------------------------------
<S> <C> <C>
INVESTING ACTIVITIES
Purchases of property and equipment (4,800,988) (3,175,630)
Acquisition of partnership interest (34,500) (34,853)
Partnership distributions 75,909 --
Acquisition of businesses, net of cash acquired
-- 345,552
Other assets 338 (40,077)
---------------------------------------
Net cash used in investing activities (4,759,241) (2,905,008)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,905,955 60,000
Proceeds from issuance of long-term debt 1,292,165 1,965,204
Principal payments on long-term debt (1,831,809) (925,927)
Proceeds from issuance of short-term borrowings 4,828,401 1,943,256
Principal payments on short-term borrowings
(4,876,995) (1,950,000)
---------------------------------------
Net cash provided by financing activities 4,317,717 1,092,533
---------------------------------------
Net increase (decrease) in cash and cash equivalents
4,223,327 (995,131)
Cash and cash equivalents at beginning of year
801,563 1,796,694
---------------------------------------
Cash and cash equivalents at end of year $ 5,024,890 $ 801,563
=======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 315,545 $ 169,247
=======================================
Cash paid for taxes $ 887,455 $ 762,626
=======================================
</TABLE>
See accompanying notes.
21
<PAGE> 21
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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 FDA approval to market the LithoTron. On December 30, 1999 the Company
submitted its application to the FDA requesting pre-market approval of the
OssaTron. The Company is currently establishing additional test sites for the
OssaTron FDA supplemental 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 leasing, 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 or lease equipment from the Company, as well as management fees from
such entities.
Effective April 1, 1997, the Company entered into an Entity Interest Agreement
with U.S. Lithotripsy, LP ("USL"), a Texas limited partnership, and with Litho
Management, Inc. ("LMI"). The Entity Interest Agreement granted the Company a
40% ownership interest (0.4% general partnership ownership interest and 39.6%
limited partnership
22
<PAGE> 22
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
ownership interest) in USL in return for the issuance of 200,000 no par value
shares of the Company's common stock valued at $1.00 per share as determined by
management in absence of a readily trading market. The Entity Interest Agreement
also granted LMI a 0.6% general partnership ownership interest in USL (the
remaining 59.4% limited partnership interest in USL is owned by independent
shareholders).
The April 1, 1997 Entity Interest Agreement constituted the formation of USL as
a limited partnership entity. Subsequent to April 1, 1997, USL made a number of
investments as the sole general partner in several separate partnerships with
equity interests ranging from 10% to 99% (the "second tier partnerships"),
formed for the purpose of purchasing, owning and operating certain medical
devices utilizing shock wave therapies. As the sole general partner, USL
consolidates the second tier partnerships. Prior to May 1, 1998, the Company
used the equity method of accounting for their investment in USL as the Company
was not the majority general partner.
On May 1, 1998, the Company purchased 100% of the outstanding stock of LMI in
exchange for 700,000 no par value shares of the Company's common stock valued at
$3.00 per share as determined by management in absence of a readily trading
market. The acquisition has been recorded using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed of LMI (consolidated with USL as LMI is the
majority general partner of USL) based on their estimated fair values as of the
date of acquisition. The total purchase price (including the value of the
200,000 shares previously issued to USL) in excess of the market value of net
tangible assets and identifiable intangible assets acquired of approximately
$2,352,000 was recorded as goodwill and is being amortized over 15 years.
In order to appropriately reflect the nature of the Company's operations and its
relationship to its subsidiaries, the accompanying consolidated statements of
income include the Company's appropriate majority or minority equity ownership
interest in the net revenues and expenses of each of its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. See Note 4 for discussion of minority interests.
23
<PAGE> 23
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1999
presentation.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
For sales of medical devices to unaffiliated entities, revenue is recognized
upon arrival at the destination; for miscellaneous sales of consumables, revenue
is recognized at the time of shipment by the Company. As discussed in Note 5,
revenue from sales of medical devices to certain equity partnerships in which
the Company is a minority general partner and/or has guaranteed certain
long-term obligations of the partnerships has been deferred at the time of the
sale. Sales of medical devices where the Company guaranteed a portion of the
long-term obligations to certain equity or cost basis investees resulted in
profit deferrals, representing the Company's proportionate interest in the
guarantees of $244,194 for the year ended December 31, 1999. Sale of medical
devices to certain consolidated partnership entities, of approximately $465,000
for the year ended December 31, 1998, have been eliminated in consolidation.
The Company recognizes a gain on sales of previously unissued partnership
interests when the sale is to investors outside the consolidated group and there
are no significant questions relating to the Company's ultimate realization of
its investment in the partnership.
24
<PAGE> 24
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.
SEGMENT REPORTING
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 uses a management approach to report financial and
descriptive information about the Company's operating segments. The Company
operated during all periods in a single segment when applying the management
approach defined in SFAS 131.
INVENTORY
Inventory is carried at the lower of cost (first-in, first-out) or market and
consists of medical devices and consumables.
25
<PAGE> 25
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PARTNERSHIP INVESTMENTS
During 1998 and 1999, the Company made a number of investments in various
general and limited partnerships. The majority of these investments are
consolidated (See Note 4). The remaining investments totaling $318,150 and
$241,848 at December 31, 1999 and 1998, respectively, 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.
PATENT LICENSE
The original cost of the patent license is being amortized on a straight-line
basis over a period of ten years, which approximates the life of the patent.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed based on the
straight-line method over the three to five-year estimated useful lives of the
related equipment.
WARRANTY ACCRUAL
The Company accrues service and parts warranty expense on the sale of each
medical device sold with a warranty.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered or settled.
26
<PAGE> 26
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for employee stock options and adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("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.
COMMON STOCK
Prior to its initial public offering, in the absence of a readily traded
market, management of the Company 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 prior to
the Company's initial public offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily in the United States, Canada and
Mexico. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are comprised principally of cash and cash
equivalents, trade accounts receivable, vendor deposits, amounts due from
affiliated partnerships, trade accounts payable, customer deposits, short-term
borrowings and long-term debt. The carrying amounts of these financial
instruments approximate their fair values.
27
<PAGE> 27
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Goodwill represents the excess of cost over the market value of net tangible
assets and identifiable intangible assets acquired and is amortized using the
straight-line method over fifteen years.
The Company periodically evaluates the recoverability of non-current tangible
and intangible assets and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
BASIC AND DILUTED INCOME PER COMMON SHARE
The Company's per share amounts for all periods have been presented in
accordance with the provisions of SFAS No. 128. Basic and diluted income per
share is 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
per share if the effect would be antidilutive.
28
<PAGE> 28
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Medical devices $1,110,163 $1,091,498
Consumables 85,580 87,800
==================================
$1,195,743 $1,179,298
==================================
</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 eight months ended December 31, 1998 and for the
year ended December 31, 1999.
On September 9, 1998, the Company exchanged 300,000 of its no par value shares
of common stock valued at $3.00 per share as determined by the Board of
Directors in absence of a readily traded market with three shareholders of the
Company who were also the sole shareholders of HLE Corporation ("HLE"), a Texas
corporation, in exchange for all of the issued and outstanding shares of HLE.
The assets of HLE consist of a 30% limited partnership interest in Metro I
Stone Management, Ltd., a Texas limited partnership. Because the Company, as
sole general partner of USL, was already consolidating Metro I Stone Management,
Ltd., this transaction effectively represents an acquisition of additional
interest in the earnings of Metro I Stone Management, Ltd. The total purchase
price in excess of the market value of net tangible assets and identifiable
intangible assets acquired of approximately $900,000 was recorded as goodwill
and is being amortized over 15 years.
The following unaudited condensed pro forma information for the year ended
December 31, 1998 is presented as if LMI (consolidated with USL) and HLE
Corporation
29
<PAGE> 29
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PARTNERSHIP INVESTMENTS (CONTINUED)
had been acquired on January 1, 1998. 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>
<S> <C>
Net revenue $15,911,792
-----------
Net income 1,422,576
---------
Net income per common share:
Basic 0.15
====
Diluted 0.14
====
</TABLE>
The Company maintains investments in certain other limited partnerships and
limited liability corporations in which the Company has a minority interest as a
limited partner. The Company has accounted for these minority interests using
the equity or cost basis method of accounting depending upon the Company's
ability to exercise significant influence over the operating and financial
policies of the investment partnership.
During 1999, the Company sold a portion of the partnership interests of certain
limited liability corporations and recognized gains of $151,637, representing
the excess of the sales price over the Company's investment basis in the
partnerships.
30
<PAGE> 30
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company recorded sales of medical
devices to certain second tier partnerships. The 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 the
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 the
partnerships to an extent greater than the Company's proportionate interest in
the partnerships. Thus, the Company has not transferred substantially all of the
risks and rewards of ownership related to the medical devices sold to the second
tier partnerships. As a result, the Company has not recorded the sales or the
related cost of goods sold and has deferred approximately $465,000 of gross
profit related to these sales for the year ended December 31, 1998.
As a result of the additional acquisition of LMI and resulting
consolidation of LMI, USL and the second tier partnerships, the deferred profit
of the medical devices at the partnership level has been eliminated in
consolidation for the years ended December 31, 1999 and 1998. Depreciation
expense is recognized in consolidation based upon the cost of the asset over the
estimated useful life of five years.
During the year ended December 31, 1999, the Company recorded sales of medical
devices to certain partnerships accounted for on the cost or equity basis of
accounting. The partnerships obtained third party financing, payable generally
over five years or less, to satisfy their obligations to the Company under these
sales. The Company, as a minority partner, has guaranteed its proportionate
interest in the related partnership debt based upon the Company's equity
ownership percentage in the partnership. As a result, the Company has deferred
their proportionate share of gross profit totaling $244,194 related to
these sales for the year ended December 31, 1999.
Several of the Company's major shareholders are also the officers of the
Company's supplier, HMT. Other shareholders of the Company are also limited
partners in USL and the second tier partnerships.
Several of the Company's shareholders are employees of a company that contracted
with the Company to provide installation and warranty service, through September
30, 1999. Payments to this company were $843,000 and $542,000 for 1999 and 1998,
respectively.
31
<PAGE> 31
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Trade accounts payable due to the Company's supplier, HMT, totaled $617,500 and
$406,000 as of December 31, 1999 and 1998, respectively. During 1999 and 1998,
the Company made payments totaling $8,509,000 and $6,070,000, respectively, to
HMT for medical devices, related parts and consumables purchases.
Consulting fees totaling $12,000 and $144,000 were paid during 1999 and 1998,
respectively, to individuals in the medical field that were shareholders of the
Company.
6. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 consist of a line of credit agreement
with a Texas bank that provides for borrowings up to $100,000. Such line of
credit agreement requires monthly interest payments on outstanding balances. The
interest rate on the line of credit is variable. At December 31, 1998, the
Company had drawn $80,604 on the line of credit. In January 2000 the line of
credit was refinanced under a 36 month note payable with principal and interest
due in monthly installments of $2,499 through February 2003. As a result, the
outstanding principal of $76,332 has been reclassified to long-term debt as of
December 31, 1999. Short-term borrowings at December 31, 1998 also include a
$112,652 note payable to a Missouri bank, with principal and interest due in
monthly installments of $4,761 through July 1999. In November 1999 the balance
of $69,770 was refinanced with payments of principal and interest due in monthly
installments of $4,369 through March 2001. As a result, the principal balance of
$68,330 has been reclassified to long-term debt as of December 31, 1999. The
interest rate on the note payable is 8.75%, as of December 31, 1999 and 1998.
On July 1, 1998, the Company obtained a $650,000 line of credit with a Tennessee
bank. On July 31, 1999, the line of credit availability was increased to
$1,200,000. Interest under this line is variable. The Company has no outstanding
balances under this line as of December 31, 1999 and 1998.
32
<PAGE> 32
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT
On July 1, 1998, the Company obtained a $1,000,000 equipment financing line with
a Tennessee bank. Interest under this line is variable. The Company had
outstanding balances of $0 and $566,863 under the equipment financing line, as
of December 31, 1999 and 1998, respectively.
The line of credit and the equipment financing line contain various financial
and non-financial covenants that must be met by the Company (excluding USL and
the second tier partnerships). The Company was in compliance with such covenants
at December 31, 1999 and 1998.
33
<PAGE> 33
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Term loan, interest at 8.35%, principal and interest payments of $15,975 due
monthly through September, 2001, secured by personal guarantees of
certain minority shareholders of a subsidiary $ 309,617 $ 467,782
Equipment note payable, variable interest rate (8.5% and 7.75% at
December 31, 1999 and 1998, respectively), 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 215,669 424,526
Equipment note payable, variable interest rate (8.25% and 7.75% at
December 31, 1999 and 1998, respectively), principal and interest due in
monthly installments of $9,287 through November 1999; renewed in September
1999, principal and interest due in monthly installments of $9,286 through
March 2002, secured by the equipment under loan, and
through guarantees from the general partner and personal guarantees 217,390 307,592
from certain limited partners
Equipment note payable, variable interest rate (8.75% and 7.75% at December 31,
1999 and 1998, respectively), 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 266,166 463,076
Equipment note payable, interest at 12%, principal and interest due in
monthly installments of $14,200 through March, 2004, secured by the
equipment under loan, and through guarantees from the general partner 544,407 627,918
and personal guarantees from certain limited partners
Equipment note payable, variable interest rate (8.25% at December 31, 1999),
principal and interest due in monthly installments of $13,215 through October
2002, secured by the equipment under loan, and
through guarantees from the general partner and personal guarantees 429,357 --
from certain limited partners and the Company
Equipment note payable, variable interest rate (8.0% at December 31, 1999),
principal and interest due in monthly installments of $13,524 through July
2002, secured by the equipment under loan, and
through guarantees from the general partner and personal guarantees 446,273 --
from certain limited partners and the Company
Equipment note payable to bank, interest at 8.25%, principal and interest due in
monthly installments of $9,583 through December 2001, secured by
the equipment under loan; balance was liquidated in September 1999 -- 304,682
Equipment note payable to bank, interest at 8.25%, principal and interest
due in monthly installments of $8,246 through December 2001, secured by
the equipment under loan; balance was liquidated in September 1999 -- 262,181
Note payable to bank, interest at 8.25%, principal and interest due in
monthly installments of $14,025 through November, 2002, secured by the 446,891 540,000
equipment under loan
Other 170,410 43,405
----------------------------------
3,046,180 3,441,162
Less current portion 1,287,054 1,209,947
----------------------------------
$ 1,759,126 $ 2,231,215
==================================
</TABLE>
34
<PAGE> 34
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
2000 $1,287,054
2001 1,005,363
2002 579,427
2003 158,638
2004 and thereafter 15,698
-----------
$3,046,180
===========
</TABLE>
8. INCOME TAXES
A reconciliation of the provision for income taxes to the federal statutory rate
of 34% for 1999 and 1998 is:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Statutory federal income tax expense $2,673,386 $1,292,335
State income taxes, net of federal benefit 311,371 150,519
Other 131,747 104,121
Change in valuation allowance for deferred tax assets
- (372,793)
Minority interest (1,926,866) (869,921)
================= =================
$ 1,189,638 $ 304,261
================= =================
</TABLE>
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Current federal $824,899 $726,202
Current state 176,541 129,030
Deferred federal 155,021 (467,845)
Deferred state 33,177 83,126
</TABLE>
35
<PAGE> 35
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>
1999 1998
---------------------------------------
<S> <C> <C>
Current deferred tax assets:
Accrued liabilities and other $ 222,533 $ 134,648
Warranty reserve 153,218 118,625
---------------------------------------
375,751 253,273
Long term deferred tax assets (liabilities):
Property and equipment 35,865 294,748
Other (48,842) 2,951
---------------------------------------
(12,977) 297,699
---------------------------------------
Net deferred tax asset $ 362,774 $ 550,972
=======================================
</TABLE>
Included in net long term deferred tax assets associated with property and
equipment is approximately $485,000 and $310,000 of temporary differences as a
result of deferred revenue on sales to equity partnerships, as of December 31,
1999 and 1998, respectively. The amount of the deferred tax asset associated
with the minority shareholders will be allocated directly to tax expense over
the life of the asset.
As of December 31, 1998, the Company has applied all remaining net operating tax
loss carryforwards. In conjunction with the application of the net operating tax
losses, the Company adjusted the tax asset valuation allowance to zero,
resulting in a reduced effective tax rate for the year ended December 31, 1998.
In assessing the likelihood of utilization of existing net deferred tax assets,
management considered (a) its current operating environment and (b) results of
future operations to generate sufficient taxable income and, accordingly, has
determined that it is more likely than not that the deferred tax assets will be
realized.
36
<PAGE> 36
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 6% of
employee compensation. The Company recognized $69,185 and $28,111 in expense
related to the 401(k) plan in 1999 and 1998, respectively.
10. EARNINGS PER SHARE
HealthTronics' per share amounts for all periods have been presented in
accordance with the provisions of SFAS No. 128. Basic and diluted income per
share are computed based on the weighted average number of common shares
outstanding. Common share equivalents (which consist of options) are excluded
from the computation of diluted income per share if the effect would be anti-
dilutive.
37
<PAGE> 37
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
Numerator: Net income $ 1,597,218 $ 1,205,048
============= =============
Denominator for weighted average
shares outstanding 10,036,851 9,223,671
Basic earnings per share 0.16 0.13
Effect of dilutive securities:
Weighted average shares
outstanding 10,036,851 9,223,671
Stock options 201,528 221,866
Denominator for diluted earnings per
share 10,238,379 9,445,537
Diluted earnings per share 0.16 0.13
</TABLE>
11. SHAREHOLDERS' EQUITY
On August 30, 1999 the Company completed an initial public offering and issued
1,000,000 shares with proceeds totaling $4,788,389 net of issuance costs of
$1,211,611.
38
<PAGE> 38
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTIONS
As of December 31, 1999 and 1998, pursuant to the Company's Warrants and Options
Program, the Board of Directors has approved options to purchase up to 800,000
and 550,000 shares of common stock, respectively.
Stock warrants for 100,000 shares of common stock with an exercise price of
$9.90 per share of common stock were issued to the placement agent for
services rendered during the Company's initial public offering. The options
are exercisable as of May 2000 and have an estimated life of five years.
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 $0 and $13,900
in expense during 1999 and 1998, respectively. During 1999, pursuant to an
agreement with the optionee the Company cancelled options with a previously
recorded fair value of $17,000.
Options for 208,500 and 108,000 shares of common stock were granted to employees
during 1999 and 1998, respectively. 75,000 of such options granted in 1998 vest
through 2003 but can accelerate upon the obtainment of certain performance
goals. Options granted in 1998 expire on December 31, 2001 or 2003 and have
exercise prices of $3.00 to $6.00. Options granted in 1999 expire in 2009 and
have various exercise prices ranging from $6.00 or $8.50. Options vest at
various dates through December 31, 2002. The weighted-average exercise price
and remaining contractual life for the options granted in 1999 and 1998 are
approximately $7.28 and $1.22 per share and 9.71 and 2.22 years, respectively.
The weighted-average exercise price for the options outstanding at December 31,
1999 and 1998 are approximately $4.52 and $1.76, respectively.
39
<PAGE> 39
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTIONS (CONTINUED)
For the Company, pro forma information regarding net income is required by FAS
123 and has been determined as if the Company had accounted for its employee
stock options granted under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1999
and 1998: risk-free interest rate of 6.69% and 5.55%, expected life of the
option of three to ten years, and no dividend yield. The weighted-average fair
value of options granted under the Warrants and Options Program was $5.11 and
$0.43 for 1999 and 1998. Had the employee option grants been accounted for under
the fair value method of FAS 123, net income would be $1,180,898, or $24,150
less than recorded in the accompanying 1998 consolidated statements of
operations, and would have no effect on basic or diluted income per share. Net
income would be $1,567,175, or $30,043 less than recorded in the accompanying
1999 consolidated statements of operations, and would have no effect on basic or
diluted income per share.
The pro forma disclosures above are not likely to be representative of the
effects on net income in future years.
13. 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 1999 and 1998 was $80,716 and
$55,700, respectively.
Aggregate future minimum lease payments under operating lease agreements for
terms greater than one year as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal Year
2000 $ 140,575
2001 209,804
2002 227,219
2003 229,048
2004 and thereafter 763,294
----------
$1,569,940
==========
</TABLE>
40
<PAGE> 40
HealthTronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. COMMITMENTS AND CONTINGENCIES
In connection with the original distributorship agreements between the Company
and HMT, the Company committed to purchase ten OssaTron orthopedic lithotriptor
and twelve LithoTron lithotripter units per year over the life of the agreement
after FDA PMA approval is received by the Company. Aggregate funding needed for
this commitment is approximately $7,000,000 per year based upon current market
prices.
Physicians and technicians who use the Company's products are subject to the
risk of liability and malpractice claims. Those claims could also name the
Company, based on a theory of malpractice or claim liability. Although the
Company has not experienced any malpractice or product liability claims, an
award for such damages could exceed the limits of its applicable insurance
coverage. Successful liability claims asserted against the Company, to the
extent not covered by insurance, could affect the Company's ability to operate
profitably. While management believes the Company's current level of insurance
is adequate, there can be no assurance of this.
15. SUBSEQUENT EVENTS
In January 2000 the Company leased office/warehouse space at a monthly rental of
$17,800 (straight-line) that expires in March 2007. The rental payments which
will begin at $10,300 in April 2000 and graduate over the life of the lease have
been included in the future minimum lease payment schedule at Note 12.
On January 25, 2000 the Company purchased tangible and intangible assets from a
New Jersey kidney treatment facility for a total purchase price of $850,000.
Effective January 25, 2000 the Company assumed control of the operations and
management of the facility.
41
<PAGE> 41
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
14
<PAGE> 42
Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Information about the directors of the Company is in "Election of Directors -
Information Concerning the Nominees and the Incumbent Directors" of the
Company's 2000 Proxy Statement and is incorporated into this report by
reference. Information about the executive officers of the Company is in
"Executive Officers of the Company" of the Company's 2000 Proxy Statement and is
incorporated into this report by reference. Information about compliance with
Section 16(a) of the Exchange Act of 1934, as amended, by the Company's
executive officers and directors, persons owning more than 10% of the Company's
common stock, and their affiliates who are required to comply with such
reporting requirements, is in "Election of Directors - Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's 2000 Proxy Statement, and is
incorporated into this report by reference.
Item 10: Executive Compensation:
Information about director compensation is in "Election of Directors -
Compensation of Directors" of the Company's 2000 Proxy statement, and
information about executive compensation is in "Executive Compensation" in the
Company's 2000 Proxy Statement, all of which is incorporated into this report by
reference.
Item 11: Security Ownership of Certain Beneficial Owners and Management.
Information about ownership of the Company's common stock by certain persons is
in "General Information about Voting - Principal Shareholders" and "Election of
Directors - Security Ownership of Directors and Officers" of the Company's 2000
Proxy Statement, all of which is incorporated into this report by reference.
Item 12: Certain Relationships and Related Transactions.
Information about certain transactions is in "Certain Relationships and Related
Transactions" of the Company's 2000 Proxy statement, all of which is
incorporated into this report by reference.
42
<PAGE> 43
Item 13: Exhibits, List and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCIPTION
----------- ----------
<S> <C>
3.1 Articles of Incorporation, incorporated by reference as filed
on exhibit 3.1 of Form SB-2 Reg. No. 333-66977
3.2 Bylaws, incorporated by reference as filed on exhibit 3.1 of
Form SB-2 Reg. No. 333-66977
9.1 House Group voting agreement, incorporated by reference as
filed on exhibit 9.1 of Form SB-2 Reg. No. 333-66977
9.2 HMT Group voting agreement, incorporated by reference as filed
on exhibit 9.2 of Form SB-2 Reg. No. 333-66977
21 Subsidiaries
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Commission during the
quarter ended December 31, 1999.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HEALTHTRONICS, INC.
By: /s/ Argil J. Wheelock
----------------------------
Argil J. Wheelock
Chief Executive Officer
Dated: March 28, 2000
43
<PAGE> 44
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 26, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Argil J. Wheelock Chairman of the Board,
--------------------------------------- Chief Executive Officer
Argil J. Wheelock and Director
(Principal Executive Officer)
/s/ Roy S. Brown President,
------------------------------------- Chief Operating Officer
Roy S. Brown and Director
/s/ John F. Warlick
------------------------------------- Executive Vice President,
John F. Warlick and Director
/s/ Victoria W. Beck Chief Financial Officer
------------------------------------- (Principal Financial and
Victoria W. Beck Accounting Officer)
Marie Marlow
------------------------------------- Vice President of Regulatory
Marie Marlow Affairs
/s/ Scott Cochran
------------------------------------- Secretary/Treasurer
Scott Cochran and Director
Joachim Voss
------------------------------------- Director
Joachim Voss
/s/ Jon Burke
------------------------------------- Director
Jon Burke
Russ Maddox Director
-------------------------------------
Russ Maddox
John House Director
-------------------------------------
John House
</TABLE>
44
<PAGE> 1
EXHIBIT 21
HEALTHTRONICS, INC.
SCHEDULE OF SUBSIDIARIES
(as of February 29, 1999)
<TABLE>
<CAPTION>
<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
East Texas Stone Mangement Limited Partnership TX
White River Lithotripsy, LP Limited Partnership CO
Central Texas Lithotripsy, LP Limited Partnership TX
Central Dallas Lithotripsy, LP Limited Partnership TX
Western Colorado Lithotripsy, LP Limited Partnership CO
Oklahoma Lithotripsy, LP Limited Partnership OK
Lithowest, LLC Limited Liability Corporation AZ
Florida Lithology, Inc. Corporation FL
Florida Lithology, Ltd. Limited Partnership FL
Wave Forms Lithotripsy, LLC Limited Liability Corporation WA
Big Country Lithotripsy, LP Limited Partnership TX
Rolla Lithotripsy, LP Limited Partnership MO
Metro II Stone Management, LP Limited Partnership TX
Ozarks Lithotripsy, LP Limited Partnership AR
OssaTronics of Houston Limited Liability Corporation TX
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement (Form S-8
No. 333-31820), pertaining to the HealthTronics, Inc. Stock Option Plan of our
report dated March 1, 2000, with respect to the consolidated financial
statements of HealthTronics, Inc. and Subsidiaries included in this Annual
Report (Form 10-K) for the year ended December 31, 1999.
Atlanta, Georgia
March 27, 2000
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHTRONICS, INC. FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,024,890
<SECURITIES> 0
<RECEIVABLES> 4,556,210
<ALLOWANCES> 129,237
<INVENTORY> 1,195,743
<CURRENT-ASSETS> 12,036,667
<PP&E> 10,555,362
<DEPRECIATION> 2,376,510
<TOTAL-ASSETS> 23,534,681
<CURRENT-LIABILITIES> 5,242,105
<BONDS> 0
0
0
<COMMON> 12,243,510
<OTHER-SE> 1,818,705
<TOTAL-LIABILITY-AND-EQUITY> 23,534,681
<SALES> 24,414,179
<TOTAL-REVENUES> 24,414,179
<CGS> 10,213,821
<TOTAL-COSTS> 10,213,821
<OTHER-EXPENSES> 6,076,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261,148
<INCOME-PRETAX> 2,786,856
<INCOME-TAX> 1,189,638
<INCOME-CONTINUING> 1,597,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,597,218
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
