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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to             

Commission File Number: 000-30406

HEALTHTRONICS, INC.

(Exact name of registrant as specified in its charter)

1301 Capital of Texas Highway, Suite B-200, Austin, Texas 78746

(Address of principal executive offices) (Zip Code)

(512) 328-2892

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Aggregate Market Value at June 30, 2004: $ 83,936,000

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the Registrant’s definitive proxy material for the 2005 annual meeting of stockholders are incorporated by reference into Part III of the Form 10-K.

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HEALTHTRONICS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

PART I

ITEM 1. BUSINESS

General

On November 10, 2004, Prime Medical Services, Inc. (“Prime”) completed a merger with HealthTronics Surgical Services, Inc. (“HSS”) pursuant to which Prime merged with and into HSS, with HealthTronics, Inc. (“HealthTronics”) as the surviving corporation. Under the terms of the merger agreement, as a result of the merger, Prime’s stockholders received one share of HealthTronics common stock for each share of Prime common stock they owned. Immediately following the merger, Prime’s stockholders owned approximately 62% of the outstanding shares of HealthTronics common stock, and Prime’s directors and senior management represented a majority of the combined company’s directors and senior management. As a result, Prime was deemed to be the acquiring company for accounting purposes and the merger was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. The consideration paid (purchase price) was allocated to the tangible and intangible net assets of HSS based on their fair values, and the net assets of HSS were recorded at their fair values as of the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed were deemed to be those of HealthTronics because HealthTronics was the surviving legal entity.

In this document, references to “we,” “us,” “our” and “HealthTronics” shall mean HealthTronics and its consolidated subsidiaries after the merger, except when the context requires, such references shall refer to HealthTronics and its consolidated subsidiaries either before or after the merger. References to “Prime” shall mean Prime and its consolidated subsidiaries before the merger, and references to “HSS” shall mean HSS and its consolidated subsidiaries before the merger.

We now provide healthcare services and manufacture medical devices, primarily to the urology community as well as manufacture and design specialty vehicles used for the transport of high technology medical and broadcast and communications equipment.

In February 2004, we acquired Medstone International, Inc. for approximately $19 million. Medstone manufactures, sells, and maintains lithotripters and makes them available for use by health care providers under various fee-for-service arrangements in both fixed and mobile settings. Medstone and its subsidiaries also market fixed and mobile tables for urological treatments and imaging, patient handling tables for use by pain management clinics and other users, and x-ray generators for medical imaging. A pioneer in the manufacture of shockwave lithotripsy, Medstone’s lithotripter was the first FDA approved device to treat both kidney stones and gallstones. With more than 130

Index to Financial Statements

lithotripters in operation worldwide, and more than 324 urology and patient handling tables in use, the Medstone devices are well established in the urology office and hospital market. For the year ended December 31, 2003, Medstone had revenue of $21 million, comprised of $15 million in service revenue and $6 million in equipment sales.

For a discussion of recent developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.”

Urology

Lithotripsy Services. According to the American Foundation for Urologic Disease, nearly 10% of Americans are afflicted with kidney stones during their lifetime. Most kidney stones occur within the 40-60 year old age group. The two primary forms of treatment of kidney stones are lithotripsy and endoscopy, a form of invasive surgery that sometimes utilizes a laser. Of the estimated 600,000 kidney stone cases each year, approximately 225,000 to 250,000 are treated with lithotripsy. Lithotripsy uses extracorporeal shock waves to break up kidney stones into small pieces, which can pass naturally through the body’s urinary tract. This procedure is a non-invasive procedure for treating kidney stones, typically performed on an outpatient basis, that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery.

Our services are provided principally through limited partnerships or other entities that we manage, which use FDA-approved lithotripsy medical devices. Generally, in providing lithotripsy services, we provide the lithotripter equipment and clinical technicians who assist physicians with the operation of the equipment during procedures. We do not render any medical services. Rather, the physicians do.

We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy services. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater proportion of the total non-physician fee.

Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $1,900 and $2,100, respectively, for 2004 and 2003. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

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As the general partner of the limited partnerships, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance, and contracting with payors, hospitals and surgery centers. We do not directly bill, nor do we collect for services rendered to, Medicare or Medicaid.

Benign Prostate Disease and Prostate Cancer Treatment. Also in the urology sement, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we use a technology called transurethral microwave therapy, a process in which heat therapy is used to treat the enlarged prostate, or we may use a green light laser. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells.

Urology Equipment Sales. We also, through Medstone International, Inc., our wholly-owned subsidiary, manufacture, sell and maintain lithotripters, and market fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics.

Urology Revenues. Although, for the years ended December 31, 2004 and 2003, manufacturing revenue was higher than urology revenue, the operating margins on urology revenue have been, historically, much higher than on manufacturing revenue. We recognize urology revenue primarily from the following sources:

Specialty Vehicle Manufacturing

We design, construct and engineer mobile trailers and coaches that transport high technology medical devices, equipment designed for mobile command and control centers, and equipment for broadcasting and communications applications. During 1997, we acquired a majority interest in AK

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Specialty Vehicles, which provides manufacturing services, installation, refurbishment and repair of trailers and coaches for mobile medical services providers, including non-lithotripsy medical services such as magnetic resonance imaging, cardiac catheterization labs, CT scanners, and postitron emission tomography. In May 2002, we acquired the remaining minority ownership interest in AK Specialty Vehicles which is now one of our wholly-owned subsidiaries.

In May 2001, we broadened our manufacturing platform by acquiring the assets of Calumet Coach Company (“Calumet”). Since its founding more than 50 years ago, Calumet has produced thousands of special-purpose mobile units, earning a worldwide reputation for leadership in innovative design and quality manufacturing. Calumet’s customers include industry leaders such as GE Medical Systems, Philips, Siemens Medical Systems, Dornier Medical Systems, hundreds of hospital systems and healthcare providers, and numerous broadcast and production companies.

In May 2002, we acquired the assets and certain liabilities of Frontline Communications Corporation (“Frontline”). Frontline is a leading manufacturer and integrator of custom vehicles for the broadcast and communications industry. This acquisition substantially expanded our market share in the broadcast and communications industry.

In July 2002, we acquired Holland-based Smit Mobile Equipment Company (“Smit”). Smit is a leading European manufacturer of mobile medical imaging vehicles. The Smit acquisition expanded our presence in the global marketplace as a manufacturer of specialty vehicles and strengthened our strategic position in the growing European market for high technology mobile medical imaging and broadcast and communication vehicles.

In January 2003, we acquired Aluminum Body Corporation (“ABC”). The acquisition of ABC extends our position in the manufacture of command and control vehicles for the Homeland Security and military and government markets. Additionally, this acquisition provides us an important west coast hub for the service and sale of all of the products manufactured within our manufacturing group.

In February 2003, we acquired Winemiller Communications (“Winemiller”). Winemiller provides turnkey remanufacturing and refurbishing of specialty vehicles utilized by the broadcast community and is a recognized leader in the application of microwave technology solutions.

Our manufacturing business is headquartered in Harvey, Illinois, with additional manufacturing operations in Calumet City, Illinois; Clearwater, Florida; Riverside, California and Oud Bierjland, Holland. Additionally, we operate a service and sales facility in Camberley, England.

Orthotripsy

In orthopaedics, we provide non-invasive surgical solutions for a wide variety of orthopaedic conditions such as chronic plantar fasciitis and chronic lateral epicondylitis, more commonly known as heel pain and tennis elbow, respectively. We provide these services with our device called the OssaTron, which is an evolution of the lithotripsy technology. The OssaTron is approved by the Food and Drug Administration, or FDA, for the two previously stated indications and has been demonstrated to be effective through good clinical studies. As of December 31, 2004, we are planning to divest this business segment and accordingly have shown it as held for sale in our 2004 consolidated financial statements, which are included in this Annual Report on Form 10-K.

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Refractive

Refractive Vision Correction (“RVC”) refers to the correction of common vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism using specialized laser applications. During 1999 and 2000, we acquired eleven refractive centers, and affiliated with physicians specializing in refractive surgery.

In 2002, we completed the divesture of our RVC operations, thereby affording us the opportunity to focus our resources on opportunities in our urology and specialty vehicle manufacturing businesses.

Revenues and Industry Segments

The information required by Regulation S-K Items 101(b) and 101(d) related to financial information about segments and financial information about sales is contained in Note M of our consolidated financial statements, which is included in this Annual Report on Form 10-K.

Competition

The lithotripsy services market is highly fragmented and competitive. We compete with other companies, private facilities and medical centers that offer lithotripsy machines and services, including smaller regional and local lithotripsy service providers. Certain of our current and potential competitors have substantial financial resources and may compete with us for acquisitions and development of operations in markets targeted by us. Additionally, while we believe that lithotripsy has emerged as the superior treatment for kidney stone disease, we also compete with hospitals, clinics and individual medical practitioners that offer alternative treatments for kidney stones.

We also compete with other manufacturers of minimally invasive medical devices in our markets. The primary competitors include Dornier MedTech GmbH, Siemens AG, Storz Medical, Richard Wolf GmbH and Direx.

In our manufacturing segment, we compete with national, regional and local designers and manufacturers of trailers and coaches for transporting medical devices and mobile equipment designed for mobile command and control centers and equipment for the media and broadcast industry.

Potential Liabilities-Insurance

All medical procedures performed in connection with our business activities are conducted directly by, or under the supervision of, physicians who are not our employees. We do not provide medical services to any patients. However, patients being treated at health care facilities at which we provide our non-medical services could suffer a medical emergency resulting in serious injury or death, which could subject us to the risk of lawsuits seeking substantial damages.

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We currently maintain general and professional liability insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy aggregate and an umbrella excess limit of $10,000,000, with a deductible of $50,000 per occurrence. In addition, we require medical professionals who utilize our services to maintain professional liability insurance. All of these insurance policies are subject to annual renewal by the insurer. If these policies were to be canceled or not renewed, or failed to provide sufficient coverage for our liabilities, we might be forced to self-insure against the potential liabilities referred to above. In that event, a single incident might result in an award of damages that might have a material adverse effect on our results of operations or financial condition.

Government Regulation and Supervision

We are directly, or indirectly through physicians and hospitals and other health care facilities, which we will refer to as Customers, subject to extensive regulation by both the federal government and the governments in states in which we conduct business, including:

Practices prohibited by these statutes include, but are not limited to, the payment, receipt, offer, or solicitation of money or other consideration in connection with the referral of patients for services covered by a federal or state health care program. We contract with physicians under a variety of financial arrangements, and physicians have ownership interests in some entities in which we also have an interest. If our operations are found to be in violation of any of the laws and regulations to which we or our Customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare, Medicaid, and other governmental healthcare programs, loss of licenses, and the curtailment of our operations. While we believe that we are in compliance with all applicable laws, we cannot assure that our activities will be found to be in compliance with these laws if scrutinized by regulatory authorities. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of us being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or in the courts, and their

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provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we were to successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

As previously reported on a Form 8-K filed by Prime on September 28, 2004, we concluded an internal investigation of a business transaction involving our manufacturing division, which transaction may have violated the federal anti-kickback laws. We voluntarily reported the transaction to the U.S. General Services Administration, or GSA. Although the GSA has yet to assign a government investigator in response to our voluntary disclosure, we intend to fully cooperate with any GSA investigation. Based on the findings of our outside legal counsel, we (1) believe this was an isolated incident, (2) do not believe the pending resolution of this matter will materially and adversely affect our financial condition, results of operation, or business, and (3) believe there is a low to moderate risk that the federal government would suspend or eliminate AKSV from federal government procurement contracting for some period of time.

Equipment

We purchase our urology equipment and maintain that equipment with either internal personnel or pursuant to service contracts with the manufacturers or other service companies. For mobile lithotripsy, we either purchase or lease the tractor, usually for a term up to five years, and purchase the trailer or a self contained coach.

We are not dependent on one manufacturer of lithotripters and have no long term or multi-system purchase commitments for equipment in place.

Employees

As of February 28, 2005, we employed approximately 920 full-time employees and approximately 8 part-time employees.

Risk Factors

We may not realize the benefits of the merger between Prime and HSS if we experience difficulties integrating the operations of the two companies.

To be successful after the merger, we will need to complete the integration of the operations of the separate companies into one company. Integration requires substantial management attention and could detract attention away from the day-to-day business of the combined company. We could encounter difficulties in the integration process, such as the loss of key employees, customers or suppliers. If we do not integrate the businesses successfully, we may fail to realize the benefits we expect to realize from the merger.

Also, the continued success of the merger will depend, in part, on our ability to realize the anticipated operating efficiencies and cost savings from combining the businesses of HSS and Prime. The amount of our cost savings will depend in part on our ability to combine the businesses of HSS and Prime in a way that permits those costs savings to be realized. If our estimates are incorrect or we are not able to successfully combine our two companies, anticipated cost savings may not be realized fully or at all, or make take longer to realize than anticipated.

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The market price of our common stock may decline if we fail to successfully integrate the operations of Prime and HSS and realize anticipated benefits of the merger.

The market price of our common stock could decline as a result of the merger, based on the occurrence of a number of events, including:

Our high levels of indebtedness may limit our financial and operating flexibility.

We continue to have high levels of debt and interest expense. Our long-term debt as of December 31, 2004 was approximately $110.3 million, not including the current portion of long-term debt of $39.8 million on that date. Our debt to equity ratio as of December 31, 2004 was approximately 0.69.

We have a revolving line of credit with a borrowing limit of $50.0 million, $32.0 million of which was drawn at December 31, 2004. In addition, we have outstanding $100.0 million of 8.75% senior subordinated notes (“8.75% notes”) due April 2008. The 8.75% notes are unsecured general obligations and are subordinated in right of payment to all of our existing and future senior indebtedness and are guaranteed by our subsidiaries on a full, unconditional, joint and several basis.

We have been assigned a B-1 senior implied rating and the 8.75% notes have been assigned a B-3 rating by Moody’s Investor Service Inc. We have also been assigned a BB- corporate credit rating by Standard and Poor’s Ratings Group. All of these ratings are below investment grade. As a result, at times we may have difficulty accessing capital markets or raising capital on favorable terms as we will incur higher borrowing costs than our competitors that have higher ratings. Therefore, our financial results may be negatively affected by our inability to raise capital or the cost of such capital as a result of our credit ratings.

We must comply with various covenants contained in our revolving credit facility, the indenture related to the 8.75% notes and any other future debt arrangements that, among other things, limit our ability to:

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Our substantial debt could have important consequences to you. For example, it could:

In addition, if we fail to comply with the terms of any of our debt, our lenders will have the right to accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt. Realization of any of these factors could adversely affect our financial condition and results of operations.

If we are not able to establish or maintain relationships with physicians and hospitals, our ability to successfully commercialize our current or future service offerings will be materially harmed.

We are dependent on health care providers in two respects. First, if physicians and hospitals and other health care facilities, which we will refer to as Customers, determine that our services are not of sufficiently high quality or reliability, or if our Customers determine that our services are not cost effective, they will not utilize our services. In addition, any change in the rates of or conditions for reimbursement could substantially reduce (1) the number of procedures for which we or our Customers can obtain reimbursement or (2) the amounts reimbursed to us or our Customers for services provided by us. If third-party payors reduce the amount of their payments to Customers, our Customers may seek to reduce their payments to us or seek an alternate supplier of services. Because unfavorable reimbursement policies have constricted and may continue to constrict the profit margins of the hospitals and clinics we bill directly, we may need to lower our fees to retain existing customers and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for services or creating downward pricing pressure. Second, physicians generally own equity interests in our partnerships. We provide a variety of services to the partnerships and in general manage their day-to-day affairs. Our operations could become disrupted, and financial results adversely affected, if these physician partners became dissatisfied with our services or if we became involved in disputes with our partners.

We are subject to extensive federal and state health care regulation.

We are subject to extensive regulation by both the federal government and the governments in states in which we conduct business. See “Government Regulation and Supervision” under this Part I for further discussion on these regulations.

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Third party payors could refuse to reimburse health care providers for use of our current or future service offerings and products, which could make our revenues decline.

Third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of medical procedures and treatments. In addition, significant uncertainty exists as to the reimbursement status of newly approved health care products. Lithotripsy treatments are reimbursed under various federal and state programs, including Medicare and Medicaid, as well as under private health care programs, primarily at fixed rates. Governmental programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, and private programs are subject to policy changes and commercial considerations, all of which may have the effect of decreasing program payments, increasing costs or requiring us to modify the way in which we operate our business. These changes could have a material adverse effect on us.

New and proposed federal and state laws and regulatory initiatives relating to various initiatives in health care reform (such as improving privacy and the security of patient information and combating health care fraud) could require us to expend substantial sums to appropriately respond to and comply with this broad variety of legislation (such as acquiring and implementing new information systems for privacy and security protection), which could negatively impact our financial results.

Recent legislation and several regulatory initiatives at the state and federal levels address patient privacy concerns. New federal legislation extensively regulates the use and disclosure of individually identifiable health-related information and the security and standardization of electronically maintained or transmitted health-related information. We do not yet know the total financial or other impact of these regulations on our business. Continuing compliance with these regulations will likely require us to spend substantial sums, including, but not limited to, purchasing new computer systems, which could negatively impact our financial results. Additionally, if we fail to comply with the privacy regulations, we could suffer civil penalties of up to $25,000 per calendar year per standard (with well over fifty standards with which to comply) and criminal penalties with fines of up to $250,000 for willful and knowing violations. In addition, health care providers will continue to remain subject to any state laws that are more restrictive than the federal privacy regulations. These privacy laws vary by state and could impose additional penalties.

The provisions of HIPAA criminalize situations that previously were handled exclusively civilly through repayments of overpayments, offsets and fines by creating new federal health care fraud crimes. Further, as with the federal laws, general state criminal laws may be used to prosecute health care fraud and abuse. We believe that our business arrangements and practices comply with existing health care fraud law. However, a violation could subject us to penalties, fines and/or possible exclusion from Medicare or Medicaid. Such sanctions could significantly reduce our revenue or profits.

A number of proposals for health care reform have been made in recent years, some of which have included radical changes in the health care system. Health care reform could result in material changes in the financing and regulation of the health care business, and we are unable to predict the effect of such change on our future operations. It is uncertain what legislation on health care reform, if any, will ultimately be implemented or whether other changes in the administration of or

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interpretation of existing laws involving governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration of or interpretation of existing legislation regarding governmental health care programs will not have a material adverse effect on the results of our operations.

We face intense competition and rapid technological change that could result in products that are superior to the products we manufacture or superior to the products on which our current or proposed services are based.

Competition in our business segments is intense. We compete with national, regional and local providers of urology services and designers and manufacturers of trailers and coaches for transporting medical devices and mobile equipment designed for mobile command and control centers and equipment for the media and broadcast industry. This competition could lead to a decrease in our profitability. Moreover, if our customers determine that our competitors offer better quality products or services or are more cost effective, we could lose business to these competitors. The medical device and specialty vehicle industries are subject to rapid and significant technological change. Others may develop technologies or products that are more effective or less costly than our products or the products on which our services are based, which could render our products or services obsolete or noncompetitive. Our business is also impacted by competition between lithotripsy services, on the one hand, and surgical and other established methods for treating urological conditions, on the other hand.

We may be subject to costly and time-consuming product liability actions that would materially harm our business.

Our urology services and manufacturing business exposes us to potential product liability risks that are inherent in these industries. All medical procedures performed in connection with our business activities are performed by or under the supervision of physicians who are not our employees. We do not perform medical procedures. However, we may be held liable if patients undergoing urology treatments using our devices are injured. We may also face product liability claims as a result of our specialty vehicle manufacturing. We cannot ensure that we will be able to avoid product liability exposure. Product liability insurance is generally expensive, if available at all. We cannot ensure that our present insurance coverage is adequate or that we can obtain adequate insurance coverage at a reasonable cost in the future.

Our success will depend partly on our ability to operate without infringing on or utilizing the proprietary rights of others.

The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. No one has claimed that any of our medical devices infringe on their intellectual property rights; however, it is possible that we may have unintentionally infringed on others’ patents or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in any litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which would reduce our revenues and net income.

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If we fail to attract and retain key personnel and principal members of our management staff, our business, financial condition and operating results could be materially harmed.

Our success depends greatly on our ability to attract and retain qualified management and technical personnel, as well as to retain the principal members of our existing management staff. The loss of services of any key personnel could adversely affect our current operations and our ability to implement our growth strategy. There is intense competition within our industry for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business. If we fail to attract and retain key management staff, or if we lose any of our current management team, our business, financial condition and operating results could be materially harmed.

The market price of our common stock may experience substantial fluctuation for reasons over which we have little control.

Our stock price has a history of volatility. Fluctuations have occurred even in the absence of significant developments pertaining to our business. Stock prices and trading volume of companies in the health care and health services industry have fallen and risen dramatically in recent years. Both company-specific and industry-wide developments may cause this volatility. During 2004, HealthTronic’s stock price ranged from $5.87 to $10.79. Factors that could impact the market price of our common stock include the following:

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

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Our acquisition strategy could fail or present unanticipated problems for our business in the future, which could adversely affect our ability to make acquisitions or realize anticipated benefits from those acquisitions.

We have followed an acquisition strategy since 1992 that has resulted in rapid growth in our business. This acquisition strategy may include acquiring healthcare services and specialty vehicle manufacturing businesses and is dependent on the continued availability of suitable acquisition candidates and our ability to finance and complete any particular acquisition successfully. Moreover, the Federal Trade Commission, or FTC, initiated an investigation in 1991 to determine whether the limited partnerships in which Lithotripters, Inc., now one of our wholly-owned subsidiaries, was the general partner posed an unreasonable threat to competition in the healthcare field. While the FTC closed its investigation and took no action, the FTC or another governmental authority charged with the enforcement of federal or state antitrust laws or a private litigant might, due to our size and market share, seek to (1) restrict our future growth by prohibiting or restricting the acquisition of additional lithotripsy operations or (2) require that we divest certain of our lithotripsy operations. Furthermore, acquisitions involve a number of risks and challenges, including:

Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquired businesses or realize other anticipated benefits from those acquisitions.

Our results of operations could be adversely affected as a result of goodwill impairments.

Goodwill represents the excess of the purchase price paid for a company over the fair value of that company’s tangible and intangible net assets acquired. As of December 31, 2004, we had goodwill of $296 million. If we determine in the future that the fair value of any of our reporting segments does not exceed the carrying value of the related reporting segment, goodwill in that reporting segment will be deemed impaired. If impaired, the amount of goodwill will be reduced to the value determined by us to be the fair value of the reporting segment. The amount of the reduction will be deducted from earnings during the period in which the impairment occurs. An impairment will also reduce stockholders’ equity in the period incurred by the amount of the impairment.

Our manufacturing operations are partially dependent upon third-party suppliers, making us vulnerable to a supply shortage.

We obtain materials and manufactured components from third-party suppliers. Some of our suppliers are the sole source for a particular supply item. Any delay in our suppliers’ abilities to provide us with necessary material and components may affect our manufacturing capabilities or may require us to seek alternative supply sources. Delays in obtaining supplies may result from a number of factors affecting our suppliers, such as capacity constraints, labor disputes, the impaired financial condition of a particular supplier, suppliers’ allocations to other purchasers, weather emergencies or acts of war

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or terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

We could be adversely affected by special risks and requirements related to our medical equipment manufacturing business.

We are subject to various special risks and requirements associated with being a medical equipment manufacturer, which could have adverse effects. These include the following:

Clinical costs to obtain FDA approval of HIFU may be higher than anticipated by us, or the FDA may fail to approve HIFU, and, as a result, our earnings and stock price could decline.

We recently signed a distribution agreement with EDAP TMS S.A., a French company, which provides that we will start a clinical trial for the submission of high intensity focused ultrasound, or HIFU, treatment of prostate cancer to the FDA for pre-market approval. In the event the costs of the clinical trial are greater than those budgeted by us, we could be forced to increase debt or to limit spending on the development of other projects. In the event of such increased costs, our earnings and stock price could be depressed or negatively impacted. While HIFU has been successful in Europe to treat prostate cancer, the results of the clinical trials may not meet the standards required for approval by the FDA. Failure to obtain FDA approval for HIFU could adversely effect future earnings and negatively impact the market price of our common stock.

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Executive Officers

As of February 28, 2005, our executive officers were as follows:

The foregoing does not include positions held in our subsidiaries. Our officers are elected for annual periods. There are no family relationships between any of our executive officers and/or directors.

Dr. Wheelock has been Chairman of the Board since November 2004. Dr. Wheelock served as Chairman and Chief Executive Officer of HSS from July 1996 until the merger in November 2004. From 1979 to 1996, Dr. Wheelock was a practicing, board-certified urologist in Chattanooga, Tennessee. While in practice, he was engaged as a consultant by various public companies.

Mr. Shifrin has been our Vice - Chairman of the Board since November 2004. Mr. Shifrin served as Prime’s Chairman of the Board from October 1989 until the merger in November 2004 and in various capacities with American Physicians Service Group, Inc. (“APS”), since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Since June 2003, Mr. Shifrin has also been a director of Financial Industries Corporation, a life insurance holding company. Mr. Shifrin is a member of the World Presidents’ Organization.

Mr. Hummel has been our President and Chief Executive Officer since June 2000. From October 1999 until June 2000, Mr. Hummel was our Executive Vice President and Chief Operating Officer. Before joining us, Mr. Hummel was with Diagnostic Health Services, Inc. since 1984, most recently serving as their President and Chief Operating Officer from 1987 to 1999, Chief Executive Officer from January 1999 to October 1999 and as a member of its board of directors. Subsequent to Mr. Hummel’s departure, DHS filed for Chapter 11 bankruptcy reorganization in March 2000 and shortly thereafter re-emerged from bankruptcy in October 2000.

Mr. Barnidge has been our Chief Financial Officer and Senior Vice President since December 2001. Mr. Barnidge was our Treasurer from August 2001 until December 2001. Before joining us, Mr. Barnidge, a CPA, was a partner in a public accounting and consulting firm from 1986 through July 2001. Mr. Barnidge is also a Certified Valuation Analyst and a Certified Fraud Examiner. He was formerly an Adjunct Professor in the University of Houston’s Graduate School of Business.

Mr. Whittenburg was named General Counsel and Senior Vice President of Development in March 2004. Previously Mr. Whittenburg practiced law at Akin Gump Strauss Hauer & Feld LLP, where he specialized in corporate and securities law. Mr. Whittenburg, a CPA, is licensed to practice law in Texas.

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Index to Financial Statements

Dr. Jenkins has served as the President of the Urology Division since April 2004 and previously served as President and Chief Executive Officer of Prime from April 1996 until June 2000. Dr. Jenkins served as Vice Chairman of Prime’s Board of Directors from June to December 2000, and served as a board member from April 1996 to April 2004. Dr. Jenkins, a board certified urologist, practiced urology in North Carolina from 1979 until 1990 before going to work for Litho, Inc., where he served as President until June 2000.

Mr. Vlietstra was named Interim President of the Specialty Vehicles Manufacturing division in September 2004. Mr. Vlietstra joined Prime in April 2003 as a Vice President of its Manufacturing division. Prior to that, he served as President of Aluminum Body Corporation for 12 years, which was acquired by Prime in 2003. Mr. Vlietstra is Certified Public Accountant and has a post graduate degree in business and accounting from the University of Pretoria, South Africa.

Mr. Rusk joined us in August 2000 as our Controller and was named Vice President in June 2002. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the last ten years as a senior audit manager.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these SEC filings. You can obtain these filings at the SEC’s website at http://www.sec.gov.

We also make available free of charge on or through our website (http://www.healthtronics.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 2. PROPERTIES

Our principal executive office is located in Austin, Texas in an office building owned by us. For our manufacturing business, we own two buildings containing approximately 78,000 and 85,000 square feet of manufacturing and office space in Harvey and Calumet City, Illinois, respectively. Additionally, we lease approximately 80,000 square feet of manufacturing and office space in Clearwater, Florida for approximately $29,700 a month, we lease approximately 68,000 square feet of manufacturing and office space in Riverside, California for approximately $32,000 a month and we lease approximately 104,000 square feet of manufacturing and office space in Oud Bierjland, Holland for approximately $76,000 a month.

16

Index to Financial Statements

In addition, in January 2000, we entered into a seven-year lease on a 28,000 square foot facility in Marietta, Georgia. In February 2003, we negotiated an amendment to our seven-year lease to include an additional 15,000 square feet adjacent to our current facility. The adjusted monthly rental is calculated on a graduating scale beginning at $26,800 per month for the first year and ending with $29,400 per month for the last year.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various claims and legal actions that have arisen in the ordinary course of business. We believe that any liabilities arising from these actions will not have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 9, 2004, both Prime and HSS held special meetings of their stockholders to consider and vote on the proposals we describe below. Management of each company solicited proxies for the meetings.

1) The proposal to approve the Prime-HSS merger was approved by the Prime stockholders. The “votes for” were 15,520,934, the “votes against” were 87,710 and the “votes withheld” were 11,464.

2) The proposal to approve the Prime-HSS merger was approved by the HSS shareholders. The “votes for” were 7,329,087, the “votes against” were 36,463 and the “votes withheld” were 60,080.

3) The proposal to amend the articles of incorporation to increase the number of authorizes shares from 30,000,000 to 70,000,000 was approved by the HSS shareholders. The “votes for” were 7,266,796, the “votes against” were 96,151 and the “votes withheld” were 62,683.

4) The proposal to amend the articles of incorporation to provide for the authority to issue up to 30,000,000 shares of preferred stock was approved by the HSS shareholders. The “votes for” were 6,846,708, the “votes against” were 493,839 and the “votes withheld” were 85,083.

5) The proposal to amend the articles of incorporation to modify the limitation of liability rights of directors of HealthTronics was approved by the HSS shareholders. The “votes for” were 7,204,481, the “votes against” were 136,917 and the “votes withheld” were 84,232.

6) The proposal to amend the articles of incorporation to provide for the indemnification rights for the HealthTronics officers and directors was approved by the HSS shareholders. The “votes for” were 7,224,092, the “votes against” were 117,962 and the “votes withheld” were 83,576.

7) The proposal to amend the articles of incorporation to provide for circumstances when the HealthTronics amended and restated articles of incorporation may be amended in the future was approved by the HSS shareholders. The “votes for” were 7,185,636, the “votes against” were 149,857 and the “votes withheld” were 90,137.

8) The proposal to amend the articles of incorporation to change the name of HSS to “HealthTronics, Inc.” was approved by the HSS shareholders. The “votes for” were 7,338,497, the “votes against” were 22,610 and the “votes withheld” were 64,523.

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Index to Financial Statements

9) The proposal to amend the articles of incorporation to adopt the amended and restated articles of incorporation was approved by the HSS shareholders. The “votes for” were 7,269,993, the “votes against” were 73,662 and the “votes withheld” were 81,975.

PART II

ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth the high and low closing prices per share for HealthTronics common stock on the Nasdaq National Market for the years ended December 31, 2004 and 2003 (NASDAQ Symbol “HTRN”).

On February 28, 2005, we had 698 holders of record of our common stock.

We are not currently paying dividends on our common stock. We have the authority to declare and pay dividends on our common stock at our discretion, as long as we have funds legally available to do so and our credit facility and indenture related to our 8.75% notes permit the declaration and payment. Our credit facility and indenture restrict our ability to pay cash dividends. In addition, we intend to retain our earnings to finance the expansion of our business and for general corporate purposes. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

18

Index to Financial Statements

Equity Compensation Plan Information

At December 31, 2004, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive plan. The plans, and all amendments thereto, had been approved by Prime’s and HSS’ shareholders, as the case may be. The following table sets forth certain information as of December 31, 2004 about our equity compensation plans: