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Article by DailyStocks_admin    (01-31-08 09:38 AM)

The Daily Magic Formula Stock for 01/31/2008 is HealthTronics Inc. According to the Magic Formula Investing Web Site, the ebit yield is 25% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

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 provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. On July 31, 2006, we completed the sale of our specialty vehicle manufacturing division. For a further discussion of this sale, see “Specialty Vehicle Manufacturing” under this Part I.

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

Urology

Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 procedures in the U.S. 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 $2,000, respectively, for both 2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

As the general partner of the limited partnerships or the manager of the other types of entities, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers.

Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers prior to November 30, 2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells. We sold our cryosurgery business on November 30, 2006 and have classified it as discontinued operations in the accompanying consolidated financial statements.

We recognize urology revenue primarily from the following sources:

•

Fees for urology services . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. These services are also primarily performed through limited partnerships, which we manage.

• Fees for operating our lithotripters . Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and receive a management fee for performing these services.

Medical Products

We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables.


• Fees for maintenance services . We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate.

• Fees for equipment sales, consumable sales and licensing applications . We manufacture, sell and maintain lithotripters and certain medical tables. We also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated.

Specialty Vehicle Manufacturing

Before July 31, 2006, we designed, constructed and engineered mobile trailers, coaches, and special purpose mobile units that transport high technology medical devices such as magnetic resonance imaging, or MRI, cardiac catheterization labs, CT scanware, lithotripters and positron emission tomography, or PET, and equipment designed for mobile command and control centers, and broadcasting and communications applications.

A significant portion of our revenue has been derived from our manufacturing operations. Revenue from the manufacture of trailers where we have a customer contract prior to beginning production is recognized when the project is substantially complete. Substantially complete is when the following have occurred (1) all significant work on the project is done; (2) the specifications under the contract have been met; and (3) no significant risks remain. Revenue from the manufacture of trailers built to an OEM’s forecast is recognized upon delivery.

On June 22, 2006, HealthTronics and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation (“Oshkosh”), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006 and have classified it as discontinued operations in the accompanying consolidated financial statements.

Orthotripsy

In orthopaedics, we provided 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 provided these services with our device called the OssaTron, which is an evolution of the lithotripsy technology. The OssaTron is approved by the FDA for the two previously stated indications and has been demonstrated to be effective through clinical studies. In August 2005, we sold our orthopaedics business unit to SanuWave, Inc., a company controlled by Prides Capital Partners L.L.C.

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 K of our consolidated financial statements, which are 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.

In Medical Products, 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.

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.

We may also face product liability claims as a result of our medical device manufacturing.

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. We sponsor a partially self-insured group medical insurance plan. The plan is designed to provide a specified level of coverage, with stop-loss coverage provided by a commercial insurer. Our maximum claim exposure is limited to $100,000 per person per policy year.

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:

•

the federal False Claims Act;

•

the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions;

•

federal and state billing and claims submission laws and regulations;

•

the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to patient privacy;

•

the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law;

•

state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; and

•

federal and state laws governing the equipment we use in our business concerning patient safety and equipment operating specifications.

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 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. The GSA has assigned a government investigator in response to our voluntary disclosure and 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, and (2) do not believe the pending resolution of this matter will materially and adversely affect our financial condition, results of operation, or business.

Equipment

We either manufacture or 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 medical equipment.

Employees

As of February 28, 2007, we employed approximately 293 full-time employees and approximately 17 part-time employees.


CEO BACKGROUND

Mr. Humphries was appointed as our President and Chief Executive Officer effective on May 11, 2006. In joining us, Mr. Humphries resigned from his position as President and Chief Executive Officer of Uroplasty, Inc., a publicly-traded medical device company, in which positions he served since January 2005. He was previously a partner of Ascent Medical Technology Fund, L.P., a venture capital fund founded in 1995. Mr. Humphries has over 25 years experience in the healthcare and medical device industry, including serving as President and Chief Executive Officer of American Medical Systems, Inc., a publicly-traded manufacturer of medical devices primarily for the urology market. Mr. Humphries serves on the Board of Directors of Uroplasty, Inc., Criticare Systems, Inc. and Universal Hospital Services, Inc.

Mr. Goolsby joined us as our Chief Financial Officer and Senior Vice President on January 8, 2007. Prior to such appointment, Mr. Goolsby served as the Chief Financial Officer, Vice President of Finance and Secretary of SigmaTel, Inc., a publicly-traded semiconductor company, from September 2001 to December 2006. From 1999 until 2001, Mr. Goolsby served as Chief Financial Officer of Utiliserve, Inc., an electrical utility products distributor, and was responsible for Utiliserve’s finance, accounting and human resources functions. From 1993 until 1999, Mr. Goolsby served as a Vice President and Controller of Cameron Ashley Building Products, Inc., a publicly-traded building products distributor, where he was responsible for finance and accounting and was involved in merger and acquisition transactions and preparing periodic filings with the Securities and Exchange Commission. Mr. Goolsby holds a Bachelor of Business Administration in Accounting from the University of Houston.

Mr. Whittenburg was named President of our Urology Division in June 2006. Prior to this time, Mr. Whittenburg served as President of our Specialty Vehicle Manufacturing Division from December 2005 until its sale in July 2006 and was our General Counsel and Senior Vice President–Development from March 2004 until June 2006. 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.

Mr. Schneider joined us as Vice President of Sales and Marketing in August 2004 and was named President of the newly-formed Medical Products division in May 2005. Prior to joining us, Mr. Schneider was Vice President of U.S. Sales and Marketing for Carbomedics, the cardiac surgery division of the Sorin Group, from June 2001 through July 2004. His experience also includes ten years in various sales, marketing and general management positions for General Electric Medical Systems.

Mr. Rusk joined us in August 2000 as our Corporate Controller and was named Vice President in June 2002. In June 2006, Mr. Rusk was named our Treasurer and in September 2006, Mr. Rusk was named our Secretary. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the last ten years as a senior audit manager.

COMPENSATION

Introduction



We compensate our executive officers primarily through a combination of base salary, annual incentive bonuses and long-term equity based awards. The executive compensation is designed to be competitive with that of comparable companies and to align executive performance with the long-term interests of our shareholders.



Our total compensation philosophy is to provide the right mix of cash and equity awards, fixed versus incentive compensation, and employee benefits for executives to:


• Enable us to attract highly talented and dedicated executives with the skills necessary for us to achieve our business plan;


• Retain those executives who continue to perform at or above the levels that we expect;


• Motivate high-quality performance;


• Compensate competitively and equitably; and


• Align incentives with shareholder value creation.



Elements of Executive Compensation



Our executive compensation program is designed to reflect the philosophy and objectives we have described above. Our Compensation Committee evaluates individual executive performance with a goal of setting compensation at levels the Committee believes are comparable with executives in other companies of similar size operating in the healthcare industry while taking into account our relative performance and our own strategic goals. We also consider the pay of each executive officer relative to each other executive officer and relative to other members of the management team. We have designed the total compensation program to be consistent for our entire executive management team.



We believe that salary, annual cash incentive compensation, and stock option awards are the primary compensation-related motivator in attracting and retaining executives. We view these components of compensation as related but distinct. Although our Compensation Committee does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking (as described under “-Base Salaries” below), our view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary performance. Except as described below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation. However, our Compensation Committee’s philosophy is to make a significant portion of an executive’s compensation performance-based to provide the opportunity to be well rewarded if we perform well.



Our Compensation Committee performs at least annually a review of our executive officers’ compensation to determine whether the compensation provides adequate incentives and motivation to our executive officers and whether they adequately compensate our executive officers relative to comparable officers in other companies with which we compete for executives. In addition, on an annual basis, our Compensation Committee reviews and considers the individual performance of executives, the financial and operating performance of the divisions or departments managed by the executives, and our overall performance. During the year, our Compensation Committee may consider compensation awards to executives for extraordinary performance. Historically, our Compensation Committee has performed this annual review in February of the year following the year reviewed. In 2006, our Compensation Committee decided to perform this review in December of the year reviewed. The Compensation Committee changed the timing of this review in order to establish an annual pay cycle based on a calendar year.



Base Salaries . Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. For each individual executive, we also consider our needs for that officer’s skill set, the contribution that the officer has made or we believe will make, whether the executive officer’s skill set is easily transferable to other potential employers and other factors. We fix executive base salaries at a level we believe enables us to hire and retain individuals in a competitive environment and to reward satisfactory individual performance and a satisfactory level of contribution to our overall business goals. We also take into account the base compensation that is payable by companies that we believe to be our competitors and by other private and public companies with which we believe we generally compete for executives. To this end, we access a number of executive compensation surveys and other databases and review them when making crucial executive officer hiring decisions and annually when we review executive compensation.



Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For 2006, this review occurred in December 2006. As a result of that review, the annual base salaries of Messrs. Humphries, Whittenburg, Schneider, and Rusk were increased by $20,000 (5%), $17,400 (6%), $22,500 (10%), and $23,400 (12%), respectively.



The base salaries paid to our named executive officers in 2006 are set forth below in the Summary Compensation Table.



Annual Non-Equity Incentive Compensation and Discretionary Cash Bonuses . We established an annual non-equity incentive compensation program in order to emphasize pay for performance. We believe this program helps focus our executive officers’ efforts in driving operating results that create shareholder value. Annual incentive compensation awards are based on the actual achievement of certain company and business division performance goals, including the achievement of certain thresholds of financial performance and certain business initiatives aimed at improving future earnings, which are determined prior to or shortly after the beginning of each year. The goals are communicated to our executive officers and are set so that the attainment of the targets is not assured and requires significant effort by our executives.



Our Compensation Committee selects specific performance measures such as earnings before interest, taxes, depreciation and amortization (“EBITDA”) growth, earnings per share growth, stock price growth, revenue growth, pre-tax income, return on capital, and division performance to establish targeted levels of performance for purposes of assessing the amount of annual non-equity incentive compensation to be paid. These performance measures and targets historically were established in February of the year to be assessed. When establishing our threshold performance incentive targets, the Compensation Committee reviews and discusses with both senior management and the full board of directors our business plan and its key underlying assumptions, expectations under then-existing and anticipated market conditions and the opportunity to generate shareholder value and then establishes the performance thresholds and targets for the year.



For 2007, our Compensation Committee selected adjusted EBITDA (i.e., EBITDA adjusted for minority interest expense) as the sole performance measure, and established a more structured, specific series of targets for purposes of determining the amount of annual non-equity incentive compensation to be paid, thereby more closely aligning the annual non-equity incentive compensation of executives to the creation of shareholder value. The 2007 annual non-equity incentive compensation would be equal to an executive’s current annual salary multiplied by a percentage determined based on the performance of the executive’s business division or overall

company performance. Performance is assessed based on the achievement of certain levels of adjusted EBITDA by the applicable business division or company. Under the terms of Mr. Humphries’ employment agreement, he will receive annual non-equity incentive compensation equal to anywhere from 50% to 150% of his annual base salary based on the achievement of certain adjusted EBITDA performance levels by the company overall (which such percentage would be 70% if the adjusted EBITDA target performance level is achieved), provided that if a minimum target level of adjusted EBITDA is not achieved (which such minimum is 90% of the adjusted EBITDA target performance level), no annual non-equity incentive compensation would be paid to Mr. Humphries. Our other executives will receive annual non-equity incentive compensation equal to anywhere from 25% to 200% of the executive’s annual base salary based on the achievement of certain adjusted EBITDA performance levels by the applicable business division or the company overall (which such percentage would be 50% if the adjusted EBITDA target performance level is achieved), provided that if a minimum target level of adjusted EBITDA is not achieved (which such minimum is 95% of the adjusted EBITDA target performance level), no annual non-equity incentive compensation would be paid to the executive. The Compensation Committee chose adjusted EBITDA because it believes adjusted EBITDA to be the best indicator of financial success and shareholder value creation.



Our Compensation Committee may exercise its discretion in revising the target levels of the performance measures during the year. In the summer of 2006, the annual non-equity incentive compensation target levels for Messrs. Whittenburg, Schneider and Rusk were revised in light of the contemplated restructuring announced in the summer of 2006, the then impending sale of our specialty vehicles division, and certain other matters.



Our Compensation Committee may also exercise discretion to pay cash bonuses as a result of extraordinary performance. In August 2006, we paid a $100,000 bonus to Mr. Whittenburg as a result of his extraordinary performance in connection with the auction, negotiation, and completion of the sale of our specialty vehicles division on August 1, 2006.



Long-Term Incentives . We believe our executives should have an ongoing stake in our success. We also believe that our executives should have a portion of their total compensation tied to stock price performance because stock-related compensation is directly tied to shareholder value. Our long-term incentives are in the form of stock options. We use stock options as a form of long-term compensation because we believe stock options more appropriately match the long-term incentive compensation with the creation of shareholder value by requiring the executives to purchase the underlying common stock at the same price as the closing price per share on the date the option was granted.



Our Board of Directors reviews and approves stock option awards to executive officers based upon our Compensation Committee’s assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Our Board of Directors has historically granted stock options to executives in February of each year in connection with our Compensation Committee’s annual performance reviews of the executives and setting compensation for the following year. In mid-year 2006, our Board of Directors granted each of Messrs. Whittenburg and Schneider a stock option to acquire 100,000 shares of our common stock. In September 2006, our Board of Directors granted Mr. Rusk a stock option to acquire 40,000 shares of our common stock. These mid-year grants were to align the long-term incentives of the entire management team shortly after the addition of Mr. Humphries to the management team. As a result of such mid-year alignment, our Compensation Committee does not anticipate future stock option grants to executives unless we hire a new executive or superior individual performance merits such.



Stock options are generally granted at a price equal to the closing price per share of our common stock, as reported on the Nasdaq Global Select Market, on the date of grant. Options grants generally have a term of 10 years and vest 25% on each of the first four anniversaries of the grant date. Our Board of Directors has not established stock ownership guidelines.



We do not time stock option grants in coordination with the release of material non-public information.

Other Executive Benefits and Perquisites



Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees.



For a description of perquisites, see “-Executive Compensation Tables—Summary Compensation Table”. We do not view perquisites as a significant element of our comprehensive compensation structure but do believe that they can be used in conjunction with base salary to attract, motivate and retain individuals in a competitive environment.



Employment Agreements



We have entered into employment agreements with our most senior executives, and the employment agreements contain severance and change of control provisions. We believe these provisions help us to attract and retain qualified executives. The employment agreements and the severance and change in control provisions for the executive officers are summarized under “Employment Agreements” and “Severance and Change of Control Benefits” below, along with a quantification of the severance and change of control benefits.



Impact of Accounting and Regulatory Requirements on Compensation



We account for equity compensation paid to our employees under the rules of SFAS No. 123R, which require us to estimate and record an expense over the service period of the award. Any gain recognized by optionees from nonqualified stock options should be deductible by us, while any gain recognized by optionees from incentive stock options will not be deductible by us if there is no disqualifying disposition by the optionee. We account for cash compensation as an expense at the time the obligation is accrued. This expense will also be tax deductible by us.



Section 162(m) of the Internal Revenue Code limits the tax deductibility by a publicly-held corporation of compensation in excess of $1 million paid to the chief executive officer or any other of its four most highly compensated executive officers, unless that compensation is “performance-based compensation” as defined by the Internal Revenue Code. The Compensation Committee considers deductibility under Section 162(m) with respect to compensation arrangements with executive officers. However, our Compensation Committee and Board of Directors believe that it is in our best interest that the Compensation Committee retain its flexibility and discretion to make compensation awards, whether or not deductible, in order to foster achievement of performance goals established by the Compensation Committee as well as other corporate goals that the Compensation Committee deems important to our success, such as encouraging employee retention and rewarding achievement.



On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, creating Section 409A of the Internal Revenue Code and changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not become effective yet, we believe we are operating in good faith compliance with the statutory provisions which were effective January 1, 2005.


MANAGEMENT DISCUSSION FROM LATEST 10K

We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry.

Urology Services . Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 procedures in the U.S. 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 $2,000 for both 2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

As the general partner of the limited partnerships, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers.

Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, prior to November 30, 2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells.

We recognize urology revenue primarily from the following sources:

•

Fees for urology services . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. (For a further discussion on our partnerships, see “Urology” and “Government Regulation and Supervision” in Part I.) The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. These services are also primarily performed through limited partnerships, which we manage.

• Fees for operating our lithotripters . Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and receive a management fee for performing these services.

Medical Products . We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables.

We recognize medical device sales and service revenue from the following sources:

• Fees for maintenance services . We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate.

• Fees for equipment sales, consumable sales and licensing applications . We manufacture, sell and maintain lithotripters and certain medical tables. We also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for devices and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated.

Recent Developments

On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006. We used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay our term loan B in full and our mortgage debt related to our building in Austin, Texas.

On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc., a closely held private company (AMPI). We used the proceeds from the sale to acquire approximately 10% of the outstanding shares of AMPI. Due to the uncertainty of any future distributions related to our AMPI shares, we have assigned no value to this investment.

On February 13, 2007, we entered into a Stock Purchase Agreement and an Interest Purchase Agreement pursuant to which we agreed to purchase all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), all of the outstanding capital stock of Keystone Kidney Associates, PC, and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $8,100,000 plus an earnout. The transaction is subject to certain closing conditions and the company can give no assurances that it will close.

Critical Accounting Policies and Estimates

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We now have two reporting units, urology services and medical products. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. As of December 31, 2006, we had goodwill of $229 million.

A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts and circumstances relating to these matters and certain negotiations with related payors.

A third critical accounting policy is consolidation of our investment in partnerships or limited liability companies (LLCs) where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships or LLCs where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The related agreements provide us with broad powers. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20%–50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.
Year ended December 31, 2006 compared to the year ended December 31, 2005

Our total revenues decreased $9,376,000 (6%) as compared to 2005. Revenues from our urology services segment decreased $10,095,000 (8%) as compared to 2005. Revenues from our lithotripsy business decreased $8,386,000 in 2006 as compared to 2005, while revenues from our prostate business decreased $1,709,000 in 2006 as compared to 2005. The actual number of lithotripsy procedures performed in 2006 decreased by 9% compared to 2005, primarily due to weak performance across our western region partnerships and the loss of certain partnerships and contracts in late 2006. The average rate per procedure increased by 1% in 2006 as compared to 2005. Revenues for our medical products segment increased by $878,000 (5%) compared to 2005 primarily due to a mix of sales between external customers and sales to our urology services segment. Medical products revenues before intersegment eliminations totaled $28.4 million for 2006 and $27.4 million for 2005. We sold 17 lithotripters and 100 tables in 2006 compared to 16 lithotripters and 73 tables in 2005. Revenues from our service operations and consumable sales decreased $399,000 in 2006 as compared to 2005. Revenues from our new lab which started operations in January 2006, totaled $1,138,000 for the year ended December 31, 2006.

Our costs of services and general and administrative expenses for 2006 increased $33,907,000 compared to 2005. Our costs associated with salaries, wages and benefits in 2006 increased $5,014,000 (13%) compared to 2005. The primary cause of this increase relates to $1.3 million in severance costs paid to two executives in 2006, $1.8 million of share-based compensation cost recorded in 2006 and an increase in our medical products segment salaries of approximately $1.6 million, primarily related to increased head count in our sales force and our new lab. Our costs associated with other costs of services for the year ended December 31, 2006 increased $2,870,000 (18%) compared to 2005. This increase relates primarily to increased medical supplies costs in our prostate operations as well as increased costs of travel primarily in our medical products segment. Our bad debt expense also increased approximately $600,000 in 2006 as compared to 2005. Our general and administrative costs increased $606,000 (8%) over 2005. This increase relates primarily to additional recruiting costs related to the searches for our new CEO and CFO, totaling approximately $200,000 and additional board of director fees totaling approximately $340,000, related to a change in Board compensation in late 2005. Costs associated with legal and professional fees increased $2,488,000 (116%) in 2006. This increase is primarily due to $1.8 million in fees from our strategic consultants. Manufacturing costs increased $2,906,000 (42%) in 2006. This increase is due primarily to the increase in sales to external customers, noted above. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

On June 22, 2006, we entered into an agreement to sell our specialty vehicle manufacturing segment. Accordingly, in 2005 we have classified this segment as held for sale in the accompanying consolidated financial statements. The sale was completed on July 31, 2006. As a result of the sale we realized a gain of $53.6 million, which is included in discontinued operations in the accompanying financial statements. This gain utilized approximately $20.4 million of our deferred tax assets.

Depreciation and amortization expense decreased $169,000 in 2006 compared to 2005.

Minority interest in consolidated income for 2006 decreased $4,539,000 (9%) compared to 2005, as a result of a decrease in income from our urology services segment due primarily to lower revenues noted above.

Provision for income taxes in 2006 decreased $11,065,000 compared to 2005 due to a decrease in taxable income, primarily related to our goodwill impairment recorded in 2006. Our effective tax rate significantly increased in 2006 as compared to 2005, since approximately half of our goodwill impairment was not deductible for tax purposes.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. We now have two reportable segments: urology services and medical products. Our specialty vehicle manufacturing division, which was sold on July 31, 2006, was also considered a reportable segment prior to its sale.

Urology Services . Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 procedures in the U.S. 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 $2,100 for each of the first nine month periods of 2007 and 2006. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

As the general partner of the limited partnerships or the manager of the other types of entities, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers.

Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers prior to November 30, 2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells. We sold our cryosurgery business on November 30, 2006 and have classified it as discontinued operations in the accompanying condensed consolidated financial statements.

We recognize urology revenue primarily from the following sources:

• Fees for urology services . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. These services are also primarily performed through limited partnerships or other entities, which we manage.

•

Fees for operating our lithotripters and laser devices . Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and lasers and receive a management fee for performing these services.

Medical Products . We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and are the exclusive U.S. distributor of the Revolix branded laser. The operations of our Claripath pathology laboratory are also included in our medical products segment at this time.

•

Fees for maintenance services . We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate.

•

Fees for equipment sales, consumable sales and licensing applications . We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix laser and we also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. In some cases, we lease certain equipment to our partnerships as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed.

•

Fees for Claripath anatomical pathology services . We provide anatomical pathology services primarily to the urology market place. Revenues from these services are recorded when the related laboratory procedures are performed.

Specialty Vehicle Manufacturing . Before July 31, 2006, we designed, constructed and engineered mobile trailers, coaches, and special purpose mobile units that transport high technology medical devices such as magnetic resonance imaging, or MRI, cardiac catheterization labs, CT scanware, lithotripters and positron emission tomography, or PET, and equipment designed for mobile command and control centers, and broadcasting and communications applications.

A significant portion of our revenue had been derived from our specialty vehicle manufacturing operations. Revenue from the manufacture of trailers where we had a customer contract prior to beginning production was recognized when the project was substantially complete. Substantially complete was when the following had occurred (1) all significant work on the project was done; (2) the specifications under the contract had been met; and (3) no significant risks remained. Revenue from the manufacture of trailers built to an OEM’s forecast was recognized upon delivery.

On June 22, 2006, we and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation (“Oshkosh”), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006 and have classified this segment as discontinued operations in the accompanying condensed consolidated financial statements.

Recent Developments

Effective April 28, 2007, we acquired all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $6.8 million, plus certain additional cash consideration to be paid depending on the number of limited partner units sold by us in a post-closing offering of such units, plus an earnout. In August 2007, we completed our post-closing offering of the limited partner units and paid an additional $934,000.

On August 7, 2007, Sam B. Humphries, our President and Chief Executive Officer, died as a result of complications from a May 21, 2007 cardiac event. Mr. Humphries had been on medical leave since May 21, 2007.

On August 13, 2007, our Board of Directors appointed James S. B. Whittenburg as our President and Chief Executive Officer and as a member of our Board of Directors. Mr. Whittenburg had been serving as acting President and Chief Executive Officer since late May, 2007. Prior to that appointment, Mr. Whittenburg served as President-Urology Services.

On July 9, 2007, Mr. Christopher B. Schneider resigned his position as President-Medical Products. Mr. Schneider will provide consulting services to us until December 31, 2007 and we will pay him approximately $22,600 per month through December 2007.

During the fourth quarter of 2006, we committed to a plan to sell our Rocky Mountain Prostate business. On September 28, 2007, we completed the sale of our Rocky Mountain Prostate business. As a result of this sale we received proceeds totaling $1.35 million in cash and recognized a gain of $450,000. Accordingly, all activities related to our Rocky Mountain Prostate business have been included in discontinued operations in the accompanying condensed consolidated financial statements.

Critical Accounting Policies and Estimates.

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We now have two reporting units, urology services and medical products. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment was due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment related primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. As of September 30, 2007, we had goodwill of $235 million.

A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts and circumstances relating to these matters and certain negotiations with related payors.

A third critical accounting policy is consolidation of our investment in partnerships or limited liability companies (LLCs) where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships or LLCs where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The related partnership and limited liability company agreements provide us, as the general partner or managing partner, with broad powers. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20%–50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.

Nine months ended September 30, 2007 compared to the Nine months ended September 30, 2006

Our total revenues for the nine months ended September 30, 2007 decreased $5,174,000 (4.7%) as compared to the same period in 2006. Revenues from our urology services segment decreased $2,129,000 (2.3%) in the first nine months of 2007 as compared to the same period in 2006. Revenues from our lithotripsy business decreased $3,074,000 for the three quarters of 2007 as compared to the same period in 2006, while revenues from our prostate business increased $945,000 for the first nine months of 2007 as compared to the same period in 2006. The actual number of lithotripsy procedures performed in the first three quarters of 2007 decreased by 7% compared to the same period in 2006, primarily due to partnership and mobile route closures in late 2006 and continued weak performance across our western region partnerships in early 2007. The average rate per procedure increased by 3% in the first nine months of 2007 as compared to the same period in 2006. Revenues for our medical products segment decreased by $3,048,000 (19%) for the first nine months of 2007 compared to the same period in 2006. Medical products revenues before intersegment eliminations totaled $19,897,000 for the first three quarters of 2007 and $23,166,000 for the same period in 2006. We sold 7 devices and 28 tables in the nine months of 2007 compared to 17 devices and 68 tables during the same period in 2006. Revenues from our service operations and consumable sales decreased $1,965,000 in the first three quarters of 2007 as compared to the same period in 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations which we closed in late 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $2,412,000 and $715,000 for the nine months ended September 30, 2007 and 2006, respectively.

Our costs of services and general and administrative expenses for the first nine months of 2007 decreased $4,402,000 compared to the same period in 2006. Our costs associated with salaries, wages and benefits decreased $101,000 in the first three quarters of 2007 as compared to the same period in 2006, primarily related to $1.3 million in severance costs paid to two executives in 2006, partially offset by performance merit increases, variable compensation accruals, and increased costs related to group medical claims. Our costs associated with other costs of services for the nine months ended September 30, 2007 increased $967,000 (7%) compared to the same period in 2006. This increase is primarily due to increased costs related to our significant increase in lab operations and several large gains on the sales of certain partnership interests in 2006, which were recorded against this expense category, partially offset by decreased costs for laser supplies which corresponds to the shift from the greenlight laser to the revolix laser. Our general and administrative costs for the first nine months of 2007 decreased $776,000 (12%) as compared to the first nine months of 2006, primarily due to decreased rent, insurance, recruiting, and other costs related to our restructuring efforts in late 2006. Costs associated with legal and professional fees decreased $1,478,000 (41%) in the first nine months of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006 which were not incurred in 2007. Manufacturing costs decreased $2,826,000 (34%) in the nine month period ended September 30, 2007 as compared to the same period in 2006. This decrease is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs decreased $154,000 (16%) in the first nine months of 2007 as compared to the same period in 2006. This relates primarily to payments for product endorsement in 2006.

Income from discontinued operations for the nine months of 2007 decreased $33,080,000 compared to the same period in 2006. The income from discontinued operations in the first nine months of 2006 included $33,532,000 attributable to our specialty vehicle manufacturing segment and $563,000 in losses attributable to our HIFU, Cryosurgery, and Rocky Mountain Thermotherapy (“RMPT”) operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of our specialty vehicle manufacturing segment. In 2007, we had a loss from discontinued operations of $111,000 attributable to our Rocky Mountain Thermotherapy and HIFU operations. This loss included a gain of $450,000 from the sale of our Rocky Mountain Prostate business, which closed on September 28, 2007.

Depreciation and amortization expense increased $7,000 in 2007 as compared to the same period in 2006.

Minority interest in consolidated income for the nine month period ended September 30, 2007 decreased $32,000 compared to the same period in 2006, as a result of a decrease in income from our urology services segment offset by increases in minority interest percentages at certain partnerships.

Provision for income taxes in 2007 decreased $306,000 compared to 2006 due to the decrease in our taxable net income during the same periods.

Three months ended September 30, 2007 compared to the three months ended September 30, 2006

Our total revenues for the three months ended September 30, 2007 increased $92,000 as compared the same period in 2006. Revenues from our urology services segment increased $517,000 (2%) in the third quarter of 2007 as compared to the same period in 2006. Revenues from our lithotripsy business increased $332,000 for the third quarter of 2007 as compared to the same period in 2006, and revenues from our prostate business increased $185,000 in the third quarter of 2007 as compared to the same period in 2006. The actual number of lithotripsy procedures performed in the third quarter of 2007 decreased by 3% compared to 2006, primarily due to partnership and mobile route closures in late 2006. The average rate per procedure increased by 3% in the third quarter of 2007 as compared to the same period in 2006. Revenues for our medical products segment decreased by $464,000 (10%) for the quarter ended September 30, 2007 compared to the same period in 2006. Medical products revenues before intersegment eliminations totaled $6,269,000 for the third quarter of 2007 and $6,375,000 for the same period in 2006. We sold 3 devices and no tables in the third quarter of 2007 compared to 3 devices and 23 tables during the same period in 2006. Revenues from our service operations and consumable sales decreased $378,000 in the third quarter of 2007 as compared to 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations, which we closed in late 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $919,000 and $187,000 for the quarters ended September 30, 2007 and 2006, respectively.

Our costs of services and general and administrative expenses for the third quarter of 2007 decreased $2,481,000 (10%) compared to the same period in 2006. Our costs associated with salaries, wages and benefits decreased $1,257,000 (11%) in the third quarter of 2007 as compared to the same period in 2006, primarily related to approximately $900,000 of severance cost in 2006 as well as decreases in the variable incentive compensation accrual in the third quarter of 2007 and lower share-based compensation costs due to forfeitures in the quarter, partially offset by an increase in group medical costs resulting from higher medical claims in 2007. Our costs associated with other costs of services for the quarter ended September 30, 2007 decreased $93,000 (2%) compared to the same period in 2006. This decrease is primarily related to decreased expenses for laser supplies related to our shift from the greenlight laser to the revolix laser, and collections on accounts previously deemed uncollectible, partially offset by increased repairs and maintenance costs. Our general and administrative costs for the third quarter of 2007 decreased $387,000 (17%) as compared to the third quarter of 2006, primarily due to decreased recruiting costs and certain other insurance costs. Costs associated with legal and professional fees decreased $634,000 (37%) in the third quarter of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006. Manufacturing costs decreased $230,000 (12%) in the three month period ended September 30, 2007 as compared to the same period in 2006. This increase is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs increased $97,000 (69%) in the third quarter of 2007 as compared with the same period in 2006. This relates primarily to expenses related to trade shows and other marketing efforts in the third quarter of 2007.

Income from discontinued operations in the third quarter of 2007 decreased $31,820,000 compared to the third quarter of 2006. The income from discontinued operations in the third quarter of 2006 included $32,213,000 attributable to our specialty vehicle manufacturing segment partially offset by $258,000 in losses attributable to our HIFU, Cryosurgery, and Rocky Mountain Thermotherapy operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of our specialty vehicle manufacturing segment. In the third quarter of 2007, we had income from discontinued operations of $135,000 attributable to our Rocky Mountain Thermotherapy and HIFU operations. This income included a gain of $450,000 from the sale of our Rocky Mountain Prostate business, which closed on September 28, 2007.

Depreciation and amortization expense decreased $141,000 in the third quarter of 2007 as compared to the same period in 2006.

Minority interest in consolidated income for the three month period ended September 30, 2007 increased $833,000 compared to the same period in 2006, as a result of an increase in income at our urology partnerships, as well as increases in minority interest percentages at certain partnerships compared to the same period in 2006.

Provision for income taxes in the third quarter of 2007 increased $399,000 compared to 2006 due to the increase in our taxable net income during the same periods, as well as an increase in the effective tax rate in 2007.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $23,257,000 and $27,857,000 at September 30, 2007 and December 31, 2006, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the nine months ended September 30, 2007 and 2006, our subsidiaries distributed cash of approximately $35,697,000 and $40,764,000, respectively, to minority interest holders.

Cash provided by our operations, after minority interest, was $45,564,000 for the nine months ended September 30, 2007 and $36,846,000 for the nine months ended September 30, 2006. For the nine months ended September 30, 2007 compared to the same period in 2006, fee and other revenue collected decreased by $5,892,000 due primarily to our decreased revenues. Cash paid to employees, suppliers of goods and others for the nine months ended September 30, 2007 decreased by $1,884,000 compared to the same period in 2006. This fluctuation is attributable to a significant payoff of accrued expenses partially offset by a decrease in our overall expenses.

Cash used by our investing activities for the nine months ended September 30, 2007, was $12,480,000. We utilized approximately $8 million in cash to acquire our interests in the new Keystone partnership and purchased equipment and leasehold improvements totaling $6,838,000 in 2007. Cash provided by our investing activities for the nine months ended September 30, 2006, was $130,920,000 primarily due to $138,519,000 received from the sale of our Specialty Vehicle segment partially offset by $8,597,000 in equipment and leasehold improvements purchases.

Cash used in our financing activities for the nine months ended September 30, 2007, was $37,486,000, primarily due to distributions to minority interests of $35,697,000 and payments on notes payable of $4,483,000 partially offset by borrowings on notes payable of $2,546,000. Cash used in our financing activities for the nine months ended September 30, 2006, was $169,659,000, primarily due to distributions to minority interests of $40,764,000 and net payments on notes payable of $129,771,000, which included the repayment in full of our term loan B.

Accounts receivable as of September 30, 2007 decreased $1,879,000 from December 31, 2006. This decrease relates primarily to lower revenues as well as to the timing of collections.

Inventory as of September 30, 2007, totaled $10,359,000 and decreased $1,115,000 from December 31, 2006.

Senior Credit Facility

Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of September 30, 2007, there were no amounts drawn on the revolver. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. We were in compliance with the covenants under our senior credit facility as of September 30, 2007.

Other

Other long term debt . On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas. As of September 30, 2007, we had notes totaling $9.7 million related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. The notes bear interest at LIBOR or prime plus a certain premium and are due over the next three years.

Other long term obligations . At September 30, 2007, we had an obligation totaling $150,000 related to payments to the previous owner of Aluminum Body Corporation, a wholly owned subsidiary of ours that we sold as part of the sale of our specialty vehicles manufacturing segment (“ABC”), for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at September 30, 2007, as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation totaling $70,840 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of the Prime-HSS merger, two obligations totaling $12,500 related to payments to two previous employees of HSS. One obligation is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement. We have an obligation totaling $110,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a previous employee of our Medical Products division.

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