<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-16752
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MEDSTONE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 66-0439440
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 COLUMBIA, SUITE 100, ALISO VIEJO, CALIFORNIA 92718
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 448-7700
----------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed,
since last report)
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
--- ---
The number of shares of the Common Stock of the registrant outstanding as of
August 4, 1996 was 5,576,260.
<PAGE> 2
MEDSTONE INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
--------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1996 (Unaudited) 3
and December 31, 1995
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1996 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months ended June 30, 1996 and 1995 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 4,341,408 $ 3,108,741
Short-term investments 9,945,533 14,494,717
Accounts receivable, less allowance for
doubtful accounts of $160,000 and
$257,000 in 1996 and 1995, respectively 3,281,530 1,509,407
Inventories 1,467,167 1,764,636
Deferred tax assets 2,087,000 698,000
Prepaid expenses and other current assets 384,029 519,542
----------- -----------
Total current assets 21,506,667 22,095,043
Property and equipment, at cost 8,355,358 6,528,930
Less accumulated depreciation and amortization (3,025,334) (3,129,955)
----------- -----------
Net property and equipment 5,330,024 3,398,975
Goodwill, net of accumulated amortization 1,132,832 ---
Other assets, net 282,908 415,838
----------- -----------
$28,252,431 $25,909,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 897,712 $ 393,542
Accrued settlement costs 6,000,000 ---
Accrued expenses 316,653 235,265
Accrued income taxes 6,077 101,293
Accrued payroll expenses 277,365 206,120
Deferred revenue 1,192,534 726,260
Customer deposits --- 932
Dividends payable --- 1,966,216
----------- -----------
Total current liabilities 8,690,341 3,629,628
Deferred tax liabilities 123,000 123,000
Minority interest 114,606 ---
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Common stock - $.004 par value, 20,000,000
shares authorized, 5,576,260 and 5,516,528
shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively 22,156 22,066
Additional paid-in capital 18,644,127 18,555,983
Accumulated earnings 1,297,190 3,710,436
Stock purchase notes receivable (134,800) (134,800)
Unrealized gain/(loss) on short-term investments 878 3,543
Treasury stock (55,000 shares at cost, at June
30, 1996 and 0 shares at December 31, 1995) (505,067) ---
----------- -----------
Total stockholders' equity 19,324,484 22,157,228
----------- -----------
$28,252,431 $25,909,856
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net equipment sales . . . . . . . . . . $ 503,500 $ 997,500 $ 1,291,000 $2,392,665
Procedures fees and maintenance. . . . . 3,631,667 2,752,188 6,722,447 5,624,313
Laser catheters. . . . . . . . . . . . . --- 271,425 --- 587,746
Interest . . . . . . . . . . . . . . . . 194,361 246,530 418,415 476,771
----------- ----------- ----------- -----------
Total revenues . . . . . . . . . . . 4,329,528 4,267,643 8,431,862 9,081,495
Costs and expenses:
Cost of equipment sales . . . . . . . . 265,900 454,659 682,424 1,041,476
Costs related to procedures and
maintenance fees . . . . . . . . . . . 1,722,379 1,183,313 3,138,707 2,437,811
Cost of laser catheters. . . . . . . . . --- 68,168 --- 157,062
Research and development . . . . . . . 127,302 273,614 250,165 489,528
Selling and marketing . . . . . . . . . 615,879 452,794 1,110,993 969,717
General and administrative . . . . . . 362,515 425,875 679,551 883,008
Settlement costs . . . . . . . . . . . . 5,500,000 --- 5,500,000 ---
Legal and other expense. . . . . . . . . 436,064 12,609 803,219 13,605
----------- ----------- ----------- -----------
Total costs and expenses . . . . . . 9,030,039 2,871,032 12,165,059 5,992,207
----------- ----------- ----------- -----------
Income (loss) before provision
for (benefit from) income taxes . . . (4,700,511) 1,396,611 (3,733,197) 3,089,288
Provision for (benefit from) income taxes (1,739,000) 480,000 (1,389,000) 1,080,000
Minority interest . . . . . . . . . . . . 69,049 --- 69,049 ---
----------- ----------- ------------ -----------
Net income (loss) . . . . . . . . . . . . $(3,030,560) $ 916,611 $ (2,413,246) $ 2,009,288
=========== =========== ============ ===========
Earnings per share:
Primary . . . . . . . . . . . . . . . $ (.55) $ .17 $ (.44) $ .36
=========== =========== ============ ===========
Fully diluted. . . . . . . . . . . . . $ --- $ .17 $ --- $ .36
=========== =========== ============ ===========
Number of shares used in the computation of
income per share:
Primary. . . . . . . . . . . . . . . . 5,531,750 5,502,009 5,532,093 5,516,663
=========== =========== ============ ===========
Fully diluted. . . . . . . . . . . . . --- 5,535,073 --- 5,572,763
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
4
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK UNREALIZED
------------------ ADDITIONAL PURCHASE LOSS
NUMBER OF PAID-IN ACCUMULATED NOTE ON SHORT-TERM TREASURY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE INVESTMENTS STOCK TOTAL
--------- ------- ----------- ----------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,516,528 $22,066 $18,555,983 $ 3,710,436 $(134,800) $ 3,543 $ --- $22,157,228
Common stock options exercised 59,732 90 88,144 --- --- --- --- 88,234
Treasury shares repurchased (55,000) --- --- --- --- --- (505,067) (505,067)
Unrealized loss on
short-term investments --- --- --- --- --- (2,665) --- (2,665)
Net income (loss) --- --- --- (2,413,246) --- --- (2,413,246)
--------- ------- ----------- ---------- --------- ------- --------- -----------
BALANCE AT JUNE 30, 1996 5,521,260 $22,156 $18,644,127 $1,297,190 $(134,800) $ 878 $(505,067) $19,324,484
========= ======= =========== ========== ========= ======= ========= ===========
</TABLE>
See accompanying notes.
5
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MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,413,246) $ 2,009,288
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 512,220 460,777
Minority interest in partnership . . . . . . . . . . . . . . 69,049 ---
Provision for doubtful accounts . . . . . . . . . . . . . . . --- ---
Provision for related party loan . . . . . . . . . . . . . . --- 1,315
Provision for lawsuit settlement . . . . . . . . . . . . . . 5,500,000 ---
Unrealized losses (gains) on short-term
investments . . . . . . . . . . . . . . . . . . . . . . . . --- ---
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (1,212,502) 256,849
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 78,171 (249,888)
Prepaid expenses and other current assets . . . . . . . . . 128,178 (93,429)
Accounts payable and accrued expenses . . . . . . . . . . . 889,454 (420,216)
Accrued income taxes . . . . . . . . . . . . . . . . . . . (1,484,216) (167,992)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 467,902 (90,610)
Customer deposits . . . . . . . . . . . . . . . . . . . . . --- (40,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (456,098) (150,000)
----------- ------------
Net cash provided by operating activities . . . . . . . . . . . 2,078,912 1,516,094
----------- ------------
Cash flows from investing activities:
Purchase of marketable securities . . . . . . . . . . . . . . . (8,826,708) (11,467,589)
Sale of marketable securities . . . . . . . . . . . . . . . . . 13,373,227 10,210,923
Related party loan . . . . . . . . . . . . . . . . . . . . . . . --- (4,006)
Purchase of subsidiary . . . . . . . . . . . . . . . . . . . . . (1,350,000) ---
Investment by minority in partnership . . . . . . . . . . . . . (195,028) ---
Distribution of minority interest . . . . . . . . . . . . . . . 45,557 ---
Purchase of property and equipment . . . . . . . . . . . . . . . (2,476,460) (185,545)
Disposals of property and equipment . . . . . . . . . . . . . . --- 212,248
----------- ------------
Net cash provided by (used in) investing activities . . . . . . 570,588 (1,233,969)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . 88,234 263,003
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . (505,067) ---
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,000,000) ---
----------- ------------
Net cash provided by (used in) financing activities . . . . . . (1,416,833) 263,003
Net increase (decrease) in cash and equivalents . . . . . . . . . . 1,232,667 545,128
Cash and equivalents at beginning of period . . . . . . . . . . . 3,108,741 1,261,596
----------- ------------
Cash and equivalents at end of period . . . . . . . . . . . . . . . $ 4,341,408 $ 1,806,724
=========== ============
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 505,893 $ 1,257,900
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ ---
</TABLE>
See accompanying notes.
6
<PAGE> 7
MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
A. ORGANIZATION AND OPERATIONS OF THE COMPANY
Medstone International, Inc. ("Medstone") was incorporated in Delaware
in October 1984. The Company designs, manufactures and markets the Medstone
STS(TM) Shockwave Therapy System (the "System") for the noninvasive
disintegration of kidney stones in human patients. In addition to sales of the
System, Medstone generates recurring revenue from procedure fees and fee for
service arrangements for use of the System and from repairs and maintenance of
the Systems. The Company, as a manufacturer of capital medical devices, has
been vertically integrating by offering its medical devices directly to
providers on a fee-per-procedure basis. Medstone currently offers mobile
lithotripsy services using eleven mobile systems in the United States on a
fee-per-procedure basis. Medstone intends to expand efforts to grow this
medical service side of its business.
On June 17, 1996, the Company completed the acquisition of 60% in a
joint venture, Northern Nevada Lithotripsy Associates, LLC, for $1.35 million
in cash. The acquisition is effective as of April 1, 1996, and the Company's
consolidated financials reflect the activity from that date forward.
B. BASIS OF PRESENTATION
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at June 30, 1996 and consolidated
results of operations and cash flows for the periods presented. Certain prior
period balances have been reclassified to conform with current period
presentation. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted and should be read in conjunction with the
Company's audited financial statements included in the Company's 1995 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
28, 1996. Results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the full year.
C. PER SHARE INFORMATION
Per share information is presented in the accompanying consolidated
statements of operations based upon the weighted average number of common and
common equivalent shares
7
<PAGE> 8
outstanding. Common equivalent shares result from the assumed exercise of
outstanding dilutive securities when applying the treasury stock method. Fully
diluted per share information is not presented for periods in which the effect
is antidilutive.
D. INVENTORIES
At June 30, 1996 and December 31, 1995, inventories consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- ------------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . $ 939,579 $1,235,161
Work in process . . . . . . . . . . . 212,593 190,002
Finished goods . . . . . . . . . . . 314,995 339,473
---------- ----------
$1,467,167 $1,764,636
========== ==========
</TABLE>
E. SHORT-TERM INVESTMENTS
The Company adopted Financial Accounting Standards Board Statement No.
115 as of January 1, 1994. The effect of the adoption is that the Company
classifies its entire investment portfolio as available-for-sale. Accordingly,
unrealized holding gains and losses on short-term investments are carried as a
separate component of stockholder's equity.
F. CONTINGENCIES
The Company was a defendant in two related class action lawsuits filed
by two shareholders of the Company alleging that adverse material information
was not disclosed at the time of the initial public offering and in subsequent
periods. On June 20, 1996 the defendants and plaintiffs reached an agreement
whereby a $6 million, non-recapturable settlement fund will be established in
return for dismissal of all claims against the Company, its underwriter and
current and former officers and directors. The Company recorded a one-time,
$5.5 million expense to cover its portion of the settlement fund, with the
first half being paid on July 9, 1996 and the second half due by August 15,
1996. All funds for the settlement will be remitted by the Company, with the
co-defendants paying their portions to the Company.
G. STOCK REPURCHASE PLAN
On March 29, 1996 the Company announced a stock repurchase program of
up to 500,000 shares of its Common Stock. For the quarter ended June 30, 1996,
the Company has repurchased a total of 55,000 shares at a cost of $505,067.
8
<PAGE> 9
H. PROFORMA INFORMATION
The following table presents proforma operating results of the
comparative periods in 1996 and 1995 adjusted for the Endocare and Urogen
subsidiaries spun out by the Company on January 1, 1996.
<TABLE>
<CAPTION>
REPORTED ADJUSTMENTS PROFORMA REPORTED ADJUSTMENTS PROFORMA
3-MONTHS FOR 3-MONTHS 3-MONTHS 6-MONTHS FOR 6-MONTHS 6-MONTHS
ENDED ENDOCARE & ENDED ENDED ENDED ENDOCARE & ENDED ENDED
6/30/95 UROGEN 6/30/95 6/30/96 6/30/95 UROGEN 6/30/95 6/30/96
---------- ----------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . $4,267,643 $ 271,425 $3,996,218 $4,329,528 $9,081,495 $ 587,746 $8,493,749 $ 8,431,862
Cost of sales . . . . . 1,706,140 82,748 1,623,392 1,988,279 3,636,349 186,222 3,450,127 3,821,131
Research & development 273,614 225,140 48,474 127,302 489,528 381,286 108,242 250,165
Selling and marketing . 452,794 79,295 373,499 615,879 969,717 163,930 805,787 1,110,993
General and administrative 425,875 85,800 340,075 362,515 883,008 166,809 716,199 679,551
Settlement costs . . . --- --- 0 5,500,000 --- --- --- 5,500,000
Legal and other expense 12,609 12,609 436,064 13,605 13,605 803,219
---------- ---------- ---------- ----------- ---------- --------- ---------- -----------
Income before taxes . 1,396,611 (201,558) 1,598,169 (4,700,511) 3,089,288 (310,501) 3,399,789 (3,733,197)
Income taxes . . . . . 480,000 (71,000) 551,000 (1,739,000) 1,080,000 (109,000) 1,189,000 (1,389,000)
Minority interest . . . --- --- --- 69,049 --- --- --- 69,049
---------- ---------- ---------- ----------- ---------- --------- ---------- -----------
Net income . . . . . . $ 916,611 $ (130,558) $ 1,047,169 $(3,030,560) $2,009,288 $(201,501) $2,210,789 $(2,413,246)
========== ========== =========== =========== ========== ========= ========== ===========
Earnings per share:
Primary . . . . . . . $ 0.17 $ 0.19 $ (0.55) $ 0.36 $ 0.40 $ (0.44)
========== =========== =========== ========== ========== ===========
Fully diluted . . . . $ 0.17 $ 0.19 $ 0.36 $ 0.40
========== =========== ========== ==========
Number of shares used
in the computation of
income per share:
Primary . . . . . . . 5,502,009 5,502,009 5,531,750 5,516,663 5,502,009 5,532,093
========== =========== =========== ========== ========== ===========
Fully diluted . . . . 5,535,073 5,535,073 5,572,763 5,535,073
========== =========== ========== ==========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
GENERAL
Medstone manufactures, markets and maintains lithotripters, and is expanding
its Fee-for-Service Program to supply lithotripsy equipment to providers on a
per procedure basis. To date, the Company's consolidated revenues have come
primarily from Medstone's lithotripsy business. On February 9, 1996, the
Company distributed two stock dividends of 5,516,528 shares of Endocare, Inc.
and UroGen Corp. to its stockholders of record on December 29, 1995. The two
dividends represent distribution of all the assets and operations of the
Endocare and Urogen divisions of the Company which were transferred to the two
corporations. Effective with the start of business on January 1, 1996 these
two companies are no longer a part of the Medstone International operations,
but are separate, publicly-held companies. Medstone retained only 100,000
shares of each company. On June 17, 1996, the Company completed the
acquisition of 60% in a joint venture, Northern Nevada Lithotripsy Associates,
LLC, for $1.35 million in cash. The acquisition is effective as of April 1,
1996, and the Company's consolidated financials reflect the activity from that
date forward.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
- -----------------------------------------------------------------------------
The Company recognized revenue of $4.33 million in second quarter of
1996 or a 1% increase compared to $4.27 million in the corresponding period of
1995. Equipment revenues decreased by 49% due to the shipment of one system in
the second quarter of 1996, compared to two systems in the second quarter of
1995. The recurring revenue stream from laser catheters decreased by $271,000
as the Company spun off the Endocare, Inc. subsidiary effective January 1, 1996
and no longer records any revenues from the laser catheter business line.
Offsetting these decreases was a 30% increase in the revenues from the
Company's maintenance, procedure and fee-for-service activities as the number
of patients treated on the Company's lithotripters in the United States
increased by 19% in the second quarter of 1996 compared to the comparable
period in 1995.
Interest income decreased by 21% in the second quarter of 1996
compared to the same period in 1995 due to a decrease in market rates and a
lower average invested balance.
Cost of sales on equipment and equipment upgrade sales increased to
53% of sales in the three months ended June 30, 1996, compared to 46% of sales
in the comparable period of the prior year due to product option mix and
average unit selling prices. Recurring revenue costs of sales increased to 47%
in the three months ended June 30, 1996, compared to 41% in
10
<PAGE> 11
the same period in the prior year due to continued expansion of the mobile
lithotripsy services across the United States. Overall cost of sales, as a
percentage of revenue (excluding interest), rose to 48% in the second quarter
of 1996 compared to 42% in the second quarter of 1995.
Research and development costs decreased by 49%, or $123,000 in the
second quarter of 1996 compared to the same quarter of 1995 due to the scaled
down staffing after the spinout of the Endocare subsidiary.
Selling expenses increased by $163,000, or 36% in the second quarter
of 1996 when compared to 1995 as the Company expanded its sales effort for the
mobile lithotripsy services.
General and administrative expenses decreased by 15% in the second
quarter of 1996 compared to the second quarter of 1995 due to lower headcount
after the spinout of the Endocare subsidiary.
A one-time settlement expense of $5.5 million was recorded in the
second quarter of 1996 due to the out-of-court agreement reached in the class
action securities suit against the Company and current and former officers.
(See Part II Item 1. Legal Proceedings)
Legal and other expenses increased in the second quarter of 1996 as
the Company continued its preparation for trial and then its negotiation of a
settlement.
Provision for (benefit from) income taxes for the second quarter of
1996 represents a current benefit against taxes that the Company fully expects
to recognize with profits in the remaining periods of 1996.
Six Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
- ---------------------------------------------------------------------------
The Company recognized revenue of $8.43 million in the six months
ended June 30, 1996 compared to revenue of $9.08 million in the same period of
1995, or a 7% decrease. Equipment revenues decreased by 46% due to the
shipment of three systems in 1996, compared to five systems in 1995, and a
decrease in average unit sales price. Recurring revenue from laser catheters
decreased by $588,000 in the first six months of 1996 due to the spinout of
Endocare subsidiary. This was more than offset by increases in the Company's
maintenance, procedure and fee-for- service revenues of more than $1.1 million
in the first six months of 1996 compared to the first six months of 1995,
resulting in an overall increase of 8% from year to year in this revenue
category. Over 10,500 patients have been treated on the Company's systems in
the first six months of 1996 compared to approximately 9,000 in the comparable
period in the prior year.
Interest income decreased by 12% in the first six months of 1996
compared to the first six months of 1995 due to lower market rates for
investments and a decrease in average invested balances as the Company devotes
more capital to growth of the business.
11
<PAGE> 12
Cost of sales on equipment and equipment upgrade sales increased to
53% of sales in the first six months of 1996, compared to 44% of sales in the
first six months of 1995 due to higher overhead costs incurred to meet the
current delivery schedule, product option mix and average unit selling prices.
Recurring revenue cost of sales increased to 47% in the first six months of
1996, compared to 42% in the same period in 1995 due to the expenses incurred
as the Company expands its mobile lithotripsy services. Overall cost of sales,
as a percentage of operating revenue, rose to 48% in the first six months of
1996 compared to 42% in the same period of the prior year.
Research and development costs decreased by $239,000 or 49% in the
first six months of 1996 compared to the first six months of 1995 due to the
lower expenditures on Endocare new product projects which went with the
Endocare spinout and the Company concentrates its efforts on the new
mini-lithotripter project.
Selling expenses increased in the first six months of 1996 by $141,000
or 15% compared to the same period of 1995 as the Company's mobile lithotripsy
route expansion efforts continue.
General and administrative expenses decreased in the first six months
of 1996 by $203,000, or 23%, compared to the same period of 1995 due to the
reduced staffing levels and legal expenses after the spinout of the Endocare
subsidiary.
Settlement expense of $5.5 million was recorded in the first six
months of 1996 to end the class action securities suit against the Company and
current and former officers. (See Part II Item 1. Legal Proceedings)
Legal and other expense increased by $790,000 in the first six months
of 1996 due to the Company's efforts to negotiate a settlement and concurrent
preparation for trial on the matter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1996, the Company had cash and short-term investments of
approximately $14.2 million. These funds were generated from operating
activities and from the Company's initial public offering in June 1988, in
which 1,150,000 shares of common stock were issued for net proceeds of
approximately $12.9 million. Cash generated from the offering and from
operations financed substantial increases in levels of inventory and capital
assets and was used to retire debt.
The Company has negotiated a settlement of the securities class action
lawsuit which calls for a total of $6 million in payments to be made in the
third quarter of 1996. The first $3 million payment was made on July 9th, and
the second payment is due on August 15th for another $3 million. These
payments close a substantial contingency of the Company, but the Company will
still maintain a cash balance in excess of $8 million.
12
<PAGE> 13
The Company believes that its existing working capital and funds
anticipated to be generated from operations will be sufficient to meet the cash
needs for continuation of its present operations during 1996.
13
<PAGE> 14
MEDSTONE INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On June 20, 1996, the Company and its co-defendants and
plaintiffs in the Kaplan vs. Rose et al case reached an
agreement whereby a $6 million, non-recapturable settlement fund
will be established in return for dismissal of all claims
against the Company, its underwriter and current and former
officers and directors. The Company recorded a one-time, $5.5
million expense to cover its portion of the settlement fund,
with the first half being paid on July 9, 1996 and the second
half due by August 15, 1996. All funds for the settlement will
be remitted by the Company, with the co-defendants paying their
portions to the Company.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herein:
11.1 Statements re: Computation of Per Share Information
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed with the
Commission during the quarter ended June 30, 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDSTONE INTERNATIONAL, INC.
----------------------------
A Delaware corporation
Date: August 13, 1996 /s/ MARK SELAWSKI
----------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
15
<PAGE> 1
EXHIBIT 11.1
MEDSTONE INTERNATIONAL, INC.
COMPUTATION OF PER SHARE INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) . . . . . . . . . . $ (3,030,560) $ 916,611 $ (2,413,246) $ 2,009,288
============ ============ ============ ============
Computation of primary per share
information:
Shares:
Number of shares outstanding(b) . . 5,531,750 5,190,532 5,532,093 5,173,758
Add effect of outstanding
options and warrants (a) . . . . -- 311,477 -- 342,905
------------ ------------ ------------ ------------
Number of shares outstanding, as
adjusted . . . . . . . . . . . . 5,531,750 5,502,009 5,532,093 5,516,663
============ ============ ============ ============
Primary earnings per share:
Net income (loss) . . . . . . . . . $ (.55) $ .17 $ (.44) $ .36
============ ============ =========== ===========
Computation of fully diluted per
share information:
Shares:
Number of shares outstanding
per primary computation . . . . . 5,190,532 5,173,758
Add effect of outstanding options and
warrants (a) . . . . . . . . . . 344,541 399,005
------------ ------------
Number of shares outstanding as
adjusted . . . . . . . . . . . . 5,535,073 5,572,763
============ ============
Fully diluted earnings per share:
Net income . . . . . . . . . . . . $ .17 $ .36
============ ============
</TABLE>
- -------------------
(a) As determined by the application of the treasury stock method.
(b) Weighted average number of shares outstanding.
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,341,408
<SECURITIES> 9,945,533
<RECEIVABLES> 3,281,530
<ALLOWANCES> 160,000
<INVENTORY> 1,467,167
<CURRENT-ASSETS> 21,506,667
<PP&E> 8,355,358
<DEPRECIATION> 3,025,334
<TOTAL-ASSETS> 28,252,431
<CURRENT-LIABILITIES> 8,690,341
<BONDS> 0
0
0
<COMMON> 22,156
<OTHER-SE> 19,302,328
<TOTAL-LIABILITY-AND-EQUITY> 28,252,431
<SALES> 4,135,167
<TOTAL-REVENUES> 4,329,528
<CGS> 1,988,279
<TOTAL-COSTS> 1,105,696
<OTHER-EXPENSES> 436,064
<LOSS-PROVISION> 5,500,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,700,511)
<INCOME-TAX> (1,739,000)
<INCOME-CONTINUING> (3,030,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,030,560)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> 0
</TABLE>
