<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 SEPTEMBER 30, 1997
------------------
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
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 92656-4114
- --------------------------------------------------------------------------------
(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
November 6, 1997 was 5,354,249.
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MEDSTONE INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 1997 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 1997 and 1996 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,250,744 $ 3,906,961
Short-term investments 8,582,006 7,102,170
Accounts receivable, less allowance for doubtful accounts of
$474,918 and $190,000 in 1997 and 1996, respectively 4,126,935 2,686,985
Inventories 2,491,294 2,459,779
Deferred tax assets 691,891 1,061,000
Note receivable 375,000 1,250,000
Prepaid expenses and other current assets 226,485 243,271
----------- -----------
Total current assets 17,744,355 18,710,166
Property and equipment:
Lithotripters 7,766,127 7,289,845
Equipment 968,910 876,809
Furniture and fixtures 1,040,506 1,007,292
Leasehold improvements 101,276 89,764
----------- -----------
9,876,819 9,263,710
Less accumulated depreciation and amortization (4,850,794) (3,740,973)
----------- -----------
Net property and equipment 5,026,025 5,522,737
----------- -----------
Goodwill, net 3,287,179 1,118,583
Other assets, net 140,425 43,805
----------- -----------
$26,197,984 $25,395,291
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 407,448 $ 1,760,922
Accrued expenses 206,968 209,512
Accrued income taxes 352,057 376,172
Accrued payroll expenses 463,508 338,461
Deferred revenue 946,243 1,042,043
----------- -----------
Total current liabilities 2,376,224 3,727,110
Deferred tax liabilities 392,000 392,000
Minority interest 336,987 111,172
Commitments and contingencies (Note G)
Stockholders' equity:
Common stock - $.004 par value, 20,000,000 shares authorized,
5,614,853 and 5,578,403 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 22,458 22,314
Additional paid-in capital 18,836,883 18,715,068
Accumulated earnings 6,505,165 3,471,965
Stock purchase notes receivable (134,800) (134,800)
Unrealized gain (loss) on short-term investments 12 (1,168)
Treasury stock (262,400) shares at cost at September 30, 1997
and 112,800 shares at cost at December 31, 1996) (2,136,945) (908,370)
----------- -----------
Total stockholders' equity 23,092,773 21,165,009
----------- -----------
$26,197,984 $25,395,291
=========== ===========
</TABLE>
See accompanying notes
3
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MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net equipment sales................................. $ 473,550 $ 116,000 $ 2,076,850 $ 1,407,000
Procedures, maintenance fees and fee-for-service.... 5,048,102 4,106,762 13,820,204 10,829,209
Interest income..................................... 133.447 125,988 385,023 544,403
---------- ---------- ----------- -----------
Total revenues...................................... 5,655,099 4,348,750 16,282,077 12,780,612
Costs and expenses:
Cost of equipment sales............................. 328,239 131,718 1,511,810 814,142
Costs of procedures and maintenance fees............ 1,974,357 1,820,863 5,396,725 4,959,570
Research and development............................ 248,410 94,799 653,413 344,964
Selling .......................................... 541,588 472,480 1,787,279 1,583,473
General and administrative.......................... 536,108 471,920 1,726,728 1,151,471
Settlement costs.................................... --- --- --- 5,500,000
Goodwill amortization............................... 22,087 7,125 55,278 14,250
Legal and other expense ............................ --- 7,580 --- 803,674
---------- ---------- ----------- -----------
Total costs and expenses............................ 3,650,789 3,006,485 11,131,233 15,171,544
---------- ---------- ----------- -----------
Income/(loss) before provision for/(benefit from)
income taxes ......................................... 2,004,310 1,342,265 5,150,844 (2,390,932)
Provision for (benefit from) income taxes............... 733,000 504,000 1,782,000 (885,000)
Minority interest....................................... 121,061 25,879 335,644 94,928
---------- ---------- ----------- -----------
Net income (loss)....................................... $1,150,249 $ 812,386 $ 3,033,200 $(1,600,860)
========== ========== =========== ===========
Earnings per share:
Primary .......................................... $ 0.21 $ 0.15 $ 0.55 $ (0.29)
========== ========== =========== ===========
Fully diluted....................................... $ 0.21 $ 0.15 $ 0.54 $ ---
========== ========== =========== ===========
Number of shares used in the computation of
earnings per share:
Primary .......................................... 5,532,980 5,570,771 5,489,753 5,528,594
========== ========== =========== ===========
Fully diluted....................................... 5,532,980 5,570,771 5,566,313 ---
========== ========== =========== ===========
</TABLE>
See accompanying notes.
4
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED STOCK PURCHASE
SHARES AMOUNT CAPITAL EARNINGS NOTE RECEIVABLE
--------- -------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 5,465,603 $ 22,314 $18,715,068 $3,471,965 $ (134,800)
Common stock options exercised 36,450 144 121,815 --- ---
Treasury stock repurchased (149,600) --- --- --- ---
Unrealized loss on short-term
investments --- --- --- --- ---
Net income --- --- --- 3,033,200 ---
--------- -------- ----------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1997 5,352,453 $ 22,458 $18,836,883 $6,505,165 $ (134,800)
========= ======== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED LOSS
ON SHORT-TERM TREASURY
INVESTMENTS STOCK TOTAL
--------------- ----------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ (1,168) $ (908,370) $21,165,009
Common stock options exercised --- --- 121,959
Treasury stock repurchased --- (1,228,575) (1,228,575)
Unrealized loss on short-term
investments 1,180 --- 1,180
Net income --- --- 3,033,200
-------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 $ 12 $(2,136,945) $23,092,773
======== =========== ===========
</TABLE>
5
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MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,033,200 $ (1,600,860)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization................................ 1,186,994 846,346
Minority interest in partnership............................. 335,644 94,928
Provision for doubtful accounts.............................. 191,000 30,000
Changes in assets and liabilities:
Accounts receivable...................................... (1,630,950) (1,052,014)
Inventories.............................................. (31,515) (750,585)
Notes receivable......................................... 875,000 ---
Deferred tax assets...................................... 369,109 (855,000)
Prepaid expenses and other current assets................ 16,786 (822,532)
Accounts payable and accrued expenses.................... (1,085,881) 1,356,936
Accrued income taxes..................................... (169,205) (101,293)
Deferred revenue......................................... (95,800) 233,828
Customer deposits........................................ --- ---
Other, net............................................... (96,620) (195,690)
----------------- -----------------
Net cash provided by (used in) operating activities...... 2,897,762 (2,845,936)
----------------- -----------------
Cash flows from investing activities:
Purchase of marketable securities.................................... (24,704,084) (11,775,967)
Sale of marketable securities........................................ 23,225,428 19,095,310
Purchase of subsidiary............................................... (2,300,000) (1,350,000)
Investment by minority in partnership................................ 201,963 (195,028)
Distribution of minority interest.................................... (234,500) 45,867
Purchase of property and equipment................................... (637,458) (3,267,424)
Disposals of property and equipment 1,288 ---
------------------ -----------------
Net cash provided by (used in) investing activities.................. (4,447,363) 2,552,758
------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock .............................. 121,959 91,234
Purchase of Treasury Stock........................................... (1,228,575) (505,067)
Dividends paid....................................................... --- (1,000,000)
------------------ -----------------
Net cash provided by (used in) financing activities.................. (1,106,616) (1,413,833)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents...................... (2,656,217) (1,707,011)
Cash and cash equivalents at beginning of period.......................... 3,906,961 3,108,741
------------------ -----------------
Cash and cash equivalents at end of period................................ $ 1,250,744 $ 1,401,730
================== =================
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes..................................................... $ 1,437,699 $ 520,540
Interest......................................................... $ 0 $ 0
</TABLE>
See accompanying notes.
6
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MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
A. ORGANIZATION AND OPERATIONS OF THE COMPANY
Medstone International, Inc. ("Medstone" or the "Company") was
incorporated in Delaware in October 1984. The Company designs, manufactures and
markets the Medstone STSTM 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 to customers in the United States on a "wholesale"
fee-per-procedure basis under which consolidated billings are rendered to
providers. Medstone intends to expand efforts to grow this medical service side
of its business.
Northern Nevada Lithotripsy Associates, LLC ("Northern Nevada"), is
owned 60% by Medstone. Medstone acquired its 60% interest for $1.35 million as
of April 1, 1996. The operating results of Northern Nevada are included in the
consolidated financial statements of the Company as of the acquisition date.
United Physicians Resources, Inc. ("UPR") was incorporated in June
1996, to expand the Company's service orientation to the urologist practitioner.
UPR provides billing, practice management, and consulting services as an
additional service line once the initial physician relationship has been
established. UPR purchased the operations of Integrated HealthCare Systems, Inc.
in July 1996 for $30,000. The operating results of UPR are included in the
consolidated financial statements of the Company since its incorporation.
As of March 1, 1997, Medstone acquired a 60% interest in Southern Idaho
Lithotripsy Associates, LLC ("Southern Idaho") for $2.3 million in cash. The
operating results of Southern Idaho are included in the consolidated financial
statements of Medstone as of March 1, 1997.
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 September 30, 1997 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
7
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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 1996 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 1997. Results of operations for the nine months ended
September 30, 1997 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 income based upon the weighted average number of common and common
equivalent shares 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. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made in preparing these financial statements
include the allowance for doubtful accounts.
E. INVENTORIES
At September 30, 1997 and December 31, 1996, inventories consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $1,383,710 $1,353,993
Work in process 301,676 255,776
Finished goods 805,908 850,010
---------- ----------
$2,491,294 $2,459,779
========== ==========
</TABLE>
F. SHORT-TERM INVESTMENTS
Effective January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
The investments
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<PAGE> 9
are adjusted for amortization of premiums and discounts to maturity and such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary are determined based on the
specific identification method and are reported in the consolidated statements
of operations.
G. CONTINGENCIES
From time to time, the Company is subject to legal actions and claims
for personal injuries or property damage related to patients who use its
products. The Company has obtained a liability insurance policy providing
coverage for product liability and other claims. Management does not believe
that the resolution of any current proceedings will have a material financial
impact on the Company or the consolidated financial statements.
H. 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 September 30,
1997, the Company has repurchased 16,000 shares at a cost of $149,221. Since
inception of the repurchase program, the Company has repurchased a total of
262,400 shares at a cost of $2,136,945.
I. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. Under Statement 128, for
the three months ended September 30, 1997 and 1996, there would be no impact on
either primary or fully diluted earnings per share. For the nine months ended
September 30, 1997, primary earnings per share would be $.56 with no impact for
the first nine months ended September 30, 1996. The impact of Statement 128 on
the calculation of fully diluted earnings per share for these nine months ended
September 30, 1997 and 1996 is not expected to be material.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Medstone is a provider of extracorporeal shockwave therapy. Medstone
manufactures, markets and maintains extracorporeal shockwave therapy (ESWT)
devices, and continues to expand its Fee-for-Service Program to supply such
devices to providers on a per procedure basis. To date, the Company's
consolidated revenues have come primarily from Medstone's lithotripsy business.
The Company as a manufacturer of capital medical devices has been
vertically integrating by offering its medical devices directly to providers.
Medstone sells its ESWT devices as well as providing them on fee-for-service
procedure basis. Medstone intends to continue the growth of this manufacturer
direct business.
The Company's extracorporeal shockwave therapy (ESWT) device has
received pre-market approval (PMA) from the U.S. Food and Drug Administration
(FDA) to treat renal stones, as described below, and has filed for approval to
treat gallstones. Medstone also is investigating the use of ESWT in the
treatment of orthopedic and other diseases.
On September 4, 1997, the Company announced that it had submitted to
the FDA an application for a PMA to treat gallstones using the Company's
non-invasive lithotripter in conjunction with Actigall(R), a gallstone
dissolution medication from Novartis Pharmaceuticals Corporation. The submission
was based on an analysis of clinical trials for Actigall monotherapy and
separate clinical trials for combination therapy with a Medstone lithotripter
and Actigall. An analysis of these separate trials indicated that the
combination therapy of the device and drug can speed up clearance of the
gallstones and result in higher success rates when compared to drug therapy
alone.
In 1996, the Company acquired a 60% interest in Northern Nevada, a
lithotripsy partnership which deals directly with patients and insurers, and
also founded UPR as a majority-owned subsidiary of the Company, to expand the
Company's service orientation to the urologist practitioner. In March 1997, the
Company acquired a 60% interest in Southern Idaho Lithotripsy Associates, LLC,
another provider of lithotripsy services.
10
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
The Company recognized revenue of $5.7 million in the third quarter of
1997, or a 30% increase, compared to $4.3 million in the corresponding period of
1996. Equipment revenues increased by 308 % as one equipment unit and one
equipment upgrade package was shipped in the third quarter of 1997 compared to
shipment of no equipment and one upgrade package in the third quarter of 1996.
Also increasing by 23% were 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 15% in the third
quarter of 1997 compared to the same period of 1996.
Interest income increased by 6% in the third quarter of 1997 compared
to the same period in 1996 due to higher overall market rates on a slightly
lower average invested balance.
Cost of sales on equipment and equipment upgrade sales decreased to 69%
of sales in the three months ended September 30, 1997, compared to 113% of sales
in the comparable period of the prior year due to this year's equipment
shipment. Recurring revenue costs of sales decreased to 39% in the three months
ended September 30, 1997, compared to 44% in the same period in the prior year
due to the increasing equipment utilization for the mobile lithotripsy services.
Overall cost of sales, as a percentage of revenue (excluding interest),
decreased to 42% in the third quarter of 1997 compared to 46% in the third
quarter of 1996.
Research and development costs increased by 162%, or $154,000, in the
third quarter of 1997 compared to the same quarter of 1996 due to increased
expenditures in connection with development of new lithotripsy products.
Sales expenses increased by $69,000 or 14% in the third quarter of 1997
when compared to the same period of 1996 due to commission expense on higher
revenues and expenses for increasing bad debt reserves.
General and administrative expenses increased by $64,000, or 14%, in
the third quarter of 1997 when compared to the third quarter of 1996 due to
clinical expenses associated with regulatory projects and higher professional
fees for registration of the 1997 Stock Incentive Plan.
Legal and other expenses increased by $7,000 in the three months ended
September 30, 1997 when compared to the same period of 1996 as legal expenses
are no longer being incurred in connection with the class action securities suit
and goodwill is amortized over its expected life.
11
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Provision for (benefit from) income taxes for the third quarter of 1997
represents an expected statutory rate in the current year, compared to a
reduction of an NOL benefit in the third quarter of 1996.
Minority interest in subsidiaries' income increased to $121,000 in the
third quarter of 1997, compared to $26,000 in the three months ended September
30, 1996, due to the acquisition of 60% of the Southern Idaho operation.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
The Company recognized revenue of $16.3 million in the nine months
ended September 30,1997 compared to revenue of $12.8 million in the
corresponding period of 1996, or a 27% increase. Equipment revenues increased by
48% as five lithotripsy systems have been shipped in 1997 compared to shipment
of three lithotripsy systems in 1996, with only a slight decrease in the average
unit sales price. Also increasing was the Company's maintenance, procedure and
fee-for-service revenues which rose almost $3.0 million in the nine months ended
September 30,1997 compared to the same period of the prior year, or an increase
of 28%. The number of patients treated in the first nine months of 1996
increased by 13%, or more than 2,100 patients, over the same period of 1996.
Interest income decreased by 29% in the first nine months of 1997
compared to the same period in 1996 due to slightly lower market rates for
investments and a decrease in average invested balances as the Company had
settled the class action litigation in 1996.
Cost of sales on equipment and equipment upgrades increased to 73% of
sales in the nine months ended September 30, 1997, compared to 58% of sales in
the comparable period of the prior year due to product option mix and a slightly
lower average unit selling price. Recurring revenue costs of sales decreased to
39% in the first nine months of 1997, compared to 46% in the same period in the
prior year due to the increased utilization of the Company's expanded mobile
lithotripsy fleet. Overall cost of sales, as a percentage of revenue (excluding
interest), decreased to 43% in the first nine months of 1997 compared to 47% in
the same period of the prior year.
Research and development costs increased by $308,000, or 89%, in the
first nine months of 1997 compared to the same period of 1996 due to the payroll
and project expenses as the Company concentrates its efforts on new lithotripsy
products.
Sales expenses increased by $204,000 or 13% in the nine months ended
September 30, 1997 when compared to the same period of 1996 due to commission
expenses for expanded mobile lithotripsy revenue.
General and administrative expenses increased by $575,000, or 50% in
the first nine months of 1997 when compared to the first nine months of 1996 due
to expanded payroll
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expense to support United Physicians Resources and bad debt expense for Northern
Nevada and Southern Idaho.
Settlement expense of $5.5 million was recorded in the first nine
months of 1996 to end the class action securities litigation against the Company
and current and former officers. There was no comparable expense in the current
year.
Legal and other expense decreased by $803,000 in the nine months ended
September 30, 1997 when compared to the same period of 1996 due to the
settlement in the second quarter of 1996 of the class action securities suit.
Minority interest expense increased to $336,000 in the first nine
months of 1997, compared to $95,000 in the first nine months of 1996, due to the
acquisition in April 1996 of Northern Nevada and Southern Idaho in March 1997.
Provision for (benefit from) income taxes went from a benefit from
income taxes of $885,000 in the first nine months of 1996 to a provision for
income taxes of $1,782,000 for the first nine months of 1997, due to the loss
from settlement of the class action securities suit in 1996 and tax consequences
therefrom. .
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and short-term investments
of approximately $9.8 million. These funds were generated from operating
activities and from the Company's initial public offering in June 1988.
Accounts receivable have increased substantially, $1.4 million, due to
the acquisition of Southern Idaho's retail receivables and timing of shipments
near the end of the quarter, along with a shift in customers to more
partnerships, which experience a longer payment pattern.
Accounts payable decreased by $1.4 million as the Company paid costs
incurred in the attempted acquisition of the lithotripsy operations of Coram
Healthcare.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to obtain regulatory approvals, the
resources that the Company devotes to the development of self-funded products,
proprietary manufacturing methods and advanced technologies, the costs of
acquisitions and/or new revenue opportunities, the ability of the Company to
obtain additional licensing arrangements and to manufacture products under those
arrangements, and the demand for its products if and when approved and possible
acquisitions of products, technologies and companies.
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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 1997.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objections, expectations and intentions are subject to change
at any time at the discretion of the Company, (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth; (iii) the Company's businesses are highly competitive and the entrance
of new competitors into or the expansion of the operations by existing
competitors in the Company's markets and other changes could adversely affect
the Company's plans and results of operations; and (iv) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
14
<PAGE> 15
MEDSTONE INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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:
3.3 Amendment of By-laws
11.1 Computation of Per Share Information
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarterly period ended September 30, 1997, the
Company filed the following Current Report on Form 8-K:
1. A report dated September 4, 1997 reporting that the
Company submitted an application for a pre-market
approval (PMA) to the U.S. Food & Drug Administration
(FDA) to treat gallstones using the Company's
non-invasive lithotripter in conjunction with
Actigall(R), a gallstone dissolution medication from
Novartis Pharmaceuticals Corporation.
15
<PAGE> 16
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: November 11, 1997 /s/ MARK SELAWSKI
-------------------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
16
<PAGE> 17
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
3.3 Amendment of By-laws
11.1 Computation of Per Share Information
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.3
AMENDED ARTICLE IX OF THE CORPORATION'S BYLAWS,
IN EFFECT AS OF JULY 16, 1993:
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. PERMISSIBLE INDEMNIFICATION. The Corporation shall, to
the maximum extent permitted by Section 145 (as it shall be amended from time to
time) or any other applicable provisions of the Delaware General Corporation Law
or by Delaware law, have power to indemnify each of its Agents against expenses,
judgments, fines, settlements and other amounts incurred in connection with any
proceeding arising by reason of the fact that any such person is or was an agent
of the Corporation, and shall have power to advance to each such agent expenses
incurred in defending any such proceeding to the maximum extent permitted by
that law. For purposes of this Article, an "Agent" of the Corporation or another
corporation includes any person who is or was a director, officer, employee or
other agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee, member or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, or of any committee or similar body, in his or her capacity as such.
SECTION 9.02. MANDATORY BROADEST LAWFUL INDEMNIFICATION OF DIRECTORS.
The Corporation shall, to the broadest and maximum extent then permitted by
Delaware law, as the same exists from time to time, indemnify each person who
serves as a director of the Corporation on or after June 30, 1987 who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that her or she is or was an Agent of the
Corporation against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually incurred by him or her in connection with
such action, suit or proceeding. In addition, the Corporation shall, to the
broadest and maximum extent permitted by Delaware law, as the same may exist
from time to time, pay to such director any and all expenses (including
attorneys' fees) incurred in defending or settling any such action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director to
repay such amount if it shall ultimately be determined by a final judgment or
other final adjudication that he or she is not entitled to be indemnified by the
Corporation as authorized in this Section 9.02. The first sentence of this
Section 9.02 to the contrary notwithstanding, the Corporation shall not
indemnify any such director with respect to any of the following matters: (i)
remuneration paid to such person if it shall be determined by a final judgment
or other final adjudication that such remuneration was in violation of law; or
(ii) any accounting of profits made from the purchase or sale by such person of
the Corporation's securities in violation of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law; or (iii) actions brought about or
contributed to by the dishonesty of such person, if a final judgment or other
final
1
<PAGE> 2
adjudication adverse to such person establishes that acts of active and
deliberate dishonesty were committed or attempted by such person with actual
dishonest purpose and intent and were material to the adjudication; or (iv)
actions based on or attributable to such person having gained any personal
profit or advantage to which he or she was not entitled, in the event that a
final judgment or other final adjudication adverse to such person establishes
that such person in fact gained such personal profit or other advantage to which
he or she was not entitled; or (v) any matter in respect of which a final
decision by a court with competent jurisdiction shall determine that
indemnification is unlawful. The Corporation shall perform its obligations under
the second sentence of this Section 9.02 on behalf of such director until such
time as it shall be ultimately determined by a final judgment or other final
adjudication that he or she is not entitled to be indemnified by the Corporation
as authorized by the first sentence of this Section 9.02 by virtue of any of the
preceding clauses (i), (ii), (iii), (iv) or (v) or otherwise.
SECTION 9.03. OTHER RIGHTS AND REMEDIES. The indemnification and
advancement of expenses provided by or granted pursuant to this Article IX shall
not be deemed exclusive and is declared expressly to be nonexclusive of any
other rights to which any person seeking indemnification may be entitled under
any Bylaw, agreement, vote of stockholders, or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
SECTION 9.04. CONSTITUENT CORPORATIONS. For the purpose of this Article
IX, reference to "the Corporation" includes, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger involving the Corporation
which, if its separate existence had continued, would have had power and
authority to indemnify Agents, so that any person who is or was an Agent of such
constituent corporation shall stand in the same position under the provisions of
this Article IX with respect to the resulting or surviving corporation as he or
she would have with respect to such constituent corporation if its separate
existence had continued.
SECTION 9.05. SEVERABILITY. If any part of this Article IX shall be
found, in any action, suit or proceeding or appeal therefrom or in any other
circumstances or as to any particular officer, director, employee, or agent, to
be unenforceable, ineffective or invalid for any reason, the enforceability,
effect and validity of the remaining parts or of such parts in other
circumstances shall not be affected, except as otherwise required by applicable
law.
SECTION 9.06. AMENDMENTS. The foregoing provisions of this Article IX
shall be deemed to constitute an agreement between the Corporation and each
director entitled to indemnification hereunder, for as long as such provisions
remain in effect. Any amendment to the foregoing provisions of this Article IX
which limits or otherwise adversely affects the scope of indemnification or
rights of any such directors hereunder shall, as to such a director, apply only
to claims arising, or causes of action based on actions or events occurring,
after such amendment and delivery of notice of such amendment to the director so
affected. Until notice of such amendment is given to the director whose rights
hereunder are adversely affected, such
2
<PAGE> 3
amendment shall have no effect on such rights of the director hereunder. Any
director entitled to indemnification under the foregoing provisions of this
Article IX, as to any act or omission occurring prior to the date of receipt of
such notice, shall be entitled to indemnification to the same extent as if such
provision had continued as Bylaws of the Corporation without such amendment.
SECTION 9.07. FORMER DIRECTORS AND SUCCESSORS. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article IX
shall continue as to a person who has ceased to be a director, and shall inure
to the benefit of the heirs, executors and administrators of such a person.
SECTION 9.08. SELECTION OF COUNSEL. In the event the Corporation shall
become obligated under this Article IX, or under California Labor Code Section
2802, California Corporations Code Sections 317 and 2115, Delaware General
Corporation Law Section 145 or other statutory provisions or common law rules,
to defend a current or former Agent ("Indemnitee") or advance or pay costs or
expenses of defending Indemnitee (together, "Indemnity Obligations" in any
action, suit or proceeding (a "Proceeding"), Indemnity shall given prompt notice
thereof to the Corporation and the Corporation shall be entitled to assume such
defense, with qualified counsel reasonably selected by the Corporation. Such
defense may be conducted jointly with the defense of the Corporation and other
indemnitees of the Corporation involved in the Proceeding. In any such
Proceeding, Indemnitee shall have the right to employ his or her own separate
counsel , but such counsel's fees and expenses shall be at Indemnitee's expense
and the Corporation will not be liable to Indemnitee under this Article IX or
Indemnity Obligations for any such fees or expenses, except as provided below.
If (a) such employment of separate counsel by Indemnitee at the Corporation's
expense is specifically authorized by the Corporation in writing, or (b) there
is a material conflict of interest between the Corporation and Indemnitee in the
conduct of such defense, or (c) such counsel retained by the Corporation shall
not assume and continue such defense of Indemnitee, then the reasonable fees and
expenses of separate counsel to defend Indemnitee in such Proceeding, who is
approved by the Corporation (which approval shall not be unreasonably withheld),
shall be paid by the Corporation.
SECTION 9.09. MANDATORY ARBITRATION. Any controversy, dispute or claim
of whatever nature arising of, in connection with, or in relation to the
interpretation, performance or breach of this Article IX, including any claim
based on contract, tort or statute, shall be settled, at the request of the
Corporation or an Agent involved in such controversy, dispute or claim, by final
and binding arbitration conducted at a location determined by the arbitrator in
Orange County California administered by and according with the then existing
Rules of Practice and Procedure of Judicial Arbitration and Mediation Services,
Inc. (JAMS), except that, unless otherwise agreed by the parties in writing, (a)
each party shall pay its pro rata share of the arbitrators fees and expenses, in
addition to the other expenses of the arbitration approved by the arbitrator,
(b) each party shall pay its own attorney's fees, witness fees and other
expenses incurred for its own benefit, unless otherwise provided by statute, and
(c) Delaware law shall be
3
<PAGE> 4
applied to interpret and determine the effect of this Article IX. Judgment upon
any award rendered by the arbitrator may be entered by any state or federal
court having jurisdiction thereof.
SECTION 9.10. NO DUPLICATION OF PAYMENTS. The Corporation shall not be
liable under this Article IX to make any payment to or for the benefit of
Indemnitee relating to any Proceeding with respect to which payment is actually
made to or for the benefit of Indemnitee under a valid and collectible insurance
policy, or with respect to which indemnity is indemnified by the Company or a
third party otherwise than pursuant to this Agreement, except for payment of any
excess beyond the amount of such payment under such insurance policy or
indemnification. In the event of any payment by the Company to Indemnitee under
this Agreement, the Company shall be subrogated to the extent of such payment to
all of Indemnitee's rights of recovery with respect to the same Proceeding under
any insurance policy or third party indemnification obligation. Indemnity shall
execute all papers required and shall do everything that may be necessary or
appropriate to enable the Corporation effectively to enforce such rights.
4
<PAGE> 1
EXHIBIT 11.1
MEDSTONE INTERNATIONAL, INC.
COMPUTATION OF PER SHARE INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Earnings:
Net income .................................. $1,150,249 $ 812,386 $3,033,200 $(1,600,860)
========== =========== ========== ===========
Computation of primary per share information:
Shares:
Number of shares outstanding(b)........... 5,352,862 5,521,593 5,398,348 5,528,594
Add effect of outstanding
options and warrants(a),............... 180,118 49,178 91,405 ---
----------- ----------- --------- -----------
Number of shares outstanding,
as adjusted............................ 5,532,980 5,570,771 5,489,753 5,528,594
=========== =========== ========= ===========
Primary earnings per share:
Net income ............................... $ .21 $ .15 $ .55 $ (.29)
=========== =========== ========= ===========
Computation of fully diluted per share information:
Shares:
Number of shares outstanding
per primary computation................ 5,352,862 5,521,593 5,398,348
Add effect of outstanding options and
warrants(a)............................ 180,118 49,178 167,965
----------- ----------- ----------
Number of shares outstanding as
adjusted............................... 5,532,980 5,570,771 5,566,313
=========== =========== ==========
Fully diluted earnings per share:
Net income ............................... $ .21 $ .15 $ .54
=========== =========== ==========
</TABLE>
- -----------
(a) As determined by the application of the treasury stock method.
(b) Weighted average number of shares outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,250,744
<SECURITIES> 8,582,006
<RECEIVABLES> 4,126,935
<ALLOWANCES> 475,000
<INVENTORY> 2,491,294
<CURRENT-ASSETS> 17,744,355
<PP&E> 9,876,819
<DEPRECIATION> 4,850,794
<TOTAL-ASSETS> 26,197,984
<CURRENT-LIABILITIES> 2,376,224
<BONDS> 0
22,458
0
<COMMON> 0
<OTHER-SE> 23,070,315
<TOTAL-LIABILITY-AND-EQUITY> 26,197,984
<SALES> 5,521,652
<TOTAL-REVENUES> 5,655,099
<CGS> 2,302,596
<TOTAL-COSTS> 1,326,106
<OTHER-EXPENSES> 22,087
<LOSS-PROVISION> 115,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,883,249
<INCOME-TAX> 733,000
<INCOME-CONTINUING> 1,150,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,150,249
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
