<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, 1998
------------------
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 92718
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 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 7, 1998 was 5,154,150.
<PAGE> 2
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 June 30, 1998
(Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1998 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months ended June 30, 1998 and 1997 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 15
Item 2. Changes in Securities 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 16
Signatures 17
</TABLE>
2
<PAGE> 3
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,101,715 $ 1,125,009
Short-term investments 8,396,216 9,900,909
Accounts receivable, less allowance for
doubtful accounts of $559,000 and
$535,000 in 1998 and 1997, respectively 4,517,585 3,120,787
Inventories 3,081,904 2,680,220
Deferred tax assets 891,507 891,507
Income taxes receivable 64,112 632,851
Prepaid expenses and other current assets 441,893 455,974
------------ ------------
Total current assets 18,494,932 18,807,257
Property and equipment:
Lithotripters 9,403,928 8,524,314
Equipment 961,667 815,585
Furniture and fixtures 851,242 821,565
Leasehold improvements 144,029 138,698
11,360,866 10,300,162
Less accumulated depreciation and amortization (5,567,802) (4,721,618)
------------ ------------
Net property and equipment 5,793,064 5,578,544
------------ ------------
Goodwill, net 3,224,129 3,266,162
Other assets, net 428,794 36,425
------------ ------------
$ 27,940,919 $ 27,688,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 458,281 $ 887,740
Accrued expenses 316,202 210,421
Accrued income taxes 183,544 --
Accrued payroll expenses 367,942 239,504
Customer deposits 139,750 132,699
Deferred revenue 1,153,765 1,080,899
------------ ------------
Total current liabilities 2,619,484 2,551,263
Deferred tax liabilities 649,524 649,524
Minority interest 339,334 366,654
Stockholders' equity:
Common stock - $.004 par value,
20,000,000 shares authorized, 5,641,250
and 5,634,788 shares issued and outstanding
at June 30, 1998 and December 31, 1997,
respectively 22,565 22,539
Additional paid-in capital 19,025,107 18,998,260
Accumulated earnings 9,587,653 7,436,263
Stock purchase note receivable -- (134,800)
Accumulated other comprehensive loss (1,493) (579)
Treasury stock (487,100 shares at cost at June 30,
1998 and 268,800 shares at December 31, 1997) (4,301,255) (2,200,736)
------------ ------------
Total stockholders' equity 24,332,577 24,120,947
------------ ------------
$ 27,940,919 $ 27,688,388
============ ============
</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,
----------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net equipment sales $ 952,500 $ 826,400 $ 1,649,500 $ 1,603,300
Procedure fees, maintenance
and fee-for-service 5,179,232 4,717,416 10,203,129 8,772,102
Interest 136,219 121,034 267,011 251,576
------------ ------------ ------------ ------------
Total revenues 6,267,951 5,664,850 12,119,640 10,626,978
Costs and expenses:
Cost of equipment sales 652,573 619,416 1,279,116 1,183,571
Costs of procedures and
maintenance fees 2,174,092 1,716,044 4,435,271 3,422,368
Research and development 212,395 210,838 487,834 405,003
Selling and marketing 630,108 687,421 1,151,398 1,245,692
General and administrative 464,596 642,858 1,017,356 1,190,620
Legal and other (income) expense 10,736 21,117 (78,031) 33,191
------------ ------------ ------------ ------------
Total costs and expenses 4,144,500 3,897,694 8,292,944 7,480,445
------------ ------------ ------------ ------------
Income before provision for income taxes
and minority interest 2,123,451 1,767,156 3,826,696 3,146,533
Provision for income taxes 749,000 609,000 1,347,000 1,049,000
Minority interest 179,177 135,659 328,306 214,583
------------ ------------ ------------ ------------
Net income $ 1,195,274 $ 1,022,497 $ 2,151,390 $ 1,882,950
============ ============ ============ ============
Earnings per share:
Basic $ .23 $ .19 $ .41 $ .35
============ ============ ============ ============
Diluted $ .23 $ .19 $ .40 $ .34
============ ============ ============ ============
Number of shares used in the computation
of earnings per share:
Basic 5,179,950 5,401,880 5,229,694 5,421,092
============ ============ ============ ============
Diluted 5,310,488 5,448,683 5,341,820 5,479,032
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
-------------------- Additional Other
Number of Paid-in Accumulated Stock Purchase Comprehensive Treasury
shares Amount Capital Earnings Note Receivable Loss Stock Total
------------ ------- ----------- ----------- --------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 5,365,988 $22,539 $18,998,260 $7,436,263 $(134,800) $ (579) $(2,200,736) $ 24,120,947
Common stock options
exercised 6,462 26 26,847 -- -- -- -- 26,873
Treasury stock
repurchased (218,300) -- -- -- -- -- (2,100,519) (2,100,519)
Repayment of stock
purchase note
receivable -- -- -- -- 134,800 -- -- 134,800
Unrealized (loss)
on short-term
investments -- -- -- -- -- (914) -- (914)
Net income -- -- -- 2,151,390 -- -- -- 2,151,390
--------- ------- ----------- ---------- --------- ------- ------------ ------------
BALANCE AT
JUNE 30, 1998
(UNAUDITED) 5,154,150 $22,565 $19,025,107 $9,587,653 $ 0 $(1,493) $(4,301,255) $24,332,577
========= ======= =========== ========== ========= ======= =========== ===========
</TABLE>
See accompanying notes
5
<PAGE> 6
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,151,390 $ 1,882,950
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 929,917 770,190
Minority interest in partnership 328,307 100,035
Provision for doubtful accounts 60,000 76,000
Changes in assets and liabilities:
Accounts receivable (1,456,798) (1,166,773)
Inventories (401,684) (98,883)
Notes receivable -- 500,000
Deferred taxes -- 369,109
Prepaid expenses and other current assets 14,081 59,127
Accounts payable and accrued expenses (188,189) (989,951)
Accrued income taxes 752,283 324,018
Deferred revenue 72,866 50,683
Other, net 2,373 7,700
------------ ------------
Net cash provided by operating activities 2,264,546 1,884,205
------------ ------------
Cash flows from investing activities:
Purchase of marketable securities (10,776,179) (16,123,348)
Sale of marketable securities 12,279,958 16,311,390
Purchase of subsidiary -- (2,300,000)
Investment by minority in partnership -- 226,009
Investments in other entities (392,369) --
Distribution of minority interest (358,000) --
Purchase of property and equipment (1,148,820) (345,619)
Disposals of property and equipment 46,416 --
------------ ------------
Net cash (used in) investing activities (348,994) (2,231,568)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 26,873 112,361
Purchase of treasury stock (2,100,519) (1,079,353)
Stock purchase note payment 134,800 --
------------ ------------
Net cash (used in) financing activities (1,938,846) (966,992)
------------ ------------
Net (decrease) in cash and equivalents (23,294) (1,314,355)
Cash and equivalents at beginning of period 1,125,009 3,906,961
------------ ------------
Cash and equivalents at end of period $ 1,101,715 $ 2,592,606
============ ============
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes $ 752,883 $ 359,504
Interest $ -- --
</TABLE>
See accompanying notes.
6
<PAGE> 7
MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Medstone International, Inc. (the Company) and its subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
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, 1998 and
consolidated results of operations and cash flows for the periods presented.
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 1997 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 30, 1998. Results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of results to be expected for the full year.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make assumption that
affect the amounts reported in the financial statements and accompanying note.
Actual results could differ from these estimates.
B. RECENT ACCOUNTING PRONOUNCEMENTS
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 130
As of January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Company's net income or stockholders' equity. SFAS No. 130 requires
unrealized gains or losses on available-for-sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
For the three months ended June 30, 1998 and 1997, total
comprehensive income was $1,193,736 and $1,022,613, respectively. For the six
months ended June 30, 1998 and 1997, total comprehensive income was $2,150,476
and $1,882,880, respectively.
7
<PAGE> 8
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $1,195,274 $1,022,497 $2,151,390 $1,882,950
Unrealized gain (loss) on
short-term investments (1,538) 116 (914) (70)
---------- ---------- ---------- ----------
Comprehensive income $1,193,736 $1,022,613 $2,150,476 $1,882,880
========== ========== ========== ==========
</TABLE>
The components of accumulated other comprehensive income (loss), net
of related tax, are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -----------
<S> <C> <C>
Unrealized (loss) on
short-term investments $(1,493) $(579)
------- -----
Accumulated other comprehensive (loss) $(1,493) $(579)
======= =====
</TABLE>
PENDING ADOPTION OF FINANCIAL STANDARDS NO. 131
In June, 1998, the Financial Accounting Standards Board issues Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
segments in interim financial reports. SFAS No.131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt the new
requirements effective with the filing of the Annual Report on Form 10-K for the
year ended December 31, 1998. Management has not completed its review of SFAS
No. 131, while adoption of SFAS No. 131 may result in more reported segments
than are currently reported, the Company does not expect that it will have an
impact on the Company's results of operations, financial position or cash flows.
C. PER SHARE INFORMATION
The Company has adopted SFAS No. 128 "Earnings Per Share," and
applied this pronouncement to all periods presented. This statement requires the
presentation of both basic and diluted net income per share for financial
statement purposes. Basic net income per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share includes the effect of the potential
shares outstanding, including dilutive stock options and warrants using the
treasury stock method. All earnings per share amounts for all periods have been
restated to conform with the SFAS No. 128 requirements and the accounting rules
set forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998.
8
<PAGE> 9
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator: Net income $1,195,274 $1,022,497 $2,151,390 $1,882,950
========== ========== ========== ==========
Denominator for weighted average
shares outstanding 5,179,950 5,401,880 5,229,694 5,421,092
========== ========== ========== ==========
Basic earnings per share $ .23 $ .16 $ .41 $ .35
========== ========== ========== ==========
Effect of dilutive securities:
Weighted average shares
outstanding 5,179,950 5,401,880 5,229,694 5,421,092
Stock options 130,538 46,803 112,126 57,940
Denominator for diluted earnings
per share 5,310,488 5,448,683 5,341,820 5,479,032
========== ========== ========== ==========
Diluted earnings per share $ .23 $ .16 $ .40 $ .34
========== ========== ========== ==========
</TABLE>
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, 1998 and December 31, 1997, inventories consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 1,880,178 $ 1,645,902
Work in process 259,839 260,773
Finished goods 941,887 773,545
----------- -----------
$ 3,081,904 $ 2,680,220
=========== ===========
</TABLE>
E. 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.
9
<PAGE> 10
F. 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, 1998,
the Company has repurchased 107,900 shares at a cost of $1,047,694. Since
inception of the repurchase program, the Company has repurchased a total of
487,100 shares at a cost of $4,301,255. At the meeting of the Board of Directors
on June 10, 1998, the stock repurchase program was determined to be complete,
and as of June 26, 1998, is no longer active.
G. SUBSEQUENT EVENTS
On July 31, 1998, the Company received notification from the U.S.
Food and Drug Administration that the Company's submission to treat gallstones,
using the Company's lithotripter, in combination with Actigall, is
non-approvable. The Company plans an appeal of this decision.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED 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.
In 1996, the Company acquired a 60% interest in Northern Nevada, a
lithotripsy partnership which deals directly with patient 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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company recognized revenue of $6.3 million in second quarter of 1998
or an 11% increase compared to $5.7 million in the corresponding period of 1997.
Equipment and equipment upgrade revenues increased by 15% due to the shipment of
two systems and one equipment upgrade in the second quarter of 1998, compared to
two systems in the second quarter of 1997. Also increasing by 10% 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 reached a record level in the second quarter of 1998 compared
to the comparable period in 1997.
Interest income increased by 12% in the second quarter of 1998 compared
to the same period in 1997 due to a higher average invested balance.
Cost of sales on equipment and equipment upgrade sales decreased to 69%
of sales in the three months ended June 30, 1998, compared to 75% of sales in
the comparable period of the prior year due slightly higher average unit selling
prices and favorable product option mix. Recurring
11
<PAGE> 12
revenue costs of sales increased to 42% in the three months ended June 30, 1998,
compared to 36% in the same period in the prior year due to higher operating
costs of the mobile van service units and higher moving expenses as routes
continue to expand geographically. Overall cost of sales, as a percentage of
revenue (excluding interest), increased to 46% in the second quarter of 1998
compared to 42% in the second quarter of 1997.
Research and development costs remained level in the second quarter of
1998 compared to the same quarter to 1997 due to a stabilization of material
expenditures in development of new lithotripsy products under development by the
Company.
Selling and marketing expenses decreased by $57,000, or 8% in the second
quarter of 1998 when compared to 1997 due to lower commission expense and lower
travel expenses as the Company's international sales effort is refined.
General and administrative expenses decreased by $178,000, or 28% in the
second quarter of 1998 when compared to the second quarter of 1997 due to
reductions in payroll expenses for the United Physicians Resources subsidiary in
1998 and additional receivable reserves recorded in 1997 in connection with the
UPR acquisition.
Legal and other (income) expenses decreased by $10,000 in the second
quarter of 1998 compared to the same period of 1997 due to a gain from disposal
of an asset as a partial offset to the goodwill amortization expense.
Provision for income taxes for the second quarter of 1998 increased by
$140,000, or 23% representing a higher taxable income when compared to the same
period in the prior year.
Minority interest in subsidiaries' income increased to $179,000 in the
second quarter of 1998, compared to $136,000 in the three months ended June 30,
1997, due to higher activity in the Northern Nevada and Southern Idaho
operations.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The Company recognized revenue of $12.1 million in the six months ended
June 30, 1998, or a 14% increase compared to $10.6 million in the corresponding
period of 1997. Equipment and equipment upgrade revenues increased by 3% as four
units were shipped in both the current year and the prior year and one equipment
upgrade package was shipped in the first six months of 1998. Average unit sales
prices dipped slightly in the current year when compared to the same period of
the prior year due to continued market pressures. Recurring revenue from
maintenance, procedure and fee-for-service activities increased by 16% in the
first six months of 1998 when compared to the same period of the prior year due
primarily from the 24% increase in the number of patients treated on Company
owned lithotripters in the United States.
12
<PAGE> 13
Interest income increased by 6% in the six months ended June 30, 1998
compared to the same period in 1997 due to slightly higher market rates and a
slightly higher average invested balances.
Cost of sales on equipment and equipment upgrade sales increased to 78%
of sales in the six months ended June 30, 1998, compared to 74% of sales in the
comparable period of the prior year due to product option mix on certain unit
shipments. Recurring revenue costs of sales increased to 43% in the six months
ended June 30, 1998, compared to 39% in the same period in the prior year due to
the added capacity for mobile lithotripsy services and the Company's new trans
urethral microwave therapy device. Overall cost of sales, as a percentage of
revenue (excluding interest), rose to 48% in the first six months of 1998
compared to 44% in the first six months of 1997.
Research and development costs increased by 20%, or $83,000 in the first
six months of 1998 compared to the same period of 1997 due to higher payroll
expenses from expanded headcount used to further the Company's efforts on new
lithotripsy products.
Sales and marketing expenses decreased by $94,000 or 8% in the six
months ended June 30, 1998 compared to the same period of 1997 due to lower
commission expenses and lower travel expenses as the Company refines its
approach to international sales opportunities.
General and administrative expenses decreased by $173,000, or 15% in the
first six months of 1998 when compared to the first six months of 1997 due to
lower payroll and staffing levels for the United Physicians Resources subsidiary
and the corresponding reduced travel expenses.
Legal and other (income) expenses decreased by $111,000 in the six
months ended June 30, 1998 when compared to the same period of 1997 as the
Company recognized a one-time gain from the transaction with joint venture
partners placing a unit on the Asian continent.
Provision for income taxes for the first six months of 1998 represents a
19% increase in taxable income when compared to the first six months of 1997
along with a slightly higher effective tax rate.
Minority interest in subsidiaries' income increased to $328,000 in the
six months ended June 30, 1998, compared to $215,000 in the six months ended
June 30, 1997 due to the continued expansion of the activities in the Northern
Nevada and Southern Idaho operations.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and short-term investments of
approximately $9.5 million. These funds were generated from continuing operating
activities and from the Company's initial public offering in June 1988.
13
<PAGE> 14
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.
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 1998.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millenium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
This issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or could fail.
During 1998, the Company has conducted a comprehensive review of its
computer systems and lithotripsy equipment and identified the lithotripsy
products as Year 2000 compliant using the newest computer system release. The
Company presently believes that, with conversion to a newer version of operating
software developed in 1996, the year 2000 problem will not materially affect the
Company's operations, financial position or cash flows.
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
Previously reported.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on June
1, 1998.
(b) The election of four board of directors of the Company was held. The
number of shares cast for each of the individuals listed below to serve until
the next Annual Meeting of stockholders and until their successors are elected
and have qualified was as follows:
NAME FOR WITHHELD
---- --- --------
David V. Radlinski 5,108,140 10,810
Frank R. Pope 5,103,140 15,810
Donald John Regan 5,102,506 16,444
Michael C.Tibbitts 5,102,606 16,344
The ratification of the appointment of Ernst & Young, LLP as
independent accountants of the Company for the year ending December
31, 1998.
For 5,105,265
Against 4,300
Abstain 9,385
Item 5. Other Information
None
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarterly period ended June 30, 1998, the
Company filed the following Current Report on Form 8-K:
1. A report dated April 30, 1998 reporting that FDA's
Gastroenterology and Urology Device Advisory Panel has
recommended conditional approval of the Medstone's submission
to treat gallstones, using the Company's lithotripter, in
combination with Actigall, a drug used to dissolve
gallstones. The condition to approval is that Medstone
performs a post-approval study of the outcome and quality of
life improvements for five years after treatment for a
limited quantity of patients.
16
<PAGE> 17
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 12, 1998 /s/ Mark Selawski
------------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,101,715
<SECURITIES> 8,396,216
<RECEIVABLES> 4,517,585
<ALLOWANCES> 559,000
<INVENTORY> 3,081,904
<CURRENT-ASSETS> 18,494,932
<PP&E> 11,360,866
<DEPRECIATION> 5,567,802
<TOTAL-ASSETS> 27,940,919
<CURRENT-LIABILITIES> 2,619,484
<BONDS> 0
0
0
<COMMON> 22,565
<OTHER-SE> 24,310,012
<TOTAL-LIABILITY-AND-EQUITY> 27,940,919
<SALES> 6,131,732
<TOTAL-REVENUES> 6,267,951
<CGS> 2,826,665
<TOTAL-COSTS> 1,317,835
<OTHER-EXPENSES> 179,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,944,274
<INCOME-TAX> 749,000
<INCOME-CONTINUING> 1,195,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,195,274
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
