<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, 1999
-------------
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: (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 9, 1999 was 5,079,365.
<PAGE> 2
MEDSTONE INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1999 (Unaudited)
and December 31, 1998 3
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1999 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months ended June 30, 1999 and 1998 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 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,869,721 $ 1,128,463
Short-term investments 9,754,536 10,494,075
Accounts receivable, less allowance for doubtful accounts of
$576,000 and $603,000 in 1999 and 1998, respectively 3,886,278 3,535,581
Inventories 4,640,043 3,595,906
Deferred tax assets 1,139,903 1,139,903
Prepaid expenses and other current assets 551,599 719,598
------------ ------------
Total current assets 22,842,080 20,613,526
Property and equipment:
Lithotripters 9,244,587 9,054,296
Equipment 1,446,585 1,077,352
Furniture and fixtures 826,732 788,457
Leasehold improvements 147,200 145,007
------------ ------------
11,665,104 11,065,112
Less accumulated depreciation and amortization (7,249,998) (6,362,955)
------------ ------------
Net property and equipment 4,415,106 4,702,157
------------ ------------
Goodwill, net 3,140,063 3,182,096
Other assets, net 345,959 651,494
------------ ------------
$ 30,743,208 $ 29,149,273
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 700,139 $ 389,589
Accrued expenses 555,335 485,108
Accrued income taxes 87,355 183,593
Accrued payroll expenses 387,074 303,687
Customer deposits 70,619 86,125
Deferred revenue 802,752 733,889
------------ ------------
Total current liabilities 2,603,274 2,181,991
Deferred tax liabilities 714,737 714,737
Minority interest 266,783 319,868
Stockholders' equity:
Commonstock - $.004 par value, 20,000,000 shares authorized,
5,661,466 and 5,650,505 shares issued and outstanding at
June 30, 1999 and 1998, respectively 22,646 22,602
Additional paid-in capital 19,144,344 19,076,104
Accumulated earnings 12,944,019 11,778,357
Accumulated other comprehensive loss (9,386) (1,177)
Treasury stock 587,100 shares at cost at June 30, 1999
and December 31, 1998, respectively (4,943,209) (4,943,209)
------------ ------------
Total stockholders' equity 27,158,414 25,932,677
------------ ------------
$ 30,743,208 $ 29,149,273
============ ============
</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,
----------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Net equipment sales $1,510,033 $ 952,500 $ 1,600,770 $ 1,649,500
Procedure fees, maintenance
and fee-for-service 4,840,152 5,179,232 9,516,687 10,203,129
Interest 142,466 136,219 279,195 267,011
---------- ---------- ----------- ------------
Total revenues 6,492,651 6,267,951 11,396,652 12,119,640
Costs and expenses:
Cost of equipment sales 792,398 652,573 852,659 1,279,116
Costs of procedures and
maintenance fees 2,265,876 2,174,092 4,672,887 4,435,271
Research and development 377,033 212,395 700,941 487,834
Selling and marketing 698,678 630,108 1,050,292 1,151,398
General and administrative 798,747 464,596 1,532,152 1,017,356
Other (income) expense 320,736 10,736 333,632 (78,031)
---------- ---------- ----------- ------------
Total costs and expenses 5,253,468 4,144,500 9,142,563 8,292,944
---------- ---------- ----------- ------------
Income before provision
for income taxes and minority interest 1,239,183 2,123,451 2,254,089 3,826,696
Provision for income taxes 454,000 749,000 803,400 1,347,000
Minority interest 151,893 179,177 285,027 328,306
---------- ---------- ----------- ------------
Net income $ 633,290 $1,195,274 $ 1,165,662 $ 2,151,390
========== ========== =========== ============
Earnings per share:
Basic $ .12 $ .23 $ .23 $ .41
========== ========== =========== ============
Diluted $ .12 $ .23 $ .22 $ .40
========== ========== =========== ============
Number of shares used in the computation of earnings per share:
Basic 5,070,143 5,179,950 5,067,796 5,229,694
========== ========== =========== ============
Diluted 5,221,813 5,310,488 5,211,477 5,341,820
========== ========== =========== ============
</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 COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) STOCK TOTAL
--------- ------- ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 5,063,405 $22,602 $19,076,104 $11,778,357 $(1,177) $(4,943,209) $ 25,932,677
Common stock options exercised 10,961 44 68,240 -- -- -- 68,284
Unrealized gain on short-term
investments -- -- -- -- 1,177 -- 1,177
Effect of foreign currency
translation loss -- -- -- -- (9,386) -- (9,386)
Net income -- -- -- 1,165,662 -- -- 1,165,662
--------- ------- ----------- ----------- ------- ----------- ------------
BALANCE AT JUNE 30, 1999
(UNAUDITED) 5,074,366 $22,646 $19,144,344 $12,944,019 $(9,386) $(4,943,209) $ 27,158,414
========= ======= =========== =========== ======= =========== ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,165,662 $ 2,151,390
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 970,021 929,917
Minority interest in partnership 285,027 328,307
Provision for doubtful accounts 15,000 60,000
Provision for investment writedown 300,000 --
Changes in assets and liabilities:
Accounts receivable (365,697) (1,456,798)
Inventories (928,210) (401,684)
Prepaid expenses and other current assets 167,999 14,081
Accounts payable and accrued expenses 448,658 (188,189)
Accrued income taxes (96,238) 752,283
Deferred revenue 68,863 72,866
Other, net (3,663) 2,373
----------- ------------
Net cash provided by operating activities 2,027,422 2,264,546
----------- ------------
Cash flows from investing activities:
Purchase of marketable securities (7,769,392) (10,776,179)
Sale of marketable securities 8,510,108 12,279,958
Purchase of subsidiary (165,600) --
Investments in other entities -- (392,369)
Distribution of minority interest (338,300) (358,000)
Purchase of property and equipment (614,969) (1,148,820)
Disposals of property and equipment 23,705 46,416
----------- ------------
Net cash used in investing activities (354,448) (348,994)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 68,284 26,873
Purchase of treasury stock -- (2,100,519)
Stock purchase note payment -- 134,800
----------- ------------
Net cash provided by/(used in) financing activities 68,284 (1,938,846)
----------- ------------
Net increase/(decrease) in cash and equivalents 1,741,258 (23,294)
Cash and equivalents at beginning of period 1,128,463 1,125,009
----------- ------------
Cash and equivalents at end of period $ 2,869,721 $ 1,101,715
=========== ============
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes $ 892,023 $ 752,883
</TABLE>
See accompanying notes.
6
<PAGE> 7
MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
A. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Medstone International, Inc. and its subsidiaries (the Company).
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, 1999 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. These financial
statements should be read in conjunction with the Company's audited financial
statements included in the Company's 1998 Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 26, 1999. Results of operations
for the three and six months ended June 30, 1999 are not necessarily indicative
of results to be expected for the full year.
On April 16, 1999, a wholly-owned subsidiary of the Company, Medstone
International, Ltd., purchased certain assets of Creos Ltd., a former supplier
of the Company, from its liquidator for $165,000 in cash. The Company does not
expect a significant impact on revenue or profits due to these operations.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
B. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENCY GAINS ON
TRANSLATION AVAILABLE-FOR-
ADJUSTMENT SALE SECURITIES TOTAL
----------- --------------- -------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 0 $(1,177) $(1,177)
Currency translation adjustments (9,386) -- (9,386)
Unrealized gains on available-for-
sale securities -- 1,177 1,177
------- ------- -------
Balance at June 30, 1999 $(9,386) $ 0 $(9,386)
======= ======= =======
</TABLE>
7
<PAGE> 8
The functional currency of the investment in foreign subsidiary is
considered to be the United States dollar.
The earnings associated with the Company's investment in its foreign
subsidiary are considered to be permanently invested and no provision for U.S.
federal and state income taxes on those earnings or translation adjustments has
been provided.
C. BUSINESS SEGMENTS
The Company operates in two business segments, equipment sales and fees
for procedures, maintenance and management.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $1,510,033 $ 952,500 $ 1,600,770 $ 1,649,500
Fees for procedures,
maintenance and
management 4,982,618 5,315,451 9,795,882 10,470,140
---------- ----------- ----------- ------------
$6,492,651 $ 6,267,951 $11,396,652 $ 12,119,640
========== =========== =========== ============
Operating income (loss):
Equipment sales $ 226,025 $ 2,942 $ 118,790 $ (232,300)
Fees for procedures,
maintenance and
management 1,013,158 2,120,509 2,135,299 4,058,996
---------- ----------- ----------- ------------
$1,239,183 $ 2,123,451 $ 2,254,089 $ 3,826,696
========== =========== =========== ============
</TABLE>
D. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator: Net income $ 633,290 $1,195,274 $1,165,662 $2,151,390
========== ========== ========== ==========
Denominator for weighted
average shares outstanding 5,070,143 5,179,950 5,067,796 5,229,694
========== ========== ========== ==========
Basic earnings per share $ .12 $ .23 $ .23 $ .41
========== ========== ========== ==========
Effect of dilutive securities:
Weighted average shares
outstanding 5,070,143 5,179,950 5,067,796 5,229,694
Stock options 151,670 130,538 143,681 112,126
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share 5,221,813 5,310,488 5,211,477 5,341,820
========== ========== ========== ==========
Diluted earnings per share $ .12 $ .23 $ .22 $ .40
========== ========== ========== ==========
</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.
E. INVENTORIES
At June 30, 1999 and December 31, 1998, inventories consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
Raw materials $3,191,885 $2,449,877
Work in process 545,174 203,540
Finished goods 902,984 942,489
---------- ----------
$4,640,043 $3,595,906
========== ==========
</TABLE>
F. 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 condensed consolidated financial statements.
9
<PAGE> 10
G. SUBSEQUENT EVENTS
Sale of Cardiac Science Stock
Starting July 14, 1999 over several days the Company sold 55,105 shares
of its holdings of Cardiac Science, Inc., for gross proceeds of approximately
$244,000 in cash. The Company still holds 491,667 shares of Cardiac Science,
Inc. and warrants for another 87,500 shares.
Stock Repurchase Plan
On August 3, 1999 the Company announced a stock repurchase plan of up
to 500,000 shares of its Common Stock. As of August 10, 1999, 5,000 shares have
been repurchased at an aggregate cost of $30,674. Under all of the Company's
stock repurchase programs a total of 592,100 shares have been repurchased at a
total cost of $4,973,883.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's audited financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 26, 1999.
RESULTS OF CONSOLIDATED OPERATIONS
GENERAL
Medstone manufactures, markets and maintains lithotripters including
its flagship Medstone STS and its newly introduced Medstone STS-T, and continues
to expand its Fee-for-service Program to supply lithotripsy equipment to
providers on a per procedure basis. The Company also offers a line of urology
procedure tables and x-ray imaging products as additional product lines. This
allows opportunities for bundling the lithotripsy products and other equipment
to potential customers. To date, the Company's consolidated revenues have come
primarily from Medstone's lithotripsy business.
Medstone currently offers lithotripsy procedures using 15 mobile and 2
transmobile systems along with 2 fixed sites in the United States on a per
procedure basis. With the ability to offer quality equipment at reasonable
prices, Medstone intends to continue the growth of this manufacturer direct
business.
RESULTS OF OPERATIONS
Three months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The Company recognized revenue of $6.5 million in the second quarter of
1999 or a 3.5% increase compared to $6.3 million in the same period of 1998.
Equipment and equipment upgrades increased by 59% due to the shipment of four of
the Company's new STS-T transmobile lithotripsy units and one equipment upgrade
in the second quarter of 1999, compared to two Medstone STS systems and one
upgrade in the comparable quarter of 1998. Offsetting this increase in the
equipment revenue was a decrease in the revenues from the Company's
fee-for-service activities as patient volume on the Company's fee-for-service
units increased by 5% but the average revenue per patient fell by 10%, when
comparing the second quarter of 1999 to the same period of 1998. Price
competition has increased in 1999 due to technology changes of the lithotripsy
service business. Maintenance and procedure fees also declined as the patient
volume of customer owned equipment decreased by 4% in the second quarter of 1999
compared to the second quarter of 1998, and the service revenues decreased due
to lower service contract renewal rates.
11
<PAGE> 12
Interest income increased by 5% in the second quarter of 1999 compared
to the same period of 1998 due to a higher average invested balance partially
offset by a lower yield on current investments.
Cost of sales on equipment and equipment upgrades decreased to 52 % of
sales in the three months ended June 30, 1999, compared to 69% of sales in the
comparable period of the prior year due to the new STS-T lower cost structure
when compared to the STS unit, even though one-time introduction costs were
incurred with the first shipments of the STS-T. Recurring revenue cost of sales
increased to 47% in the three months ended June 30, 1999, compared to 42% in the
comparable period of 1998 due to higher costs of providing new forms of
fee-for-service mobile lithotripsy and the maintenance of additional units
placed in service. Overall cost of sales, as a percentage of revenue (excluding
interest), increased to 48% in the second quarter of 1999 compared to 47% in the
second quarter of 1998.
Research and development costs increased by $165,000 or 78% in the
three months ended June 30, 1999 compared to the same period of 1998 due to
costs associated with certification and compliance testing of the STS-T and the
costs associated with the development of the Company's new transportable urology
table.
Selling and marketing expenses increased by 11%, or $69,000 due to
higher commission expenses on higher equipment revenue and trade show costs for
displaying the STS-T at the annual American Urological Association meeting.
General and administrative expenses increased by $334,000 or 72% in the
second quarter of 1999 when compared to the second quarter of 1998 due to the
costs associated with the Company's strategic planning process, legal fees and
additional costs of the operations of Medstone International, Ltd.
Other (income) expense increased by $310,000 in the second quarter of
1999 compared to the same period in the prior year due to the expense associated
with the writedown of an equity investment in a vendor to the Company.
Provision for income taxes for the second quarter of 1999 decreased by
$295,000 from the same period in the prior year due to a 42% decrease in
operating profit.
Minority interest in subsidiaries' income decreased to $152,000 in the
second quarter of 1999 compared to $179,000 in the three months ended June 30,
1998, due to lower activity in the partnership operations.
Six months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The Company recognized revenue of $11.4 million in the six months ended
June 30, 1999, or a 6% decrease compared to $12.1 million in the corresponding
period of 1998. Equipment and equipment upgrade revenues decreased by 3% due to
a lower average per unit sales price on
12
<PAGE> 13
shipments of four units in both the six months ended June 30, 1999 and June 30,
1998, with STS-T units shipped in 1999 and STS units shipped in 1998. Revenue
from procedures, maintenance and management fees decreased by 7% in the six
months ended June 30, 1999 compared to the same period of the prior year due to
a decrease in the revenue per procedure, even though the number of patients
treated on the Company owned lithotripters increased by 14 % in the current
year. The Company experienced lower maintenance revenue and lower spare part
shipments in the current year when compared to the prior year.
Interest income increased by 5% in the first six months of 1999
compared to the first six months of 1998 due to a higher average invested
balance but a lower yield on current investments.
Cost of sales on equipment and equipment upgrades decreased to 53 % of
sales in the six months ended June 30, 1999, compared to 78% of sales in the
comparable period of the prior year due to the lower cost structure of the STS-T
when compared to the STS unit. Recurring revenue cost of sales increased to 49%
in the six months ended June 30, 1999, compared to 43% in the comparable period
of 1998 due to higher costs for additional fee-for-service equipment and
additional staff to service the mobile routes in service. Overall cost of sales,
as a percentage of revenue (excluding interest), increased to 50% in the first
half of 1999 compared to 48% in the first half of 1998.
Research and development costs increased by 44%, or $213,000, in the
six months ended June 30, 1999 compared to the same period of 1998 due to costs
associated with evolution expenses of the STS-T and the costs associated with
the development of the Company's new transportable urology table.
Selling and marketing expenses decreased by 9%, or $101,000 due to
lower consulting expenses, lower travel expenses and lower overall marketing
expenses.
General and administrative expenses increased by $515,000 or 51% in the
six months ended June 30,1999 when compared to the same period in 1998 due to
the costs associated with the Company's strategic planning process, legal fees
and headcount attributable to the operations of Medstone International, Ltd.
Other (income) expense increased by $412,000 in the first six months of
1999 compared to the same period in the prior year due to the expense associated
with the writedown of an equity investment in a vendor to the Company, and
1998's gain on a joint venture sale.
Provision for income taxes for the six months ended June 30,1999
decreased by $544,000 from the same period in the prior year due to a 41%
decrease in operating profit.
Minority interest in subsidiaries' income decreased to $285,000 in the
first half of 1999 compared to $328,000 in the six months ended June 30, 1998,
due to lower activity in the partnership operations.
13
<PAGE> 14
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and short-term investments of
approximately $12.6 million. These funds were generated from continuing
operating activities and from the Company's initial public offering in June
1988.
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 1999.
YEAR 2000
YEAR 2000 UPDATE
To date, the Company has transitioned its accounting systems to Year
2000 compliant software and continues to transition additional systems related
to manufacturing throughout the second and third quarters of 1999. The Company
plans to have all systems implemented and operational by September 30, 1999.
The Company continues its assessment of customer and vendor compliance
to Year 2000 requirements. Questionnaires were delivered to customers, vendors
and other third parties during the second quarter of 1999 and responses by the
vendors received to date indicate compliance with Year 2000 readiness. No
assurances can be given that unforseen remediation will be completed either on a
timely basis or at all.
All costs of Year 2000 remediation have been immaterial to the
Company's overall financial position but it is possible that future costs of
delays and unforseen compliance issues may be material to the future financial
condition and results of operations of the Company.
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,
14
<PAGE> 15
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.
15
<PAGE> 16
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 24, 1999.
(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:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
David V. Radlinski 4,033,889 619,399
Frank R. Pope 4,033,889 619,399
Donald John Regan 4,033,889 619,399
Michael C.Tibbitts 4,033,889 619,399
</TABLE>
The ratification of the appointment of Ernst & Young, LLP as
independent accountants of the Company for the year ending
December 31, 1999.
For 4,622,669
Against 5,720
Abstain 24,899
Item 5. Other Information
None
16
<PAGE> 17
Itemv 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(3.2) Restated and Amended ByLaws of the Company
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None
17
<PAGE> 18
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, 1999 /s/ Mark Selawski
---------------------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
3.2 Restated and Amended ByLaws of the Company
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.2
RESTATED AND AMENDED BYLAWS
OF
MEDSTONE INTERNATIONAL, INC.
ARTICLE I
NAME AND LOCATION
SECTION 1.1 NAME: The name of this corporation shall be Medstone International,
Inc.
SECTION 1.2 PRINCIPAL OFFICE: Its principal office shall be located in Aliso
Viejo, County of Orange, State of California, or at such other location inside
or outside of the State of Delaware as the Board of Directors shall designate .
SECTION 1.3 OTHER OFFICES: Other offices for the transaction of business, and
the corporation's registered office in Delaware, shall be located at such places
as the Board of Directors may, from time to time, designate.
ARTICLE II
CAPITAL STOCK
SECTION 2.1 ISSUANCE OF CAPITAL STOCK: Subject to any limitations in the
corporation's certificate of incorporation or under applicable laws, the Board
of Directors may, at any time and from time to time, if all of the shares of
capital stock which the corporation is authorized by its certificate of
incorporation to issue have not been issued, subscribed for, or otherwise
committed to be issued, issue or take subscriptions for additional shares of its
capital stock up to the amount authorized in the certificate of incorporation.
The shares of stock so issued may be issued for such consideration, having a
value not less than the par value thereof in the case of shares with par value,
as determined from time to time by the Board of Directors.
SECTION 2.2 CERTIFICATES OF STOCK: Every holder of stock in the corporation
shall be entitled to have a certificate, signed by or in the name of the
corporation by, the chairman or vice-chairman of the Board of Directors, or the
President or a vice-president, and by the Treasurer or an Assistant Treasurer,
or the Secretary of the corporation, certifying the number of shares owned by
him or her in the corporation. Any or all of the signatures on the certificate
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before the
certificate is issued, it may be issued with the same effect as if such person
were such officer, transfer agent, or registrar at the date of issue. If the
corporation shall be authorized to
<PAGE> 2
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class of series of stock, provided
that, except as otherwise provided in Section 202 of the Delaware General
Corporation Law (or any successor provision), in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock a
statement that the corporation will furnish without charge to each shareholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
SECTION 2.3 LOST CERTIFICATES: A new certificate or certificates shall be issued
in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. The corporation may require, as a condition precedent
to the issuance of a new certificate or certificates, the owner of such lost,
stolen, or destroyed certificate or certificates, or his or her legal
representative, to give the corporation a surety bond in such form and amount as
it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed. New certificates of stock may be issued in the place of any
certificate therefor issued by the corporation, alleged to have been lost,
stolen or destroyed, and the directors may, in their discretion, require the
owner of the lost, stolen or destroyed certificate or his legal representatives,
to give the corporation a bond, in such sum as they may direct, not exceeding
double the value of the stock, to indemnify the corporation against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
SECTION 2.4 TRANSFERS OF SHARES: The shares of stock of the corporation shall be
transferable only upon its books by the holders thereof, in person or by their
duly authorized attorneys or legal representatives, and upon such transfer the
old certificates shall be surrendered to the corporation by the delivery thereof
to the person in charge of the stock and transfer books and ledgers, or to such
other persons as the directors may designate, by whom they shall be canceled,
and new certificates shall thereupon be issued. A record shall be made of each
transfer.
ARTICLE III
SHAREHOLDERS MEETINGS
SECTION 3.1 ANNUAL MEETING: An annual meeting of the shareholders shall be held
at such date, time and place, either within or outside of the State of Delaware,
as may be designated from time to time by resolution of the Board of Directors.
At such meeting, the
<PAGE> 3
shareholders shall elect directors to serve until their successors shall be
elected and qualified. At such annual meeting the shareholders may transact any
other proper business which may be brought before the shareholders.
SECTION 3.2. SPECIAL MEETINGS: A special meeting of the shareholders may be
called at any time for any proper purpose or purposes by the Board of Directors
or by the Chief Executive Officer, but not by any other person or persons except
as required by applicable laws.
SECTION 3.3 CONDUCT OF MEETINGS: Unless otherwise determined by the Board of
Directors, a meeting of the shareholders shall be presided over by the Chief
Executive Officer, or in his or her absence by the President, or in his or her
absence by the Chairman of the Board, or in the absence of any of the foregoing
by a chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary of the
corporation, or in his or her absence, an Assistant Secretary, shall act as
secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present, the Chairman of the meeting shall appoint a secretary of
the meeting. The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of shareholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to shareholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of shareholders shall not be required to
be held in accordance with rules of parliamentary procedure.
SECTION 3.4 NOTICE OF MEETINGS: Except as otherwise required by law, written
notice of each annual or special meeting of shareholders shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall state the place,
date and hour of the meeting and, in the case of a special meeting, shall also
state the purpose or purposes for which the meeting is called. If mailed, notice
is given when deposited in the United States mail, postage prepaid, directed to
the shareholder at such shareholder's address as it appears on the records of
the corporation.
SECTION 3.5 RECORD DATES FOR MEETINGS: In order that the corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any
<PAGE> 4
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting. If
no record is fixed by the Board of Directors, the record date for determining
shareholders entitled to notice or to vote at a meeting of shareholders shall be
the close of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
SECTION 3.6 VOTING AND PROXIES: Each shareholder entitled to vote at any meeting
of shareholders shall be entitled to cast one (1) vote for each share of common
stock held in his or her name, which vote may either be cast by such shareholder
in person or by another person or other persons acting for him or her by proxy.
All proxies shall be in writing and shall be filed with the Secretary, who shall
make a record thereof and present such record at the meeting. No proxy shall be
voted or acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. With respect to a
meeting of shareholders, a shareholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the corporation. Directors shall be elected
at all meetings of shareholders for the election of directors by a plurality of
the votes of the shares present in person or represented by proxy and entitled
to vote on the election of directors. All other elections and questions shall,
unless otherwise provided by law, or by the corporation's certificate of
incorporation or these bylaws, be decided by the vote of the holders of a
majority of the outstanding shares of stock entitled to vote thereon present in
person or by proxy at the meeting.
SECTION 3.7 QUORUM AND ADJOURNMENT: Except as otherwise required by applicable
laws, a quorum for the transaction of business at a shareholders meeting shall
consist of a majority of the shares of stock issued and outstanding entitled to
vote at such meeting, present in person or by proxy. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. Any meeting of shareholders may be adjourned either by the
Chairman of the meeting or by the vote of a majority of the shares casting
votes, though less than a quorum. Except as otherwise expressly required by law,
notice of any adjourned meeting of the shareholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At any adjourned meeting at which a quorum shall be present or
represented, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the
<PAGE> 5
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
SECTION 3.8 LIST OF SHAREHOLDERS ENTITLED TO VOTE: The Secretary shall prepare
and make, at least ten (10) days before every meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any shareholder who is present. The stock ledger
shall be the only evidence as to who are the shareholders entitled to examine
the stock ledger, the list of shareholders or the books of the corporation, or
to vote in person or by proxy at any meeting of shareholders.
SECTION 3.9 INSPECTORS OF ELECTIONS AND OPENING AND CLOSING OF POLLS: The Board
of Directors shall, in advance of any meeting of shareholders, appoint one or
more inspectors, which inspector or inspectors may include individuals who serve
the corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of shareholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of the duties of
inspector, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by Section 231 of the
Delaware General Corporation Law (or any successor provision). The date and time
of the opening and the closing of the polls for each matter upon which the
shareholders will vote at a meeting shall be announced at the meeting.
ARTICLE IV
DIRECTORS
SECTION 4.1 NUMBER, TERM AND QUALIFICATIONS: The Board of Directors shall
consist of one or more members, the number thereof to be determined from time to
time by resolution of the Board of Directors. A director need not be a
shareholder, a citizen of the United States or a resident of the State of
Delaware. The directors shall be elected at each annual meeting of the
shareholders and each director shall hold office until his or her successor is
elected and qualified or until such director's earlier death, resignation or
removal.
<PAGE> 6
SECTION 4.2 RESIGNATIONS: Any director may resign as such at any time upon
written notice to the corporation delivered at its principal executive office,
addressed to the corporation or its Chief Executive Officer, President or
Secretary, or otherwise delivered personally to the Chief Executive Officer,
President or Secretary. Such resignation shall be made in writing and shall take
effect at the time specified therein or, if no time is specified, at the time of
its receipt at the corporation's principal executive office or by the Chief
Executive Officer, President or Secretary. The acceptance of a resignation shall
not be necessary to make it effective.
SECTION 4.3 VACANCIES: Any vacancy in the Board of Directors, including a
vacancy resulting from death, resignation, removal, a director's resolution
increasing the number of directors or another cause, may be filled by (a)
approval of the Board of Directors, or (b), if the number of directors then in
office is less than a quorum, by (i) the unanimous written consent of the
directors then in office, (ii) the affirmative vote of a majority of the
directors then in office at a meeting held pursuant to Section 4.5, or (iii) a
sole remaining director, or (c) at a meeting of the shareholders by a plurality
of the votes of the shares present in person or represented by proxy and
entitled to vote on the election of directors. Each director so appointed or
elected shall hold office until the expiration of the term of office of any
director which he or she replaced and until his other successor shall have been
elected and qualified.
SECTION 4.4 REMOVAL: Any director or the entire Board of Directors may be
removed, with or without cause, at any time by the affirmative vote of the
holders of majority of the shares then entitled to vote at an election of
directors. No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
SECTION 4.5 MEETINGS OF DIRECTORS AND NOTICES: The time and place of any regular
meeting of the Board of Directors shall be fixed by resolution of the Board. No
notice shall be required for a regular meeting for which the time and place have
been so fixed. Unless otherwise determined by a resolution of the Board of
Directors, a meeting of the Board of Directors shall be held without further
notice immediately following, and at the same location, as each annual meeting
of shareholders. Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board, the Chief
Executive Officer, the President or by two directors. Each special meeting shall
be held on at least forty-eight (48) hours' notice , specifying the time of the
meeting, delivered personally or by telephone, including a voice messaging
system or other system or technology designed to record and communicate
messages, telegraph, facsimile, electronic mail or other electronic means. Oral
notice given personally or by telephone or other electronic means must be
transmitted directly to the director or to a voice messaging system at the
number most recently specified by the director to the corporation's Chief
Executive Officer, President or Secretary for this purpose. Written notice, if
used, shall be addressed to each director and transmitted or delivered at the
applicable address or number of the director most recently specified by the
director to the corporation's Chief Executive Officer, President or Secretary
for this purpose.
<PAGE> 7
Any such notice shall be deemed to have been given when communicated personally
to the director or when received at his or her designated address or number. The
notice need not specify the purpose of the meeting nor the business to be
transacted, nor need it specify the place unless the meeting is to be held other
than at the principal executive office of the corporation. Notice of a meeting,
although otherwise required, need not be given to any director who (a) either
before or after the meeting signs a waiver of notice or a consent to the holding
of the meeting without being given notice or (b) attends the meeting, except
when he or she attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the Chief Executive Officer,
if present and acting, or the President, if present and acting, or any other
director chosen by the Board, shall preside at all Board meetings.
SECTION 4.6 QUORUM AND VOTE REQUIRED FOR ACTION: At all meetings of the Board of
Directors, directors constituting a majority of the then authorized total number
of directors shall constitute a quorum for the transaction of business. Except
in cases in which the corporation's certificate of incorporation, these by-laws
or applicable laws otherwise provide, the vote of a majority of the directors
present at a meeting shall be the act of the Board of Directors. A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, provided that any action taken is
approved by at least a majority of the required quorum for such meeting. A
majority of the directors present, whether or not a quorum is present, may
adjourn any directors meeting to another time and place. Notice of the time and
place of holding an adjourned meeting need not be given to absent directors if
the time and place is fixed at the meeting adjourned, provided that, if the
meeting is adjourned for more than twenty-four (24) hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
SECTION 4.7 TELEPHONIC MEETINGS: Members of the Board of Directors, or any
committee designated by the Board, may participate in a meeting of such Board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this by-law shall constitute presence
in person at such meeting.
SECTION 4.8 ACTIONS WITHOUT MEETING: Unless otherwise restricted by the
corporation's certificate of incorporation or these bylaws, any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board
(which shall constitute at least a majority of the then authorized total number
of directors) or all of the members of such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
<PAGE> 8
SECTION 4.9 COMMITTEES: The Board of Directors may, by resolution passed by
directors constituting a majority of the total number of then authorized
directors, designate one or more committees, each committee to consist of one or
more of the directors of the corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of the committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he, she
or they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have power or authority
in reference to: (a) adopting, amending or repealing any of these bylaws; (b)
approving, adopting or recommending to the shareholders an amendment of the
corporation's certificate of incorporation, an agreement of merger or
consolidation, the sale, lease or exchange of all or substantially all of the
corporation's property or assets, a dissolution of the corporation or a
revocation of dissolution, or any other action or matter expressly required by
the Delaware General Corporation Law to be submitted to the shareholders for
approval; (c) filling vacancies on the Board or any committee; (d) fixing the
compensation of directors for serving on the Board or on a committee; and (e),
unless the resolution expressly so provides, declaring a dividend or authorizing
the issuance of stock. Unless the Board of Directors otherwise provides, each
committee designated by the Board may make, alter and repeal rules for conduct
of its business. In the absence of such rules, each committee shall conduct its
business in the same manner as the Board of Directors conducts its business
pursuant to these bylaws.
SECTION 4.10 COMPENSATION AND REIMBURSEMENTS: Subject to their duties to the
corporation and its shareholders under the Delaware General Corporation Law and
other applicable laws, directors may receive such compensation for their
services, and such reimbursements for their expenses, as may be fixed or
determined by the Board. A director may serve the corporation in any capacity as
an officer, employee, agent or otherwise, and receive compensation therefor.
ARTICLE V
OFFICERS
SECTION 5.1 OFFICERS: The officers of the corporation shall include, if and when
designated by the Board of Directors, a Chairman of the Board, a Chief Executive
Officer, a President, one or more Vice Presidents, a Secretary and a Chief
Financial Officer, each of whom shall be elected by the Board of Directors. Such
other officers and assistant officers as may be deemed necessary may be elected
or appointed by the Board of Directors. One person may hold one or more offices
and it shall not be necessary that all offices of the corporation be filled.
<PAGE> 9
SECTION 5.2 ELECTION AND TERM OF OFFICE: The officers of the corporation to be
elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual
meeting of the shareholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as conveniently may
be. Each officer shall hold office until his or her successor is elected and
qualified or until his or her death, resignation or removal.
SECTION 5.3 REMOVAL: Any officer may be removed at any time by the Board of
Directors whenever in its judgment the best interests of the corporation would
be served thereby. A contract of employment shall not prevent the removal of any
officer, but this provision shall not prevent the making of a contract of
employment with any officer and shall have no effect upon any cause of action
which any officer may have as a result of removal in breach of a contract of
employment.
SECTION 5.4. CHAIRMAN OF THE BOARD: The Chairman of the Board shall be a
director and shall preside at meetings of the Board of Directors and perform
such other duties as the Board may prescribe.
SECTION 5.5 CHIEF EXECUTIVE OFFICER: The Chief Executive Officer of the
corporation shall, subject to the control of the Board, have general
supervision, direction and control of the business and affairs of the
corporation. He or she shall have the general powers and duties of management
usually vested in the Chief Executive Officer of a corporation, and shall have
such other powers and duties with respect to the administration of the business
and affairs of the corporation as may from time to time be assigned to him or
her by the Board or as is prescribed by the Bylaws. In accordance with these
bylaws, he or she shall preside at meetings of the shareholders. Unless another
individual is serving as the President, the Chief Executive Officer shall serve
as the President and carry out any duties of the President that are different
from those of the Chief Executive Officer.
SECTION 5.6 PRESIDENT: The President shall exercise and perform such powers and
duties with respect to the administration of the business and affairs of the
corporation as may from time to time be assigned to him or her by the Chief
Executive Officer and by the Board or as is prescribed by the Bylaws. In the
absence or disability of the Chief Executive Officer, the President shall
perform all of the duties of the Chief Executive Officer and when so acting
shall have all the powers and be subject to all of the restrictions upon the
Chief Executive Officer. In accordance with these bylaws, he or she may preside
at meetings of shareholders or the Board.
SECTION 5.7 VICE PRESIDENTS: If desired, one or more Vice Presidents may be
chosen by the Board of Directors. In the absence and/or disability of both the
Chief Executive Officer and the President, the chief executive's duties and
responsibilities shall be carried out by the highest ranking available Vice
President if Vice Presidents are ranked or, if they are not ranked, by a Vice
President designated by the Board of Directors. When so acting, a Vice President
<PAGE> 10
shall have all the powers of and be subject to all the restrictions on the Chief
Executive Officer. Vice presidents of the corporation shall have such other
powers and perform such other duties as prescribed from time to time by the
board of directors, the bylaws or the Chief Executive Officer.
SECTION 5.8. SECRETARY: The Secretary shall cause to be prepared and kept, at
the corporation's principal executive office or such other place as is
designated by the Board of Directors, a book of minutes of all meetings and
actions of the shareholders, the Board of Directors and committees of the Board.
The Secretary shall keep, or cause to be kept, at the corporation's principal
executive office or at the office of its transfer agent or registrar, a record
or duplicate record of the shareholders. This record shall show the names of all
shareholders and their addresses, the number and classes of shares held by each,
the number and date of share certificates issued to each shareholder and the
number and date of cancellation of any certificates surrendered for
cancellation. The Secretary shall give notice, or cause notice to be given, of
all shareholders' meetings, Board meetings and meetings of committees of the
Board for which notice is required by statute or by the bylaws. If the Secretary
or other person authorized by the Secretary to give notice fails to act, notice
of any meeting may be given by any other officer of the corporation. The
Secretary shall keep the seal of the corporation, if any, in safe custody. The
Secretary shall have such other powers and perform such other duties as are
prescribed by the Board of Directors, the Chief Executive Officer or the bylaws.
SECTION 5.9 CHIEF FINANCIAL OFFICER: The chief financial officer, who may also
be designated ;the Treasurer, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors or the Chief
Executive Officer. He or she shall disburse such funds of the corporations as
may be ordered by Board or the Chief Executive Officer, taking proper vouchers
for such disbursements, and shall render to the Chief Executive Officer and
directors, at the regular meetings of the Board, or whenever they may require
it, an account of all his or her transactions as Chief Executive Officer and of
the financial condition of the corporation.
SECTION 5.10 ASSISTANT OFFICERS: The Board of Directors may elect one or more
Assistant Secretaries and one or more Assistant Treasurers who shall not be
general officers of the corporation, but shall perform such duties as the Chief
Executive Officer may delegate to them under his or her general direction. In
the absence or disability of the Secretary or Chief Financial Officer, the
Assistant Secretary or Assistant Treasurer, respectively, shall perform the
duties and exercise the powers of his or her respective office.
SECTION 5.11 OTHER DUTIES AND AUTHORITIES: In addition to the duties enumerated
herein, the officers (and the employees and agents of the corporation) shall
have such duties and authorities as may be conferred on them by the Board of
Directors or the Chief Executive Officer of the corporation. The Board of
Directors may from time to time delegate
<PAGE> 11
the powers or duties of any officer to any other officer or agent,
notwithstanding any provision hereof.
SECTION 5.12 SALARIES: The salaries and compensation of the officers shall be
fixed from time to time by or in the manner designated by the Board of
Directors.
SECTION 5.13 LOANS TO OFFICERS AND EMPLOYEES: The corporation may lend money to,
or guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
ARTICLE VI
OTHER MATTERS
SECTION 6.1 CONTRACTS: Subject to any applicable limitations under the
corporation's certificate of incorporation, these bylaws or applicable laws, the
Board of Directors may authorize any officer(s) or other person(s) to enter into
any contract or execute and deliver any instrument or document in the name of
and on behalf of the corporation, and such authority may be general or confined
to specific instances.
SECTION 6.2 CHECKS AND DEPOSITORIES: All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer(s) or other person(s) and in
such manner as shall from time to time be determined by the Board of Directors.
All funds of the corporation not otherwise employed shall be deposited from time
to time to the credit of the corporation in such banks, trust companies or other
depositories as the Board of Directors may select.
SECTION 6.3 DIVIDENDS: Dividends upon the capital stock of the corporation,
subject to the provisions of the corporation's certificate of incorporation, if
any, may be declared by the Board of Directors pursuant to applicable laws at
any regular or special meeting. Dividends may be paid in cash, in property or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation and applicable laws.
SECTION 6.4 FISCAL YEAR: The Board of Directors shall determine the fiscal year
of the corporation.
SECTION 6.5 SHARES OR INTERESTS IN OTHER CORPORATIONS OR ENTITIES: Subject to
any limitations prescribed by the Board of Directors, the Chief Executive
Officer, the
<PAGE> 12
President, any Vice President, the Secretary or any other person designated by
the Board of Directors or the Chief Executive Officer may, on behalf of the
corporation, vote or exercise other rights with respect to any shares of or
ownership interests in other corporations or entities standing in the name of
this corporation. The authority to vote or exercise rights granted by this
section includes the authority to execute proxies in the name of the corporation
for purposes of voting the shares or other interests.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1. 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 and
other Delaware laws, 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 such laws. 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, limited liability company, joint
venture, trust, employee benefit plan or other enterprise, or of any committee
or similar body, in his or her capacity as such.
SECTION 7.2 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, subject to Section 7.8 below, 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 amounts 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 7.2. The first sentence of this
Section 7.2 to the contrary notwithstanding, the corporation shall not indemnify
any such director with respect to any of the following matters: (a) remuneration
paid to such person if it shall be determined by a final judgment or other final
adjudication that such
<PAGE> 13
remuneration was in violation of law; or (b) 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 (c)
actions brought about or contributed to by the dishonesty of such person, if a
final judgment or other final 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 (d) 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 (e) 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 7.2 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 7.2 by virtue of
any of the preceding clauses (a), (b), (c), (d) or (e) or otherwise.
SECTION 7.3 OTHER RIGHTS AND REMEDIES: The indemnification and advancement of
expenses provided by or granted pursuant to this Article VII 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 shareholders or disinterested directors, or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding any office.
SECTION 7.4 CONSTITUENT CORPORATIONS: For the purpose of this Article VII,
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 VII 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 7.5 SEVERABILITY: If any part of this Article VII 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 7.6 AMENDMENTS: The foregoing provisions of this Article VII 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
<PAGE> 14
provisions of this Article VII 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 amendment
shall have no effect on such rights of the director hereunder. Any director
entitled to indemnification under the foregoing provisions of this Article VII,
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 in the bylaws of the corporation without such amendment.
SECTION 7.7 FORMER DIRECTORS AND SUCCESSORS: The indemnification and advancement
of expenses provided by, or granted pursuant to, this Article VII 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 7.8. SELECTION OF COUNSEL: In the event the corporation shall become
obligated under this Article VII, 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, "Indemnitee Obligations") in any action, suit or
proceeding (a "Proceeding"), Indemnitee shall give 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 VII 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 7.9 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 VII, 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
<PAGE> 15
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 applied to interpret and determine the effect of this
Article VII. Judgment upon any award rendered by the arbitrator may be entered
by any state or federal court having jurisdiction thereof.
SECTION 7.10 NO DUPLICATION OF PAYMENTS: The corporation shall not be liable
under this Article VII to make any payment to or for the benefit of an
Indemnitee relating to any Proceeding with respect to which payment is actually
made to or for the benefit of the Indemnitee under a valid and collectible
insurance policy, or with respect to which the Indemnitee is indemnified by the
corporation or a third party otherwise than pursuant to this Article VII, 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 corporation to an
Indemnitee under this Article VII, the corporation shall be subrogated to the
extent of such payment to all of the Indemnitee's rights of recovery with
respect to the same Proceeding under any insurance policy or third party
indemnification obligation. The Indemnitee shall execute all papers required and
shall do everything that may be necessary or appropriate to enable the
corporation effectively to enforce such rights.
ARTICLE VIII
AMENDMENTS
SECTION 8.1 AMENDMENTS BY SHAREHOLDERS: These bylaws may be altered, amended or
repealed and new bylaws may be adopted by a vote of the shareholders
representing a majority of all the shares issued and outstanding at any annual
or special shareholders' meeting when the proposed amendment has been set out in
the notice of such meeting.
SECTION 8.2 AMENDMENTS BY DIRECTORS: The directors, by a vote of a majority of
all directors then holding office, may adopt, amend or repeal these bylaws,
subject always to the right of the shareholders to adopt, amend or repeal
bylaws. The Directors may amend or repeal a bylaw adopted by the shareholders
unless the bylaw in question shall forbid amendment or repeal or limit the
extent or manner in which it may be amended or repealed. The directors shall not
adopt a bylaw which shall require for action by the shareholders any quorum or
vote which is greater than a simple majority of all the shares issued and
outstanding.
SECTION 8.3 AUTOMATIC AMENDMENTS TO CONFORM TO MANDATORY PROVISIONS OF DELAWARE
GENERAL CORPORATION LAW: Certain of the foregoing bylaw provisions correspond
with specific mandatory requirements of the Delaware General Corporation Law
which may not be altered by these bylaw provisions. If any such
<PAGE> 16
mandatory provision in the Delaware General Corporation Law is altered and such
change makes it inconsistent with any term(s) of these bylaws, a corresponding
modification of such term(s) of these bylaws so that they are consistent will be
deemed to be made as of the time of such change in the statutory provision. If
any such mandatory provision in the Delaware General Corporation Law or its
binding judicial interpretation otherwise is or becomes inconsistent with any
term(s) of these bylaws, a corresponding modification of such term(s) of these
bylaws shall be deemed to be made so that they are consistent with such
statutory provision or interpretation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,869,721
<SECURITIES> 9,754,536
<RECEIVABLES> 3,886,278
<ALLOWANCES> 576,000
<INVENTORY> 4,640,043
<CURRENT-ASSETS> 22,842,080
<PP&E> 11,665,104
<DEPRECIATION> 7,249,998
<TOTAL-ASSETS> 30,743,208
<CURRENT-LIABILITIES> 2,603,274
<BONDS> 0
0
0
<COMMON> 22,646
<OTHER-SE> 27,135,768
<TOTAL-LIABILITY-AND-EQUITY> 27,158,414
<SALES> 6,350,185
<TOTAL-REVENUES> 6,492,651
<CGS> 3,058,274
<TOTAL-COSTS> 2,195,194
<OTHER-EXPENSES> 151,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,087,290
<INCOME-TAX> 454,000
<INCOME-CONTINUING> 633,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633,270
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
