<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
--------------------------------------------------
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.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 66-0439440
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
100 COLUMBIA, SUITE 100, ALISO VIEJO, CALIFORNIA 92718
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(Address of principal executive offices) (Zip Code)
</TABLE>
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
November 3, 2000 was 4,435,620.
<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
September 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE> 3
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,129,086 $ 1,061,422
Short-term investments held to maturity 6,395,419 8,629,990
Accounts receivable, less allowance for doubtful accounts of
$479,000 and $571,252 in 2000 and 1999, respectively 3,696,019 3,291,372
Current receivable from unconsolidated subsidiary 805,934 --
Inventories, less allowance for inventory obsolescence
of $278,313 at September 30, 2000 and $307,203 at
December 31, 1999, respectively 5,652,494 5,760,887
Deferred tax assets 1,273,386 1,273,386
Prepaid expenses and other current assets 270,629 366,774
------------ ------------
Total current assets 19,222,967 20,383,831
Buildings, property and equipment, at cost:
Building 359,324 359,324
Lithotripters 11,796,507 11,163,744
Furniture and fixtures 2,828,112 2,577,643
Leasehold improvements 157,083 147,200
------------ ------------
15,141,026 14,247,911
Less accumulated depreciation and amortization (9,884,702) (8.308,841)
------------ ------------
Net property and equipment 5,256,324 5,939,070
------------ ------------
Goodwill, net of amortization 3,332,623 3,409,916
Investment in unconsolidated subsidiaries 1,337,119 325,000
Long-term receivable from unconsolidated subsidiary 1,200,000 --
Other assets, net 160,751 117,195
------------ ------------
$ 30,509,784 $ 30,175,012
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 525,734 $ 611,492
Accrued expenses 548,156 716,619
Accrued income taxes 200,224 263,058
Accrued payroll expenses 358,055 346,262
Customer deposits 54,847 --
Deferred revenue 754,540 907,326
------------ ------------
Total current liabilities 2,441,556 2,844,757
Deferred tax liabilities 628,856 628,856
Minority interest 463,671 284,350
Deferred rent 38,897 --
Stockholders' equity:
Common stock - $.004 par value, 20,000,000 shares authorized, 5,702,370 and
5,667,142 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 22,809 22,669
Additional paid-in capital 19,391,447 19,177,274
Accumulated earnings 16,669,509 14,619,507
Accumulated other comprehensive (loss) income 66,243 (13,942)
Treasury stock, at cost, 1,289,250 shares at September 30, 2000
and 974,650 shares at December 31, 1999 (9,213,204) (7,388,459)
------------ ------------
Total stockholders' equity 26,936,804 26,417,049
------------ ------------
$ 30,509,784 $ 30,175,012
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net equipment sales ................................. $ 374,000 $ 1,435,990 $ 2,880,544 $ 3,036,760
Procedures, maintenance fees and fee-for-service .... 4,908,462 4,842,232 14,215,683 14,358,919
Interest income ..................................... 160,408 161,412 439,107 440,607
------------ ------------ ------------ ------------
Total revenues ...................................... 5,442,870 6,439,634 17,535,334 17,836,286
Costs and expenses:
Cost of equipment sales ............................. 222,145 868,702 1,939,484 1,788,506
Costs of procedures and maintenance fees ............ 3,209,622 2,398,713 8,642,755 7,004,455
Research and development ............................ 253,145 389,015 913,522 1,089,956
Selling ............................................. 544,491 452,849 1,575,547 1,503,141
General and administrative .......................... 559,161 434,562 1,941,904 1,966,714
------------ ------------ ------------ ------------
Total costs and operating expenses .................. 4,788,564 4,543,841 15,013,212 13,352,772
------------ ------------ ------------ ------------
Operating income ....................................... 654,306 1,895,793 2,522,122 4,483,514
Other expense (income):
Gain on sale of investments ......................... (471,897) (244,305) (1,552,607) (244,305)
Other expense ....................................... 22,270 56,312 73,535 389,944
------------ ------------ ------------ ------------
Total other expense (income): ....................... (449,627) (187,993) (1,479,072) 145,639
Minority interests:
Minority interest in subsidiaries income ............ 213,314 144,144 613,321 429,171
Equity in income from unconsolidated subsidiary ..... (12,119) -- (12,119) --
------------ ------------ ------------ ------------
Total minority interest ............................. 201,195 144,144 601,202 429,171
------------ ------------ ------------ ------------
Income before provision of income taxes ................ 902,738 1,939,642 3,399,992 3,908,704
Provision for income taxes ............................. 330,000 758,000 1,349,990 1,561,400
------------ ------------ ------------ ------------
Net income ............................................. $ 572,738 $ 1,181,642 $ 2,050,002 $ 2,347,304
============ ============ ============ ============
Earnings per share:
Basic ............................................... $ .13 $ .23 $ .45 $ .46
============ ============ ============ ============
Diluted ............................................. $ .13 $ .23 $ .45 $ .45
============ ============ ============ ============
Number of shares used in the computation of
earnings per share:
Basic ............................................... 4,421,134 5,030,765 4,544,616 5,055,451
============ ============ ============ ============
Diluted ............................................. 4,458,456 5,083,973 4,549,489 5,170,456
============ ============ ============ ============
</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, 1999 4,692,49 $ 22,669 $19,177,27 $14,619,507 $ (13,942) $(7,388,459) $26,417,049
Common stock options exercised 35,228 140 214,173 -- -- -- 214,313
Treasury stock repurchased (314,600) -- -- -- -- (1,824,745) (1,824,745
Unrealized gain on foreign
currency translation -- -- -- -- 80,185 -- 80,185
Net income -- -- -- 2,050,002 -- -- 2,050,002
----------- ----------- ---------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED) 4,413,120 $ 22,809 $19,391,44 $16,669,509 $ 66,243 $(9,213,204) $26,936,804
=========== =========== ========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 2,050,002 $ 2,347,304
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization ............................ 1,801,879 1,487,072
Minority interest in partnership ......................... 613,321 429,171
Minority equity in unconsolidated subsidiary ............. (12,119) --
Provision for doubtful accounts ......................... -- 30,000
Provision for inventory obsolescence ..................... 70,000 --
Gain on sale of investments .............................. (1,552,607) (244,305)
Provision for investment write down ...................... -- 300,000
Changes in assets and liabilities:
Accounts receivable ................................... (404,647) (71,625)
Receivable from unconsolidated subsidiary ............. (805,934) --
Inventories ........................................... 38,393 (1,192,045)
Prepaid expenses and other current assets ............. 96,145 66,157
Accounts payable and accrued expenses ................. (204,220) 404,875
Accrued income taxes .................................. (62,834) 163,077
Deferred revenue ...................................... (152,786) 127,260
Customer deposits ..................................... 54,847 (86,125)
Other, net ............................................ 36,629 7,696
------------ ------------
Net cash provided by operating activities ................ 1,566,069 3,768,512
------------ ------------
Cash flows from investing activities:
Purchase of marketable securities .............................. (10,795,267) (20,031,931)
Sale of marketable securities .................................. 13,029,838 20,736,907
Sale of long-term investments .................................. 1,552,607 244,305
Purchase of subsidiary ......................................... -- (165,600)
Distribution of minority interest .............................. (434,000) (456,300)
Investment in other entities ................................... (1,000,000) (100,000)
Long-term loan to unconsolidated subsidiary .................... (1,200,000) --
Purchase of property and equipment ............................. (1,045,563) (1,688,910)
Disposals of property and equipment ............................ 3,723 23,705
------------ ------------
Net cash provided by (used in) investing activities ...... 111,338 (1,437,824)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ......................... 214,313 98,626
Purchase of Treasury Stock ..................................... (1,824,745) (598,618)
Deferral of rent payments ...................................... 38,897 --
Loan payments .................................................. (38,208) --
------------ ------------
Net cash used in financing activities .................... (1,609,743) (499,992)
------------ ------------
Net increase in cash and cash equivalents .......................... 67,664 1,830,696
Cash and cash equivalents at beginning of period ................... 1,061,422 1,128,463
------------ ------------
Cash and cash equivalents at end of period ......................... $ 1,129,086 $ 2,959,159
============ ============
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes ................................................... $ 1,409,327 $ 1,395,122
Interest ....................................................... $ 0 $ 0
</TABLE>
See accompanying notes.
6
<PAGE> 7
MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2000
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 September 30, 2000 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 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2000. Results of operations for
the three and nine months ended September 30, 2000 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 notes.
Actual results could differ from these estimates.
B. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss are as follows:
<TABLE>
<CAPTION>
CURRENCY
TRANSLATION
ADJUSTMENT
-----------
<S> <C>
Balance at December 31, 1999 $(13,942)
Foreign currency translation adjustments 80,185
--------
Balance at September 30, 2000 $ 66,243
========
</TABLE>
The functional currency of the investment in foreign subsidiary is
considered to be the United States dollar.
7
<PAGE> 8
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 NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 374,000 $ 1,435,990 $ 2,880,544 $ 3,036,760
Fees for procedures,
maintenance and
management 4,908,462 5,003,644 14,215,683 14,799,526
----------- ----------- ----------- -----------
$ 5,282,462 $ 6,439,634 $17,096,227 $17,836,286
=========== =========== =========== ===========
Operating income (loss):
Equipment sales $ (34,593) $ 231,846 $ 82,687 $ 350,605
Fees for procedures,
maintenance and
management 1,138,526 1,851,940 3,918,507 3,987,270
----------- ----------- ----------- -----------
$ 1,103,933 $ 2,083,786 $ 4,001,194 $ 4,337,875
=========== =========== =========== ===========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator: Net income $ 572,738 $1,181,642 $2,050,002 $2,347,304
========== ========== ========== ==========
Denominator for weighted
average shares outstanding 4,421,134 5,030,765 4,544,616 5,055,451
Basic earnings per share $ .13 $ .23 $ .45 $ .46
========== ========== ========== ==========
Effect of dilutive securities:
Weighted average shares
outstanding 4,421,134 5,030,765 4,544,616 5,055,451
Stock options 37,322 53,208 4,873 115,005
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share 4,458,456 5,083,973 4,549,489 5,170,456
========== ========== ========== ==========
Diluted earnings per share $ .13 $ .23 $ .45 $ .45
========== ========== ========== ==========
</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 September 30, 2000 and December 31, 1999, inventories consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ ----------------
<S> <C> <C>
Raw materials $ 4,011,840 $ 3,699,983
Work in process 211,160 427,600
Finished goods 1,429,589 1,633,304
------------------ ----------------
$ 5,652,494 $ 5,760,887
================== =================
</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 consolidated financial statements.
9
<PAGE> 10
G. STOCK REPURCHASE PLAN
On June 22, 2000 the Company announced a stock repurchase plan of up to
250,000 additional shares of its Common Stock. During the third quarter of 2000
the Company purchased a total of 187,800 shares at an aggregate cost of
$1,094,780. Under all of the Company's stock repurchase plans a total of
1,289,250 shares have been repurchased at a total cost of $9,213,204.
H. RELATED PARTIES
During April 2000 the Company purchased Common Stock representing 46% of
the outstanding shares of Medicredit.com, Inc. ("Medicredit"). As part of this
purchase, the Company agreed to advance up to $2,000,000 to Medicredit under a
revolving note agreement, with a maturity date of April 20, 2003, and interest
charged at prime rate. The purpose of the Note is to allow Medicredit to expand
its loan portfolio. As of September 30, 2000, $2,000,000 was advanced to
Medicredit under the agreement, with $800,000 reflected in current assets and
$1,200,000 reflected as a long-term asset.
I. SUBSEQUENT EVENTS
Sale of Cardiac Science Stock
Subsequent of September 30, 2000, the Company sold 10,000 shares of its
holdings of Cardiac Science, Inc. for gross proceeds of approximately $76,000 in
cash. The Company still holds 223,000 shares of Cardiac Science, Inc.
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 1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 29, 2000.
RESULTS OF CONSOLIDATED OPERATIONS
GENERAL
Medstone manufactures, markets and maintains lithotripters, and
continues to evolve 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 urological
procedure tables to potential customers. The Company also provides radiology
imaging suites in the United Kingdom through its Zenith Medical Systems Ltd.
Subsidiary. To date, the Company's consolidated revenues have come primarily
from Medstone's lithotripsy business.
The Company currently offers lithotripsy procedures using 15 mobile and
17 transmobile systems along with two 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 expansion of this manufacturer direct
business.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
The Company recognized revenue of $5.4 million in the third quarter of
2000 or a decrease of 15% compared to $6.4 million in the corresponding period
of 1999. Equipment and equipment upgrade revenues decreased by 74% due to a
decrease in the number of lithotripsy units shipped from four in the third
quarter of 1999 to one in the third quarter of 2000. Included in equipment
revenues in the third quarter of 2000 are two pain management tables, which the
Company commenced shipping during the current year. Revenues from the Company's
maintenance, procedure and fee-for-service activities increased by 1% in the
third quarter of 2000 compared to the same period of 1999, due to a
stabilization of the fee-for-service revenues, and a slight increase in imaging
revenues due to the addition of the Zenith Medical Systems Ltd. business line.
Patient volume on the Company-owned lithotripters was stable in a period to
period comparison.
Interest income remained level in the three months ended September 30,
2000 compared to the same period in 1999 due to higher interest yields on lower
average balances.
Cost of sales on equipment and equipment upgrade sales decreased to 59%
of sales in the
11
<PAGE> 12
three months ended September 30, 2000, compared to 60% of sales in the
comparable period of the prior year due to slightly better production efficiency
in the three months September 30, 2000 when compared to the same period of 1999.
Recurring revenue cost of sales increased to 65% in the third quarter of 2000
compared to 50% in the third quarter of 1999 due to the additional expenses
associated with the placement of fee-for-service units and the corresponding
operating expenses as fee-for-service patient volume remained flat. Overall cost
of sales, as a percentage of revenue (excluding interest), increased to 65% in
the third quarter of 2000 compared to 52% in the third quarter of 1999.
Research and development costs decreased by $136,000 or 35% in the third
quarter of 2000 compared to the same period in the prior year due to reduction
of headcount associated with the STS-T transportable lithotripter and lower
overall development costs of the fixed urology table.
Selling and marketing expenses increased by $92,000, or 20% in the third
quarter of 2000 when compared to 1999 due to increased expenses for tradeshows
for the Company's pain management products and expenses associated with media
and educational materials regarding the Company's approval for gallstone
lithotripsy.
General and administrative expenses increased by $125,000, or 29% in the
third quarter of 2000 when compared to the third quarter of 1999 due to
consultants and expenses associated with the gallstone lithotripsy application
approved by the Food and Drug Administration during the third quarter of the
current year.
Other income increased to $450,000 in the third quarter of 2000 compared
to $188,000 in the same period of 1999 due to higher average per share proceeds
for sales of the Company's holdings of Cardiac Science, Inc. common stock in the
current quarter when compared to the same period in the prior year.
Minority interest increased to $201,000 in the third quarter of 2000,
compared to $144,000 in the three months ended September 30, 1999, due to
significantly higher activity int he Northern Nevada and Southern Idaho
operations, slightly offset by the Company's interest in Medicredit.
Provision for income taxes for the third quarter of 2000 decreased by
$428,000, or 56% representing a lower taxable income when compared to the same
period in the prior year.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The Company recognized revenue of $17.5 million in the nine months ended
September 30, 2000, or a 2% decrease compared to $17.8 million in the
corresponding period of 1999. Equipment and equipment upgrade revenues remained
approximately level due to shipment of seven lithotripsy units and one
radiographic imaging suite in the currently period compared to shipment of eight
lithotripsy units in the same period of 1999. Recurring revenue from
maintenance, procedure and fee-for-service activities decreased by 1% in the
first nine months of 2000 when compared to the same period of the prior year due
primarily to a 1% decrease in the number of patients treated and
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<PAGE> 13
lower average revenue per treatment offset by an increase in imaging revenues.
Interest income remained level in the nine months ended September 30,
2000 compared to the same period in 1999 due to a higher yield in investments
offset by lower average invested balances.
Cost of sales on equipment and equipment upgrade sales increased to 67%
of sales in the nine months ended September 30, 2000, compared to 59% of sales
in the comparable period of the prior year due to higher costs on the
radiographic imaging suite installation. Recurring revenue cost of sales
increased to 61% in the nine months ended September 30, 2000, compared to 49% in
the same period in the prior year due to higher expenses associated with
additional fee-for-service equipment. Overall cost of sales, as a percentage of
revenue (excluding interest), rose to 62% in the first nine months of 2000
compared to 51% in the first nine months of 1999.
Research and development costs decreased by 16%, or $176,000 in the
first nine months of 2000 compared to the same period of 1999 due to the prior
year's expenses associated with final development of the Company's new
lithotripsy products.
Sales and marketing expenses increased by $72,000 or 5% in the nine
months ended September 30, 2000 compared to the same period of 1999 due to
higher consulting expenses and higher tradeshow activity with the Company's
entry into the imaging market.
General and administrative expenses decreased by $25,000, or 1% in the
first nine months of 2000 when compared to the first nine months of 1999 due to
lower legal expenses mostly offset by higher consulting expenses due to the
gallstone lithotripsy application.
Other (income) expenses increased by $1,625,000 in the nine months ended
September 30, 2000 when compared to the same period of 1999 due to a gain on the
sale of approximately 259,000 shares of Cardiac Science, Inc. in 2000 versus a
net expense for 1999's write down of an investment partially offset by a gain on
the sale of Cardiac Science, Inc. securities.
Minority interest increased to $601,000 in the nine months ended
September 30, 2000, compared to $429,000 in the nine months ended September 30,
1999 due to significantly higher activity in the Northern Nevada and Southern
Idaho operations.
Provision for income taxes for the first nine months of 2000 decreased
by 13% due to a lower taxable income when compared to the first nine months of
1999.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash and short-term investments
of approximately $7.5 million. These funds were generated from continuing
operating activities.
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
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<PAGE> 14
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 2000.
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
MEDSTONE INTERNATIONAL, INC.
-----------------------------------------
A Delaware corporation
Date: November 9, 2000
/s/ Mark Selawski
-----------------------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
