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 March 31, 2002
-------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16752
MEDSTONE INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 66-0439440
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Columbia, Suite 100, Aliso Viejo, California 92656
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 448-7700
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Not Applicable
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(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 May
1, 2002 was 3,931,220.
MEDSTONE INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
-----------------------------
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2002 (Unaudited) and
December 31, 2001 3
Consolidated Statements of Income
Three Months Ended March 31, 2002 and 2001 (Unaudited) 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2002 (Unaudited) 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 (Unaudited) 6
Notes to Unaudited 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 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
-2-
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2001
--------------- ----------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,465,085 $ 1,928,731
Short-term investments held to maturity 4,600,383 4,570,420
Accounts receivable, less allowance for doubtful accounts of
$737,084 and $477,180 at March 31, 2002 and
December 31, 2001, respectively 3,865,087 4,013,781
Inventories, less allowance for inventory obsolescence
of $582,417 and $457,088 at March 31, 2002 and
December 31, 2001, respectively 5,426,721 6,296,069
Deferred tax assets 2,160,695 2,160,695
Prepaid expenses and other current assets 628,513 541,194
--------------- ----------------
Total current assets 18,146,484 19,510,890
Buildings, property and equipment, at cost:
Building 359,324 359,324
Lithotripters 13,500,987 13,163,285
Equipment 2,303,530 2,048,582
Furniture and fixtures 965,231 961,776
Leasehold improvements 175,032 171,177
--------------- ----------------
17,304,104 16,704,144
Less accumulated depreciation and amortization (12,433,361) (12,041,254)
--------------- ---------------
Net property and equipment 4,870,743 4,662,890
--------------- ----------------
Goodwill, net 3,201,545 3,205,251
Investment in unconsolidated subsidiaries 879,133 909,492
Net investment in sale-type lease 308,432 224,731
Other assets, net 114,501 117,006
--------------- ----------------
$ 27,520,838 $ 28,630,260
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 888,959 $ 1,087,594
Accrued expenses 384,088 345,075
Accrued income taxes --- ---
Accrued payroll expenses 288,901 313,472
Customer deposits 27,100 364,048
Deferred revenue 895,057 783,948
--------------- ----------------
Total current liabilities 2,484,105 2,894,137
Deferred tax liabilities 562,534 562,534
Minority interest 479,666 497,647
Deferred rent 87,275 86,425
Stockholders' equity:
Common stock - $.004 par value, 20,000,000 shares authorized, 5,742,670
shares issued at both
March 31, 2002 and December 31, 2001 22,971 22,971
Additional paid-in capital 19,646,388 19,646,388
Accumulated earnings 16,217,459 16,050,251
Accumulated other comprehensive income 3,039 32,756
Treasury stock, at cost, 1,811,450 and 1,631,450 shares at
March 31, 2002 and December 31, 2001, respectively (11,982,599) (11,162,849)
--------------- ----------------
Total stockholders' equity 23,907,258 24,589,517
--------------- ----------------
$ 27,520,838 $ 28,630,260
=============== ================
See accompanying notes
-3-
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2002 and 2001
(Unaudited)
2002 2001
--------------- --------------
Revenues:
Procedures, maintenance fees and fee-for-service ....................... $ 4,337,435 $ 4,510,773
Net equipment sales .................................................. 1,896,443 353,181
Interest income ...................................................... 82,123 141,886
--------------- --------------
Total revenues ..................................................... 6,316,001 5,005,840
Costs and operating expenses:
Cost of procedures and maintenance fees .............................. 2,426,949 2,833,030
Cost of equipment sales .............................................. 1,474,909 350,288
Research and development ............................................. 260,939 260,957
Selling .............................................................. 812,215 530,622
General and administrative ........................................... 817,490 664,029
--------------- --------------
Total costs and operating expenses ................................. 5,792,502 4,638,926
--------------- --------------
Operating income ....................................................... 523,499 366,914
Other expense (income):
Gain on sale of investments .......................................... --- (358,108)
Other expense (income) ............................................... (1,887) 33,343
--------------- --------------
Total other expenses (income) ...................................... (1,887) (324,765)
--------------- --------------
Minority interests:
Minority interest in subsidiaries income ............................. 170,019 155,395
Equity in loss (income) from unconsolidated subsidiary ............... 30,359 (29,509)
--------------- --------------
Total minority interest ............................................ 200,378 125,886
--------------- --------------
Income before provision for income taxes ............................... 325,008 565,793
Provision for income taxes ............................................. 157,800 215,000
--------------- --------------
Net income ............................................................. $ 167,208 $ 350,793
=============== ==============
Net income per share:
Basic .............................................................. $ .04 $ .08
=============== ==============
Diluted ............................................................ $ .04 $ .08
=============== ==============
Number of shares used in the computation of
earnings per share:
Basic .............................................................. 3,954,553 4,273,220
=============== ==============
Diluted ............................................................ 3,954,553 4,281,932
=============== ==============
See accompanying notes.
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
-------------------- Additional Other
Number of paid-in Accumulated Comprehensive Treasury
shares Amount capital earnings income (loss) Stock Total
---------- -------- ----------- ----------- --------------- --------------- ----------------
Balance at December 31, 2001 4,111,220 $ 22,971 $19,646,388 $16,050,251 $ 32,756 $ (11,162,849) $ 24,589,517
Net income --- --- --- 167,208 --- --- 167,208
Other comprehensive income:
Unrealized loss on foreign
currency translation, net --- --- --- --- (29,717) --- (29,717)
----------------
Total comprehensive income 137,491
----------------
Treasury stock repurchased (180,000) --- --- --- --- (819,750) (819,750)
---------- -------- ----------- ----------- --------------- --------------- ----------------
Balance at March 31, 2002
(Unaudited) 3,931,220 $ 22.971 $19,646,388 $16,217,459 $ 3,039 $ (11,982,599) $ 23,907,258
========== ======== =========== =========== =============== =============== ================
See accompanying notes.
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2002 and 2001
(Unaudited)
2002 2001
------------------ ------------------
Cash flows from operating activities:
Net income ................................................. $ 167,208 $ 350,793
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......................... 433,876 554,900
Provision for doubtful accounts ....................... 60,000 30,000
Provision for inventory obsolescence .................. 42,000 42,000
Gain on sale of long-term investments ................. --- (358,108)
Minority interest in partnerships ..................... 170,019 155,395
Minority loss (equity) in unconsolidated subsidiary ... 30,359 (29,509)
Changes in assets and liabilities:
Accounts receivable ................................ 122,995 (59,496)
Inventories ........................................ 667,608 (120,582)
Prepaid expenses and other current assets .......... (37,721) 154,198
Accounts payable and accrued expenses .............. (155,637) 176,290
Accrued payroll expenses ........................... (24,571) (53,971)
Accrued income taxes ............................... --- 168,674
Deferred revenue ................................... 111,109 (57,993)
Customer deposits .................................. (336,948) 285,267
Other, net ......................................... (29,721) 18,602
------------------ ------------------
Net cash provided by operating activities .......... 1,220,576 1,256,460
------------------ ------------------
Cash flows from investing activities:
Purchase of short-term investments ......................... (1,169,251) (3,333,231)
Proceeds from sales of short-term investments .............. 1,139,288 4,150,973
Proceeds from sale of long-term investments ................ --- 358,108
Investment in sales type lease ............................. (7,860) ---
Distribution of minority interest .......................... (188,000) (180,000)
Purchase of property and equipment, net .................... (635,514) (646,191)
------------------ ------------------
Net cash provided by investing activities .......... (861,337) 349,659
------------------ ------------------
Cash flows from financing activities:
Purchase of treasury stock ................................. (819,750) (506,037)
Deferral of rent payments .................................. 850 2,705
Loan payments .............................................. (3,985) (6,726)
------------------ ------------------
Net cash used in financing activities .............. (822,885) (510,058)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents .......... (463,646) 1,096,061
Cash and equivalents at beginning of period ................... 1,928,731 945,610
------------------ ------------------
Cash and equivalents at end of period ......................... $ 1,465,085 $ 2,041,671
================== ===================
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes ....................................... $ 6,288 $ 59,847
================== ===================
See accompanying notes.
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MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
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 March 31, 2002 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 2001 Annual Report on
Form 10-K filed with the Securities and Exchange Commission on April 1, 2002.
Results of operations for the three months ended March 31, 2002 are not
necessarily indicative of results to be expected for the full year.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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)/Income:
The components of accumulated other comprehensive (loss)/income are as follows:
Currency
Translation
Adjustment
----------------
Balance at December 31, 2001 $ 32,756
Foreign currency translation adjustments (29,717)
----------------
Balance at March 31, 2002 $ 3,039
================
The functional currency of the investment in foreign subsidiary is
considered to be the United States dollar.
-7-
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.
For the three months ended March 31, 2002, total comprehensive income was
$137,491. For the three months ended March 31, 2001, total comprehensive income
was $346,270.
C. Business Segments
The Company operates in two business segments, equipment sales and fees for
procedures, maintenance and management.
Three Months Ended
March 31, 2002 March 31, 2001
----------------- -----------------
(Unaudited) (Unaudited)
Revenue:
Equipment sales $ 1,896,443 $ 353,181
Fees for procedures,
maintenance fees and
fee-for-service 4,337,435 4,510,773
----------------- -----------------
$ 6,233,878 $ 4,863,954
================= =================
Operating income (loss):
Equipment sales $ (139,942) $ 9,366
Fees for procedures,
maintenance fees and
fee-for-service 663,441 357,548
----------------- -----------------
$ 523,499 $ 366,914
================= =================
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.
-8-
The following table sets forth the computation of earnings per share:
Three Months Ended
March 31, March 31,
2002 2001
--------------- ----------------
(Unaudited) (Unaudited)
Numerator: Net income $ 167,208 $ 350,793
============== =============
Denominator for weighted
average shares outstanding 3,954,553 4,273,220
-------------- -------------
Basic earnings per share $ .04 $ .08
============== =============
Effect of dilutive securities:
Weighted average shares
outstanding 3,954,553 4,273,220
Stock options --- 8,712
-------------- -------------
Denominator for diluted earnings
per share 3,954,553 4,281,932
============== =============
Diluted earnings per share $ .04 $ .08
============== =============
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
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
March 31, December 31,
2002 2001
---------------- ----------------
(Unaudited)
Raw materials $ 3,852,940 $ 3,888,640
Work in process 520,823 231,175
Finished goods 1,052,957 1,983,236
---------------- ----------------
$ 5,426,721 $ 6,103,051
================ ================
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-
G. Stock Repurchase Plan
In the first quarter of 2002 the Company purchased a total of 180,000
shares at an aggregate cost of $819,750 under the Company's current Stock
Repurchase Plan. To date under all of the Company's stock repurchase plans a
total of 1,811,450 shares have been repurchased at a total cost of $11,982,599.
-10-
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 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 1, 2002.
In the ordinary course of business, the company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
equity investments, fixed asset lives, contingencies and litigation. The Company
has also chosen certain accounting policies when options were available,
including:
. The first-in, first-out (FIFO) method to value a majority of our
inventories; and
. The intrinsic value method, or APB Opinion No. 25, to account for our
common stock incentive awards; and
. We record an allowance for credit losses based on estimates of
customers' ability to pay. If the financial condition of our
customers were to deteriorate, additional allowances may be
required.
These accounting policies are applied consistently for all periods
presented. Our operating results would be affected if other alternatives were
used. Information about the impact on our operating results is included in the
footnotes to our consolidated financial statements.
Results of Consolidated Operations
----------------------------------
General
Medstone manufactures, markets and maintains lithotripters, and
continues to expand its Fee-for-Service Program to supply lithotripsy equipment
to providers on a per procedure basis. The lithotripters manufactured by
Medstone is approved to treat both kidney stones and gallstones. The Company is
also marketing a urology imaging and treatment table, used for various
urological functions, mobile urology and pain management table to serve the
mobile treatment market and various radiology room equipment, capitalizing on
the relationships that the Company has with radiology equipment manufacturers.
To date, the Company's consolidated revenues have come primarily from Medstone's
lithotripsy business.
-11-
As a manufacturer of medical devices, the Company has been vertically
integrating by offering its medical devices directly to providers. It currently
offers lithotripsy procedures using 15 mobile systems, two fixed sites and 22
transmobile lithotripters located throughout 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.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
-------------------------------------------------------------------------------
The Company recognized total revenue of $6.3 million in the first
quarter of 2002 compared to $5.0 million in the first quarter of 2001, or a 26%
increase. Revenues from procedures, maintenance and management fees decreased
from $4.5 million in the three months ended March 31, 2001 to $4.3 million in
the three months ended March 31, 2002 due to lower average per patient charges
on the Company's fee-for-service equipment on a lower patient count. Also
decreasing were the spares revenues as a lower number of shipments occurred in
the current year compared to the same period of the prior year. Partially
offsetting these decreases were increased maintenance revenues as the number of
site under maintenance contracts increased in the current year when compared to
the same period of the prior year. Equipment revenues increased to $1.9 million
in the quarter ending March 31, 2002 from $.353 million in the comparable
quarter of the prior year, or a 437% increase. The Company shipped three
lithotripsy systems in the quarter ending March 31, 2002 compared to no systems
in the each same period in the prior year. The Company also realized revenue on
three UroPro urology systems in the current year with no comparable activity in
the prior period due to the introduction of this product line in late 2001. The
number of patient handling tables shipped in each period remained constant at 16
units, but the product mix changed and resulted in slightly lower revenue in the
current year when compared to the prior year. Interest income decreased by 42%
in the first quarter of 2002 when compared to the same period of the prior year
due to a significant decline in investment yields and no significant change
in the average invested balance.
Recurring revenue cost of sales decreased to 56% of sales in the
quarter ended March 31, 2002 compared to 62% in the same quarter of the prior
year. This is due to lower depreciation and equipment rental expenses as the
fee-for-service revenue stream incorporates more fixed site fee-for-service
units and older mobile vans are fully depreciated. Cost of sales on equipment
sales decreased to 78% of sales in the three months ended March 31, 2002
compared to 99% of sales in the same period of 2001. This decrease is due to a
significantly higher equipment sales activity with a negligible increase in
costs of production. Overall cost of sales, as a percentage of revenue
(excluding interest), decreased to 63% in the first quarter of 2002 compared to
65% in the first quarter of 2001.
Research and development costs remained constant at $261,000 in the
first quarter of 2001 when compared to the first quarter of 2001 due to
decreased development costs for the UroPro offset by higher consulting expenses
for the ultrasound application for the lithotripsy equipment.
Selling costs increased to $812,000 in the first quarter of 2002
compared to $531,000 in the same period of the prior year, a change of $282,000
or 53% due to higher payroll expenses for added sales staff, increased bad debt
expense and higher commission expenses.
-12-
General and administrative expenses increased by $153,000 or 23% in the
three months ended March 31, 2002 compared to the same period in the prior year
due to higher legal and consulting expenses.
Gain on sale of investments was $0 in the quarter ending March 31, 2002
compared to $350,000 in the three months ended March 31, 2001. The Company had
no further sales of Cardiac Science, Inc. common stock in the current year,
whereas the Company sold 73,000 shares of Cardiac Science in the same period of
2001. The net book value of the shares was $0.
Total minority interest increased to $200,000 in the three months ended
March 31, 2002 compared to $126,000 in the same period of the prior year due to
lower profits in the Northern Nevada and Southern Idaho operations and
recognition of the Company's portion of operating losses in Arcoma AB operations
in 2002 compared to income from operations for Medicredit.com, Inc. in 2001.
Provision for income taxes for the first quarter of 2002 decreased by
$57,000 as a result of lower taxable income in the current year when compared to
the same period of 2001.
Liquidity and Capital Resources
-------------------------------
At March 31, 2002, the Company had cash and short-term investments of
approximately $6.1 million. These funds were generated from continuing operating
activities.
As of March 31, 2002, the Company held 95,000 shares of Genstar
Therapeutics Corp. common stock. The Company will continue to liquidate its
holdings in these companies as markets allow.
As of May 1, 2002, the Company's holdings of Genstar Therapeutics Corp.
(95,000 shares) has an approximate market value of $74,000.
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 2002.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Forward-looking statements in this report, including without
limitation, statements relating to
-13-
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-
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 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herein:
None.
(b) Reports on Form 8-K.
None.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDSTONE INTERNATIONAL, INC.
----------------------------
A Delaware corporation
Date: May 14, 2002
/s/ Mark Selawski
--------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)
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