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, 2001
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)
DELAWARE 66-0439440
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(State or other jurisdiction (I.R.S. Employer
of 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
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 2, 2001 was 4,176,220.
MEDSTONE INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
Nine Months Ended September 30, 2001 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 2001 and 2000 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 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
--------------- ------------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,872,927 $ 945,610
Short-term investments held to maturity 3,381,474 5,223,659
Accounts receivable, less allowance for doubtful accounts
$685,986 and $477,180 at September 30, 2001 and
December 31, 2000, respectively 4,269,887 4,165,563
Inventories, less allowance for inventory obsolescence
of $498,417 at September 30, 2001 and $457,088 at
December 31, 2000, respectively 6,330,296 6,103,051
Deferred tax assets 1,005,814 1,005,814
Prepaid expenses and other current assets 392,125 526,825
--------------- ----------------
Total current assets 18,252,523 17,970,522
Buildings, property and equipment, at cost:
Building 359,324 359,324
Lithotripters 13,243,389 12,316,739
Equipment, furniture and fixtures 3,031,040 2,784,217
Leasehold improvements 170,427 157,083
--------------- ----------------
16,804,180 15,617,363
Less accumulated depreciation and amortization (11,929,446) (10,440,172)
--------------- ----------------
Net property and equipment 4,874,734 5,177,191
--------------- ----------------
Goodwill, net 3,230,170 3,306,622
Investment in unconsolidated subsidiaries 2,114,584 1,263,598
Long-term receivable from unconsolidated subsidiary 2,000,000 2,000,000
Net investment in sale-type lease 262,737 ---
Other assets, net 122,931 158,914
--------------- ----------------
$ 30,857,679 $ 29,876,847
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 969,846 $ 657,878
Accrued expenses 506,102 580,232
Accrued income taxes 278,449 73,314
Accrued payroll expenses 307,751 347,034
Customer deposits 367,730 58,441
Deferred revenue 611,549 656,332
--------------- ----------------
Total current liabilities 3,041,427 2,373,231
Deferred tax liabilities 562,313 562,313
Minority interest 622,736 554,292
Deferred rent 85,575 78,697
Stockholders' equity:
Common stock - $.004 par value, 20,000,000 shares authorized,
5,742,670 shares issued and outstanding at both September 30,
2001 and December 31, 2000, respectively 22,971 22,971
Additional paid-in capital 19,646,388 19,646,388
Accumulated earnings 17,603,770 16,708,143
Accumulated other comprehensive income 47,588 55,395
Treasury stock, at cost, 1,544,450 and 1,434,450 shares at
September 30, 2001 and December 31, 2000, respectively (10,775,089) (10,124,583)
--------------- ----------------
Total stockholders' equity 26,545,628 26,308,314
--------------- ----------------
$ 30,857,679 $ 29,876,847
=============== ================
See accompanying notes.
3
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
Revenues:
Procedures, maintenance fees and fee-for service.... $ 4,816,951 $ 4,908,462 $ 14,076,918 $ 14,215,683
Net equipment sales................................. 1,066,443 374,000 2,134,302 2,880,544
Interest income..................................... 104,139 160,408 362,096 439,107
------------- ------------- ------------ -------------
Total revenues...................................... 5,987,533 5,442,870 16,573,316 17,535,334
Costs and expenses:
Costs of procedures and maintenance fees............ 2,928,207 3,209,622 8,438,313 8,642,755
Cost of equipment sales............................. 683,820 222,145 1,705,647 1,939,484
Research and development............................ 319,631 253,145 879,735 913,522
Selling .......................................... 681,465 544,491 1,925,116 1,575,547
General and administrative.......................... 591,478 559,161 1,903,783 1,941,904
------------- ------------- ------------ -------------
` Total costs and operating expenses.................. 5,204,601 4,788,564 14,852,594 15,013,212
------------- ------------- ------------ -------------
Operating income.................................... 782,932 654,306 1,720,722 2,522,122
Other expense (income):
Gain on sale of investments......................... (200,169) (471,897) (627,774) (1,552,607)
Other expense....................................... 47,255 22,270 99,631 73,535
------------- ------------- ------------ -------------
Total other expense (income):....................... (152,914) (449,627) (528,143) (1,479,072)
Minority interests:
Minority interest in subsidiaries income............ 229,485 213,314 564,444 613,321
Equity in (income)/loss from
unconsolidated subsidiaries.................... 186,179 (12,119) 149,014 (12,119)
------------- ------------- ------------ -------------
Total minority interest............................. 415,664 201,195 713,458 601,202
------------- ------------- ------------ -------------
Income before provision for income taxes................ 520,182 902,738 1,535,407 3,399,992
Provision for income taxes.............................. 205,129 330,000 639,780 1,349,990
------------- ------------- ------------ -------------
Net income .......................................... $ 315,053 $ 572,738 $ 895,627 $ 2,050,002
============= ============= ============ =============
Earnings per share:
Basic .......................................... $ .08 $ .13 $ .21 $ .45
============= ============= ============ =============
Diluted .......................................... $ .08 $ .13 $ .21 $ .45
============= ============= ============ =============
Number of shares used in the computation of
earnings per share:
Basic .......................................... 4,198,220 4,421,134 4,223,220 4,544,616
============= ============= ============ =============
Diluted .......................................... 4,198,220 4,458,456 4,226,971 4,549,489
============= ============= ============ =============
See accompanying notes.
4
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------------
Number of paid-in Accumulated Comprehensive Treasury
shares Amount capital earnings income (loss) Stock Total
--------- -------- ----------- -------- ---------------- ------------ --------------
Balance at December 31, 2000 4,308,220 $ 22,971 $19,646,388 $ 16,708,143 $ 55,395 $ (10,124,583) $ 26,308,314
Net income --- --- --- 895,627 --- --- 895,627
Other comprehensive income:
Unrealized loss on foreign
currency translation, net --- --- --- --- (7,807) --- (7,807)
-----------
Total comprehensive income 887,820
-----------
Treasury stock repurchased (110,000) --- --- --- --- (650,506) (650,506)
-------- -------- ---------- ------------ ------------ -------------- -----------
Balance at September 30, 2001
(Unaudited) 4,198,220 $ 22,971 $19,646,388 $ 17,603,770 $ 47,588 $ (10,775,089) $26,545,628
========= ======== =========== ============ ============ =============== ===========
See accompanying notes.
5
MEDSTONE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2000
(Unaudited)
2001 2000
----------------- ------------------
Cash flows from operating activities:
Net income ........................................................... $ 895,627 $ 2,050,002
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization................................. 1,569,241 1,801,879
Minority interest in partnership.............................. 564,444 613,321
Minority equity in unconsolidated subsidiaries................ 149,014 (12,119)
Provision for doubtful accounts.............................. 215,000 ---
Provision for inventory obsolescence.......................... 126,000 70,000
Gain on sale of investments................................... (627,774) (1,552,607)
Provision for investment write down........................... ---
Changes in assets and liabilities:
Accounts receivable....................................... (319,324) (404,647)
Receivable from unconsolidated subsidiary................. --- (805,934)
Inventories............................................... (575,131) 38,393
Prepaid expenses and other current assets................. 236,963 96,145
Accounts payable and accrued expenses..................... 208,255 (204,220)
Accrued income taxes...................................... 232,850 (62,834)
Deferred revenue.......................................... (44,783) (152,786)
Customer deposits......................................... 309,289 54,847
Other, net................................................ 4,151 36,629
---------------- ----------------
Net cash provided by operating activities..................... 2,943,822 1,566,069
---------------- ----------------
Cash flows from investing activities:
Purchase of short-term investments.................................... (6,739,054) (10,795,267)
Proceeds from sales of short-term investments......................... 8,581,239 13,029,838
Sale of long-term investments......................................... 627,774 1,552,607
Distribution of minority interest..................................... (496,000) (434,000)
Investment in other entities.......................................... (1,000,000) (1,000,000)
Long-term loan to unconsolidated subsidiary........................... --- (1,200,000)
Purchase of property and equipment.................................... (1,199,985) (1,045,563)
Disposals of property and equipment................................... 5,963 3,723
---------------- ----------------
Net cash provided by (used in) investing activities........... (220,063) 111,338
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................... --- 214,313
Purchase of Treasury Stock............................................ (650,506) (1,824,745)
Net investment in sale-type lease ................................... (143,114) ---
Deferral of rent payments ........................................... 6,878 38,897
Loan payments......................................................... (9,700) (38,208)
---------------- ----------------
Net cash used in financing activities......................... (796,442) (1,609,743)
---------------- ----------------
Net increase in cash and cash equivalents................................. 1,927,317 67,664
Cash and cash equivalents at beginning of period.......................... 945,610 1,061,422
---------------- ----------------
Cash and cash equivalents at end of period................................ $ 2,872,927 $ 1,129,086
================ ================
Supplemental cash flow disclosures:
Cash paid during the period for:
Income taxes ....................................................... $ 442,086 $ 1,409,327
Interest.............................................................. $ 0 $ 0
See accompanying notes.
6
MEDSTONE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
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, 2001 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 2000 Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 30, 2001.
Results of operations for the three and nine months ended September 30, 2001 are
not necessarily indicative of results to be expected for the full year.
On September 1, 2001, the Company purchased common stock representing 25%
of the outstanding shares of Arcoma AB, a Swedish manufacturer and supplier of
equipment to the Company. The Company reflects this purchase as an investment in
unconsolidated subsidiary and reflects its proportional percentage of operating
income or loss in minority interests. Operating results for Arcoma AB for the
three months ended September 30, 2001 were not material.
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. Recently Issued Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
7
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income, after tax, of approximately $60,000 ($.01 per share) per year.
During 2002, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
C. Accumulated Other Comprehensive Loss
The components of other comprehensive loss are as follows:
Currency Translation Adjustment
-------------------------------
Balance at December 31, 2000 $ 55,395
Foreign currency translation adjustments (7,807)
----------
Balance at September 30, 2001 $ 47,588
==========
The functional currency of the investment in foreign subsidiaries is
considered to be the United States dollar.
The earnings associated with the Company's investment in its foreign
subsidiaries 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 September 30, 2001 and 2000, total comprehensive
income was $321,068 and $541,666, respectively, For the nine months ended
September 30, 2001 and 2000, total comprehensive income was $887,820 and
$2,130,187, respectively.
D. Business Segments
The Company operates in two business segments, equipment sales and fees
for procedures, maintenance and management.
Three months ended Nine months ended
September September
2001 2000 2001 2000
---------- ---------- ----------- -----------
Revenue:
Equipment sales $1,066,443 $ 374,000 $ 2,134,302 $ 2,880,544
Fees for procedures,
maintenance and
management 4,816,951 4,908,462 14,076,918 14,215,683
---------- ---------- ----------- -----------
$5,883,394 $5,282,462 $16,211,220 $17,096,227
========== ========== =========== ===========
Operating income (loss):
Equipment sales $ 94,547 $ (34,593) $ (29,144) $ 82,687
Fees for procedures,
maintenance and
management 841,298 1,138,526 2,278,008 3,918,507
---------- ---------- ----------- -----------
$ 935,845 $1,103,933 $ 2,248,864 $ 4,001,194
========== ========== =========== ===========
8
E. 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.
The following table sets forth the computation of earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------- ------------- -------------- ---------------
Numerator: Net income $ 315,053 $ 572,738 $ 895,627 $ 2,050,002
=============== ============= ============= ================
Denominator for weighted
average shares outstanding 4,198,220 4,421,134 4,223,220 4,544,616
=============== ============= ============= ================
Basic earnings per share $ .08 $ .13 $ .21 $ .45
=============== ============= ============= ===============
Effect of dilutive securities:
Weighted average shares
outstanding 4,198,220 4,421,134 4,223,220 4,544,616
Stock options --- 37,322 3,751 4,873
--------------- ------------- ------------- ---------------
Denominator for diluted earnings
per share 4,198,220 4,458,456 4,226,971 4,549,489
=============== ============= ============= ===============
Diluted earnings per share $ .08 $ .13 $ .21 $ .45
=============== ============= ============= ==============
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.
F. Inventories
At September 30, 2001 and December 31, 2000, inventories consisted
of the following:
September 30, December 31,
2001 2000
------------- ------------
Raw materials $ 4,347,417 $ 3,888,640
Work in process 438,770 231,175
Finished goods 1,544,109 1,983,236
------------- ------------
$ 6,330,296 $ 6,103,051
============= ============
9
G. Contingencies
From time to time, the Company is subject to legal actions and claims for
personal injuries or property damage related to patients who use its products.
The Company has obtained a liability insurance policy providing coverage for
product liability and other claims. Management does not believe that the
resolution of any current proceedings will have a material financial impact on
the Company or the consolidated financial statements.
H. Stock Repurchase Plan
On September 26, 2001, the Company announced a stock repurchase plan of up
to 420,000 additional shares of its Common Stock. During the third quarter of
2001 the Company did not repurchase any shares. Under all of the Company's stock
repurchase plans a total of 1,544,450 shares have been repurchased at a total
cost of $10,775,089.
I. Subsequent Events
Stock Repurchase Plan
---------------------
From October 1, 2001 through November 2, 2001, the Company has repurchased
a total of 22,000 shares of its Common Stock under the current Stock Repurchase
Plan for a cost of approximately $92,000.
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 2000 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 2001.
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 are 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 tables 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.
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 23
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.
Results of Operations
Three Months ended September 30, 2001 Compared to Three Months Ended September
------------------------------------------------------------------------------
30, 2000
--------
The Company recognized total revenue of $6.0 million in the third
quarter of 2001 compared to $5.4 million in the third quarter of 2000, or a 10%
increase. Revenues from procedures, maintenance and management fees decreased
from $4.9 million in the three months ended September 30, 2000 to $4.8 million
in the three months ended September 30, 2001 due to lower average per patient
charges on the Company's fee-for-service equipment even as the patient count
increased slightly. Also decreasing were the revenues from maintenance contracts
as the number of contracts declined. Partially offsetting these decreases were
increased spares revenues as there were higher shipments for both domestic and
foreign customers in the current year when compared to the same period of the
prior year. Equipment revenues increased to $1.066 million in the quarter ending
September 30, 2001 from $ .374 million in the comparable
11
quarter of the prior year, or a 185% increase. The Company shipped one
lithotripsy system in each period but there were 29 various patient handling
tables shipped in the 3 months ended September 30, 2001 compared to two shipped
in the same period of 2000.
Interest income decreased by 35% in the third quarter of 2001 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 61% of sales in the
quarter ended September 30, 2001 compared to 65% 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 increased to 64% of sales in the three months ended September 30, 2001
compared to 59% of sales in the same period of 2000. This increase is due to a
higher cost of sales of imaging tables and increased costs of production on
lithotripsy equipment. Overall cost of sales, as a percentage of revenue
(excluding interest), decreased to 61% in the third quarter of 2001 compared to
65% in the third quarter of 2000.
Research and development costs increased to $320,000 in the third
quarter of 2001 compared to $253,000 in the third quarter of 2000 or an increase
of 26% due to additional UroPro 2000 development spending and additional
consulting expenses as the Company accelerates spending on new applications for
our existing equipment.
Selling costs increased to $681,000 in the third quarter of 2001
compared to $544,000 in the same period of the prior year, a change of $137,000
or 25% due to higher payroll expenses for added sales staff and increased bad
debt expense.
General and administrative expenses increased by $32,000 or 6% in the
three months ended September 30, 2001 compared to the same period in the prior
year due to higher legal and audit expenses.
Gain on sale of investments was approximately $200,000 in the quarter
ending September 30, 2001 compared to $472,000 in the three months ended
September 30, 2000. The Company sold the final 86,000 shares of its Cardiac
Science, Inc. common stock in the current year, whereas the Company sold 65,000
shares of Cardiac Science in the same period of 2000 at a higher average per
share price. The net book value of all shares was $0.
Total minority interest expense increased to $416,000 in the three
months ended September 30, 2001 compared to $201,000 in the same period of the
prior year due to higher profits in the Northern Nevada and Southern Idaho
operations and recognition of the Company's portion of operating losses in
Medicredit.com, Inc., k.Biotech and Arcoma AB operations in 2001.
12
Provision for income taxes for the third quarter of 2001 decreased by
$125,000 as a result of lower taxable income in the current year when compared
to the same period of 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
--------------------------------------------------------------------------------
2000
----
The Company recorded total revenue of $16.6 million in the first nine
months of 2001 or a 5% decrease compared to $17.5 million in the corresponding
period of 2000. Revenues from procedures, maintenance and management fees
decreased by $139,000, or 1%, due to lower average reimbursement per patient
even as total patient count increased by 3% in the current year, to over 21,400
patients. Maintenance revenue also decreased in the current year compared to the
same period in the prior year. Equipment revenue decreased by $746,000, or 26%,
as lithotripter shipments decreased from 7 in the nine months ended September
30, 2000 to 2 in the same period of 2001. Offsetting some of the decline in
lithotripter shipments is the increased activity in the Company's imaging
tables, as the Company has shipped 78 various types of tables in 2001 with only
2 units sold in the corresponding period of 2000.
Interest income decreased by 18% for the first nine months of 2001
when compared to the same period of the prior year as significantly lower
interest yields were earned on a lower average invested balance.
Procedure, maintenance and management fee cost of sales decreased to
60% in the nine months ended September 30, 2001 compared to 61% in the same
period of the prior year as costs decreased in the fee-for-service program due
to lower depreciation and equipment rental costs. Cost of sales on equipment
sales increased to 80% of revenue in the first nine months of 2001 compared to
67% of revenue in the first nine months of 2000 due to lower margins on imaging
tables. Overall cost of sales, as a percentage of revenue (excluding interest),
increased slightly to 63% in the first nine months of 2001 compared to 62% in
the first nine months of 2000.
Research and development costs decreased by $34,000, or 4% in the
first nine months of 2001 when compared to the same period of 2000 as the
Company developed the UroPro 2000 table in 2000 and is increasing spending on
new project applications in 2001.
Selling costs increased by 22%, or $350,000, in the first nine months
of 2001 compared to the same period of 2000 due to higher tradeshow expenses,
payroll for expanded imaging sales efforts and bad debt expense.
General and administrative expenses decreased by 2%, or $38,000, in
the nine months ended September 30, 2001 compared to the first nine months of
2000 due to lower consulting expense regarding the gallstone filing and lower
audit fees due to the 2000 acquisition of an ownership interest in
Medicredit.com, Inc..
Gain on sale of investments was $628,000 in the nine months ended
September 30,2001 compared to $1,553,000 in the nine months ended September 30,
2000. In 2001, the Company sold a total of 187,000 shares of Cardiac Science
common stock whereas 258,667 shares of
13
Cardiac Science common stock and 5,000 shares of Genstar Therapeutics Corp.
(Formerly Urogen Corp.) were sold in 2000. The net book value of all shares sold
was $0.
Minority interest increased by 19%, or $112,000 in the nine months
ended September 30, 2001 when compared to the same period of the prior year due
to decreased profits in the partnership operations and recognition of the
Company's portion of the losses of k.Biotech and Arcoma AB and minimal equity
earnings from Medicredit.com, Inc.
Provision for income taxes decreased to $640,000 in the first nine
months of 2001 compared to $1,350,000 for the same period of 2000 as a result of
lower taxable income in the current year.
Liquidity and Capital Resources
-------------------------------
At September 30, 2001, the Company had cash and short-term investments
of approximately $6.3 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 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 2001.
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
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: November 8, 2001 /s/ Mark Selawski
----------------------------
Mark Selawski
Chief Financial Officer
(Principal financial and
accounting officer)