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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
COMMISSION FILE NUMBER 0-16752
MEDSTONE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 66-0439440
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 COLUMBIA, SUITE 100, ALISO VIEJO, CALIFORNIA 92656
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 448-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.004 PAR VALUE
(TITLE OF CLASS)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form-K. [ ]
The number of shares of the Common Stock of the registrant outstanding as
of March 10, 1997 was 5,440,330. The number of shares of Common Stock held by
nonaffiliates on such date was 5,177,746 with an approximate aggregate market
value of $45,952,496.
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TABLE OF CONTENTS
Page
Item Number and Caption Number
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 7
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 15
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 15
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 20
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Medstone International, Inc., formerly known as Cytocare, Inc. prior to its
renaming in September 1995 (the "Company" or "Medstone"), a Delaware
corporation formed in October 1984, manufactures, markets and maintains
lithotripters. The Company, as a manufacturer of capital medical devices, has
been vertically integrating by offering its medical devices directly to
providers on a fee-per-procedure basis. Medstone currently offers lithotripsy
services in the United States on a fee-per-procedure basis in both the fixed
and mobile environment. Medstone intends to expand efforts to grow this
medical service side of its business. A majority of the Company's consolidated
revenues during fiscal 1996 came from Medstone's lithotripsy business.
In early 1996, the Company completed efforts to separate its operating
business units and revenue streams into independent operations by spinning off
two subsidiaries, Endocare, Inc. ("Endocare") and UroGen Corp. ("UroGen"), to
the Company's stockholders of record at December 29, 1995. Endocare
manufactures equipment and devices to treat urologic soft tissue diseases.
UroGen is a development stage company in the business of developing
pharmaceuticals to treat prostate cancer.
In June 1996 the Company purchased, for $1.35 million cash, a 60% interest
in Northern Nevada Lithotripsy Associates, LLC ("Northern Nevada"), an operator
of lithotripsy services. The Company consolidates the revenues of Northern
Nevada and reflects minority interest expense for the portion of profits earned
by the minority partners. Northern Nevada's revenues are derived from
invoicing patients or insurers.
United Physicians Resources, Inc. ("UPR") was incorporated as a
majority-owned subsidiary of the Company in June 1996, to expand the Company's
service orientation to the urologist practitioners. UPR provides billing,
practice management, and consulting services as an additional service line once
the initial physician relationship has been established. UPR purchased the
operations of Integrated Healthcare Systems, Inc. in July 1996 for $30,000.
The operating results of UPR are included in the consolidated financial
statements of the Company since its incorporation.
MARKETS
The Company currently operates in the kidney stone treatment market. In the
United States, it is estimated that over 1,500,000 persons per year suffer from
kidney stones and an estimated 375,000 patients per year are hospitalized with
a primary kidney stone. Historically, approximately 180,000 of these patients
have been treated with extracorporeal shockwave lithotripsy each year. With an
estimated installed base of 380 lithotripters in the United States, there is a
sufficient number of lithotripter to respond to this market.
Outside the United States the incidence of kidney stones varies from country
to country. The installed base of extracorporeal shockwave lithotripters is
not as extensive as in the United States. Medstone has sold systems into
Japan, Egypt, Russia, Israel, Saudi Arabia, U.A.E., and China.
In a joint effort, Medstone and Ciba-Geigy ("Ciba") are preparing to submit
application to the U.S. Food and Drug Administration ("FDA") to treat certain
types of gallstones. Such treatment would include the use of the Medstone
lithotripter to fragment the gallstones and Ciba's drug Actigall to dissolve
the fragments. If the Medstone lithotripsy system were to receive such
approval, it would be the only system approved to treat kidney stones and
gallstones on the same equipment in the United States although no assurance can
be given that such approval will ever be given. See "Governmental Regulation"
below.
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In the United States, it is estimated that 20,000,000 persons have
gallstones resulting in approximately 600,000 surgeries each year to remove
these gallstones. At this time it is impossible to estimate the number of
procedures that would be performed using the non-invasive lithotripsy/drug
alternative.
Medstone is also investigating the application of shockwave therapy for
various orthopedic applications.
The share of its markets that the Company will obtain will be dependent on
successful development of new products, obtaining appropriate regulatory agency
approvals, market acceptance of the products, the Company's ability to market,
the alternative sources of equivalent products and future developments.
PRODUCTS
The Medstone STS ("System") is presently being used to treat kidney stones,
without invasive surgery, in the U.S. and foreign locations. The Company
received a pre-market approval ("PMA") from the FDA in 1988 authorizing
commercial use of the device for treating patients with kidney stones.
A series of shockwaves are created outside the patient's body and focused to
travel through water-based fluids until they enter the body and disintegrate
the stone. Each successive shockwave serves to further break apart the kidney
stone into smaller particles until they are small enough to be passed in the
patient's urine. A treatment typically requires 1200-1600 shockwaves in a
procedure which lasts 45 to 60 minutes.
In addition to the shockwave generator, the Medstone STS's components
include a customized X-ray table on which the patient lies horizontally with
his or her kidney positioned above the shockwave generator, a computer, an
X-ray system, an ultrasound system, and an electrocardiogram ("ECG") monitor.
The computer generates information regarding the treatment and monitors the
patient's condition. The X-ray/ultrasound system produces images that are
converted and analyzed by the computer and then used by the physician for
proper positioning and to determine when the kidney stone has been sufficiently
disintegrated to terminate the treatment. The ECG monitor supplies the data
that allows the computer to synchronize the shockwaves with phases of the
patient's heartbeat.
The Company has developed and copyrighted all the software that controls the
Medstone STS. This software, an integral part of the system and therefore
subject to review by regulatory agencies, is licensed for use on a per
procedure basis.
The Company also has developed and manufactures its own disposable
components for use with the Medstone STS. Electrodes manufactured by the
Company are used to produce electrical sparks in the shockwave generator part
of the device. A disposable coupling bag containing fluid for transmission of
the shockwave is placed between the shockwave generator and the patient's back
or stomach during the treatment. One complete set of the supplies is normally
used in each patient procedure.
The Company, as a vertically integrated manufacturer, also offers
fee-for-service lithotripsy in the continental United States. It has placed
its lithotripters in mobile trailers and contracts with hospitals, clinics, and
ambulatory surgery centers to provide the equipment necessary to treat kidney
stones, usually on an outpatient basis. This allows small and mid-size
facilities in wide ranging geographic locations to access equipment and
technology that would only be economically viable in larger population centers.
There are currently over 80 sites in the United States that are active sites on
the Company's mobile routes. The Company plans to continue to expand its
customer base for lithotripsy services in future years.
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KIDNEY STONES AND TREATMENT
A kidney stone develops when the salt and mineral substances in urine form
crystals that stick together and grow in size. In most cases, these crystals
are removed from the body by the flow of urine, but they sometimes stick to the
lining of the kidney or settle in places where the urine flow fails to carry
them away. These crystals may gather and grow into a stone ranging in size
from that of a grain of sand to a golf ball. Most stones start to form in the
kidney. Some may travel to other parts of the urinary system, such as the
ureter or bladder, and grow there.
Stones vary in size, composition, and the ease with which they can be
dissolved. In some cases, certain medications may be used to lower the amount
of acidity or alkalinity in the urine, thereby dissolving the stones. At
present, stones that contain calcium cannot be dissolved. Most stones can be
treated with conservative methods. This includes increased fluid intake,
changes in diet, and medications. About 90 percent of stones that leave the
kidney will pass through the ureter within three to six weeks. Stones that do
not pass through the ureter may be removed with the aid of a grasping device
(basket). The device is passed through a telescopic instrument (cystoscope)
that the doctor inserts into the bladder or ureter (urethroscope). In some
cases, the stones are removed whole, but sometimes they must be broken into
smaller pieces with ultrasound before they can be removed with the basket.
The Medstone STS is a non-invasive nonsurgical treatment for stones in the
kidney and ureter called extracorporeal shockwave lithotripsy. In this method,
X-rays are used to target the stone, and then high energy shockwaves are used
to break down the stones into gravel which passes out with urine within a few
weeks.
Although most stones can be treated with nonsurgical methods, certain stones
still require conventional surgery, particularly when there is internal
scarring and obstruction. With conventional surgery, an incision is made over
the stone site. The hospital stay and recovery period are several weeks longer
than when more conservative techniques are used. Therefore, stones are treated
with non-invasive methods when possible.
PRODUCTION
Medstone manufactures, under FDA mandated Good Manufacturing Practice
("GMP") requirements, its devices at its plant in Aliso Viejo, California. The
Company moved into its facility in March 1994. Subsequent to that move the
Company was audited by the FDA and has received notification from the FDA
enabling it to manufacture and market devices in that facility. The Company
has existing capacity to produce sufficient quantities of its shockwave
lithotripters to support its commercial needs for the foreseeable future.
PRODUCT DEVELOPMENT
The Company has focused its research in 1996 on developments intended to
improve performance and convenience, and also to reduce the size and costs of
its lithotripter systems. The Company devotes significant resources to
research and development, and will continue to invest significantly in
proprietary products. During the years ended December 31, 1994, 1995, and
1996, the Company's expenditures for research and development totalled
$1,076,033, $926,665, and $521,793, respectively.
PRODUCT LIABILITY AND INSURANCE
The Company currently has in force commercial liability insurance, with
coverage limits of $1 million per incident, and $2 million on an annual
aggregate basis. It also has general umbrella liability insurance with
coverage limits of $4 million per incident for a total aggregate amount of
$5,000,000 per incident. The Company's insurance policies provide coverage on
a claims-made basis and are subject to annual renewal.
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GOVERNMENT REGULATION
Governmental regulations in the United States and other countries are a
significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the FDA has broad
authority under the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act to regulate the distribution, manufacture and sale of drugs,
including biologics, and medical devices. Foreign sales of drugs and medical
devices are subject to foreign governmental regulation and restrictions which
vary from country to country.
DEVICES - Medical devices intended for human use in the United States are
classified into three categories, depending upon the degree of regulatory
control to which they will be subject. Such devices are classified by
regulation into either class I (general controls), class II (performance
standards) or class III (pre-market approval) depending upon the level of
regulatory control required to provide reasonable assurance of the safety and
effectiveness of the device. A class III product, such as the Medstone STS,
and class I and II devices for which a PMA is necessary generally require
initial Investigational Device Exemption ("IDE") approval by the FDA. An IDE
permits limited clinical evaluation of the product under controlled conditions.
Extensive reporting and monitoring of patient treatments made pursuant to the
IDE are required. After the PMA is obtained, the product may be marketed to an
unrestricted number of users in the United States, but general medical device
regulations regarding FDA inspection of facilities, Good Manufacturing
Practices, labeling, maintenance of records and filings with the FDA continue
to be applicable.
A subset of medical devices categorized as class I or II and classified as
"old" devices, that is, commercially distributed before March 28, 1976 or
substantially equivalent to a device that was in commercial distribution before
that date, may be marketed after the acceptance of the premarket notification
under a 510(k) exemption. The 510(k) section of the Federal Food, Drug and
Cosmetic Act allows an exemption from the requirement of premarket
notification.
Medstone has obtained from the California Department of Health Services a
license to manufacture medical devices and is subject to periodic inspections
and other regulation by that agency.
Certificate of Need ("CON") laws and regulations are in effect in many
states. Under such laws, a CON issued by a governmental agency is generally
required before the introduction of certain new health care services or before
a hospital or other provider can acquire certain new medical equipment or
facilities having values exceeding specified amounts. Failure to obtain a
required CON may prohibit the purchase of desired equipment or cause the denial
of Medicare or other governmental reimbursements or payments for patient
treatments. In recent years several states have repealed their CON laws and
many other states have made or are considering possible amendments to the laws.
Most of the revisions involve raising the thresholds for review, eliminating
certain types of facilities or services from review or streamlining the review
process.
PATENTS, COPYRIGHTS, TRADE SECRETS AND LICENSES
The Company's policy is to secure and protect intellectual property rights
relating to its technology. While Medstone believes that the protection of
patents or licenses is important to its business, it also relies on trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. The Company has received or filed for certain patents or
copyrights for its lithotripter operating systems.
The Company seeks to preserve the confidentiality of its technology by
entering into confidentiality agreements with its employees, consultants,
customers, and key vendors and by other means. No assurance can be given,
however, that these measures will prevent the unauthorized disclosure or use of
such technology.
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COMPETITION
The Company's products currently marketed and under development will be
competing with many existing products and therapies for market share. The
Company competes with fully integrated device companies, many of which have
substantially more experience, financial and other resources and superior
expertise in research and development, manufacturing, testing, obtaining
regulatory approvals, marketing and distribution.
Future products of the Company are expected to address the urological
market. The Company's competition will be determined in part by the particular
urological disease to which the Company's potential products relate. An
important factor in competition may be the timing of market introduction of its
or competitive products. Accordingly, the relative speed with which Medstone
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market are expected to be
important competitive factors. The Company expects that competition among
products approved for sale will be based on, among other things, product
efficacy, safety, reliability, availability, price, patent position and sales,
marketing and distribution capabilities.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
SHOCKWAVE LITHOTRIPTERS
The Company's two principal competitors in shockwave lithotripsy are
Dornier, a subsidiary of a Singapore-based conglomerate, and Siemens GmbH, a
German electronic company. In addition, a number of other companies, both in
the U.S. and foreign countries, have PMAs to sell their lithotripters for the
treatment of kidney stones in the U.S. or are conducting clinical studies on
the use of lithotripters for the treatment of kidney stones.
The Company believes that, in addition to the obtaining of FDA and other
governmental approvals, important competitive factors in the markets for
shockwave lithotripters include the reliability, effectiveness in treating
patients and pricing of particular systems. The Company believes the Medstone
System compares favorably with other lithotripters presently being offered by
competitors with respect to the precision of its imaging systems, its ease of
patient handling, its simplicity of operation design, its safety features and
its success rate in treating patients.
MOBILE LITHOTRIPSY SERVICES
In the fee-for-service business segment, the Company competes with a number
of service oriented medical businesses, in a fragmented and highly competitive
industry, both nationally and locally. Moreover, certain of the Company's
current and potential competitors have substantially greater financial
resources than the Company and may compete with the Company for acquisitions
and development of operations in markets targeted by the Company. The Company
has experienced competition in the acquisition of existing lithotripsy
facilities and the development of relationships with treating physicians. The
Company has experienced competition from hospitals or treating physicians who
have opened their own lithotripsy facilities. Such competition could intensify
in the event of a decrease in the purchase price of lithotripters or if the
supply of new or used lithotripters increases over time.
The Company's main competitors in the fee-for-service business are Prime
Medical Services, Inc., a Texas-based mobile lithotripsy provider, Coram
Healthcare, a Colorado-based healthcare concern, of which one operating entity
owns lithotripsy provider partnerships, and other smaller regional and local
providers.
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SALES AND MARKETING
The Company's current products and pipeline of products are targeted at the
urology market. Medstone has a direct sales force, covering the continental
United States. Outside the United States, the Company uses a network of
distributors.
The Company generates revenue from the sale of equipment, and also from the
sale of software licenses, disposable supplies, procedure fees and service
contracts to hospitals, physicians, and other health care providers.
The Company offers to hospitals, surgery centers and physician groups
lithotripsy services on a fee basis. In the current cost conscious healthcare
environment many facilities do not have the patient flow to justify owning, or
the available capital to purchase, a lithotripsy machine. These facilities are
candidates for fee-for-service. In a fee-for-service arrangement the customer
will sign a contract for a period of time, typically one to three years, and
will pay a fixed fee for each patient treated on the lithotripter. Most often
this service is provided by a lithotripter that is in a mobile van so a single
machine can provide service over a wide geographic area. For facilities with
adequate patient flow, fee-for-service can be provided with a fixed unit
installed in that facility.
Marketing for the Company's products is accomplished through advertisement
in medical journals, direct mail, direct physician contact, company
participation in various associations, product exhibition and telephonic
marketing.
BACKLOG - SHOCKWAVE LITHOTRIPSY
The Company's lithotripsy equipment sale backlog was $480,000 as of March
24, 1997 and $440,000 as of March 20, 1996. Due to the high per unit price of
the Medstone Systems, equipment backlog can vary significantly from period to
period based upon the number of systems on order. Backlog consists only of
orders evidenced by signed contracts for equipment scheduled for delivery and
installation within 12 months and does not include revenues for maintenance and
per procedure charges, or management services contracts.
With the maturity of Medstone's lithotripsy business, recurring revenues
from fee for service and procedure fees and maintenance services have become a
major source of Medstone's revenue stream. Maintenance services are generally
provided under annual service contracts, and procedure and fee for service fees
are earned based upon usage of the System.
HUMAN RESOURCES
As of February 15, 1997, Medstone had 81 employees. Of the 81 employees, 7
are engaged directly in research and development activities, 12 are engaged in
manufacturing, 17 are engaged in mobile operations, 15 are engaged in field
service, 13 are engaged in sales and marketing and 17 are employed in general
and administrative positions.
Although Medstone conducts most of its research and development using its
own employees, the Company has funded, and plans to continue to fund, research
using consultants. Consultants provide services under written agreements and
are paid based on the amount of time spent on Company matters. Under their
consulting agreements, Medstone's consultants are required to disclose and
assign to the Company any ideas, discoveries and inventions developed by them
in the course of providing consulting services.
ITEM 2. PROPERTIES
In March 1994, the Company took occupancy of office, manufacturing,
engineering, and warehouse space, and research and development laboratories,
located in Aliso Viejo, California, under an operating lease with an initial
term of two years. The monthly lease rate was $12,500 through February 1996
and the first year extension was at a monthly lease rate of $12,862 and the
second one-year option to extend the lease was exercised, extending the lease
until March 1998 at a monthly lease rate of $13,360.
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UPR leases a 1,600 square foot office in Templeton, California under
an operating lease which expires in October 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company does not carry director and officer liability insurance,
but does have indemnification agreements with its officers and directors.
The Company was a defendant in two related class action lawsuits
filed by two shareholders of the Company alleging that adverse material
information was not disclosed at the time of the initial public offering and in
subsequent periods. On June 20, 1996 the defendants and plaintiffs reached an
agreement whereby a $6 million, non-recapturable settlement fund will be
established in return for dismissal of all claims against the Company, its
underwriter and current and former officers and directors. The Company
recorded a one-time, $5.5 million expense in the second quarter of 1996 to
cover its portion of the settlement fund, with the first half paid on July 9,
1996 and the second half paid on August 15, 1996. All funds for the settlement
were remitted by the Company, with the co-defendants having paid their portions
to the Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on July 23,
1996. At the meeting Frank R. Pope, David V. Radlinski, Donald Regan and
Michael C. Tibbitts were elected directors.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is included
in Item 10 of Part III.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to January 24, 1991, the Company's common stock was traded on
the NASDAQ Stock Market under the symbol MSHK. On January 24, 1991, the
Company changed its name to Cytocare, Inc. and began trading on the NASDAQ
Stock Market under the symbol CYTI. On September 25, 1995, the Company changed
its name to Medstone International, Inc. and began trading on the NASDAQ Stock
Market under the symbol MEDS. The following table sets forth the high and low
sales prices of the Company's common stock for the two years ended December 31,
1995 and December 31, 1996 as reported in the NASDAQ National Market System for
the quarter indicated.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1995
----------------------------
First quarter $ 6-1/8 $ 5
Second quarter 8-5/8 5-1/2
Third quarter 12 7-1/2
Fourth quarter 12-1/2 8-7/8
YEAR ENDED DECEMBER 31, 1996
----------------------------
First quarter $ 12-1/8 $ 7-5/8
Second quarter 10-5/8 8
Third quarter 9-3/4 6-1/2
Fourth quarter 9-1/8 6-1/2
The stock markets have experienced extreme price and volume
fluctuations during certain periods. These broad market fluctuations and other
factors may adversely affect the market price of the Company's Common Stock.
Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in the fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's stock. Finally, the Company participates in a highly
dynamic industry, which often results in significant volatility of the
Company's common stock price.
At March 17, 1997, there were 342 stockholders of record and
approximately 3,100 beneficial owners of the Company's Common Stock.
On February 9, 1996, the Company distributed two stock dividends,
one common share of both Endocare and of Urogen for each common share of
Medstone to holders of record at the close of business on December 29, 1995.
The shares represent a distribution of all the assets of these two subsidiaries
of the Company which became separate public companies upon distribution. Those
companies operate as separate entities as of January 1, 1996. (See Footnote 10
to the Company's Consolidated Financial Statements.)
The Company has not paid any cash dividends during its two most
recent fiscal years. The Company's board of directors does not presently
anticipate that any cash dividends will be paid in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- -------- --------- ---------
Revenues:
Net equipment sales $ 2,420 $ 4,588 $ 3,125 $ 2,317 $ 5,407
Procedure and maintenance fees,
and management fees 14,884 12,797 12,538 10,875 7,530
Interest and dividends 676 1,005 642 481 631
---------- --------- -------- --------- ---------
Total revenues 17,980 18,390 16,305 13,673 13,568
Costs and expenses:
Cost of sales 8,009 7,633 6,004 5,506 5,994
Research and development 522 927 1,076 2,334 2,193
Selling 2,146 2,050 2,551 2,674 1,619
General and administrative 1,666 1,656 2,105 2,226 1,583
Lawsuit settlement cost 5,500 --- --- --- ---
Legal and other expense 402 164 35 338 868
---------- --------- -------- --------- ---------
Total costs and expenses 18,245 12,430 11,771 13,078 12,257
---------- --------- -------- --------- ---------
Income (loss) from operations before income taxes (265) 5,960 4,534 595 1,311
Minority interest 143 --- --- --- ---
Provision for (benefit from) income taxes (170) 2,086 150 65 142
---------- --------- -------- --------- ---------
Net income (loss) $ (238) $ 3,874 $ 4,384 $ 530 $ 1,169
========== ========= ======== ========= =========
Earnings (loss) per share:
Primary net income (loss) per share $ (.04) $ .70 $ .82 $ .10 $ .22
========== ========= ======== ========= =========
Fully diluted net income (loss) per share N/A $ .69 $ .81 $ .10 $ .21
========== ========= ======== ========= =========
CONSOLIDATED BALANCE SHEET DATA:
(in thousands)
DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- -------- --------- ---------
Working capital $ 14,983 $ 18,465 $ 16,658 $ 12,406 $ 11,434
Total assets 25,395 25,910 22,260 17,709 17,817
Total liabilities 4,230 3,753 2,809 2,935 3,707
Stockholders' equity 21,165 22,157 19,451 14,774 14,110
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF 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. To date, the Company's consolidated
revenues have come primarily from Medstone's lithotripsy business. On February
9, 1996, the Company distributed two stock dividends to stockholders of record
on the close of trading on December 29, 1995. The two dividends represented
distribution of all the assets and operations of the Endocare and Urogen
divisions of the Company. Effective with the start of business on January 1,
1996 these two companies were no longer a part of the Medstone operations.
Medstone retained 100,000 shares of each company. These two companies are
separate, publicly-held companies.
In March 1994, the Company moved into a smaller, more efficient
facility at a substantial cost saving. This move did require a PMA supplement
to be filed with the FDA and an audit from the FDA. The Company received
notification from the FDA that the PMA Supplement was approved for
manufacturing at the new facility.
The Company as a manufacturer of capital medical devices has been
vertically integrating by offering its medical devices directly to providers.
It currently offers lithotripsy procedures using 13 mobile systems and one
fixed site in the United States on a per procedure basis. With the ability to
offer quality equipment at reasonable prices, Medstone intends to continue the
growth of this manufacturer direct business.
In June 1996, the Company completed the acquisition of a 60%
interest in Northern Nevada, a lithotripsy partnership which deals directly
with patient and insurers and also founded UPR as a majority-owned subsidiary
of the Company, to expand the Company's service orientation to the urologist
practitioner. Both entities signify the Company's emphasis on growth through
expansion of relationships and acquisition. See also Footnote 15 to the
Company's Consolidated Financial Statements regarding the recent acquisition of
a 60% interest in Southern Idaho Lithotripsy Associates, LLC, another "retail"
provider of lithotripsy services.
The Company began the year with approximately $17.6 million in cash
and marketable securities, no debt, inventories of $1.8 million, and total
assets of $25.9 million. After an acquisition , settlement of the class action
lawsuit, investment in seven new mobile trailers and one fixed site system, the
Company ended the year with approximately $11.0 million in cash and marketable
securities, no debt, inventories of $2.5 million and total assets of $25.4
million.
Through its continuing research and development, management of the
Company is putting in place the scientific and engineering base it believes is
necessary to carry it through the next phases of its growth plans.
The Company was a defendant in two related class action lawsuits
filed by two shareholders of the Company alleging that adverse material
information was not disclosed at the time of the initial public offering and in
subsequent periods. On June 20, 1996 the defendants and plaintiffs reached an
agreement whereby a $6 million, non-recapturable settlement fund will be
established in return for dismissal of all claims against the Company, its
underwriter and current and former officers and directors. The Company
recorded a one-time, $5.5 million expense in the second quarter of 1996 to
cover its portion of the settlement fund, with the first half paid on July 9,
1996 and the second half paid on August 15, 1996. All funds for the settlement
were remitted by the Company, with the co-defendants paying their portions to
the Company. (See Item 3. Legal Proceedings).
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.
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In 1996, the Company negotiated with Coram Healthcare ("Coram") for
the right to purchase the lithotripsy related operations of Coram. In October
1996, negotiations ceased and, upon Coram's subsequent acquisition by
Integrated Health Services, Inc., a breakup fee clause was enacted and the
Company is entitled to reimbursement of $1.25 million of certain documented
out-of-pocket expenses relating to the attempted acquisition and related
financing. The Company is scheduled to receive the first reimbursement before
the end of the first quarter of 1997.
ASSETS
Cash and equivalents and short-term investments decreased by
$6,594,000 at December 31, 1996 from December 31, 1995 due to the Company's
capital acquisitions, settlement of the class action lawsuit, and purchase of
the Northern Nevada operation. All of the Company's invested cash balance is
invested in U.S. Treasury Bills at rates of 4.7% to 5.1%.
Accounts receivable increased by $1,178,000 from December 31, 1995
to December 31, 1996 due to the addition of the Northern Nevada receivables and
a much higher number of customers utilizing the fee-for-service program. No
receivables were written off against the accounts receivable reserves in 1996.
Inventories increased by $695,000 at December 31, 1996 from December
31, 1995 due to expansion of the Company's manufacturing effort to meet
delivery schedules of units to be shipped in early 1997.
Note receivable increased by $1,250,000 in the current year due to
the Company's reimbursement agreement from Coram Healthcare for certain
expenses related to the Company's bid to acquire the lithotripsy operations of
Coram.
Prepaid expenses and other current assets decreased by $276,000 due
to the Company's shorter investment maturity schedule.
Property and equipment increased by $2,735,000 from December 31,
1995 to December 31, 1996 primarily as a result of the purchase of mobile vans
used in the mobile lithotripsy operations, partially offset by the distribution
of the Endocare and Urogen assets.
Goodwill, net, increased by $1,119,000 in the current year due to
the purchase of Northern Nevada and the allocation of purchase price to the
assets purchased.
Other assets decreased by $372,000 in the current year due to last
year's deposits for the manufacture of new mobile vans which were delivered in
1996.
LIABILITIES
Accounts payable at December 31, 1996 increased by $1,367,000
compared to December 31, 1995 due to expenses to be paid in connection with the
Company's attempted acquisition of the lithotripsy related operations of Coram.
Accrued income taxes increased $275,000 in the current year due to
allocations between payables and deferred tax assets.
Deferred revenue increased $316,000 in the current year due to
prepayment of several years of maintenance and patient treatments by a new
customer.
Dividends payable at December 31, 1996 decreased by $1,966,000 due
to the distribution of the stock dividend on February 9, 1996 of a share of
Common Stock of both Endocare and Urogen for each share of the Company held on
December 29, 1995.
-11-
14
Deferred tax liabilities increased by $269,000 from December 31,
1995 to December 31, 1996 due to a difference between tax and book depreciation
expense.
Minority interest increased by $111,000 due to the acquisition in
1996 of Northern Nevada, of which the Company is a 60% owner.
STOCKHOLDERS' EQUITY
Additional paid-in-capital increased $159,000 in the current year
due to the exercise of common stock options held by employees and associated
tax benefits.
Treasury Stock increased by $908,000 due to the Company's repurchase
of 112,800 shares of its common stock under the repurchase program initiated in
1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues decreased slightly to $18.0 million, or 2% for the
year ended December 31, 1996 when compared to revenues of $18.4 million in the
year ended December 31, 1995. The revenues from equipment sales decreased by
47% as both the number of units and the average unit selling price decreased.
Also decreasing was the revenue from equipment upgrades when compared to 1995.
Revenue from procedure and maintenance fees, or recurring revenue,
increased by $2.1 million, or 16%, from 1995 levels due to the Company's
continued success in its fee-for-service business, continued growth in revenue
from procedure fees on third-party owned equipment, and the addition of the
Northern Nevada "direct" revenues. Volume on company owned mobile lithotripsy
units increased by 43% in 1996 when compared to 1995. Procedure revenue
increased by 9% in 1996 when compared to 1995 as the volume on third party
owned equipment continued to grow. Revenues acquired with Northern Nevada
increase the per patient revenue due to the revenue recognized when billing
patients or insurers when compared to the revenue from billing providers.
Partially offsetting these gains was the loss of the Endocare revenues, which
totalled $951,000 in 1995, which were spun out effective January 1, 1996.
Interest income decreased by 33% in 1996 when compared to 1995 due
to dramatically lower average invested cash balances which resulted from the
large capital expenditures for mobile lithotripsy trailers and the settlement
of the class action lawsuit.
Cost of equipment sales in 1996 decreased by 38% in 1996 from 1995
levels due to the lower number of unit shipments in the year. Gross margins on
equipment and equipment upgrades decreased due to the decrease in average unit
selling prices.
Cost of recurring revenues increased by $1,158,000, or 21%, in 1996
when compared to 1995 due to the additional costs associated with the eight
additional fee-for-service vans placed in service in 1996, which include
depreciation, van movement costs, and staffing costs. Gross margins decreased
due to lower than optimal utilization on the newer vans placed in service.
Research and development costs decreased in 1996 by 44% when
compared to 1995 levels due to 1995's level of expenses associated with
numerous Endocare new product development projects, most of which became
salable new product lines before completion of the spinout of Endocare. In
1996 the Company concentrated its research efforts on lithotripsy products.
Selling expenses increased by $96,000, or 5%, in 1996 when compared
to 1995 due to the additional sales staff and associated expenses for travel,
along with the costs of product brochures as the Company expanded
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its mobile fee-for-service program from a Western United States concentration
to include the Southwest, Southeast and Northeastern areas of the country. The
Company also increased its efforts in connection with international sales in
1996.
General and administrative expenses remained constant, with an
increase of less than 1% in 1996 compared to 1995 expenses. Administrative
staff expenses of Endocare, spun out at the end of 1995, were offset by staff
expenses for UPR and Northern Nevada.
Other income/expense, net increased by $239,000 in 1996 when
compared to 1995 due to the litigation preparation expenses for the class
action litigation incurred before settlement of the action, partially offset by
the gain on the sale of securities held for investment.
Lawsuit settlement costs increased by $5.5 million due to the
expense recorded for the out-of-court settlement reached by the plaintiffs and
defendants, of which the Company was a co-defendant, on the class action
lawsuit that had been in existence since 1989. This settlement charge
represents closure of all open charges against the Company.
Minority interest expense of $143,000 represents the minority
shareholder's interest in the results of operations of Northern Nevada.
Provision for (benefit from) income taxes recognizes the tax benefit
in 1996 of the net operating loss carryforwards generated in 1996 with that
carryforward expected to be utilized in future periods.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased to $18.4 million for the year ended
December 31, 1995, a 13% increase from the 1994 revenues of $16.3 million. The
increased net equipment sales resulted from an increase in both lithotripsy
systems shipped, and an increase in the average lithotripter unit selling
price. This equipment revenue gain was slightly offset by a decline in 1995 of
upgrades in the Company's installed base of lithotripters from 1994 levels.
Revenue from procedure and maintenance fees, or recurring revenue,
increased in 1995 by $.3 million, or 2%, from 1994 levels due to the continued
expansion of the Company's mobile lithotripsy services and increased revenue
from the procedure fees on third-party owned equipment offset by major declines
in the laser catheter revenues. Revenues from mobile lithotripsy services
increased by $1.3 million or 41% as the volume on the Company's vans increased
by 41% in 1995 compared to the number of patients treated in 1994. Procedure
revenue increased by 4% in 1995 as the utilization for the Company's equipment
owned by third parties continued to increase. The number of procedures
performed on third-party owned lithotripters in the United States increased by
13% from 1994 to 1995. Several Endocare product introductions in the fourth
quarter of 1995 added $273,000 of revenues for 1995. Offsetting these gains
was a 70% decrease in 1995 revenues from the laser catheters due to both lower
unit shipments and prices, as this market matures.
Interest income in 1995 increased by 56% from 1994 levels due to
increases in both average invested cash balances, due to higher cash flow from
operations, and higher yields due to the interest rate increases as a result of
market conditions.
Cost of equipment sales in 1995 increased by 83% from 1994 due to
the increased number of unit shipments and the sale of higher cost van units.
Gross margins on equipment and equipment upgrades decreased due to the
combination of higher cost units and lower upgrade volume.
Cost of recurring revenues increased in 1995 by $689,000 from 1994
due to the Company's continued expansion of its mobile lithotripsy services and
the requisite equipment investment and expenses related to their operations.
Maintenance material costs increased by 37% due to the higher number of units
under contract.
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Research and development costs decreased in 1995 compared to the
same period in 1994 due to the lower headcount associated with the refined
research group.
Selling expenses decreased in 1995 compared to the same period in
the prior year, due to the decreased commission expenses for the lower laser
catheter product sales and lower training expenses.
General and administrative expenses decreased in 1995 compared to
the same period in 1994 due to the lower headcount and expenses relating to the
scaled down Endocare operation.
Legal and other expenses increased primarily due to the expenses
associated with the Company's increased effort in preparation of defense of the
class-action lawsuit scheduled for trial in May 1996.
The Company's tax provision increased by $1.9 million from 1994 to
1995 due to the booking in 1994 of deferred tax assets and the Company
providing for taxes at approximately statutory rates in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and short-term
investments of approximately $11.0 million. These funds were generated from
operating activities and from the Company's initial public offering in June
1988.
The Company's long-term capital expenditure requirements will depend
upon 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 cost of
acquisition 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 1997. See "Safe Harbor
Statement under the Private Securities Litigation Reform Act of 1995."
BUSINESS ACQUISITION
As of March 18, 1997 the Company has completed the acquisition of a
60% interest in Southern Idaho Lithotripsy Associates, LLC, an operator of a
"retail" lithotripsy operation in Southern Idaho, for a purchase price of $2.3
million in cash. The assets, liabilities and operating results of Southern
Idaho Lithotripsy Associates, LLC will be consolidated effective March 1, 1997.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14. "Exhibits, Financial Statement Schedules, and Reports on
Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following are the directors of the Company:
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
David V. Radlinski 52 Chairman of the Board and
Chief Executive Officer of the Company
Frank R. Pope 47 Managing Director
Verdigris Capital
Donald John Regan 62 Vice President and General Counsel
Kinsell, O'Neil, Newcomb & De Dios, Inc.
Michael C. Tibbitts 49 Officer and Vice President of Business Development
Gulf South Medical Supply, Inc.
Mr. Radlinski has been the Chairman of the Board and Chief Executive
Officer of the Company since September 1995. He had been the President of the
Company's subsidiary, Medstone International, Inc. and Chief Financial Officer
and Secretary of the Company from January 1991 to September 1995. From July
1987 to January 1991, he was the Company's Executive Vice President of Finance,
Chief Financial Officer and Secretary. From 1984 to 1987, he was Vice
President of Finance and Chief Financial Officer of Printronix, Inc., a
publicly-owned company which manufactures computer printers.
Mr. Pope is Managing Director of Verdigris Capital, a private investment
banking firm. From April 1981 to October 1996, Mr. Pope was a General Partner
with Technology Funding, a venture capital investment firm. He was also the
Executive Vice President, Chief Financial Officer and a director of Technology
Funding Inc. Mr. Pope is also a director of Thermatrix, Inc. and a director
and officer of Advanced BioCatalytics Corp. Mr. Pope is a C.P.A. and a member
of the California Bar. He has been a director of the Company since January
1991.
Mr. Regan is currently the Vice President and General Counsel of Kinsell,
O'Neal, Newcomb & De Dios, Inc., a municipal securities investment banking
firm. Mr. Regan has practiced securities, municipal finance, nonprofit
corporation, real estate, and business transactions law for over thirty years.
He is a member of the National Association of Bond Lawyers, has published
several articles on securities law and served as a lecturer for the Practicing
Law Institute. He specializes in revenue and project finance bonds. He is
also a founding owner of and remains as special counsel to ARV Assisted Living,
Inc., a developer of residential retirement facilities and the largest provider
of assisted living services in the United States. He has been a director of
the Company since September 1995.
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Mr. Tibbitts, who was elected to the Board of Directors on May 13, 1996,
has been with Gulf South Medical Supply, Inc. since 1991 as an officer and Vice
President of Business Development. Prior to joining that corporation, he was
employed for 19 years by Johnson & Johnson in two divisions: Sterile Design
(which manufactured and marketed kit packages) and Surgikos (which manufactured
and marketed surgical supplies). He has been a Director of the Company since
May 1996.
EXECUTIVE OFFICERS
The names, ages and positions of all the executive officers of the Company
as of March 1997 are listed below, followed by a brief account of their
business experience during the past five years. Officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
selected. None of these officers has been involved in any court or
administrative proceeding within the past five years adversely reflecting on
his or her ability or integrity.
NAME AGE POSITION
---- --- --------
David V. Radlinski 52 Chief Executive Officer and Chairman of the Board
Thomas W. Gardner 43 Executive Vice President of Sales
and Marketing
Mark Selawski 41 Vice President of Finance,
Chief Financial Officer and Secretary
Mr. Radlinski has been currently the Chairman and Chief Executive Officer
of the Company since September 1995. He had been the President of the
Company's subsidiary, Medstone International, Inc. and Chief Financial Officer
and Secretary of the Company from January 1991 to September 1995. From July
1987 to January 1991, he was the Company's Executive Vice President of Finance,
Chief Financial Officer and Secretary. From 1984 to 1987, he was Vice
President of Finance and Chief Financial Officer of Printronix, Inc., a
publicly-owned company which manufactures computer printers.
Mr. Gardner has been the Company's Executive Vice President of Sales and
Marketing since July 1995. He served as President of the Company's subsidiary,
Endocare, Inc. from January 1995 to July 1995. He served as the President of
the Company's Medical Biology Division from March 1, 1993 to January 1995. He
was a Vice President of Domestic Sales for the Company from November 1990 until
February 1993. Prior to that he had served as the Vice President of Sales
since November 1984.
Mr. Selawski has been the Chief Financial Officer, Vice President of
Finance and Secretary of the Company since September 1995. He had previously
served as the Company's Manager of Planning and Analysis since joining the
Company in 1988. Prior to joining the Company he held various finance
management positions with several high-tech manufacturing companies.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is not aware of any director, officer, or 10% shareholder who
during 1996 failed to file on a timely basis any report regarding the Company's
securities required by Section 16(a) of the Securities Exchange Act of 1934,
except as follows. Michael C. Tibbitts was late in filing a Form 3 relating to
his becoming a director of the Company. Mr. Tibbitts, Mr. Pope and Mr. Regan
did not timely file Form 4 relating option grants to them. Mr. Radlinski and
Mr. Selawski filed amendments to Form 4 which they had timely filed relating to
the exercise and receipts of stock options.
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and to each of the Company's other executive
officers during fiscal 1996.
SUMMARY OF COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------- --------------------------------- ------------
NAME OTHER RESTRICTED SECURITIES
AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS(S) OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) (#)(2) ($) ($)
-------- ------ ------- ------- ------------ ---------- ---------- ------- ------------
David V. Radlinski (3) 1996 200,100 --- --- --- 50,000 --- ---
Chairman of the Board and 1995 181,250 --- --- --- 150,000 --- ---
Chief Executive Officer 1994 175,000 --- --- --- --- --- ---
Mark Selawski (4) 1996 85,600 --- --- --- 20,000 --- ---
Chief Financial Officer, Vice 1995 72,730 7,500 --- --- 20,000 --- ---
President of Finance 1994
and Secretary
Thomas W. Gardner 1996 95,600 --- 35,349 --- --- --- ---
Executive Vice President of 1995 83,750 20,000 2,815 --- 40,000 --- ---
Sales and Marketing 1994 95,000 --- --- --- --- --- ---
- ---------------------------------
(1) In addition to the cash compensation shown in the table, executive
officers of the Company may receive indirect compensation in the form of
perquisites and other personal benefits. For each of the named
executive officers, the amount of this indirect compensation in 1996,
1995 and 1994 did not exceed the lesser of $50,000 or 10% of the
executive officer's total salary and bonus for that year.
(2) Options to acquire shares of Common Stock.
(3) Mr. Radlinski served as the Chief Financial Officer and Secretary of the
Company until his election as Chairman of the Board and Chief Executive
Officer on September 21, 1995.
(4) Mr. Selawski was appointed Chief Financial Officer, Vice President of
Finance and Secretary on September 21, 1995.
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STOCK OPTION GRANTS DURING 1996
The following table provides information related to the stock options
granted in 1996.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- -------------------------------------------------------------------------- ---------------------
% OF TOTAL
SHARES EMPLOYEE
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- ----------- --------- ---------- ------ -------
David V. Radlinski 50,000 24% 7.13 7/23/02 121,210 274,505
Mark Selawski 20,000 9% 7.13 7/23/02 48,484 109,802
STOCK OPTIONS HELD AT END OF FISCAL YEAR
The following table provides information related to options exercised
during 1996 and options held by the named executive officers at December 31,
1996.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONSAT FY-END ($)(2)
SHARES ACQUIRED -------------------------------- ---------------------------
NAME ON EXERCISE(#) VALUE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------------- ----------- ------------- ----------- -------------
David V. Radlinski 61,000 355,450 43,333 156,667 1,041 11,458
Thomas W. Gardner --- --- 11,333 28,667 --- ---
Mark Selawski 4,611 27,429 7,333 32,667 417 4,583
- -------------------------------------
(1) The value is calculated based on the difference between the option
exercise price and the market price for the Company's Common Stock on the
exercise date, multiplied by the number of shares purchased. For this
purpose, the surrender or withholding of shares to pay the exercise price
is not taken into account.
(2) The closing price for the Company's Common Stock as reported by the
National Association of Securities Dealers (NASD) on December 31, 1996 was
$7.38. Value is calculated on the basis of the difference between the
option exercise price and $7.38, multiplied by the number of shares of
Common Stock underlying the option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996 Donald J. Regan and Frank R. Pope served as the members of the
Company's Compensation Committee. Neither such individual is a current or
former officer or employee of the Company or any of its subsidiaries. During
1996 there were no compensation committee interlocks between the Company and
other entities involving Medstone executive officers serving as directors or
members of compensation or similar committees of such other entities.
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COMPENSATION OF DIRECTORS
The Company currently compensates Messrs. Regan and Tibbitts $1,000 per
meeting for their services, in addition to reimbursement to all directors for
expenses incurred by them in connection with the Company's business.
Under the Nonemployee Director Stock Option Plan, each new nonemployee
director is automatically granted an option to purchase up to 5,000 shares as
of the effective date of his or her first appointment to the Board or first
election to the Board by the shareholders, whichever is earlier. Subject to
acceleration of the option exercises in the event of certain events specified
in the plan, each such option becomes exercisable with respect to 1/60 of the
shares issuable for each elapsed full month during the five-year period after
its grant date, but will not be initially exercisable until six months after
the grant date. The exercise price of each option will equal the fair market
value of the underlying Common Stock on the date the option is granted. Each
option will expire six years after its grant, except that the expiration will
be extended until one year after the optionee's death if it occurs less than
one year before the option's expiration date. An option granted under the plan
is not transferrable during the grantee's lifetime and must be exercised within
one year following his or her death, or within 90 days after the grantee ceases
to be a member of the Board for any other reason, and will only be exercisable
to the extent it is exercisable on the date the grantee leaves the Board.
Under this plan, Mr. Pope was granted 5,000 shares at $2.38 per share in
January 1992, Mr. Regan was granted 5,000 shares in September 1995 at $11.88
and Mr. Tibbitts was granted 5,000 shares at $8.63 per share in May 1996.
As additional compensation, each current nonemployee director of the
Company has received an option to purchase up to 15,000 shares of the Company's
Common Stock. The options issued to Mssrs. Pope and Tibbitts and Regan were
issued in November 1996 and have exercise prices of $7.13 per share. The
options are exercisable, after six months following their grant dates, in
incremental amounts equal to 1/48 of the underlying shares for each elapsed
calendar month during which the director remains on the Company's board. The
terms of the options are five years, subject to earlier termination related to
the director no longer serving on the board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock known to the Company to be beneficially owned as of March 1, 1997
by each person who owns beneficially more than 5 percent of the outstanding
shares of Common Stock, by each of the present directors and nominees for
director, by each of the executive officers named in the Executive Compensation
in Item 11 and by all executive officers and directors of the Company as a
group, and the percentage of the total outstanding shares of Common Stock such
shares represented as of March 1, 1997.
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNERSHIP
------------------------------------ ------------- -----------------
The Kaufmann Fund 480,500 9.0%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Hathaway & Associates, Ltd. 375,000 7.0%
119 Rowayton Avenue
Rowayton, CT 06853
David V. Radlinski(2)(3) 195,815(4) 3.6%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Thomas W. Gardner(3) 122,656(5) 2.3%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Mark Selawski(3) 14,180(6) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
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Frank R. Pope(2) 9,250(8) (10)
25 Preston Road
Woodside, CA 94062
Donald J. Regan(2) 14,183(7) (10)
462 Stevens Avenue, Suite 308
Solana Beach, CA 92075
Michael C. Tibbitts(2) 5,167(9) (10)
27001 La Paz Road, Suite 448B
Mission Viejo, CA 92691
All executive officers and directors
as a group (6 persons) (11) 356,084 6.43%
- ---------------
(1) All such shares were held of record with sole voting and investment power,
subject to applicable community property laws, by the named individual
and/or by his wife, except as indicated in the following footnotes.
(2) Director of the Company.
(3) Executive officer of the Company.
(4) Includes 56,667 shares issuable upon exercise of presently outstanding
stock options.
(5) Includes 14,000 shares issuable upon exercise of presently outstanding
stock options.
(6) Includes 10,000 shares issuable upon exercise of presently outstanding
stock options.
(7) Includes 7,583 shares issuable upon exercise of presently outstanding
stock options.
(8) Includes 7,250 shares issuable upon exercise of presently outstanding
stock options.
(9) Includes 3,167 shares issuable upon exercise of presently outstanding
stock options.
(10) Percentage information is omitted because the beneficially owned shares
represent less than 1% of the outstanding shares of the Company's Common
Stock
(11) Includes 98,667 shares issuable upon exercise of presently outstanding
stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac Science,
Inc., for which the Company purchased 5,353,031 shares of common stock, for a
cash payment of $.0016 per share. This purchase represented 77.3% of the
outstanding stock. As of July 8, 1991, the Company distributed, as a dividend
to its shareholders of record on that date, one share of Cardiac Science, Inc.
stock for each share of Medstone stock held. The Company retained 629,768
shares of common stock of Cardiac Science, Inc.
In June 1991, the Company agreed to loan Cardiac Science, Inc. up to
$220,000 to provide working capital pursuant to the terms of a revolving note
agreement. The unpaid principal amount of the loan, together with interest
accrued thereon at the rate of 10% per annum, was due and payable to Medstone
in December 1991. Medstone then agreed to extend this note and to loan
additional amounts to Cardiac Science, Inc. As of April 30, 1992, the Company
had loaned Cardiac Science, Inc. approximately $310,000. In April 1992, the
Company agreed to extend its initial loan to Cardiac Science, Inc. and to loan
Cardiac Science, Inc. an additional $200,000. These loans bore interest at a
rate of 8% per annum, payable quarterly, and were secured by Cardiac Science's
assets and were to mature on the earlier of April 1, 1995 or the closing of the
initial public offering of Cardiac Science's Common Stock. Cardiac Science,
Inc. had the option to pay the interest on the notes in either cash or shares
of its common stock valued at $.15 per share. To pay such interest, Cardiac
Science, Inc. had issued 419,054 shares of its common stock to the Company as
of December 31, 1995. In connection with such loan extension and the agreement
to make additional loans, Cardiac Science issued to Medstone 3,400,000 warrants
to purchase shares of its common stock at $.15 per share for an aggregate
exercise price of up to $510,000.
In September 1994, Cardiac Science reached an agreement with Medstone
pursuant to which, and concurrently with the closing of a Private Placement of
Cardiac Science's Common Stock, (i) Medstone exercised the warrants to the
extent of 2,720,000 shares, (ii) Cardiac Science utilized the proceeds
therefrom ($408,000) to pay an equivalent portion of the note, (iii) the due
date for the remaining principal balance on the note ($102,000) was extended to
April 1, 1996, (iv) Medstone maintains its current lien on the assets of the
Company until the balance of the note is paid, (v) the expiration date for the
remaining warrants to purchase 680,000 shares of Cardiac Science common stock
was changed to March 31, 1996, and (vi) all outstanding unsecured obligations
owing by Cardiac Science to Medstone (approximately $270,000) were satisfied by
the issuance to Medstone of 1,800,000 shares of
-20-
23
common stock and a ten year warrant to purchase 1,000,000 shares of common
stock at $.001 per share. Per an oral agreement between the Company and
Cardiac Science, interest payment on the note were suspended in April 1995 due
to prior considerations paid during the renegotiation of the unsecured debt in
1994.
In April 1996, the Company exercised warrants to purchase 680,000 shares
and Cardiac Science utilized the proceeds therefrom ($102,000) to pay off the
remaining note balance and related interest. After completion of this
transaction, the Company executed a release of the lien on Cardiac Science's
assets.
As of December 31, 1996, the Company held 6,248,822 shares of Cardiac
Science Common Stock. This investment is recorded at a cost of $750,054 and
the Company currently does not expect to realize this investment, therefore a
corresponding valuation reserve has been established, making the net investment
carrying value $0.
Separately, the Company advanced amounts to Cardiac Science for health
insurance. These amounts were to be repaid by Cardiac Science on a
month-to-month basis. As of December 31, 1996, $2,895 had been advanced to
Cardiac Science.
-21-
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
1. Consolidated Financial Statements
Report of Independent Auditors 23
Consolidated Balance Sheets at December 31, 1996 and 1995 24
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 25
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements 28
2. Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts 37
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed with the Commission during
the quarter ended December 31, 1996.
(c) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------
3.1 Certificate of Incorporation of the Company, as amended (1)
3.2 Bylaws of the Company, as amended (1)
4.2 Specimen Certificate of the Company's Common Stock (2)
10.26 1989 Stock Incentive Plan (3)(4)
10.27 Non-employee Director Stock Option Plan (3)(4)
10.28 Facility Lease on 100 Columbia (5)
11.1 Schedule of Computation of Per Share Information (See page 39 hereof)
22.1 Subsidiaries (See page 40 hereof)
23.1 Consent of Independent Auditors (see page 41 hereof)
27 Financial Data Schedule
28.2 Form of Cytocare, Inc. Information Statement - Distribution to Shareholders of Stock of Cardiac
Science, Inc. (6)
28.3 Form of Medstone International, Inc. Information Statement - Distribution to Shareholders of Stock of
Endocare, Inc. and UroGen Corp. (7)
----------------------------
(1) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act of 1933, Reg. No 33-16340 and with the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1988, and incorporated herein by reference.
(2) Previously filed with the same exhibit number with the
Company's Registration Statement on Form S-1 under the
Securities Act of 1933, Reg. No. 33-16340 and incorporated
herein by reference.
(3) Previously filed with the same exhibit number with the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, and incorporated herein by reference.
(4) Compensatory plan or arrangement.
(5) Previously filed with the same exhibit number with the
Company's annual report on Form 10-K for the year ended
December 31, 1993.
(6) Previously filed with the same exhibit number with the
Company's current report on Form 8-K dated June 26, 1991, and
incorporated herein by reference.
(7) Previously filed with the Company's current report on Form
8-K dated February 9, 1996, and incorporated herein by
reference.
-22-
25
Report of Independent Auditors
Stockholders and Board of Directors
Medstone International, Inc.
We have audited the accompanying consolidated balance sheets of Medstone
International, Inc. as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medstone International, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Orange County, California
February 14, 1997
-23-
26
MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------------
1996 1995
--------------- --------------
ASSETS
Current assets:
Cash and equivalents $ 3,906,961 $ 3,108,741
Short-term investments 7,102,170 14,494,717
Accounts receivable, less allowance for doubtful accounts of
$220,000 and $207,000 in 1996 and 1995, respectively 2,686,985 1,509,407
Inventories 2,459,779 1,764,636
Deferred tax assets 1,061,000 698,000
Note receivable 1,250,000 ---
Prepaid expenses and other current assets 243,271 519,542
--------------- --------------
Total current assets 18,710,166 22,095,043
Property and equipment:
Lithotripters 7,289,845 3,627,628
Equipment 876,809 1,637,529
Furniture and fixtures 1,007,292 1,174,009
Leasehold improvements 89,764 89,764
--------------- --------------
9,263,710 6,528,930
Less accumulated depreciation and amortization (3,740,973) (3,129,955)
--------------- --------------
Net property and equipment 5,522,737 3,398,975
--------------- --------------
Goodwill, net 1,118,583 ---
Other assets, net 43,805 415,838
--------------- --------------
$ 25,395,291 $ 25,909,856
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,760,922 $ 393,542
Accrued expenses 209,512 236,197
Accrued income taxes 376,172 101,293
Accrued payroll expenses 338,461 206,120
Deferred revenue 1,042,043 726,260
Dividends payable --- 1,966,216
--------------- --------------
Total current liabilities 3,727,110 3,629,628
Deferred tax liabilities 392,000 123,000
Minority interest 111,172 ---
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Common stock - $.004 par value, 20,000,000 shares authorized,
5,578,403 and 5,516,528 shares issued and outstanding at
December 31, 1996 and 1995, respectively 22,314 22,066
Additional paid-in capital 18,715,068 18,555,983
Accumulated earnings 3,471,965 3,710,436
Stock purchase notes receivable (134,800) (134,800)
Unrealized gain (loss) on short-term investments (1,168) 3,543
Treasury stock (112,800 shares at cost at December 31,
1996 and 0 shares at December 31, 1995) (908,370) ---
--------------- --------------
Total stockholders' equity 21,165,009 22,157,228
--------------- --------------
$ 25,395,291 $ 25,909,856
=============== ==============
See accompanying notes
-24-
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
Revenues:
Net equipment sales $ 2,420,000 $ 4,588,015 $ 3,125,495
Procedures and maintenance fees
and management fees 14,883,598 12,797,608 12,537,264
Interest and dividend income 675,967 1,004,655 642,058
-------------- --------------- ---------------
Total revenues 17,979,565 18,390,278 16,304,817
Costs and expenses:
Cost of equipment sales 1,298,427 2,080,747 1,139,805
Costs related to procedure
and maintenance fees and
laser catheters 6,710,645 5,552,354 4,863,595
Research and development 521,793 926,665 1,076,033
Selling 2,145,759 2,050,109 2,551,088
General and administrative 1,666,164 1,656,455 2,105,324
Lawsuit settlement costs 5,500,000 --- ---
Legal and other expense 402,673 163,621 34,770
-------------- --------------- ---------------
Total costs and expenses 18,245,461 12,429,951 11,770,615
-------------- --------------- ---------------
Income (loss) before provision for/
benefit from income taxes (265,896) 5,960,327 4,534,202
Minority interest in subsidiary income 142,575 --- ---
Provision (benefit) for income taxes (170,000) 2,086,000 150,000
-------------- --------------- ---------------
Net income (loss) $ (238,471) $ 3,874,327 $ 4,384,202
============== =============== ===============
Net income (loss) per share:
Primary net income (loss) $ (.04) $ .70 $ .82
============== =============== ===============
Fully diluted net income N/A $ .69 $ .81
============== =============== ===============
Number of shares used in the computation
of net income (loss) per share:
Primary 5,517,976 5,544,831 5,350,404
============== =============== ===============
Fully diluted N/A 5,618,231 5,427,685
============== =============== ===============
See accompanying notes
-25-
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------- ADDITIONAL ACCUMULATED UNREALIZED LOSS
NUMBER OF PAID-IN EARNINGS STOCK PURCHASE ON SHORT-TERM TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) NOTE RECEIVABLE INVESTMENTS STOCK TOTAL
--------- -------- ------------ ------------- --------------- --------------- ---------- ------------
BALANCE AT
DECEMBER 31, 1993 4,871,268 $ 19,485 $ 17,336,245 $ (2,581,877) $ --- $ --- $ --- $ 14,773,853
Common stock options
exercised 73,335 293 139,397 --- --- --- --- 139,690
Income tax benefit
from stock options --- --- 200,000 --- --- --- --- 200,000
Unrealized loss on
short-term
investments --- --- --- --- --- (46,279) --- (46,279)
Net income --- --- --- 4,384,202 --- --- --- 4,384,202
--------- -------- ------------ ------------ ------------ ------------ ---------- ------------
BALANCE AT
DECEMBER 31, 1994 4,944,603 19,778 17,675,642 1,802,325 0 (46,279) 0 19,451,466
Common stock options
exercised 571,925 2,288 670,341 --- (134,800) --- --- 537,829
Income tax benefit
from stock options --- --- 210,000 --- --- --- --- 210,000
Unrealized gain on
short-term
investments --- --- --- --- --- 49,822 --- 49,822
Dividend declared --- --- --- (1,966,216) --- --- --- (1,966,216)
Net income --- --- --- 3,874,327 --- --- --- 3,874,327
--------- -------- ------------ ------------ ------------ ------------ ---------- ------------
BALANCE AT
DECEMBER 31, 1995 5,516,528 22,066 18,555,983 3,710,436 (134,800) 3,543 0 22,157,228
Common stock
options exercised 61,875 248 96,085 --- --- --- --- 96,333
Income tax benefit
from stock options --- --- 63,000 --- --- --- --- 63,000
Treasury stock
repurchased (112,800) -- --- --- --- --- (908,370) (908,370)
Unrealized loss on
short-term
investments --- --- --- --- --- (4,711) --- (4,711)
Net income (loss) --- --- --- (238,471) --- --- --- (238,471)
--------- -------- ------------ ------------ ------------ ------------ ---------- ------------
BALANCE AT
DECEMBER 31, 1996 5,465,603 $ 22,314 $ 18,715,068 $ 3,471,965 $ (134,800) $ (1,168) $ (908,370) $ 21,165,009
========= ======== ============ ============ ============ ============ ========== ============
See accompanying notes.
-26-
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MEDSTONE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
-------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (238,471) $ 3,874,327 $ 4,384,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,244,840 945,050 914,021
Provision for doubtful accounts 60,000 --- 140,000
Provision for related party loan --- 1,315 34,849
Provision for excess inventories (136,884) --- ---
Minority interest in partnership 142,575 --- ---
Changes in operating assets and liabilities:
Accounts receivable (934,923) 308,646 (336,390)
Inventories (777,557) (961,695) (616,946)
Deferred taxes (94,000) 205,000 (780,000)
Note receivable (1,250,000) --- ---
Prepaid expenses and other 355,207 (124,947) 147,257
Accounts payable 1,356,997 (127,954) (136,231)
Accrued expenses (25,753) (133,677) (89,759)
Accrued income taxes 251,608 (290,483) (26,962)
Accrued payroll expenses 132,341 (202,764) 101,952
Deferred revenue 317,411 83,709 140,130
Customer deposits --- (39,068) (140,750)
Other, net (216,995) (393,338) 28,203
-------------- --------------- --------------
Net cash provided by operating activities 186,396 3,144,121 3,763,576
-------------- --------------- --------------
Cash flows from investing activities:
Purchases of investments available for sale (16,918,215) (18,744,464) (23,165,800)
Proceeds from sales of investments available for sale 24,306,051 17,448,155 19,122,614
Related party loan --- 5,782 (39,774)
Purchase of subsidiary (1,350,000) --- ---
Investment by minority in partnership (162,028) --- ---
Distribution of minority interest (64,403) --- ---
Purchases of property and equipment (3,392,627) (1,220,503) (1,009,218)
Disposals of property and equipment 5,083 676,225 40,145
-------------- --------------- --------------
Net cash provided by (used in)
investing activities 2,423,861 (1,834,805) (5,052,033)
-------------- --------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 96,333 537,829 139,690
Purchase of treasury stock (908,370) --- ---
Dividends paid (1,000,000) --- ---
-------------- --------------- --------------
Net cash provided by (used in)
financing activities (1,812,037) 537,829 139,690
Net increase (decrease) in cash and equivalents 798,220 1,847,145 (1,148,767)
Cash and equivalents at beginning of year 3,108,741 1,261,596 2,410,363
-------------- --------------- --------------
Cash and equivalents at end of year $ 3,906,961 $ 3,108,741 $ 1,261,596
============== =============== ==============
Supplemental cash flow disclosures:
Cash paid during the year for:
Income taxes $ 554,136 $ 2,173,390 $ 956,962
Supplemental schedule of noncash investing
and financing activities:
Tax benefit of employee stock options $ 63,000 $ 210,000 $ 200,000
Dividends declared $ --- $ 1,966,216 $ ---
See accompanying notes
-27-
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MEDSTONE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
Medstone International, Inc. ("Medstone"), was incorporated in
Delaware in October 1984. The Company designs, manufactures and markets the
Medstone STSTM Shockwave Therapy System (the "System") for the noninvasive
disintegration of kidney stones in human patients. In addition to sales of the
System, Medstone generates recurring revenue from procedure fees and fee for
service arrangements for use of the System and from repairs and maintenance of
the System.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the
Company, United Physicians Resources, a physicians practice management
operation, incorporated in June 1996 by the Company and in which the Company
has a 61% ownership interest, Northern Nevada Lithotripsy Associates, LLC, a
Nevada Limited Liability Company in which the Company holds a 60% ownership
interest (See Note 12), and Medstone Sales Corporation, a foreign sales
corporation. All material intercompany transactions and accounts have been
eliminated.
Reclassifications
Certain prior year balances have been reclassified to conform with the
December 31, 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made in preparing these financial statements
include the allowance for doubtful accounts.
Statement of cash flows
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The Company had net non-cash transfers of inventory into fixed assets
of $1,376,000, $804,000 and $630,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company had net non-cash transfers of accounts receivable,
inventory, prepaid expenses, fixed assets, accounts payable accrued expenses
and deferred revenue totalling $966,000 in 1996 in the form of a dividend as a
result of the spinout of the Endocare, Inc. and Urogen, Inc. subsidiaries.
Short-term Investments
Effective January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
The investments are adjusted for amortization of premiums and discounts to
maturity and such amortization is included
-28-
31
in interest income. Realized gains and losses and declines in value judged to
be other than temporary are determined based on the specific identification
method and are reported in the consolidated statements of operations.
The Company invests primarily in U.S. government securities and
corporate obligations. As of December 31, 1996 and December 31, 1995,
investments are summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
------------- ------------ ------------- --------------
1996
U.S. Treasury Bills $ 7,104,024 $ --- $ 1,854 $ 7,102,170
1995
U.S. Treasury Bills $ 14,489,267 $ 5,450 $ --- $ 14,494,717
No gains or losses were realized in 1996 and 1995.
The amortized cost and estimated fair value of investments at December
31, 1996 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuer of the securities may
have the right to repurchase such securities.
COST FAIR VALUE
-------------- -------------
Due in one year or less $ 7,104,024 $ 7,102,170
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
marketable securities and accounts receivable. The Company's marketable
securities consist principally of U.S. Treasury Bills.
The Company sells its products primarily to hospitals worldwide.
Credit is extended based on an evaluation of the customer's financial condition
and collateral generally is not required. The Company's ten largest customers
accounted for approximately 20% of accounts receivable at December 31, 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
December 31,
------------------------------------
1996 1995
---------------- ----------------
Raw materials $ 1,353,993 $ 1,235,161
Work in process 255,776 190,002
Finished goods 850,010 339,473
---------------- ----------------
$ 2,459,779 $ 1,764,636
================ ================
Property and equipment
Property and equipment are carried at cost. Depreciation and
amortization are computed on the straight-line method over the following
estimated useful lives:
Lithotripters 5 years
Equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Life of lease
-29-
32
Revenue recognition
Revenues are recognized in accordance with the underlying contractual
terms of each sale. Typically, revenue recognition requires the transfer of
title upon shipment, customer acceptance, receipt of specified down payments
and performance of all significant contractual obligations. All foreign sales
contracts are negotiated with payment terms in U.S. dollars so the Company has
no exposure to foreign currency price fluctuations.
Service and maintenance contract revenues are deferred and amortized
over the terms of the related contracts.
Advertising
The Company expenses advertising costs including promotional
literature, brochures and trade shows as incurred. Advertising expense was
$107,000, $124,000 and $156,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Per share information
Per share information is presented in the accompanying consolidated
statements of income based upon the weighted average number of common and
common equivalent shares outstanding. 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.
Long-Lived Assets
The financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121), in March
1995. SFAS No. 121 requires long-lived assets and certain intangibles held and
used by the Company to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is to be performed at the lowest level at
which undiscounted net cash flow can be directly attributable to long-lived
assets. The Company adopted SFAS No. 121 on January 1, 1996 with no material
effect on the Company's financial statements.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black- Scholes model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
-30-
33
3. COMMITMENTS
In March 1994, the Company took occupancy of new office,
manufacturing, engineering, warehouse space, and research and development
laboratories under an operating lease with an initial term of two years. The
monthly lease rate was $12,500 through February 1996 and the Company exercised
the first one year option, extending the lease term through March 1997, at a
monthly lease rate of $12,862. The Company has exercised its second option
year at a monthly lease rate of $13,360 and retains the option to extend the
lease one more year through March 1999 for a modest price increase. The future
minimum lease payments under the lease are as follows:
Minimum Rental
-------------------
1997 $ 161,000
1998 $ 27,000
Total net rent expense under all operating leases for the years ended
December 31, 1996, 1995 and 1994 was $156,000, $152,000 and $237,000,
respectively.
4. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
Current:
Federal $ (34,000) $ 1,631,000 $ 1,256,000
State (42,000) 299,000 45,000
Utilization of tax credits 0 (49,000) (373,000)
---------------- ---------------- -----------------
Total current (76,000) 1,881,000 928,000
---------------- ---------------- -----------------
Deferred:
Federal (129,000) 55,000 (484,000)
State 35,000 150,000 (294,000)
---------------- ---------------- -----------------
Total deferred (94,000) 205,000 (778,000)
---------------- ---------------- -----------------
Provision (benefit) for
income taxes $ (170,000) $ 2,086,000 $ 150,000
================ ================ =================
The following is a reconciliation of the provision (benefit) for
income taxes at the federal statutory rate compared to the Company's effective
tax rate:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ----------------- -----------------
Income tax(benefit) at the
statutory rate $ (90,000) $ 2,027,000 $ 1,542,000
State income taxes
(net of federal benefit) (48,000) 264,000 (164,000)
Change in valuation allowance --- --- (775,000)
Minority interest (49,000) --- ---
Tax credits (with) current benefit --- --- (373,000)
Accruals (with) tax benefit --- (211,000) ---
Other 17,000 6,000 (80,000)
----------------- ---------------- ------------------
Provision(benefit) for income
taxes $ (170,000) $ 2,086,000 $ 150,000
================= ================ ==================
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The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
DEFERRED TAX ASSETS:
Cardiac investment reserve $ 293,000 $ 257,000
Inventory reserve 172,000 231,000
Bad debt reserve 110,000 137,000
Accruals not currently deductible for tax 103,000 59,000
Net operating loss carryforward 369,000 ---
Other credits 14,000 14,000
------------ -------------
Net deferred assets 1,061,000 698,000
------------ -------------
Depreciation and amortization 392,000 123,000
------------ -------------
Total gross deferred tax liabilities 392,000 123,000
------------ -------------
Net deferred tax assets and liabilities $ 669,000 $ 575,000
============ =============
As of December 31, 1996, the Company had federal and state net
operating losses for tax purposes of $1,041,000 and $436,000, respectively.
These federal and state net operating losses will expire in 2011 and 2001,
respectively.
At December 31, 1996 and 1995 there was no valuation allowance
recognized to offset to Company's deferred tax assets since it is more likely
than not that the assets will be fully realized.
5. STOCK OPTIONS
In 1987, the Company adopted the 1987 Stock Option Plan (1987 Plan)
under which options could be granted to key employees or directors of the
Company by a committee appointed by the Company's Board of Directors (the
Committee) to purchase up to 476,323 shares of the Company's common stock. The
exercise price for options granted under the 1987 Plan were equal to the fair
market value of the common stock on the date of grant. During 1988 and 1989,
the Committee granted options which generally become exercisable with respect
to 1/60th of the issuable shares for each elapsed month during the five-year
period commencing with dates determined by the Committee. All options granted
in 1988 and 1989 terminate one year after the end of the five-year period. In
June 1989, the Company terminated the 1987 Plan as to the granting of
additional options. In April 1996, the remaining options outstanding under
this Plan were exercised and the Plan is now terminated.
In June 1989, the Company's stockholders approved the 1989 Stock
Incentive Plan which provides for the granting of a variety of stock- related
securities, including shares of common stock, stock options and stock
appreciation rights to employees and other selected individuals. In May 1991,
the Company's stockholders amended the Plan to increase the number of shares
issuable to 1,593,783 and eliminated the provision for an automatic increase in
the number of shares issuable on January 1 of each year by one percent of the
then outstanding shares. As of December 31, 1996, 683,926 options for shares
of common stock had been granted and are outstanding under this plan.
In June 1989, the Company's stockholders also approved the Nonemployee
Director Stock Option Plan. This plan provides for the issuance of up to
50,000 shares of the Company's common stock upon exercise of options granted
under the plan. As of December 31, 1996, 15,000 options for shares of common
stock had been granted under this plan. In addition three outside directors
have each been granted separate options to purchase 15,000 shares.
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Stock option activity under the Company's plans is summarized as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
NUMBER OF OPTIONS DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- ----------------- -----------------
Outstanding, beginning of year 683,748 839,948 946,251
Granted 212,000 535,500 43,000
Exercised (61,875) (571,925) (73,335)
Cancelled (89,947) (119,775) (75,968)
--------------- --------------- ---------------
Outstanding, end of year 743,926 683,748 839,948
=============== =============== ===============
Available for future grants 152,041 251,490 628,555
=============== =============== ===============
A summary of the Company's stock option plans as of the years ended
1996 and 1995 and changes during the years ending is presented below:
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------- ---------------- ------------- ----------------
Outstanding, beginning of year 683,748 $7.76 839,948 $2.47
Granted 212,000 $8.12 535,500 $9.00
Exercised (61,875) $4.15 (571,925) $1.97
Cancelled (89,947) $7.29 (119,775) $3.88
-------------- ---------------- ------------- ----------------
Outstanding, end of year 743,926 $8.22 683,748 $7.76
============== ================ ============= ================
Exercisable at end of year 216,179 181,753
============== =============
Weighted-average fair value of options
granted during the year $4.59 $5.68
================ ================
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
------------------- ------------------ ---------------- ------------------- ------------------
$0 to $5.47 77,332 $3.99 61,108 $3.69
$5.50 to $7.50 145,563 $7.06 17,115 $6.58
$8.50 to $8.63 360,449 $8.51 99,457 $8.50
$10.00 to $11.88 160,582 $10.64 38,499 $10.64
------------------- ------------------ --------------- ------------------- ------------------
$1.31 to $11.88 743,926 $8.22 216,179 $7.37
=================== ================== =============== =================== ==================
In calculating pro forma information regarding net income and net
income per share, as required by Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation, the fair value was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for the options on the Company's common
stock for the years ended December 31, 1996 and 1995, respectively: risk free
interest rates of 6.5% and 6.5%; dividend yields of 0% and 0%; volatility of
the expected
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market prices of the Company's common stock of .543 and .653; and expected life
of the options of 5.5 years for both periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's proforma information for the years ended December 31, 1996 and 1995
follows (in thousands, except per share information):
YEAR ENDED DECEMBER 31,
1996 1995
----------- ------------
Pro forma net income (loss) . . . . . . . . . . . . . $ (571) $ 3,766
Pro forma net income (loss) per share . . . . . . . . $ (0.10) $ .68
These pro forma amounts reflect only the cumulative effect of the
expense of options granted during the years ended December 31, 1996 and 1995,
and does not give effect to options granted prior to January 1, 1995.
6. EMPLOYEE BENEFIT PLAN
In January 1990, the Company established a defined contribution profit
sharing 401(k) plan for all eligible employees. The plan provides for the
deferral of up to 15% of an employee's qualifying compensation under Section
401(k) of the Internal Revenue Code. Contributions by the Company may be made
to the plan at the discretion of the Board of Directors. No such contributions
were made to the plan during the years ended December 31, 1996, 1995 and 1994.
7. MAJOR CUSTOMERS AND FOREIGN SALES
During the year ended December 31, 1996 no single customer accounted
for 10% or more of total revenues and the Company derived 11% of its total
revenues from sales to foreign customers. During the year ended December 31,
1995, no single customer accounted for 10% of total revenues of the Company and
the Company derived 9% of its total revenues from sales to foreign customers.
During the year ended December 31, 1994, one foreign customer accounted for
10% or more of the total revenues and the Company derived 13% of its total
revenues from sales to foreign customers.
8. CONTINGENCIES
In June 1996, the Company negotiated a settlement of the two related
class action lawsuits filed by two shareholders of the Company. The settlement
in the third quarter of 1996, totalled $6.0 million, with $500,000 paid by the
Company's underwriter and $5.5 million paid by the Company. The $5.5 million
was charged against earnings in the second quarter of 1996.
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. RELATED PARTY TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac
Science, Inc., for which the Company purchased 5,353,031 shares of common
stock, for a cash payment of $.0016 per share. This purchase represented 77.3%
of the outstanding stock. As of July 8, 1991, the Company distributed a
dividend to its shareholders of record on that date, one share of Cardiac
Science, Inc. stock for each share of Medstone stock held. The Company
retained 629,768 shares of common stock of Cardiac Science, Inc.
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In June 1991, the Company agreed to loan Cardiac Science, Inc. up to
$220,000 to provide working capital pursuant to the terms of a revolving note
agreement. The unpaid principal amount of the loan, together with interest
accrued thereon at the rate of 10% per annum, was due and payable to Medstone
in December 1991. Medstone then agreed to extend this note and to loan
additional amounts to Cardiac Science, Inc. As of April 30, 1992, the Company
had loaned Cardiac Science, Inc. approximately $310,000. In April 1992, the
Company agreed to extend its initial loan to Cardiac Science, Inc. and to loan
Cardiac Science, Inc. an additional $200,000. These loans bore interest at a
rate of 8% per annum, payable quarterly, are secured by Cardiac Science's
assets and were to mature on the earlier of April 1, 1995 or the closing of the
initial public offering of Cardiac Science's common stock.
In September 1994, Cardiac Science completed a private placement
offering, and in conjunction with that offering, the Company exercised warrants
to purchase 2,720,000 shares of Cardiac Science Common Stock at $.15 per share.
The proceeds of $408,000 were used to pay down a portion of the loans described
above. The due date for the remaining principal balance of $102,000 had been
extended to April 1, 1996. The expiration date for the remaining warrants was
changed to March 31, 1996. In addition, the Company was issued 1,800,000
shares of Cardiac Science Common Stock and a ten year warrant to purchase
1,000,000 shares at $.001 per share in full payment of unsecured obligations of
approximately $176,000.
In April 1996, the Company exercised warrants to purchase 680,000
shares and Cardiac Science utilized the proceeds therefrom ($102,000) to pay
off the remaining note and related interest. After completion of this
transaction, the Company executed a release of the lien on Cardiac Science's
assets.
As of December 31, 1996, the Company held warrants to purchase
1,000,000 shares at $.001 per share, which expire September 10, 2004.
As of December 31, 1996, the Company held 6,248,822 shares of Cardiac
Science Common Stock. This investment is recorded at a cost of $750,054 and
the Company currently does not expect to realize this investment, therefore a
corresponding valuation reserve has been established, making the net investment
carrying value to $0.
Separately, the Company advanced amounts to Cardiac Science for health
insurance. These amounts are to be repaid by Cardiac Science on a
month-to-month basis. As of December 31, 1996, $2,895 had been advanced to
Cardiac Science.
10. DISTRIBUTION TO SHAREHOLDERS
On February 9, 1996, the Company distributed two stock dividends,
payable to stockholders of record on the close of trading on December 29, 1995.
The two dividends represent distribution of all the assets and operations of
the Endocare and Urogen divisions of the Company. Effective with the start of
business on January 1, 1996 these two companies were no longer a part of the
Medstone operations, as Medstone distributed to its shareholders all
outstanding common stock of each company, retaining only 100,000 shares of each
company. These two companies are separate, publicly-held companies.
Medstone, as part of the distribution of Endocare, forgave
intercompany debt of $2,831,364 and contributed $500,000 in cash and net other
assets of $803,133 to Endocare. As part of the distribution of Urogen,
Medstone forgave intercompany debt of $3,888,875 and contributed $500,000 in
cash and net other assets of $163,082 to UroGen.
In October 1996, the Company liquidated its position in Endocare. The
average sales price was $5.53 per share, net of commissions, for the 100,000
shares that were owned by the Company. A $553,372 gain was recognized in the
fourth quarter of 1996.
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11. GOODWILL
The Company recorded goodwill resulting from the excess of the
purchase price of Northern Nevada over the fair market value of the net assets.
Goodwill is being amortized over a period not to exceed forty years using the
straight-line basis. Accumulated amortization at December 31, 1996 is $21,374.
12. PURCHASE OF NORTHERN NEVADA
The Company acquired, in the second quarter of 1996, a 60% interest in
Northern Nevada, an operator of a "retail" lithotripsy operation which bills
patients or insurers for their services. The assets acquired, accounted for on
the purchase method, consisted of the accounts receivable and contracts to
provide service to insurers. The Company acquired this 60% interest for $1.35
million cash. The operating results of Northern Nevada are included in the
consolidated financial statements of the Company since April 1, 1996.
13. STOCK REPURCHASE PLAN
On March 29, 1996, the Company announced a Stock Repurchase Program of
up to 500,000 shares of its Common Stock. For the year ended December 31,
1996, the Company has repurchased a total of 112,800 shares at a cost of
$908,370, which is recorded as treasury stock.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below set forth selected quarterly financial information
for 1996 and 1995 (in thousands, except per share amounts).
1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---- --------------- --------------- ------------- --------------
Net sales $ 4,102 $ 4,330 $ 4,349 $ 5,199
Gross profit 2,269 2,341 2,396 2,964
Net income 617 (3,031) 812 1,362
Earnings per share $ .11 $ (.5) $ .15 $ .25
1996 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---- --------------- --------------- ------------- --------------
Net sales $ 4,814 $ 4,268 $ 5,284 $ 4,025
Gross profit 2,884 2,562 3,043 2,269
Net income 1,093 916 1,211 654
Earnings per share $ .20 $ .17 $ .22 $ .12
In 1996 and 1995, the Company's effective income tax rate approximated
statutory rates. (See Note 4).
15. SUBSEQUENT EVENTS
On March 18, 1997, the Company completed the acquisition of a 60%
interest in Southern Idaho Lithotripsy Associates, LLC, an operator of a
"retail" lithotripsy operation in southern Idaho, for a purchase price of $2.3
million in cash. The assets, liabilities and operating results of Southern
Idaho Lithotripsy Associates, LLC will be consolidated effective March 1, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDSTONE INTERNATIONAL, INC.
By: DAVID V. RADLINSKI
------------------------------------
David V. Radlinski
Chief Executive Officer
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 24, 1997.
SIGNATURE TITLE
--------- -----
Chairman of the Board and
Chief Executive Officer
and Director
DAVID V. RADLINSKI (Principal Executive Officer)
- --------------------------------------------------
David V. Radlinski
MARK SELAWSKI
- --------------------------------------------------
Mark Selawski Chief Financial Officer
(Principal Financial and Accounting Officer)
DONALD J. REGAN
- --------------------------------------------------
Donald J. Regan Director
FRANK R. POPE Director
- ----------------------------------------------------
Frank Pope
MICHAEL C. TIBBITTS Director
- ----------------------------------------------------
Michael C. Tibbitts
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MEDSTONE INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ------------ ---------- ---------- ---------- -----------
FOR THE YEAR ENDED
DECEMBER 31, 1996:
- ------------------
Allowance for
doubtful accounts $ 207,260 $ 60,000 $ --- $ 46,948(a) $ 220,312
========== ============ ============= ============== ==============
Allowance for
inventory obsolescence $ 576,884 $ (136,884) $ --- $ --- $ 440,000
========== ============ ============= ============== ==============
Allowance for
related party loan $ 109,672 $ --- $ --- $ 109,672(d) $ 0
========== ============ ============= ============== ==============
Allowance for investment
in related party $ 643,000 $ --- $ --- $ (107,054(d) $ 750,054
========== ============ ============= ============== ==============
FOR THE YEAR ENDED
DECEMBER 31, 1995:
- ------------------
Allowance for
doubtful accounts $ 257,418 $ --- $ --- $ 50,158(c) $ 207,260
========== ============ ============= ============== ==============
Allowance for
inventory obsolescence $ 665,549 $ --- $ --- $ 88,665(b) $ 576,884
========== ============ ============= ============== ==============
Allowance for
related party loan $ 108,357 $ 1,315 $ --- $ --- $ 109,672
========== ============ ============= ============== ==============
Allowance for investment
in related party $ 643,000 $ --- $ --- $ --- $ 643,000
========== ============ ============= ============== ==============
FOR THE YEAR ENDED
DECEMBER 31, 1994:
- ------------------
Allowance for
doubtful accounts $ 168,390 $ 140,000 $ --- $ 50,972(c) $ 257,418
========== ============ ============= ============== ==============
Allowance for
inventory
obsolescence $ 668,111 $ --- $ --- $ 2,562(b) $ 665,549
========== ============ ============= ============== ==============
Allowance for
related party loan $ 693,072 $ 34,849 $ --- $ 619,564(d) $ 108,357
========== ============ ============= ============== ==============
Allowance for investment
in related party $ 23,436 $ --- $ --- $ (619,564(d) $ 643,000
========== ============ ============= ============== ==============
____________________________________
(a) Reserve transferred to Endocare with the spinout.
(b) Write-off of inventory
(c) Write-off of bad debt
(d) Reserve transferred from loan provision to investment provision due to
restructuring.
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