x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

MEDSTONE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

66-0439440

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 Columbia, Suite 100, Aliso Viejo,  California

92656

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:          (949) 448-7700

Not Applicable

(Former name, former address and former fiscal year, if changed, since last report)

Yes

x

No

o

Page No.

PART I.     FINANCIAL INFORMATION

Item 1.

Financial Statements:

Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001

3

Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2002 and 2001

4

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
Nine Months Ended September 30, 2002

5

Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 2002 and 2001

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

14

Item 4.

Controls and Procedures

15

PART II.     OTHER INFORMATION

Item 1.

Legal Proceedings

16

Item 2.

Changes in Securities

16

Item 3.

Defaults Upon Senior Securities

16

Item 4.

Submission of Matters to a Vote of Security Holders

16

Item 5.

Other Information

16

Item 6.

Exhibits and Reports on Form 8-K

16

Signatures

17

Certifications

September 30,
2002

December 31,
2001

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

1,739,324

$

1,928,731

Short-term investments held to maturity

4,305,503

4,570,420

Accounts receivable, less allowance for doubtful accounts of $840,220 and $804,646 at September 30, 2002 and December 31, 2001, respectively

3,945,773

4,013,781

Inventories, less allowance for inventory obsolescence of $440,712 and $540,417 at September 30, 2002 and December 31, 2001, respectively

6,064,828

6,296,069

Deferred tax assets

2,160,695

2,160,695

Prepaid expenses and other current assets

474,025

541,194

Total current assets

18,690,148

19,510,890

Buildings, property and equipment, at cost:

Building

359,324

359,324

Lithotripters

13,569,744

13,163,285

Equipment

2,368,810

2,048,582

Furniture and fixtures

999,452

961,776

Leasehold improvements

175,032

171,177

17,472,362

16,704,144

Less accumulated depreciation and amortization

(13,236,592

)

(12,041,254

)

Net property and equipment

4,235,770

4,662,890

Goodwill, net

3,187,708

3,205,251

Investment in unconsolidated subsidiaries

879,133

909,492

Net investment in sale-type lease

217,488

224,731

Other assets, net

102,096

117,006

$

27,312,343

$

28,630,260

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

1,166,488

$

1,087,594

Accrued expenses

228,628

345,075

Accrued income taxes

211,102

—  

Accrued payroll expenses

435,596

313,472

Customer deposits

80,912

364,048

Deferred revenue

679,736

783,948

Total current liabilities

2,802,462

2,894,137

Deferred tax liabilities

562,534

562,534

Minority interest

469,727

497,647

Deferred rent

86,091

86,425

Stockholders’ equity:

Common stock - $.004 par value, 20,000,000 shares authorized, 5,742,670 shares issued at both September 30, 2002 and December 31, 2001

22,971

22,971

Additional paid-in capital

19,646,388

19,646,388

Accumulated earnings

16,525,815

16,050,251

Accumulated other comprehensive income/(loss)

(37,936

)

32,756

Treasury stock,  at cost, 1,984,450 and 1,631,450 shares at September 30, 2002 and December 31, 2001, respectively

(12,765,709

)

(11,162,849

)

Total stockholders’ equity

23,391,529

24,589,517

$

27,312,343

$

28,630,260

Three Months Ended
September 30,

Nine Months Ended
September 30,

2002

2001

2002

2001

Revenues:

Procedures, maintenance fees and fee-for service

$

4,600,563

$

4,816,951

$

13,278,084

$

14,076,918

Net equipment sales

1,271,401

1,066,443

4,779,095

2,134,302

Interest income

84,862

104,139

246,506

362,096

Total revenues

5,956,826

5,987,533

18,303,685

16,573,316

Costs and expenses:

Costs of procedures and maintenance fees

2,604,139

2,928,207

7,642,548

8,438,313

Cost of equipment sales

837,740

683,820

3,506,676

1,705,647

Research and development

360,304

319,631

935,214

879,735

Selling

702,431

681,465

2,308,676

1,925,116

General and administrative

708,839

591,478

2,360,060

1,903,783

Total costs and operating expenses

5,213,453

5,204,601

16,753,174

14,852,594

Operating income

743,373

782,932

1,550,511

1,720,722

Other expense (income):

Gain on sale of investments

—  

(200,169

)

—  

(627,774

)

Other expense

22,942

47,255

25,208

99,631

Total other expense (income):

22,942

(152,914

)

25,208

(528,143

)

Minority interests:

Minority interest in subsidiaries income

191,550

229,485

522,080

564,444

Equity in (income)/loss  from unconsolidated subsidiaries

—  

186,179

30,359

149,014

Total minority interest

191,550

415,664

552,439

713,458

Income before provision for income taxes

528,881

520,182

972,864

1,535,407

Provision for income taxes

301,800

205,129

497,300

639,780

Net income

$

227,081

$

315,053

$

475,564

$

895,627

Earnings per share: