Server: Microsoft-IIS/3.0 Date: Thu, 18 Dec 1997 20:30:23 GMT Content-Type: text/html Accept-Ranges: bytes Last-Modified: Tue, 25 Nov 1997 18:15:13 GMT Content-Length: 22589 MEDSTONE Shareholder Info
MEDSTONE
INTERNATIONAL
INC.

Shareholder Information
July 31, 1997

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For Further Information:

David Radlinski, Chairman & CEO Medstone International, Inc.
100 Columbia, Suite 100 Aliso Viejo, CA 92656-4114 (714) 448-7700 Ext. 235

MEDICAL EQUIPMENT
(NASDAQ:MEDS)

Medstone International, Inc. is the only domestic company that manufactures and services lithotripters, and, provides lithotripsy service on a fee-for-procedure basis. Lithotripsy is the leading non-invasive method of treating kidney stones with the use of shock waves and is one of the few medical procedures that has actually decreased the cost of curing a patient of a disease.

Market Data Stock Performance Chart:

Price At 6/30/97: $9.125
52 Week Range: $12.13 - $6.50
Shares Outstanding: 5,439,280
Market Capitalization: $49,633,430

Float:

5,010,000

Trailing 4 Qtrs:

$0.75

Current P/E

14

INVESTMENT HIGHLIGHTS

As the only vertically integrated provider of shockwave therapy that manufactures, sells, services lithotripters, and provides lithotripsy on fee for procedure basis, Medstone International can place its large ticket equipment into service at a fraction of the cost of its competitors who must purchase lithotripsy equipment from outside sources, including Medstone, before placing it into service with a medical group. Medstone has transitioned from solely a manufacturer of lithotripters to a service company providing lithotripsy on a fee per procedure basis. Approximately 80% of Medstone's revenue is generated from recurring sources (procedure fees, fee for service and maintenance contracts.) Medstone consistently produces pre-tax margins in excess of 30%.

Medstone places its equipment into service with medical groups on either a fixed-site or mobile basis. In 1996, Medstone owned- equipment in service, 12 mobile units and two fixed sites, performed 4,418 procedures, an increase of 43%, at an average fee of $1,584 for each procedure.

Non-Recurring vs. Recurring Revenue

Since inception, in addition to generating non-recurring lithotripter manufacturing revenue, Medstone has always focused on strengthening its sources of recurring revenue: (1) fee-for-service; (2) per procedure licensing fees; and (3) maintenance fees. This was in recognition of the fact that sales of large ticket equipment can be erratic and need to be balanced with more consistent sources of revenue. Recurring revenue for FY 1996 has grown at an annualized rate of 21.3% from 1994 and now represents 82% of total revenue, up from 72% two years ago.

Under the leadership of new CEO, David Radlinski, Medstone spun off two seedling non-lithotripsy subsidiaries to its shareholders in late 1995 in order to focus on the highly profitable core business: Endocare, manufactures equipment and devices to treat urologic soft tissue diseases and has traded as high as $5, and Urogen, a developmental stage company which is developing pharmaceuticals to treat prostate cancer and will be available for trading in late 1997. Settlement was also reached with respect to a shareholder lawsuit that has lingered since 1989. While these events had a negative impact on 1996 results, they also position Medstone to benefit in 1997 as a result of these actions.

U.S. Procedures-Medstone Equipment

Medstone's market share in the U.S. continues to grow rapidly when measured in terms of procedures performed on equipment-owned and operated by Medstone. These numbers represent the vast opportunity potential for the company to expand its sales and product line.

Medstone has substantial cash, no long-term debt, high pre-tax margins, and substantial positive cash flow. As a percentage of revenue, Medstone's after tax earnings are greater than 20%.

THE COMPANY

Medstone International was formed in 1984 to develop proprietary technology in the field of non-surgical shockwave therapy. The system was approved for commercial sale in the United States. by the Food and Drug Administration in 1988. The company markets its products worldwide with units installed in China, Japan, Egypt, Saudi Arabia, Russia, Israel, and the United States. Sales and service is provided directly by the company in the U.S. and through distributors outside the United States. To date, the company has sold 82 machines worldwide, of which 50 were sold domestically.

Medstone receives non-recurring revenue from the sale of equipment, including lithotripters and feature upgrades. A substantially larger portion of revenue is generated through recurring sources, including: a license fee each time any domestic machine performs a procedure, revenue from the fee-for-service program provided in Medstone owned and operated mobile vans, and maintenance contracts. It is Medstone's plan to continue the expansion of recurring revenue sources.

The company has become the industry expert in providing lithotripsy procedures. Their expertise is derived from both its (a) technological advantage as a vertically integrated manufacturer and service provider, and (b) its experience advantage, given that it has been studying and performing shockwave lithotripsy for over 12 years.

THE PRODUCTS

The Medstone International STS is presently used to treat kidney stones, without invasive surgery. 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. The Company received its pre-market approval (PMA) from the FDA in 1988, authorizing the device for treating patients with kidney stones.

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 which allows the computer to synchronize the shockwaves with phases of the patient's heartbeat.

Medstone has developed and copyrighted all the software that controls the STS. Medstone has also developed and manufactures its own disposable components for use with the STS: Electrodes, used to produce electrical sparks in the shockwave generator, and, a disposable coupling bag containing the fluids necessary for the transmission of the shockwaves. One complete set of the supplies is normally used for each patient procedure.

OUTLOOK FOR GROWTH

Kidney stones affect about 2.5% of the population and are particularly prevalent in men between 45 and 64 years old. This segment of the U.S. population is projected to grow 36% (from 25 million in 1995 to 34 million in 2005) in the next ten years. Since this is the country's most rapidly growing population segment, the growth in demand for lithotripsy procedures seems to be accelerating from 2%-4% annually to 4%-6%. A study prepared by The American Lithotripsy Society indicated approximately 175,000 lithotripsy procedures were performed in 1993, up from 126,000 in 1988. Approximately 180,000 procedures were performed in 1995.

The industry is very fragmented and offers many opportunities for growth through consolidation. Approximately 65% of the machines are owned by individual medical groups which usually own only one or two machines.

Medstone has few competitors, and it is the only company that both manufactures and services lithotripters. Medstone profitably competes in the most competitive regions of the United States. Fee per procedures are much lower in Medstone's geographic service areas than in other parts of the country. The company has eliminated its historical impediments to growth, and now can focus on growing through acquisitions and increasing recurring revenues. Management attention had been diverted by a 1988 shareholder lawsuit that was finally settled in June 1996 for $5.5 million and in December 1995 two subsidiaries, Endocare and Urogen, were spun off to shareholders.

New markets the company is entering have much higher compensation rates per procedure than in its existing markets. Currently, revenue per procedure has averaged $1,600, while in many parts of the U.S. the procedures average $4,000. The company is particularly active in the western U. S., but it is expanding its operating routes in include Texas, Florida and the Northeast.

 

BUSINESS STRATEGY

Medstone's primary strategy is to be the leading provider of lithotripsy procedures in the United States and in selected locations abroad. The company is pursuing a multi-pronged growth plan during 1997 which entails:

Capturing increased efficiencies among the Medstone-owned lithotripsy machines already in the field by enhancing marketing efforts aimed directly at hospitals and urology groups and strategically planning mobile routes so as to increase the number of procedures performed per location.

Selectively acquiring related businesses or physician groups that compliment Medstone's strategic initiatives and expand its geographic reach.

Expanding international sales and services in high-growth markets by leveraging the company's relationships and experience.

FINANCIAL HIGHLIGHTS

 

MEDSTONE INTERNATIONAL, INC.

CONDENSED COMPARATIVE OPERATING RESULTS

June 30, 1997

Condensed Comparative Operating Reults:(unaudited)

For the three months ended______________________________ _Jun,30,1997__ _Jun,30,1996__
Revenues $5,664,850 $4,329,528
Income (loss) before taxes 1,631,497 (4,769,560)(1)
Net income (loss) 1,022,497 (3,030,560)
Primary earnings per share:
Net income (loss)
.19 (.55)
Fully diluted earnings per share:
Net income
.19 N/A
Number of shares used in the computation of earnings per share:
Primary
5,448,683 5,531,750
Fully diluted 5,503,345 N/A
For the six months ended: Jun, 30, 1997 Jun, 30,1996
Revenues 10,626,978 8,431,862
Income (loss) before taxes 2,931,951 (3,802,246)(1)
Net income (loss) 1,882,951 (2,413,246)
Primary earnings per share: Net income (loss) .34 (.44)
Fully diluted earnings per share: Net income .34 N/A
Number of shares used in the computation of earnings per share:
Primary
5,490,008 5,532,093
Fully diluted 5,544,688 N/A

(1) Includes a $5.5 million settlement expense.

CORPORATE INFORMATION

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This website contains forward-looking statements within the meaning of Section 27A of the Securitires Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that such statements shall be protected by the safe harbors provided for in such sections. Such statements are subject to risks and uncertanties that could cause actual results to vary materially from those projected in the forward-looking statements. The Company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, including, but not limited to, timing of customer orders, new or increased competition, delays in new products, delays or disapproval of medical regulatory agencies, changes in market demand, market acceptance of new products or new applications for existing products, seasonality on product usage, and others. These factors and others could cause operating results to vary significantly from those in prior periods, and those projected in forward-looking statements. Additional information with respect to those and other factors which could materially affect the Company and its operations are included in the Company's filings with the Securities and Exchange Commission and are incorporated herein.

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