item 14 exhibits financial statement schedules reports form 8k index consolidated financial statements page 1 consolidated financial statements reports independent auditors 34 consolidated balance sheets december 31 2001 2000 36 consolidated statements operations years ended december 31 2001 2000 1999 37 consolidated statements stockholders equity years ended december 31 2001 2000 1999 38 consolidated statements cash flows years ended december 31 2001 2000 1999 39 notes consolidated financial statements 40 2 schedule consolidated financial statements schedule ii valuation qualifying accounts 53 schedules omitted applicable required information included consolidated financial statements notes thereto b reports form 8k one report filed commission form 8k december 7 2001 relating change companys auditors c exhibits exhibit description 31 certificate incorporation company amended 1 32 restated amended bylaws company 2 42 specimen certificate companys common stock 3 1026 1989 stock incentive plan 45 1027 nonemployee director stock option plan 45 1029 1997 stock incentive plan 56 1030 employment agreement david radlinski 57 1031 employment agreement mark selawski 57 1032 employment agreement eva novotny 57 1033 amended lease aliso viejo property 8 21 subsidiaries 231 consent independent auditors 282 form cytocare inc information statement distribution shareholders stock cardiac science inc 9 283 form medstone international inc information statement distribution shareholders stock endocare inc urogen corp 10 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number companys quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number companys quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 10 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheet medstone international inc december 31 2001 related consolidated statements operations stockholders equity cash flows year ended audit also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position medstone international inc december 31 2001 results operations cash flows year ended conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein moss adams llp santa rosa california february 7 2002 report independent auditors board directors stockholders medstone international inc audited accompanying consolidated balance sheets medstone international inc subsidiaries company december 31 2000 related consolidated statements income stockholders equity cash flows two years period ended december 31 2000 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc subsidiaries december 31 2000 consolidated results operations cash flows two years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein sernst young llp orange county california february 14 2001 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 2001 1 organization operations company medstone international inc medstone company designs manufactures markets medstone ststm ststc shockwave therapy systems system noninvasive disintegration kidney stones human patients company also generates revenues use systems procedure fees fee service arrangements repairs maintenance companys customers primarily located united states 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company medstone international ltd scotish subsidiary group united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation majorityowned subsidiaries consolidated material intercompany accounts transactions eliminated investments less 20 owned affiliates accounted cost method unless company able exercise significant influence affiliates operating financial policies case investments accounted equity method use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents fair value financial instruments fair market value cash equivalents shortterm investments accounts receivable approximate cost due short period time maturity carrying value long term receivable unconsolidated subsidiary approximates net realizable value due impairment analysis current market conditions shortterm investments company applies provisions statement financial accounting standards 115 accounting certain investments debt equity securities shortterm investments statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified heldtomaturity carried amortized cost amortized cost market value investments december 31 2001 contractual maturity shown amortized cost market value due one year less 4570419 4620942 comprehensive income components accumulated comprehensive incomeloss follows concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments federally insured accounts receivable companys shortterm investments consist principally us treasury bills us government agency notes commercial paper company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 10 accounts receivable december 31 2001 2000 inventories stated lower cost firstin firstout market consist following december 31 2001 2000 raw materials 4567799 3888640 work process 363768 231175 finished goods 1364502 1983236 6296069 6103051 building property equipment building property equipment carried cost depreciation amortization computed straightline method following estimated useful lives building 50 years lithotripters 5 years equipment 5 years furniture fixtures 5 years leasehold improvements life lease depreciation expense years ended december 31 2001 2000 1999 1903685 2274183 1987000 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho zenith medical systems ltd fair market value net assets acquired goodwill amortized periods ranging fifteen forty years using straightline method accumulated amortization december 31 2001 2000 473165 371194 respectively longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable based upon analysis company believes properly recorded reserves totaling 3232673 results year ending december 31 2001 reflecting impairment various longlived assets relating investments receivables expected life greater one year based upon analysis company believes material impairment carrying value longlived assets inclusive intangible assets existed december 31 2000 companys analysis based comparison carrying amount assets companys historical actual cash flows estimate future undiscounted cash flows earnings per share basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding diluted net income per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method since loss exists december 31 2001 diluted earnings per share number presented inclusion common stock equivalents computation would antidilutive earnings per share amounts periods restated conform sfas 128 requirements following table sets forth computation earnings loss per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model blackscholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options revenue recognition revenues recognized feeforservice segment companys operations invoiced customer uses equipment month service provided revenues equipment sales recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 58000 32000 58000 years ended december 31 2001 2000 1999 respectively shipping handling costs shipping handling costs included component cost equipment sales business segments geographic information company applies provisions statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards related disclosures products services geographic areas major customers company operates two business segments equipment sales fees procedures maintenance management equipment sales segment significant fees procedures maintenance management segment represents recurring revenue procedure fees fee service arrangements use maintenance lithotripter equipment accounting policies segments described summary significant accounting policies except certain expenses amortization certain intangibles certain corporate expenses allocated segments asset categories used allocation segment reporting include net accounts receivable net inventory net property equipment net goodwill selected financial information companys reportable segments years ended december 31 2001 2000 1999 follows thousands selected financial information companys operations geographic segment follows thousands recently issued accounting pronouncements june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets effective fiscal years beginning december 15 2001 new rules goodwill intangible assets deemed indefinite lives longer amortized subject annual impairment tests accordance statements intangible assets continue amortized useful lives company apply new rules accounting goodwill intangible assets beginning 2002 application nonamortization provisions statement expected result increase net income 60000 per year 2002 company perform first required impairment tests goodwill indefinite lived tangible assets january 1 2002 yet determined effect tests earnings financial position company sfas 143 accounting asset retirement obligations addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs statement applies legal obligations associated retirement longlived assets result acquisition construction development normal operation longlived asset provisions statement required applied starting fiscal years beginning june 15 2002 adoption sfas 143 expected material effect companys financial statements sfas 144 accounting impairment disposal longlived assets addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 amends certain accounting pronouncements provisions statement effective financial statements issued fiscal years beginning december 15 2001 adoption sfas 144 expected material effect companys financial statements 3 sales type leases company sells equipment longterm capital lease agreements classified sale type leases maturities subsequent years sales type leases follows principal amount 2002 108035 2003 125642 2004 99089 4 acquisitions investments joint ventures equity investment arcoma ab september 2001 company purchased common stock representing 25 interest arcoma ab arcoma 1 million cash arcoma based vaxjo sweden designer manufacturer medical imaging tablesdevices arcoma supplier several types tables company currently markets including uropro 2000 table introduced 2000 company continue expand distribution arcomadesigned devices united states future years investment arcoma accounted equity method investment net companys share net losses period september 1 2001 december 31 2001 91000 included investment unconsolidated subsidiaries equity investment medicreditcom inc april 2000 company purchased common stock representing 46 interest medicreditcom inc medicredit 1 million cash medicredit californiabased company funds services patient accounts finance elective surgeries cosmetic cash paying sector healthcare investment medicredit accounted equity method based companys review equity balance cash flows medicredit december 31 2001 determined reserve 953011 remaining equity investment balance recorded investment carrying value net carrying value 0 along cash investments medicredit company also provides medicredit subordinated line credit 2 million prime interest rate 475 december 31 2001 interest payments due monthly principal due maturity april 20 2003 december 31 2001 2 million advanced company reviewed relation medicredits current cash flows impairment reserve 2 million established net carrying value 0 accrued interest 26000 due medicredit recorded assets accrued interest amounts collected subsequent december 31 2001 purchase assets creos ltd april 1999 medstone international ltd whollyowned subsidiary company located scotland purchased certain assets creos ltd liquidator 165600 cash acquisition accounted purchase generate goodwill medstone international ltd commenced manufacturing xray generator products previously produced creos ltd operating results medstone international ltd included consolidated financial statements company since april 1999 purchase zenith medical systems ltd october 1999 medstone international ltd purchased outstanding shares zenith medical systems ltd 870000 cash less 284000 acquired cash net cost 586000 acquisition accounted purchase accordingly excess cost fair value net assets acquired recorded goodwill approximately 317000 amortized expected benefit period 15 years zenith medical systems ltd distributor major medical imaging systems british national health service located manchester england operating results zenith medical systems ltd included consolidated financial statements company since october 1999 investment digital imaging systems inc 1998 company entered supply agreement digital imaging systems inc dis components integral companys new transportable lithotripsy product dis commenced shipments product company january 1999 company purchased 300000 shares dis preferred stock 300000 represents 14 ownership interest 1999 company recorded investment writedown 300000 result review realizable value investment k biotech 1998 company made aware opportunity invest developmental biotech drug company catering members international centre genetic engineering biotechnology icgeb united nations sponsored institute k biotech purchased license agreements formulas developed icgeb commercialization purposes indian subcontinent primary market companys investment kbiotech preferred stock 325000 representing 21 ownership interest 2001 company recognized share k biotechs losses investment reserve totaling 325000 reducing carrying value 0 investment k biotech accounted equity method company ability exercise significant influence kbiotech included assets k biotech continually seeking additional funding international sources finance required investment plant equipment unaudited pro forma consolidated results giving effect businesses acquired fiscal 1999 would materially different reported amounts 1999 1998 due immateriality acquisitions 5 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision income taxes consists following reconciliation provision benefit income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 6 stock options june 1989 companys stockholders approved 1989 stock incentive plan 1989 plan provided granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended 1989 plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares may 1997 company terminated 1989 plan granting additional options december 31 2001 162534 options shares common stock granted remain outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan june 1 1999 plan expired additional shares may granted plan outstanding options shall continue vest remain exercisable accordance grants outstanding december 31 2001 5000 options shares common stock granted remain outstanding plan options purchase 15000 shares common stock issued member board directors november 1996 exercise prices 6375 repricing options august 31 1998 options exercisable six months following grant dates incremental amounts equal 148 underlying shares elapsed calendar month director remains companys board terms options five years subject earlier termination related director longer serving board november 5 2001 options expired longer outstanding may 1997 companys stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date december 31 2001 number shares authorized plan 994316 789450 options shares common stock granted outstanding plan effective august 13 1998 company repriced outstanding options granted plans exercise prices exceeding closing market value stock date accordingly exercise price options reduced 6375 per share summary companys stock option plans end 2001 2000 1999 changes years presented following table summarizes information stock options outstanding december 31 2001 calculating pro forma information regarding net income loss net income loss per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 2001 2000 1999 respectively risk free interest rates 4 2001 6 2000 1999 dividend yields 0 periods volatility expected market prices companys common stock 394 555 469 expected life options 55 years periods purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 2001 2000 1999 follows thousands except per share information pro forma amounts give effect options granted prior january 1 1995 7 stock repurchase plan companys stock repurchase programs authorized repurchase 1970000 shares common stock year ending december 31 2001 company repurchased total 197000 shares cost 1038266 year ending december 31 2000 company repurchased total 459800 shares cost 2736124 year ending december 31 1999 company repurchased total 387550 shares cost 2445250 company repurchased total 1631450 shares since inception stock repurchase programs total cost 11162849 amounts recorded treasury stock companys current repurchase program active december 31 2001 8 commitments company occupied current facility since march 1994 current operating lease runs november 2005 average monthly rental expense 19449 term lease option one fiveyear extension rate negotiated based current market rates companys subsidiary occupied current facility since april 1999 entered sixtymonth lease monthly rent 2980 october 2000 future minimum lease payments operating leases follows minimum rental 2002 273000 2003 288000 2004 299000 2005 284000 2006 27000 total net rent expense operating leases years ended december 31 2001 2000 1999 257000 204000 227000 respectively 9 contingencies company involved legal proceedings incidental normal conduct business company obtained various liability insurance policies providing coverage general liability product liability claims management believe resolution current proceedings material financial impact company consolidated financial position results operations cash flows 10 related party transactions cardiac science inc cardiac science inc formed subsidiary company 1991 shortly thereafter spun separate entity majority common stock cardiac science inc distributed companys stockholders 1991 1996 company performed various financing activities cardiac science exchange common stock warrants december 31 2001 2000 company held approximately 0 187000 shares common stock respectively cardiac science inc common stock carrying value zero 2001 2000 company sold approximately 187000 305000 shares 628000 1855000 cash respectively proceeds sales common stock warrants included income k biotech companys original investment k biotech 325000 represents 21 interest 2001 company recognized share k biotechs losses investment reserve totaling 325000 reducing carrying value 0 two members board directors company also shareholders kbiotech inc one member board directors president kbiotech digital imaging systems 1998 company obtained 14 ownership interest digital imaging systems inc dis 300000 entered supply agreement whereby company would purchase equipment 11 million dis 1999 company recorded investment writedown 300000 result review realizable value investment dis commenced shipments products company january 1999 pursuant supply agreement genstar therapeutics corporation genstar therapeutics corp formerly urogen corp subsidiary company early 1996 time company spun subsidiary separate company distributed stock genstar stockholders except 100000 shares company retained 2000 company sold 5000 shares genstar gain approximately 28000 still holds 95000 shares genstar common stock book value 0 december 31 2001 market value retained genstar common stock approximately 235000 december 31 2001 investment medicreditcom inc april 2000 company purchased common stock representing 46 interest medicreditcom inc medicredit 1 million cash medicredit californiabased company funds services loans physicians finance elective surgeries cosmetic cash paying sector healthcare along cash investment medicredit company agreed subordinated line credit 2 million prime interest rate company recognized losses reserves totaling 953011 investment leaving net asset carrying value december 31 2001 0 subordinated line credit impairment reserve 2 million recorded 2001 making net carrying value 0 arcoma ab september 2001 company purchased common stock representing 25 interest arcoma ab arcoma 1 million cash arcoma based vaxjo sweden designer manufacturer medical imaging tablesdevices arcoma supplier several types tables company currently markets including uropro 2000 table introduced 2000 company continue expand distribution arcomadesigned devices united states future years investment arcoma accounted equity method investment net companys share net losses period september 1 2001 december 31 2001 91000 included investment unconsolidated subsidiaries 11 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors 2001 companys board directors elected change employee match tiered system 25 dollar depending years service employer match maximum ranges 2000 10500 per year 2001 2000 1999 companys contribution totaled 85148 58382 50557 respectively 12 major customers foreign sales three years ended december 31 2001 2000 1999 single customer accounted 10 total revenues one year company derived 8 7 3 total revenues sales foreign customers years ending december 31 2001 2000 1999 respectively 13 selected quarterly financial data unaudited tables set forth selected quarterly financial information 2001 2000 thousands except per share amounts 14 subsequent events march 4 2002 company purchased 165000 shares common stock cost 752000 current stock repurchase program medstone international inc schedule ii valuation qualifying accounts writeoff inventories b writeoff bad debts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 27 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 22 2002 signature title chairman board david v radlinski chief executive officer director david v radlinski principal executive officer mark selawski chief financial officer principal financial mark selawski accounting officer donald j regan director donald j regan frank r pope director frank r pope david reed director david reed michael c tibbitts director michael c tibbitts jack olshansky director jack olshansky exhibit index exhibit description 31 certificate incorporation company amended 1 32 restated amended bylaws company 2 42 specimen certificate companys common stock 3 1026 1989 stock incentive plan 45 1027 nonemployee director stock option plan 45 1028 facility lease 100 columbia 6 1029 1997 stock incentive plan 57 1030 employment agreement david radlinski 5 1031 employment agreement mark selawski 5 1032 employment agreement eva novotny 5 21 subsidiaries 231 consent independent auditors 282 form cytocare inc information statement distribution shareholders stock cardiac science inc 8 283 form medstone international inc information statement distribution shareholders stock endocare inc urogen corp 9 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number companys quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number companys quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 10 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference item 14 exhibits financial statement schedules reports form 8k index consolidated financial statements page 1 consolidated financial statements report independent auditors 26 consolidated balance sheets december 31 1999 1998 27 consolidated statements operations years ended december 31 1999 1998 1997 28 consolidated statements stockholders equity years ended december 31 1999 1998 1997 29 consolidated statements cash flows years ended december 31 1999 1998 1997 30 notes consolidated financial statements 31 2 schedule consolidated financial statements schedule ii valuation qualifying accounts 43 schedules omitted applicable required information included consolidated financial statements notes thereto b reports form 8k reports form 8k filed commission quarter ended december 31 1999 c exhibits exhibit description 31 certificate incorporation company amended 1 32 restated amended bylaws company 2 42 specimen certificate companys common stock 3 1026 1989 stock incentive plan 45 1027 nonemployee director stock option plan 45 1028 facility lease 100 columbia 6 1029 1997 stock incentive plan 57 1030 employment agreement david radlinski 5 1031 employment agreement mark selawski 5 1032 employment agreement eva novotny 5 21 subsidiaries 231 consent independent auditors 27 financial data schedule 282 form cytocare inc information statement distribution shareholders stock cardiac science inc 8 283 form medstone international inc information statement distribution shareholders stock endocare inc urogen corp 9 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys annual report form 10k year ended december 31 1993 7 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 8 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 9 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc subsidiaries company december 31 1999 1998 related consolidated statements operations stockholders equity cash flows three years period ended december 31 1999 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc subsidiaries december 31 1999 1998 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 10 2000 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 1999 1 organization operations company medstone international inc medstone company designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients company also generates revenues use system procedure fees fee service arrangements repairs maintenance company operations occur mainly customers located united states 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company medstone international ltd scottish subsidiary group united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation majorityowned subsidiaries consolidated material intercompany accounts transactions eliminated investments less 20 owned affiliates accounted cost method unless company able exercise significant influence affiliates operating financial policies case investments accounted equity method reclassifications certain prior year balances reclassified conform december 31 1999 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates significant estimates made preparing financial statements include allowance doubtful accounts statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents shortterm investments company applies provisions statement financial accounting standards 115 accounting certain investments debt equity securities shortterm investments statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified heldtomaturity carried amortized cost amortized cost market value investments december 31 1999 contractual maturity shown comprehensive income january 1 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes new rules reporting display comprehensive income components however adoption statement impact companys net income stockholders equity sfas 130 requires unrealized gains losses availableforsale securities unrealized gains losses foreign currency translation included comprehensive income prior financial statements reclassified conform requirements sfas 130 components accumulated comprehensive loss follows concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments federally insured accounts receivable companys shortterm investments consist principally us treasury bills us government agency notes commercial paper company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 16 accounts receivable december 31 1999 inventories stated lower cost firstin firstout market consist following building property equipment building property equipment carried cost depreciation amortization computed straightline method following estimated useful lives depreciation expense years ended december 31 1999 1998 1997 1987000 1863000 1538000 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho zenith medical systems ltd fair market value net assets goodwill amortized periods ranging fifteen forty years using straightline method accumulated amortization december 31 1999 1998 269635 180569 respectively longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable based upon companys analysis company believes material impairment carrying value longlived assets inclusive intangible assets existed december 31 1999 1998 companys analysis based comparison carrying amount assets companys historical actual cash flows estimate future undiscounted cash flows earnings per share company adopted sfas 128 earnings per share applied pronouncement periods presented statement requires presentation basic diluted net income per share financial statement purposes basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding diluted net income per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method earnings per share amounts periods restated conform sfas 128 requirements following table sets forth computation earnings per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model blackscholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options revenue recognition revenues recognized feeforservice segment companys operations invoiced customer uses equipment month service provided revenues equipment sales recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 58000 135000 126000 years ended december 31 1999 1998 1997 respectively business segments geographic information effective january 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 also establishes standards related disclosures products services geographic areas major customers adoption sfas 131 affect results operations financial position affect following disclosure segment information company operates two business segments equipment sales fees procedures maintenance management equipment sales segment significant fees procedures maintenance management segment represents recurring revenue procedure fees fee service arrangements use maintenance lithotripter equipment accounting policies segments described summary significant accounting policies except certain expenses amortization certain intangibles certain corporate expenses allocated segments asset categories used allocation segment reporting include net accounts receivable net inventory net property equipment net goodwill selected financial information companys reportable segments years ended december 31 1999 1998 1997 follows thousands selected financial information companys operations geographic segment follows thousands 3 acquisitions investments joint ventures purchase assets creos ltd april 1999 medstone international ltd whollyowned subsidiary company located scotland purchased certain assets creos ltd liquidator 165600 cash acquisition accounted purchase generate goodwill medstone international ltd commenced manufacturing xray generator products previously produced creos ltd operating results medstone international ltd included consolidated financial statements company since april 1999 purchase zenith medical systems ltd october 1999 medstone international ltd purchased outstanding shares zenith medical systems ltd 870000 cash less 284000 acquired cash net cost 586000 acquisition accounted purchase accordingly excess cost fair value net assets acquired recorded goodwill approximately 317000 amortized expected benefit period 15 years zenith medical systems ltd distributor major medical imaging systems british national health service located manchester england operating results zenith medical systems ltd included consolidated financial statements company since october 1999 investment digital imaging systems inc 1998 company entered supply agreement digital imaging systems inc dis components integral companys new transportable lithotripsy product dis commenced shipments product company january 1999 company purchased 300000 shares dis preferred stock 300000 represents 14 ownership interest 1999 company recorded investment writedown 300000 result review realizable value investment k biotech 1998 company made aware opportunity invest developmental biotech drug company catering members international centre genetic engineering biotechnology icgeb united nations sponsored institute k biotech purchased license agreements formulas developed icgeb commercialization purposes indian subcontinent primary market companys investment kbiotech preferred stock 325000 representing 21 ownership interest 225000 representing 153 ownership interest december 31 1999 1998 respectively investment k biotech accounted equity method company ability exercise significant influence kbiotech included assets k biotech continually seeking additional funding international sources finance required investment plant equipment investment chinese joint venture company along acuity international acuity phenix optical ltd phenix chinese company created joint venture march 1998 provide lithotripsy services inland chinese areas entity 13 owner joint venture company recorded investment 92000 assets december 1998 documents drawn executed turn ownership phenix return delivery optical products acuity company 1999 company received optical products release share joint venture company estimates resale value optical products approximate value investment established joint venture company intends sell optical products purchase southern idaho march 18 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc operator retail lithotripsy operation southern idaho purchase price 23 million cash assets acquired accounted purchase method consisted accounts receivable contracts provide services insurers operating results southern idaho included consolidated financial statements company since march 1 1997 unaudited pro forma consolidated results giving effect businesses acquired fiscal 1999 would materially different reported amounts 1999 1998 due immateriality acquisitions 4 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision income taxes consists following reconciliation provision income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 5 stock options june 1989 companys stockholders approved 1989 stock incentive plan 1989 plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended 1989 plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares may 1997 company terminated 1989 plan granting additional options december 31 1999 566428 options shares common stock granted remain outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan june 1 1999 plan expired additional shares may granted plan outstanding options shall continue vest remain exercisable accordance grants outstanding december 31 1999 10000 options shares common stock granted remain outstanding plan options purchase 15000 shares common stock issued current members board november 1996 exercise prices 6375 repricing options august 31 1998 options exercisable six months following grant dates incremental amounts equal 148 underlying shares elapsed calendar month director remains companys board terms options five years subject earlier termination related director longer serving board december 31 1999 45000 options shares common stock granted outstanding may 1997 companys stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date january 1 1999 number shares authorized plan increased 895585 december 31 1999 501000 options shares common stock granted outstanding plan effective august 13 1998 company repriced outstanding options granted plans exercise prices exceeding closing market value stock date accordingly exercise price options reduced 6375 per share summary companys stock option plans end 1999 1998 changes years presented following table summarizes information stock options outstanding december 31 1999 calculating pro forma information regarding net income net income per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 1999 1998 1997 respectively risk free interest rates 6 periods dividend yields 0 periods volatility expected market prices companys common stock 469 542 316 expected life options 55 years periods purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 1999 1998 1997 follows thousands except per share information pro forma amounts give effect options granted prior january 1 1995 6 stock repurchase plan august 3 1999 company announced recent stock repurchase program 500000 shares common stock three stock repurchase programs announced company authorized repurchase 1100000 shares common stock year ending december 31 1999 company repurchased total 387550 shares cost 2445250 year ended december 31 1998 company repurchased total 318300 shares cost 2742473 year ended december 31 1997 company repurchased total 156000 shares cost 129236600 company repurchased total 974650 shares since inception stock repurchase programs total cost 7388459 amounts recorded treasury stock companys current repurchase program active december 31 1999 7 commitments march 1994 company took occupancy office manufacturing engineering warehouse space research development laboratories operating lease initial term two years lease extensions current monthly lease rate 14410 june 2000 april 1999 companys subsidiary took possession manufacturing office warehouse space operating lease december 1999 monthly rent 3233 december 1999 new twelve month lease entered monthly rent 4849 commencing january 1 2000 future minimum lease payments operating leases follows total net rent expense operating leases years ended december 31 1999 1998 1997 227000 194000 182000 respectively 8 contingencies time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 9 related party transactions cardiac science inc 1991 company party formation cardiac science inc company purchased 5353031 presplit shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend stockholders record date one share cardiac science inc stock share medstone stock held company retained 629768 presplit shares common stock cardiac science inc 1991 1996 company performed various financings cardiac science received warrants purchase cardiac science common stock due companys exercise warrants common stock issued lieu interest unsecured advances company received 5619054 presplit shares cardiac science common stock april 1997 cardiac science effectuated 1 1142857143 reverse stock split reducing companys holdings 546772 shares number shares held 1999 company evaluated market value cardiac science prevailing share price sold 55105 shares cardiac science third quarter 1999 gain approximately 244000 included income december 31 1999 company holds 491667 shares cardiac science remaining investment recorded net investment value 0 since 1997 due cardiac sciences previous historical financial performance market valuation company also held warrants purchase 87500 postsplit shares cardiac science 011 expiration date september 2004 fourth quarter 1999 company sold warrants cash price 300 per share recognized gain approximately 262000 included income k biotech year company increased ownership interest kbiotech inc 100000 total investment 325000 represents 21 interest two members board directors company also shareholders kbiotech inc one member board directors president kbiotech digital imaging systems 1998 company obtained 14 ownership interest digital imaging systems inc dis 300000 entered supply agreement whereby company purchase equipment 11 million dis 1999 company recorded investment writedown 300000 result review realizable value investment dis commenced shipments products company january 1999 pursuant supply agreement urogen corp urogen corp subsidiary company early 1996 time company spun subsidiary separate company distributed stock urogen stockholders except 100000 shares company retained 100000 shares urogen common stock book value 0 december 31 1999 1998 market value urogen common stock approximately 60000 december 31 1999 10 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors 1997 companys board directors elected match employee contributions 25 dollar maximum company contribution 2000 per year 1999 1998 1997 companys contribution totaled 50557 44430 37991 respectively 11 major customers foreign sales year ended december 31 1999 single customer accounted 10 total revenues company derived 3 total revenues sales foreign customers year ended december 31 1998 single customer accounted 10 total revenues company derived 4 total revenues sales foreign customers year ended december 31 1997 single customer accounted 10 total revenues company derived 2 total revenues sales foreign customers 12 selected quarterly financial data unaudited tables set forth selected quarterly financial information 1999 1998 thousands except per share amounts 13 subsequent events january 2000 company sold 89167 shares cardiac science common stock gross proceeds approximately 410000 january 21 2000 purchasing additional 69800 shares cost 391675 company suspended activity stock repurchase program january 27 2000 company sold 5000 shares urogen common stock gross proceeds approximately 28000 medstone international inc schedule ii valuation qualifying accounts writeoff inventory b writeoff bad debt signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 27 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 27 2000 exhibit index 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys annual report form 10k year ended december 31 1993 7 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 8 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 9 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page item 14 exhibits financial statement schedules reports form 8k index consolidated financial statements schedules omitted applicable required information included consolidated financial statements notes thereto b reports form 8k reports form 8k filed commission quarter ended december 31 2000 c exhibits 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number companys quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number companys quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 10 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc subsidiaries company december 31 2000 1999 related consolidated statements income stockholders equity cash flows three years period ended december 31 2000 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc subsidiaries december 31 2000 1999 consolidated results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 14 2001 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements income see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 2000 1 organization operations company medstone international inc medstone company designs manufactures markets medstone ststm stst shockwave therapy systems system noninvasive disintegration kidney stones human patients company also generates revenues use systems procedure fees fee service arrangements repairs maintenance companys customers primarily located united states 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company medstone international ltd scotish subsidiary group united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation majorityowned subsidiaries consolidated material intercompany accounts transactions eliminated investments less 20 owned affiliates accounted cost method unless company able exercise significant influence affiliates operating financial policies case investments accounted equity method reclassifications certain prior year balances reclassified conform december 31 2000 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents fair value financial instruments fair market value cash equivalents shortterm investments accounts receivable approximate cost due short period time maturity carrying value long term receivable unconsolidated subsidiary approximates fair value interest rate fluctuates market conditions shortterm investments company applies provisions statement financial accounting standards 115 accounting certain investments debt equity securities shortterm investments statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified heldto maturity carried amortized cost medstone international inc notes consolidated financial statementscontinued december 31 2000 amortized cost market value investments december 31 2000 contractual maturity shown comprehensive income january 1 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 established new rules reporting display comprehensive income components however adoption statement impact companys net income sfas 130 requires unrealized gains losses availableforsale securities unrealized gains losses foreign currency translation included comprehensive income prior financial statements reclassified conform requirements sfas 130 components accumulated comprehensive incomeloss follows concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents shortterm investments federally insured accounts receivable companys shortterm investments consist principally us treasury bills us government agency notes commercial paper company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 10 accounts receivable december 31 2000 inventories stated lower cost firstin firstout market consist following medstone international inc notes consolidated financial statementscontinued december 31 2000 building property equipment building property equipment carried cost depreciation amortization computed straightline method following estimated useful lives depreciation expense years ended december 31 2000 1999 1998 2274183 1987000 1863000 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho zenith medical systems ltd fair market value net assets acquired goodwill amortized periods ranging fifteen forty years using straight line method accumulated amortization december 31 2000 1999 371194 269635 respectively longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable based upon companys analysis company believes material impairment carrying value longlived assets inclusive intangible assets existed december 31 2000 1999 companys analysis based comparison carrying amount assets companys historical actual cash flows estimate future undiscounted cash flows earnings per share company adopted sfas 128 earnings per share applied pronouncement periods presented statement requires presentation basic diluted net income per share financial statement purposes basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding diluted net income per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method earnings per share amounts periods restated conform sfas 128 requirements medstone international inc notes consolidated financial statementscontinued december 31 2000 following table sets forth computation earnings per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model blackscholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options revenue recognition revenues recognized feeforservice segment companys operations invoiced customer uses equipment month service provided revenues equipment sales recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 32000 58000 135000 years ended december 31 2000 1999 1998 respectively medstone international inc notes consolidated financial statementscontinued december 31 2000 business segments geographic information company applies provisions statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards related disclosures products services geographic areas major customers company operates two business segments equipment sales fees procedures maintenance management equipment sales segment significant fees procedures maintenance management segment represents recurring revenue procedure fees fee service arrangements use maintenance lithotripter equipment accounting policies segments described summary significant accounting policies except certain expenses amortization certain intangibles certain corporate expenses allocated segments asset categories used allocation segment reporting include net accounts receivable net inventory net property equipment net goodwill selected financial information companys reportable segments years ended december 31 2000 1999 1998 follows thousands medstone international inc notes consolidated financial statementscontinued december 31 2000 selected financial information companys operations geographic segment follows thousands recently issued accounting pronouncements june 1998 financial accounting standards board issued statement financial accounting standards 133 accounting certain derivatives hedging activities sfas 133 amended required adopted effective january 1 2001 sfas 133 established new standards recording derivatives interim annual financial reports requiring derivative instruments except qualifying hedge criteria set forth sfas 133 recorded balance sheet fair value adjustments fair value earnings company adopt new requirements effective filing quarterly report form 10q quarter ended march 31 2001 company anticipates adoption sfas 133 impact financial position results operations cash flows 3 acquisitions investments joint ventures equity investment medicreditcom inc april 2000 company purchased common stock representing 46 interest medicreditcom inc medicredit 1 million cash medicredit californiabased company funds services patient accounts finance elective surgeries cosmetic cash paying sector healthcare investment medicredit accounted equity method investment net companys share net losses period april 1 2000 december 31 2000 61000 included investment unconsolidated subsidiary along cash investments medicredit company also provides medicredit line credit 2 million prime interest rate95 december 31 2000 interest payments due monthly principal due maturity april 20 2002 december 31 2000 company advanced 2 million medicredit line credit accrued interest 21550 due medicredit recorded long term receivable unconsolidated subsidiary assets respectively purchase assets creos ltd april 1999 medstone international ltd whollyowned subsidiary company located scotland purchased certain assets creos ltd liquidator 165600 cash acquisition accounted purchase generate goodwill medstone international ltd commenced manufacturing xray generator products previously produced creos ltd operating results medstone international ltd included consolidated financial statements company since april 1999 medstone international inc notes consolidated financial statementscontinued december 31 2000 purchase zenith medical systems ltd october 1999 medstone international ltd purchased outstanding shares zenith medical systems ltd 870000 cash less 284000 acquired cash net cost 586000 acquisition accounted purchase accordingly excess cost fair value net assets acquired recorded goodwill approximately 317000 amortized expected benefit period 15 years zenith medical systems ltd distributor major medical imaging systems british national health service located manchester england operating results zenith medical systems ltd included consolidated financial statements company since october 1999 investment digital imaging systems inc 1998 company entered supply agreement digital imaging systems inc dis components integral companys new transportable lithotripsy product dis commenced shipments product company january 1999 company purchased 300000 shares dis preferred stock 300000 represents 14 ownership interest 1999 company recorded investment writedown 300000 result review realizable value investment k biotech 1998 company made aware opportunity invest developmental biotech drug company catering members international centre genetic engineering biotechnology icgeb united nations sponsored institute k biotech purchased license agreements formulas developed icgeb commercialization purposes indian subcontinent primary market companys investment kbiotech preferred stock 325000 representing 21 ownership interest 225000 representing 153 ownership interest december 31 1999 1998 respectively investment k biotech accounted equity method company ability exercise significant influence kbiotech included assets k biotech continually seeking additional funding international sources finance required investment plant equipment investment chinese joint venture company along acuity international acuity phenix optical ltd phenix chinese company created joint venture march 1998 provide lithotripsy services inland chinese areas entity 13 owner joint venture company recorded investment 92000 assets december 1998 documents drawn executed turn ownership phenix return delivery optical products acuity company 1999 company received optical products release share joint venture company estimates resale value optical products approximate value investment established joint venture company intends sell optical products distribute promotional items unaudited pro forma consolidated results giving effect businesses acquired fiscal 1999 would materially different reported amounts 1999 1998 due immateriality acquisitions medstone international inc notes consolidated financial statementscontinued december 31 2000 4 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision income taxes consists following reconciliation provision income taxes federal statutory rate compared companys effective tax rate medstone international inc notes consolidated financial statementscontinued december 31 2000 tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 5 stock options june 1989 companys stockholders approved 1989 stock incentive plan 1989 plan provided granting variety stock related securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended 1989 plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares may 1997 company terminated 1989 plan granting additional options december 31 2000 473201 options shares common stock granted remain outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan june 1 1999 plan expired additional shares may granted plan outstanding options shall continue vest remain exercisable accordance grants outstanding december 31 2000 10000 options shares common stock granted remain outstanding plan options purchase 15000 shares common stock issued member board directors november 1996 exercise prices 6375 repricing options august 31 1998 options exercisable six months following grant dates incremental amounts equal 148 underlying shares elapsed calendar month director remains companys board terms options five years subject earlier termination related director longer serving board december 31 2000 45000 options shares common stock granted outstanding may 1997 companys stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance medstone international inc notes consolidated financial statementscontinued december 31 2000 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date january 1 2001 number shares authorized plan increased 951234 december 31 2000 521950 options shares common stock granted outstanding plan effective august 13 1998 company repriced outstanding options granted plans exercise prices exceeding closing market value stock date accordingly exercise price options reduced 6375 per share summary companys stock option plans end 2000 1999 1998 changes years presented following table summarizes information stock options outstanding december 31 2000 calculating pro forma information regarding net income net income per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 2000 1999 1998 respectively risk free interest rates 6 periods dividend yields 0 periods volatility expected market prices companys common stock 555 469 542 expected life options 55 years periods medstone international inc notes consolidated financial statementscontinued december 31 2000 purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 2000 1999 1998 follows thousands except per share information pro forma amounts give effect options granted prior january 1 1995 6 stock repurchase plan companys stock repurchase programs authorized repurchase 1550000 shares common stock year ending december 31 2000 company repurchased total 459800 shares cost 2736124 year ending december 31 1999 company repurchased total 387550 shares cost 2445250 year ended december 31 1998 company repurchased total 318300 shares cost 2742473 company repurchased total 1434450 shares since inception stock repurchase programs total cost 10124583 amounts recorded treasury stock companys current repurchase program active december 31 2000 7 commitments march 1994 company took occupancy office manufacturing engineering warehouse space research development laboratories operating lease initial term two years first extended lease facility monthly lease rate 14410 expired june 30 2000 april 2000 company signed new sixtyfour month lease facility term running november 2005 average monthly rental expense 19449 term lease new lease option one fiveyear extension rate negotiated based current market rates april 1999 companys subsidiary took possession manufacturing office warehouse space monthly operating lease october 2000 time entered new sixtymonth lease monthly rent 2980 commencing october 1 2000 future minimum lease payments operating leases follows total net rent expense operating leases years ended december 31 2000 1999 1998 204000 227000 194000 respectively medstone international inc notes consolidated financial statementscontinued december 31 2000 8 contingencies company involved legal proceedings incidental normal conduct business company obtained various liability insurance policies providing coverage general liability product liability claims management believe resolution current proceedings material financial impact company consolidated financial position results operations cash flows 9 related party transactions cardiac science inc cardiac science inc formed subsidiary company 1991 shortly thereafter spun separate entity majority common stock cardiac science inc distributed companys stockholders 1991 1996 company performed various financing activities cardiac science exchange common stock warrants december 31 2000 1999 company held approximately 187000 492000 shares common stock 0 87500 warrants purchase common stock respectively cardiac science inc common stock warrants carrying value zero december 31 2000 fair market value investment cardiac science inc common stock approximates 795000 2000 1999 company sold approximately 305000 55000 shares 1855000 244000 cash respectively 1999 company sold 87500 warrants 262000 cash proceeds sales common stock warrants included income k biotech 1999 company increased ownership interest kbiotech inc 100000 total investment 325000 represents 21 interest two members board directors company also shareholders kbiotech inc one member board directors president kbiotech digital imaging systems 1998 company obtained 14 ownership interest digital imaging systems inc dis 300000 entered supply agreement whereby company would purchase equipment 11 million dis 1999 company recorded investment writedown 300000 result review realizable value investment dis commenced shipments products company january 1999 pursuant supply agreement genstar therapeutics corporation genstar therapeutics corp formerly urogen corp subsidiary company early 1996 time company spun subsidiary separate company distributed stock genstar stockholders except 100000 shares company retained 2000 company sold 5000 shares genstar gain approximately 28000 still holds 95000 shares genstar common stock book value 0 december 31 2000 market value retained genstar common stock approximately 926000 december 31 2000 medstone international inc notes consolidated financial statementscontinued december 31 2000 investment medicreditcom inc april 2000 company purchased common stock representing 46 interest medicreditcom inc medicredit 1 million cash medicredit californiabased company funds services loans physicians finance elective surgeries cosmetic cash paying sector healthcare along cash investment medicredit company agreed line credit 2 million prime interest rate december 31 2000 full 2 million credit line outstanding medicredit reflected longterm assets consolidated balance sheets company reflects equity position operating results medicredit since purchase minority interest section consolidated statements income 10 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors 1997 companys board directors elected match employee contributions 25 dollar maximum company contribution 2000 per year 2000 1999 1998 companys contribution totaled 58382 50557 44430 respectively 11 major customers foreign sales three years ended december 31 2000 1999 1998 single customer accounted 10 total revenues one year company derived 7 3 4 total revenues sales foreign customers years ending december 31 2000 1999 1998 respectively 12 selected quarterly financial data unaudited tables set forth selected quarterly financial information 2000 1999 thousands except per share amounts 13 subsequent events january 2001 company sold 73000 shares cardiac science common stock gain approximately 358000 january 2001 company purchased 10000 shares common stock cost 62475 current stock repurchase program medstone international inc schedule iivaluation qualifying accounts writeoff inventories b writeoff bad debts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 30 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 23 2001 exhibit index 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number companys quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number companys quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 10 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference item 14 exhibits financial statement schedules reports form 8k b reports form 8k reports form 8k filed commission quarter ended december 31 1995 c exhibits exhibit description 31 certificate incorporation company amended 1 32 bylaws company amended 1 42 specimen certificate companys common stock 2 1026 1989 stock incentive plan 34 1027 nonemployee director stock option plan 34 1028 facility lease 100 columbia 5 111 schedule computation per share information see page 40 hereof 231 consent independent auditors see page 42 hereof 27 financial data schedule 282 form cytocare inc information statement distribution shareholders stock cardiac science inc 6 283 form medstone international inc information statement distribution shareholders stock endocare inc urogen corp 7 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 3 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 4 compensatory plan arrangement 5 previously filed exhibit number companys annual report form 10k year ended december 31 1993 6 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 7 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference report independent auditors board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc december 31 1995 1994 related consolidated statements income stockholders equity cash flows three years period ended december 31 1995 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position medstone international inc december 31 1995 1994 consolidated results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed first paragraph note 8 financial statements company defendant class action lawsuit management company believes allegations without merit intends continue vigorously defend action ultimate outcome litigation cannot presently determined accordingly provision liability may result made financial statements ernst young llp orange county california february 14 1996 medstone international inc consolidated balance sheets see accompanying notes see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 1995 1 organization operations company medstone international inc medstone formerly cytocare inc prior renaming september 21 1995 incorporated delaware october 1984 company designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients addition sales system medstone generates recurring revenue procedure fees fee service arrangements use system repairs maintenance systems 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company endocare inc urogen corp medstone sales corporation foreign sales corporation reclassifications certain prior period balances reclassified conform december 31 1995 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions effect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates significant estimates made preparing financial statements include allowance doubtful accounts statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents company net noncash transfers inventory fixed assets 804000 630000 168000 years ended december 31 1995 1994 1993 respectively shortterm investments effective january 1 1994 company adopted provisions statement financial accounting standards 115 accounting certain investments debt equity securities adoption significant impact companys consolidated financial statements management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified availableforsale carried fair value unrealized gains losses net tax reported separate component stockholders equity investments adjusted amortization premiums discounts maturity amortization included interest income realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company invests primarily us government securities corporate obligations december 31 1995 december 31 1994 investments summarized follows gross realized gains losses 0 respectively 1995 1994 amortized cost estimated fair value investments december 31 1995 contractual maturity shown expected maturities differ contractual maturities issuer securities may right repurchase securities concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable companys marketable securities consist principally us treasury bills company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 34 accounts receivable december 31 1995 inventories stated lower cost firstin firstout market consist following property equipment property equipment carried cost depreciation amortization computed straightline method following estimated useful lives lithotripters 5 years equipment 5 years furniture fixtures 5 years leasehold improvements life lease revenue recognition revenues recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations foreign sales contracts negotiated payment terms us dollars company exposure foreign currency price fluctuations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 124000 156000 298000 years ended december 31 1995 1994 1993 respectively per share information per share information presented accompanying consolidated statements income based upon weighted average number common equivalent shares outstanding common equivalent shares result assumed exercise outstanding dilutive securities applying treasury stock method fully diluted per share information presented periods effect antidilutive stock options october 1995 financial accounting standards board issued fasb statement 123 accounting stockbased compensation company currently accounts stock options per requirements contained apb opinion 25 accounting stock issued employees company make election 1996 method accounting stockbased compensation 3 commitments march 1994 company took occupancy new office manufacturing engineering warehouse space research development laboratories operating lease initial term two years monthly lease rate 12500 february 1996 company exercised first one year option extending lease term march 1997 monthly lease rate 12862 retains option extend lease one year segments march 1999 modest price increases future minimum lease payments lease follows total net rent expense operating leases years ended december 31 1995 1994 1993 152000 237000 495000 respectively 4 income taxes provision income taxes consists following reconciliation provision benefit income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 5 stock options 1987 company adopted 1987 stock option plan 1987 plan options could granted key employees directors company committee appointed companys board directors committee purchase 476323 shares companys common stock exercise prices options granted 1987 plan equal fair market value common stock date grant 1988 1989 committee granted options generally become exercisable respect 160th issuable shares elapsed month fiveyear period commencing dates determined committee options granted 1988 1989 terminate one year end fiveyear period june 1989 company terminated 1987 plan granting additional options february 1995 termination date remaining 39750 options exercisable plan extended additional year previously extended termination date june 1989 companys stockholders approved 1989 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares december 31 1995 633998 options shares common stock granted outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan december 31 1995 10000 options shares common stock granted plan stock option activity companys plans summarized follows december 31 1995 1994 1993 number unoptioned shares reserved available issuance plans 999785 880085 776782 respectively outstanding options 181753 shares exercisable december 31 1995 6 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors contributions made plan years ended december 31 1995 1994 1993 7 major customers foreign sales year ended december 31 1995 single customer accounted 10 total revenues company derived 9 total revenues sales foreign customers year ended december 31 1994 one foreign customer accounted 10 total revenues company derived 13 total revenues sales foreign customers year ended december 31 1993 single customer accounted 10 total revenues company derived 8 total revenues sales foreign customers 8 contingencies company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods may 4 1992 district court granted summary judgment one actions favor company claims july 9 1992 district court granted companys motion dismiss second action october 1994 company received opinion ninth circuit appeals affirming part reversing part united states district courts decision granting summary judgment favor company several officers complaints allege principally adverse material information disclosed time initial public offering june 1988 april 1995 company filed supreme court brief october 1995 company informed supreme court declined hear case returning case district court scheduling trial set district court may 21 1996 company intends proceed trial remaining matters ultimate outcome litigation cannot presently determined accordingly provision liability may result made financial statements time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 9 related party transactions 1991 company party formation cardiac science inc company purchased 5353031 shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend shareholders record date one share cardiac science inc stock share medstone stock held company retained 629768 shares common stock cardiac science inc june 1991 company agreed loan cardiac science inc 220000 provide working capital pursuant terms revolving note agreement unpaid principal amount loan together interest accrued thereon rate 10 per annum due payable medstone december 1991 medstone agreed extend note loan additional amounts cardiac science inc april 30 1992 company loaned cardiac science inc approximately 310000 april 1992 company agreed extend initial loan cardiac science inc loan cardiac science inc additional 200000 loans bore interest rate 8 per annum payable quarterly secured cardiac sciences assets mature earlier april 1 1995 closing initial public offering cardiac sciences common stock september 1994 cardiac science completed private placement offering conjunction offering company exercised warrants purchase 2720000 shares cardiac science common stock 15 per share proceeds 408000 used pay portion loans described due date remaining principal balance 102000 extended april 1 1996 expiration date remaining warrants changed march 31 1996 addition company issued 1800000 shares cardiac science common stock ten year warrant purchase 1000000 shares 001 per share full payment unsecured obligations approximately 176000 december 31 1995 107055 includes accrued interest loaned cardiac science reserve 107055 provided nonpayment loan december 31 1995 company held warrants purchase 680000 shares cardiac sciences common stock 15 per share expire march 31 1996 warrants purchase 1000000 shares 001 per share expire september 10 2004 separately company advanced amounts cardiac science health insurance amounts repaid cardiac science monthtomonth basis december 31 1995 8290 advanced cardiac science reserve 2617 provided nonpayment advances effective march 15 1994 cardiac science business conducted location completely independent medstone insure cardiac science cannot perceived lacking autonomy business technical operations 10 distribution shareholders december 19 1995 company declared two stock dividends payable stockholders record close trading december 29 1995 two dividends represent distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone international operations medstone distribute shareholders outstanding common stock company retaining 100000 shares company two companies become separate publiclyheld companies company distribute 5516528 shares company february 9 1996 medstones transfer agent effected distributions endocare develops manufacturers markets devices treat urological diseases endocare began department later formed division medstone international inc continue research development efforts medstone treatment urological disorders focus new product development addition enhancing medstones existing lithotripsy products research development conducted endocare produced several products outside medstones core business lithotripsy products include prolaser side firing laser catheter electrosurgical devices designed treat urological tissue cryocaretm system currently clinical trials common theme endocare product development innovative design minimally invasive outpatientoriented procedures cost effective solutions marketplace endocares goal continue find better surgical solutions better patient care area urologic disease following distribution endocare also continue perform research development medstone urogen formed medical biology small molecule pharmaceuticals division medstone continue effort started 1991 develop pharmaceuticals treat diseases urology particular interest prostate cancer conjunction leading cancer research centers universities urogen pursue opportunities develop new therapies including drugs stimulate immune systems novel small molecules assist urologists effective disease management urogen also seek opportunities diagnostics particularly prostate cancer medstone part distribution endocare forgive intercompany debt 2831364 contribute 500000 cash net assets 803133 endocare part distribution urogen medstone forgive intercompany debt 3888875 contribute 500000 cash net assets 163082 urogen 11 selected quarterly financial data unaudited tables set forth selected quarterly financial information 1995 1994 thousands except per share amounts 1994 companys effective tax rate reduced use net operating loss carryforwards exhausted fourth quarter 1994 1995 companys tax rate approximated statutory rates see note 4 medstone international inc schedule ii valuation qualifying accounts writeoff inventory b writeoff bad debt including 642000 one significant customer c reserve transferred loan provision investment provision due restructuring c reserve transferred loan provision investment provision due restructuring signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 22 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 22 1996 signature title chairman board chief executive officer david v radlinski director principal executive officer david v radlinski mark selawski chief financial officer principal financial accounting officer mark selawski donald regan director donald regan frank pope director frank pope medstone international inc computation per share information determined application treasury stock method exhibit 231 consent independent auditors consent incorporation reference registration statements form s8 nos 3332890 3332891 3345470 3332892 pertaining 1987 stock option plan 1989 stock incentive plan amended nonemployee director stock option plan medstone international inc report dated february 14 1996 respect consolidated financial statements schedule medstone international inc included annual report form 10k year ended december 31 1995 ernst young llp orange county california february 14 1996 item 14 exhibits financial statement schedules reports form 8k index consolidated financial statements b reports form 8k reports form 8k filed commission quarter ended december 31 1998 c exhibits 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form 10q quarter ended september 30 1997 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys annual report form 10k year ended december 31 1993 7 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 8 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 9 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc december 31 1998 1997 related consolidated statements operations stockholders equity cash flows three years period ended december 31 1998 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc december 31 1998 1997 consolidated results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 11 1999 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 1998 1 organization operations company medstone international inc medstone company designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients company also generates revenues use system procedure fees fee service arrangements repairs maintenance company operations occur mainly customers located united states 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation majorityowned subsidiaries consolidated material intercompany accounts transactions eliminated investments less 20 owned affiliates accounted cost method unless company able exercise significant influence affiliates operating financial policies case investments accounted equity method reclassifications certain prior year balances reclassified conform december 31 1998 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates significant estimates made preparing financial statements include allowance doubtful accounts statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents company net noncash transfers inventory fixed assets 0 250000 1376000 years ended december 31 1998 1997 1996 respectively company net noncash transfers accounts receivable inventory prepaid expenses fixed assets accounts payable accrued expenses deferred revenue totaling 966000 1996 form dividend result spinout endocare inc urogen inc subsidiaries shortterm investments company applies provisions statement financial accounting standards 115 accounting certain investments debt equity securities shortterm investments statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified availableforsale carried fair value unrealized gains losses net tax reported separate component stockholders equity investments adjusted amortization premiums discounts maturity amortization included interest income realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company invests primarily us government securities corporate obligations december 31 1998 december 31 1997 investments summarized follows gains losses realized 1998 1997 amortized cost estimated fair value investments december 31 1998 contractual maturity shown expected maturities differ contractual maturities issuer securities may right repurchase securities comprehensive income january 1 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes new rules reporting display comprehensive income components however adoption statement impact companys net income stockholders equity sfas 130 requires unrealized gains losses availableforsale securities prior adoption reported separately shareholders equity included comprehensive income prior financial statements reclassified conform requirements sfas 130 concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents short term investments federally insured accounts receivable companys short term investments consist principally us treasury bills company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 16 accounts receivable december 31 1998 inventories stated lower cost firstin firstout market consist following property equipment property equipment carried cost depreciation amortization computed straightline method following estimated useful lives depreciation expense years ended december 31 1998 1997 1996 1863000 1538000 1223000 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho fair market value net assets goodwill amortized period exceed forty years using straightline method accumulated amortization december 31 1998 1997 180569 96503 respectively longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable based upon companys analysis company believes material impairment carrying value longlived assets inclusive intangible assets existed december 31 1998 1997 companys analysis based comparison carrying amount assets companys historical actual cash flows estimate future undiscounted cash flows earnings loss per share company adopted sfas 128 earnings per share applied pronouncement periods presented statement requires presentation basic diluted net income loss per share financial statement purposes basic net income loss per share computed dividing income loss available common stockholders weighted average number common shares outstanding diluted net income loss per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method impact options warrants antidilutive difference loss per share amount computed basic diluted purposes 1996 earnings loss per share amounts periods restated conform sfas 128 requirements following table sets forth computation earnings loss per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model blackscholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options revenue recognition revenues recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations foreign sales contracts negotiated payment terms us dollars company exposure foreign currency price fluctuations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 135000 126000 107000 years ended december 31 1998 1997 1996 respectively business segments effective january 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 superseded statement financial accounting standards 14 financial reporting segments business enterprise sfas 131 also establishes standards related disclosures products services geographic areas major customers adoption sfas 131 affect results operations financial position affect following disclosure segment information company operates two business segments equipment sales fees procedures maintenance management equipment sales segment significant fees procedures maintenance management segment represents recurring revenue procedure fees fee service arrangements use maintenance lithotripter equipment accounting policies segments described summary significant accounting policies except certain expenses amortization certain intangibles certain corporate expenses allocated segments costs related class action lawsuit settled 1996 included asset categories used allocation segment reporting include net accounts receivable net inventory net property equipment net goodwill selected financial information companys reportable segments years ended december 31 1998 1997 1996 follows thousands 3 acquisitions investments joint ventures purchase northern nevada company acquired second quarter 1996 60 interest northern nevada operator retail lithotripsy operation bills patients insurers services assets acquired accounted purchase method consisted accounts receivable contracts provide service insurers company acquired 60 interest 135 million cash operating results northern nevada included consolidated financial statements company since april 1 1996 purchase southern idaho march 18 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc operator retail lithotripsy operation southern idaho purchase price 23 million cash assets acquired accounted purchase method consisted accounts receivable contracts provide services insurers operating results southern idaho included consolidated financial statements company since march 1 1997 digital imaging systems inc 1998 company entered supply agreement digital imaging systems inc dis components integral companys new transportable lithotripsy product dis commenced shipments product company january 1999 company purchased 300000 shares dis preferred stock 300000 represents 14 ownership interest accounted cost method value recorded assets company considers investment temporary nature k biotech 1998 company made aware opportunity invest developmental biotech drug company catering members international centre genetic engineering biotechnology icgeb united nations sponsored institute k biotech purchased license agreements formulas developed icgeb commercialization purposes indian subcontinent primary market company purchased 225000 preferred stock represents 153 ownership interest assist k biotech establishing viable business entity investment k biotech accounted equity method company ability exercise significant influence kbiotech included assets k biotech seeking additional funding international sources finance required investment plant equipment chinese joint venture company along acuity international acuity phenix optical ltd phenix chinese company created joint venture march 1998 provide lithotripsy services inland chinese areas entity 13 owner joint venture company recorded investment 92000 assets november 1998 purchase 23 ownership owned phenix proposed december 1998 documents drawn turn ownership phenix return delivery optical products acuity company subsequent december 31 1998 company received optical products release share joint venture final release documents processed company estimates resale value optical products approximates value investment established joint venture company intends sell products 1999 4 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision benefit income taxes consists following reconciliation provision benefit income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 5 stock options 1987 company adopted 1987 stock option plan 1987 plan options could granted key employees directors company committee appointed companys board directors committee purchase 476323 shares companys common stock exercise price options granted 1987 plan equal fair market value common stock date grant 1988 1989 committee granted options generally become exercisable respect 160th issuable shares elapsed month fiveyear period commencing dates determined committee options granted 1988 1989 terminated one year end fiveyear period june 1989 company terminated 1987 plan granting additional options april 1996 remaining options outstanding plan exercised plan terminated june 1989 companys stockholders approved 1989 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares may 1997 company terminated 1989 plan granting additional options december 31 1998 610052 options shares common stock granted remain outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan december 31 1998 15000 options shares common stock granted plan 5000 shares exercised addition three outside directors granted separate options purchase 15000 shares may 1997 companys stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date january 1 1998 number shares authorized plan increased 853660 december 31 1998 417850 options shares common stock granted outstanding plan effective august 13 1998 company repriced outstanding options granted plans exercise prices exceeding closing market value stock date accordingly exercise price options reduced 6375 per share summary companys stock option plans end 1998 1997 changes years presented following table summarizes information stock options outstanding december 31 1998 calculating pro forma information regarding net income net income per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 1998 1997 1996 respectively risk free interest rates 6 65 dividend yields 0 periods volatility expected market prices companys common stock 542 316 543 expected life options 55 years periods purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 1998 1997 1996 follows thousands except per share information pro forma amounts reflect cumulative effect expense options granted years ended december 31 1998 1997 1996 give effect options granted prior january 1 1995 6 distribution shareholders february 9 1996 company distributed two stock dividends payable stockholders record close trading december 29 1995 two dividends represent distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone operations medstone distributed shareholders outstanding common stock company retaining 100000 shares company two companies separate publiclyheld companies medstone part distribution endocare forgave intercompany debt 2831364 contributed 500000 cash net assets 803133 endocare part distribution urogen medstone forgave intercompany debt 3888875 contributed 500000 cash net assets 163082 urogen october 1996 company liquidated position endocare average sales price 553 per share net commissions 100000 shares owned company 553372 gain recognized fourth quarter 1996 7 stock repurchase plan march 29 1996 company announced stock repurchase program 500000 shares common stock august 1998 company announced additional stock purchase plan 100000 shares common stock programs fulfilled november 1998 year ended december 31 1998 company repurchased total 318300 shares total cost 2742 473 two repurchase programs year ended december 31 1997 company repurchased total 156000 shares cost 1292366 year ended december 31 1996 company repurchased total 112800 shares cost 908370 company repurchased 587100 shares total cost 4943209 since inception repurchase programs amounts recorded treasury stock company active repurchase programs place december 31 1998 8 commitments march 1994 company took occupancy office manufacturing engineering warehouse space research development laboratories operating lease initial term two years lease extensions monthly lease rate 13360 february 1998 13874 february 1999 company negotiated extension sixteen month period march 1999 june 2000 monthly rate 14410 future minimum lease payments operating leases follows total net rent expense operating leases years ended december 31 1998 1997 1996 194000 182000 156000 respectively 9 contingencies june 1996 company negotiated settlement two related class action lawsuits filed two shareholders company settlement third quarter 1996 totaled 60 million 500000 paid companys underwriter 55 million paid company 55 million charged earnings second quarter 1996 time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 10 related party transactions cardiac science inc 1991 company party formation cardiac science inc company purchased 5353031 presplit shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend shareholders record date one share cardiac science inc stock share medstone stock held company retained 629768 presplit shares common stock cardiac science inc investment recorded net investment value 0 due cardiac sciences historical financial performance 1991 1996 company performed various financings cardiac science received warrants purchase cardiac science common stock due exercise warrants common stock issued lieu interest unsecured advances company received 5619054 presplit shares cardiac science april 1997 cardiac science effectuated 1 1142857143 reverse stock split reducing companys holdings 546772 shares number shares held december 31 1998 investment recorded net investment value 0 due cardiac sciences historical financial performance company also holds warrants purchase 87500 postsplit shares cardiac science 011 expiration date september 2004 k biotech year company obtained 153 ownership interest kbiotech inc 225000 two members board directors company also shareholders kbiotech inc one member president kbiotech digital imaging systems year company obtained 14 ownership interest digital imaging systems inc dis 300000 entered supplier agreement whereby company purchase equipment 11 million dis 11 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors 1997 companys board directors elected match employee contributions 25 dollar maximum company contribution 2000 1998 1997 companys contribution totaled 44430 37991 respectively contributions made plan year ended december 31 1996 12 major customers foreign sales 12 months ended december 31 1998 single customer accounted 10 total revenues company derived 4 total revenues sales foreign customers year ended december 31 1997 single customer accounted 10 total revenues company derived 2 total revenues sales foreign customers year ended december 31 1996 single customer accounted 10 total revenues company derived 11 total revenues sales foreign customers 13 selected quarterly financial data unaudited tables set forth selected quarterly financial information 1998 1997 thousands except per share amounts 14 subsequent events february 17 1999 company announced retained jp morgan securities inc advise company respect strategic alternatives companys current business plan strategic plans include limited acquisitions partnerships sale part companys assets operations plans could material effect financial position results operations cash flows company future operating periods medstone international inc schedule ii valuation qualifying accounts reserve transferred endocare spinout b writeoff inventory c writeoff bad debt reserve transferred loan provision investment provision due restructuring signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 26 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 26 1999 exhibit index item 14 exhibits financial statement schedules reports form 8k 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form 10q quarter ended september 30 1997 incorporated herein reference 3 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number companys annual report form 10k year ended december 31 1993 7 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1997 8 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 9 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc december 31 1997 1996 related consolidated statements operations stockholders equity cash flows three years period ended december 31 1997 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc december 31 1997 1996 consolidated results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 14 1998 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 1997 1 organization operations company medstone international inc medstone company incorporated delaware october 1984 company designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients addition sales system medstone generates recurring revenue procedure fees fee service arrangements use system repairs maintenance system 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation material intercompany transactions accounts eliminated reclassifications certain prior year balances reclassified conform december 31 1997 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions effect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates significant estimates made preparing financial statements include allowance doubtful accounts statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents company net noncash transfers inventory fixed assets 250000 1376000 804000 years ended december 31 1997 1996 1995 respectively company net noncash transfers accounts receivable inventory prepaid expenses fixed assets accounts payable accrued expenses deferred revenue totaling 966000 1996 form dividend result spinout endocare inc urogen inc subsidiaries shortterm investments company applies provisions statement financial accounting standards 115 accounting certain investments debt equity securities statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified availableforsale carried fair value unrealized gains losses net tax reported separate component stockholders equity investments adjusted amortization premiums discounts maturity amortization included interest income realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company invests primarily us government securities corporate obligations december 31 1997 december 31 1996 investments summarized follows gains losses realized 1997 1996 amortized cost estimated fair value investments december 31 1997 contractual maturity shown expected maturities differ contractual maturities issuer securities may right repurchase securities concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable companys marketable securities consist principally us treasury bills company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 15 accounts receivable december 31 1997 inventories stated lower cost firstin firstout market consist following property equipment property equipment carried cost depreciation amortization computed straightline method following estimated useful lives depreciation expense years ended december 31 1997 1996 1995 1538000 1223000 945000 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho fair market value net assets goodwill amortized period exceed forty years using straightline basis accumulated amortization december 31 1997 1996 96503 21374 respectively longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable based upon companys analysis company believes material impairment carrying value longlived assets inclusive intangible assets existed december 31 1997 companys analysis based comparison carrying amount assets companys historical actual cash flows estimate future undiscounted cash flows earnings loss per share company adopted sfas 128 earnings per share applied pronouncement periods presented statement requires presentation basic diluted net income loss per share financial statement purposes basic net income loss per share computed dividing income loss available common stockholders weighted average number common shares outstanding diluted net income loss per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method impact options warrants antidilutive difference loss per share amount computed basic diluted purposes 1996 earnings loss per share amounts periods restated conform statement 128 requirements accounting rules set forth staff accounting bulletin 98 issued securities exchange commission february 3 1998 following table sets forth computation earnings loss per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model blackscholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options revenue recognition revenues recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations foreign sales contracts negotiated payment terms us dollars company exposure foreign currency price fluctuations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 126000 107000 124000 years ended december 31 1997 1996 1995 respectively recent accounting pronouncements june 1997 fasb issued statement 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 establishes standards reporting display comprehensive income components financial statements comprehensive income generally represents changes shareholders equity except resulting investments owners distributions owners company adopt new standards 1998 expect impact financial statement presentation significant june 1997 fasb issued statement 131 sfas 131 disclosures segments enterprise related information effective fiscal years beginning december 15 1997 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report information operating segments interim financial reports sfas 131 also establishes standards related disclosures products services geographic areas major customers company adopt new standards retroactively 1998 management completed review sfas 131 3 acquisitions purchase northern nevada company acquired second quarter 1996 60 interest northern nevada operator retail lithotripsy operation bills patients insurers services assets acquired accounted purchase method consisted accounts receivable contracts provide service insurers company acquired 60 interest 135 million cash operating results northern nevada included consolidated financial statements company since april 1 1996 purchase southern idaho march 18 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc operator retail lithotripsy operation southern idaho purchase price 23 million cash assets acquired accounted purchase method consisted accounts receivable contracts provide services insurers operating results southern idaho included consolidated financial statements company since march 1 1997 4 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision benefit income taxes consists following reconciliation provision benefit income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows december 31 1997 1996 valuation allowance recognized offset companys deferred tax assets since likely assets fully utilized 5 stock options 1987 company adopted 1987 stock option plan 1987 plan options could granted key employees directors company committee appointed companys board directors committee purchase 476323 shares companys common stock exercise price options granted 1987 plan equal fair market value common stock date grant 1988 1989 committee granted options generally become exercisable respect 160th issuable shares elapsed month fiveyear period commencing dates determined committee options granted 1988 1989 terminated one year end fiveyear period june 1989 company terminated 1987 plan granting additional options april 1996 remaining options outstanding plan exercised plan terminated june 1989 companys stockholders approved 1989 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares may 1997 company terminated 1989 plan granting additional options december 31 1997 673803 options shares common stock granted outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan december 31 1997 15000 options shares common stock granted plan 5000 shares exercised addition three outside directors granted separate options purchase 15000 shares may 1997 companys stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date december 31 1997 242000 options shares common stock granted outstanding plan stock option activity companys plans summarized follows summary companys stock option plans end 1997 1996 changes years presented following table summarizes information stock options outstanding december 31 1997 calculating pro forma information regarding net income net income per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 1997 1996 respectively risk free interest rates 6 65 dividend yields 0 volatility expected market prices companys common stock 2303 543 expected life options 55 years periods purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 1997 1996 follows thousands except per share information pro forma amounts reflect cumulative effect expense options granted years ended december 31 1997 1996 1995 give effect options granted prior january 1 1995 6 distribution shareholders february 9 1996 company distributed two stock dividends payable stockholders record close trading december 29 1995 two dividends represent distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone operations medstone distributed shareholders outstanding common stock company retaining 100000 shares company two companies separate publiclyheld companies medstone part distribution endocare forgave intercompany debt 2831364 contributed 500000 cash net assets 803133 endocare part distribution urogen medstone forgave intercompany debt 3888875 contributed 500000 cash net assets 163082 urogen october 1996 company liquidated position endocare average sales price 553 per share net commissions 100000 shares owned company 553372 gain recognized fourth quarter 1996 7 stock repurchase plan march 29 1996 company announced stock repurchase program 500000 shares common stock year ended december 31 1997 company repurchased total 156000 shares cost 1292366 year ended december 31 1996 company repurchased total 112800 shares cost 908370 company repurchased 268800 shares total cost 2200736 since inception repurchase program amounts recorded treasury stock march 17 1998 company repurchased additional 110400 shares total cost 1052825 8 commitments march 1994 company took occupancy new office manufacturing engineering warehouse space research development laboratories operating lease initial term two years lease extensions monthly lease rate 12862 february 1997 13360 february 1998 company exercised option lease february 1999 monthly lease rate 13874 company negotiated extension sixteen month period march 1999 june 2000 monthly rate 14410 future minimum lease payments lease follows total net rent expense operating leases years ended december 31 1997 1996 1995 182000 156000 152000 respectively 9 contingencies june 1996 company negotiated settlement two related class action lawsuits filed two shareholders company settlement third quarter 1996 totaled 60 million 500000 paid companys underwriter 55 million paid company 55 million charged earnings second quarter 1996 time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 10 related party transactions 1991 company party formation cardiac science inc company purchased 5353031 presplit shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend shareholders record date one share cardiac science inc stock share medstone stock held company retained 629768 presplit shares common stock cardiac science inc 1991 1996 company performed various financings cardiac science received warrants purchase cardiac science common stock due exercise warrants common stock issued lieu interest unsecured advances company received 5619054 presplit shares cardiac science april 1997 cardiac science effectuated 1 1142857143 reverse stock split reducing companys holdings 546772 shares number shares held december 31 1997 investment recorded net investment value 0 due cardiac sciences historical financial performance significant fluctuations stock price companys investment cardiac science currently restricted trading company also holds warrants purchase 87500 postsplit shares cardiac science 011 expiration date september 2004 11 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors 1997 companys board directors elected match employee contributions 25 dollar maximum company contribution 2000 1997 companys contribution totaled 37991 contributions made plan years ended december 31 1996 1995 12 major customers foreign sales 12 months ended december 31 1997 single customer accounted 10 total revenues company derived 2 total revenues sales foreign customers year ended december 31 1996 single customer accounted 10 total revenues company derived 11 total revenues sales foreign customers year ended december 31 1995 single customer accounted 10 total revenues company derived 9 total revenues sales foreign customers 13 selected quarterly financial data unaudited tables set forth selected quarterly financial information 1997 1996 thousands except per share amounts 1997 1996 companys effective income tax rate approximated statutory rates see note 4 medstone international inc schedule ii valuation qualifying accounts reserve transferred endocare spinout b writeoff inventory c writeoff bad debt reserve transferred loan provision investment provision due restructuring signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 24 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 24 1997 signature title david v radlinski chairman board chief executive officer david v radlinski director principal executive officer mark selawski chief financial officer principal financial accounting officer mark selawski donald j regan director donald j regan frank r pope director frank r pope michael c tibbitts director michael c tibbitts item 14 controls procedures within 90day period prior date report company carried evaluation supervision participation company’s management including chief executive officer chief financial officer effectiveness design operation company’s disclosure controls procedures pursuant exchange act rule 5dl 4 c based evaluation chief executive officer chief financial officer concluded company’s disclosure controls procedures effective timely manner alert material information relating company required included company’s periodic securities exchange commission filings significant changes company’s internal controls factors could significantly affect controls subsequent evaluation date part iv item 15 item 14 exhibits financial statement schedules reports form 8k index consolidated financial statement b reports form 8k reports form 8k filed commission quarter ended december 31 1994 c exhibits 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 3 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 4 compensatory plan arrangement 5 previously filed exhibit number companys annual report form 10k year ended december 31 1993 6 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference report independent auditors board directors cytocare inc audited accompanying consolidated balance sheets cytocare inc december 31 1994 1993 related consolidated statements income stockholders equity cash flows three years period ended december 31 1994 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position cytocare inc december 31 1994 1993 consolidated results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed first paragraph note 8 financial statements company defendant class action lawsuit management company believes allegations without merit intends continue vigorously defend action ultimate outcome litigation cannot presently determined accordingly provision liability may result made financial statements ernst young llp orange county california february 15 1995 cytocare inc consolidated balance sheets liabilities stockholders equity see accompanying notes cytocare inc consolidated statements income see accompanying notes cytocare inc consolidated statements stockholders equity see accompanying notes cytocare inc consolidated statements cash flows see accompanying notes cytocare inc notes consolidated financial statements december 31 1994 1 organization operations company cytocare inc formerly medstone international inc prior renaming reorganization company january 1991 incorporated delaware october 1984 companys whollyowned subsidiary medstone international inc medstone designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients addition sales system medstone generates recurring revenue procedure fees fee service arrangements use system repairs maintenance systems 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company medstone international inc medstone sales corporation foreign sales corporation reclassifications certain prior period balances reclassified conform december 31 1994 presentation statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents company net noncash transfers inventory fixed assets 630000 168000 468000 years ended december 31 1994 1993 1992 respectively shortterm investments effective january 1 1994 company adopted provisions statement financial accounting standards 115 accounting certain investments debt equity securities adoption significant impact companys consolidated financial statements management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified availableforsale carried fair value unrealized gains losses net tax reported separate component stockholders equity investments adjusted amortization premiums discounts maturity amortization included interest income realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company invests primarily us government securities corporate obligations december 31 1994 december 31 1993 investments summarized follows gross realized gains losses 0 331817 respectively 1994 amortized cost estimated fair value investments december 31 1994 contractual maturity shown expected maturities differ contractual maturities issuer securities may right repurchase securities concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable companys marketable securities consist principally us treasury bills company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 47 accounts receivable december 31 1994 inventories stated lower cost firstin firstout market consist following property equipment property equipment carried cost depreciation amortization computed straightline method following estimated useful lives revenue recognition revenues recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations foreign sales contracts negotiated payment terms us dollars company exposure foreign currency price fluctuations service maintenance contract revenues deferred amortized terms related contracts results year ended december 31 1992 include two systems shipped november 1990 foreign customer amount 14 million revenue related costs 324000 recognized december 1992 upon resolution dispute distributor per share information per share information presented accompanying consolidated statements income based upon weighted average number common equivalent shares outstanding common equivalent shares result assumed exercise outstanding dilutive securities applying treasury stock method fully diluted per share information presented periods effect antidilutive 3 commitments march 1994 company took occupancy new office manufacturing engineering warehouse space research development laboratories operating lease initial term two years monthly lease rate 12500 upon expiration initial two year term company option extend lease one year segments march 1999 modest price increases future minimum lease payments initial noncancelable term lease follows total net rent expense operating leases years ended december 31 1994 1993 1992 237000 495000 328000 respectively 4 income taxes provision income taxes consists following reconciliation provision income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows december 31 1994 company california net operating loss carryforward approximately 950000 california research development credit carryforward approximately 50000 net operating losses credits expire 1997 2008 result continued profitability company recognized deferred tax assets current year management believes likely deferred tax assets realized tax reform act 1986 contains provisions could substantially limit availability net operating loss carryforward well research development credit carryforward greater 50 change ownership threeyear period december 31 1994 company experienced less 5 ownership change 5 stock options 1987 company adopted 1987 stock option plan 1987 plan options could granted key employees directors company committee appointed companys board directors committee purchase 476323 shares companys common stock exercise prices options granted 1987 plan equal fair market value common stock date grant 1988 1989 committee granted options generally become exercisable respect 160th issuable shares elapsed month fiveyear period commencing dates determined committee options granted 1988 1989 terminate one year end fiveyear period june 1989 company terminated 1987 plan granting additional options april 1994 termination date remaining 76250 options exercisable plan extended additional year previously extended termination date june 1989 companys stockholders approved 1989 stock incentive plan provides granting variety stock related securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares december 31 1994 753698 options shares common stock granted outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan december 31 1994 10000 options shares common stock granted plan stock option activity companys plans summarized follows december 31 1994 1993 1992 number unoptioned shares reserved available issuance plans 880085 776782 674367 respectively outstanding options 677539 shares exercisable december 31 1994 effective march 2 1990 company changed exercise price outstanding options granted exercise prices exceeding closing market value stock date accordingly exercise price options reduced 500 per share 6 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors contributions made plan years ended december 31 1994 1993 1992 7 major customers foreign sales year ended december 31 1994 one foreign customer accounted 10 total revenue company derived 13 total revenues sales foreign customers year ended december 31 1993 single customer accounted 10 total revenue company derived 8 total revenues sales foreign customers year ended december 31 1992 company recorded revenues two customers one domestic one foreign greater 10 total revenue derived 25 total revenue sales foreign customers 8 contingencies company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods may 4 1992 district court granted summary judgment one actions favor company claims july 9 1992 district court granted companys motion dismiss second action october 1994 company received opinion ninth circuit appeals affirming part reversing part united states district courts decision granting summary judgment favor company several officers complaints allege principally adverse material information disclosed time initial public offering june 1988 company intends proceed trial remaining matters ultimate outcome litigation cannot presently determined accordingly provision liability may result made financial statements time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company 9 related party transactions 1991 company party formation cardiac science inc company purchased 5353031 shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend shareholders record date one share cardiac science inc stock share cytocare stock held company retained 629768 shares common stock cardiac science inc june 1991 company agreed loan cardiac science inc 220000 provide working capital pursuant terms revolving note agreement unpaid principal amount loan together interest accrued thereon rate 10 per annum due payable cytocare december 1991 cytocare agreed extend note loan additional amounts cardiac science inc april 30 1992 company loaned cardiac science inc approximately 310000 april 1992 company agreed extend initial loan cardiac science inc loan cardiac science inc additional 200000 loans bore interest rate 8 per annum payable quarterly secured cardiac sciences assets mature earlier april 1 1995 closing initial public offering cardiac sciences common stock september 1994 cardiac science completed private placement offering conjunction offering company exercised warrants purchase 2720000 shares cardiac science common stock 15 per share proceeds 408000 used pay portion loans described due date remaining principal balance 102000 extended april 1 1996 expiration date remaining warrants changed march 31 1996 addition company issued 1800000 shares cardiac science common stock ten year warrant purchase 1000000 shares 001 per share full payment unsecured obligations approximately 176000 december 31 1994 104335 includes accrued interest loaned cardiac science reserve 104335 provided nonpayment loan december 31 1994 company held warrants purchase 680000 shares cardiac sciences common stock 15 per share expire march 31 1996 warrants purchase 1000000 shares 001 per share expire september 10 2004 separately company advanced amounts cardiac science operational expenses including limited accounting services health insurance amounts repaid cardiac science monthtomonth basis december 31 1994 8947 advanced cardiac science reserve 4023 provided nonpayment advances effective march 15 1994 cardiac science business conducted location completely independent cytocare insure cardiac science cannot perceived lacking autonomy business technical operations cytocare inc schedule ii valuation qualifying accounts writeoff inventory b writeoff bad debt including 642000 one significant customer c reserve transferred loan provision investment provision due restructuring signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized cytocare inc errol payne errol payne chief executive officer dated march 22 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 22 1994 signature title exhibit index 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 3 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 4 compensatory plan arrangement 5 previously filed exhibit number companys annual report form 10k year ended december 31 1993 6 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference item 14 exhibits financial statement schedules reports form 8k b reports form 8k reports form 8k filed commission quarter ended december 31 1996 c exhibits 1 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 companys quarterly report form 10q quarter ended june 30 1988 incorporated herein reference 2 previously filed exhibit number companys registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 3 previously filed exhibit number companys quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 4 compensatory plan arrangement 5 previously filed exhibit number companys annual report form 10k year ended december 31 1993 6 previously filed exhibit number companys current report form 8k dated june 26 1991 incorporated herein reference 7 previously filed companys current report form 8k dated february 9 1996 incorporated herein reference report independent auditors stockholders board directors medstone international inc audited accompanying consolidated balance sheets medstone international inc december 31 1996 1995 related consolidated statements operations stockholders equity cash flows three years period ended december 31 1996 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position medstone international inc december 31 1996 1995 consolidated results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles also opinion related financial statement schedules considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 14 1997 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 1996 1 organization operations company medstone international inc medstone incorporated delaware october 1984 company designs manufactures markets medstone ststm shockwave therapy system noninvasive disintegration kidney stones human patients addition sales system medstone generates recurring revenue procedure fees fee service arrangements use system repairs maintenance system 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company united physicians resources physicians practice management operation incorporated june 1996 company 61 ownership interest northern nevada lithotripsy associates llc nevada limited liability company holds 60 ownership interest see note 12 medstone sales corporation foreign sales corporation material intercompany transactions accounts eliminated reclassifications certain prior year balances reclassified conform december 31 1996 presentation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions effect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates significant estimates made preparing financial statements include allowance doubtful accounts statement cash flows company considers highly liquid investments maturity three months less purchased cash equivalents company net noncash transfers inventory fixed assets 1376000 804000 630000 years ended december 31 1996 1995 1994 respectively company net noncash transfers accounts receivable inventory prepaid expenses fixed assets accounts payable accrued expenses deferred revenue totalling 966000 1996 form dividend result spinout endocare inc urogen inc subsidiaries shortterm investments effective january 1 1995 company adopted provisions statement financial accounting standards 115 accounting certain investments debt equity securities adoption significant impact companys consolidated financial statements management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent companys investments classified availableforsale carried fair value unrealized gains losses net tax reported separate component stockholders equity investments adjusted amortization premiums discounts maturity amortization included interest income realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company invests primarily us government securities corporate obligations december 31 1996 december 31 1995 investments summarized follows gains losses realized 1996 1995 amortized cost estimated fair value investments december 31 1996 contractual maturity shown expected maturities differ contractual maturities issuer securities may right repurchase securities concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents marketable securities accounts receivable companys marketable securities consist principally us treasury bills company sells products primarily hospitals worldwide credit extended based evaluation customers financial condition collateral generally required companys ten largest customers accounted approximately 20 accounts receivable december 31 1996 inventories stated lower cost firstin firstout market consist following property equipment property equipment carried cost depreciation amortization computed straightline method following estimated useful lives revenue recognition revenues recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations foreign sales contracts negotiated payment terms us dollars company exposure foreign currency price fluctuations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 107000 124000 156000 years ended december 31 1996 1995 1994 respectively per share information per share information presented accompanying consolidated statements income based upon weighted average number common equivalent shares outstanding common equivalent shares result assumed exercise outstanding dilutive securities applying treasury stock method fully diluted per share information presented periods effect antidilutive longlived assets financial accounting standards board issued statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 march 1995 sfas 121 requires longlived assets certain intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability test performed lowest level undiscounted net cash flow directly attributable longlived assets company adopted sfas 121 january 1 1996 material effect companys financial statements stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price companys employee stock options equals market price underlying stock date grant compensation expense recognized calculate pro forma information required statement 123 company uses blackscholes option pricing model black scholes model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options 3 commitments march 1994 company took occupancy new office manufacturing engineering warehouse space research development laboratories operating lease initial term two years monthly lease rate 12500 february 1996 company exercised first one year option extending lease term march 1997 monthly lease rate 12862 company exercised second option year monthly lease rate 13360 retains option extend lease one year march 1999 modest price increase future minimum lease payments lease follows total net rent expense operating leases years ended december 31 1996 1995 1994 156000 152000 237000 respectively 4 income taxes provision benefit income taxes consists following reconciliation provision benefit income taxes federal statutory rate compared companys effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows december 31 1996 company federal state net operating losses tax purposes 1041000 436000 respectively federal state net operating losses expire 2011 2001 respectively december 31 1996 1995 valuation allowance recognized offset companys deferred tax assets since likely assets fully realized 5 stock options 1987 company adopted 1987 stock option plan 1987 plan options could granted key employees directors company committee appointed companys board directors committee purchase 476323 shares companys common stock exercise price options granted 1987 plan equal fair market value common stock date grant 1988 1989 committee granted options generally become exercisable respect 160th issuable shares elapsed month fiveyear period commencing dates determined committee options granted 1988 1989 terminate one year end fiveyear period june 1989 company terminated 1987 plan granting additional options april 1996 remaining options outstanding plan exercised plan terminated june 1989 companys stockholders approved 1989 stock incentive plan provides granting variety stock related securities including shares common stock options stock appreciation rights employees selected individuals may 1991 companys stockholders amended plan increase number shares issuable 1593783 eliminated provision automatic increase number shares issuable january 1 year one percent outstanding shares december 31 1996 683926 options shares common stock granted outstanding plan june 1989 companys stockholders also approved nonemployee director stock option plan provides issuance 50000 shares companys common stock upon exercise options granted plan december 31 1996 15000 options shares common stock granted plan addition three outside directors granted separate options purchase 15000 shares stock option activity companys plans summarized follows summary companys stock option plans years ended 1996 1995 changes years ending presented following table summarizes information stock options outstanding december 31 1996 calculating pro forma information regarding net income net income per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options companys common stock years ended december 31 1996 1995 respectively risk free interest rates 65 dividend yields 0 volatility expected market prices companys common stock 543 653 expected life options 55 years periods purposes pro forma disclosures estimated fair value options amortized expense options vesting period companys proforma information years ended december 31 1996 1995 follows thousands except per share information pro forma amounts reflect cumulative effect expense options granted years ended december 31 1996 1995 give effect options granted prior january 1 1995 6 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employees qualifying compensation section 401k internal revenue code contributions company may made plan discretion board directors contributions made plan years ended december 31 1996 1995 1994 7 major customers foreign sales year ended december 31 1996 single customer accounted 10 total revenues company derived 11 total revenues sales foreign customers year ended december 31 1995 single customer accounted 10 total revenues company derived 9 total revenues sales foreign customers year ended december 31 1994 one foreign customer accounted 10 total revenues company derived 13 total revenues sales foreign customers 8 contingencies june 1996 company negotiated settlement two related class action lawsuits filed two shareholders company settlement third quarter 1996 totalled 60 million 500000 paid companys underwriter 55 million paid company 55 million charged earnings second quarter 1996 time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 9 related party transactions 1991 company party formation cardiac science inc company purchased 5353031 shares common stock cash payment 0016 per share purchase represented 773 outstanding stock july 8 1991 company distributed dividend shareholders record date one share cardiac science inc stock share medstone stock held company retained 629768 shares common stock cardiac science inc june 1991 company agreed loan cardiac science inc 220000 provide working capital pursuant terms revolving note agreement unpaid principal amount loan together interest accrued thereon rate 10 per annum due payable medstone december 1991 medstone agreed extend note loan additional amounts cardiac science inc april 30 1992 company loaned cardiac science inc approximately 310000 april 1992 company agreed extend initial loan cardiac science inc loan cardiac science inc additional 200000 loans bore interest rate 8 per annum payable quarterly secured cardiac sciences assets mature earlier april 1 1995 closing initial public offering cardiac sciences common stock september 1994 cardiac science completed private placement offering conjunction offering company exercised warrants purchase 2720000 shares cardiac science common stock 15 per share proceeds 408000 used pay portion loans described due date remaining principal balance 102000 extended april 1 1996 expiration date remaining warrants changed march 31 1996 addition company issued 1800000 shares cardiac science common stock ten year warrant purchase 1000000 shares 001 per share full payment unsecured obligations approximately 176000 april 1996 company exercised warrants purchase 680000 shares cardiac science utilized proceeds therefrom 102000 pay remaining note related interest completion transaction company executed release lien cardiac sciences assets december 31 1996 company held warrants purchase 1000000 shares 001 per share expire september 10 2004 december 31 1996 company held 6248822 shares cardiac science common stock investment recorded cost 750054 company currently expect realize investment therefore corresponding valuation reserve established making net investment carrying value 0 separately company advanced amounts cardiac science health insurance amounts repaid cardiac science monthtomonth basis december 31 1996 2895 advanced cardiac science 10 distribution shareholders february 9 1996 company distributed two stock dividends payable stockholders record close trading december 29 1995 two dividends represent distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone operations medstone distributed shareholders outstanding common stock company retaining 100000 shares company two companies separate publiclyheld companies medstone part distribution endocare forgave intercompany debt 2831364 contributed 500000 cash net assets 803133 endocare part distribution urogen medstone forgave intercompany debt 3888875 contributed 500000 cash net assets 163082 urogen october 1996 company liquidated position endocare average sales price 553 per share net commissions 100000 shares owned company 553372 gain recognized fourth quarter 1996 11 goodwill company recorded goodwill resulting excess purchase price northern nevada fair market value net assets goodwill amortized period exceed forty years using straightline basis accumulated amortization december 31 1996 21374 12 purchase northern nevada company acquired second quarter 1996 60 interest northern nevada operator retail lithotripsy operation bills patients insurers services assets acquired accounted purchase method consisted accounts receivable contracts provide service insurers company acquired 60 interest 135 million cash operating results northern nevada included consolidated financial statements company since april 1 1996 13 stock repurchase plan march 29 1996 company announced stock repurchase program 500000 shares common stock year ended december 31 1996 company repurchased total 112800 shares cost 908370 recorded treasury stock 14 selected quarterly financial data unaudited tables set forth selected quarterly financial information 1996 1995 thousands except per share amounts 1996 1995 companys effective income tax rate approximated statutory rates see note 4 15 subsequent events march 18 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc operator retail lithotripsy operation southern idaho purchase price 23 million cash assets liabilities operating results southern idaho lithotripsy associates llc consolidated effective march 1 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized medstone international inc david v radlinski david v radlinski chief executive officer dated march 24 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 24 1997 medstone international inc schedule ii valuation qualifying accounts reserve transferred endocare spinout b writeoff inventory c writeoff bad debt reserve transferred loan provision investment provision due restructuring item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters manufactured medstone approved treat kidney stones certain gallstones company also marketing fixed mobile urology imaging pain management tables xray generators medical imaging date companys consolidated revenues come primarily lithotripsy business sells lithotripters related supplies lithotripsy revenues come recurring procedure maintenance fees feeforservice arrangements company continues expand programs companyowned lithotripters made available use hospitals physician groups surgical centers charges based usage equipment monthly fees company currently offers lithotripsy services throughout united states using 15 sts systems mobile trailers one sts system fixed site 25 transportable ststc systems fixed locations moved different sites small trucks june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator retail lithotripsy operations southern idaho operating results consolidated effective march 1997 april 1999 company purchased certain assets creos ltd manufacturer high performance xray generators supplier company commenced manufacturing operations facility located fife scotland formerly occupied creos ltd october 1999 company purchased outstanding shares zenith medical systems ltd distributor major imaging equipment british national health service located manchester england 1999 acquisitions operating results consolidated effective respective acquisition dates goodwill represents approximately 11 12 companys total assets stockholders equity respectively december 31 2001 goodwill resulted excess purchase price northern nevada southern idaho zenith medical systems ltd fair value net assets acquired goodwill amortized periods ranging 15 40 years expected period benefit using straightline method january 1 2002 company adopt sfas 142 longer amortize goodwill periodic basis company review recoverable life intangible assets annually determine impairment assets write net realizable value necessary company reviews longlived assets impairment whenever changes circumstances indicate carrying value asset may recoverable based upon companys analysis includes comparison carrying amounts assets companys historical actual cash flows estimated future undiscounted cash flows company aware material portion goodwill longlived assets dissipate shorter period amortization period used time company makes investments businesses accounted equity method 2001 company made equity investment 1 million arcoma ab 2000 company made investment including subordinated loan medicreditcom aggregating 3 million 1998 1999 company made aggregate investment kbiotech 325000 2001 companys share net losses unconsolidated subsidiaries impairment reserves amounted 3354106 net losses composed losses 91000 arcoma operations 325000 k biotech operations reserves losses reserves 2938100 medicreditcom companys share losses unconsolidated subsidiaries 2000 related medicreditcom approximated 61000 earnings losses unconsolidated subsidiaries recognized 1999 company additional financial commitments unconsolidated subsidiaries future performance unconsolidated subsidiaries uncertain therefore company may recognize earnings losses unconsolidated subsidiaries future research development acquisitions clinical submissions management believes hiring retaining appropriate personnel necessary continue growth development companys product lines brand recognition ordinary course business company made number estimates assumptions relating reporting results operations financial condition preparation financial statements conformity accounting principles generally accepted united states america actual results could differ significantly estimates different assumptions conditions company believes following discussion addresses companys critical accounting policies important portrayal companys financial condition results company constantly reevaluates significant factors makes adjustments facts circumstances dictate historically actual results significantly deviated determined using necessary estimates inherent preparation financial statements estimates assumptions include limited customer receivables inventories equity investments fixed asset lives contingencies litigation company also chosen certain accounting policies options available including firstin firstout fifo method value majority inventories intrinsic value method apb opinion 25 account common stock incentive awards record allowance credit losses based estimates customers ability pay financial condition customers deteriorate additional allowances may required accounting policies applied consistently years presented operating results would affected alternatives used information impact operating results included footnotes consolidated financial statements time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements results operations year ended december 31 2001 compared year ended december 31 2000 revenue 2001 totaled 227 million 1 decrease compared revenue 228 million 2000 revenues procedures maintenance management fees decreased 186 million 2001 compared 189 million revenue 2000 decrease due continuing trend lower revenue per patient competition forces price concessions contract renewals even patient counts third party company owned equipment increased 2001 overall patient volume increased 2001 3 third party owned equipment 7 company owned equipment compared 2000 revenue radiographic supplies increased current year due significant contract medstone ltd xray generators higher shipment volume spare parts partially offsetting increased radiology revenue decrease service contract revenue maintenance contracts expired renewals lower rates equipment revenues increased 367000 11 2001 compared period 2000 due increased number imaging tables shipped company 2001 company shipped 92 various patient handling tables 2001 compared 29 prior year partially offsetting increase imaging table revenue reduction number lithotripters shipped current year 7 2000 6 current year interest income decreased 24 2001 compared 2000 due significantly lower investment yields resulting numerous cuts prime interest rate reduction almost 900000 average invested cash balance 2001 compared 2000 costs recurring revenue decreased 657000 2001 compared period 2000 percentage revenue recurring revenue cost sales decreased 62 2000 59 2001 decrease due reduced operating costs fixedsite feeforservice lithotripsy units reduced costs operation mobile trailer fleet units reach end depreciable lives cost equipment sales increased 27 million 2001 74 sales current year compared 23 million 69 year ended december 31 2000 increase due lower margin associated sale imaging tables compared lithotripsy equipment research development costs increased 138000 12 twelve months ending december 31 2001 compared period 2000 increase due development work optional equipment uropro urology imaging table company also developed several enhancements ststc lithotripter introduced 2002 selling costs increased 2175000 year ending december 31 2000 2682000 period 2001 increase due higher staffing levels company increased number imaging product specialists increased tradeshow expenses company exhibited products regional imaging tradeshows company also increased bad debt expense economic downturn increased number customers extending payment invoices dispute distributor amounts owed imaging tables general administrative expenses decreased 97000 4 twelve months ended december 31 2001 compared period prior year due lower consulting expenses gallstone treatment filing fda 2000 lower audit expenses due managements decision change auditing firms gain sale investments decreased approximately 628000 twelve months ending december 31 2001 compared 1882000 period 2000 2001 company sold 187000 shares cardiac science inc common stock 2000 company sold 304667 shares cardiac science inc common stock 5000 shares genstar common stock net book value shares sold 0 expense increased 141000 year ending december 31 2001 109000 period 2000 due loss disposal assets current year reserves impairment investments longterm receivables increased 3232673 comparable value prior year result companys review k biotech medicredit investments loans minority interest subsidiaries income decreased 199000 24 twelve months ended december 31 2001 compared period prior year decrease due lower profits northern nevada southern idaho operations equity loss unconsolidated subsidiaries increased 121000 year ended december 31 2001 compared 61000 period 2000 due losses arcoma current year provision benefit income taxes year 2001 changed 2094000 result losses reserves deferred tax benefits current year compared period 2000 year ended december 31 2000 compared year ended december 31 1999 company recorded total revenue 228 million 2000 3 decrease compared 235 million total revenue recognized year ending december 311999 revenues procedures maintenance fees feeforservice decreased 189 million 2000 compared 195 million revenue 1999 pricing pressures continue force per patient charges lower competing equipment saturated market low cost transportable lithotripsy equipment patient volume per patient fees decreased 2000 sites continued transition lower cost equipment sites selecting flat daily monthly fee anticipation release final stark ii regulations occurred january 4 2001 procedure fees third party equipment decreased 11 second year row decreased fees although patient volume increased 4 2000 compared 1999 fees per procedure decreased company experienced increase volume ststc units commenced shipment 1999 reached full utilization also renewed interest companys lithotripsy products achieved due approval gallstone procedure revenue radiographic supplies increased current year due full year activity medstone ltd zenith operations additional activity expanding product offerings company 2000 equipment revenues decreased 2 2000 compared period 1999 number lithotripters sold decreased 7 2000 compared 10 1999 average sales prices decreased slightly offsetting decrease lithotripters introduction imaging tables 2000 total 29 various units sold 2000 equipment included pain management tables radiology tables portable urology tables along imaging systems associated several unit sales interest income increased 1 current year compared period prior year due higher investment yields even though average invested balance decreased substantially costs recurring revenue increased 117 million 62 recurring revenue 2000 compared 102 million 52 recurring revenue 1999 due continuation companys program placement large number fixedsite feeforservice lithotripsy units hospitals surgery centers expected units drive longterm patient volume growth continuous availability equipment along expectation additional volume due gallstone approval costs providing maintenance increased also due higher number companyowned units service cost equipment sales increased 23 million 2000 69 sales current year compared 19 million 58 year ended december 31 1999 increase due lower margin associated sale radiology equipment compared historical higher margin lithotripsy equipment lithotripsy equipment margins deteriorated slightly due unabsorbed overhead expenses due lower actual production levels compared plan research development costs decreased 19 275000 twelve months ending december 31 2000 compared period 1999 decrease due majority development work uropro2000 urology imaging table occurring earlier 2000 reduced staffing completion 1999 final development ststc selling costs increased 126000 6 year ending december 31 2000 compared period 1999 due higher advertising tradeshow consulting expenses introduction new imaging table products company also increased efforts sell government contract market incurring expenses establish reimbursement guidelines gallstone lithotripsy general administrative expenses increased 59000 2 twelve months ended december 31 2000 compared period prior year due higher consulting expenses gallstone postapproval work higher audit expenses due expanded scope companys operations full years expenses medstone ltd gain sale investments approximately 1882000 twelve months ending december 31 2000 compared 244000 period 1999 2000 company sold 304667 shares cardiac science inc common stock 5000 shares genstar common stock 1999 company sold warrants purchase 87500 shares cardiac science common stock net book value sales 0 minority interest subsidiaries income increased 292000 48 twelve months ended december 31 2000 compared period prior year due substantially higher activity northern nevada southern idaho operations also company equity investment medicredit recognized 61000 expense portion operating losses medicredit april 1 2000 december 31 2000 provision income taxes year 2000 decreased 256000 result lower taxable income current year compared period 1999 liquidity capital resources company began year 2001 approximately 61 million cash shortterm investments debt inventories 61 million total assets 299 million purchase 10 million treasury stock investment arcoma 10 million fixed asset additions 14 million cash usages offset proceeds sale longterm investments 6 million net cash provided operating activities 40 million company ended year approximately 65 million cash shortterm investments debt inventories 63 million total assets 286 million 2001 company purchased 197000 shares treasury stock 1038266 company estimates purchase resulted 5 increase basic net income per share companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 2002 see safe harbor statement private securities litigation reform act 1995 recently issued accounting pronouncements june 2001 financial accounting standards board issued statements financial accounting standards 141 business combinations 142 goodwill intangible assets effective fiscal years beginning december 15 2001 new rules goodwill intangible assets deemed indefinite lives longer amortized subject annual impairment tests accordance statements intangible assets continue amortized useful lives company apply new rules accounting goodwill intangible assets beginning 2002 application nonamortization provisions statement expected result increase net income 60000 per year 2002 company perform first required impairment tests goodwill indefinite lived tangible assets january 1 2002 yet determined effect tests earnings financial position company sfas 143 accounting asset retirement obligations addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs statement applies legal obligations associated retirement longlived assets result acquisition construction development normal operation longlived asset provisions statement required applied starting fiscal years beginning june 15 2002 adoption sfas 143 expected material effect companys financial statements sfas 144 accounting impairment disposal longlived assets addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 amends certain accounting pronouncements provisions statement effective financial statements issued fiscal years beginning december 15 2001 adoption sfas 144 expected material effect companys financial statements safe harbor statement private securities litigation reform act 1995 forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objectives expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters continues expand feeforservice program supply lithotripsy equipment providers per procedure basis company also marketing urology imaging treatment table used various urological functions date companys consolidated revenues come primarily medstones lithotripsy business manufacturer medical devices company vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using 15 mobile systems two fixed sites united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator retail lithotripsy operations southern idaho operating results consolidated effective march 1 1997 april 1999 company purchased certain assets creos ltd manufacturer high performance xray generators supplier company commenced manufacturing operations facility located fife scotland formerly occupied creos ltd october 1999 company purchased outstanding shares zenith medical systems ltd distributor major imaging equipment british national health service located manchester england 1999 acquisitions operating results consolidated effective respective acquisition dates company began year approximately 116 million cash marketable securities debt inventories 36 million total assets 291 million purchase 24 million treasury stock acquisitions totaling 10 million fixed asset additions 27 million company ended year approximately 97 million cash marketable securities debt inventories 58 million total assets 300 million continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements results operations year ended december 31 1999 compared year ended december 31 1998 total revenue 235 million 1999 represented 1 decrease revenue compared 238 million 1998 breaking string several years continuous revenue growth results lower procedure maintenance management fee revenue partially offset increase equipment revenue generated 1999s sales activity revenue procedure maintenance management fees decreased 195 million 1999 8 decrease compared 211 million revenue 1998 decline due market pressures widespread availability transportable lithotripters caused patient volume shift customers purchased lower costs lithotripsy systems average revenue per patient decreased lower price transportable technology larger patient volume customers chose purchase equipment company competitors price concessions instituted continuing customers 1999 procedure revenue third party owned equipment decreased 11 compared prior year due declines volume lower per procedure fees maintenance fees decreased 20 current period compared 1998 due lower average contract prices lower number sites maintenance contracts company also realized revenue 604000 1999 sales imaging product lines acquired zenith ltd operations net equipment sales 1999 increased 33 million 56 21 million comparable period prior year due increased shipments equipment related introduction stst transportable lithotripter 1999 even though transportable lithotripters carry lower average unit sales price compared fixed unit models activity level equipment upgrades remained level current year compared prior year interest income increased 9 47000 year ended december 31 1999 compared period prior year average invested cash balances increased even yields remained level year costs recurring revenue increased 102 million 1999 12 increase compared 90 million 1998 due companys strategy placing stst equipment customer sites permanent basis making technology always available customer rather scheduled service program approach large upfront investment results reflected patient volume utilization increases cost equipment sales decreased 58 revenue year ended december 31 1999 compared 89 revenue year ended december 31 1998 absolute dollars costs remained level year company realized substantial cost savings introduction transportable lithotripter even total unit shipments doubled research development costs increased 377000 35 compared 1998 levels due increased spending transportable lithotripter continued development uts series products selling expenses increased 60000 3 1999 compared 1998 due introductory advertising expenses medstone stst transportable lithotripter companys trade show expenses medical imaging business general administrative expenses increased 22 461000 1998 1999 due increased staffing costs foreign operations costs associated strategic planning process 1999 legal costs associated actions company incomeexpense increased 36000 1999 compared 1998 due recognition gains sale cardiac science securities partially offset investment reserve 1999 compared gain sales joint venture 1998 minority interest expense decreased 603000 1999 compared 628000 1998 due slight decrease per patient revenue corresponding effect profitability provision income taxes decreased due lower level profitability current year compared prior year ended december 31 1998 compared year ended december 31 1997 total revenue increased 238 million 10 year ended december 31 1999 compared year ended december 31 1997 equipment revenues decreased 578000 current year compared prior year due decline number unit shipments partially offset increase average unit selling prices also decreasing revenue equipment upgrades compared year ended 1997 revenue procedure maintenance management fees increased 2652000 14 current year compared prior year companys feeforservice revenues continue increase number patients treated 1998 increased 26 compared number patients treated feeforservice northern nevada southern idaho operations 1997 higher patient counts northern nevada southern idaho former due higher activity latter due full year results increased activity resulted 22 increase revenue two operating entities even though slight decrease average per patient revenue pricing pressures procedure revenue thirdparty owned equipment resulted 7 decrease per procedure fee even though number procedures increased 5 compared 1997 interest income increased 3 year ended december 31 1999 compared prior year companys average invested cash balance increased slightly partially offset decrease average investment yield cost equipment sales decreased 1901000 1998 compared 2040000 1997 due decline number unit shipments offset increase option content needed complete sales along costs associated foreign installation current year cost recurring revenues increased 9099000 43 revenues 1998 compared 7463000 40 1997 due addition several new vans new geographic areas 1998 associated overhead needed operations pricing pressure also contributed slight decline gross margins recurring revenues research development costs increased 1998 57000 6 compared period 1997 due slightly higher spending payroll related costs company completed development new transportable lithotripter introduced marketplace march 1999 selling expenses decreased 269000 12 1998 compared 1997 due lower payroll company refocused marketing effort associated lower travel expenses lower bad debt expenses general administrative expenses declined 2131000 1998 compared 2231000 1997 representing 4 decrease due mainly lower payroll united physician resources subsidiary refined lower bad debt northern nevada southern idaho operations partially offset increase legal expenses legal incomeexpense increased 22000 1998 compared 1997 due gain investment joint venture partially offset increased goodwill amortization full year southern idaho acquisition minority interest expenses 628000 1998 increased 468000 1997 due full years activity southern idaho increased activity southern idaho northern nevada provision income taxes increased current year compared prior year due increase taxable income higher effective tax rate 1998 liquidity capital resources december 31 1999 company cash shortterm investments approximately 97 million funds generated operating activities companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1999 see safe harbor statement private securities litigation reform act 1995 impact year 2000 prior years company discussed nature progress plans become year 2000 ready late 1999 company completed remediation testing systems result planning implementation efforts company experienced significant disruptions mission critical information technology noninformation technology systems believes systems successfully responded year 2000 date change companys expenses remediation immaterial company aware material problems resulting year 2000 issues either products internal systems products year 2000 issues third parties company continue monitor mission critical computer applications suppliers vendors throughout year 2000 ensure latent year 2000 matters may arise addressed promptly safe harbor statement private securities litigation reform act 1995 forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objectives expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters continues expand feeforservice program supply lithotripsy equipment providers per procedure basis lithotripters manufactured medstone approved treat kidney stones gallstones company also marketing urology imaging treatment table used various urological functions mobile urology pain management table serve mobile treatment market various radiology room equipment capitalizing relationships company radiology equipment manufacturers date companys consolidated revenues come primarily medstones lithotripsy business manufacturer medical devices company vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using 15 mobile systems two fixed sites 20 transmobile lithotripters located throughout united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator retail lithotripsy operations southern idaho operating results consolidated effective march 1 1997 april 1999 company purchased certain assets creos ltd manufacturer high performance xray generators supplier company commenced manufacturing operations facility located fife scotland formerly occupied creos ltd october 1999 company purchased outstanding shares zenith medical systems ltd distributor major imaging equipment british national health service located manchester england 1999 acquisitions operating results consolidated effective respective acquisition dates goodwill represents approximately 11 12 companys total assets stockholders equity respectively december 31 2000 goodwill resulted excess purchase price northern nevada southern idaho zenith medical systems ltd fair value net assets acquired goodwill amortized periods ranging 15 40 years expected period benefit using straightline method company reviews goodwill longlived assets impairment whenever changes circumstances indicate carrying value asset may recoverable based upon companys analysis includes comparison carrying amount assets companys historical actual cash flows estimated future undiscounted cash flows company aware material portion goodwill longlived assets dissipate shorter period amortization period used time company makes investments businesses accounted equity method 2000 company made investment including loans medicreditcom aggregating 3 million 1998 1999 company made aggregate investment kbiotech 325000 companys share losses unconsolidated subsidiaries 2000 related medicreditcom approximated 61000 earnings losses unconsolidated subsidiaries recognized 1999 1998 company additional financial commitments unconsolidated subsidiaries future performance unconsolidated subsidiaries uncertain therefore company may recognize earnings losses unconsolidated subsidiaries future company began year approximately 97 million cash shortterm investments debt inventories 58 million total assets 302 million purchase 27 million treasury stock investment lendings medicredit totaling 30 million fixed asset additions 15 million partially offset proceeds sale longterm investments 19 million company ended year approximately 62 million cash shortterm investments debt inventories 61 million total assets 299 million research development acquisitions clinical submissions management believes hiring retaining appropriate personnel necessary continue growth development companys product lines brand recognition time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements results operations year ended december 31 2000 compared year ended december 31 1999 company recorded total revenue 228 million 2000 3 decrease compared 235 million total revenue recognized year ending december 311999 revenues procedures maintenance fees feefor service decreased 189 million 2000 compared 195 million revenue 1999 pricing pressures continue force per patient charges lower competing equipment saturated market low cost transportable lithotripsy equipment patient volume per patient fees decreased 2000 sites continued transition lower cost equipment sites selecting flat daily monthly fee anticipation release final stark ii regulations occurred january 4 2001 procedure fees third party equipment decreased 11 second year row decreased fees although patient volume increased 4 2000 compared 1999 fees per procedure decreased company experienced increase volume stst units commenced shipment 1999 reached full utilization also renewed interest companys lithotripsy products achieved due approval gallstone procedure revenue radiographic supplies increased current year due full year activity medstone ltd zenith operations additional activity expanding product offerings company 2000 equipment revenues decreased 2 2000 compared period 1999 number lithotripters sold decreased 7 2000 compared 10 1999 average sales prices decreased slightly offsetting decrease lithotripters introduction imaging tables 2000 total 29 various units sold 2000 equipment included pain management tables radiology tables portable urology tables along imaging systems associated several unit sales interest income increased 1 current year compared period prior year due higher investment yields even though average invested balance decreased substantially costs recurring revenue increased 117 million 62 recurring revenue 2000 compared 102 million 52 recurring revenue 1999 due continuation companys program placement large number fixedsite feeforservice lithotripsy units hospitals surgery centers expected units drive longterm patient volume growth continuous availability equipment along expectation additional volume due gallstone approval costs providing maintenance increased also due higher number companyowned units service cost equipment sales increased 23 million 2000 69 sales current year compared 19 million 58 year ended december 31 1999 increase due lower margin associated sale radiology equipment compared historical higher margin lithotripsy equipment lithotripsy equipment margins deteriorated slightly due unabsorbed overhead expenses due lower actual production levels compared plan research development costs decreased 19 275000 twelve months ending december 31 2000 compared period 1999 decrease due majority development work uropro2000 urology imaging table occurring earlier 2000 reduced staffing completion 1999 final development stst selling costs increased 126000 6 year ending december 31 2000 compared period 1999 due higher advertising tradeshow consulting expenses introduction new imaging table products company also increased efforts sell government contract market incurring expenses establish reimbursement guidelines gallstone lithotripsy general administrative expenses increased 59000 2 twelve months ended december 31 2000 compared period prior year due higher consulting expenses gallstone postapproval work higher audit expenses due expanded scope companys operations full years expenses medstone ltd gain sale investments approximately 1882000 twelve months ending december 31 2000 compared 244000 period 1999 2000 company sold 304667 shares cardiac science inc common stock 5000 shares genstar common stock 1999 company sold warrants purchase 87500 shares cardiac science common stock net book value sales 0 minority interest subsidiaries income increased 292000 48 twelve months ended december 31 2000 compared period prior year due substantially higher activity northern nevada southern idaho operations also company equity investment medicredit recognized 61000 expense portion operating losses medicredit april 1 2000 december 31 2000 provision income taxes year 2000 decreased 256000 result lower taxable income current year compared period 1999 year ended december 31 1999 compared year ended december 31 1998 total revenue 235 million 1999 represented 1 decrease revenue compared 238 million 1998 breaking string several years continuous revenue growth results lower procedure maintenance management fee revenue partially offset increase equipment revenue generated 1999s sales activity revenue procedure maintenance fees feeforservice decreased 195 million 1999 8 decrease compared 211 million revenue 1998 decline due market pressures widespread availability transportable lithotripters caused patient volume shift customers purchased lower cost lithotripsy systems average revenue per patient decreased lower price transportable technology larger patient volume customers chose purchase equipment company competitors price concessions instituted continuing customers 1999 procedure revenue third party owned equipment decreased 11 compared prior year due declines volume lower per procedure fees maintenance fees decreased 20 current period compared 1998 due lower average contract prices lower number sites maintenance contracts company also realized revenue 604000 1999 sales imaging product lines acquired zenith ltd operations net equipment sales 1999 increased 33 million 56 21 million comparable period prior year due increased shipments equipment related introduction stst transportable lithotripter 1999 even though transportable lithotripters carry lower average unit sales price compared fixed unit models activity level equipment upgrades remained level current year compared prior year interest income increased 9 47000 year ended december 31 1999 compared period prior year average invested cash balances increased even yields remained level year costs recurring revenue increased 102 million 1999 12 increase compared 90 million 1998 due companys strategy placing stst equipment customer sites permanent basis making technology always available customer rather scheduled service program approach large upfront investment results reflected patient volume utilization increases cost equipment sales decreased 58 revenue year ended december 31 1999 compared 89 revenue year ended december 31 1998 absolute dollars costs remained level year company realized substantial cost savings introduction transportable lithotripter even total unit shipments doubled research development costs increased 377000 35 compared 1998 levels due increased spending transportable lithotripter continued development uts series products selling expenses increased 60000 3 1999 compared 1998 due introductory advertising expenses medstone stst transportable lithotripter companys trade show expenses medical imaging business general administrative expenses increased 22 461000 1998 1999 due increased staffing costs foreign operations costs associated strategic planning process 1999 legal costs associated actions company incomeexpense increased 36000 1999 compared 1998 due recognition gains sale cardiac science securities partially offset investment reserve 1999 compared gain sales joint venture 1998 minority interest expense decreased 603000 1999 compared 628000 1998 due slight decrease per patient revenue corresponding effect profitability provision income taxes decreased due lower level profitability current year compared prior year liquidity capital resources december 31 2000 company cash shortterm investments approximately 62 million funds generated operating activities 2000 company purchased 459800 shares treasury stock approximately 2736000 company estimates purchase resulted 10 increase basic net income per share companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 2000 see safe harbor statement private securities litigation reform act 1995 safe harbor statement private securities litigation reform act forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objectives expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters expand feeforservice program supply lithotripsy equipment providers per procedure basis date companys consolidated revenues come primarily medstones lithotripsy business december 19 1995 company declared two stock dividends payable stockholders record close trading december 29 1995 two dividends represent distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone international operations medstone distribute shareholders outstanding common stock company retaining 100000 shares company two companies become separate publiclyheld companies company distribute 5516528 shares company february 9 1996 medstones transfer agent effected distributions march 1994 company moved smaller efficient facility substantial cost saving move require pma supplement filed fda audit fda company received notification fda pma supplement approved manufacturing new facility company received benefit full year cost savings 1995 result move company manufacturer capital medical devices vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using six mobile systems western united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business financial indicators company strong financial position company completed 1995 reporting increased revenue pretax income compared 1994 positive cash flow stable inventories conservative asset acquisition strategy longterm debt balance sheet ratios improved company began year approximately 144 million cash marketable securities debt inventories 16 million total assets 223 million company ended year approximately 176 million cash marketable securities debt inventories 18 million total assets 259 million well five consecutive profitable years continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods may 4 1992 district court granted summary judgment one actions favor company claims july 9 1992 district court granted companys motion dismiss second action october 1994 company received opinion ninth circuit appeals affirming part reversing part united states district courts decision granting summary judgment favor company several officers complaints principally allege adverse material information disclosed time initial public offering june 1988 april 1995 company filed supreme court brief october 1995 company informed supreme court declined hear case returning case district court scheduling trial set district court may 21 1996 see item 3 legal proceedings company intends proceed trial remaining matters ultimate outcome litigation cannot presently determined company expects spend excess 1 million defense suits provision liability may result made financial statements time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements assets cash equivalents shortterm investments increased 3193000 december 31 1995 december 31 1994 due companys increased sales continued efforts streamline operations companys invested cash balance invested us treasury bills rates 51 67 staggered maturities november 1996 accounts receivable decreased 316000 december 31 1994 december 31 1995 due collection several large receivable balances prior year end major unit receivables end 1995 receivables 50000 written accounts receivable reserves 1995 prepaid expenses current assets increased 125000 current year due increased interest receivable companys treasury bill investments fixed assets decreased 194000 december 31 1994 december 31 1995 primarily result sales mobile vans used mobile lithotripsy operations partially offset addition lower cost vans assets increased 393000 current year due deposits manufacture new mobile vans delivered 1996 liabilities accounts payable december 31 1995 decreased 128000 compared december 31 1994 due payment past legal fees companys counsel class action litigation accrued expenses decreased 134000 december 31 1994 december 31 1995 due final payment former distributor companys products fulfillment settlement agreement reached 1992 accrued income taxes decreased 500000 current year due recognition current year tax provision less prepayments accrued payroll expenses december 31 1995 decreased 203000 compared december 31 1994 due decreased bonus pool current year lower commissions earned current year deferred revenue increased 84000 current year due increased number sites maintenance contract customer deposits december 31 1995 decreased 39000 compared december 31 1994 due realization revenue earned 1995 deferred previously dividends payable december 31 1995 increased 1966000 due declaration stock dividend shareholders record december 29 1995 shareholder company received share common stock endocare urogen shareholders equity additional paidincapital increased 880000 current year due exercise common stock options held employees associated tax benefits notes receivable stock purchases increased 135000 due note issued officer company payment stock option exercises results operations year ended december 31 1995 compared year ended december 31 1994 total revenues increased 184 million year ended december 31 1995 13 increase 1994 revenues 163 million increased net equipment sales resulted increase lithotripsy systems shipped increase average lithotripter unit selling price equipment revenue gain slightly offset decline 1995 upgrades companys installed base lithotripters 1994 levels revenue procedure maintenance fees recurring revenue increased 1995 3 million 2 1994 levels due continued expansion companys mobile lithotripsy services increased revenue procedure fees thirdparty owned equipment offset major declines laser catheter revenues mobile lithotripsy services increased 13 million 41 volume companys vans increased 41 1995 compared number patients treated 1994 procedure revenue increased 4 1995 utilization companys equipment owned third parties continued increase number procedures performed thirdparty owned lithotripters united states increased 13 1994 1995 several endocare product introductions fourth quarter 1995 added 273000 revenues 1995 offsetting gains 70 decrease 1995 revenues laser catheters due lower unit shipments prices market matures interest income 1995 increased 56 1994 levels due increases average invested cash balances due higher cash flow operations higher yields due interest rate increases result market conditions cost equipment sales 1995 increased 83 1994 due increased number unit shipments sale higher cost van units gross margins equipment upgrades decreased due combination higher cost units lower upgrade volume cost recurring revenues increased 1995 689000 1994 due companys continued expansion mobile lithotripsy services requisite equipment investment expenses related operations maintenance material costs increased 37 due higher number units contract research development costs decreased 1995 compared period 1994 due lower headcount associated refined research group selling expenses decreased 1995 compared period prior year due decreased commission expenses lower laser catheter product sales lower training expenses general administrative expenses decreased 1995 compared period 1994 due lower headcount expenses relating scaled endocare operation expenses increased primarily due expenses associated companys increased effort preparation defense classaction lawsuit scheduled trial may 1996 companys tax provision increased 19 million 1994 1995 due booking 1994 deferred tax assets company providing taxes approximately statutory rates 1995 year ended december 31 1994 compared year ended december 31 1993 total revenue increased 163 million year ended december 31 1994 19 increase 1993 revenue 137 million increased net equipment sales resulted increase lithotripsy systems shipped increase average lithotripter unit selling price equipment revenue gain slightly offset decline 1994 upgrades companys installed base lithotripters 1993 levels revenue procedure maintenance fees recurring revenue increased 1994 17 million 15 1993 levels due continued expansion companys mobile lithotripsy services increased revenue procedure fees thirdparty owned equipment volume mobile lithotripsy services companys vans increased 81 1994 compared number patients treated 1993 procedure revenue increased 18 1994 utilization companys equipment owned third parties continues increase number procedures performed third partyowned lithotripters united states increased 27 1993 1994 decrease 1994 revenues laser catheters due lower unit prices interest income 1994 increased 33 1993 levels due increases average invested cash balances due higher cash flow operations higher yields due interest rate increases result market conditions cost equipment sales 1994 decreased 31 1993 due shipment lower cost content foreign lithotripsy units gross margins equipment upgrades increased due combination lower cost units higher average unit selling prices cost recurring revenues increased 1994 1015000 1993 due companys expansion mobile lithotripsy services requisite equipment investment expenses related operations maintenance expenses also increased 33 sites maintenance contract 1994 research development costs decreased 1994 compared period 1993 due scaling back biochemical research selling expenses decreased 1994 compared period prior year due decreased costs sales marketing effort laser catheter products introductory stage marketplace completed general administrative expenses decreased 1994 compared period 1993 due reduced bad debt expenses funding cardiac science advances current year expenses decreased primarily due expenses 1993 writedown market value companys holdings mutual fund expenses relating class action lawsuit company result recognizing deferred tax assets utilization net operating loss carryforwards provision taxes minimal 1994 company expects tax provision 1995 approximate statutory rates liquidity capital resources december 31 1995 company cash shortterm investments approximately 176 million funds generated operating activities companys initial public offering june 1988 1150000 shares common stock issued net proceeds approximately 129 million cash generated offering operations financed substantial increases levels inventory capital assets used retire debt companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies length outcome existing securities litigation ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1995 item 8 item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters continues expand feeforservice program supply lithotripsy equipment providers per procedure basis company also marketing urology imaging treatment table used various urological functions date companys consolidated revenues come primarily medstones lithotripsy business manufacturer medical devices company vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using 15 mobile systems two fixed sites united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator retail lithotripsy operations southern idaho operating results consolidated effective march 1 1997 company began year approximately 11 million cash marketable securities debt inventories 27 million total assets 277 million purchase 27 million treasury stock payment income taxes 26 million recurring operating costs company ended year approximately 116 million cash marketable securities debt inventories 36 million total assets 291 million continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods june 20 1996 defendants plaintiffs reached agreement whereby 6 million nonrecapturable settlement fund established return dismissal claims company underwriter current former officers directors company recorded paid onetime 55 million expense 1996 cover portion settlement fund funds settlement remitted company codefendants paying portions company see item 3 legal proceedings time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 1996 company negotiated coram healthcare coram right purchase lithotripsy related operations coram october 1996 negotiations ceased upon corams subsequent acquisition integrated health services inc breakup fee clause enacted company received reimbursement 125 million certain documented outofpocket expenses relating attempted acquisition related financing company received 125 million 10 installments 1997 results operations year ended december 31 1998 compared year ended december 31 1997 total revenue increased 238 million 10 year ended december 31 1998 compared year ended december 31 1997 equipment revenues decreased 578000 current year compared prior year due decline number unit shipments partially offset increase average unit selling prices also decreasing revenue equipment upgrades compared year ended 1997 revenue procedure maintenance management fees increased 2652000 14 current year compared prior year companys feeforservice revenues continue increase number patients treated 1998 increased 26 compared number patients treated feeforservice northern nevada southern idaho operations 1997 higher patient counts northern nevada southern idaho former due higher activity latter due full year results increased activity resulted 22 increase revenue two operating entities even though slight decrease average per patient revenue pricing pressures procedure revenue thirdparty owned equipment resulted 7 decrease per procedure fee even though number procedures increased 5 compared 1997 interest income increased 3 year ended december 31 1998 compared prior year companys average invested cash balance increased slightly partially offset decrease average investment yield cost equipment sales decreased 1901000 1998 compared 2040000 1997 due decline number unit shipments offset increase option content needed complete sales along costs associated foreign installation current year cost recurring revenues increased 9099000 43 revenues 1998 compared 7463000 40 1997 due addition several new vans new geographic areas 1998 associated overhead needed operations pricing pressure also contributed slight decline gross margins recurring revenues research development costs increased 1998 57000 6 compared period 1997 due slightly higher spending payroll related costs company completed development new transportable lithotripter introduced marketplace march 1999 selling expenses decreased 269000 12 1998 compared 1997 due lower payroll company refocused marketing effort associated lower travel expenses lower bad debt expenses general administrative expenses declined 2131000 1998 compared 2231000 1997 representing 4 decrease due mainly lower payroll united physician resources subsidiary refined lower bad debt northern nevada southern idaho operations partially offset increase legal expenses legal incomeexpense decreased 22000 1998 compared 1997 due gain investment joint venture partially offset increased goodwill amortization full year southern idaho acquisition minority interest expenses 628000 1998 increased 468000 1997 due full years activity southern idaho increased activity southern idaho northern nevada provision benefit income taxes increased current year compared prior year due increase taxable income higher effective tax rate 1998 year ended december 31 1997 compared year ended december 31 1996 total revenues increased 217 million 21 year ended december 31 1997 compared revenues 180 million year ended december 31 1996 revenues equipment sales increased 12 number units sold increased average unit selling price decreased due competition decreasing revenue equipment upgrades compared 1996 fewer field upgrades performed revenue procedure maintenance fees recurring revenue increased 34 million 23 1996 levels due companys continued revenue growth feeforservice business additional revenue southern idaho acquisition volume company owned mobile lithotripsy units increased 51 1997 compared 1996 fees remaining constant procedure revenue thirdparty owned equipment flat 1997 compared 1996 patient volume increased slightly per procedure fees decreased slightly revenues acquired southern idaho combined previously acquired northern nevada increased per procedure averages due higher fees direct billings interest income decreased 21 1997 compared 1996 due lower average invested cash balances resulted payment coram expenses acquisition costs treasury stock repurchases cost equipment sales 1997 increased 57 1997 1996 levels due higher number unit shipments year gross margins equipment upgrades decreased due decrease average unit selling prices cost recurring revenues increased 752000 11 1997 compared 1996 due increased activity staffing costs van movement costs mobile services correlation higher patient volume gross margin percentage recurring revenue increased 60 1997 55 due higher utilization existing equipment fixed costs remain stable research development costs increased 1997 96 compared 1996 levels due increased spending materials staffing consultants company accelerated development portable lithotripter selling expenses increased 111000 5 1997 compared 1996 due higher commission expense connection revenue growth cost national ad campaign bad debt expenses general administrative expenses increased 34 565000 1996 1997 due higher staffing costs associated full years operations united physicians resources increased legal expenses increased billing service expense direct billings done acquired entities incomeexpense net decreased 442000 1997 compared 1996 due class action litigation preparation expenses incurred 1996 partially offset gain sale securities held investment 1996 lawsuit settlement costs decreased 55 million due settlement class action lawsuit 1996 minority interest expense 468000 represents minority shareholders interest results operations northern nevada southern idaho provision benefit income taxes recognizes tax expense current years income compared operating loss incurred 1996 liquidity capital resources december 31 1998 company cash shortterm investments approximately 116 million funds generated operating activities companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1999 see safe harbor statement private securities litigation reform act 1995 year 2000 impact year 2000 year 2000 issue exists many computer systems applications currently use twodigit date fields designate year century date occurs computer programs computers embedded microprocessors controlling equipment datesensitive systems may recognize year 2000 1900 inability recognize properly treat year 2000 may result computer system failures miscalculations critical financial operational information well failures equipment controlling datesensitive microprocessors addition two related issues could also lead miscalculations failures older systems programming assigns special meaning certain dates 9999 ii year 2000 leap year state readiness company started formulate plan address year 2000 issue 1997 date companys primary focus internal information technology systems along datesensitive subsystems products company developed year 2000 plan address year 2000 issues year 2000 plan developed involve generally following phrases awareness assessment renovation testing implementation company completed assessment approximately 95 internal information technology systems company already completed renovation approximately 50 information technology systems including modifying upgrading software developing purchasing new software continues renovate portions systems assessment complete companys goal complete testing implementation phases june 30 1999 company recently begun assess potential year 2000 problems information systems customers vendors company preparing questionnaires expects send customers vendors third parties company material relationship march 31 1999 company expects complete assessment respect parties june 30 1999 subject ability provide requested information company sufficient information provide estimated timetable completion renovation testing parties company material relationship may undertake company unable estimate costs may incur remedy year 2000 issues relating parties mission critical date sensitive systems used companys products evaluated compliance year 2000 issues findings evaluation upgrade computer system equipment along operating system upgrade system fully compliant year 2000 existing customer base company notified upgrades performed compliance certificates issued customers also advised upgrade purchased compliance certificate cannot issued date related information contained systems software equipment would impact operation safety companys products addressed vendors company throughout 1999 company done assessment potential year 2000 problems embedded microprocessors equipment facilities including telecommunications systems utilities security systems hvacs expects significant effect noncritical functions company provided major suppliers mass consumption items electricity telephone data transmission gasoline water natural gas waste disposal meet projections year 2000 compliance company already installed new telephone system 1998 comply year 2000 costs address year 2000 issues company estimates preliminary basis cost assessment renovation testing implementation internal systems material overall operations company major components costs consultants programming new software hardware software upgrades travel expenses company expects costs funded operating cash flows estimate based currently available information updated company continues assessment proceeds renovation testing implementation may adjusted upon receipt information companys vendors customers third parties upon design implementation companys contingency plan addition availability cost consultants personnel trained area unanticipated acquisitions might materially affect estimated costs risks company companys year 2000 issue involves significant risks assurance company succeed implementing year 2000 plan developing following describes companys reasonably likely worsecase scenario given current uncertainties companys renovated replaced internal information technology systems fail testing phase software application embedded microprocessors central companys operations overlooked assessment implementing phases significant problems including delays may incurred billing companys major customers services performed major customers systems become year 2000 compliant timely basis company problems incur delays receiving processing correct reimbursement systems diagnostic imaging equipment utilized company year 2000 compliant company may able provide imaging services patients companys vendors suppliers companys necessary power telecommunications transportation financial services fail provide company equipment services company unable provide services customers uncertainties occur companys business financial condition results operations would adversely affected company unable assess likelihood events occurring extent effect company contingency plan company yet established contingency plan address unavoidable year 2000 risks internal information technology systems customers vendors third parties expects create plan june 30 1999 safe harbor statement private securities litigation reform act 1995 forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objectives expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters continues expand feeforservice program supply lithotripsy equipment providers per procedure basis date companys consolidated revenues come primarily medstones lithotripsy business company manufacturer capital medical devices vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using 13 mobile systems two fixed sites united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator retail lithotripsy operations southern idaho operating results consolidated effective march 1 1997 company began year approximately 11 million cash marketable securities debt inventories 25 million total assets 254 million acquisition purchase 13 million treasury stock payment costs relating attempted acquisition lithotripsy division coram healthcare company ended year approximately 11 million cash marketable securities debt inventories 27 million total assets 274 million continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods june 20 1996 defendants plaintiffs reached agreement whereby 6 million nonrecapturable settlement fund established return dismissal claims company underwriter current former officers directors company recorded paid onetime 55 million expense 1996 cover portion settlement fund funds settlement remitted company codefendants paying portions company see item 3 legal proceedings time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 1996 company negotiated coram healthcare coram right purchase lithotripsy related operations coram october 1996 negotiations ceased upon corams subsequent acquisition integrated health services inc breakup fee clause enacted company received reimbursement 125 million certain documented outofpocket expenses relating attempted acquisition related financing company received 125 million 10 installments 1997 assets accounts receivable increased 434000 december 31 1996 december 31 1997 due addition southern idaho receivables higher number customers utilizing feeforservice program 3000 written accounts receivable reserves 1997 income taxes receivable increased 547000 due overpayment tax estimates utilization net operating loss carryforwards note receivable decreased 1250000 current year due companys reimbursement coram healthcare certain expenses related companys 1996 bid acquire lithotripsy operations coram prepaid expenses current assets increased 299000 due companys prepayment directors officers liability insurance recognition value van due company goodwill net increased 2148000 current year due 2223000 goodwill recorded connection purchase southern idaho offset amortization expense see footnote 2 liabilities customer deposits increased 133000 december 31 1997 compared december 31 1996 due receipt deposits three equipment orders future shipment dates accounts payable december 31 1997 decreased 873000 compared december 31 1996 due payment expenses connection companys attempted acquisition lithotripsy related operations coram accrued income taxes decreased 376000 current year due payment estimated taxes deferred tax liabilities increased 258000 december 31 1996 december 31 1997 due difference tax book depreciation goodwill amortization expenses minority interest increased 255000 due acquisition 1997 southern idaho company 60 owner stockholders equity additional paidincapital increased 283000 current year due exercise common stock options held employees treasury stock increased 1292000 due companys repurchase 156000 shares common stock repurchase program initiated 1996 results operations year ended december 31 1997 compared year ended december 31 1996 total revenues increased 217 million 21 year ended december 31 1997 compared revenues 180 million year ended december 31 1996 revenues equipment sales increased 12 number units sold increased average unit selling price decreased due competition decreasing revenue equipment upgrades compared 1996 fewer field upgrades performed revenue procedure maintenance fees recurring revenue increased 34 million 23 1996 levels due companys continued revenue growth feeforservice business additional revenue southern idaho acquisition volume company owned mobile lithotripsy units increased 51 1997 compared 1996 fees remaining constant procedure revenue thirdparty owned equipment flat 1997 compared 1996 patient volume increased slightly per procedure fees decreased slightly revenues acquired southern idaho combined previously acquired northern nevada increases per procedure averages due higher fees direct billings interest income decreased 21 1997 compared 1996 due lower average invested cash balances resulted payment coram expenses acquisition costs treasury stock repurchases cost equipment sales 1997 increased 57 1997 1996 levels due higher number unit shipments year gross margins equipment upgrades decreased due decrease average unit selling prices cost recurring revenues increased 752000 11 1997 compared 1996 due increased activity staffing costs van movement costs mobile services correlation higher patient volume gross margin percentage recurring revenue increased 60 1997 55 due higher utilization existing equipment fixed costs remain stable research development costs increased 1997 96 compared 1996 levels due increased spending materials staffing consultants company accelerated development portable lithotripter selling expenses increased 111000 5 1997 compared 1996 due higher commission expense connection revenue growth cost national ad campaign bad debt expenses general administrative expenses increased 34 565000 1996 1997 due higher staffing costs associated full years operations united physicians resources increased legal expenses increased billing service expense direct billings done acquired entities incomeexpense net decreased 442000 1997 compared 1996 due class action litigation preparation expenses incurred 1996 partially offset gain sale securities held investment 1996 lawsuit settlement costs decreased 55 million due settlement class action lawsuit 1996 minority interest expense 468000 represents minority shareholders interest results operations northern nevada southern idaho provision benefit income taxes recognizes tax expense current years income compared operating loss incurred 1996 year ended december 31 1996 compared year ended december 31 1995 total revenues increased slightly 180 million 2 year ended december 31 1996 compared revenues 184 million year ended december 31 1995 revenues equipment sales decreased 47 number units average unit selling price decreased also decreasing revenue equipment upgrades compared 1995 revenue procedure maintenance fees recurring revenue increased 21 million 16 1995 levels due companys continued success feeforservice business continued growth revenue procedure fees thirdparty owned equipment addition northern nevada direct revenues volume company owned mobile lithotripsy units increased 43 1996 compared 1995 procedure revenue increased 9 1996 compared 1995 volume third party owned equipment continued grow revenues acquired northern nevada increase per patient revenue due revenue recognized billing patients insurers compared revenue billing providers partially offsetting gains loss endocare revenues totaled 951000 1995 spun effective january 1 1996 interest income decreased 33 1996 compared 1995 due dramatically lower average invested cash balances resulted large capital expenditures mobile lithotripsy trailers settlement class action lawsuit cost equipment sales 1996 decreased 38 1996 1995 levels due lower number unit shipments year gross margins equipment upgrades decreased due decrease average unit selling prices cost recurring revenues increased 1158000 21 1996 compared 1995 due additional costs associated eight additional feeforservice vans placed service 1996 include depreciation van movement costs staffing costs gross margins decreased due lower optimal utilization newer vans placed service research development costs decreased 1996 44 compared 1995 levels due 1995s level expenses associated numerous endocare new product development projects became salable new product lines completion spin endocare 1996 company concentrated research efforts lithotripsy products selling expenses increased 96000 5 1996 compared 1995 due additional sales staff associated expenses travel along costs product brochures company expanded mobile feeforservice program western united states concentration include southwest southeast northeastern areas country company also increased efforts connection international sales 1996 general administrative expenses remained constant increase less 1 1996 compared 1995 expenses administrative staff expenses endocare spun end 1995 offset staff expenses upr northern nevada incomeexpense net increased 239000 1996 compared 1995 due litigation preparation expenses class action litigation incurred settlement action partially offset gain sale securities held investment lawsuit settlement costs increased 55 million due expense recorded outofcourt settlement reached plaintiffs defendants company codefendant class action lawsuit existence since 1989 settlement charge represents closure open charges company minority interest expense 143000 represents minority shareholders interest results operations northern nevada provision benefit income taxes recognizes tax benefit 1996 net operating loss carryforwards generated 1996 carryforward expected utilized future periods liquidity capital resources december 31 1997 company cash shortterm investments approximately 110 million funds generated operating activities companys initial public offering june 1988 companys longterm capital expenditure requirements treasury shares repurchase depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1998 see safe harbor statement private securities litigation reform act 1995 year 2000 company aware issues associated programming code existing computer systems millenium year 2000 approaches year 2000 problem pervasive complex virtually every computer operation affected way rollover two digit year value 00 issue whether computer systems properly recognize date sensitive information year changes 2000 systems properly recognize information could generate erroneous data could fail 1997 company conducted comprehensive review computer systems lithotripsy equipment identify areas could affected year 2000 issue company presently believes conversion newer version operating software developed 1996 year 2000 problem materially affect companys operations financial position cash flows recent accounting pronouncements june 1997 fasb issued statement 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 establishes standards reporting display comprehensive income components financial statements comprehensive income generally represents changes shareholders equity except resulting investments owners distributions owners company adopt new standards 1998 expect impact financial statement presentation significant june 1997 fasb issued statement 131 sfas 131 disclosures segments enterprise related information effective fiscal years beginning december 15 1997 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report information operating segments interim financial reports sfas 131 also establishes standards related disclosures products services geographic areas major customers company adopt new standards retroactively 1998 management completed review sfas 131 safe harbor statement private securities litigation reform act 1995 forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objectives expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 8 item 7 management’s discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters urology tables radiology equipment lithotripters manufactured medstone approved treat kidney stones certain gallstones company also marketing fixed mobile urology imaging pain management tables xray generators medical imaging date company’s consolidated revenues come primarily lithotripsy business sells lithotripters related supplies lithotripsy revenues come recurring procedure maintenance fees feeforservice arrangements company continues expand programs companyowned lithotripters made available use hospitals physician groups surgical centers charges based usage equipment monthly fees company currently offers lithotripsy services throughout united states using 14 sts systems mobile trailers one sts system fixed site 27 transportable ststc systems fixed locations moved different sites small trucks june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand company’s service orientation urologist practitioner entities signify company’s emphasis growth expansion relationships acquisition march 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc another operator “retail” lithotripsy operations southern idaho operating results consolidated effective march 1997 part northern nevada southern idaho acquisitions physicians participating operations signed covenants compete duration five years company assign value covenants june 2001 covenants related physicians affiliated northern nevada expired march 2002 covenants related physicians affiliated southern idaho expired april 1999 company purchased certain assets creos ltd manufacturer high performance xray generators supplier company commenced manufacturing operations facility located fife scotland formerly occupied creos ltd october 1999 company purchased outstanding shares zenith medical systems ltd distributor major imaging equipment british national health service located manchester england 1999 acquisitions’ operating results consolidated effective respective acquisition dates goodwill represents approximately 11 13 company’s total assets stockholders’ equity respectively december 31 2002 goodwill resulted excess purchase price northern nevada southern idaho zenith medical systems ltd fair value net assets acquired goodwill amortized periods ranging 15 40 years expected period benefit using straightline method january 1 2002 company adopted sfas 142 amortize goodwill periodic basis october 1 2002 company performed annual review goodwill values review determined goodwill resulting zenith acquisition permanently impaired impairment charge 269855 recorded company reducing goodwill zenith carrying value 0 analysis goodwill lithotripsy services segment northern nevada lithotripsy southern idaho lithotripsy determined impaired company used projected discounted cash flows using riskfree interest rates basis analysis time company makes investments businesses accounted equity method 2001 company made equity investment 1 million arcoma ab 2000 company made investment including subordinated loan medicreditcom aggregating 3 million 1998 1999 company made aggregate investment kbiotech 325000 2002 company’s share net losses unconsolidated subsidiaries 175409 relating losses arcoma operations company also recognized gain 1000000 upon closing sale 46 interest subordinated loan medicreditcom cash 2001 company’s share net losses unconsolidated subsidiaries impairment reserves amounted 3354106 net losses composed losses 91000 arcoma operations 325000 k biotech operations reserves losses reserves 2938100 medicreditcom company’s share losses unconsolidated subsidiaries 2000 related medicreditcom approximated 61000 company additional financial commitments unconsolidated subsidiaries future performance unconsolidated subsidiaries uncertain therefore company may recognize earnings losses unconsolidated subsidiaries future research development acquisitions clinical submissions management believes hiring retaining appropriate personnel necessary continue growth development company’s product lines brand recognition ordinary course business company made number estimates assumptions relating reporting results operations financial condition preparation financial statements conformity accounting principles generally accepted united states america actual results could differ significantly estimates different assumptions conditions company believes following discus5ion addresses company’s critical accounting policies important portrayal company’s financial condition results company constantly reevaluates significant factors makes adjustments facts circumstances dictate historically actual results significantly deviated determined using necessary estimates inherent preparation financial statements estimates assumptions include limited customer receivables inventories equity investments fixed asset lives contingencies litigation company also chosen certain accounting policies options available including • firstin firstout fifo method value majority inventories • intrinsic value method apb opinion 25 account common stock incentive awards • record allowance credit losses based estimates customers’ ability pay financial condition customers deteriorate additional allowances may required accounting policies applied consistently years presented operating results would affected alternatives used information impact operating results included footnotes consolidated financial statements time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements results operations year ended december 31 2002 compared year ended december 31 2001 revenue 2002 totaled 233 million 3 increase compared revenue 227 million 2001 revenues procedures maintenance management fees decreased 174 million 2002 compared 186 million revenue 2001 decrease due lower patient counts company’s feeforservice routes well continuing trend lower revenue per patient due competition patient counts feeforservice program decreased several high volume sites converted equipment sales late 2001 early 2002 third party patient counts increased year basis due conversions overall patient volume increased 2002 2 compared patient volume 2001 revenue radiographic supplies decreased 2002 compared 2001 due significant slowdown united kingdom market radiology supplies services partially offsetting decreased feeforservice radiology revenue increase service contract revenue sites purchased maintenance contracts equipment shipped current year resulting increased number sites contract equipment revenues increased 1925000 53 2002 compared period 2001 due shipment five uropro systems 2002 first year shipment product number lithotripsy units shipped 2002 also increased 2002 compared period 2001 company also shipped 105 various imaging tables 2002 compared 92 prior year recognized slightly lower imaging table revenue due inclusion imaging system tables shipped 2001 interest income decreased 35 2002 compared period 2001 due continued lower investment yields shortterm investments decreased average invested cash balance 2002 compared 2001 costs recurring revenue decreased 583000 2002 compared period 2001 decrease due lower activity feeforservice lithotripsy units current year even fixed operating costs declined depreciation costs decreased company’s feeforservice equipment operating costs also declined truck rental costs decreased lower movement activity trailer equipment cost equipment sales increased 41 million 2002 73 sales current year compared 27 million 74 year ended december 31 2001 increased cost due higher volume equipment shipments current year first revenue recorded uropro urology table recorded 2002 cost sales percentage sales declined slightly due higher volume shipments slightly higher profit margin uropro tables compared patient handling tables research development costs increased 1468000 twelve months ended december 31 2002 compared 1320000 period 2001 11 increase due spending project consultants materials multirad system developed 2002 whereas 2001 major spending option enhancements existing products already offered company selling costs percentage revenue increased 13 revenue 12 months ended december 31 2002 compared 12 period 2001 increase due additional payroll costs company expanded staff expertise imaging products well expanding presence imaging tradeshows company also increased advertising recruitment spending gallstone postapproval trial patients commission expenses also increased due higher equipment sales revenue current year compared prior year general administrative expenses percentage revenue increased 13 revenue 12 months ended december 31 2002 compared 11 period 2001 due higher utilization consultants several projects involving gallstone lithotripsy studying alternatives enhancing shareholder value several tax matters insurance costs also increased current year due trend rising costs directors officers liability insurance impairment goodwill increased 270000 2002 without comparable amount 2001 due company’s comprehensive review goodwill required implementation sfas 142 equipment sales servicing segment operating united kingdom significantly impacted termination distribution agreement effective first quarter 2003 upon review projected future cash flows sufficient future profit support carrying value goodwill company took impairment charge equivalent unamortized goodwill balance review date october 1 2002 gain sales investments 12 months ended december 31 2002 1000000 due sale company’s 46 interest medicredit associated subordinated loan gain partially offset impairment reserves company’s portion medicredit’s operating losses totaling 3 million recognized 2001 2000 company’s net loss including tax benefits taken statutory rates approximately 12 million medicredit transaction gain sales investments period 2001 composed 628000 result company’s sale 187000 shares cardiac science common stock net book value 0 due previous reserves expense decreased 42000 year ending december 31 2002 141000 period 2001 due discontinuation amortization goodwill adoption sfas 142 company january 1 2002 minority interest subsidiaries income increased 86000 11 twelve months ended december 31 2002 compared period prior year increase due higher distributions operating profits northern nevada southern idaho operations higher expenses recognizing company’s portion unconsolidated subsidiaries losses arcoma provision income taxes year 2002 782000 compared tax benefit 431000 period 2001 due operating profits domestic operations company nondeductible foreign losses incurred current year compared losses generated deferred tax assets company twelve months ended december 31 2001 year ended december 31 2001 compared year ended december 31 2000 revenue 2001 totaled 227 million 1 decrease compared revenue 228 million 2000 revenues procedures maintenance management fees decreased 186 million 2001 compared 189 million revenue 2000 decrease due continuing trend lower revenue per patient competition forces price concessions contract renewals even patient counts third party company owned equipment increased 2001 overall patient volume increased 2001 3 third party owned equipment 7 company owned equipment compared 2000 revenue radiographic supplies increased current year due significant contract medstone ltd xray generators higher shipment volume spare parts partially offsetting increased radiology revenue decrease service contract revenue maintenance contracts expired renewals lower rates equipment revenues increased 367000 11 2001 compared period 2000 due increased number imaging tables shipped company 2001 company shipped 92 various patient handling tables 2001 compared 29 prior year partially offsetting increase imaging table revenue reduction number lithotripters shipped current year 7 2000 6 current year interest income decreased 24 2001 compared 2000 due significantly lower investment yields resulting numerous cuts prime interest rate reduction almost 900000 average invested cash balance 2001 compared 2000 costs recurring revenue decreased 657000 2001 compared period 2000 percentage revenue recurring revenue cost sales decreased 62 2000 59 2001 decrease due reduced operating costs fixedsite feeforservice lithotripsy units reduced costs operation mobile trailer fleet units reach end depreciable lives cost equipment sales increased 27 million 2001 74 sales current year compared 23 million 69 year ended december 31 2000 increase due lower margin associated sale imaging tables compared lithotripsy equipment research development costs increased 138000 12 twelve months ending december 31 2001 compared period 2000 increase due development work optional equipment uropro urology imaging table company also developed several enhancements ststc lithotripter introduced 2002 selling costs increased 2175000 year ending december 31 2000 2682000 period 2001 increase due higher staffing levels company increased number imaging product specialists increased tradeshow expenses company exhibited products regional imaging tradeshows company also increased bad debt expense economic downturn increased number customers extending payment invoices dispute distributor amounts owed imaging tables general administrative expenses decreased 97000 4 twelve months ended december 31 2001 compared period prior year due lower consulting expenses gallstone treatment filing fda 2000 lower audit expenses due management’s decision change auditing firms gain sale investments decreased approximately 628000 twelve months ending december 31 2001 compared 1882000 period 2000 2001 company sold 187000 shares cardiac science inc common stock 2000 company sold 304667 shares cardiac science inc common stock 5000 shares genstar common stock net book value shares sold 0 expense increased 141000 year ending december 31 2001 109000 period 2000 due loss disposal assets current year reserves impairment investments longterm receivables increased 3232673 comparable value prior year result company’s review k biotech medicredit investments loans minority interest subsidiaries income decreased 199000 24 twelve months ended december 31 2001 compared period prior year decrease due lower profits northern nevada southern idaho operations equity loss unconsolidated subsidiaries increased 121000 year ended december 31 2001 compared 61000 period 2000 due losses arcoma current year provision benefit income taxes year 2001 changed 2094000 result losses reserves deferred tax benefits current year compared period 2000 liquidity capital resources company began year 2002 approximately 63 million cash shortterm investments debt inventories 63 million total assets 286 million purchase 16 million treasury stock fixed asset additions 10 million cash usages offset proceeds sale medicredit 10 million net cash provided operating activities 24 million company ended year approximately 64 million cash shortterm investments debt inventories 64 million total assets 265 million 2002 company purchased 353000 shares treasury stock 1602860 company estimates purchase resulted 7 increase basic net income per share company’s longterm capital expenditure requirements depend upon numerous factors including progress company’s research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 2003 see “safe harbor statement private securities litigation reform act 1995” safe harbor statement private securities litigation reform act 1995 forwardlooking statements report including without limitation statements relating company’s plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following company’s plans strategies objectives expectations intentions subject change time discretion company ii company’s plans results operations affected company’s ability manage growth iii company’s businesses highly competitive entrance new competitors expansion operations existing competitors company’s markets changes could adversely affect company’s plans results operations iv risks uncertainties indicated time company’s filings securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations general cytocare transitioned company solely medical capital equipment business one offering devices therapeutics urological diseases endocare focused prostate diseases medstone continues manufacture market maintain lithotripters expand feeforservice program supply lithotripsy equipment providers per procedure basis date companys consolidated revenues come primarily medstones lithotripsy business 1994 company received 510k notification prolase cryocare surgical system diolase 60 allowing company manufacture sell products united states prolase already started contributing revenue cryocare surgical system diolase 60 expected go market 1995 march 1994 company moved smaller efficient facility substantial cost saving move require pma supplement filed fda audit fda company received notification fda pma supplement approved manufacturing new facility company expects receive benefit full year cost savings 1995 result move company manufacturer capital medical devices vertically integrating offering medical devices directly provider per procedure basis medstone companys whollyowned subsidiary currently offers mobile lithotripsy procedures using five mobile systems western united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business financial indicators company strong position company completed 1994 reporting revenue increased expenses decreased net income increased compared 1993 positive cash flow stable inventories conservative asset acquisition strategy longterm debt balance sheet ratios improved company began year approximately 116 million cash marketable securities debt inventories 16 million total assets 177 million company ended year approximately 144 million cash marketable securities debt inventories 16 million total assets 223 million well four consecutive profitable years continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans assets cash equivalents shortterm investments increased 2848000 december 31 1994 december 31 1993 due companys increased sales efforts streamline operations move new lowercost facility companys invested cash balance invested us treasury bills rates 345 67 staggered maturities february 1996 accounts receivable increased 208000 december 31 1993 december 31 1994 due increase revenue mobile lithotripsy operations resulting higher number customers receivable balances deferred tax assets increased 1005000 current year due companys acknowledgement probability continued profitability utilization assets future periods recognition deferred tax asset resulted extremely low tax provision 1994 prepaid expenses decreased 147000 current year due utilization equipment deposit mobile van manufacturer company completed purchase two additional vans 1994 fixed assets cost increased 1300000 december 31 1993 december 31 1994 primarily result additions mobile vans used mobile lithotripsy operations assets decreased 110000 current year due refund several deposits held state taxation agencies building landlord facility vacated march 1994 liabilities accounts payable december 31 1994 decreased 136000 compared december 31 1993 due lower spending levels operating expenses accrued income taxes decreased 227000 current year due recognition current year tax provision less prepayments accrued payroll expenses december 31 1994 increased 102000 compared december 31 1993 due increased bonus pool established result profits current year deferred revenue increased 140000 current year due increased number sites maintenance contract one two year maintenance agreement customer deposits december 31 1994 decreased 141000 compared december 31 1993 due recognition revenue 1994 deferred tax liabilities increased 225000 current year due companys recording deferred tax assets liabilities amount represents companys booktax depreciation timing differences shareholders equity additional paidincapital increased 139000 current year due exercise common stock options held employees results operations year ended december 31 1994 compared year ended december 31 1993 total revenue increased 163 million year ended december 31 1994 19 increase 1993 revenue 137 million increased net equipment sales resulted increase lithotripsy systems shipped increase average lithotripter unit selling price equipment revenue gain slightly offset decline 1994 upgrades companys installed base lithotripters 1993 levels revenue procedure maintenance fees recurring revenue increased 1994 17 million 15 1993 levels due continued expansion companys mobile lithotripsy services increased revenue procedure fees thirdparty owned equipment volume mobile lithotripsy services companys vans increased 81 1994 compared number patients treated 1993 procedure revenue increased 18 1994 utilization companys equipment owned third parties continues increase number procedures performed third partyowned lithotripters united states increased 27 1993 1994 16 decrease 1994 revenues laser catheters due lower unit prices interest income 1994 increased 33 1993 levels due increases average invested cash balances due higher cash flow operations higher yields due interest rate increases result market conditions cost equipment sales 1994 decreased 31 1993 due shipment lower cost content foreign lithotripsy units gross margins equipment upgrades increased due combination lower cost units higher average unit selling prices cost recurring revenues increased 1994 1015000 1993 due companys expansion mobile lithotripsy services requisite equipment investment expenses related operations maintenance expenses also increased 33 sites maintenance contract 1994 research development costs decreased 1994 compared period 1993 due scaling back biochemical research selling expenses decreased 1994 compared period prior year due decreased costs sales marketing effort laser catheter products introductory stage marketplace completed general administrative expenses decreased 1994 compared period 1993 due reduced bad debt expenses funding cardiac science advances current year expenses decreased primarily due expenses 1993 writedown market value companys holdings mutual fund expenses relating class action lawsuit company result recognizing deferred tax assets utilization net operating loss carryforwards provision taxes minimal 1994 company expects tax provision 1995 approximate statutory rates year ended december 31 1993 compared year ended december 31 1992 company recognized revenue 137 million 1993 compared 136 million 1992 1 increase revenue result several changes companys revenue streams shipments lithotripters decreased four systems 1993 eight systems 1992 shipment system upgrades companys installed base lithotripters increased 21 1992 levels company recognized interest dividend income 481000 1993 compared 631000 1992 24 decline although average investable balances remained relatively constant periods revenues decreased economy continued push interest rate yields lower throughout 1993 equipment cost sales decreased 39 1993 compared 1992 reflecting lower equipment sales volume gross margins equipment sales equipment upgrades decreased 28 1993 50 1992 direct result lower average unit selling prices cost sales related recurring revenues decreased 35 1993 43 1992 due increased volume recurring revenues prolase product increased medstone patient volume research development expenses increased 141000 6 1993 compared period 1992 due additional headcount company continued efforts expand product line offerings treatment urological diseases selling expenses increased 1055000 65 company introduced laser catheter product line associated expenses advertising headcount additions sales commissions necessary successfully launch effort attract new customers retain current users new applications general administrative expenses increased 644000 41 company established separate divisions respective management teams increase focus increasing efforts specifically increases expenses came areas headcount additions travel legal expenses decreased approximately 530000 primarily due expenses 1992 class action lawsuit settlement litigation former distributor liquidity capital resources december 31 1994 company cash shortterm investments approximately 144 million funds generated operating activities companys initial public offering june 1988 1150000 shares common stock issued net proceeds approximately 129 million cash generated offering operations financed substantial increases levels inventory capital assets used retire debt companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies length outcome existing securities litigation ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1995 item 8 item 7 managements discussion analysis financial condition results operations general medstone manufactures markets maintains lithotripters continues expand feeforservice program supply lithotripsy equipment providers per procedure basis date companys consolidated revenues come primarily medstones lithotripsy business february 9 1996 company distributed two stock dividends stockholders record close trading december 29 1995 two dividends represented distribution assets operations endocare urogen divisions company effective start business january 1 1996 two companies longer part medstone operations medstone retained 100000 shares company two companies separate publiclyheld companies march 1994 company moved smaller efficient facility substantial cost saving move require pma supplement filed fda audit fda company received notification fda pma supplement approved manufacturing new facility company manufacturer capital medical devices vertically integrating offering medical devices directly providers currently offers lithotripsy procedures using 13 mobile systems one fixed site united states per procedure basis ability offer quality equipment reasonable prices medstone intends continue growth manufacturer direct business june 1996 company completed acquisition 60 interest northern nevada lithotripsy partnership deals directly patient insurers also founded upr majorityowned subsidiary company expand companys service orientation urologist practitioner entities signify companys emphasis growth expansion relationships acquisition see also footnote 15 companys consolidated financial statements regarding recent acquisition 60 interest southern idaho lithotripsy associates llc another retail provider lithotripsy services company began year approximately 176 million cash marketable securities debt inventories 18 million total assets 259 million acquisition settlement class action lawsuit investment seven new mobile trailers one fixed site system company ended year approximately 110 million cash marketable securities debt inventories 25 million total assets 254 million continuing research development management company putting place scientific engineering base believes necessary carry next phases growth plans company defendant two related class action lawsuits filed two shareholders company alleging adverse material information disclosed time initial public offering subsequent periods june 20 1996 defendants plaintiffs reached agreement whereby 6 million nonrecapturable settlement fund established return dismissal claims company underwriter current former officers directors company recorded onetime 55 million expense second quarter 1996 cover portion settlement fund first half paid july 9 1996 second half paid august 15 1996 funds settlement remitted company codefendants paying portions company see item 3 legal proceedings time company subject legal actions claims personal injuries property damage related patients use products company obtained liability insurance policy providing coverage product liability claims management believe resolution current proceedings material financial impact company consolidated financial statements 1996 company negotiated coram healthcare coram right purchase lithotripsy related operations coram october 1996 negotiations ceased upon corams subsequent acquisition integrated health services inc breakup fee clause enacted company entitled reimbursement 125 million certain documented outofpocket expenses relating attempted acquisition related financing company scheduled receive first reimbursement end first quarter 1997 assets cash equivalents shortterm investments decreased 6594000 december 31 1996 december 31 1995 due companys capital acquisitions settlement class action lawsuit purchase northern nevada operation companys invested cash balance invested us treasury bills rates 47 51 accounts receivable increased 1178000 december 31 1995 december 31 1996 due addition northern nevada receivables much higher number customers utilizing feeforservice program receivables written accounts receivable reserves 1996 inventories increased 695000 december 31 1996 december 31 1995 due expansion companys manufacturing effort meet delivery schedules units shipped early 1997 note receivable increased 1250000 current year due companys reimbursement agreement coram healthcare certain expenses related companys bid acquire lithotripsy operations coram prepaid expenses current assets decreased 276000 due companys shorter investment maturity schedule property equipment increased 2735000 december 31 1995 december 31 1996 primarily result purchase mobile vans used mobile lithotripsy operations partially offset distribution endocare urogen assets goodwill net increased 1119000 current year due purchase northern nevada allocation purchase price assets purchased assets decreased 372000 current year due last years deposits manufacture new mobile vans delivered 1996 liabilities accounts payable december 31 1996 increased 1367000 compared december 31 1995 due expenses paid connection companys attempted acquisition lithotripsy related operations coram accrued income taxes increased 275000 current year due allocations payables deferred tax assets deferred revenue increased 316000 current year due prepayment several years maintenance patient treatments new customer dividends payable december 31 1996 decreased 1966000 due distribution stock dividend february 9 1996 share common stock endocare urogen share company held december 29 1995 deferred tax liabilities increased 269000 december 31 1995 december 31 1996 due difference tax book depreciation expense minority interest increased 111000 due acquisition 1996 northern nevada company 60 owner stockholders equity additional paidincapital increased 159000 current year due exercise common stock options held employees associated tax benefits treasury stock increased 908000 due companys repurchase 112800 shares common stock repurchase program initiated 1996 results operations year ended december 31 1996 compared year ended december 31 1995 total revenues decreased slightly 180 million 2 year ended december 31 1996 compared revenues 184 million year ended december 31 1995 revenues equipment sales decreased 47 number units average unit selling price decreased also decreasing revenue equipment upgrades compared 1995 revenue procedure maintenance fees recurring revenue increased 21 million 16 1995 levels due companys continued success feeforservice business continued growth revenue procedure fees thirdparty owned equipment addition northern nevada direct revenues volume company owned mobile lithotripsy units increased 43 1996 compared 1995 procedure revenue increased 9 1996 compared 1995 volume third party owned equipment continued grow revenues acquired northern nevada increase per patient revenue due revenue recognized billing patients insurers compared revenue billing providers partially offsetting gains loss endocare revenues totalled 951000 1995 spun effective january 1 1996 interest income decreased 33 1996 compared 1995 due dramatically lower average invested cash balances resulted large capital expenditures mobile lithotripsy trailers settlement class action lawsuit cost equipment sales 1996 decreased 38 1996 1995 levels due lower number unit shipments year gross margins equipment upgrades decreased due decrease average unit selling prices cost recurring revenues increased 1158000 21 1996 compared 1995 due additional costs associated eight additional feeforservice vans placed service 1996 include depreciation van movement costs staffing costs gross margins decreased due lower optimal utilization newer vans placed service research development costs decreased 1996 44 compared 1995 levels due 1995s level expenses associated numerous endocare new product development projects became salable new product lines completion spinout endocare 1996 company concentrated research efforts lithotripsy products selling expenses increased 96000 5 1996 compared 1995 due additional sales staff associated expenses travel along costs product brochures company expanded mobile feeforservice program western united states concentration include southwest southeast northeastern areas country company also increased efforts connection international sales 1996 general administrative expenses remained constant increase less 1 1996 compared 1995 expenses administrative staff expenses endocare spun end 1995 offset staff expenses upr northern nevada incomeexpense net increased 239000 1996 compared 1995 due litigation preparation expenses class action litigation incurred settlement action partially offset gain sale securities held investment lawsuit settlement costs increased 55 million due expense recorded outofcourt settlement reached plaintiffs defendants company codefendant class action lawsuit existence since 1989 settlement charge represents closure open charges company minority interest expense 143000 represents minority shareholders interest results operations northern nevada provision benefit income taxes recognizes tax benefit 1996 net operating loss carryforwards generated 1996 carryforward expected utilized future periods year ended december 31 1995 compared year ended december 31 1994 total revenues increased 184 million year ended december 31 1995 13 increase 1994 revenues 163 million increased net equipment sales resulted increase lithotripsy systems shipped increase average lithotripter unit selling price equipment revenue gain slightly offset decline 1995 upgrades companys installed base lithotripters 1994 levels revenue procedure maintenance fees recurring revenue increased 1995 3 million 2 1994 levels due continued expansion companys mobile lithotripsy services increased revenue procedure fees thirdparty owned equipment offset major declines laser catheter revenues mobile lithotripsy services increased 13 million 41 volume companys vans increased 41 1995 compared number patients treated 1994 procedure revenue increased 4 1995 utilization companys equipment owned third parties continued increase number procedures performed thirdparty owned lithotripters united states increased 13 1994 1995 several endocare product introductions fourth quarter 1995 added 273000 revenues 1995 offsetting gains 70 decrease 1995 revenues laser catheters due lower unit shipments prices market matures interest income 1995 increased 56 1994 levels due increases average invested cash balances due higher cash flow operations higher yields due interest rate increases result market conditions cost equipment sales 1995 increased 83 1994 due increased number unit shipments sale higher cost van units gross margins equipment upgrades decreased due combination higher cost units lower upgrade volume cost recurring revenues increased 1995 689000 1994 due companys continued expansion mobile lithotripsy services requisite equipment investment expenses related operations maintenance material costs increased 37 due higher number units contract research development costs decreased 1995 compared period 1994 due lower headcount associated refined research group selling expenses decreased 1995 compared period prior year due decreased commission expenses lower laser catheter product sales lower training expenses general administrative expenses decreased 1995 compared period 1994 due lower headcount expenses relating scaled endocare operation legal expenses increased primarily due expenses associated companys increased effort preparation defense classaction lawsuit scheduled trial may 1996 companys tax provision increased 19 million 1994 1995 due booking 1994 deferred tax assets company providing taxes approximately statutory rates 1995 liquidity capital resources december 31 1996 company cash shortterm investments approximately 110 million funds generated operating activities companys initial public offering june 1988 companys longterm capital expenditure requirements depend upon numerous factors including progress companys research development programs time required obtain regulatory approvals resources company devotes development selffunded products proprietary manufacturing methods advanced technologies cost acquisition andor new revenue opportunities ability company obtain additional licensing arrangements manufacture products arrangements demand products approved possible acquisitions products technologies companies company believes existing working capital funds anticipated generated operations sufficient meet cash needs continuation present operations 1997 see safe harbor statement private securities litigation reform act 1995 business acquisition march 18 1997 company completed acquisition 60 interest southern idaho lithotripsy associates llc operator retail lithotripsy operation southern idaho purchase price 23 million cash assets liabilities operating results southern idaho lithotripsy associates llc consolidated effective march 1 1997 safe harbor statement private securities litigation reform act forwardlooking statements report including without limitation statements relating companys plans strategies objectives expectations intentions adequacy resources made pursuant safe harbor provisions private securities litigation reform act 1995 investors cautioned forwardlooking statements involve risks uncertainties including without limitation following companys plans strategies objections expectations intentions subject change time discretion company ii companys plans results operations affected companys ability manage growth iii companys businesses highly competitive entrance new competitors expansion operations existing competitors companys markets changes could adversely affect companys plans results operations iv risks uncertainties indicated time companys filings securities exchange commission item 8 item 7a quantitative qualitative disclosures market risk company financial instruments subject market risk although companys earnings cash flows subject fluctuations due changes interest rates investments hypothetical 10 adverse decrease interest rates would material adverse effect results operations majority companys investments shortterm treasury bills 10 reduction interest rates would reduce interest income approximately 50000 annually due short period maturity company believes impact 10 reduction interest rates would material effect carrying value securities companys earnings cash flows medstone international ltd scottish subsidiary subject fluctuations due changes foreign currency rates company believes changes foreign currency exchange rate would material adverse effect results operations majority foreign transactions delineated medstone international ltds functional currency british pound item 8 item 7a quantitative qualitative disclosures market risk company financial instruments subject market risk although companys earnings cash flows subject fluctuations due changes interest rates investments hypothetical 10 adverse decrease interest rates would material adverse effect results operations majority companys investments shortterm treasury bills 10 reduction interest rates would reduce interest income approximately 50000 annually due short period maturity company believes impact 10 reduction interest rates would material effect carrying value securities item 8 item 7a quantitative qualitative disclosures market risk company financial instruments subject market risk although companys earnings cash flows subject fluctuations due changes interest rates investments hypothetical 10 adverse decrease interest rates would material adverse effect results operations majority companys investments shortterm treasury bills 10 reduction interest rates would reduce interest income approximately 50000 annually due short period maturity company believes impact 10 reduction interest rates would material effect carrying value securities companys earnings cash flows medstone international ltd scottish subsidiary subject fluctuations due changes foreign currency rates company believes changes foreign currency exchange rate would material adverse effect results operations majority foreign transactions delineated medstone international ltds functional currency british pound item 8 item 7a quantitative qualitative disclosures market risk company financial instruments subject market risk although companys earnings cash flows subject fluctuations due changes interest rates investments hypothetical 10 adverse decrease interest rates would material adverse effect results operations majority companys investments shortterm treasury bills 10 reduction interest rates would reduce interest income approximately 50000 annually due short period maturity company believes impact 10 reduction interest rates would material effect carrying value availableforsale securities item 8 item 7a quantitative qualitative disclosures market risk company financial instruments subject market risk although company’s earnings cash flows subject fluctuations due changes interest rates investments hypothetical 10 adverse decrease interest rates would material adverse effect results operations majority company’s investments shortterm treasury bills 10 reduction interest rates would reduce interest income approximately 30000 annually due short period maturity company believes impact 10 reduction interest rates would material effect carrying value securities company’s earnings cash flows medstone international ltd scottish subsidiary subject fluctuations due changes foreign currency rates company believes changes foreign currency exchange rate would material adverse effect results operations majority foreign transactions delineated medstone international ltd’s functional currency british pound item 8 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 “exhibits financial statement schedules reports form 8k” item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 8 financial statements supplementary data see item 14 exhibits financial statement schedules reports form 8k item 9 item 15 exhibits financial statement schedules reports form 8k 1 previously filed exhibit number company’s registration statement form s1 securities act 1933 reg 3316340 company’s quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number company’s registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number company’s quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number company’s quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number company’s quarterly report form 10q quarter ended september 30 2002 10 previously filed exhibit number company’s current report form 8k dated june 26 1991 incorporated herein reference 11 previously filed company’s current report form 8k dated february 9 1996 incorporated herein reference company furnish requesting beneficial owner securities copy exhibits upon payment fee equal 20 per exhibit page independent auditor’s report board directors stockholders medstone international inc audited accompanying consolidated balance sheets medstone international inc december 31 2002 2001 related consolidated statements operations stockholders’ equity cash flows years ended audits also included financial statement schedule listed index item 14a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position medstone international inc december 31 2002 2001 results operations cash flows years ended conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements effective january 1 2002 company adopted statement financial accounting standards 142 goodwill intangible assets moss adams llp santa rosa california february 7 2003 report independent auditors board directors stockholders medstone international inc audited accompanying consolidated statements income stockholders’ equity cash flows medstone international inc “company” year ended december 31 2000 audit also included financial statement schedule listed index item 14a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements medstone international inc referred present fairly material respects consolidated results operations cash flows year ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp orange county california february 14 2001 medstone international inc consolidated balance sheets see accompanying notes medstone international inc consolidated statements operations see accompanying notes medstone international inc consolidated statements stockholders’ equity see accompanying notes medstone international inc consolidated statements cash flows see accompanying notes medstone international inc notes consolidated financial statements december 31 2002 1 organization operations company medstone international inc “medstone” “company” designs manufactures markets medstone ststm ststc shockwave therapy systems “system” noninvasive disintegration kidney stones human patients company also generates revenues use systems procedure fees fee service arrangements repairs maintenance company’s customers primarily located united states 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company medstone international ltd scottish subsidiary group united physicians resources 80 owned physicians practice management operation incorporated june 1996 northern nevada lithotripsy associates llc 60 owned nevada limited liability company southern idaho lithotripsy associates llc california limited liability company also 60 owned see note 3 medstone sales corporation 100 owned foreign sales corporation majorityowned subsidiaries consolidated material intercompany accounts transactions eliminated investments less 20 owned affiliates accounted cost method unless company able exercise significant influence affiliates operating financial policies case investments accounted equity method use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenue expenses reporting period actual results could differ estimates cash equivalents company considers highly liquid investments maturity three months less purchased cash equivalents fair value financial instruments fair market value cash equivalents shortterm investments accounts receivable approximate cost due short period time maturity shortterm investments company applies provisions statement financial accounting standards 115 “accounting certain investments debt equity securities” shortterm investments statement management determines appropriate classification securities time purchase reevaluates classification balance sheet date based intent company’s investments classified heldtomaturity carried amortized cost amortized cost market value investments december 31 2002 contractual maturity shown comprehensive income components accumulated comprehensive incomeloss follows concentrations credit risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents may times exceed fdic limits shortterm investments federally insured accounts receivable company’s shortterm investments consist principally commercial paper company sells products primarily hospitals worldwide credit extended based evaluation customer’s financial condition collateral generally required company’s ten largest customers accounted approximately 17 10 accounts receivable december 31 2002 2001 respectively accounts receivable company reviews accounts receivable monthly basis determine collectability amounts review accounts reserve requirement established based amounts due 60 days customers past payment history payment cycles industry geographic region company currently change interest past due amounts based review industry practice similar companies company’s policy actively pursue past due accounts internal resources first utilize collection agencies internal resources successful collection amount last step collection process utilize judicial system company reason believe sufficient financial resources available satisfy debt steps yielded successful collection amounts due management writeoff uncollected amount previously established reserves inventories stated lower cost firstin firstout market consist following building property equipment building property equipment carried cost depreciation amortization computed straightline method following estimated useful lives depreciation expense years ended december 31 2002 2001 2000 1794400 1903685 2274183 respectively goodwill company recorded goodwill resulting excess purchase prices northern nevada southern idaho zenith medical systems ltd fair market value net assets acquired goodwill amortized periods ranging fifteen forty years using straightline method december 31 2001 commencing january 1 2002 company adopted sfas 142 goodwill intangible assets accordingly amortization expense recognized 2002 comprehensive review goodwill company’s two operational segments equipment sales service zenith medical systems lithotripsy services northern nevada lithotripsy southern idaho lithotripsy completed company’s annual review date october 1 2002 valuation segment completed using discounted future cash flow projections cash flows resulted impairment lithotripsy services segment zenith cash flows based losses current year economic impact changes products distributed resulted significant short fall ability zenith’s future profits cover value goodwill valuation date result company recognized charge goodwill impairment 269855 2002 reducing carrying value goodwill related zenith 0 goodwill associated amortization impairment reserves shown reporting segments december 31 2002 follows calculating pro forma information regarding net income loss net income loss per share required sfas 142 effect exclusion goodwill amortization operating results net income taxes 40 years ending december 31 2002 2001 2000 follows thousands except per share information longlived assets longlived assets held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable company’s analysis based comparison carrying amount assets company’s historical actual cash flows estimate future undiscounted cash flows earnings per share basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding diluted net income per share includes effect potential shares outstanding including dilutive stock options warrants using treasury stock method outstanding stock options whose exercise price excess average price company’s stock considered antidilutive excluded per share calculation year ended december 31 2002 since loss exists december 31 2001 diluted earnings per share number presented inclusion common stock equivalents computation would antidilutive earnings per share amounts periods restated conform sfas 128 requirements following table sets forth computation earnings loss per share stock compensation company elected follow accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations accounting employee stock options discussed alternative fair value accounting provided fasb statement 123 accounting stockbased compensation requires use option valuation models developed use valuing employee stock options apb 25 exercise price company’s employee stock options equals market price underlying stock date grant compensation expense recognized calculating pro forma information regarding net income loss net income loss per share required financial accounting standards board statement 123 accounting stockbased compensation fair value estimated date grant using blackscholes option pricing model following weightedaverage assumptions options company’s common stock years ended december 31 2002 2001 2000 respectively risk free interest rates 4 2002 2001 6 2000 dividend yields 0 periods volatility expected market prices company’s common stock 324 394 555 expected life options 55 years periods revenue recognition revenues recognized feeforservice segment company’s operations invoiced customer uses equipment month service provided revenues equipment sales recognized accordance underlying contractual terms sale typically revenue recognition requires transfer title upon shipment customer acceptance receipt specified payments performance significant contractual obligations service maintenance contract revenues deferred amortized terms related contracts advertising company expenses advertising costs including promotional literature brochures trade shows incurred advertising expense 53000 58000 32000 years ended december 31 2002 2001 2000 respectively shipping handling costs shipping handling costs included component cost equipment sales business segments geographic information company applies provisions statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards related disclosures products services geographic areas major customers company operates two business segments equipment sales fees procedures maintenance management fees procedures maintenance management segment represents recurring revenue procedure fees fee service arrangements use maintenance lithotripter equipment accounting policies segments described summary significant accounting policies except certain expenses amortization certain intangibles certain corporate expenses allocated segments asset categories used allocation segment reporting include net accounts receivable net inventory net property equipment net goodwill selected financial information company’s reportable segments years ended december 31 2002 2001 2000 follows thousands selected financial information company’s operations geographic segment follows thousands recently issued accounting pronouncements financial accounting standards board fasb issued following accounting pronouncements statement financial accounting standards sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections statement rescinds fasb statement 4 reporting gains losses extinguishment debt amendment statement fasb statement 64 extinguishments debt made satisfy sinkingfund requirements statement also rescinds fasb statement 44 accounting intangible assets motor carriers statement amends fasb statement 13 accounting leases eliminate inconsistency required accounting saleleaseback transactions required accounting certain lease modifications economic effects similar saleleaseback transactions statement also amends existing authoritative pronouncements make various technical corrections clarify meanings describe applicability changed conditions adoption sfas 145 expected material effect company’s consolidated financial statements sfas 146 accounting costs associated exit disposal activities statement addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” provisions statement effective exit disposal activities initiated december 31 2002 adoption sfas 146 expected material effect company’s consolidated financial statements sfas 148 accounting stockbased compensation statement amends fasb statement 123 accounting stockbased compensation provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition statement amends disclosure requirements statement 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results statement permits two additional transition methods entities adopt preferable method accounting stockbased employee compensation methods avoid rampup effect arising prospective application fair value based method addition address concerns raised constituents lack comparability caused multiple transition methods statement permit use original statement 123 prospective method transition changes fair value based method made fiscal years beginning december 15 2003 company adopted disclosure requirements statement continues follow intrinsic value method account stockbased employee compensation fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee also significantly expands disclosures guarantors must include financial statements interpretation’s accounting provisions effective prospectively guarantees issued modified december 31 2002 disclosure requirements generally apply guarantees must included financial statements interim annual periods ending december 15 2002 adoption interpretation 45 expected material effect company’s consolidated financial statements fasb interpretation 46 consolidation variable interest entities addresses consolidation business enterprises variable interest entities 1 equity investment insufficient entity finance activities without additional financial support interests absorb entity’s expected losses 2 equity investors lack one essential characteristics controlling interest characteristics include ability make decisions entity’s activities voting rights similar rights obligation absorb entity’s expected losses makes possible entity finance activities right receive entity’s expected residual returns compensation risk absorbing expected losses interpretation effective company later third quarter 2003 currently expected material effect company’s consolidated financial statements 3 acquisitions investments unconsolidated affiliates equity investment arcoma ab september 2001 company purchased common stock representing 25 interest arcoma ab “arcoma” 1 million cash arcoma based vaxjo sweden designer manufacturer medical imaging tablesdevices arcoma supplier several types tables company currently markets including uropro 2000 table introduced 2000 company continue expand distribution arcomadesigned devices united states future years investment arcoma accounted equity method investment net company’s share net losses period september 1 2001 december 31 2002 121000 included investment unconsolidated subsidiaries equity investment medicreditcom inc april 2000 company purchased common stock representing 46 interest medicreditcom inc “medicredit” 1 million cash medicredit californiabased company funds services patient accounts finance elective surgeries cosmetic cash paying sector healthcare investment medicredit accounted equity method based company’s review equity balance cash flows medicredit december 31 2001 determined reserve 953011 remaining equity investment balance recorded investment carrying value carrying value date 0 along cash investments medicredit company also provides medicredit subordinated line credit 2 million prime interest rate 475 december 31 2001 interest payments due monthly principal due maturity april 20 2003 december 31 2001 2 million advanced company reviewed relation medicredit’s current cash flows impairment reserve 2 million established putting carrying value date 0 december 2002 company completed sale 46 interest 2 million note private partnership 1 million cash 1 million recognized gain included income expense year ended december 31 2002 company longer financial interest medicredit investment k biotech 1998 company made aware opportunity invest developmental biotech drug company catering members international centre genetic engineering biotechnology “icgeb” united nations sponsored institute k biotech purchased license agreements formulas developed icgeb commercialization purposes indian subcontinent primary market company’s investment k biotech preferred stock 325000 representing 21 ownership interest 2001 company recognized share k biotech’s losses investment reserve totaling 325000 reducing carrying value 0 investment k biotech accounted equity method company ability exercise significant influence k biotech included assets k biotech continually seeking additional funding international sources finance required investment plant equipment unaudited pro forma consolidated results giving effect businesses acquired fiscal 1999 would materially different reported amounts 1999 1998 due immateriality acquisitions genstar therapeutics corporation genstar therapeutics corp formerly urogen corp subsidiary company early 1996 time company spun subsidiary separate company distributed stock genstar stockholders except 100000 shares company retained 2000 company sold 5000 shares genstar gain approximately 28000 still holds 95000 shares genstar common stock book value 0 december 31 2002 market value retained genstar common stock approximately 30400 december 31 2002 february 4 2003 genstar vascular genetics private biotech company merged new entity named corautus genetics inc 4 income taxes company provides income taxes liability method accordingly deferred income tax assets liabilities computed differences financial statement tax bases assets liabilities result taxable deductible amounts future based enacted tax laws rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amounts likely realized provision benefit income taxes attributable income continuing operations consists following reconciliation provision benefit income taxes federal statutory rate compared company’s effective tax rate tax effect temporary differences give rise significant portions deferred tax assets deferred tax liabilities follows 5 stock options december 31 2002 53000 options shares common stock granted remain outstanding company’s 1989 stock incentive plan options expired unexercised january 7 2003 may 1997 company’s stockholders approved 1997 stock incentive plan provides granting variety stockrelated securities including shares common stock options stock appreciation rights employees selected individuals plan allows issuance 800000 shares increases january 1 plan effect number shares equal one percent total number outstanding shares common stock date december 31 2001 number shares authorized plan 1035428 855018 options shares common stock granted outstanding plan effective august 13 1998 company repriced outstanding options granted plans exercise prices exceeding closing market value stock date accordingly exercise price options reduced 6375 per share summary company’s stock option plans end 2002 2001 2000 changes years presented following table summarizes information stock options outstanding december 31 2002 purposes pro forma disclosures estimated fair value options amortized expense options’ vesting period company’s proforma information years ended december 31 2002 2001 2000 follows thousands except per share information pro forma amounts give effect options granted prior january 1 1995 6 stock repurchase plan since 1995 company numerous stock repurchase programs latest repurchase program completed 2002 company repurchase plan effect december 31 2002 listed summary activity company’s repurchase plans amounts recorded treasury stock 7 commitments company occupied current facility since march 1994 current operating lease runs november 2005 average monthly rental expense 19449 term lease slightly different cash payments due previously deferred rent lease option one fiveyear extension rate negotiated based current market rates united physicians resources occupied present facility since 1998 february 2002 extended lease september 2005 average monthly rent 4178 company’s scottish subsidiary occupied current facility since april 1999 entered sixtymonth lease monthly rent 2980 october 2000 future minimum cash lease payments operating leases follows total net rent expense operating leases years ended december 31 2002 2001 2000 319000 257000 204000 respectively terms employment agreement company’s ceo terminated without “good cause” change control occurs severance payment 750000 due payable addition amount consulting contract totaling 594000 payable monthly installments three years also due company 8 contingencies company involved legal proceedings incidental normal conduct business company obtained various liability insurance policies providing coverage general liability product liability claims management believe resolution current proceedings material financial impact company consolidated financial position results operations cash flows 9 related party transactions k biotech company’s original investment k biotech 325000 represents 21 interest 2001 company recognized share k biotech’s losses investment reserve totaling 325000 reducing carrying value 0 one member board directors company also shareholder k biotech inc arcoma ab september 2001 company purchased common stock representing 25 interest arcoma ab “arcoma” 1 million cash arcoma based vaxjo sweden designer manufacturer medical imaging tablesdevices arcoma supplier several types tables company currently markets including uropro table introduced 2000 company’s ceo also director arcoma company continue expand distribution arcomadesigned devices united states future years investment arcoma accounted equity method investment net company’s share net losses period september 1 2001 december 31 2002 266000 included investment unconsolidated subsidiaries 10 employee benefit plan january 1990 company established defined contribution profit sharing 401k plan eligible employees plan provides deferral 15 employee’s qualifying compensation section 401k internal revenue code contributions profit sharing portion company may made plan discretion board directors 2001 company’s board directors elected change employee match tiered system 25 dollar depending years service employer match maximum ranges 2000 11000 per year 2002 2001 2000 company’s contribution totaled 123019 85148 58382 respectively 11 major customers foreign sales three years ended december 31 2002 single customer accounted 10 total revenues one year company derived 6 8 7 total revenues sales foreign customers years ending december 31 2002 2001 2000 respectively 12 selected quarterly financial data unaudited tables set forth selected quarterly financial information 2002 2001 thousands except per share amounts 4th quarter 2002 company experienced net losses compared profit first three quarters year due recognition additional reserves inventory obsolescence net income taxes 93 also recognized without benefit income taxes goodwill impairment charges 255 company’s portion losses unconsolidated affiliates 145 quarter 2001 company experienced net losses compared profit first three quarters year due recognition impairment reserves charge net income taxes approximately 1840 reserves included charges medicredit investment related subordinated loan 1740 k biotech investment 100 medstone international inc schedule ii valuation qualifying accounts writeoff inventories b writeoff bad debts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 22 2002 signature title david v radlinski chairman board chief executive officer director principal executive officer david v radlinski mark selawski chief financial officer principal financial accounting officer mark selawski michael c tibbitts director michael c tibbitts frank r pope director frank r pope david reed director david reed jack olshansky director jack olshansky medstone international inc certification david v radlinski certify 1 reviewed annual report form 10k medstone international inc registrant 2 based knowledge annual report contain untrue statement material factor omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 21 2003 david v radlinski david v radlinski chairman chief executive officer medstone international inc certification mark selawski certify 1 reviewed annual report form 10k medstone international inc registrant 2 based knowledge annual report contain untrue statement material factor omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 21 2003 mark selawski mark selawski chief financial officer exhibit index 1 previously filed exhibit number company’s registration statement form s1 securities act 1933 reg 3316340 company’s quarterly report form 10q quarter ended june 30 1998 incorporated herein reference 2 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1999 incorporated herein reference 3 previously filed exhibit number company’s registration statement form s1 securities act 1933 reg 3316340 incorporated herein reference 4 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 5 compensatory plan arrangement 6 previously filed exhibit number company’s quarterly report form 10q quarter ended june 30 1997 7 previously filed exhibit number company’s quarterly report form 10q quarter ended september 30 1998 8 previously filed exhibit number company’s quarterly report form 10q quarter ended march 31 2000 9 previously filed exhibit number company’s quarterly report form 10q quarter ended september 30 2002 10 previously filed exhibit number company’s current report form 8k dated june 26 1991 incorporated herein reference 11 previously filed company’s current report form 8k dated february 9 1996 incorporated herein reference