<PAGE>
Physio-Control International Corporation
11811 Willows Road Northeast
Post Office Box 97006
Redmond, WA 98073-9706 USA
Telephone: 206.867.4000
Fax: 206.867.4227
LIFESAVING TOOLS FOR LIFESAVING TEAMS
PHYSIO-CONTROL INTERNATIONAL CORPORATION
11811 Willows Road Northeast
Redmond, Washington 98052
Telephone: (206) 867-4000
April 1, 1997
Dear Physio-Control Stockholder:
You are cordially invited to attend the 1996 Annual Meeting of
Stockholders of Physio-Control International Corporation, which is currently
scheduled to be held on Thursday, May 1, 1997, at 10:00 a.m. at the Hyatt
Regency Hotel, 900 Bellevue Way Northeast, Bellevue, Washington.
At the meeting, we will report to you on current business conditions and
recent developments at Physio-Control. Members of the Board of Directors and
our executive officers will be present to discuss the affairs of
Physio-Control with you.
The Company has enclosed a copy of its 1996 Annual Report for the fiscal
year ended December 31, 1996 with this letter, notice of annual meeting of
stockholders and proxy statement. If you would like another copy of the 1996
Annual Report, please contact Joseph J. Caffarelli, Executive Vice President
and Chief Financial Officer, at Physio-Control, and one will be sent to you.
It is important that your shares be represented and voted at the Annual
Meeting, regardless of the size of your holdings. Accordingly, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed envelope to ensure your shares will be represented. If you do attend
the Annual Meeting, you may, of course, withdraw your proxy should you wish
to vote in person.
On behalf of the Board of Directors and management of Physio-Control, I
would like to thank you for choosing to invest in our Company. We are very
excited about the future opportunities of the Company and are looking forward
to the annual meeting after the successful 1996 year of record growth.
Sincerely,
/s/ RICHARD O. MARTIN
Richard O. Martin
Chairman of the Board and Chief Executive Officer
<PAGE> PHYSIO-CONTROL INTERNATIONAL CORPORATION
11811 Willows Road Northeast
Redmond, Washington 98052
___________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 1, 1997
___________
The Annual Meeting of Stockholders of Physio-Control International
Corporation, a Delaware corporation (the "Company"), is currently scheduled
to be held on Thursday, May 1, 1997, at 10:00 a.m. (the "Annual Meeting"), at
the Hyatt Regency Hotel, 900 Bellevue Way Northeast, Bellevue, Washington,
for the purpose of:
(1) Electing two (2) Directors to serve until the annual meeting of
stockholders in 2000 and until their successors are duly elected and
qualified;
(2) Authorizing changing the Company's and its principal operating
subsidiary, Physio-Control Corporation's, state of incorporation
from Delaware to Washington;
(3) Adoption of an amended and restated 1997 Stock and Incentive Plan;
(4) Approving the appointment of the independent certified public
accountants of the Company for the fiscal year ending December 31,
1997; and
(5) Transacting such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 31, 1997,
as the record date for the determination of stockholders entitled to notice
of, and to vote at, the Annual Meeting or any adjournment or postponement
thereof.
By Order of the Board of Directors
/s/ V. MARC DROPPERT
V. Marc Droppert
Secretary
April 1, 1997
The Company's 1996 Annual Report for the fiscal year ended December 31,
1996 is enclosed. The 1996 Annual Report contains financial and other
information about the Company, but is not incorporated into the Proxy
Statement and is not deemed to be a part of the proxy soliciting material.
- -------------------------------------------------------------------------------
Even if you expect to attend the Annual Meeting, please promptly complete,
sign, date and mail the enclosed proxy card. A self-addressed envelope is
enclosed for your convenience. No postage is required if mailed in the United
States. Stockholders who attend the Annual Meeting may revoke their proxies
and vote in person if they so desire.
- -------------------------------------------------------------------------------
<PAGE>
PHYSIO-CONTROL INTERNATIONAL CORPORATION
11811 Willows Road Northeast
Redmond, Washington 98052
--------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
ON MAY 1, 1997
--------
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Physio-Control International Corporation, a Delaware
corporation (the "Company"), of proxies to be used at the annual meeting of
stockholders of the Company currently scheduled to be held on May 1, 1997 (the
"Annual Meeting"). This Proxy Statement and the related proxy card are being
mailed to holders of the Company's common stock, par value $.01 per share (the
"Common Stock"), commencing on or about April 1, 1997.
If the enclosed proxy card is executed and returned, the shares represented
by it will be voted as directed on all matters properly coming before the Annual
Meeting for a vote. Returning your completed proxy will not prevent you from
voting in person at the Annual Meeting should you be present and desire to do
so. In addition, the proxy may be revoked at any time prior to its exercise
either by giving written notice to the Company or by submission of a later-dated
proxy.
Stockholders of record of the Company's Common Stock at the close of
business on March 31, 1997 will be entitled to vote at the Annual Meeting. On
March 17, 1997, the Company had outstanding approximately 17,154,441 shares of
Common Stock. A list of the Company's stockholders will be open to the
examination of any stockholders, for any purpose germane to the meeting, at the
Company's headquarters for a period of ten days prior to the meeting. Each share
of Common Stock entitles the holder thereof to one vote on all matters submitted
to stockholders. At the Annual Meeting, inspectors of election shall determine
the presence of a quorum and shall tabulate the results of the stockholders'
voting. The holders of a majority of the total number of outstanding shares of
Common Stock entitled to vote must be present in person or by proxy to
constitute the necessary quorum for any business to be transacted at the Annual
Meeting. In accordance with the General Corporation Law of the State of Delaware
(the "DGCL"), properly executed proxies marked "abstain" as well as proxies held
in street name by brokers that are not voted on all proposals to come before the
Annual Meeting ("broker non-votes"), will be considered "present" for the
purposes of determining whether a quorum has been achieved at the Annual
Meeting.
The two nominees for Director receiving the greatest number of votes cast at
the Annual Meeting in person or by proxy shall be elected. Consequently, any
shares of Common Stock present in person or by proxy at the Annual Meeting but
not voted for any reason have no impact in the election of Directors, except to
the extent that the failure to vote for an individual may result in another
individual receiving a larger number of votes. All other matters to be
considered at the Annual Meeting require for approval the favorable vote of a
majority of the shares entitled to vote at the meeting either in person or by
proxy. Stockholders have no right to cumulative voting as to any matter,
including the election of Directors. If any proposal at the Annual Meeting must
receive a specific percentage of favorable votes for approval, abstentions in
respect of such proposal are treated as present and entitled to vote under the
DGCL and therefore have the effect of a vote against such proposal. Broker
non-votes in respect of any proposal are not counted for purposes of determining
whether such proposal has received the requisite approval under the DGCL.
1
<PAGE>
The shares represented by all valid proxies received will be voted in the
manner specified on the proxies. Where specific choices are not indicated on
a valid proxy, the shares represented by such proxies received will be voted:
(i) for the nominees for Director named in this Proxy Statement; (ii) for
authorization of a change in the Company's and its principal operating
subsidiary, Physio-Control Corporation's state of incorporation from Delaware
to Washington; (iii) for approval of the Company's amended and restated 1997
Stock and Incentive Plan; (iv) for approval of the appointment of Price
Waterhouse LLP as independent certified public accountants; and (v) in
accordance with the best judgment of the persons named in the enclosed proxy,
or their substitutes, for any other matters which properly come before the
Annual Meeting or any adjournment or postponement thereof.
PROPOSAL 1.
ELECTION OF DIRECTORS
The Board of Directors is currently comprised of seven Directors divided
into three classes. The term of each class expires in different years. The Board
of Directors has nominated and recommends the election for the class of
Directors up for election at the Annual Meeting ("Class II") the two nominees
set forth below. Each nominee currently serves as Director of the Company. If
any nominee becomes unavailable for any reason or should a vacancy occur before
the election (which events are not anticipated), the persons named on the
enclosed proxy card may substitute another person as a nominee or may add or
reduce the number of nominees to such extent as they shall deem advisable. At
the Annual Meeting, two Directors are to be elected as members of Class II to
serve until the annual meeting in 2000 and until their successors are elected
and qualified or until their earlier removal or resignation. At present, other
than reimbursement for reasonable travel expenses incurred in attending Board of
Directors' meetings, Directors first elected on or after January 30, 1996 are
paid an annual retainer of $10,000 per annum. The Directors do not receive any
additional compensation for committee participation.
Information regarding the nominees for Director of the Company is set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------
<S> <C> <C>
John J. O'Malley (1) 49 Director
Robert A. Sandler (2) 53 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
2
<PAGE>
Information regarding Directors of the Company not subject to reelection
at the Annual Meeting is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- ----------------
<S> <C> <C>
Ronald W. Dollens (2) 50 Director
Robert C. Gay (1) 45 Director
Robert M. Guezuraga 47 President, Chief Operating Officer and Director
Richard O. Martin 57 Chairman of the Board, Chief Executive Officer and
Director
Stephen G. Pagliuca (1)(2) 42 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
There are no family relationships between or among any Directors or
executive officers of the Company.
Director Nominees (Class II Directors)
John J. O'Malley has been a Director of the Company since September 1994.
Mr. O'Malley has been an Executive Vice President of Bain Capital, Inc. since
1993. From 1991 to 1993, Mr. O'Malley was President and Chief Executive Officer
of Robertson Ceco, an international construction products and engineering
company. From 1986 to 1991, he was Executive Vice President of HMK Group Inc., a
diversified manufacturing and services company. Mr. O'Malley is a director of GS
Technologies Corporation, Medical Specialties, Inc. and Wesley-Jessen
Corporation.
Robert A. Sandler has been a Director of the Company since March 1996. Mr.
Sandler has been a partner of the law firm of Sandler, Rolnick & Morse since
1971. In addition, from 1985 to 1994, Mr. Sandler served as an Executive Vice
President, General Counsel and Secretary of Siemens--Pacesetter Systems, Inc., a
pacemaker and medical products manufacturer, and from 1981 to 1985, as Vice
President and General Counsel to Pacesetter Systems, Inc. Mr. Sandler has been a
director of various non-profit organizations.
Class I Directors (term expiring at the 1999 annual meeting)
Robert C. Gay has been a Director of the Company since its incorporation. He
has been a Managing Director of Bain Capital, Inc. since 1993, and has been a
general partner of Bain Venture Capital since February 1989. Mr. Gay serves as a
director of several other companies including GS Technologies Corporation,
Alliance Entertainment Corp., GT Bicycles, Inc., Sportcraft, Bocchi, and
American Pad & Paper Company.
Robert M. Guezuraga has been President and Chief Operating Officer of the
Company since February 1997 and a Director of the Company since September 1994.
Prior to that appointment Mr. Guezuraga served as Executive Vice President and
Chief Operating Officer of the Company since September 1994. From 1989 to
September 1994, Mr. Guezuraga was the President, Chief Executive Officer and a
director of Positron Corporation, a medical device company specializing in
medical diagnostic imaging equipment. Mr. Guezuraga was previously employed by
General Electric Company in various managerial positions in numerous operating
divisions, including its medical systems business division. Mr. Guezuraga
continues to serve as a director of Positron Corporation.
3
<PAGE>
Class III Directors (term expiring at the 1998 annual meeting)
Stephen G. Pagliuca has been a Director of the Company since its
incorporation and served as Chairman of the Board of the Company from September
1994 to February 1997. Mr. Pagliuca has been a Managing Director of Bain
Capital, Inc. since May 1993 and a general partner of Bain Venture Capital since
1989, where he founded Information Partners. Prior to joining Bain Venture
Capital, Mr. Pagliuca was a partner at Bain & Company, where he provided
strategic and operational advice for clients in the health care and information
industries. He also worked as a senior accountant and international tax
specialist for Peat Marwick Mitchell & Company in The Netherlands. Mr. Pagliuca
serves as Chairman of the Board of Wesley-Jessen Corporation. He also serves as
a director of several other companies including Dade International, Gartner
Group, Clarity Telecom, and, VIVRA.
Richard O. Martin has been Chairman of the Board and Chief Executive
Officer since February 1997 and a Director of the Company since July 1994.
Prior to that appointment, Dr. Martin served as President and Chief Executive
Officer of the Company from July 1994 to February 1997, and prior thereto
served as President of the Company's predecessor, a wholly owned subsidiary
of Eli Lilly and Company ("Lilly"), since April 1991. Prior to being named
President of the Company's predecessor and since November 1989, Dr. Martin
was a Vice President of SULZERmedica, Inc., a medical device company
specializing in implantable products. From January 1988 to November 1989, Dr.
Martin was the President and Chief Operating Officer of Positron Corporation,
a medical device company specializing in medical diagnostic imaging
equipment. Dr. Martin also serves as a director of Encore Orthopedics, Inc.,
a designer and manufacturer of implantable orthopedic devices, of Maxxim
Medical Inc., a developer, manufacturer and marketer of a diversified range
of specialty medical products, and of SeaMED Corporation, a designer and
manufacturer of electromechanical products.
Ronald W. Dollens has been a Director of the Company since March 1996. Mr.
Dollens is President, Chief Executive Officer and a director of Guidant
Corporation ("Guidant"), a manufacturer of cardiovascular medical devices, and
has held these positions since Guidant was formed in June 1994. Prior thereto,
Mr. Dollens served as President of the Medical Devices and Diagnostic ("MDD")
Division of Lilly. Mr. Dollens previously served as Vice President of the MDD
Division of Lilly and Chairman of Advanced Cardiovascular Systems, Inc. ("ACS"),
a former subsidiary of Lilly and now part of Guidant, since 1990. From 1988 to
1990, he held the position of President and Chief Executive Officer of ACS. Mr.
Dollens joined Lilly in 1972. Mr. Dollens currently serves on the board of the
Health Industry Manufacturers Association, Eiteljorg Museum Board and the
Indiana State Symphony Society Board. He is also the president of the Indiana
Health Industry Forum.
Committees and Directors' Meetings
The Board of Directors has two standing committees: the Audit Committee and
the Compensation Committee.
The Audit Committee is composed of three directors, none of whom is a
current employee of the Company, and is authorized to make recommendations to
the Board of Directors regarding the independent auditors to be nominated for
election by the stockholders and to review the independence of such auditors,
approve the scope of the annual audit activities of the independent auditors,
approve the audit fee payable to the independent auditors and review such audit
results. The Audit Committee conducted its business during meetings of the Board
of Directors and did not conduct any separate meetings in 1996.
4
<PAGE>
The Compensation Committee is composed of three directors, none of whom is a
current employee of the Company, and is authorized to provide a general review
of the Company's compensation and benefit plans to ensure that they meet
corporate objectives. In addition, the Compensation Committee reviews and
approves the Chief Executive Officer's recommendations on (i) compensation of
all officers of the Company and (ii) adopting and changing major Company
compensation policies and practices. The Compensation Committee held three
meetings in 1996.
The Board of Directors held five meetings during the Company's preceding
fiscal year. All of the Directors attended 75% or more of the total number of
meetings of the Board of Directors during their terms other than Mr. Gay, who,
because of schedule conflicts, missed three meetings.
The Company does not have a nominating committee. The entire Board of
Directors currently is responsible for filling vacancies on the Board as they
occur and recommending candidates for election as Directors at the annual
meetings of stockholders. The Board will consider individuals recommended for
nominations by stockholders of the Company. Such recommendations should be
submitted in writing to the Chairman of the Board, who will submit them to the
entire Board for its consideration. The recommendation must be accompanied by
the consent of the individual nominated to be elected and to serve.
In addition, the Amended and Restated By-Laws of the Company (the
"By-Laws") require that advance notice of nominations for the election of
Directors to be made by a stockholder (as distinguished from a stockholder's
recommendation to the Board) be given to the Secretary of the Company no
later than 60 days and no more than 90 days before an annual meeting of
stockholders, provided, that in the event that the date of the annual meeting
is changed from 30 days from the first anniversary date of the preceding
year's annual meeting, notice by stockholders must be received no later than
the close of business on the tenth (10th) day following the earlier of the
date on which this notice was mailed or public announcement of the meeting
was made. Such notice must include (i) as to each person whom the stockholder
proposes to nominate for election as a Director at such meeting all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected); (ii) as to the stockholder giving the notice, (A) the
name and address, as they appear on the Company's books, of such stockholder
and (B) the class and number of shares of the Company which are beneficially
owned by such stockholder and also which are owned of record by such
stockholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Company which are beneficially owned by
such person.
Certain Relationships and Related Transactions
The Company has entered into agreements to provide indemnification for its
Directors and executive officers in addition to the indemnification provided for
in the Company's Restated Certificate of Incorporation and By-Laws.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's officers, Directors
and persons who beneficially own more than ten percent of the Company's Common
Stock to file reports of securities ownership and changes in such ownership with
the Securities and Exchange Commission ("SEC"). Officers, Directors and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file. To
the Company's knowledge, based solely on copies of such reports furnished to the
Company, all of its directors and executive officers made any required filings
on a timely basis.
5
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Except as otherwise noted, the following table sets forth certain
information as of March 1, 1997 as to the security ownership of those persons
owning of record or known to the Company to be the beneficial owner of more
than five percent of the voting securities of the Company and the security
ownership of equity securities of the Company by (i) each of the Directors of
the Company, (ii) the Director nominees, (iii) each of the executive officers
named in the Summary Compensation Table, and (iv) all Directors and executive
officers as a group. All information with respect to beneficial ownership has
been furnished by the respective Director, Director nominee, executive
officer or five percent beneficial owner, as the case may be. Unless
otherwise indicated, the persons named below have sole voting and investment
power with respect to the number of shares set forth opposite their names.
Beneficial ownership of the Common Stock has been determined for this purpose
in accordance with the applicable rules and regulations promulgated under the
Exchange Act.
<TABLE>
<CAPTION>
Common Stock
-----------------------
<S> <C> <C>
Number of Percent
Directors, Officers and 5% Stockholders Shares of Class
--------------------------------------- --------- --------
The Capital Group Companies, Inc. (1) 1,670,700 9.7%
333 South Hope Street
Los Angeles, California 90071
RCM Capital Management (2) 1,357,300 7.9%
Four Embarcadero Center, Suite 2900
San Francisco, California 94111
J & W Seligman & Co. Incorporated (3) 1,305,438 7.6%
100 Park Avenue
New York, New York 10017
Denver Investment Advisors LLC (4) 1,074,700 6.3%
1225 17th St., 26th Floor
Denver, Colorado 80202
American Express Financial Advisors, Inc. (5) 1,055,700 6.2%
IDS Tower 10
Minneapolis, MN 55440
Richard O. Martin (6)........................ 460,956 2.7%
Robert M. Guezuraga(7)....................... 49,133 *
Joseph J. Caffarelli (8)..................... 19,878 *
V. Marc Droppert (9)......................... 86,362 *
Stephen G. Pagliuca (10)..................... 558,633 3.3%
Robert C. Gay (10)........................... 558,633 3.3%
John J. O'Malley (10)........................ 558,633 3.3%
Robert A. Sandler............................
Ronald W. Dollens............................
All Directors and executive officers
as a group (9 persons) (11)................. 1,174,962 6.8%
</TABLE>
- ------------------------
* Less than one percent.
(1) The Capital Group Companies, Inc. ("Capital Group") and one of its
operating subsidiaries, Capital Guardian Trust Company ("Capital Trust"),
each reported on a Schedule 13G filed with the SEC, as of December 31,
1996, sole voting power with respect to 772,900 shares of
6
<PAGE>
Common Stock. The Capital Group reported sole dispositive power with
respect to 1,670,700 shares of Common Stock and the Capital Trust reported
sole dispositive power with respect to 920,700 shares of Common Stock.
(2) RCM Capital Management ("RCM Capital"), a registered investment
advisor; reported on a Schedule 13G filed with the SEC, as of December
31, 1996, sole voting power with respect to 1,052,300 shares of Common
Stock, sole dispositive power with respect to 1,282,300 shares of
Common Stock, and shared dispositive power with respect to 75,000
shares of Common Stock. RCM Limited L.P. ("RCM Limited"), the general
partner of RCM Capital, and RCM General Corporation, the general
partner of RCM Limmited, also reported sole voting and dispositive
power with respect to these shares.
(3) J & W Seligman & Co., Inc. reported on a Schedule 13G filed with the SEC,
as of December 31, 1996, sole voting power with respect to 1,055,600 shares
of Common Stock, and sole dispositive power with respect to 1,305,438
shares of Common Stock.
(4) Denver Investment Advisors LLC reported on a Schedule 13G filed with
the SEC, as of December 31, 1996, sole voting power with respect to
707,900 shares of Common Stock, sole dispositive power with respect
to 1,073,100 shares of Common Stock, and shared dispositive power with
respect to 1,600 shares of Common Stock.
(5) American Express Company and American Express Financial Corporation,
reported on a Schedule 13G filed with the SEC as of December 31, 1996,
shared voting power with respect to 247,150 shares of Common Stock
and share dispositive power with respect to 1,055,700 shares of Common
Stock.
(6) Includes 311,536 shares subject to stock options which are currently
exercisable or exercisable prior to May 1, 1997.
(7) Includes 49,133 shares subject to stock options which are currently
exercisable or exercisable prior to May 1, 1997.
(8) Includes 18,000 shares subject to stock options which are currently
exercisable or exercisable prior to May 1, 1997.
(9) Includes 85,053 shares subject to stock options which are currently
exercisable or exercisable prior to May 1, 1997.
(10) Includes 233,136 shares held by Bain Capital Fund IV, L.P. ("Fund IV"),
266,803 shares held by Bain Capital Fund IV-B, L.P. ("Fund IV-B"),
36,709 shares held by BCIP Associates and 21,985 shares held by BCIP
Trust Associates, L.P. (collectively, the "Bain Capital Entities").
Messrs. Pagliuca, Gay and O'Malley, who serve as Directors of the
Company, are officers of Bain, which is the general partner of Fund
IV and Fund IV-B. Messrs. Pagliuca, Gay and O'Malley disclaim
beneficial ownership of the shares of Common Stock owned by the Bain
Capital Entities and in which each has no pecuniary interest.
(11) Includes 463,722 shares subject to stock options held by executive
officers of the Company that are currently exercisable.
7
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The table below provides information relating to compensation for the
Company's last three fiscal years for the Chief Executive Officer and the
last two years for the other executive officers of the Company who received
compensation in excess of $100,000 in those years (collectively, the "Named
Executive Officers"). The amounts shown include compensation for services in all
capacities that were provided to the Company and its subsidiaries.
<TABLE>
<CAPTION> LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) COMPENSATION(2)
- ----------------------------------- --------- ---------- ------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Richard O. Martin 1996 $250,008 $141,875(3) $2,885(4) 130,000 $5,784
Chairman of the Board and 1995 $250,020 $342,500(5) $6,732(4) 77,107 $6,300
Chief Executive Officer 1994 $242,518 $99,344(6) $13,578(4) 385,535(7) $6,622
Robert M. Guezuraga 1996 $200,004 $113,500(3) 130,000 $3,468
President and Chief Operating 1995 $200,004 $187,600(8) -- 23,133 $3,468
Officer
Joseph J. Caffarelli 1996 $156,000 $70,824(3) 90,000 $3,716
Executive Vice President and 1995 $156,000 $137,062(9) -- 7,711 $3,167
Chief Financial Officer
V. Marc Droppert 1996 $145,008 $57,601(3) 70,000 $3,010
Executive Vice President Law. 1995 $144,996 $81,606(8) -- 57,118 $1,940
Human Resources and Corporate
Affairs and Secretary
</TABLE>
- ------------------------
(1) The aggregate amount of perquisites and other personal benefits,securities
or property, given to each Named Executive Officer, valued on the basis of
the aggregate incremental cost to the Company, was less than either
$50,000 or 10% of the total of annual salary and bonus for that
executive officer during each of the periods presented.
(2) Includes matching contributions made by the Company under its 401(k) plan
and compensation due to life insurance provided by the Company.
(3) Represents a bonus received in early 1997 as a result of the operating
performance of the Company in 1996.
(4) Reflects cash paid by the Company to Dr. Martin for accrued vacation not
used.
(5) Includes (a) a $234,500 bonus received by Dr. Martin in early 1996 as a
result of the operating performance of the Company in 1995 and (b) $108,000
paid by Lilly to Dr. Martin for remaining as President and Chief Executive
Officer of the Company for a specified period of time following Lilly's sale
of the Company in July 1994.
(6) Includes (a) $54,091 received by Dr. Martin from Lilly as a result of the
Company meeting certain performance targets in 1994, (b) $9,253 received by
Dr. Martin from the Company as part of the Company's Team Member Bonus
Program and (c) $36,000 received by Dr. Martin from Lilly as a result of a
bonus based on the purchase price received by Lilly in its sale of the
Company.
(7) Includes options relating to 77,107 shares of Common Stock that were
canceled and reissued in October 1995.
(8) Represents a bonus received in early 1996 as a result of the operating
performance of the Company in 1995.
(9) Includes a $117,062 bonus received by Mr. Caffarelli in early 1996 as a
result of the operating performance of the Company in 1995 and a $20,000
signing bonus.
8
<PAGE>
STOCK OPTION GRANTS
The following table provides information relating to the stock options
awarded to the Named Executive Officers during 1996 and 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT
ASSUMED ANNUAL RATES OF
NUMBER OF STOCK PRICE APPRECIATION
SECURITIES FOR
UNDERLYING PERCENT OF TOTAL OPTION TERM(1)
OPTIONS OPTIONS GRANTED EXERCISE EXPIRATION ------------------------
NAME GRANTED(#) IN FISCAL YEAR PRICE($) DATES(2) 5%($) 10%($)
- ---------------------------- ----------- ----------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard O. Martin........... 90,000 14.47% $15.38 8/5/06 $457,201 $1,128,725
40,000 $20.50 1/30/06 $826,346 $2,069,948
Robert. M. Guezuraga........ 90,000 14.47% $15.38 8/5/06 $457,201 $1,128,725
40,000 $20.50 1/30/06 $826,346 $2,069,948
Joseph J. Caffarelli........ 60,000 10.02% $15.38 8/5/06 $342,901 $846,544
30,000 $20.50 1/30/06 $550,897 $1,379,965
V. Marc Droppert............ 50,000 7.79% $15.38 8/5/06 $228,601 $564,362
20,000 $20.50 1/30/06 $459,081 $1,149,971
</TABLE>
- ----------------------------
AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
The following table sets forth information with respect to the Named
Executive Officers concerning the stock options held as of March 1, 1997 and
stock options were exercised in 1996 and first quarter, 1997.
AGGREGATED OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES VALUE YEAR-END(#)(3) AT FISCAL YEAR-END ($)(4)
ACQUIRED ON REALIZED --------------------------- ----------------------------
NAME EXERCISE(1) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISALE UNEXERCISABLE
- ------ ----------- --------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard O. Martin 100,000 $1,616,799 311,536 104,000 $4,590,217 $278,640
Robert M. Guezuraga 92,529 $1,802,513 49,133 104,000 $224,188 $278,640
Joseph J. Caffarelli 38,555 $629,796 18,000 72,000 $46,440 $185,760
V. Marc Droppert 4,571 $86,426 85,053 56,000 $688,044 $154,800
---------- ---------
$5,548,889 $897,840
</TABLE>
- ------------------------
(1) The number of shares received upon exercise of options during 1996 and
through March 1, 1997.
9
<PAGE>
(2) With respect to options exercised during 1996 and through March 1, 1997, the
dollar value of the difference between the option exercise price and the
market value of the option shares purchased on the date of the exercise of
the options.
(3) The total number of unexercised options held as of March 1, 1997, separated
between those options that were exercisable and those options that were not
exercisable.
(4) For all unexercised options held as of March 1, 1997, the aggregate dollar
value of the excess of the market value of the stock underlying those
options over the exercise price of those unexercised options. These values
are shown separately for those options that were exercisable, and those
options that were not yet exercisable, on March 1, 1997. As required, the
price used to calculate these figures was the closing sale price of the
Common Stock as of March 1, 1997 which was $19.25 per share.
SEVERANCE AGREEMENT
The Company has entered into a letter agreement with Joseph J. Caffarelli,
Executive Vice President and Chief Financial Officer, pursuant to which the
Company would be obligated to pay Mr. Caffarelli a lump sum payment equal to one
year of his then current base salary in the event that his employment with the
Company is either (i) involuntarily terminated except for misconduct or (ii) his
salary is reduced or his job responsibilities are substantially reduced and
within thirty days thereafter, he decides to cease working for the Company.
RETIREMENT PLAN
Substantially all full-time employees of the Company participate in the
Physio-Control Retirement Plan (the "Retirement Plan"), a defined benefit
pension plan intended to qualify under Section 401(a) of the Internal Revenue
Code (the "Code"). The Retirement Plan is a cash balance plan whereby each
participant's benefit is determined based on annual pay credits and annual
interest credits made to each participant's notional account. In general, a
participant becomes vested under the Retirement Plan upon completion of five
years of service.
Pay credits range from 2.0% to 4.0% of compensation, depending on a
participant's length of service with the Company. Compensation refers to pension
eligible earnings of the participant under the Retirement Plan (up to $150,000
for 1996, as limited by the Code), including base pay, overtime, and pre-tax
deferrals, but excluding incentive bonuses, commissions, stipends, and special
items such as allowances for living expenses.
Interest credits are based on the notional account balance on the last day
of each plan year and the plan's interest credit rate. This interest rate is
determined for each plan year and equals the value as of the last day of the
immediately preceding plan year of the rate on 26-week Treasury bills.
No pay or interest credits are granted under the Retirement Plan for periods
of employment prior to September 1, 1994. However, service is calculated from
date of hire for purposes of determining the level of pay credit for the plan
year. The normal retirement age under the plan is 65. Benefits are computed on a
straight life basis. Certain participants under this plan may be entitled to a
minimum benefit equal to the amount accrued under the prior formula as of August
31, 1994.
The aggregate estimated annual benefits payable from the Retirement Plan to
Messrs. Martin, Guezuraga, Caffarelli and Droppert upon normal retirement are
$12,756, $15,792, $10,416 and $18,321, respectively. As of December 31, 1996,
such executive officers had the following years of credited service under the
Retirement Plan: Dr. Martin--5 years; and Messrs. Guezuraga, Caffarelli and
Droppert--2 years.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Compensation Committee report shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
10
<PAGE>
Statement into any filing under the Securities Act or under the Exchange Act,
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under such Acts.
The following report has been submitted by the Compensation Committee of the
Board of Directors:
The Compensation Committee was established by the Board of Directors in
December 1995 in connection with the Company's initial public offering. At
such time, Messrs. Robert C. Gay and John J. O'Malley were appointed to the
Committee. The Board selected Messrs. Gay and O'Malley, as non-employee
directors, to help ensure that the compensation policies of the Company serve
to align the interests of the Company's management with those of its
stockholders. With the addition of two board members in 1996, the
Compensation Committee was reconstituted at the May 1, 1996 meeting of the
Board of Directors. Messrs. Pagliuca, Gay and Sandler were appointed to serve
as the Compensation Committee. All are non-employee directors.
The Compensation Committee is responsible for (i) establishing the
compensation of the Company's Chief Executive Officer and for reviewing the
recommendations of the Company's Chief Executive Officer on (i) compensation of
all other officers of the Company and (ii) any changes in major compensation
policies and practices of the Company. It is to report its actions and
recommendations to the full Board of Directors. In addition, the Compensation
Committee is responsible for the administration of the Company's Stock Incentive
Plan (the "1996 Plan") and if approved by stockholders the Incentive Plan as
described in Proposal 3 and Employee Share Purchase Plan (the "Purchase Plan").
In reviewing the Company's compensation programs, the Compensation Committee
intends to adhere to a compensation philosophy that (i) attracts and retains
qualified executives that will add to the long-term success of the Company; (ii)
relates to the achievement of operational and strategic objectives; and (iii) is
commensurate with each executive's performance and overall contribution to the
success of the Company. In making its recommendations to the full Board of
Directors concerning adjustments to compensation levels, the Compensation
Committee intends to consider the financial condition and operational
performance of the Company during the prior year. The Compensation Committee
expects the Company's executive compensation program to consist of three
principal components: (i) base salary; (ii) annual bonus; and (iii) long-term
equity incentives.
BASE SALARY. In light of other performance based programs, no increases in
the base salaries of the executive officers of the Company were made in 1996.
ANNUAL BONUS. In January 1996, the Board of Directors adopted an annual
bonus program for 1996 for all of the Company's employees based on year
performance targets measured by achieving earnings per share targets. 1996's
program allowed for upside potential for all employees if EPS levels exceed the
targeted performance levels. The Company's earnings per share for 1996 did meet
the targeted level and all eligible employees, including the Company's executive
officers, did receive annual bonus awards in early 1997, based on the Company's
1996 performance.
LONG-TERM EQUITY INCENTIVES. Long term incentives for the executive officers
of the Company have been stock-based to ensure alignment of the interests of the
Company's management and its stockholders. The executive officers participated
in the acquisition of the Company from Lilly and also were awarded stock options
prior to the initial public offering, which options all vested fully at the time
of the initial public offering.
Subsequent to the initial public offering, further stock option awards have
been made to the executive officers of the Company under the terms of the
Company's 1996 Plan. Awards have also been made to a broader group of management
and employees of the Company's principal operating subsidiaries. All options
under the 1996 Plan were issued at an exercise price equal to the fair market
value at the time of award and are subject to vesting over a five-year period
(at 20% vesting per calendar year). Since the ultimate value of stock options
bear a direct relationship to market price of the Common Stock, the Committee
believes that awards under the 1996 Plan are an effective incentive for the
Company's employees to create value for the Company's stockholders.
The Company's executive officers and the employees of its principal
operating subsidiaries are also generally eligible to participate in the
Company's Employee Share Purchase Plan. Under this plan, eligible
11
<PAGE>
employees are entitled to purchase shares of the Company's Common Stock at a
purchase price equal to 85% of its fair market value through payroll
deductions. This plan is designed to enable and encourage all employees to
share in the growth in value of the Company.
The foregoing report has been approved by all the members of the
Compensation Committee.
Stephen G. Pagliuca
Robert C. Gay
Robert A. Sandler
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder
return since the Common Stock became publicly traded on December 12, 1995 with
the Nasdaq Total Return Index and an index of certain companies selected by the
Company as comparative to the Company in that each is a manufacturer of medical
devices. The graph assumes that the value of the investment in the Company's
Common Stock at its initial public offering price of $14.50 per share and each
index was $100.00 on December 12, 1995.
Comparison of the Company's Common Stock,
The Nasdaq Total Return Index and a Peer Group Index(1)
<TABLE>
<CAPTION>
DECEMBER 12, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- ------ ----------
<S> <C> <C> <C>
Physio-Control International 100 123 155
Nasdaq Total Return Index 100 100 123
Peer Group Index 100 102 97
</TABLE>
- ------------------------
(1) The companies selected to form the Company's industry peer group index are
Datascope, Guidant, Marquette Electronics, Medtronics, Nellcor, Protocol
Systems, Respironics, SpaceLabs Medical, Ventritex acquired by St. Jude
Medical, and Zoll Medical. Total returns are based on market capitalization.
12
<PAGE>
PROPOSAL 2.
APPROVAL OF REINCORPORATION IN WASHINGTON
For the reasons set forth below, the Board of Directors believes that the
best interests of the Company and its stockholders will be served by changing
the Company's and its principal operating subsidiary, Physio-Control
Corporation's, state of incorporation from Delaware to Washington (the
"Reincorporation"). The Board of Directors has approved the Reincorporation
which would be accomplished by merging the Company with and into its newly
formed Washington subsidiary, New Physio Corporation ("New Physio"). Upon
effectiveness of the merger, New Physio's name will be changed to Physio-Control
International Corporation, the name under which the Corporation has operated
since 1994. At the Annual Meeting, the stockholders will be asked to approve the
Reincorporation.
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION
The Company was originally incorporated as a Delaware corporation in 1994.
Delaware was selected because it provided a comprehensive body of both statutory
and case law appropriate for a public corporation. Among the significant
provisions are the state's corporate laws relating to limitations on director
liabilities and indemnification of directors and officers. These issues have
consistently been viewed by the Board of Directors and management as extremely
important to recruiting and retaining directors and officers of the highest
caliber who are essential to the continuing successful operation of the Company.
Although the Company has not incurred any recent problem in recruiting or
retaining directors and officers, the cost and availability of adequate director
and officer insurance and the uncertainties relating to indemnification have
been reviewed on a regular basis. As a Delaware corporation the Company pays a
substantial annual franchise fee in Delaware; such fee was approximately $25,000
for 1996.
As corporations in Washington and other states made similar decisions to
incorporate in Delaware, the legislatures of other states, including Washington,
updated their corporation laws. Specifically, the Washington Legislature amended
its corporate law in 1987 to provide limitations on director liability and to
revise statutes relating to indemnification of directors and officers.
Furthermore, in 1989, the Washington Legislature adopted a comprehensive
revision of the Washington Business Corporation Act ("WBCA") which became
effective in 1990 and has been further amended through 1996. In the Company's
opinion, Washington law is now as clear and better addresses the Company's
concerns in these areas than does Delaware law. The Company also anticipates
significant savings in its annual franchise fees with reincorporation in
Washington. It is anticipated that the annual franchise fees in Washington will
be only $59.
Under Delaware law, the ability of a corporation to indemnify directors and
officers in certain actions brought on behalf of the corporation remains
unclear, even though director and officer insurance purchased with corporate
funds may be used for such indemnification. By contrast, Washington law permits
such indemnification subject to specific limitations. See "Certain Differences
in Corporate Laws-- Indemnification of Directors and Officers" below.
Furthermore, during the last five years, the cost of insurance for directors and
officers has increased and exclusions have broadened. Although the Company
currently maintains director and officer liability insurance, in the future such
insurance may be difficult to obtain on a cost-effective basis.
PLAN OF MERGER
The Company will be merged with and into New Physio pursuant to the terms of
the proposed Plan and Agreement of Merger (the "Merger Agreement," a copy of
which may be obtained from the Secretary of the Company). Upon the completion of
the merger, the owner of each outstanding common share of the Company will
automatically own one New Physio common share. Each outstanding certificate
representing a Company common share or shares will continue to represent the
same number of shares in New Physio (i.e., a certificate representing one
Company common share will then represent one New Physio common share). Thus, it
will NOT be necessary for stockholders of the Company to exchange their existing
share certificates. The common shares of the Company will continue to be traded
13
<PAGE>
on the Nasdaq National Market under the same symbol subsequent to the merger.
New Physio's Articles of Incorporation and By-Laws will be the Articles of
Incorporation and By-Laws of the surviving corporation, except that, upon the
effectiveness of the merger, New Physio's name will be changed to Physio-Control
International Corporation. A copy of the Articles of Incorporation of New Physio
may be obtained from the Secretary of the Company.
EFFECT OF REINCORPORATION AND MERGER
The Reincorporation and the merger will effect a change in the legal
domicile of the Company and other changes of a legal nature, the most
significant of which are described in this Proxy Statement. However, the
Reincorporation and merger will not result in any change in the name, business,
management, location of the Company's principal executive offices, assets,
liabilities, or net worth or accounting practices. Moreover, as noted above, the
Company's common shares will continue to be traded on the Nasdaq National Market
under the symbol "PHYS." The merger will not give rise to any appraisal or
dissenters' rights.
PRINCIPAL DIFFERENCES IN CORPORATE CHARTERS
The Company's current Certificate of Incorporation differs from New Physio's
Articles of Incorporation primarily as to indemnification of officers and
directors and limitations on director liability. Other differences primarily
concern technical differences between the WBCA and the Delaware General
Corporation Law ("DGCL").
LIMITATION ON DIRECTOR LIABILITY. Both the WBCA and the DGCL allow charter
documents to eliminate or limit the personal liability of directors; however,
the two statutes prescribe different limitations. In Washington, the Articles of
Incorporation may not eliminate or limit the liability of a director for: (i)
acts or omissions involving intentional misconduct or a knowing violation of
law; (ii) approval of certain distributions contrary to law; or (iii) any
transaction from which the director personally receives a benefit in money,
property, or services to which the director is not legally entitled. The
Delaware statute further excludes the limitation of director liability: (i) if a
director has breached the duty of loyalty to the corporation or its
stockholders; or (ii) for acts or omissions not in good faith. In both New
Physio's Articles of Incorporation and the Company's Certificate of
Incorporation, these limits on director liability are deemed to be contract
rights, which may not be adversely affected by a repeal or modification of the
applicable law and which are to be automatically amended as authorized by
changes in applicable law so that the liability of a director shall be
eliminated or limited to the fullest extent not prohibited by applicable law.
Neither the DGCL nor the WBCA limit a director's liability for violation of
certain federal laws including the federal securities laws.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the Company's current
Certificate of Incorporation and under Delaware law, the ability of the Company
to indemnify its directors and officers for payments made in settlement of
derivative actions may be open to certain questions. See "Principal Reasons for
the Proposed Reincorporation" above. New Physio's Articles of Incorporation
provide that New Physio shall indemnify its directors and officers for expenses
and liabilities incurred by them as a result of their service as directors and
officers, provided that no such indemnification shall be provided on account of:
(i) acts or omissions of the director or officer finally adjudged to be
intentional misconduct or a knowing violation of the law; (ii) approval of
certain distributions contrary to law; or (iii) any transaction with respect to
which the director or officer is finally adjudged to have received a benefit to
which he or she was not legally entitled. This comprehensive language is
intended to provide the broadest indemnification of directors and officers not
prohibited by Washington law, and to authorize indemnification of directors and
officers of amounts paid in settlement of actions brought on behalf of the
Company, commonly known as derivative actions. See "Certain Differences in
Corporate Law--Indemnification of Directors and Officers" below.
The Board of Directors believes that the potential personal liability that
can result from derivative actions arising out of an individual's service as a
director or officer of a corporation is a major concern for individuals who are
asked to serve in such positions. The Board of Directors has concluded that by
providing indemnification to the Company's directors and officers for amounts
14
<PAGE>
paid in settlement of derivative actions, subject to the restrictions set forth
in the WBCA, the Company will be able to effectively maintain its ability to
recruit and retain individuals who possess the qualities and experience
necessary to serve as directors and officers of the Company.
Other Differences in the Charter Documents and By-Laws. New Physio's
Articles of Incorporation differ in other aspects. The general provision under
the WBCA provides that unless specified to the contrary in the articles of
incorporation, the affirmative vote of two-thirds of all votes entitled to be
cast in the case of a merger, consolidation, sale of all or substantially all of
its assets not in the ordinary course of its business or dissolution, instead of
a simple majority which is the DGCL requirement. New Physio will implement the
WBCA general provision and such matters will require a two-thirds vote. So as to
minimize differences in corporate governance before and after the
Reincorporation, preemptive rights, cumulative voting, and stockholder-called
meetings are precluded in New Physio's Articles of Incorporation since such
rights do not presently apply to the Company under the DGCL.
Various differences also exist between New Physio's By-Laws and the
Company's By-Laws which are generally reflective of technical differences
between Delaware and Washington law and a policy decision not to include
provisions which are adequately covered by statute or not required to be
included in the By-Laws. However, none of these provisions is expected to have a
material effect on the governance of the Company. A copy of New Physio's By-Laws
may be obtained by writing to the Corporate Secretary at the Company's Executive
Offices.
CERTAIN DIFFERENCES IN CORPORATE LAW
The DGCL currently governs the rights of the Company's stockholders. After
the merger, the rights of stockholders shall be governed by the WBCA. The
following discussion summarizes certain significant differences between the
provisions of the DGCL and the WBCA, as applicable to a public company.
Provisions Affecting Acquisitions and Business Combinations. The WBCA
imposes restrictions on certain transactions between a corporation and certain
significant stockholders.
Washington law (Chapter 19 of the WBCA) prohibits a "target corporation,"
with certain exceptions, from engaging in certain "significant business
transactions" (such as a merger or sale of assets) with an "acquiring person"
who acquires 10% or more of the voting securities of a target corporation for a
period of five years after such acquisition, unless the transaction is approved
by a majority of the members of the target corporation's board of directors
prior to the date of the acquisition. Target corporations include domestic
corporations with a class of voting shares registered with the Securities and
Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"). Foreign corporations required to have a certificate of
authority to transact business in Washington are also subject to the statute if:
(i) the corporation has a class of voting shares registered with the SEC
pursuant to the Exchange Act; (ii) its principal executive office is located in
Washington; (iii) it has (A) more than 10% of its stockholders of record
resident in Washington, (B) more than 10% of its shares owned by Washington
residents or (C) 1,000 or more stockholders of record in Washington; (iv) a
majority of its employees, together with those of its subsidiaries, are
residents of the state or the corporation, together with its subsidiaries,
employs more than 1,000 residents in the state; and (v) a majority of the
corporation's tangible assets, together with those of its subsidiaries, are
located in Washington or the corporation and its subsidiaries has more than $50
million worth of tangible assets in Washington. A target corporation which meets
the definition may not "opt out" of this statute. The Company, currently a
foreign corporation with a certificate of authority to transact business in
Washington, believes it meets these requirements and is subject to the statute.
Delaware has enacted a business combination statute that is contained in
Section 203 of the DGCL providing that any person who acquires 15% or more of a
corporation's voting stock (thereby becoming an "interested stockholder") may
not engage in certain "business combinations" with the target corporation for a
period of three years following the date the person became an interested
stockholder, unless (i) the board of directors of the corporation has approved,
prior to that acquisition date, either the business combination or the
transaction that resulted in the person becoming an interested stockholder; (ii)
upon consummation of
15
<PAGE>
the transaction that resulted in the person becoming an interested
stockholder, that person owns at least 85% of the corporation's voting stock
outstanding at the time the transaction is commenced (excluding shares owned
by persons who are both directors and officers and shares owned by employee
stock plans in which participants do not have the right to determine
individually whether shares will be tendered in a tender or exchange offer);
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not
by written consent) of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.
These restrictions placed on interested stockholders by Section 203 do not
apply under certain circumstances, including, but not limited to, the following:
(i) if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or (ii) if the
corporation, by action of its stockholders, adopts an amendment to its By-Laws
or certificate of incorporation expressly electing not to be governed by Section
203, provided that such an amendment is approved by the affirmative vote of not
less than a majority of the outstanding shares entitled to vote and that such an
amendment will not be effective until 12 months after its adoption and will not
apply to any business combination with a person who became an interested
stockholder at or prior to such adoption. The Company has not elected to take
itself outside of the coverage of Section 203.
The Company believes that the differences between these two statutes are
not material as they apply to the Company. Also, as discussed above, the
Company as a foreign corporation believes it is presently subject to the WBCA
statute. With approval of the reincorporation, the provisions of Chapter 19
of the WBCA would clearly apply to the Company because such provisions apply
to all domestic corporations (i.e. Washington corporations) with a class of
voting securities registered with the SEC pursuant to the Exchange Act.
Amendment of Articles/Restated Certificate of Incorporation. The WBCA
authorizes a corporation's board of directors to make various changes to its
articles of incorporation without stockholder approval including changes: of
corporate name, of the number of outstanding shares in order to effectuate a
stock split or stock dividend in the corporation's own shares, and to change or
eliminate provisions with respect to par value of its shares. Other amendments
to a corporation's articles of incorporation must be recommended to the
stockholders by the board of directors, unless the board determines that because
of a conflict of interest or other special circumstances it should make no
recommendation and communicates the basis for its determination to the
stockholders with the amendment. For the amendment to be adopted, it must be
approved by a majority of all votes entitled to be cast by each voting group
which has a right to vote on the amendment.
Under the DGCL, amendments to a corporation's certificate of incorporation
require the approval of stockholders holding a majority of the voting power of
the corporation unless a different proportion is specified in the certificate of
incorporation. Under the WBCA, amendments to the articles of incorporation of a
public company (defined as one with a class of securities registered with the
SEC pursuant to Section 12 or 15 of the Exchange Act, which covers the Company),
are by majority vote unless the amendment would affect voting on one of the
organic changes (e.g. merger, sale of substantially all assets) which requires a
two-thirds vote.
Mergers, Acquisitions and Other Transactions. Under the WBCA, a merger,
consolidation, sale of substantially all of a corporation's assets other than
in the regular course of business, or dissolution of a public corporation
must be approved by the affirmative vote of a majority of directors when a
quorum is present, and by two-thirds of all votes entitled to be cast by each
voting group entitled to vote as a separate group, unless another proportion
is specified in the articles of incorporation. The WBCA allows companies to
provide for a lesser vote or lesser vote by separate voting groups, so long
as the vote provided for each separate voting group is not less than a
majority of all votes entitled to be cast. As previously set forth in "Other
Differences in the Charter Documents," New Physio's Articles of Incorporation
implement the WBCA's standard provision requiring that the corporate
transactions specified above be approved by two-thirds of the outstanding
shares entitled to vote. Under the DGCL, a merger, consolidation, sale of all
or substantially all of a corporation's assets other than in the regular
course of business or dissolution of a corporation must be approved by a
majority of the outstanding shares entitled to vote.
16
<PAGE>
Action Without a Meeting. Under the WBCA, stockholder action may be
taken without a meeting if written consents setting forth such action are
signed by all holders of outstanding shares entitled to vote thereon.
The DGCL authorizes stockholder action without a meeting if consents are
received from holders of a majority of the outstanding shares. The Company's
Certificate of Incorporation does not permit such action.
Class Voting. Under the WBCA, the articles of incorporation of a
corporation may authorize one or more classes of shares that have special,
conditional or limited voting rights, including the right to vote on certain
matters as a group. The articles of incorporation may not limit the rights of
holders of a class to vote as a group with respect to certain amendments to
the articles of incorporation and certain mergers that adversely affect the
rights of holders of that class.
The DGCL requires voting by separate classes only with respect to
amendments to the certificate of incorporation that adversely affect the
holders of those classes or that increase or decrease the aggregate number of
authorized shares or the par value of the shares of any of those classes.
Transactions With Officers or Directors. The WBCA sets forth a safe
harbor for transactions between a corporation and one or more of its
directors. A conflicting interest transaction may not be enjoined, set aside
or give rise to damages if: (i) it is approved by a majority of qualified
directors; (ii) it is approved by the affirmative vote of all qualified
shares; or (iii) at the time of commitment, the transaction was fair to the
corporation. For purposes of this provision, "qualified director" is one who
does not have: (a) a conflicting interest respecting the transaction, or (b)
a familial, financial, professional, or employment relationship with a second
director which relationship would reasonably be expected to exert an
influence on the first director's judgment when voting on the transaction.
"Qualified shares" are defined generally as shares other than those
beneficially owned, or the voting of which is controlled, by a director who
has a conflicting interest respecting the transaction.
The DGCL provides that contracts or transactions between a corporation
and one or more of its officers or directors or an entity in which they have
an interest is not void or voidable solely because of such interest or the
participation of the director or officer in a meeting of the board or a
committee which authorizes the contract or transaction if: (i) the material
facts as to the relationship or interest and as to the contract or
transaction are disclosed or are known to the board or the committee, and the
board or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of disinterested directors; (ii) the
material facts as to the relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the board of directors, a committee thereof, or the stockholders.
Appraisal or Dissenters' Rights. Under the WBCA, a stockholder is
entitled to dissent from and, upon perfection of his or her dissenters'
rights, to obtain fair value of his or her shares in the event of certain
corporate actions, including certain mergers, consolidations, share
exchanges, sales of substantially all assets of the corporation, and
amendments to the corporation's articles of incorporation that materially and
adversely affect such stockholder's rights.
Under the DGCL, appraisal rights are available only in connection with
certain mergers or consolidations, unless otherwise provided in the
corporation's certificate of incorporation. Even in the event of those
mergers or consolidations, unless the certificate of incorporation otherwise
provides, the DGCL does not provide appraisal rights (i) if the shares of the
corporation are listed on a national securities exchange, designated as a
"National Market System" security, or held of record by more than 2,000
stockholders (as long as in the merger the stockholders receive shares of the
surviving corporation or any other corporation the shares of which are listed
on a national securities exchange, designated as a National Market System
security, or held of record by more than 2,000 stockholders) or (ii) if the
corporation is the surviving corporation and no vote of its stockholders is
required for the merger. The Company's common stock is listed on the Nasdaq
National Market and stockholders therefore would presently not have statutory
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appraisal rights under the DGCL in such mergers but would have statutory
dissenters' rights under the WBCA. The procedure for exercise of dissenters'
rights under the WBCA is also different from the appraisal rights in the DGCL.
Indemnification of Directors and Officers. Under the WBCA, if authorized
by the articles of incorporation, a bylaw adopted or ratified by
stockholders, or a resolution adopted or ratified, before or after the event,
by the stockholders, a corporation has the power to indemnify a director or
officer made a party to a proceeding, or advance or reimburse expenses
incurred in a proceeding, under any circumstances, except that no such
indemnification shall be allowed on account of: (i) acts or omissions of a
director finally adjudged to be intentional misconduct or a knowing violation
of the law; (ii) conduct of a director finally adjudged to be an unlawful
distribution; or (iii) any transaction with respect to which it was finally
adjudged that such director personally received a benefit in money, property
or services to which the director was not legally entitled. Written
commentary by the drafters of the WBCA, which has the status of legislative
history, specifically indicates that a corporation may indemnify its
directors and officers for amounts paid in settlement of derivative actions,
provided that the director's or officer's conduct does not fall within one of
the categories set forth above. New Physio's Articles provide that New Physio
shall indemnify its directors and officers to the fullest extent not
prohibited by law, including indemnification for payments in settlement of
actions brought against the director or officer in the name of the
corporation, commonly referred to as a derivative action. See "Principal
Differences in Corporate Charters--Indemnification of Directors and Officers"
above.
Under the DGCL, indemnification of directors and officers is authorized
to cover judgments, amounts paid in settlement, and expenses arising out of
non-derivative actions where the director or officer acted in good faith and
in, or not opposed to, the best interests of the corporation. Additionally,
under the DGCL, a corporation may reimburse directors and officers for
expenses incurred in a derivative action. While the DGCL provides that these
indemnification provisions are not exclusive, which, in the Company's
opinion, indicates that a corporation may provide for broader indemnification
in its charter documents including circumstances not otherwise authorized
under the DGCL, there is some uncertainty as to the extent to which a
corporation may indemnify its directors and officers for judgments and
amounts paid in settlement of derivative actions. There are no definitive
decisions and this uncertainty exists because certain legal commentators have
argued that such indemnification would be circular and is against public
policy. Also, a proposal to permit such indemnification was specifically
rejected by the General Corporation Law Section of the Delaware Bar
Association.
The Company has included undertakings in various registration statements
filed with the SEC that in the event a claim for indemnification is asserted
by a director or officer relating to liabilities under the Securities Act of
1933 the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether indemnification would be against public
policy and will be governed by any final adjudication of such issue.
Tax Consequences
In connection with the Reincorporation, the law firm of Preston Gates &
Ellis LLP, counsel to the Company, will issue an opinion that the
Reincorporation will constitute a tax free reorganization under the Internal
Revenue Code. Accordingly, it is anticipated that no gain or loss will be
recognized for federal income tax purposes by the Company, New Physio, or
their stockholders as a result of the merger, and the tax basis and holding
period for the shares of New Physio deemed received by the stockholders of
the Company in exchange for the Company's shares will be the same as the tax
basis and holding period of the shares of the Company deemed to be exchanged
therefor. In addition, New Physio generally will succeed to the tax
attributes of the Company.
Vote Required and Board Recommendation
Delaware law requires the favorable vote of at least a majority of all of
the outstanding voting shares of the Company to approve the Reincorporation.
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As discussed above, one of the reasons for proposing the Reincorporation
is that Washington law has clearer and broader provisions relating to the
limitation of director liability and indemnification of officers and
directors. Accordingly, the Board has a personal interest in the approval of
the Reincorporation.
The indemnification requirements might have a significant adverse effect
on the Company and its stockholders in the event of a substantial judgment or
settlement, not otherwise covered by insurance, with respect to a director or
officer entitled to indemnification.
The Company is not aware of any pending or threatened litigation or
proceeding which may result in a claim for indemnification by a director or
officer or where the limitations on director liability under the DGCL or WBCA
would be applicable.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE REINCORPORATION FROM DELAWARE TO WASHINGTON BY MEANS OF A MERGER OF THE
COMPANY INTO NEW PHYSIO, A NEWLY FORMED, WHOLLY OWNED WASHINGTON CORPORATION.
PROPOSAL 3.
1997 STOCK AND INCENTIVE PLAN
The Board of Directors requests that the stockholders approve the Amended
and Restated Physio-Control International Corporation 1997 Stock and
Incentive Plan (the "Incentive Plan") to amend and replace the Company's 1996
Stock Incentive Plan (the "1996 Plan"), to increase the number of shares
available by 1,000,000 shares from the 1,250,000 shares available under 1996
Plan to 2,250,000 shares, extend the 1996 Plan to non-employee directors and
consultants of the Company and to affiliates, and reflect the reincorporation
of the Company in Washington (subject to stockholder approval). The Board
adopted the Incentive Plan and recommends its approval by the stockholders in
order to allow the Company to continue to offer stock options to key
employees as a part of its overall compensation package. The Board believes
that this Incentive Plan is essential to attract and retain the best
available personnel for positions of substantial responsibility, to encourage
ownership of the Common Stock by key employees, directors and consultants of
the Company and to promote the Company's success.
The Company's 1997 Stock Incentive Plan provides that the committee of
the Board (the "Committee") charged with administering the Incentive Plan, on
behalf of the Company, may grant stock options, stock appreciation rights or
other stock based awards (individually or collectively, an "Award") to
eligible employee or consultant that are consistent with the provisions of
the Incentive Plan. Common Stock purchased under the Incentive Plan will be
purchased from the Company; therefore the Company will receive the purchase
price paid for the Common Stock, if any.
The Board, subject to approval by the stockholders of the increase of
1,000,000 shares over the 1996 Plan, has reserved for issuance under the
Incentive Plan a total of 2,250,000 shares of the Company's Common Stock,
subject to adjustment in the event of a stock dividend, stock split or
similar change in outstanding shares of Common Stock. If so approved, the
Incentive Plan shall be deemed effective with the approval of the 1996 Plan
on December 11, 1995 for a ten-year period ending December 10, 2005.
The following description of certain features of the Incentive Plan is
qualified in its entirety by reference to the Incentive Plan itself, which is
included as Appendix A to this Proxy Statement.
Purpose. The purpose of the Incentive Plan is to provide flexibility to
the Company in its ability to motivate, attract and retain the services of
key employees and others, including non-employee directors and consultants,
who have the ability to enhance the value of the Company and its
subsidiaries. In addition, the Incentive Plan provides for incentive awards
to employees, directors and consultants of affiliates in those cases where
the success of the Company or its subsidiaries may be enhanced by the award
of incentives to such persons.
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Awards. Awards may include, without limitation, stock options, stock
appreciation rights or other stock based awards.
Administration. The Incentive Plan is administered by the Committee. The
Committee shall consist of two or more members of the Compensation Committee
or other committee of the Board, consisting of at least two "non-employee"
directors within the meaning of Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Subject to certain limitations in the
Incentive Plan, the Committee (or its Authorized Delegate) is authorized and
empowered to do all things necessary or desirable in connection with the
administration of the Incentive Plan, including the following:
(i) select eligible employees and Consultants to whom Awards are
granted;
ii) determine the size and types of Awards;
(iii) determine the terms and conditions of such Awards in a manner
consistent with the Incentive Plan;
(iv) determine whether, to what extent and under what circumstances,
Awards may be settled, paid or exercised in cash, shares, or other Awards,
or other property or canceled, forfeited or suspended;
(v) construe and interpret the Incentive Plan and any agreement or
instrument entered into under the Plan;
(vi) establish, amend or waive rules and regulations for the Incentive
Plan's administration;
(vii) amend (in accordance with the Incentive Plan) the terms and
conditions, other than price (which amendment may be made only by the Board
of Directors of the Company), of any outstanding Award to the extent such
terms and conditions are within its discretion;
(viii) provide in the terms of the Award Agreements for acceleration of
exercise or removal of restrictions on exercise or other change in terms or
conditions in regard to "significant business transactions" as defined in
the Washington Business Corporation Act; and
(ix) determine the terms and conditions for and provide in the Award
Agreements for such limitations or restrictions on transfer of the Awards or
rights thereunder as the Committee may determine consistent with any rule or
interpretation promulgated under Section 16 of the Exchange Act; and
(x) make all other determinations which may be necessary or advisable
for the administration of the Plan.
Any decision of the Committee (or any Authorized Delegate)in the
interpretation and administration of the Incentive Plan lies within its sole
and absolute discretion and is final, conclusive and binding on all parties
concerned.
Transferability. Except as may be approved by the Committee where such
approval would not adversely affect compliance of the Incentive Plan with
Rule 16b-3 under the Exchange Act, a Participant's rights and interest under
the Incentive Plan may not be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated (other than by will or laws of descent or
pursuant to a qualified domestic relations order).
Eligibility. Any person employed by the Company, any of its subsidiaries
or any affiliate, as well as any non-employee Director or consultant of the
Company is eligible to be considered by the Committee for the grant of Awards
under the Incentive Plan. As of December 31, 1996, the Company had
approximately 830 employees and Directors eligible to participate in the
Incentive Plan.
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Amendment, Modification and Termination. The Committee may amend or
terminate the Incentive Plan at any time and in any manner, with the approval
of the Board of Directors; provided, however, that no such amendment or
termination may deprive the recipient of an Award previously granted under
the Incentive Plan of any of his or her rights thereunder without the consent
of such recipient. Awards may be repriced only with the consent of the Board
of Directors. Furthermore, without the approval of the stockholders of the
Company, no amendment or modification may materially increase the number of
shares which may be issued under the Incentive Plan (except as described
under "Adjustment" below) or cause the Incentive Plan not to comply with Rule
16b-3 of the Exchange Act. No Awards may be granted under the Incentive Plan
after December 10, 2005. Shares of Common Stock may be issued after December
10, 2005 pursuant to Awards granted prior to such date; however, no shares of
Common Stock may be issued under the Incentive Plan after December 10, 2015.
Adjustment. In the event of any merger, reorganization, consolidation,
recapitalization, separation, spin-off, liquidation, stock dividend,
split-up, share combination or other change in the corporate or capital
structure of the Company affecting the shares, the Committee shall, in its
sole discretion, adjust the number and class of Shares which may be delivered
under the Incentive Plan and the number and class of and/or price of shares
subject to outstanding Awards granted under the Incentive Plan to prevent
dilution or enlargement of rights. With respect to incentive stock options,
no adjustment shall be authorized by the Committee, except with Board
approval, if such adjustment would (i) cause the Incentive Plan to violate
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
(ii) constitute a "modification" within the meaning of Section 424(h)(3) of
the Code with the effect that such modification, if applied, would be
considered the granting of a new option under Section 424(h)(1) of the Code.
Granting of Awards. As of December 31, 1996, Awards representing 420,000
options had been granted under the 1996 Plan to executive officers and Awards
representing 478,500 options had been granted to the Company's non-executive
employees.
To date, all options granted under the Incentive Plan have been granted
at fair market value. As a result, future gains from such option grants, if
any, are not determinable at this time. No other Awards have been granted
under the Incentive Plan to date. The type or number of future Awards that
will be granted under the Incentive Plan to the above-named individuals and
groups in the future is not determinable at this time.
Tax Consequences to Participants. The following is a brief summary of
the principal federal income tax consequences to participants of the grant
and exercise of certain Awards under the Incentive Plan. This summary does
not purport to address all aspects of federal income taxes that may affect
participants in light of their individual circumstances. Moreover, this
summary is based upon the current provisions of the Code, Treasury
Regulations (including proposed Treasury Regulations) promulgated thereunder,
rulings, administrative pronouncements and court interpretations thereof in
effect as of the date hereof. It is possible that future legislative,
regulatory, judicial or administrative changes or interpretations could
modify such tax consequences and the conclusions reached below and that any
such change could apply retroactively. This summary applies only to
participants who acquire options under the Incentive Plan in connection with
their employment by the Company or one of its affiliates and exercise such
options during their lifetimes. Because federal income tax consequences will
vary as a result of individual circumstances, each option holder is urged to
consult a tax advisor with respect to the tax consequences (including those
under State and local tax laws) of the grant and exercise of stock options
under the Incentive Plan, Moreover, the following summary relates only to
option holders' federal income tax treatment. The state, local and foreign
tax consequences may be substantially different from the federal income tax
consequences described herein. In the opinion of management the Federal
income tax treatment under the Incentive Plan will not be materially
different than under the 1996 Plan.
A. Taxation of Ordinary Income and Capital Gains.
The ordinary income of an individual taxpayer currently is generally
subject to a maximum federal income tax rate of 39.6%, while long-term
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capital gains of an individual currently are generally subject to a maximum
tax rate of 28%. The effective marginal rates of some taxpayers may be higher
to the extent that they are subject to the phase-out of personal exemptions
or the reduction of itemized deductions that occur at certain income levels.
The classification of income as capital or ordinary is also relevant for
taxpayers who have capital losses or investment interest.
B. Restricted Stock.
A participant who is granted restricted stock may, if the restrictions
constitute a "substantial risk of forfeiture" as defined in Section 83 of the
Code, make a Section 83(b) election to have the grant taxed as compensation
income at the date of grant in an amount equal to the fair market value on
the date of grant of the shares subject to such award less any amount paid by
the participant for the shares. If the participant does not make a timely
Section 83(b) election, the grant is generally taxed to him or her as
compensation income at the date(s) that the restrictions imposed on the
shares expire, in an amount on each such date equal to the fair market value
on such date of the shares as to which the restrictions expire less any
amount paid by the participant for the shares. Unless a participant makes a
timely Section 83(b) election, any dividends paid on the shares subject to
the award while such shares remain subject to the restrictions are
compensation income to the participant. Provided such compensation income is,
or is deemed to be, included in the holder's gross income, the Company is
generally entitled to a deduction for any compensation income taxed to the
participant.
Upon a participant's sale of shares received pursuant to a grant of
restricted stock, the difference between the selling price and the tax basis
of the shares (generally, if a timely Section 83(b) election is made, the
fair market value of the shares on the date of grant or, if a timely Section
83(b) election is not made, the fair market value of the shares on the
date(s) on which the restrictions on the shares expire) is a capital gain or
loss (long-or short-term, depending on the participant's holding period for
the shares). A participant's holding period begins on the date of grant if a
timely Section 83(b) election is made or on the date(s) on which the
restrictions on the shares expire if no timely Section 83(b) election is made.
An exception to the foregoing treatment may occur in the event that the
participant is subject to Section 16(b) of the Exchange Act. In certain
circumstances, the fair market value of particular shares may be determined,
and the participant's holding period for such shares may commence, on a date
other than the date of grant or the date on which the restrictions on such
shares lapse unless the participant makes a timely Section 83(b) election
with respect to such shares.
C. Options.
Under the Incentive Plan, a participant may be granted options that
qualify as incentive stock options under Section 422 of the Code ("ISOs") or
options that do not so qualify (nonqualified options or "NQOs") or both.
Generally, the tax consequences to an option holder with respect to ISOs will
be different from the tax consequences with respect to NQOs, as more fully
explained below. In addition, the discussion below assumes that at the time
an NQO is exercised, the Shares received are either fully vested or the
holder makes a timely election under Section 83(b)
i. Nonqualified Options.
The holder of an NQO does not recognize taxable income upon the grant of
the NQO, nor is the Company entitled, for income tax purposes, to a deduction
upon such a grant. The option holder recognizes ordinary compensation income
(subject to withholding taxes), on the exercise of an NQO equal to the excess
of the fair market value of the shares received on exercise over the option
exercise price. The fair market value of the shares is measured on the
exercise date. If such taxable compensation is properly included in the
holder's gross income by the holder or is deemed to have been properly
included as a result of the timely satisfaction of certain reporting
requirements by the Company, the Company should be entitled to a deduction in
computing its federal income taxes in an amount equal to the ordinary income
recognized by the option holder on the exercise of the NQO.
If an option holder sells shares acquired pursuant to the exercise of an
NQO, the option holder will recognize capital gain or loss equal to the
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difference between the selling price of the shares and their fair market
value on the exercise date. The capital gain is long-term or short-term,
depending on whether the option holder has held the option shares, for more
than one year after the exercise date. The Company is not entitled to any
deduction with respect to any capital gain recognized by the option holder.
The previous paragraph assumes, for simplicity, that the option holder's
tax basis in the option shares sold is equal to the fair market value of such
shares on the exercise date. While this would be the case if the option
holder had paid the exercise price for such shares in cash, it would not
normally be the case if the option holder paid the exercise price in whole or
in part by delivery of other shares of Common Stock. In the latter case, the
option holder's tax basis in, and holding period for, the previously acquired
shares surrendered carries over to an equal number of the option shares
received on a share-for-share basis. Shares received in excess of the shares
surrendered have a tax basis equal to the fair market value of those received
shares on the exercise date and the option holder's holding period for such
received shares begins on the exercise date. The option holder's capital gain
or loss on a sale of option shares would be determined based on the option
holder's actual basis in the shares sold and the long-term or short-term
nature of any gain would be based on the option holder's actual holding
period.
ii. Incentive Stock Options.
The holder of an ISO does not realize taxable income upon the grant or
exercise of the ISO and the Company is not entitled to any deduction with
respect to such grant or exercise. However, upon exercise of an ISO, the
excess of the fair market value on the exercise date of the shares acquired
pursuant to the exercise of the ISO over the exercise price will be included
in the option holder's alternative minimum taxable income and may cause or
increase a liability for alternative minimum tax. Such alternative minimum
tax may be payable even though the option holder receives no cash upon the
exercise of the ISO with which to pay such tax.
The income tax treatment of any gain or loss realized upon an option
holder's disposition of option shares depends on the timing of the
disposition. If the option shares have been held for at least one year and if
at least two years have elapsed since the date of grant of the ISO (the
"Required Holding Periods") then the option holder recognizes (i) long-term
capital gain to the extent that the selling price exceeds the exercise price
or (ii) long-term capital loss to the extent that the exercise price exceeds
the selling price. In either case, no deduction is allowed, to the Company.
If an option holder disposes of option shares before the expiration of
the Required Holding Period ("Disqualifying Disposition"), then (i) if the
selling price exceeds the fair market value of the option shares on the date
the ISO was exercised, the excess of such fair market value over the exercise
price is taxable to the option holder as ordinary income and the excess of
the selling price over such fair market value is taxable to the option holder
as capital gain (long-term or short-term depending on whether the option
holder has held the shares for more than one year); (ii) if the selling price
exceeds the exercise price but does not exceed the fair market value of the
option shares on the date the ISO was exercised, the excess of the selling
price over the exercise price is taxable to the option holder as ordinary
income and (iii) if the selling price is less than the exercise price, the
difference is treated as capital loss to the option holder. If, however, the
disposition is a sale to a related party (as defined in Section 267(b) of the
Code to include, for example, a member of the option holder's family or a
corporation majority-owned by the option holder) or a gift, then the ordinary
income recognized by the option holder will not be less than the excess of
the fair market value of the option shares on the exercise date over the
option exercise price. In each case, the Company is entitled to a deduction
equal to the amount of ordinary income (but not capital gain) recognized by
the option holder on the Disqualifying Disposition, provided such taxable
amount is, or is deemed to be, included in the gross income of the option
holder.
The previous paragraphs assume, for simplicity, that the option holder's
tax basis in the option shares disposed of is equal to the option exercise
price. While this would be the case if the option holder had paid the option
exercise price for such shares in cash, it would not normally be the case if
the option holder paid the option exercise price in whole or in part by
delivery of the Common Stock. If an option holder delivers previously
acquired Common Stock (other than shares acquired upon exercise of an ISO and
not held for the Required Holding Periods)in payment of all or part of the
option exercise price of an ISO, the option holder's tax basis in, and
holding period for, the previously acquired shares surrendered
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carries over to an equal number of the option shares received (for capital
gain purposes, but not for purposes of determining whether a Disqualifying
Disposition occurs) on a share-for-share basis. Shares received in excess of
the shares surrendered have a tax basis equal to the amount paid (if any) by
the option holder to exercise the ISO in addition to the previously acquired
shares, and such shares' holding period begins on the exercise date. Proposed
regulations provided that where an ISO is exercised using previously acquired
shares, a later Disqualifying Disposition of the shares received will be
deemed to have been a disposition of the shares having the lowest basis
first. The option holder's capital gain or loss on a sale of option shares
would be determined based on the option holder's actual basis in such shares
(increased by any ordinary income on such disposition) and the long-term or
short-term nature of any gain would be based on the option holder's actual
holding period.
If an option holder pays the exercise price of an ISO in whole or in part
with previously acquired Common Stock that was acquired upon the exercise of
an ISO and that has not been held for the Required Holding Periods, the
option holder will recognize ordinary income (but not capital gain) with
respect to the surrendered shares under the rules applicable to Disqualifying
Dispositions. The Company will be entitled to a corresponding deduction. The
option holder's basis in the shares received in exchange for the shares
surrendered will be increased by the amount of ordinary income the option
holder recognizes.
Under the Incentive Plan, the Committee may allow options to be exercised
after the termination of an option holder's employment. However, if an ISO is
exercised more than three months after the termination of an option holder's
employment other than because of the option holder's death (or more than one
year after the termination of an option holder's employment because of
disability) the option holder will be taxed on the exercise as if the ISO
were an NQO.
iii. Effect of Section 16(b) of the Securities Exchange Act of 1934.
The tax consequences to an option holder of the exercise of either an ISO
or an NQO may vary from those described above if the option holder is a
person who is subject to liability under Section 16(b) of the Exchange
(typically, officers, directors and major stockholders of a corporation) for
certain dealings in the Common Stock (a "16(b) Person"). In general, an
option holder who is a 16(b) Person will not recognize income on receipt of
the Common Stock until such holder is no longer subject to a liability under
Section 16(b) with respect to the disposition of such Common Stock. However,
the option holder may elect to be taxed based on the fair market value of the
shares on the exercise date (and have a holding period beginning on the
exercise date) by filing an election under Section 83(b) of the Code within
30 days of the exercise date.
D. Other Awards.
Because other awards may take many forms, as determined by the Committee,
it is not possible to describe generally what their tax treatment will be.
E. Effect of Section 162(m)of the Internal Revenue Code.
Starting with tax years beginning after January 1, 1994, a publicly held
corporation may not deduct compensation paid to its chief executive officer
and its four other most-highly compensated officers in excess of $1 million
per officer during a corporate taxable year except to the extent such amounts
in excess of $1 million qualify for an exception to this limitation. To
qualify for this exception, such amounts must be determined on the basis of
preestablished, objective, nondiscretionary formulae that meet certain
stockholder and outside director approval requirements. For this purpose,
"compensation" is broadly defined and would include, for example, income
realized on the exercise of non-qualified options or SARs, disqualifying
dispositions of ISO shares, and the receipt (if a timely Section 83(b)
election is made) or vesting (if no Section 83(b) election is made)of
restricted stock. Thus, to the extent awards granted to the chief executive
officer and the four other most highly compensated officers do not qualify
for the performance-based exception, the Company's deductions with respect to
such awards may be subject to the $1 million per executive deduction
limitation.
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Incentive Plan Benefits. The following table sets forth the number of
nonqualified stock options that have been granted under the Incentive Plan as
of the date of this Proxy Statement to (i) each Named Executive Officer, (ii)
all current executive officers as a group, (iii) all current Directors who
are not executive officers, as a group, and (iv) all employees, including all
current officers who are not executive officers, as a group.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE AMENDED AND RESTATED 1997 STOCK AND INCENTIVE PLAN.
PROPOSAL 4.
APPROVAL OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors recommends a vote for approval of the appointment
of Price Waterhouse LLP as the independent certified public accountants of
the Company and its subsidiaries to audit the books and accounts for the
Company and its subsidiaries for the fiscal year ended December 31, 1997.
During fiscal 1996, Price Waterhouse LLP examined the financial statements of
the Company and its subsidiaries. It is expected that representatives of
Price Waterhouse LLP will attend the Annual Meeting, with the opportunity to
make a statement if they so desire, and will be available to answer
appropriate questions.
OTHER BUSINESS
The Board of Directors of the Company is not aware of any other matters
that are to be presented at the Annual Meeting, and it has not been advised
that any other person will present any other matters for consideration at the
meeting. Nevertheless, if other matters should properly come before the
Annual Meeting, the stockholders present, or the persons, if any, authorized
by a valid proxy to vote on their behalf, shall vote on such matters in
accordance with their judgment.
VOTING PROCEDURES
Votes at the Annual Meeting of Stockholders are counted by Inspectors of
Election appointed by the Board of Directors. If a quorum is present, an
affirmative vote of a majority of the votes entitled to be cast by those
present in person or by proxy is required for the approval of items submitted
to stockholders for their consideration, including the election of directors,
unless, for a specific proposal, a different number of votes is required by
statute or the Company's Certificate of Incorporation, and is so indicated in
this Proxy. Abstentions by those present at the meeting are tabulated
separately from affirmative and negative votes and do not constitute
affirmative votes. If a stockholder returns his proxy card and withholds
authority to vote for any or all of the nominees, the votes represented by
the proxy card will be deemed to be present at the meeting for purposes of
determining the presence of a quorum but will not be counted as affirmative
votes. Shares in the name of brokers that are not voted are treated as not
present.
SUBMISSION OF STOCKHOLDERS' PROPOSALS AND ADDITIONAL INFORMATION
Proposals of stockholders intended to be eligible for inclusion in the
Company's proxy statement and proxy card relating to the 1998 annual meeting
of stockholders of the Company must be received by the Company on or before
the close of business December 18, 1997. Such proposals should be submitted
by certified mail, return receipt requested.
The Company's By-Laws provide that a stockholder wishing to present a
nomination for election of a director or to bring any other matter before an
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annual meeting of stockholders must give written notice to the Company's
Secretary not less than 60 days nor more than 90 days prior to the meeting
and that such notice must meet certain other requirements. If Proposal 2 is
adopted by the stockholders, the By-Laws of New Physio will contain the same
provisions. Any stockholder interested in making such a nomination or
proposal should request a copy of the By-Laws provisions from the Secretary
of the Company.
AVAILABILITY OF REPORTS ON FORM 10-K
The Company will furnish without charge to each person whose proxy is
being solicited, upon written request of any such person, a copy of the
Annual Report on Form 10-K of the Company for the fiscal year ended December
31, 1996, as filed with the SEC, including the financial statements and
schedules thereto. Requests for copies of such Annual Report on Form 10-K
should be directed to the Chief Financial Officer, Physio-Control
International Corporation, 11811 Willows Road Northeast, Redmond, Washington
98052.
OTHER MATTERS
The Company will bear the costs of soliciting proxies from its
stockholders. In addition to the use of the mails, proxies may be solicited
by the Directors, officers and employees of the Company by personal
interview, telephone or telegram. Such Directors, officers and employees will
not be additionally compensated for such solicitation, but may be reimbursed
for out-of-pocket expenses incurred in connection therewith. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of Common Stock held of record by such persons, and the Company will
reimburse such brokerage houses, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred in connection therewith.
The Directors know of no other matters which are likely to be brought
before the Annual Meeting, but if any such matters property come before the
meeting the persons named in the enclosed proxy, or their substitutes, will
vote the proxy in accordance with their best judgment.
By Order of the Board of Directors
/s/ V. MARC DROPPERT
V. Marc Droppert
Secretary
April 1, 1997
It is important that the proxies be returned promptly. Even if you expect
to attend the Annual Meeting, please promptly complete, sign, date and mail
the enclosed proxy card in the enclosed envelope, which requires no postage
if mailed in the United States.
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APPENDIX A
AMENDED AND RESTATED
PHYSIO-CONTROL INTERNATIONAL CORPORATION
1997 STOCK AND INCENTIVE PLAN
Article 1. Purpose and Duration
1.1 Purpose. The purpose of the 1997 Amended and Restated
Physio-Control International Corporation Stock and Incentive Plan (the
"Plan") is to further the growth, development and financial success of
Physio-Control International Corporation (herein the "Company") and its
Subsidiaries by aligning the personal interests of key employees, through the
ownership of shares of the Company's Common Stock and through other
incentives, to those of the Company's shareholders. The Plan is further
intended to provide flexibility to the Company in its ability to compensate
key employees and others including non-employee directors and consultants, to
motivate, attract and retain the services of such individuals who have the
ability to enhance the value of the Company and its Subsidiaries. In
addition, the Plan provides for incentive awards to employees, directors and
consultants of Affiliates in those cases where the success of the Company or
its Subsidiaries may be enhanced by the award of incentives to such persons.
The Plan permits the granting of Stock Options, Stock Appreciation rights and
Other Stock Based Awards.
1.2 Duration. The shareholders of the Company approved the 1996 Stock
Incentive Plan with an effective date of December 11, 1995 (the "1996 Plan").
This Plan amends and restates the 1996 Plan, increases the number of Shares
available, extends the Plan to directors and consultants of the Company and
to Affiliates and reflects the reincorporation of the Company in Washington.
Subject to ratification by an affirmative vote of a majority of the Shares
present and entitled to vote at the 1997 annual meeting of shareholders of
the Company anticipated to be held in May, 1997, or at any adjournment
thereof, the Plan, if so approved, shall be deemed effective with the
approval of the 1996 Plan on December 11, 1995 (the "Effective Date" herein),
and shall remain in effect, subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article 9 herein, until December
10, 2005 (the "Termination Date"). No Award may be granted under the Plan on
or after the Termination Date, but Awards made prior to the Termination Date
may be exercised, vested or otherwise effectuated beyond that date unless
otherwise limited.
Article 2. Definitions
2.1 Definitions. Whenever used in the Plan, the following terms shall
have the meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized:
(a) "Act" means the Washington Business Corporation Act, RCW Title
23B.
(b) "Affiliate" means any corporation (other than a Subsidiary),
limited liability company, partnership, association, joint venture or other
<PAGE>
entity in which the Company or any Subsidiary participates directly or
indirectly in the decisions regarding the management thereof or the
production or marketing of products or services.
(c) "Award" means, individually or collectively, a grant under this
Plan of Stock Options, Stock Appreciation Rights or Other Stock Based Awards.
(d) "Award Agreement" means the document which evidences an Award
and which sets forth the terms, conditions and limitations relating to such
Award.
(e) "Board" or "Board of Directors" means the Board of Directors of
the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time or any successor Code thereto.
(g) "Committee" means the group of two or more individuals
administering the Plan, which shall be (i) the Compensation Committee of the
Board (or a subcommittee of the Compensation Committee, composed solely of
two or more "non-employee" Directors within the meaning of Rule 16b-3 under
the Exchange Act, or any successor rule thereto or the Compensation
Committee, which if following the abstention or recusal of all members who
are not "non-employee" Directors, is composed solely of two or more
"non-employee" Directors and in either case, the participating Directors also
qualify as "outside directors" under Section 162 of the Code) or (ii) any
other committee of the Board, consisting of at least two (2) Directors, all
of whom are "non-employee directors," and "outside directors" as appointed
from time to time by the Board and constituted so as to permit the Plan to
comply with Rule 16b-3 under the Exchange Act and Section 162 of the Code or
any successor rules or sections thereto.
(h) "Company" means Physio-Control International Corporation, a
Washington corporation.
(i) "Consultant" means an individual who performs services for the
Company, a Subsidiary or any Affiliate as an independent contractor and,
unless the context of this Plan provides to the contrary, includes
non-employee Directors of the Company and those of its subsidiaries and those
holding similar positions with Affiliates.
(j) "Director" means a member of the Board of Directors of Company.
(k) "Effective Date" means December 11, 1995.
(l) "Eligible Employee" means any executive, managerial,
professional, technical or administrative employee of the Company, any
Subsidiary or any Affiliate who is expected to contribute to its success.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor Act thereto.
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(n) "Fair Market Value" means, with respect to any particular day,
the closing price of a Share as reported on the NASDAQ National Market System
on that day or, if not a business day, the most recent previous business day,
or the price of a Share determined by such other method as may be required by
law.
(o) "Incentive Stock Options" or "ISO" means an option to purchase
Shares, granted pursuant to Article 6 herein, which is designated as an
Incentive Stock Option and is intended to meet the requirements of Section
422 of the Code.
(p) "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted pursuant to Article 6 herein, which is not intended
to be an Incentive Stock Option.
(q) "Other Stock Based Award" means an Award, granted pursuant to
Article 6 herein, other than a Stock Option or SAR, that is paid with, valued
in whole or in part by reference to, or is otherwise based on Shares.
(r) "Participant" means an Eligible Employee or Consultant selected
by the Committee to receive an Award under the Plan, or a Director who
receives Director Options under the Plan.
(s) "Plan" means the Amended and Restated 1997 Physio-Control
International Corporation Stock and Incentive Plan.
(t) "Shares" means the issued or unissued shares of the common
stock, par value of $0.01 per share, of Physio-Control International
Corporation.
(u) "Significant business transaction" shall have the meaning set
forth in the Act.
(v) "Stock Appreciation Right" or "SAR" means the grant, pursuant
to Article 6 herein, of a right to receive a payment from the Company, in the
form of stock, cash or a combination of both, equal to the difference between
the Fair Market Value of one or more Shares and the exercise price of such
Shares under the terms of such Stock Appreciation Right.
(w) "Stock Option" means the grant, pursuant to Article 6 herein,
of a right to purchase a specified number of Shares during a specified period
at a designated price, which may be an Incentive Stock Option or a
Nonqualified Stock Option.
(x) "Subsidiary" means a corporation as defined in Section 424(f)
of the Code with the Company being treated as the employer corporation for
purposes of this definition.
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(y) "Termination Date" means the earlier of: the date on which all
Shares subject to the Plan have been purchased or acquired according to the
Plan's provisions, the date the Plan is terminated pursuant to Article 9, or
December 10, 2005.
(z) "Withholding Event" means an event related to an Award which
results in the Participant being subject to taxation at the federal, state,
local or foreign level.
Article 3. Administration
3.1 Authority. The Plan shall be administered by the Committee which
shall have full and exclusive power, except as limited by the Act, other
applicable law or by the Articles of Incorporation or Bylaws of the Company,
as amended, and subject to the provisions herein, to:
(a) select Eligible Employees and Consultants to whom Awards are
granted;
(b) determine the size and types of Awards;
(c) determine the terms and conditions of such Awards in a manner
consistent with the Plan;
(d) determine whether, to what extent and under what circumstances,
Awards may be: settled, paid or exercised in cash, shares, or other Awards,
or other property or canceled, forfeited or suspended;
(e) construe and interpret the Plan and any agreement or instrument
entered into under the Plan;
(f) establish, amend or waive rules and regulations for the Plan's
administration;
(g) amend (subject to the provisions of Section 4.4 and Article 7
herein) the terms and conditions, other than price (which amendment may be
made only by the Board of Directors of the Company pursuant to Article 7), of
any outstanding Award to the extent such terms and conditions are within its
discretion;
(h) provide in the terms of the Award Agreements for acceleration
of exercise or removal of restrictions on exercise or other change in terms
or conditions in regard to "significant business transactions" as defined in
the Act; and
(i) determine the terms and conditions for and provide in the Award
Agreements for such limitations or restrictions on transfer of the Awards or
rights thereunder as the Committee may determine consistent with any rule or
interpretation promulgated under Section 16 of the Exchange Act;
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(j) make all other determinations which may be necessary or
advisable for the administration of the Plan.
All Awards hereunder shall be made by the Committee. Where the action is
by the "non-employee" Directors of the Committee and such are less than the
full Committee, the non-employee Directors shall be empowered to act
independently and without further approval on behalf of the Committee or the
Board of Directors except as specifically limited in this Plan.
To the extent permitted at any time under Rule 16b-3 or any successor
rule and under Section 162(m) of the Internal Revenue Code or any successor
statutory provision, and any implementing regulations, without adversely
affecting the ability of the Plan to comply with the conditions for exemption
from Section 16 of the Exchange Act provided by Rule 16b-3 and the exemption
from the limitations on the deductibilty of certain executive compensation
provided by Section 162(m), the Committee may delegate the administration of
the Plan in whole or in part, on such terms and conditions, to such other
person or persons as it may determine in its discretion, which persons may be
officers or employees of the Company or third parties (each such person, an
"Authorized Delegate").
3.2 Decisions. All determinations and decisions made by the Committee
pursuant to the provisions of the Plan and all related orders or resolutions
of the Board of Directors shall be final, conclusive and binding on all
persons, including the Company, its Subsidiaries and Affiliates, its
shareholders, Participants, and their estates and beneficiaries. The
Committee may act only by a majority of its members in office, except that
the members thereof may authorize any one or more of their members or any
Authorized Delegate to execute and deliver documents or to take any other
ministerial action on behalf of the Committee with respect to Awards made or
to be made to Plan participants. No member of the Committee or Authorized
Delegate shall be liable for anything done or omitted to be done by such
member or Authorized Delegate, by any other member of the Committee or by any
other Authorized Delegate in connection with the performance of duties under
the Plan, except for his or her own willful misconduct or as expressly
provided by statute.
Article 4. Shares Subject to the Plan
4.1 Number of Shares. Subject to adjustment as provided in Section 4.4
herein, no more than 2,250,000 Shares may be issued under the Plan. These
Shares may consist, in whole or in part, of authorized and unissued Shares,
or of treasury Shares. No fractional Shares shall be issued under the Plan;
however, cash may be paid in lieu of any fractional Shares in settlements of
Awards under the Plan.
For purposes of determining the number of Shares available for issuance
under the Plan:
(a) The grant of an Award shall reduce the authorized pool of
Shares by the number of Shares subject to such Award while such Award is
outstanding, except to the extent that such an Award is in tandem with
another Award covering the same or fewer Shares.
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(b) Any Shares tendered by a Participant in payment of the
price of a Stock Option or stock option exercised under any other Company
plan shall be credited to the authorized pool of Shares.
(c) To the extent that any Shares covered by SARs are not issued
upon the exercise of such SAR, the authorized pool of Shares shall be
credited for such number of Shares.
(d) To the extent that an Award is settled in cash or any form
other than in Shares, the authorized pool of Shares shall be credited with
the appropriate number of Shares represented by such settlement of the Award,
as determined at the sole discretion of the Committee (subject to the
limitation set forth in Section 4.2 herein).
(e) If Shares are used to pay dividends and dividend equivalents in
conjunction with outstanding Awards, an equivalent number of Shares shall be
deducted from the Shares available for issuance.
4.2 Lapsed Awards. If any Award granted under the Plan is cancelled,
terminates, expires or lapses for any reason, any Shares subject to such
Award shall again be available for the grant of an Award under the Plan;
except, however, to the extent that such Award was granted in tandem with
another Award, any Shares issued pursuant to the exercise or settlement of
such other Award shall not be credited back. In the event that prior to the
Award's cancellation, termination, expiration, or lapse, the holder of the
Award at any time received one or more "benefits of ownership" pursuant to
such Award (as defined by the Securities and Exchange Commission, pursuant to
any rule or interpretation promulgated under Section 16 of the Exchange Act),
the Shares subject to such Award shall not be made available for regrant
under the Plan.
4.3 Effect of Acquisition. Any Awards granted by the Company in
substitution for awards or rights issued by a company whose shares or assets
are acquired by the Company or a Subsidiary shall not reduce the number of
Shares available for grant under the Plan.
4.4 Adjustments in Authorized Shares. Subject to specific provisions in
any Award Agreement, in the event of any merger, reorganization,
consolidation, recapitalization, separation, spin-off, liquidation, stock
dividend, split-up, Share combination or other change in the corporate or
capital structure of the Company affecting the Shares, such adjustment shall
be made in the number and class of Shares which may be delivered under the
Plan, and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to
prevent dilution or enlargement of rights; provided that the number of Shares
subject to any Award shall always be a whole number; and provided, further,
with respect to Incentive Stock Options, except with Board approval and in
compliance with Article 7, no adjustment shall be authorized by the Committee
to the extent such adjustment would (i) cause the Plan to violate Section 422
of the Code, or (ii) constitute a "modification" within the meaning of
Section 424(h)(3) of the Code, or any successor provision thereto, with the
effect that such modification, if applied, would be considered the granting
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of a new option under Section 424(h)(1) of the Code, or any successor
provision thereto.
4.5 Committee Determination. In determining the number of Shares
available for issuance under the Plan as contemplated by this Article 4, the
Committee shall interpret and apply the provisions of this Article so as to
permit the Plan to comply with Rule 16b-3 under the Exchange Act, or any
successor rule thereto.
Article 5. Participation
5.1 Selection of Participants. Subject to the provisions of the Plan,
the Committee may, from time to time, select from all Eligible Employees and
Consultants, those to whom Awards shall be granted and shall determine the
nature and amount of each Award. No Eligible Employee or Consultant shall
have the right to receive an Award under the Plan, or, if selected to receive
an Award, the right to continue to receive same. Further, no Participant
shall have any rights, by reason of the grant of any award under the Plan to
continued employment by the Company or any Subsidiary or Affiliate. There is
no obligation for uniformity of treatment of Participants under the Plan.
5.2 Award Agreement. All Awards granted under the Plan shall be
evidenced by an Award Agreement that shall specify the terms, conditions,
limitations and such other provisions applicable to the Award as the
Committee shall determine.
Article 6. Awards
Except as otherwise provided for in Section 3.1 herein, Awards may be
granted by the Committee to Eligible Employees, and Consultants in the case
of Awards other than Incentive Stock Options, at any time, and from time to
time as the Committee shall determine. The Committee shall have complete
discretion in determining the number of Awards to grant (subject to the Share
limitations set forth in Section 4.1 herein) and, consistent with the
provisions of the Plan, the terms, conditions and limitations pertaining to
such Awards, including whether such Awards are eligible to earn dividends or
dividend equivalents.
The Committee may provide that the Participant shall have the right to
utilize Shares to pay all or any part of the purchase price of the exercise
of any Stock Option or option to acquire Shares under any other
Physio-Control International Corporation incentive compensation plan, if
permitted under such plan; provided that the number of Shares, bearing
restrictive legends, if any, which are used for such exercise, shall be
subject to the same restrictions following such exercise.
Notwithstanding any other provision of the Plan, no Eligible Employee
shall be granted Stock Options or other Awards if the compensation
attributable to such Awards would not qualify as "performance-based
compensation" as described in Section 162(m) of the Code. This limitation
shall be subject to adjustment as provided in Section 4.4 hereof, but only to
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the extent such adjustment would not affect the status of compensation
attributable to Awards hereunder as "performance-based compensation".
6.1 Stock Options. Stock Options may be granted at an exercise price
established by the Committee, which, in the case of Incentive Stock Options
shall not be less than one hundred percent (100%) of the Fair Market Value of
a Share on the date the Stock Option is granted. In the case of Director
Options granted pursuant to Section 6.4 herein, the exercise price shall be
100% of the Fair Market Value of a Share on the date the Director Option is
granted.
In the case of an Incentive Stock Option granted to an Eligible Employee
who, at the time of grant, owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company its
Subsidiaries, the exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value of a Share on the date the Incentive
Stock Option is granted, and the Incentive Stock Option by its terms shall
not be exercisable after the expiration of five (5) years from the date of
grant.
Except as provided in the preceding paragraph, a Stock Option may be
exercised at such times as may be specified in an Award Agreement, in whole
or in installments, which may be cumulative and shall expire at such time as
the Committee shall determine at the time of grant; provided that no Stock
Option shall be exercisable later than ten (10) years after the date granted.
Prior to the exercise of a Stock Option, the holder thereof shall not have
any rights of a shareholder with respect to any of the Shares covered by the
Stock Option.
Stock Options shall be exercised by the delivery of a written notice of
exercise to the Secretary of the Company or such other person as may be
specified by the Committee, setting forth the number of Shares with respect
to which the Stock Option is to be exercised, accompanied by full payment of
the total Stock Option price and any required withholding taxes. Payment
shall be made either (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having a Fair Market Value at the time of exercise
equal to the total price of the Stock Option, (c) by the delivery of a
promissory note, the terms and conditions of which shall be determined by the
Committee, or (d) by a combination of (a), (b) and (c). The Committee may
allow exercises to be made with the delivery of payment as permitted under
Federal Reserve Board Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee determines to be
consistent with the Plan's purpose and applicable law including without
limitation services provided by the recipient of the Award. The Committee
may provide that the exercise of a Stock Option, by tendering previously
acquired shares, will entitle the exercising Participant to receive another
Stock Option covering the same number of shares tendered and with a price of
no less than the Fair Market Value on the date of grant of such replacement
Stock Option.
6.2 Stock Appreciation Rights. SARs may be granted at a price which
shall not be less than one hundred percent (100%) of the Fair Market Value of
a Share on the date the SAR is granted. SARs may be granted in tandem with a
Stock Option, such that the exercise of the SAR or related Stock Option will
result in a forfeiture of the right to exercise the related Stock Option or
SAR as applicable for an equivalent number of shares, or independently of any
Stock Option.
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An SAR may be exercised at such times as may be specified in an Award
Agreement, in whole or in installments, which may be cumulative and shall
expire at such time as the Committee shall determine at the time of grant;
provided that no SAR shall be exercisable later than ten (10) years after the
date granted.
SARs shall be exercised by the delivery of a written notice of exercise
to the Chief Financial Officer of the Company or such other person as may be
specified by the Committee, setting forth the number of Shares with respect
to which the SAR is to be exercised.
6.3 Other Stock Based Awards. Other Stock Based Awards may be granted
to such Eligible Employees, or Consultants (other than Directors) where
permitted by law, as the Committee may select, at any time and from time to
time as the Committee shall determine. The Committee shall have complete
discretion in determining the number of Shares subject to such Awards
(subject to the Share limitations set forth in Section 4.1 herein), the
consideration for such Awards and the terms, conditions and limitations
pertaining to same including, without limitation, restrictions based upon the
achievement of specific business objectives, tenure, and other measurements
of individual or business performance, and/or restrictions under applicable
federal or state securities laws, and conditions under which same will lapse.
Such Awards may include the issuance of Shares in payment of amounts earned
under other incentive compensation plans of the Company. The terms,
restrictions and conditions of the Award need not be the same with respect to
each Participant.
The Committee may, at its sole discretion, direct the Company to issue
Shares subject to such restrictive legends and/or stop transfer instructions
as the Committee deems appropriate.
6.4 Director Options. Nonqualified Stock Options may be granted to
Directors of the Company who are not Eligible Employees ("Director Options"),
subject to the following terms and conditions:
(a) Each Director Option may be exercised any time after six (6)
months from the date of its grant to ten (10) years from such date, at which
time the Director Option shall lapse and be of no force and effect.
(b) The exercise price of Director Options shall be one hundred
percent (100%) of the Fair Market Value of a Share on the date of grant.
(c) Director Options may be exercised in whole or in part.
(d) Any grant of Director Options is intended to meet the
requirements of Rule 16b-3 under the Exchange Act, or any successor rule
thereto, with the result that Directors who are not Eligible Employees may
be granted Director Options hereunder which will be exempt from Section
16(b) of the Exchange Act. These provisions relating to Director Options
shall be interpreted accordingly, and may be amended to comport with changes
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in the Exchange Act, rules thereunder, the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
Article 7. Amendment, Modification and Termination
7.1 Amendment, Modification and Termination. The Committee may
terminate, amend or modify the Plan at any time and from time to time, with
the approval of the Board of Directors. The termination, amendment or
modification of the Plan may be in response to changes in the Act, the Code,
the Exchange Act, national securities exchange regulations or for other
reasons deemed appropriate by the Committee. However, without the approval of
the shareholders of the Company, no amendment or modification may:
(a) Materially increase the total amount of Shares which may be
issued under the Plan, except as provided in Sections 4.3 and 4.4 herein; or
(b) Cause the Plan not to comply with Rule 16b-3 under the Exchange
Act, or any successor rule thereto.
7.2 Awards Previously Granted. No termination, amendment or
modification of the Plan shall in any manner adversely affect any Award
previously granted under the Plan, without the written consent of the
Participant. Any amendment which would change the exercise price of any
outstanding Awards (other than pursuant to Section 4.4) must be approved by
the Board of Directors.
Article 8. Withholding
8.1 . The Company shall have the power and the right to deduct or
withhold, or require a Participant to remit to the Company, an amount in cash
or Shares having a Fair Market Value sufficient to satisfy federal, state and
local taxes (including the Participant's FICA obligation) required by law to
be withheld with respect to any Withholding Event which occurs because of a
grant, exercise or payment made under or as a result of the Plan.
Article 9. Assignment/Transferability
Awards granted under the Plan only may be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated (other than by will or by the
laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code, or Title I of the Employee Retirement
Income Security Act, as amended, or the rules thereunder) on such terms and
conditions and subject to such restrictions and limitations as the Committee
may determine at the time of the grant.
Article 10. Unfunded Plan
The Plan shall be unfunded and the Company shall not be required to
segregate any assets that may at any time be represented by Awards under the
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Plan. Any liability of the Company to any person with respect to any Award
under the Plan shall be based solely upon any contractual obligations that
may be effected pursuant to the Plan. No such obligation of the Company
shall be deemed to be secured by any pledge of, or other encumbrance on, any
property or assets of the Company.
Article 11. Successors
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or substantially all of
the business and/or assets of the Company.
Article 12. Securities Law and Code Compliance
The Plan is intended to comply with all applicable conditions of Rule
16b-3 or any successor rule thereto under the Exchange Act. To the extent
any provision of the Plan or action by the Committee fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Further, each Award shall be subject to the
requirement that, if at any time the Committee shall determine, in its sole
discretion, that the listing, registration or qualification of any Award
under the Plan upon any securities exchange or under any state or federal
law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting
of such Award or the grant or settlement thereof, such Award may not be
exercised or settled in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee. It is the intent of the
Company that the Plan also comply in all respects with Section 162(m) of the
Code, and that Awards of Incentive Stock Options comply with Section 422 of
the Code, that any ambiguities or inconsistencies in construction of the Plan
or an Award of an Incentive Stock Option be interpreted to give effect to
such intention and that if any provision of the Plan or an Award of an
Incentive Stock Option is found not to be in compliance with Sections 162(m)
or 422, respectively, such provision shall be deemed null and void to the
extent required to permit the Plan or Award to comply with Sections 162(m) or
422, respectively.
Article 13. Requirements of Law
13.1 Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be require.
13.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
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13.3 Governing Law. To the extent not preempted by federal law, the Plan
and all Award Agreements, shall be construed in accordance with and governed
by the laws of the State of Washington.
13.4 Acceptance. By accepting any Award or other benefit under the Plan,
each recipient of an Award and each person claiming under or through him or
her shall be conclusively deemed to have indicated his or her acceptance and
ratification of, and consent to, any action taken under the Plan by the
Company, the Board of Directors or the Committee or its delegates.
12
<PAGE>
PHYSIO-CONTROL INTERNATIONAL CORPORATION
PROXY
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 1, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Richard O. Martin, Robert M.
Guezuraga, or Stephen G. Pagliuca, and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all of the shares of
Physio-Control International Corporation, a Delaware corporation (the
"Company") which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of the Company to be held at the Hyatt Regency Hotel,
900 Bellevue Way Northeast, Bellevue, Washington, 98004, on Thursday, May 1,
1997, at 10:00 a.m. or at any adjournment or postponement thereof, as shown
on the voting side of this card.
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<PAGE>
/X/PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE. 6877
This proxy will be voted as specified. If a choice is not specified, this proxy
will be voted FOR the nominees for Class II Directors and FOR Proposals 2-4.
1. Election of All FOR WITHHELD
Nominees for Class / / / /
II Directors Listed
Hereon.
Nominees:
John J. O'Malley
Robert A. Sandler
For all nominees listed hereon, except vote
withheld from the following nominee(s):
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FOR AGAINST ABSTAIN
2. Authorize changing / / / / / /
the Company's and its
principal operating
subsidiary, Physio-Control
Corporation's state of
incorporation from Delaware
to Washington. The Board
of Directors recommends a
vote FOR this proposal.
FOR AGAINST ABSTAIN
3. Approval of the adoption / / / / / /
of an amended and restated
1997 Stock and Incentive
Plan. The Board of Directors
recommends a vote FOR this
proposal.
4. Approval of the / / / / / /
appointment of Price
WaterHouse LLP as the
independent certified public
accountants for the
Company's 1997 fiscal year.
The Board of Directors
recommends a vote FOR this
proposal.
5. In their discretion,
the proxies are authorized
to vote upon such other
business as may properly
come before the Annual
Meeting or any adjournment
or postponement thereof.
SIGNATURE(S)_____________________________________ DATE __________________
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
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