<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
MEDSTONE INTERNATIONAL, INC.
100 COLUMBIA
SUITE 100
ALISO VIEJO, CALIFORNIA 92656
_______________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 1, 1997
To the Stockholders of
Medstone International, Inc.
The 1997 Annual Meeting of Stockholders of Medstone International,
Inc., a Delaware corporation (the "Company"), will be held at the Company's
headquarters, 100 Columbia, Suite 100, Aliso Viejo, California on May 1, 1997,
at 2:00 p.m., local time (the "Meeting"), for the following purposes:
1. To elect a board of four directors of the Company to serve for
the ensuing year and until their successors are duly elected and qualified;
2. To consider and vote upon a proposal to approve the Company's
1997 Stock Incentive Plan;
3. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31, 1997; and
4. To transact such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
THE FOREGOING ITEMS OF BUSINESS ARE MORE FULLY DESCRIBED IN THE PROXY
STATEMENT ACCOMPANYING THIS NOTICE.
The Board of Directors has fixed the close of business on March 17,
1997 as the record date for the determination of stockholders entitled to
notice of and to vote at the meeting.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN
PERSON. YOU ARE URGED TO SIGN, DATE AND OTHERWISE COMPLETE THE ENCLOSED PROXY
CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN
PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE SIGNED AND RETURNED YOUR PROXY
CARD.
By order of the Board of Directors,
Mark Selawski, Secretary
Aliso Viejo, California
April 7, 1997
<PAGE> 3
MEDSTONE INTERNATIONAL, INC.
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Medstone International, Inc., a Delaware
corporation (the "Company"), for use at the Company's 1997 Annual Meeting of
Stockholders to be held on May 1, 1997, at 2:00 p.m., local time (the
"Meeting") and at any and all adjournments and postponements of the Meeting.
This Proxy Statement and the accompanying form of proxy are expected to be
first mailed to stockholders on or about April 7, 1997.
PURPOSES OF THE ANNUAL MEETING
The purposes of the Annual Meeting are; 1) to elect a board of four
directors of the Company to serve for the ensuing year and until their
successors are duly elected and qualified; 2) to consider and vote upon a
proposal to approve the Company's 1997 Stock Incentive Plan; 3) to ratify the
appointment of Ernst & Young LLP as independent auditors of the Company for the
year ending December 31, 1997; and 4) to transact such other business as may
properly come before the Meeting and any adjournment or postponement thereof.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
Mark Selawski, Secretary) a written notice of revocation or a fully executed
proxy bearing a later date or by attending the Meeting and voting in person.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 17, 1997 (the
"Record Date") are entitled to notice of and to vote at the Meeting. At the
Record Date, 5,439,280 shares of the Company's Common Stock were issued and
outstanding (after deducting 147,000 shares held in Treasury).
SOLICITATION
The costs of soliciting proxies will be paid by the Company. Proxies may
also be solicited in person or by telephone, telegraph or cable by personnel of
the Company who will not receive any additional compensation for such
solicitation. The Company may reimburse brokers or other persons representing
beneficial owners of stock for their expenses in forwarding solicitation
materials to such beneficial owners.
QUORUM AND VOTING
The holders of a majority of the shares of Common Stock outstanding on the
record date and entitled to be voted at the Annual Meeting, present in person
or by proxy, will constitute a quorum for the transaction of business at the
Meeting and any adjournment thereof. Each stockholder is entitled to one vote
for each share of Common Stock on any matter that may be presented for
consideration and action by the stockholders at the Meeting.
1
<PAGE> 4
Unless otherwise directed by the stockholder on the proxy card, the persons
named as proxies will vote the shares represented by each proxy FOR the
nominees to be directors named herein, FOR the approval of the Company's 1997
Stock Incentive Plan, and FOR the ratification of the appointment of Ernst &
Young LLP as the Company's independent auditors.
Abstentions will be counted for purposes of determining both (i) the
presence or absence of a quorum for the transaction of business, and (ii) the
total number of votes present and entitled to vote with respect to a proposal
(other than the election of directors). Accordingly, abstentions will have the
same effect as a vote against a proposal.
Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but will not be counted
as present or entitled to vote for purposes of determining the number of votes
cast with respect to the particular proposal on which the broker has expressly
not voted.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1998 Annual Meeting of Stockholders must
be received by the Company no later than December 8, 1997 in order that they
may be included in the Proxy Statement and form of proxy relating to that
meeting.
PROPOSAL ONE -
ELECTION OF DIRECTORS
VOTING PROCEDURE
The authorized number of the Company's directors is currently fixed at
four. All four directors will be elected at the Meeting to serve until the
next annual meeting of stockholders and until their successors are duly elected
and qualified. Provided a quorum is present at the Meeting, the four nominees
receiving the greatest numbers of votes will be elected. Each share entitles
its holder to vote for four nominees and to cast one vote for any nominee.
NOMINEES FOR ELECTION
Management's nominees for election as directors at the Meeting are
set forth in the table below. Unless authority to vote for any directors is
withheld in a proxy, it is intended that each proxy will be voted for such
nominees. In the event that any of the nominees for directors before the
Meeting become unavailable to serve, it is intended that shares represented by
proxies which are executed and returned will be voted for such substitute
nominees as may be recommended by the Company's existing Board of Directors,
unless other directions are given in the proxies. To the best of the Company's
knowledge, all the nominees will be available to serve.
<TABLE>
<CAPTION>
NOMINEE AGE PRINCIPAL OCCUPATION
------- --- --------------------
<S> <C> <C>
David V. Radlinski 52 Chairman of the Board and
Chief Executive Officer of the Company
Frank R. Pope 47 Managing Director
Verdigris Capital
Donald John Regan 62 Vice President and General Counsel
Kinsell, O'Neil, Newcomb & De Dios, Inc.
Michael C. Tibbitts 49 Officer and Vice President of Business Development
Gulf South Medical Supply, Inc.
</TABLE>
2
<PAGE> 5
Mr. Radlinski has been the Chairman of the Board and Chief Executive
Officer of the Company since September 1995. He had been the President of the
Company's subsidiary, Medstone International, Inc., and Chief Financial Officer
and Secretary of the Company from January 1991 to September 1995. From July
1987 to January 1991, he was the Company's Executive Vice President of Finance,
Chief Financial Officer and Secretary. From 1984 to 1987, he was Vice
President of Finance and Chief Financial Officer of Printronix, Inc., a
publicly-owned company which manufactured computer printers.
Mr. Pope is Managing Director of Verdigris Capital, a private investment
banking firm. From April 1981 to October 1996, Mr. Pope was a General Partner
with Technology Funding, a venture capital investment firm. He was also the
Executive Vice President, Chief Financial Officer and a director of Technology
Funding Inc. Mr. Pope is also a director of Thermatrix, Inc. and a director
and officer of Advanced BioCatalytics Corp. Mr. Pope is a C.P.A. and a member
of the California Bar. He has been a director of the Company since January
1991.
Mr. Regan is currently the Vice President and General Counsel of Kinsell,
O'Neal, Newcomb & De Dios, Inc., a municipal securities investment banking
firm. Mr. Regan has practiced securities, municipal finance, nonprofit
corporation, real estate, and business transactions law for over thirty years.
He is a member of the National Association of Bond Lawyers, has published
several articles on securities law and served as a lecturer for the Practicing
Law Institute. He specializes in revenue and project finance bonds. He is
also a founding owner of and remains as special counsel to ARV Assisted Living,
Inc., a developer of residential retirement facilities and the largest provider
of assisted living services in the United States. He has been a director of
the Company since September 1995.
Michael C. Tibbitts has been with Gulf South Medical Supply, Inc. since
1991 as Vice President of Business Development. Prior to joining that
corporation, he was employed for 19 years by Johnson & Johnson in two
divisions: Sterile Design (which manufactured and marketed kit packages) and
Surgikos (which manufactured and marketed surgical supplies). He has been a
director of the Company since May 1996.
COMMITTEES AND MEETINGS
The Audit Committee of the Board of Directors currently consists of
Messrs. Regan and Pope. The Audit Committee reviews and reports to the Board
of Directors with respect to various auditing and accounting matters, including
the selection of the Company's independent public accountants and the scope of
the annual audit.
The Compensation Committee currently consists of Messrs. Regan and Pope.
The Compensation Committee reviews salaries and other compensation of employees
of the Company and furnishes recommendations for compensation adjustments to
the Board of Directors.
The Stock Option Committee currently consists of Messrs. Pope and
Tibbitts. The Stock Option Committee administers the Company's employee stock
incentive plans and, to the extent required, the Company's nonemployee director
stock option plan.
The Board of Directors has not established a standing nominating committee
or other committee performing similar functions.
During the Company's fiscal year ended December 31, 1996, there were 4
meetings of the Board of Directors, 2 Stock Option Committee meetings and 1
Compensation Committee meeting. Messrs. Radlinski, Pope, Tibbitts and Regan
attended 100% of these meetings applicable to them.
3
<PAGE> 6
COMPENSATION OF DIRECTORS
The Company currently compensates Messrs. Regan and Tibbitts $1,000 per
meeting for their services, in addition to reimbursement to all directors for
expenses incurred by them in connection with the Company's business.
Under the Nonemployee Director Stock Option Plan, each new nonemployee
director is automatically granted an option to purchase up to 5,000 shares as
of the effective date of his or her first appointment to the Board or first
election to the Board by the shareholders, whichever is earlier. Subject to
acceleration of the option exercises in the event of certain events specified
in the plan, each such option becomes exercisable with respect to 1/60 of the
shares issuable for each elapsed full month during the five-year period after
its grant date, but will not be initially exercisable until six months after
the grant date. The exercise price of each option will equal the fair market
value of the underlying Common Stock on the date the option is granted. Each
option will expire six years after its grant, except that the expiration will
be extended until one year after the optionee's death if it occurs less than
one year before the option's expiration date. An option granted under the plan
is not transferrable during the grantee's lifetime and must be exercised within
one year following his or her death, or within 90 days after the grantee ceases
to be a member of the Board for any other reason, and will only be exercisable
to the extent it is exercisable on the date the grantee leaves the Board.
Under this plan, Mr. Pope was granted 5,000 shares at $2.38 per share in
January 1992, Mr. Regan was granted 5,000 shares in September 1995 at $11.88
and Mr. Tibbitts was granted 5,000 shares at $8.63 per share in May 1996.
As additional compensation, each current nonemployee director of the
Company has received an option to purchase up to 15,000 shares of the Company's
Common Stock. The options issued to Mssrs. Pope, Tibbitts and Regan were
issued in November 1996 and have exercise prices of $7.13 per share. The
options are exercisable, after six months following their grant dates, in
incremental amounts equal to 1/48 of the underlying shares for each elapsed
calendar month after the grant date during which the director remains on the
Company's board. The terms of the options are five years, subject to earlier
termination related to the director no longer serving on the board.
VOTE REQUIRED AND RECOMMENDATION OF BOARD OF DIRECTORS
The nominees receiving the highest number of affirmative votes of the
shares entitled to be voted, up to the number of directors to be elected, shall
be elected as directors. Votes withheld will be counted for purposes of
determining the presence of a quorum for the transaction of business at the
Meeting, but will have no other effect upon the election of directors.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
NOMINEES SET FORTH HEREIN.
4
<PAGE> 7
PROPOSAL TWO -
APPROVAL OF THE COMPANY'S 1997 STOCK INCENTIVE PLAN
GENERAL
The Board of Directors adopted the 1997 Stock Incentive Plan (the "1997
Plan") in March 1997, to be effective as of May 1, 1997 if approved by the
Company's shareholders. The Board has elected to seek shareholder approval to
have the 1997 Plan meet the requirements for granting "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Tax
Code") and the listing requirements for the NASDAQ National Market System. The
affirmative vote of the holders of a majority of the shares present at the
Meeting and entitled to vote is required to approve the 1997 Plan. The Board
of Directors recommends a vote FOR approval of the 1997 Plan.
The 1997 Plan provides for the granting of a variety of stock-related
securities ("Awards"), including shares of Common Stock, stock options intended
to qualify as incentive stock options, stock options not intended to qualify as
incentive stock options ("non-statutory options") and stock appreciation rights
("SARs"). The purposes of the 1997 Plan are to attract and retain the services
of officers and key employees of the Company and to provide incentives for such
persons and other selected persons to exert their maximum efforts to promote
the growth and success of the Company. The following summary is not a complete
description of all the provisions of the 1997 Plan. Any stockholder who wishes
to obtain a complete copy of the 1997 Plan text may do so by submitting a
written request at the Company's corporate offices addressed to the Company's
Secretary.
The Company's existing 1989 Stock Incentive Plan (the "1989 Plan") has
terms similar to those of the 1997 Plan, although only stock options have
actually been issued under the 1989 Plan. The number of shares that may be
issued pursuant to additional awards under the 1989 Plan is limited, which has
led to the adoption of the 1997 Plan. Upon shareholder approval of the 1997
Plan at the Meeting, no further awards will be granted under the 1989 Plan, but
outstanding awards granted thereunder will continue in effect.
ADMINISTRATION
The 1997 Plan will be administered by a committee of two or more persons
appointed by the Company's Board of Directors (the "Committee"). The Committee
may delegate the granting of Awards and other administration of the 1997 Plan
to officers of the Company or other persons and the Board itself may carry out
the functions of the Committee. Subject to the provisions of the 1997 Plan and
Board approval requirements or other limitations under applicable laws, the
Committee will have authority to grant Awards and interpret the 1997 Plan.
ELIGIBILITY
The 1997 Plan authorizes the Committee to grant Awards to any officers,
directors or key employees of the Company or its subsidiaries and to any other
consultants or individuals whose participation in the 1997 Plan the Committee
determines is in the Company's best interests ("Eligible Grantees"). However,
if necessary for securities issuances under the 1997 Plan to qualify for
registration under the Securities Exchange Act of 1933, as amended, on Form S-8
(or another similar form covering employee benefit plan issuances), awards may
only be issued to individuals who are not employees, officers or directors of
the Company or its subsidiaries if such individuals are consultants or advisors
to such entities who render bona fide services not in connection with the offer
or sale of securities in capital-raising transactions. An Eligible Grantee who
has been granted an Award may be granted additional Awards or Awards in
substitution for previously granted or exercised Awards, if the Committee so
determines. The Committee may make Award grants singly, in combination or in
tandem, subject to limitations on tandem grants under the Tax Code with respect
to incentive stock options. No awards have been made under the 1997 Plan.
5
<PAGE> 8
STOCK ISSUABLE UNDER THE 1997 PLAN
The stock issuable under the 1997 Plan will be shares of the Company's
Common Stock, par value $0.004 per share, consisting of authorized but unissued
shares or previously issued shares reacquired by the Company, including shares
purchased on the open market. Shares subject to outstanding Awards of options
or SARs will be reserved for issuance. The total number of shares of Common
Stock issuable under the 1997 Plan is 800,000 shares, increased on January I of
each year the 1997 Plan is in effect by a number of shares equal to one percent
of the total number of outstanding shares of Common Stock on that date. The
number of shares issuable under the 1997 Plan will be subject to adjustments as
described below. Should a stock option granted under the 1997 Plan expire,
terminate or be cancelled prior to its exercise in whole or in part, the shares
subject to the unexercised portion of the option will be available for
subsequent Award grants under the 1997 Plan. Shares of Restricted Stock issued
under the 1997 Plan which are reacquired by the Company or cancelled pursuant
to the terms of the Restricted Stock Awards will also be available for
subsequent Award grants. Any shares of stock surrendered to the Company to pay
the exercise prices upon exercises of stock options or to satisfy withholding
tax requirements related to Awards will not be added to the number of shares of
stock available for issuance under the 1997 Plan. If the number of shares to
be issued pursuant to an option exercise is reduced to pay the exercise price
or if the number of shares to be issued pursuant to an Award is reduced to
satisfy tax withholding requirements, the number of shares issuable under the
1997 Plan will be reduced by such reduction. The number of shares issuable
under the 1997 Plan will be decreased (but without duplication for shares
received upon such exercise) by the number of shares covered by the portion of
the option which is cancelled or surrendered in whole or in part upon the
exercise of a Tandem SAR granted with respect to that option. The number of
shares issuable under the 1997 Plan will also be reduced, upon the exercise of
a portion of a Freestanding SAR, by the same portion of the total number of
shares of Common Stock with respect to which the Freestanding SAR was
originally granted, as specified by the Committee at the time of its grant. No
Awards have been made under the 1997 Plan.
PAYMENT OF OPTION EXERCISE PRICE
Payment for shares of stock purchased upon any exercise of an option
granted under the 1997 Plan will be made in full in cash concurrently with such
exercise, except that, if the Committee shall have authorized it and the
Company is not then legally prohibited from receiving such consideration, the
purchase may be made in whole or in part: (i) by forgiveness of indebtedness
owed by the Company to the purchaser-, (ii) by transfer or surrender to the
Company concurrently with such exercise of shares of stock valued on the basis
of the fair market value of the stock on the date of exercise; (iii) by
reducing the number of shares of stock to be delivered to the optionee upon
exercise of the option, with the reduction valued on the basis of the aggregate
fair market value on the date of exercise of the additional shares of stock
that would otherwise have been delivered to the optionee upon the option
exercise; (iv) by the delivery, concurrently with such exercise and in
accordance with Regulation T promulgated under the Securities Exchange Act of
1934, or any successor rule or regulation, of a properly executed exercise
notice for the option and irrevocable instructions to a broker promptly to
deliver to the Company to pay the exercise price a specified amount of the
proceeds of a sale of the option shares or loan secured by the option shares;
and/or (v) by other means determined by the Committee to be consistent with the
1997 Plan's purposes. Subject to any Board approval requirements or other
limitations under applicable laws, the Committee may also assist any optionee
(including an officer or director) in the exercise of his or her option by
authorizing a loan from the Company, permitting the optionee to pay the
exercise price in installments or authorizing a guarantee by the Company of a
third party loan to the optionee. The terms and conditions of any such loan,
installment sale or guarantee will be determined by the Committee.
FAIR MARKET VALUE OF SHARES
For purposes of establishing the exercise price and other valuations
under the 1997 Plan, the fair market value of a share of Common Stock on any
relevant date is to be determined in accordance with the following rules. If
the Common Stock is at the time listed or admitted to trading on a securities
exchange, the fair market value will
6
<PAGE> 9
be the closing price per share of Common Stock on the composite tape of the
principal securities exchange on which the Common Stock is listed or so
admitted. If the Common Stock is not listed or admitted to trading on any
securities exchange but is traded in the over-the-counter market, the fair
market value will be the reported closing price or, if such prices are not
reported, the mean between the last reported bid and asked prices, per share of
Common Stock as furnished by the National Association of Securities Dealers,
Inc. through its NASDAQ system or any similar organization. If the Common
Stock is neither listed nor admitted to trading on any securities exchange and
prices for the stock are not so furnished through NASDAQ or a similar
organization, the fair market value will be determined by the Committee. On
February 20, 1997, the fair market value of the Common Stock was $9.125 per
share, representing the closing price per share for the Common Stock on that
date as reported on the NASDAQ National Market System.
TERMS OF INCENTIVE STOCK OPTIONS
The 1997 Plan incorporates the provisions of the federal tax laws
applicable to incentive stock options. Accordingly, if then required by the
Tax Code: (i) incentive stock options may only be granted to employees of the
Company or its affiliated corporation specified in Section 422(a)(2) of the Tax
Code (an "Eligible Employer"); (ii) no incentive stock option may be granted
under the 1997 Plan more than 10 years after the 1997 Plan's effective date;
(iii) the per share exercise price of an incentive stock option may not be less
than 100% of the fair market value of a share of the Common Stock on the date
of grant; (iv) an incentive stock option may not be exercised more than 10
years after its grant date; (v) if an incentive stock option is granted to an
employee owning more than 10% of the total combined voting power of all classes
of stock of the Company or of its parent or subsidiary corporation, the
exercise price may not be less than 110% of such fair market value and the
option may not be exercised more than five years after its grant date; (vi) the
aggregate fair market value (determined as of the date of grant) of the shares
of Common Stock for which one or more incentive stock options granted under the
1997 Plan or any other plans of the Company held by an optionee first become
exercisable in a single calendar year may not exceed $100,000; (vii) an
incentive stock option will not be assignable or transferrable by the optionee
other than by will or the laws of the descent and distribution and, during the
optionee's lifetime, may be exercised only by him or her; (viii) if the
optionee ceases to be employed by an Eligible Employer for any reason, other
than because of his or her death or total disability, any portion or all of the
optionee's incentive stock option which has not been previously exercised will
expire, subject to earlier expiration pursuant to other sections of the 1997
Plan or the terms of the option, three months following the date his or her
employment is terminated and will only be exercisable to the extent exercisable
on the date of termination; and (ix) if the optionee ceases to be employed by
an Eligible Employer because of his or her total disability, his or her
incentive stock option will expire, subject to earlier expiration pursuant to
other sections of the 1997 Plan or the terms of the option, one year after the
date his or her employment is terminated and will only be exercisable to the
extent exercisable on the date of termination.
OTHER OPTION TERMS
Unless otherwise approved by the Committee, in its discretion, and
agreed in writing by the Company and the optionee in the Award agreement or
otherwise, each option granted under the 1997 Plan shall be subject to the
following conditions: (i) the exercise price per share of the stock subject to
the option shall not be less than 100% of the fair market value on the grant
date; (ii) no option may be exercised in whole or in part more than 10 years
after its grant date; (iii) if the optionee for any reason ceases to be
employed or retained as an employee or service provider (which shall include
serving as a director) by an Eligible Employer, other than because of his or
her death or total disability, any portion or all of the optionee's option
which has not been previously exercised shall expire, subject to earlier
expiration pursuant to other sections of the 1997 Plan or the terms of the
option, three months following the date he or she ceases to be so employed or
retained and shall only be exercisable to the extent exercisable on the date of
termination; (iv) if the optionee ceases to be so employed or retained because
of his or her death or total disability, his or her option shall expire,
subject to earlier expiration pursuant to other sections of the 1997 Plan or
the terms of the option, one year following the date he or she ceases to be so
employed or retained and shall only be exercisable to the extent exercisable on
the date of termination; (v) if the optionee dies less than
7
<PAGE> 10
one year before the expiration date of his or her option, the expiration date
will be extended to one year after the date of his or her death; and (vi) the
option will not be transferable by the optionee except by will or the laws of
the descent and distribution, and will be exercisable during the optionee's
lifetime only by him or her. In the event of an optionee's death, his or her
option may be exercised by the executor, administrator or personal
representative of his or her estate, or by the person inheriting the option, to
the extent the option is otherwise exercisable under the terms of the 1997
Plan.
STOCK APPRECIATION RIGHTS
At the Committee's discretion, an Eligible Grantee may be issued a
Tandem SAR to receive upon its exercise an amount equal to some or all of the
excess of the fair market value as of the date of exercise of the shares
subject to unexercised portions of the option with respect to which the Tandem
SAR is granted (the "Corresponding Option") over the aggregate exercise price
for such shares under the Corresponding Option. No Tandem SAR may be exercised
in whole or in part other than in connection with the contemporaneous surrender
without exercise of its Corresponding Option, or the portion thereof that
corresponds to the portion of the Tandem SAR being exercised, or except to the
extent that the Corresponding Option or such portion thereof is exercisable on
the date of exercise of the Tandem SAR. A Tandem SAR may be granted at the
time the Corresponding Option is granted or at any time thereafter during the
term of the Corresponding Option. With respect to any Tandem SAR, the
Committee, in its discretion, may place an upper limit on the amount payable on
exercise of the SAR, may limit the exercise of the SAR to specified time
periods or to a portion of the shares subject to the Corresponding Option, may
require a portion of the shares subject to the Corresponding Option to be
purchased as a condition to exercise of the SAR, may add any restrictions
necessary to provide for incentive stock option treatment of the Corresponding
Option and may provide such other provisions or limitations as are consistent
with the 1997 Plan and applicable laws and regulatory requirements.
At the Committee's discretion, an Eligible Grantee may be issued a
Freestanding SAR to receive upon its exercise an amount equal to some or all of
the excess of the fair market value of a number of shares of Common Stock
specified by the Committee at the time of the Freestanding SAR's grant over a
base value (which may or may not equal the fair market value of the same number
of shares at the date of grant) determined by the Committee. The Committee, in
its discretion, may place an upper limit on the amount payable on exercise of
the Freestanding SAR, may limit the exercise periods and may provide such other
provisions or limitations as are consistent with the 1997 Plan and applicable
laws and regulatory requirements.
As determined or agreed to by the Committee, the amount payable upon
exercise of an SAR may be paid in cash, in shares of Common Stock (valued on
the basis of their fair market value on the exercise date and rounded down to
the highest number of whole shares, unless payment for a fractional share
equivalent shall be agreed to by the Committee) or in a combination of cash and
such shares so valued. The Committee may permit a grantee to defer payments
payable to him or her upon exercise of an SAR under such rules and procedures
as the Committee may establish, including (without limitation) the crediting of
interest on deferred amounts denominated in cash and of dividend equivalents on
deferred amounts denominated in Common Stock.
EXERCISE OF OPTIONS AND SARS
Unless consideration other than services to the Company or its
affiliated entity is given for such Award, no Option or SAR shall be
exercisable until at least six months after its date of grant. The Committee
will, in its discretion subject to the requirements of the 1997 Plan and
applicable laws and regulatory requirements, prescribe the terms and conditions
upon which options and SARs may be exercised, which need not be the same in
each case. Such terms and conditions may include (without limitation) vesting
and acceleration provisions and provisions requiring termination of options and
SARs following termination of employment or other occurrences. At any time,
the Committee and the option or SAR holder may agree to accelerate the exercise
date or dates for any outstanding option or SAR or portion thereof.
8
<PAGE> 11
CHANGES IN CAPITALIZATION
If the number of outstanding shares of Common Stock is increased or
decreased by a stock dividend payable in shares of stock or a subdivision,
split, combination or reverse split of outstanding shares of stock, or if the
outstanding shares of stock are changed into or exchanged for a different
number or kind of securities of the Company through a reorganization, merger,
recapitalization or reclassification, an appropriate and proportionate
adjustment shall be made in the number and kind of securities as to which
Awards may be granted under the 1997 Plan. A corresponding adjustment changing
the number and kind of securities allocated to, and the exercise price per
share of, options, SARs or portions thereof outstanding at the time of such
change shall likewise be made. Any such adjustment of an outstanding option
shall be made without changing the total exercise price for the unexercised
portion of the option.
Subject to rights of holders of outstanding shares under Section 155
of the Delaware General Corporation Law or any successor provision, no
fractional shares of Common Stock will be issued under the 1997 Plan, and no
payment will be made with respect to fractional shares, on account of any such
adjustment unless approved by the Committee in its discretion. The grant of an
Award pursuant to the 1997 Plan will not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes of its capital structure, to merge, consolidate or dissolve, or to
liquidate, sell or transfer all or any part of its business or assets.
ACCELERATION OF OPTIONS AND SARS UPON CERTAIN EVENTS
The Company will give to each holder of an outstanding Award granted
under the 1997 Plan at least fifteen (15) days advance written notice of any of
the following transactions ("Corporate Transactions"): (i) the dissolution or
liquidation of the Company; (ii) a reorganization, merger or consolidation as a
result of which the Company is not the surviving entity or as a result of which
the outstanding shares of Common Stock are changed into or exchanged for cash,
property or securities not of the Company's issue (other than a merger or
consolidation with a wholly-owned subsidiary of the Company or a transaction
effected for the purpose of changing the state in which the Company is
incorporated); and (iii) the sale or other transfer of all or substantially all
of the Company's assets in one or a series of transactions to any person or
entity or to persons or entities which are affiliated or acting in concert with
respect to such sale or transfer. Any option or SAR granted under the 1997
Plan will automatically terminate upon the closing of the Corporate Transaction
and will become fully exercisable with respect to all unissued shares subject
to the option or the full remaining SAR payment prior to the closing of the
Corporate Transaction. The Committee may impose limitations on the
applicability of the preceding sentence and that sentence will not be
applicable with respect to any option or SAR if provision is made in connection
with the Corporate Transaction for assumption of the option or SAR by, or the
substitution for the option or SAR of a new option or SAR covering the stock
of, the surviving, successor or purchasing corporation or a parent or
subsidiary thereof. In connection with such an assumption or substitution,
appropriate adjustments shall be made to the exercise price and number and kind
of shares or other property issuable upon exercise of the option or SAR. The
Committee may also permit or require other accelerations of option or SAR
exercise dates upon the occurrence of a Corporate Transaction or any other
acquisition of the Company's shares or business or changes in control of the
Company. The possible acceleration of option or SAR exercise dates in the
event of such a Corporate Transaction, acquisition or change in control of the
Company may have the effect of discouraging potential merger proposals,
takeover attempts or other efforts to gain control of the Company or remove
incumbent management.
9
<PAGE> 12
STOCKHOLDER AND EMPLOYMENT RIGHTS
An option or SAR holder will have none of the rights of a stockholder
with respect to the shares subject to his or her option or SAR until such
shares have been duly issued to the holder pursuant to his or her exercise of
the option or SAR. Nothing contained in the 1997 Plan will be deemed to give
any grantee of an Award a right to the continuation of his or her employment by
the Company to which he or she is not otherwise entitled, nor will the Company
be under any obligation by virtue of the 1997 Plan to retain any grantee as an
employee for any period.
ASSIGNABILITY OF OPTIONS AND SARS
Unless otherwise provided in the 1997 Plan and the Award agreement
between the grantee and the Company, as each may be amended, an Option or SAR
granted under the 1997 Plan will not be transferable by the grantee and will be
exercisable during the grantee's lifetime only by him or her, and amounts
payable or shares issuable pursuant to such an Award will be delivered only to
or for the account of the grantee. Subject to the transferability limitations
applicable to incentive stock options, securities laws requirements and the
terms of the Award agreements, the foregoing restrictions will not apply to (i)
transfers to the Company; (ii) the designation of a beneficiary to receive
benefits in the event of the grantee's death or, if the grantee has died,
transfers to or exercise by the grantee's beneficiary, or, in the absence of a
validly designated beneficiary, transfers by will or the laws of descent and
distribution; (iii) transfers pursuant to a domestic relations order (as
defined in Section 414(p) of the Tax Code) relating to the grantee; (iv) if the
grantee has suffered a disability, permitted transfers or exercises on behalf
of the grantee by his or her legal representative; or (v) the authorization by
the Committee of "cashless exercise" procedures with third parties who provide
financing for the purpose of (or who otherwise facilitate) the exercise of
Awards consistent with applicable laws and the authorization of the Committee.
Subject to the transferability limitations applicable to incentive stock
options and securities laws requirements, the Committee also may permit an
Award to be exercised by and paid to certain persons or entities related to the
grantee, including but not limited to members of the grantee's family,
charitable institutions, or trusts or other entities whose beneficiaries or
beneficial owners are members of the grantee's family and/or charitable
institutions, pursuant to such conditions and procedures as the Committee may
establish. Any transfer permitted by the preceding sentence shall be subject
to the condition that the Committee receive evidence satisfactory to it that
the transfer is being made for estate and/or tax planning purposes on a
gratuitous or donative basis and without consideration (other than nominal
consideration).
RESTRICTED STOCK
The Committee may issue shares of Common Stock under the 1997 Plan
("Restricted Stock") to any Eligible Grantee in such amounts and for such
lawful consideration as the Committee determines is beneficial to the Company.
The Committee will determine the terms and conditions applicable to any such
Restricted Stock issuance including, without limitation, rights of the Company
or its assignees to acquire all or a portion of the shares upon termination of
the grantee's employment by the Company or upon other specified dates or
events, restrictions on transfers of the shares, possession of share
certificates, voting and dividend rights with respect to shares which are
restricted and the effects of changes in the Company's control. The Committee
may also agree to issue Restricted Stock to an Eligible Grantee on a deferred
basis at a future date or future dates, and may provide that until the issuance
of deferred shares the grantee may receive payments from the Company as
additional compensation equal to dividends that would have been paid on the
deferred shares if they had been outstanding on the record dates for the
dividend payments.
WITHHOLDING TAXES
Upon any exercise, vesting, payment or other grant related to an Award
issued under the 1997 Plan, the Company or any affiliate the recipient will
have the right to deduct from the recipient's compensation or require the
recipient to remit to the employer corporation an amount sufficient to satisfy
federal, state and local withholding tax requirements applicable to each event.
If such payment is legally permissible and is approved by the Committee and
10
<PAGE> 13
the employer corporation, such amount may be paid by surrender or retention of
the recipient's shares of Common Stock valued at their current fair market
value.
FOREIGN GRANTEES
In order to fulfill the 1997 Plan's purposes and without amending the
1997 Plan, Awards may be granted to Eligible Grantees who are foreign
nationals, employed outside the United States or both on such terms and
conditions different from those otherwise specified in the 1997 Plan as may, in
the judgment of the Committee, be necessary or desirable to recognize
differences in applicable foreign laws, tax policy or customs.
AMENDMENT AND TERMINATION OF THE PLAN AND OF AWARDS
The Company's Board of Directors will have full power to amend or
modify the 1997 Plan; however, the Board may not deprive a grantee of any
outstanding Award or rights thereunder without his or her consent. Unless
approved by the Company's shareholders, the Board may not make any amendment
which would increase the total number of shares of Common Stock or other
securities of the Company that are issuable under the 1997 Plan. Shareholder
approval of certain plan amendments might be required to satisfy requirements
for incentive stock options under Section 422 of the Tax Code and for listing
on the NASDAQ National Market System.
The Board may terminate the 1997 Plan at any time. Any options or
SARs outstanding at the time of the termination of the 1997 Plan will remain in
force in accordance with their respective terms.
Subject to the terms and limitations set forth in the 1997 Plan, the
Committee and the grantee may without shareholder approval modify, extend,
review or terminate any outstanding Award or agreement evidencing an Award.
FEDERAL INCOME TAX CONSEQUENCES
Current federal income tax consequences of Awards granted under the
1997 Plan are summarized below. Special rules and exceptions not described
below will apply in certain circumstances. ln addition, the federal tax laws
are complex and subject to continuing changes. Accordingly, this summary
should not be relied upon as being a complete statement.
INCENTIVE STOCK OPTIONS. Options granted under the 1997 Plan may be
either incentive stock options which satisfy the requirements of Section 422 of
the Tax Code or non-statutory options which are not intended to satisfy such
requirements. No taxable income is recognized by the optionee upon the grant
of an incentive stock option, and no taxable income is generally recognized
upon exercise. However, the amount by which the current fair market value of
the shares received upon exercise of an incentive stock option exceeds the
exercise price of the shares will generally be an item of alternative minimum
taxable income for purposes of the alternative minimum tax under Section 55 of
the Tax Code.
The optionee will recognize taxable income in the year in which shares
received upon the exercise of an incentive stock option are sold or otherwise
disposed of. For federal income tax purposes, dispositions of incentive stock
options arc divided into two categories: qualifying and disqualifying. The
optionee will make a qualifying disposition of the purchased shares if the sale
or other disposition of the shares is made after the optionee has held the
shares for more than two years after the grant date of the option and more than
one year after the exercise date. If the optionee fails to satisfy either of
these two holding periods prior to the sale or other disposition of the
purchased shares, other than because of death or insolvency, then a
disqualifying disposition will result. Upon a qualifying disposition of the
shares, the optionee will recognize long-term capital gain in an amount equal
to the excess of the amount realized upon the sale or other disposition over
the exercise price paid for the shares. If there is a disqualifying
disposition of the shares, then the lesser of (i) the excess of the fair market
value of the shares at the date of exercise over the exercise price paid
therefor, or (ii) the amount realized on disposition of the stock over
11
<PAGE> 14
the exercise price, will be taxable as ordinary income. Any additional gain
recognized upon the disqualifying disposition will be a capital gain. If the
optionee makes a disqualifying disposition of the purchased shares, the Company
will be entitled to an income tax deduction, for the taxable year of the
Company in which the disposition occurs, equal to the ordinary income
recognized by the optionee.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. Subject to the rules regarding
restricted stock purchases described below, the optionee will recognize
ordinary income in the year in which the option is exercised equal to the
excess of the fair market value of the purchased shares at the date of exercise
over the exercise price. If the exercise price is paid by the optionee in
cash, the tax basis of the shares acquired will be equal to the cash paid plus
the amount of income recognized by the optionee as a result of the exercise.
The Company will be entitled to an income tax deduction, for the taxable year
or the Company in which the exercise occurs, equal to the income recognized by
the optionee. Upon any subsequent disposition of the shares, any further gain
or loss recognized by the optionee will be treated as capital gain or loss.
Special rules will apply in cases where an optionee pays the exercise
price of an option or applicable withholding tax obligations under the 1997
Plan by delivering previously owned shares of the Company or by reducing the
number of shares otherwise issuable.
RESTRICTED STOCK. Subject to the rules described in the following
paragraph, Restricted Stock issuances under the 1997 Plan will (in general)
cause the issuee to recognize ordinary income in the year in which the stock is
issued, equal to the excess of the fair market value of the stock at the time
of its issuance over the purchase price paid for the stock (excluding the value
of any personal services of the issuee to the Company). The issuee will be
required to satisfy the tax withholding requirements applicable to such income.
The issuee's tax basis in the issued shares will be equal to the purchase price
paid plus the amount includable in his or her taxable income by reason of the
issuance. The Company will be entitled to an income tax deduction, for the
taxable year of the Company in which the issuance occurs, equal to such income
recognized by the issuee. Upon any subsequent disposition of the shares, any
further gain or loss recognized by the issuee will be treated as a capital gain
or loss.
Special provisions of the Tax Code apply to the acquisition of Common
Stock as Restricted Stock under the 1997 Plan or upon exercise of a
non-statutory option if the purchased shares are nontransferable and are
subject to certain repurchase rights or other "substantial risks of forfeiture"
(including potential liability of officers, directors and 10% shareholders
under Section 16(b) of the Securities Exchange Act of 1934 upon any sale of the
shares at a profit). If the Restricted Stock or shares acquired upon exercise
of the non-statutory option are nontransferable and subject to repurchase by
the Company at the original purchase price in the event the purchaser's
employment by the Company terminates before he or she vests in the shares, or
if the shares are nontransferable and subject to any other substantial risk of
forfeiture (excluding a restriction which "by its terms will never lapse"), the
stockholder will not recognize any taxable income at the time of the stock
acquisition, but will have to report as ordinary income, when the shares become
transferable or the Company's repurchase right or risk of forfeiture lapses, an
amount equal to the excess of (i) the fair market value of the shares on the
date the shares become transferable or the Company's repurchase right or the
risk of forfeiture lapses over (ii) the purchase price paid for the shares
(excluding the value of any personal services of the stockholder to the
Company). The stockholder may, however, elect under Section 83(b) of the Tax
Code to include as ordinary income in the year the stock is acquired an amount
equal to the difference between (i) the fair market value of the shares on the
date of acquisition (determined as if the shares were not subject to the
Company's repurchase right or any substantial risk of forfeiture) and (ii) the
purchase price paid for the shares. The election must be filed with the
Internal Revenue Service not later than 30 days after the date the stock is
acquired. If the Section 83(b) election is made, the stockholder will not
recognize any additional income when the shares become transferable or the
repurchase right or substantial risk of forfeiture lapses. However, if any of
the shares are forfeited before vesting after a Section 83(b) election, any
excess of the amount paid for such shares over the amount received upon the
forfeiture is treated as a capital loss rather than an ordinary loss. The
Company will be entitled to an income tax deduction, for the taxable year of
the Company in which the stockholder recognizes the ordinary income, equal to
the amount of ordinary income recognized by the stockholder.
12
<PAGE> 15
STOCK APPRECIATION RIGHTS. A grantee of an SAR under the 1997 Plan
will generally not recognize taxable income at the time the SAR or option is
granted. However, at the time of exercise of the SAR the holder (in general)
will realize ordinary income equal to the amount of cash paid by the Company or
the fair market value at the time of the exercise of any shares of Common Stock
issued to the holder. The holder will be required to satisfy the tax
withholding requirements applicable to such income. Correspondingly, the
Company will not be entitled to a deduction at the time of grant of an SAR, but
will (in general) be entitled to a deduction, for the taxable year of the
Company in which the cash payment or stock issuance occurs, equal to the amount
of ordinary income recognized by the holder.
PARACHUTE PAYMENTS. In certain circumstances, all or a portion of the
increase in the value of an unvested option or unvested SAR resulting from the
acceleration of the exercisability of the option or SAR may be treated as an
"excess parachute payment," not deductible by the Company and resulting in a
20% excise tax to the recipient. Generally, payments that are in the nature of
compensation and are contingent on a change in the ownership or effective
control of a corporation (referred to as "parachute payments") and that are
made to a shareholder, officer or highly compensated individual may be so
treated if the total of the parachute payments received by such a recipient
exceeds three times the recipient's average annual compensation in the
five-year period preceding the change in control. If the parachute payments
exceed such base amount, the portion of each parachute payment in excess of an
allocable part of the base amount (which is allocated among all parachute
payments in proportion to their present values) will be treated as an excess
parachute payment, except to the extent the recipient can show by clear and
convincing evidence that the parachute payment is reasonable compensation for
services actually rendered.
SECTION 162(M). Section 162(m) of the Tax Code may render
nondeductible to the Company certain compensation income to its CEO or another
executive officer in excess of $1,000,000 in any year.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
THE APPROVAL OF THE COMPANY'S 1997 STOCK INCENTIVE PLAN.
13
<PAGE> 16
PROPOSAL THREE -
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the financial statements of the Company for the year ending
December 31, 1997, and recommends that the stockholders vote for the
ratification of such appointment. In the event such ratification is not
approved by the holders of a majority of the shares represented either in
person or by proxy, the Board of Directors will reconsider its selection.
Ernst & Young LLP has audited the Company's financial statements since 1987.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting of Stockholders and will have the opportunity to make statements if
they so desire. The representatives also are expected to respond to
appropriate questions from stockholders.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
14
<PAGE> 17
SECURITY OWNERSHIP
The following table sets forth the number of shares of the Company's
Common Stock known to the Company to be beneficially owned as of March 1, 1997
by each person who owns beneficially more than 5 percent of the outstanding
shares of Common Stock, by each of the present directors and nominees for
director, by each of the executive officers named in the Executive Compensation
table below and by all executive officers and directors of the Company as a
group, and the percentage of the total outstanding shares of Common Stock such
shares represented as of March 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNERSHIP
------------------------------------ ---------------- -------------
<S> <C> <C>
The Kaufmann Fund 480,500 9.0%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Hathaway & Associates, Ltd. 375,000 7.0%
119 Rowayton Avenue
Rowayton, CT 06853
David V. Radlinski(2)(3) 195,815(4) 3.6%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Thomas W. Gardner(3) 122,656(5) 2.3%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Mark Selawski(3) 14,180(6) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Donald J. Regan(2) 14,183(7) (10)
462 Stevens Avenue, Suite 308
Solana Beach, CA 92075
Frank R. Pope(2) 9,250(8) (10)
25 Preston Road
Woodside, CA 94062
Michael C. Tibbitts(2) 5,167(9) (10)
27001 La Paz Road, Suite 448B
Mission Viejo, CA 92691
All executive officers and directors
as a group (6 persons) (11) 356,084 6.43%
- ---------------
</TABLE>
(1) All such shares were held of record with sole voting and investment power,
subject to applicable community property laws, by the named individual
and/or by his wife, except as indicated in the following footnotes.
(2) Director of the Company.
(3) Executive officer of the Company.
(4) Includes 56,667 shares issuable upon exercise of presently outstanding
stock options.
(5) Includes 14,000 shares issuable upon exercise of presently outstanding
stock options.
(6) Includes 10,000 shares issuable upon exercise of presently outstanding
stock options.
(7) Includes 7,583 shares issuable upon exercise of presently outstanding
stock options.
(8) Includes 7,250 shares issuable upon exercise of presently outstanding
stock options.
(9) Includes 3,167 shares issuable upon exercise of presently outstanding
stock options.
(10) Percentage information is omitted because the beneficially owned shares
represent less than 1% of the outstanding shares of the Company's
Common Stock
(11) Includes 98,667 shares issuable upon exercise of presently outstanding
stock options.
15
<PAGE> 18
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and to each of the Company's other executive
officers during fiscal 1996.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ---------------------- ---------------------
NAME OTHER RESTRICTED SECURITIES
AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS(S) OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) (#)(2) ($) ($)
- --------------------- ------ ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David V. Radlinski (3) 1996 200,000 --- --- --- 50,000 --- ---
Chairman of the Board and 1995 181,250 --- --- --- 150,000 ---
Chief Executive Officer 1994 175,000 --- --- --- --- ---
Mark Selawski (4) 1996 85,600 --- --- --- 20,000 --- ---
Chief Financial Officer, 1995 72,730
Vice President of Finance 1994 7,500 --- --- 20,000 ---
and Secretary
Thomas W. Gardner 1996 95,600 --- 35,349 --- --- --- ---
Executive Vice President of 1995 83,750 20,000 2,815 --- 40,000
Sales and Marketing 1994 95,000 --- --- --- --- --- ---
</TABLE>
_________________________________
(1) In addition to the cash compensation shown in the table, executive
officers of the Company may receive indirect compensation in the form of
perquisites and other personal benefits. For each of the named executive
officers, the amount of this indirect compensation in 1995, 1994 and 1993
did not exceed the lesser of $50,000 or 10% of the executive officer's
total salary and bonus for that year.
(2) Options to acquire shares of Common Stock.
(3) Mr. Radlinski served as the Chief Financial Officer and Secretary of the
Company until his election as Chairman of the Board and Chief Executive
Officer on September 21, 1995.
(4) Mr. Selawski was appointed Chief Financial Officer, Vice President of
Finance and Secretary on September 21, 1995.
16
<PAGE> 19
STOCK OPTION GRANTS DURING 1996
The following table provides information related to the stock options
granted in 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------------- -------------------
% OF TOTAL
SHARES EMPLOYEE
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- ----------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David V. 50,000 24% 7.13 7/23/02 121,210 274,505
Radlinski
Mark Selawski 20,000 9% 7.13 7/23/02 48,484 109,802
</TABLE>
STOCK OPTIONS HELD AT END OF FISCAL YEAR
The following table provides information related to options exercised
during 1996 and options held by the named executive officers at December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(2)
SHARES ACQUIRED -------------------------- ---------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David V. Radlinski 61,000 355,450 43,333 156,667 1,041 11,458
Thomas W. Gardner --- --- 11,333 28,667 --- ---
Mark Selawski 4,611 27,429 7,333 32,667 417 4,583
- --------------------------------------
</TABLE>
(1) The value is calculated based on the difference between the option
exercise price and the market price for the Company's Common Stock on the
exercise date, multiplied by the number of shares purchased. For this
purpose, the surrender or withholding of shares to pay the exercise price
is not taken into account.
(2) The closing price for the Company's Common Stock as reported by the
National Association of Securities Dealers (NASD) on December 31, 1996 was
$7.38. Value is calculated on the basis of the difference between the
option exercise price and $7.38, multiplied by the number of shares of
Common Stock underlying the option.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has provided the following Board Compensation
Committee Report:
Executive Compensation Policy - Medstone's overall executive officer
compensation philosophy is as follows:
a) Attract and retain quality talent, which is critical to both the
short-term and long-term success of this company;
b) Reinforce strategic performance objectives through the use of
incentive compensation programs; and
c) Create a mutuality of interest between executive officers and
shareholders through compensation structures that share the
rewards and risks of strategic decision making.
17
<PAGE> 20
Base Compensation - The Committee's approach to base compensation is to
offer competitive salaries in comparison to market practices. The Committee
annually examines market compensation levels and trends observed in the labor
market. Market information is used as a frame of reference for annual salary
adjustments and starting salary offers. The review considers the
decision-making responsibilities of each position and the experience, work
performance, and team-building skills of position incumbents.
Long-term Incentive Compensation - The Committee provides the Company's
executive officers with long-term incentive compensation through grants of
stock options, determining the individuals to whom grants should be made, the
timing of grants, the exercise price per share and the number of shares subject
to each option. Other than stock options, as discussed below, the Committee
made no other long-term performance awards during the last fiscal year.
Long-term incentive awards are granted based on individual or corporate
performance as determined subjectively by the Committee. The Committee
considers grants of options to executive officers during each fiscal year.
The Committee believes that stock options provide the Company's executive
officers with the opportunity to purchase and maintain an equity interest in
the Company and to share in the appreciation of the value of the stock. The
Committee believes that stock options directly motivate an executive to
maximize long-term stockholder value. The options also utilize vesting periods
in order to encourage key employees to continue in the employ of the Company.
All options to executive officers to date have been granted at the fair market
value of the Company's Common Stock on the date of the grant. The Committee
considers the grant of each option subjectively, considering factors such as
the individual performance of executive officers and competitive compensation
packages in the industry.
Incentive Stock Options of 50,000 and 20,000 shares were granted to Mr.
Radlinski and Mr. Selawski, respectively, in 1996 with the view that internally
generated and acquisition growth in future periods facilitated by them will
result in corresponding growth in share value.
Frank Pope, Chairman of Compensation Committee
Donald Regan, Member
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996 Donald J. Regan and Frank R. Pope served as the members of the
Company's Compensation Committee. Neither such individual is a current or
former officer or employee of the Company or any of its subsidiaries. During
1996 there were no compensation committee interlocks between the Company and
other entities involving Medstone executive officers serving as directors or
members of compensation or similar committees of such other entities.
18
<PAGE> 21
CERTAIN TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac Science,
Inc., for which the Company purchased 5,353,031 shares of common stock, for a
cash payment of $.0016 per share. This purchase represented 77.3% of the
outstanding stock. As of July 8, 1991, the Company distributed, as a dividend
to its shareholders of record on that date, one share of Cardiac Science, Inc.
stock for each share of Medstone stock held. The Company retained 629,768
shares of common stock of Cardiac Science, Inc.
In June 1991, the Company agreed to loan Cardiac Science, Inc. up to
$220,000 to provide working capital pursuant to the terms of a revolving note
agreement. The unpaid principal amount of the loan, together with interest
accrued thereon at the rate of 10% per annum, was due and payable to Medstone
in December 1991. Medstone then agreed to extend this note and to loan
additional amounts to Cardiac Science, Inc. As of April 30, 1992, the Company
had loaned Cardiac Science, Inc. approximately $310,000. In April 1992, the
Company agreed to extend its initial loan to Cardiac Science, Inc. and to loan
Cardiac Science, Inc. an additional $200,000. These loans bore interest at a
rate of 8% per annum, payable quarterly, and were secured by Cardiac Science's
assets and were to mature on the earlier of April 1, 1995 or the closing of the
initial public offering of Cardiac Science's Common Stock. Cardiac Science,
Inc. had the option to pay the interest on the notes in either cash or shares
of its common stock valued at $.15 per share. To pay such interest, Cardiac
Science, Inc. had issued 419,054 shares of its common stock to the Company as
of December 31, 1995. In connection with such loan extension and the agreement
to make additional loans, Cardiac Science issued to Medstone 3,400,000 warrants
to purchase shares of its common stock at $.15 per share for an aggregate
exercise price of up to $510,000.
In September 1994, Cardiac Science reached an agreement with Medstone
pursuant to which, and concurrently with the closing of a Private Placement of
Cardiac Science's Common Stock, (i) Medstone exercised the warrants to the
extent of 2,720,000 shares, (ii) Cardiac Science utilized the proceeds
therefrom ($408,000) to pay an equivalent portion of the note, (iii) the due
date for the remaining principal balance on the note ($102,000) was extended to
April 1, 1996, (iv) Medstone maintains its current lien on the assets of the
Company until the balance of the note is paid, (v) the expiration date for the
remaining warrants to purchase 680,000 shares of Cardiac Science common stock
was changed to March 31, 1996, and (vi) all outstanding unsecured obligations
owing by Cardiac Science to Medstone (approximately $270,000) were satisfied by
the issuance to Medstone of 1,800,000 shares of common stock and a ten year
warrant to purchase 1,000,000 shares of common stock at $.001 per share. Per
an oral agreement between the Company and Cardiac Science, interest payment on
the note were suspended in April 1995 due to prior considerations paid during
the renegotiation of the unsecured debt in 1994.
In April 1996, the Company exercised warrants to purchase 680,000 shares
of Cardiac Science Common Stock and Cardiac Science utilized the proceeds
therefrom ($102,000) to pay off the remaining note balance and related interest
due to Medstone. After completion of this transaction, the Company executed a
release of the lien on Cardiac Science's assets.
As of December 31, 1996, the Company held 6,248,822 shares of Cardiac
Science Common Stock. This investment is recorded at a cost of $750,054 and
the Company currently does not expect to realize this investment, therefore a
corresponding valuation reserve has been established, making the net investment
carrying value $0.
Separately, the Company advanced amounts to Cardiac Science for health
insurance. These amounts were to be repaid by Cardiac Science on a
month-to-month basis. As of December 31, 1996, $2,895 had been advanced to
Cardiac Science.
19
<PAGE> 22
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company is not aware of any director, officer or 10% shareholder who
during 1996 failed to file on a timely basis any report regarding the Company's
securities required by Section 16(a) of the Securities Exchange Act of 1934,
except as follows. Michael C. Tibbitts was late in filing a Form 3 relating to
his becoming a director of the Company. Mr. Tibbitts, Mr. Pope and Mr. Regan
did not timely file Form 4s relating to option grants to them in 1996. Mr.
Radlinski and Mr. Selawski filed amendments to Form 4s which they had timely
filed relating to the exercise and receipts of stock options.
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
MEDSTONE INTERNATIONAL, INC.
Company Index: MEDSTONE INTERNATIONAL, INC. (Fiscal Year-end 12/31/96)
Market Index: NASDAQ Stock Market (US Companies)
Peer Index: Companies in the Self-Determined Peer Group: Candela
Corp., Prime Medical Services, Inc., New Medical
Alliance Inc. and Trimedyne, Inc.
<TABLE>
<CAPTION>
TOTAL RETURNS INDEX FOR: 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MEDSTONE INTERNATIONAL, INC. 100.0 393.8 256.3 293.8 535.2 375.9
NASDAQ Stock Market (US Companies) 100.0 116.4 133.6 130.6 184.7 227.2
Self-Determined Peer Group 100.0 163.8 147.5 82.3 164.8 208.5
</TABLE>
__________________________
NOTES: A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization
on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
B. The index level for all series was set to $100.00 on 12/31/91.
20
<PAGE> 23
OTHER MATTERS
The Board of Directors of the Company does not know of any other
matters that are to be presented for action at the Meeting. Should any other
matters properly come before the Meeting or any adjournment or postponement
thereof, it is the intention of the persons named in the enclosed proxy to vote
the shares they represent as the Board of Directors may recommend.
ANNUAL REPORT
The Company's 1996 Annual Report to Stockholders is being mailed to
stockholders concurrently with this Proxy Statement, but such report is not
incorporated herein and is not deemed to be a part of this proxy solicitation
material.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS, WILL BE FURNISHED WITHOUT
CHARGE TO ANY PERSON FROM WHOM THE ACCOMPANYING PROXY IS SOLICITED UPON WRITTEN
REQUEST TO THE COMPANY'S SECRETARY, MR. MARK SELAWSKI, AT MEDSTONE
INTERNATIONAL, INC., 100 COLUMBIA, SUITE 100, ALISO VIEJO, CALIFORNIA 92656.
FOR THE BOARD OF DIRECTORS,
Mark Selawski, Secretary
Aliso Viejo, California
April 7, 1997
STOCKHOLDERS ARE URGED TO SPECIFY THEIR CHOICES ON, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL
AND YOUR COOPERATION WILL BE APPRECIATED.
21
<PAGE> 24
<PAGE> 25
PROXY MEDSTONE INTERNATIONAL, INC. - PROXY CARD
100 Columbia, Bldg. 100
Aliso Viejo, CA 92656
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints David V. Radlinski and Mark Selawski, and
each of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote as designated below all the
shares of Common Stock of Medstone International, Inc. held of record by the
undersigned on March 17, 1997 at the Annual Meeting of Stockholders to be held
on May 1, 1997, and at any adjournments thereof.
DIRECTORS RECOMMEND A VOTE "FOR"
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except) as marked to the contrary to vote for all nominees
below) listed below
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
line through or otherwise strike out the nominee's name below)
DAVID V. RADLINSKI, FRANK R. POPE, DONALD J. REGAN AND MICHAEL TIBBITTS
2. APPROVAL OF THE PROPOSED 1997 STOCK INCENTIVE PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
(IMPORTANT -- PLEASE SIGN ON OTHER SIDE)
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE NOMINEES NAMED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3.
DATED: _______________________, 1997
_____________________________________
Signature
_____________________________________
Signature
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
[ ] I PLAN TO ATTEND THE MEETING
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
23
