<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:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
MEDSTONE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(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] Fee not 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 paid
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 JUNE 10, 1998
To the Stockholders of
Medstone International, Inc.
The 1998 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 June 10, 1998,
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 ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31, 1998; and
3. 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 April 27, 1998
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,
/s/ MARK SELAWSKI
-----------------------------------
Mark Selawski, Secretary
Aliso Viejo, California
May 14, 1998
<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 1998 Annual Meeting of
Stockholders to be held on June 10, 1998, 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 May 11, 1998.
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 ratify the appointment of Ernst
& Young LLP as independent auditors of the Company for the year ending December
31, 1998; and 3) 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 April 27, 1998 (the
"Record Date") are entitled to notice of and to vote at the Meeting. At the
Record Date, 5,212,050 shares of the Company's Common Stock were issued and
outstanding (after deducting 429,200 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.
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 and FOR the ratification of the appointment of
Ernst & Young LLP as the Company's independent auditors.
1
<PAGE> 4
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 1999 Annual Meeting of Stockholders must
be received by the Company no later than January 11, 1999 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 53 Chairman of the Board and
Chief Executive Officer of the Company
Frank R. Pope 48 Managing Director
Verdigris Capital
Donald John Regan 63 Vice President and General Counsel
Kinsell, O'Neil, Newcomb & De Dios, Inc.
Michael C. Tibbitts 50 Officer and Vice President of
Gulf South Medical Supply, Inc.
</TABLE>
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.
2
<PAGE> 5
Mr. Pope is Managing Director of Verdigris Capital, a private merchant
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 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 has been a director of the
Company since September 1995.
Mr. Tibbitts, who was elected to the Board of Directors on May 13, 1996,
has been with Gulf South Medical Supply, Inc. since 1991 as an officer and Vice
President. 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, 1997, there were 3
meetings of the Board of Directors, 4 Stock Option Committee meetings and 1
Compensation Committee meeting. Messrs. Radlinski, Pope, Tibbitts and Regan
attended 100% of these meetings applicable to them.
COMPENSATION OF DIRECTORS
The Company currently compensates Messrs. Regan, Tibbitts and Pope $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
3
<PAGE> 6
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, which were exercised during 1997, 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
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 -
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, 1998, 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, 1998.
5
<PAGE> 8
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, 1998 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 in Item 11
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, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNERSHIP
- ------------------------------------ ------------ ----------------
<S> <C> <C>
FMR Corp. 561,200 10.7%
82 Devonshire Street
Boston, MA 02109
The Kaufmann Fund 500,000 9.5%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Hathaway & Associates, Ltd. 400,000 7.6%
119 Rowayton Avenue
Rowayton, CT 06853
David V. Radlinski(2)(3) 256,648(4) 4.8%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Mark Selawski(3) 24,847(6) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Donald J. Regan(2) 13,246(7) (10)
462 Stevens Avenue, Suite 308
Solana Beach, CA 92075
Michael C. Tibbitts(2) 7,979(9) (10)
27001 La Paz Road, Suite 448B
Mission Viejo, CA 92691
Frank R. Pope(2) 6,063(8) (10)
25 Preston Road
Woodside, CA 94062
Eva Novotny(3) 5,800(5) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
All executive officers and directors
as a group (6 persons) (11) 314,583 5.81%
</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 117,500 shares issuable upon exercise of presently outstanding
stock options.
(5) Includes 5,000 shares issuable upon exercise of presently outstanding stock
options.
(6) Includes 20,667 shares issuable upon exercise of presently outstanding
stock options.
(7) Includes 6,646 shares issuable upon exercise of presently outstanding stock
options.
(8) Includes 4,063 shares issuable upon exercise of presently outstanding stock
options.
(9) Includes 5,979 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 159,855 shares issuable upon exercise of presently outstanding
stock options.
6
<PAGE> 9
EXECUTIVE COMPENSATION
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 1997.
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) 1997 200,300 --- --- --- 100,000 --- ---
Chairman of the Board and 1996 200,100 --- --- --- 50,000 --- ---
Chief Executive Officer 1995 181,250 --- --- --- 150,000 --- ---
Mark Selawski (4) 1997 85,833 11,300 --- --- 20,000 --- ---
Chief Financial Officer, 1996 85,600 --- --- --- 20,000 --- ---
Vice President of Finance 1995 72,730 7,500 --- --- 20,000 --- ---
and Secretary
Thomas W. Gardner (5) 1997 88,387 --- 36,665 --- 20,000 --- ---
Executive Vice President 1996 95,600 --- 35,349 --- --- --- ---
of Sales and Marketing 1995 83,750 20,000 2,815 --- 40,000 --- ---
Eva Novotny (6) 1997 25,300 --- --- --- 50,000 --- ---
Executive Vice President
of Sales and Marketing
</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 1997, 1996 and 1995
did not exceed the lesser of $50,000 or 10% of the executive officer's
total salary and bonus for that year.
(2) Options to acquire shares of Common Stock.
(3) Mr. Radlinski served as the Chief Financial Officer and Secretary of the
Company until his election as Chairman of the Board and Chief Executive
Officer on September 21, 1995.
(4) Mr. Selawski was appointed Chief Financial Officer, Vice President of
Finance and Secretary on September 21, 1995.
(5) Mr. Gardner resigned his position with the Company as of October 9, 1997.
(6) Ms. Novotny joined the Company as of October 15, 1997.
7
<PAGE> 10
STOCK OPTION GRANTS DURING 1997
The following table provides information related to the stock options
granted in 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- --------------------------------------------------------------------- ---------------------
% OF TOTAL
SHARES EMPLOYEE
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- --- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David V. Radlinski 50,000 12% 7.75 1/09/03 131,750 298,375
50,000 12% 7.88 6/10/03 133,960 303,380
Mark Selawski 20,000 5% 7.88 6/10/03 53,584 121,352
Thomas W. Gardner (1) 20,000 5% 7.88 10/09/97 53,584 121,352
Eva Novotny 50,000 12% 10.38 10/15/03 176,460 399,630
</TABLE>
- ---------------------------
(1) Mr. Gardner resigned in October 1997 and forfeited these options.
STOCK OPTIONS HELD AT END OF FISCAL YEAR
The following table provides information related to options exercised
during 1997 and options held by the named executive officers at December 31,
1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(2)
SHARES ACQUIRED VALUE ----------------------------------------------------------------
NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David V. Radlinski --- --- 98,333 201,667 130,158 382,832
Mark Selawski --- --- 17,333 42,667 41,581 111,008
Eva Novotny --- --- 0 50,000 --- ---
</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, 1997 was
$10.38. Value is calculated on the basis of the difference between the
option exercise price and $10.38, multiplied by the number of shares of
Common Stock underlying the option.
8
<PAGE> 11
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.
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 100,000, 20,000, and 50,000 shares were granted
to Mr. Radlinski, Mr. Selawski, and Ms. Novotny, respectively, in 1997 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 1997 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 1997 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.
9
<PAGE> 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1991, the Company was a party to the formation of Cardiac Science,
Inc., for which the Company purchased 5,353,031 (pre-split) 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 (pre-split) shares of common stock of Cardiac Science, Inc.
From 1991 through 1996, the Company performed various financings for
Cardiac Science and received warrants to purchase Cardiac Science common stock.
Due to exercise of warrants, common stock issued in lieu of interest and
unsecured advances the Company received 5,619,054 (pre-split) shares of Cardiac
Science.
In April 1997, Cardiac Science effectuated a 1 for 11.42857143 reverse
stock split, reducing the Company's holdings to 546,772 shares, which is the
number of shares held at December 31, 1997. This investment is recorded at a
cost of $750,054 and the Company currently is restricted from trading this
investment, therefore a corresponding valuation reserve has been established,
making the net investment value $0.
The Company also holds warrants to purchase 87,500 (post-split) shares at
$.011 each, with an expiration date of September 2004.
10
<PAGE> 13
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 1997 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: Mr. Radlinski, Mr. Selawski and Ms. Novotny did not timely
file Form 5s regarding changes in stock option holdings.
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
MEDSTONE INTERNATIONAL, INC.
Company Index: MEDSTONE INTERNATIONAL, INC. (Fiscal Year-end 12/31/97)
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: 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ------------------------ -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
MEDSTONE INTERNATIONAL, INC. 100.0 65.1 74.6 135.9 95.5 134.3
NASDAQ Stock Market (US Companies) 100.0 114.8 112.2 158.7 195.2 239.6
Self-Determined Peer Group 100.0 90.1 50.3 100.7 127.3 122.7
</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.
D. The index level for all series was set to $100.00 on 12/31/92.
11
<PAGE> 14
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 1997 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,
/s/ MARK SELAWSKI
-------------------------------------
Mark Selawski, Secretary
Aliso Viejo, California
May 14, 1998
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.
12
<PAGE> 15
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 April 27, 1998 at the Annual Meeting of Stockholders to be held
on June 10, 1998, and at any adjournments thereof.
Directors recommend a Vote "FOR"
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
</TABLE>
(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. RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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)
<PAGE> 16
(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 PROPOSAL 2.
DATED:_______________________, 1998
___________________________________
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.
