<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-16752
MEDSTONE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 66-0439440
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 COLUMBIA, SUITE 100, ALISO VIEJO, CALIFORNIA 92656
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 448-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.004 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form-K. [ ]
The number of shares of the Common Stock of the registrant outstanding
as of March 1, 1999 was 5,064,905 The number of shares of voting and non-voting
Common Stock held by non-affiliates on such date was 4,960,177 with an
approximate aggregate market value of $40,301,438.
================================================================================
<PAGE> 2
Items 10 and 11 of Part III are amended to read in full as follows:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following are the directors of the Company:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ---- --- --------------------
<S> <C> <C>
David V. Radlinski 54 Chairman of the Board and
Chief Executive Officer of the Company
Frank R. Pope 49 Managing Director
Verdigris Capital
Donald J. Regan 64 Vice President and General Counsel
Kinsell, Newcomb & De Dios, Inc.
Michael C. Tibbitts 51 Vice President
Links Medical Products, 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.
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 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, 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 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 is currently Vice President of Links Medical Products,
Inc., a medical device manufacturer. From May 1991 to May 1999, he was Vice
President of Gulf South Medical Supply, Inc., a medical device manufacturer.
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.
<PAGE> 3
EXECUTIVE OFFICERS
The names, ages and positions of all the executive officers of the
Company as of March 1999 are listed below, followed by a brief account of their
business experience during the past five years. Officers are normally appointed
annually by the Board of Directors at a meeting of the directors immediately
following the Annual Meeting of Shareholders. There are no family relationships
among these officers nor any arrangements or understandings between any officer
and any other person pursuant to which an officer was selected. None of these
officers has been involved in any court or administrative proceeding within the
past five years adversely reflecting on his or her ability or integrity.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David V. Radlinski 54 Chief Executive Officer and Chairman of the Board
Mark Selawski 43 Vice President of Finance,
Chief Financial Officer and Secretary
Eva Novotny 41 Executive Vice President of Sales
and Marketing
</TABLE>
Mr. Radlinski has been the Chairman 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. Selawski has been the Chief Financial Officer, Vice President of
Finance and Secretary of the Company since September 1995. He had previously
served as the Company's Manager of Planning and Analysis since joining the
Company in 1988. Prior to joining the Company he held various finance management
positions with several high-tech manufacturing companies.
Ms. Novotny has been Executive Vice President of Sales and Marketing of
the Company since October 1997. Prior to joining the Company, she was Director
of Marketing for Imagyn Medical, formerly UroHealth, from June 1995 to October
1997. From 1985 to 1995, she was employed by Mentor Corporation as a Marketing
Manager and later as Director of Marketing for Mentor Urology.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is not aware of any director, officer or 10% shareholder
who during 1998 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.
<PAGE> 4
ITEM 11. 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 1998.
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 1998 219,135 -- 2,426 -- 350,000 -- --
Chairman of the Board and 1997 200,300 -- -- -- 100,000 -- --
Chief Executive Officer 1996 200,100 -- -- -- 50,000 -- --
Mark Selawski 1998 99,038 300 -- -- 80,000 -- --
Chief Financial Officer, Vice 1997 85,833 11,300 -- -- 20,000 -- --
President of Finance 1996 85,600 -- -- -- 20,000 -- --
and Secretary
Eva Novotny (3) 1998 120,000 300 -- -- 70,000 -- --
Executive Vice President of 1997 25,300 -- -- -- 50,000 -- --
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 1998,
1997 and 1996 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 granted or repriced.
(3) Ms. Novotny joined the Company as of October 15, 1997.
EMPLOYMENT AGREEMENTS
Mr. Radlinski - On August 13, 1998, the Company entered into an
employment agreement with Mr. Radlinski to assure his continued service to the
Company. The agreement runs for a term of five years, expiring on August 13,
2003. The agreement provides for a base salary of not less that $250,000 per
year, subject to adjustments as authorized by the Board of Directors.
Mr. Radlinski is also eligible for bonuses based on performance of the
Company's Common Stock. The Common Stock's closing price must attain and remain
at or above various levels, ranging from $11 to $21, for a period of 90
consecutive days. If these breakpoint prices are achieved within a set number of
months, the longest which is 48 months, from the commencement of the contract, a
cash bonus will be paid following the achievement period. Each breakpoint bonus
can be earned separately if achieved within the stated achievement period, but
each bonus can only be awarded once.
Concurrent with the commencement of this agreement, the exercise prices
of Mr. Radlinski's existing stock options to purchase up to 350,000 shares of
the Company's Common Stock from $7.13 to $10.63 were reduced to equal $6.375 per
share, the closing price per share of the Company's Common Stock on the
commencement date as reported on the NASDAQ National Market System. Such option
agreements were amended to provide that they shall become
<PAGE> 5
fully exercisable, regardless of any otherwise applicable vesting requirements,
i) concurrently with any termination of Mr. Radlinski's employment by the
Company without "Good Cause" (as defined), or ii) if there is an acquisition of
substantially all of the Company's assets or business while he is still employed
by the Company and he does not immediately enter into an employment agreement
with a buying or surviving party in the transaction (a "change in control").
If he is terminated without "Good Cause" or a change of control occurs
within the first three years of the agreement, a severance payment of five times
his then current base salary will be due and payable. If he is terminated
without "Good Cause" or such a change of control occurs within the fourth year
of the agreement, a severance payment of four times his then current base salary
will be due and payable. If he is terminated without "Good Cause" or a change of
control occurs within the fifth year of the agreement, a severance payment of
three times his then current base salary will be due and payable.
In addition to the preceding paragraph, if Mr. Radlinski is terminated
without Good Cause in the first three years of this agreement, he will become a
consultant to the Company for a period of five years following termination at a
monthly compensation of $16,500 per month. If he is terminated without Good
Cause in the fourth year of this agreement, he will become a consultant to the
Company for a period of four years following termination at the same monthly
compensation. If he is terminated without Good Cause in the fifth year of this
agreement, he will become a consultant to the Company for a period of three
years following termination at the same monthly compensation. The Company,
during the consulting contract, shall provide term life insurance equivalent to
the unpaid amount of the consulting fees as established above, payable to the
beneficiary of his designation.
Mr. Selawski and Ms. Novotny - On August 13, 1998, the Company entered
into employment agreements with both Mr. Selawski and Ms. Novotny to assure
their continued service to the Company. The agreements run for a term of three
years, expiring on August 13, 2001. The agreements provide for a base salary of
not less that $100,000 per year for Mr. Selawski and $120,000 per year for Ms.
Novotny, subject to adjustments as authorized by the Board of Directors.
Concurrent with the commencement of these agreements, the exercise
prices of Mr. Selawski's existing stock options to purchase up to 80,000 shares
of the Company's Common Stock at from $7.13 to $9.68 were reduced to equal
$6.375 per share, the closing price per share of the Company's Common Stock on
the commencement date as reported on the NASDAQ National Market System. Ms.
Novotny's existing stock options to purchase up to 70,000 shares of the
Company's Common Stock at from $9.68 to $10.68 were reduced to equal $6.375 per
share, the closing price per share of the Company's Common Stock on the
commencement date as reported on the NASDAQ National Market System. Each such
option agreement was amended to provide that it shall become fully exercisable,
regardless of any otherwise applicable vesting requirements, i) concurrently
with any termination of the officer's employment by the Company without Good
Cause, or ii) if there is an acquisition of substantially all of the Company's
assets or business while such officer is still employed by the Company and he or
she does not immediately enter into an employment agreement with a buying or
surviving party in the transaction. If the officer is terminated without "Good
Cause" or such a change of control occurs within the term of the agreement, a
severance payment of two times his or her then current base salary will be due
and payable.
<PAGE> 6
STOCK OPTION GRANTS AND REPRICINGS DURING 1998
The following table provides information related to the stock options
that in August 1998 were repriced to the current market value and new options
granted in 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL REPRICINGS AND GRANTS OPTION TERM
--------------------------------------------------------- --------------------
SHARES % OF TOTAL
UNDERLYING EMPLOYEE
OPTIONS OPTIONS
GRANTED OR GRANTED OR EXERCISE
REPRICED REPRICED IN PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
---- ---------- ----------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David V. Radlinski 50,000 5% 6.375 7/26/01 108,375 245,438
100,000 10% 6.375 9/25/01 216,750 490,875
50,000 5% 6.375 7/23/02 108,375 245,438
50,000 5% 6.375 1/9/03 108,375 245,438
50,000 5% 6.375 6/10/03 108,375 245,438
50,000 5% 6.375 4/15/04 108,375 245,438
Mark Selawski 20,000 2% 6.375 7/26/01 43,350 98,175
20,000 2% 6.375 7/23/02 43,350 98,175
20,000 2% 6.375 6/10/03 43,350 98,175
20,000 2% 6.375 4/15/04 43,350 98,175
Eva Novotny 50,000 5% 6.375 10/15/03 108,375 245,438
20,000 2% 6.375 4/15/04 43,350 98,175
</TABLE>
- ----------
(1) The options granted or repriced vest equally over a 60-month period
commencing upon the original grant date. The first six months after a
grant does not allow exercise of the option for the then vested shares.
The options are for a 6-year term, subject to earlier termination in
certain events related to termination of employment. The option
exercises may be accelerated if there is a termination of employment or
an acquisition of substantially all of the Company's assets or business,
as described under "Employment Agreements" above. The Compensation
Committee retains discretion, subject to the option plans' limits, to
modify the terms of outstanding options.
2) Subject to certain conditions, the exercise price may be paid by
delivery of already owned shares and the tax withholding obligations
related to exercise may be paid by offset of the underlying shares.
STOCK OPTIONS HELD AT END OF FISCAL YEAR
The following table provides information related to options exercised
during 1998 and options held by the named executive officers at December 31,
1998.
<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 -- -- 165,000 185,000 29,700 33,300
Mark Selawski -- -- 32,000 48,000 5,760 8,640
Eva Novotny -- -- 14,333 55,667 2,580 10,020
</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, 1998
was $6.56. Value is calculated on the basis of the difference between
the option exercise price and $6.56, multiplied by the number of shares
of Common Stock underlying the option.
<PAGE> 7
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998 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
1998 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.
COMPENSATION OF DIRECTORS
The Company currently compensates its outside directors, Messrs. Regan,
Tibbitts and Pope, $1,000 per Board meeting for their services, and reimburses
all directors for expenses incurred by them in connection with the Company's
business. In addition, the Company has agreed to pay a total of $150,000 to the
outside directors for their services on the Special Committee of the Board in
1998 and 1999. Of this amount, during 1998 the Company paid Messrs. Pope and
Regan $11,000 each and Mr. Tibbitts $8,000. The Special Committee was formed by
the Company on November 13, 1998 to evaluate strategic alternatives available to
the Company, including potential acquisitions, strategic relationships and sale
of all or part of 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, including certain changes in control based on altered makeups of the
Company's Board or shareholders, 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. 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. These options were repriced on August 13, 1998 to a price of
$6.375.
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 $6.375 after repricing of the
options on August 13, 1998. 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.
Additionally, each such director was granted options, on August 13, 1998, for
4,000 shares at an exercise price of $6.375. These options are exercisable,
after six months following their grant dates, in incremental amounts equal to
1/36 of the underlying shares for each elapsed calendar month during which the
director remains on the Company's Board. The term of the options are four years,
subject to early termination related to the director no longer serving on the
Board.
Subject to certain exceptions set forth in the applicable plan or
agreement provisions, the exercisability of the outstanding options held by the
nonemployee directors will be accelerated, and the options will thereafter
terminate, if there is a reorganization, merger or consolidation as a result of
which the Company is not the surviving corporation or the Company's outstanding
shares are changed into or exchanged for cash, property or securities not of the
Company's issue, or if there is a sale of all or substantially al of the
Company's assets. Such accelerations will not apply if appropriate provision is
made in the transaction for the assumption of such options by, or the
substitution of new options for such options covering the stock of, the
surviving, successor or purchasing corporation or its affiliate.
<PAGE> 8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to be
signed on its behalf by the undersigned, thereunto duly authorized.
MEDSTONE INTERNATIONAL, INC.
By: /s/ David V. Radlinski
-------------------------------------
David V. Radlinski
Chief Executive Officer
Dated: May 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment No. 1 has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on May 17, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ David V. Radlinski Chairman of the Board,
- ------------------------------------- Chief Executive Officer
David V. Radlinski and Director
(Principal Executive Officer)
/s/ Mark Selawski Chief Financial Officer
- ------------------------------------- (Principal Financial and Accounting Officer)
Mark Selawski
/s/ Donald J. Regan Director
- -------------------------------------
Donald J. Regan
/s/ Frank R. Pope Director
- -------------------------------------
Frank R. Pope
/s/ Michael C. Tibbitts Director
- -------------------------------------
Michael C. Tibbitts
</TABLE>
