<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
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
MEDSTONE INTERNATIONAL, INC.
(Name of Registrant as Specified in Its Charter)
MARK SELAWSKI, CHIEF FINANCIAL OFFICER
(Name of Person(s) Filing Proxy Statement)
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:
------------------------------------------------------------------------
1
<PAGE> 2
MEDSTONE INTERNATIONAL, INC.
100 COLUMBIA
SUITE 100
ALISO VIEJO, CALIFORNIA 92656
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 24, 1999
To the Stockholders of
Medstone International, Inc.
The 1999 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 24, 1999
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, 1999; 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 26, 1999
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 17, 1999
<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 1999 Annual Meeting of
Stockholders to be held on June 24, 1999, 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 17, 1999.
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, 1999; 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 26, 1999 (the
"Record Date") are entitled to notice of and to vote at the Meeting. At the
Record Date, 5,068,032 shares of the Company's Common Stock were issued and
outstanding (after deducting 587,100 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.
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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 Proposal 2.
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 2000 Annual Meeting of
Stockholders must be received by the Company no later than January 18, 2000 in
order that they may be included in the Proxy Statement and form of proxy
relating to that meeting. Any such proposal received after April 2, 2000 will be
considered untimely for purposes of the 2000 Annual Meeting and proxies
delivered for the 2000 Annual Meeting will confer discretionary authority to
vote on any such matter.
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> <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 of
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,
2
<PAGE> 5
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.
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.
On November 13, 1998, the Company formed a Special Committee of the
Board of Directors, consisting of its independent directors, Messrs. Pope, Regan
and Tibbitts. The Special Committee's function is to evaluate strategic
alternatives available to the Company, including potential acquisitions,
strategic relationships and sale of all or part of the Company's business. To
assist the Special Committee in studying strategic alternatives, the Committee
has retained J.P. Morgan Securities, Inc. as its financial advisor.
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, 1998, there were 10
meetings of the Board of Directors, 3 Stock Option Committee meetings, 1 Audit
Committee meeting, 5 Compensation Committee meetings and 3 Special Committee
meetings. Messrs. Radlinski, Pope, Tibbitts and Regan attended 100% of these
meetings applicable to them.
3
<PAGE> 6
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 in 1998 and 1999.
Of this amount, during 1998 the Company paid Messrs. Pope and Regan $11,000 each
and Mr. Tibbitts $8,000.
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 all 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.
4
<PAGE> 7
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.
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, 1999, 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, 1999.
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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, 1999
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 under Executive Compensation,
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, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNERSHIP
- ------------------------------------ ---------------- -------------
<S> <C> <C>
FMR Corp. 561,200 11.1%
82 Devonshire Street
Boston, MA 02109
The Kaufmann Fund 500,000 9.9%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Hathaway & Associates, Ltd. 440,000 8.7%
119 Rowayton Avenue
Rowayton, CT 06853
David V. Radlinski(2)(3) 276,648(4) 5.3%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Mark Selawski(3) 40,847(5) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Eva Novotny(3) 19,800(6) (10)
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Donald J. Regan(2) 17,996(7) (10)
462 Stevens Avenue, Suite 308
Solana Beach, CA 92075
Frank R. Pope(2) 10,590(8) (10)
25 Preston Road
Woodside, CA 94062
Michael C. Tibbitts(2) 8,757(9) (10)
27001 La Paz Road, Suite 448B
Mission Viejo, CA 92691
All executive officers and directors
as a group(6 persons)(11) 374,638 7.02%
</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 187,500 shares issuable upon exercise of presently outstanding
stock options.
(5) Includes 36,667 shares issuable upon exercise of presently outstanding
stock options.
(6) Includes 19,000 shares issuable upon exercise of presently outstanding
stock options.
(7) Includes 11,396 shares issuable upon exercise of presently outstanding
stock options.
(8) Includes 8,590 shares issuable upon exercise of presently outstanding
stock options.
(9) Includes 6,757 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 269,910 shares issuable upon exercise of presently outstanding
stock options.
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<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 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
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<PAGE> 10
$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 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 $6.375 per
share, the closing price per share of the Company's Common Stock on the
commencement date as reported on the NASDAQ National Market System. Each such
option agreement was amended to provide that it shall become fully exercisable,
regardless of any otherwise applicable vesting requirements, i) concurrently
with any termination of the officer's employment by the Company without Good
Cause, or ii) if there is an acquisition of substantially all of the Company's
assets or business while such officer is still employed by the Company and he or
she does not immediately enter into an employment agreement with a buying or
surviving party in the transaction. If the officer is terminated without "Good
Cause" or such a change of control occurs within the term of the agreement, a
severance payment of two times his or her then current base salary will be due
and payable.
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<PAGE> 11
STOCK OPTION GRANTS AND REPRICINGS DURING 1998
The following table provides information related to the stock options
that in August 1998 were repriced to the current market value and new options
granted in 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL REPRICINGS AND GRANTS OPTION TERM
------------------------------------------------- -------------------
SHARES % OF TOTAL
UNDERLYING EMPLOYEE
OPTIONS OPTIONS
GRANTED OR GRANTED OR EXERCISE
REPRICED REPRICED IN PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/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.
9
<PAGE> 12
REPORT ON REPRICING OF OPTIONS
In light of the depressed performance of health care stocks, including
the Company's Common Stock, in August 1998 the Company's Compensation Committee
approved an option repricing program (the "1998 Repricing") for all Company
personnel including the executive officers. Options are a key component of the
Company's long-term incentive program, and the Committee determined that the
program was advisable to retain and provide greater incentives for its
personnel. Under the 1998 Repricing, an aggregate of 500,000 stock options held
by Messrs. Radlinski and Selawski and Ms. Novotny, with exercise prices ranging
from $7.13 to $10.63, were repriced to $6.375, the closing price of the
Company's Common Stock on the date of the repricing. Except for the exercise
price, the terms of the repriced options remained the same. The following table
sets forth certain information with respect to executive officers regarding the
1998 Repricing, as well as a repricing of certain options in March 1990.
10-YEAR HISTORY OF REPRICING OF OPTIONS
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE ORIGINAL OPTION
UNDERLYING AT TIME OF EXERCISE PRICE TERM REMAINING
OPTIONS STOCK AT TIME OF NEW EXERCISE AT DATE OF
NAME DATE REPRICED REPRICING REPRICING PRICE REPRICING
---- --------------- ---------- ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David Radlinski AUGUST 13, 1998 50,000 $6.375 $ 8.500 $6.375 36
AUGUST 13, 1998 100,000 $6.375 $10.630 $6.375 37
AUGUST 13, 1998 50,000 $6.375 $ 7.130 $6.375 48
AUGUST 13, 1998 50,000 $6.375 $ 7.750 $6.375 53
AUGUST 13, 1998 50,000 $6.375 $ 7.880 $6.375 59
AUGUST 13, 1998 50,000 $6.375 $ 9.680 $6.375 68
MARCH 2, 1990 25,000 $5.000 $13.000 $5.000 51
MARK SELAWSKI AUGUST 13, 1998 20,000 $6.375 $ 8.500 $6.375 36
AUGUST 13, 1998 20,000 $6.375 $ 7.130 $6.375 48
AUGUST 13, 1998 20,000 $6.375 $ 7.880 $6.375 59
AUGUST 13, 1998 20,000 $6.375 $ 9.680 $6.375 68
MARCH 2, 1990 3,000 $5.000 $ 20.00 $5.000 56
EVA NOVOTNY AUGUST 13, 1998 50,000 $6.375 $10.380 $6.375 62
AUGUST 13, 1998 20,000 $6.375 $ 9.680 $6.375 68
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Committee
The Company's Compensation Committee is composed of two nonemployee
directors, Messrs. Frank R. Pope and Donald J. Regan. The Committee's primary
responsibility is to establish executive officer compensation packages,
including bonus programs and employee benefit plans. In addition, the Committee
reviews management's proposed compensation packages for other officers and
certain employees of the Company.
Compensation Philosophy
The Committee's philosophy on executive officer compensation is to link
executive pay with the Company's annual and long-term performance. The Committee
firmly believes that it must establish compensation packages that are
competitive with local and national medical device companies in order to
attract, motivate and retain the highest
10
<PAGE> 13
caliber executives. In addition, the Committee aligns executive officer and
shareholder interests by establishing compensation packages that create a direct
link between compensation and shareholder return on investment.
Components of Executive Compensation
The primary components of executive compensation are base salary and
long-term equity incentives.
Base Salary. The Committee's approach to base salary is to offer
competitive salaries in comparison to other companies within the Company's
industry, adjusted for the size of the Company, its stage of development and the
level of responsibility, experience, performance and contribution of each
executive officer to the Company's growth and profitability. The Committee
annually reviews the executive officers' compensation packages and compares them
to market compensation levels. The Committee may supplement this market
information with input from experienced outside consultants to ensure that
compensation levels are equitable and consistent with sound personnel practices.
Long-Term Equity Incentives. Generally, the Company grants annual
long-term equity incentives in the form of stock options to executive officers.
The level of the annual stock awards is determined subjectively by the Committee
and is based, in part, on the executive's contribution to the Company during the
prior year, as well as the overall performance and growth of the Company.
The stock options granted to executive officers typically vest over a
period of 4 years, have a term of 5 years and are granted at fair market value.
The vesting periods are designed to establish an executive's long-term
affiliation with the Company and, by tying the exercise price to the Company's
market valuation at the time the stock options are granted, to motivate
executives to reach performance goals and increase shareholder value.
Chief Executive Officer Compensation
During fiscal year 1998, the Company maintained steady growth: revenue
and net income for fiscal 1998 were 9.6% and 9.5%, respectively, higher than in
1997. To reward Mr. Radlinski for the Company's steady performance and in
connection with the Company's consideration of acquisitions and other strategic
alternatives aimed at more rapidly increasing shareholder value, during the
third quarter of fiscal 1998 the Committee authorized a new compensation package
for Mr. Radlinski. The new compensation package is specifically designed to
reward Mr. Radlinski for optimizing the resources of the Company to promote
increased rates of growth and to provide shareholders with tangible value. In
designing the new compensation package, the Committee relied, in part, upon the
advice of an outside consultant with considerable experience in the area of
executive compensation.
As described more fully under "Employment Agreements" above, Mr.
Radlinski's new compensation package provides for an annual base salary of not
less than $250,000 and agreed severance payments. Mr. Radlinski is also eligible
to receive performance-based cash bonuses that are tied directly to the
performance of the Company's Common Stock. Finally, stock options to purchase an
aggregate of 350,000 shares of the Company's Common Stock held by Mr. Radlinski
with exercise prices from $7.13 to $10.63, including options to purchase 50,000
shares granted in 1998, were repriced as part of the 1998 Repricing to $6.375
per share, the fair market value of the Company's Common Stock on the date the
new compensation arrangement was agreed to. Tying Mr. Radlinski's cash bonuses
and option exercise prices directly to the performance of the Company's Common
Stock creates a strong "mutuality of interest" between Mr. Radlinski and the
shareholders of the Company.
COMPENSATION COMMITTEE
Frank R. Pope
Donald J. Regan
11
<PAGE> 14
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.
CERTAIN RELATIONSHIPS AND INVESTMENTS
CARDIAC SCIENCE, INC.
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, 1998. This investment is recorded at a
cost of $750,054.
The Company also holds warrants to purchase 87,500 (post-split) shares
at $.011 each, with an expiration date of September 2004.
DIGITAL IMAGING SYSTEMS, INC.
In 1998, the Company entered into a supply agreement with Digital
Imaging Systems, Inc. ("DIS") for components integral in the Company's new
transportable lithotripsy product. The Company has purchased $300,000, or
300,000 shares, of DIS preferred stock, which represents a 14% ownership
interest. DIS has commenced shipments to the Company as of January 1999. The
Company considers this investment to be temporary in nature.
K. BIOTECH
In 1998, the Company was made aware of an opportunity to invest in a
developmental biotech drug company catering to the members of the International
Centre for Genetic Engineering and Biotechnology ("ICGEB"), a United Nations
sponsored institute. k. Biotech purchased license agreements for formulas,
developed by the ICGEB, for commercialization purposes in the Indian
sub-continent as its primary market. The Company has purchased $225,000 of
preferred stock to assist k. Biotech in establishing itself as a viable business
entity. Two of the Company's directors, Mssrs. Pope and Regan, are investors in
k.Biotech and Mr. Regan serves as k. Biotech's President. Additional funding
from international sources is currently being evaluated.
12
<PAGE> 15
CHINESE JOINT VENTURE
The Company, along with Acuity International ("Acuity") and Phenix
Optical Ltd ("Phenix"), a Chinese company, created a joint venture, in March
1998, to provide lithotripsy services to inland Chinese areas. Each entity was a
1/3 owner of the joint venture. The Company recognized a gain of $105,000 on its
contribution of equipment to the joint venture in the first quarter of 1998, and
recorded its investment of $92,000 as other assets. In November 1998, a purchase
of the 2/3 ownership, not owned by Phenix, was proposed. In December 1998,
documents were drawn to turn ownership over to Phenix in return for delivery of
optical products to both Acuity and the Company. Subsequent to December 31,
1998, the Company received its optical products in release of its share in the
joint venture and final release documents are being processed. The Company is
carrying the value of the optical products at their estimated fair value, which
is the same value as its investment established in the joint venture, with the
intention of remarketing these products in 1999.
13
<PAGE> 16
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 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.
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
MEDSTONE INTERNATIONAL, INC.
Company Index: MEDSTONE INTERNATIONAL, INC. (Fiscal Year-end 12/31/98)
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: 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MEDSTONE INTERNATIONAL, INC. 100.0 114.6 208.8 146.7 206.4 130.5
NASDAQ Stock Market (US Companies) 100.0 97.8 138.3 170.0 208.5 293.8
Self-Determined Peer Group 100.0 55.8 111.8 141.6 136.5 79.5
</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 12/31/93.
14
<PAGE> 17
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 1998 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 17, 1999
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.
15
<PAGE> 18
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 26, 1999 at the Annual Meeting of Stockholders to be held
on June 24, 1999, and at any adjournments thereof.
Directors recommend a Vote "FOR"
1. ELECTION OF DIRECTORS
[X] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to vote for all nominees
to the contrary 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. RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting in accordance with
applicable rules.
(IMPORTANT -- PLEASE SIGN ON OTHER SIDE)
<PAGE> 19
(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: _______________________, 1999
------------------------------------
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.
