SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
(Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934)
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted
by Rule 14a-6(e)-2)
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to
(S)240.14a-11(c) or (S)240.14a-12
MedSource Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange
Act Rules 14a-6(i)(1) 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:
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
MEDSOURCE TECHNOLOGIES, INC.
110 Cheshire Lane, Suite 100
Minneapolis, Minnesota 55305
_________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
November 4, 2003
TO THE STOCKHOLDERS OF
MEDSOURCE TECHNOLOGIES, INC.
The annual meeting of stockholders of MedSource Technologies, Inc. will be
held at the offices of Jenkens & Gilchrist Parker Chapin LLP, 405 Lexington
Avenue, New York, New York 10174, on Tuesday, November 4, 2003, at 2:00 p.m.,
local time, to consider the following:
1. The election of two Class II directors to serve until the annual
meeting of stockholders to be held in 2006 and until their respective
successors are elected and qualified;
2. A proposal to ratify the action of our board of directors in
appointing Ernst & Young LLP as our independent auditors for the
fiscal year ending June 30, 2004; and
3. Such other business as may properly come before the meeting or any
adjournments or postponements thereof.
Only stockholders of record at the close of business on September 25, 2003
will be entitled to notice of, and to vote at, the meeting and any adjournments
or postponements thereof.
You are cordially invited to attend the meeting. Whether or not you plan to
be present, kindly fill out and sign the enclosed proxy exactly as your name
appears on the proxy, and mail it promptly in order that your vote can be
recorded. A return envelope is enclosed for your convenience and requires no
postage if mailed within the United States. The giving of this proxy will not
affect your right to vote in person in the event that you find it convenient to
attend the meeting.
By Order of the Board of Directors
William J. Kullback, Secretary
Minneapolis, Minnesota
October 2, 2003
MEDSOURCE TECHNOLOGIES, INC.
110 Cheshire Lane, Suite 100
Minneapolis, Minnesota 55305
PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
General
We are sending you this proxy statement on or about October 3, 2003, in
connection with the solicitation by our board of directors of proxies in the
accompanying form for use at our annual meeting to be held at 2:00 p.m., New
York time, on Tuesday, November 4, 2003 and at any adjournments or postponements
thereof. The annual meeting will be held at the offices of Jenkens & Gilchrist
Parker Chapin LLP, 405 Lexington Avenue, New York, New York 10174. Our principal
executive offices are located at 110 Cheshire Lane, Suite 100, Minneapolis,
Minnesota 55305 and our telephone number is (952) 807-1234.
Votes Required and Board of Directors' Recommendation
Only holders of record of our common stock as of the close of business on
September 25, 2003 are entitled to notice of, and to vote at, our annual
meeting. As of the close of business on that date, there were outstanding an
aggregate of 28,822,266 shares of our common stock. Each outstanding share of
our common stock on that date is entitled to one vote upon each matter to be
acted upon at the annual meeting.
The presence, in person or by proxy, of more than 50% of the total
outstanding shares of common stock entitled to vote at our annual meeting will
constitute a quorum to transact business.
A plurality of votes cast at the annual meeting in person or by proxy is
required for the election of each nominee to serve as a director. The
affirmative vote of a majority of votes cast at the annual meeting in person or
by proxy is required to ratify the selection of Ernst & Young as our independent
auditors for fiscal 2003.
Our board of directors has unanimously approved ALL of the matters
submitted to stockholders in this proxy statement and recommends that
stockholders vote "FOR" each such matter.
Voting By and Revocability of Proxies
All proxies received will be voted in accordance with the specifications
made thereon or, in the absence of specification: (a) for the election of all
nominees named herein to serve as directors, and (b) in favor of the proposal to
ratify the appointment of Ernst & Young LLP as our independent auditors.
Management does not intend to bring before the annual meeting any matters other
than those specifically described above and knows of no other matters to come
before the annual meeting. If any other matters or motions come before the
annual meeting, it is the intention of the persons named in the accompanying
form of proxy to vote proxies in accordance with their judgment on those matters
or motions, including any matter dealing with the conduct of the annual meeting.
Proxies may be revoked at any time prior to their exercise by written
notification to our Secretary at our principal executive offices located at 110
Cheshire Lane, Suite 100, Minneapolis, Minnesota 55305, by voting at the annual
meeting or by submitting a later dated proxy.
Withholding Votes for Election of Directors, Abstentions and Broker Non-Votes
Votes withheld, in the case of the election of directors, and abstentions
with respect to the ratification of the selection of our independent auditors
will not be considered votes cast in the final tally of votes with regard to
those proposals but will be counted in determining whether a quorum is present.
If you hold your shares through a broker, bank or other representative,
generally the broker or other representative may only vote the shares that it
holds for you in accordance with your instructions. However, if the broker or
other representative does not timely receive your instructions, it may vote on
certain matters for which it has discretionary authority. If a broker or other
representative cannot vote on a particular matter because it does not have
discretionary voting authority, this is a "broker non-vote" on that matter.
Brokers and other representatives will be able to exercise discretionary voting
authority on each matter that is presently scheduled to come before the meeting.
-2-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of September 25, 2003,
regarding the beneficial ownership of:
. our common stock by each person or group of affiliated persons that
beneficially owns more than 5% of our outstanding common stock;
. our common stock by each of our directors;
. our common stock by each of our executive officers named in the
Summary Compensation Table; and
. our common stock by all of our directors and executive officers as a
group.
Unless otherwise indicated below, the address for each listed director and
executive officer is MedSource Technologies, Inc., 110 Cheshire Lane, Suite 100,
Minneapolis, Minnesota 55305. We have determined beneficial ownership in
accordance with the rules of the SEC and, as a result, include voting and
investment power with respect to shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares shown as beneficially owned. The percentage of ownership of common stock
for each stockholder is based on 28,822,266 shares of our common stock
outstanding as of September 25, 2003. The number of shares of our common stock
outstanding used in calculating the percentage for each listed person includes
the shares of our common stock underlying the options and warrants held by that
person that are exercisable within 60 days following September 25, 2003.
Number of Shares Percentage of Shares
Beneficial Owner Beneficially Owned Beneficially Owned
- ---------------- ------------------ ------------------
Richard J. Effress(a) ...................................... 652,985 2.3
Daniel C. Croteau(b) ....................................... 114,843 *
William G. Ellerkamp(c) .................................... 10,356 *
Ralph M. Polumbo(d) ........................................ 94,890 *
R. Richard Snider(e) ....................................... 188,997 *
Joseph Ciffolillo(f) ....................................... 44,552 *
Paul E. Fulchino (g) ....................................... 5,896 *
John Galiardo(h) ........................................... 44,985 *
William J. Kidd(i) ......................................... 2,211,751 7.7
T. Michael Long(j) ......................................... 3,434,740 11.9
Ross Manire(k) ............................................. 79,550 *
Carl S. Sloane(l) .......................................... 30,686 *
The 1818 Fund III, L.P. (m) ................................ 3,418,366 11.9
Carla G. Kidd(n) ........................................... 2,211,751 7.7
State of Wisconsin Investment Board (o) .................... 2,184,000 7.6
Funds Affiliated with Whitney & Co.(p) ..................... 2,084,689 7.2
Jennison Associates LLC(q) ................................. 1,457,500 5.1
All directors and executive officers as a group
(12 persons)(r) .......................................... 7,120,121 24.7
___________
* Represents less than 1% of our outstanding common stock.
(a) Includes (1) 5,027 shares of restricted stock; (2) 644,234 shares of our
common stock (which include 244,444 shares of restricted stock) owned by a
family limited partnership, the general partner of which is a limited
liability company in which Mr. Effress's spouse holds a majority interest
and Mr. Effress holds a minority interest, and the limited partners of
which are Mr.
-3-
Effress's spouse and the trust referred to in the following clause (3); and
(3) 3,724 shares of our common stock owned by a trust established for the
benefit of Mr. Effress's children. Mr. Effress disclaims beneficial
ownership of all of the foregoing shares.
(b) Includes 112,833 shares of restricted stock. (c) Includes 1,659 shares of
restricted stock. (d) Includes 90,627 shares of restricted stock.
(e) Includes (1) 112,847 shares of restricted stock and (2) 66,380 shares of
our common stock that are owned by a trust. (f) Includes (1) 13,333 shares
of restricted stock and (2) 28,178 shares of our common stock beneficially
owned by River Edge Partners, Inc.
(g) Includes 7,076 shares of restricted stock. (h) Includes 13,333 shares of
restricted stock.
(i) Includes (1) 725,593 shares of our common stock that are owned by Mr.
Kidd's spouse; (2) 665,098 shares of our common stock owned by a trust for
the benefit of Mr. Kidd's spouse and descendants; (3) 806,990 shares of our
common stock owned by certain trusts established for the benefit of Mr.
Kidd's children; and (4) 13,333 shares of restricted stock. Mr. Kidd
disclaims beneficial ownership of the shares owned by his spouse and the
foregoing trusts.
(j) Includes 13,333 shares of restricted stock. Mr. Long, a general partner of
Brown Brothers Harriman & Co., which is the general partner of The 1818
Fund III, L.P., may be deemed to be the beneficial owner of shares held of
record by The 1818 Fund III, L.P. (see footnote (l) below) due to his role
as co-manager of The 1818 Fund III, L.P. Mr. Long disclaims beneficial
ownership of the shares beneficially owned by The 1818 Fund III, L.P.,
except to the extent of his pecuniary interest therein.
(k) Includes (1) 13,333 shares of restricted stock; (2) 48,833 shares of our
common stock beneficially owned by Manire Limited Partnership; and
(3)16,666 shares of our common stock issuable upon exercise of a warrant.
Mr. Manire is a director and officer of Odyssey Corp., the general partner
of Manire Limited Partnership.
(l) Includes 13,333 shares of restricted stock.
(m) Represents shares owned of record by The 1818 Fund III, L.P. Brown Brothers
Harriman & Co. is the general partner of The 1818 Fund III. Mr. Long and
Michael C. Tucker are partners of Brown Brothers Harriman & Co. and have
the power to vote and dispose of these shares, but each disclaims
beneficial ownership except to the extent of his pecuniary interest. The
address of each beneficial owner is 59 Wall Street, New York, New York
10005.
(n) Includes (1) 14,070 shares of our common stock that are owned by Mrs.
Kidd's spouse (including 13,333 shares of restricted stock); (2) 665,098
shares of our common stock owned by a trust for the benefit of Mrs. Kidd
and her spouse's descendants; and (3) 806,990 shares of our common stock
owned by certain trusts established for the benefit of Mrs. Kidd's
children. Mrs. Kidd disclaims beneficial ownership of the shares owned by
her spouse and by the foregoing trusts. Mrs. Kidd's address is c/o Kidd &
Company, LLC, Three Pickwick Plaza, Greenwich, Connecticut 06830.
(o) The address of the beneficial owner is P.O. Box 7842, Madison, Wisconsin
57307. The listed information is based upon information contained in
filings with the SEC.
(p) Represents 2,035,758 shares of our common stock owned by J.H. Whitney III,
L.P. and 48,931 shares owned by Whitney Strategic Partners III, L.P. J.H.
Whitney Equity Partners III, LLC is the general partner of J.H. Whitney III
and Whitney Strategic Partners III and has voting and investment power over
their shares. Each of these funds is affiliated with Whitney & Co., LLC.
Peter M. Castleman, Michael R. Stone, William Laverack, Jr., Jeffrey R.
Jay, Daniel J. O'Brien, James H. Fordyce and Joseph D. Carrabino, Jr. are
managing members of J.H. Whitney Equity Partners III, LLC. Accordingly,
they may be deemed to share beneficial ownership of the shares beneficially
owned by J.H. Whitney III and Whitney Strategic Partners III, although they
disclaim this beneficial ownership except to the extent of their pecuniary
interest in J.H. Whitney III and Whitney Strategic Partners III. The
address of each beneficial owner is 177 Broad Street, Stamford, Connecticut
06901. The listed information is based upon information contained in
filings with the SEC.
-4-
(q) The address of the beneficial owner is 466 Lexington Avenue, New York, NY
10017. The listed information is based upon information contained in
filings with the SEC.
(r) Includes (1) 836,325 shares of restricted stock; and (2) 16,666 shares of
our common stock issuable upon exercise of a warrant.
ELECTION OF DIRECTORS
Our board of directors presently consists of eight directors, divided into
three classes. The terms of office of Class I, Class II and Class III directors
expire at our annual meetings of stockholders to be held during 2005, 2003 and
2004, respectively. At each annual meeting, directors are chosen to succeed
those in the class whose term expires at that annual meeting to serve for a term
of three years each and until their respective successors are elected and
qualified.
Unless otherwise directed, persons named in the enclosed proxy intend to
cast all votes pursuant to proxies received for the election of John W. Galiardo
and Carl S. Sloane as Class II directors to serve until the 2006 annual meeting
of stockholders and until his successor is elected and qualified (those persons
are referred to in this proxy statement as the "nominees"). Each nominee
currently serves as a director and has indicated his availability to serve as a
director. In the event that any of the nominees should become unavailable or
unable to serve for any reason, the holders of the proxies have discretionary
authority to vote for one or more alternate nominees who will be designated by
our board.
A plurality of the votes cast at our annual meeting in person or by proxy
is required for the election of each nominee. Votes withheld will have no effect
on the outcome of the election of directors.
Our board unanimously recommends a vote "FOR" each nominee.
Background of Nominees, Continuing Directors and Non-Director Executive Officers
The following tables set forth the name, age (as of September 25, 2003) and
background of each of our directors.
Nominees for terms expiring in 2006 (Class II)
Name Age Background
- ---- ----- ------------
John W. Galiardo .......... 69 Mr. Galiardo has been a director of MedSource since January 2000. From 1977
until his retirement in January 2000, he worked at Becton Dickinson, a
medical technology company, where he was Vice Chairman and General Counsel.
He is a director of VISX Incorporated, a company that develops products and
procedures to improve eyesight using lasers. Jack received a B.S. from the
University of Maryland and an LL.B. from Columbia Law School.
Carl S. Sloane ............ 66 Mr. Sloane was a director of MedSource from January 2000 through October 2000
and re-joined our board in January 2002. He was the Ernest L. Arbuckle
Professor of Business Administration at Harvard Business School from 1991
until his retirement in 2000, and is presently Professor Emeritus.
Previously, Carl spent thirty years in management consulting, the last twenty
with the firm he co-founded, Temple, Barker & Sloane, Inc., and its successor
firm, Mercer Management Consulting, where he served as Chairman and Chief
Executive Officer. He is also an independent consultant and serves as a
director of Rayonier Inc., a forest products company, and The Brinks Co., a
global business and security services company.
-5-
Directors Whose Terms Expire in 2004 (Class III)
Name Age Background
- ---- ----- ------------
Joseph Ciffolillo ......... 64 Mr. Ciffolillo has been a director of MedSource since April 2001. From 1983
until his retirement in May 1997, he worked at Boston Scientific, a medical
technology company, most recently as Chief Operating Officer. Prior to Boston
Scientific, he worked in several positions at Johnson & Johnson, a
diversified medical products company, where he last served as president of
Johnson & Johnson Orthopedics. He serves as a director of Boston Scientific
and as Chairman of the Advisory Board of the Health Science Technology
Division of Harvard University and Massachusetts Institute of Technology.
Mr. Ciffolillo received his B.A. from Bucknell University.
Paul E. Fulchino .......... 56 Mr. Fulchino has been a director of MedSource since July 2003. He has served
as Chairman of the Board of Directors, President and Chief Executive Officer
of Aviall, Inc., a provider to the aerospace aftermarket of new aviation
parts, supply-chain management and other related value-added services, since
January 2000. From 1996 to 1999, Mr. Fulchino was President and Chief
Operating Officer of B/E Aerospace, Inc., a leading supplier of aircraft
cabin interior products and services. From 1990 to 1996, Mr. Fulchino served
in the capacities of President and Vice Chairman of Mercer Management
Consulting, Inc., an international general management consulting firm. Mr.
Fulchino is also a director of Aviall, Inc., The Sports Authority, Inc., a
member of the President's Advisory Board of Embry-Riddle Aeronautical
University, and a director of several privately-held companies.
Ross Manire ............... 51 Mr. Manire has been a director of MedSource since November 2000. Mr. Manire
has been Chairman and CEO of ClearLinx Network Corporation, a wireless
network company, since September 2002. Mr. Manire was President of
Flextronics Enclosures, a division of Flextronics International, an
electronics contract manufacturer from September 2000 until August 2002. He
was the President and CEO of Chatham Technologies, Inc., which merged with
Flextronics in September 2000. Prior to joining Chatham in 1999, Ross was
Senior Vice President of the Carrier Systems Business Unit of 3Com
Corporation, a provider of networking solutions, a position he held since
1997. Previously, he served in various executive positions with U.S. Robotics
including Chief Financial Officer, Senior Vice President, Operations, and
General Manager, Network Systems Division. Mr. Manire is also a director of
Zebra Technologies Corp., a manufacturer of products used in automatic
identification, debt collection and personnel identification. Mr. Manire
holds a B.A. from Davidson College and an M.B.A. from the University of
Chicago.
-6-
Directors Whose Terms Expire in 2005 (Class I)
Name Age Background
- ---- ----- ------------
Richard J. Effress ........ 33 Mr. Effress was a co-founder of MedSource, has been the Chairman of our board
of directors since inception and became Chief Executive Officer in January
2000. From May 1997 until January 2000, he worked as a principal at Kidd &
Company, a venture management firm, of which he is also a founder. While at
Kidd & Company he participated in the development of Chatham Technologies, a
provider of custom electronic enclosure systems for the communications
industry. Previously, he was an associate at Kidd, Kamm & Company, a private
equity investment firm. Mr. Effress received a B.S. from the Wharton School
of the University of Pennsylvania and an M.B.A. from Harvard Business School,
where he was a Baker Scholar.
T. Michael Long ........... 60 Mr. Long has been a director of MedSource since October 2000. He has been a
Partner of Brown Brothers Harriman & Co., an investment bank, since 1983 and
has been with Brown Brothers Harriman since 1971. He serves as a director of
HCA, a company that owns and operates hospitals and related health care
entities, Vaalco Energy Company, an independent energy company, and Genesee &
Wyoming, a company that operates short line and regional freight railroads
and provides related rail services. Mr. Long received a B.A. from Harvard
University and an M.B.A. from Harvard Business School.
William J. Kidd ........... 62 Mr. Kidd was a co-founder of MedSource and has been a director since our
inception. Bill was a founding principal of Kidd & Company, a venture
management firm he founded in 1997. Prior to Kidd & Company, Mr. Kidd was a
founding partner of Kidd, Kamm & Company, a private equity investment firm.
He received a B.A. and M.B.A. from Cornell University.
Information About Non-Director Executive Officers
The following table sets forth the name, age (as of September 25, 2003) and
background of each of our executive officers and key employees who is not a
director.
Name Age Background
- ---- ----- ------------
Daniel C. Croteau ......... 38 Mr. Croteau joined MedSource in August 1999 as Director of Business
Development, became our Vice President--Business Development in January 2000,
became our Vice President--Corporate Development in December 2001 and became
our Senior Vice President - Corporate Development in November 2002. From
July 1997 until July 1999, he was a consultant at Booz Allen & Hamilton in
Sydney, Australia. Previously, he worked at General Electric, a diversified
industrial corporation, in various technical marketing, sales, and general
management roles. Mr. Croteau has a B.S. in Mechanical Engineering from the
University of Vermont and an M.B.A. from Harvard Business School.
-7-
Name Age Background
- ---- --- ----------
Rolf Dahl ................. 40 Mr. Dahl joined MedSource in October 2002 as Vice President -- Business
Excellence. From March 1998 to October 2002, Mr. Dahl served as an executive
director at Cummins Inc., a manufacturer of engines and turbines. From
September 1996 until March 1998, he was a plant manager for Cummins.
William Ellerkamp ......... 44 Mr. Ellerkamp joined MedSource in June 2000 as Vice President--Market
Development. From March 2000 until July 2000, he was an independent
consultant, performing services relating to the e-commerce and medical device
industries. From September 1997 until March 2000, he worked at TFX Medical,
a supplier of engineered components, assemblies and products to medical
device and original equipment manufacturers, most recently as President.
Prior to that he spent over ten years in Europe with Teleflex and Rusch
International in various sales and marketing positions. Mr. Ellerkamp has a
B.A. from Colgate University and an M.B.A. from the London Business School.
William J. Kullback ....... 43 Mr. Kullback joined MedSource in November 2002 as Senior Vice President --
Finance, Chief Financial Officer, Secretary and Treasurer. From 1999 until
2002, he served as Executive Vice President and Chief Financial Officer of
Pemstar, Inc., a multi-national corporation in the electronic manufacturing
services industry. Prior to Pemstar, Mr. Kullback served from 1995 until
1999 as the Chief Financial Officer of Crenlo, Inc., a manufacturer of
fabricated metal products. Before Crenlo, Mr. Kullback worked in various
positions with the Stant Corporation, a manufacturer of automotive parts,
including Corporate Controller and CFO of Stant's Plews Tool subsidiary.
From 1987 to 1990, Mr. Kullback worked as a consultant in the audit and
manufacturing consulting practices of Price Waterhouse. Mr. Kullback
received both his B.A. and M.B.A. from the State University of New York at
Buffalo.
Ralph Polumbo ............. 51 Mr. Polumbo joined MedSource in April 1999 as Vice President--Human Resources
and Integration. From 1995 until 1999, he worked at Rubbermaid, a company
that produces and markets products principally in the home, juvenile and
commercial products categories, where he held several positions including
Vice President of Integration and Vice President of Human Resources for
Rubbermaid's Home Products division. Previously, he worked at The Stanley
Works, a tool manufacturer, in a variety of positions including Vice
President of Human Resources and Vice President of Operations. Mr. Polumbo
has a B.S. from the Wharton School of the University of Pennsylvania and a
Masters of Labor and Industrial Relations from Michigan State University.
-8-
Name Age Background
- ---- --- ----------
Robert R. Snider .......... 52 Mr. Snider joined MedSource in February 2000 as Vice President--New Product
Introduction and became our Senior Vice President - New Product Introduction
in November 2002. From 1996 until 2000, he worked at Bridge Medical, a
start-up medical device and information company, where he was a Vice
President and co-founder. Prior to that, he served in various senior
management positions at Amcare Health Services, McGaw, and Quest Medical.
Mr. Snider has a B.S. degree in Mechanical Engineering from Southern
Methodist University and an M.B.A. from Louisiana State University.
Committees of the Board
We have an audit committee, a compensation and management development
committee and a nominating and governance committee.
Our audit committee consists of Messrs. Ciffolillo, Fulchino, Long and
Manire (Mr. Sloane served as a member of our audit committee until Mr. Fulchino
was elected to our board and our audit committee in July 2003), each of whom we
believe meets the independence requirements for audit committee members under
the listing standards of the Nasdaq Stock Market's National Market, on which our
common stock is listed. Our audit committee provides assistance to our directors
in fulfilling their oversight responsibility to ensure that management is
maintaining an adequate system of internal controls to assure:
. that assets are safeguarded and that financial reports are properly
presented;
. consistent application of generally accepted accounting principles;
and
. compliance with management's policies and procedures.
The specific functions and responsibilities of our audit committee are
set forth in our audit committee's written charter, which was adopted by our
board of directors. Our audit committee reviews and reassesses the charter
annually and recommends any changes to the board for approval. A copy of the
charter is attached as Appendix A to this proxy statement. A report of our audit
committee appears under the caption "--Audit Committee Report" below. Our audit
committee met four times during the past fiscal year.
Our compensation and management development committee consists of Messrs.
Ciffolillo, Galiardo, Long and Sloane and is authorized to determine management
and executive compensation and establish health and benefit plans and other
compensation policies. Our compensation and management development committee is
also responsible for the administration of our stock plans, including reviewing
management's recommendation with respect to grants of awards and taking other
actions that may be required in connection with our compensation and incentive
plans. Our compensation and management development committee met six times
during the past fiscal year and acted by written consent on one occasion during
the past fiscal year.
Our nominating and governance committee consists of Messrs. Sloane,
Fulchino and Kidd (Mr. Long served as a member of our nominations and governance
committee from its formation in November 2002 until Mr. Fulchino was elected to
our board and our nominating and governance committee in July 2003) and is
authorized to assist the board by identifying individuals qualified to become
board members, and to recommend to the board the director nominees at each
annual meeting of stockholders. Our nominating and governance committee is also
responsible for recommending corporate governance guidelines, leading the board
in its annual review of its own performance and recommending nominees
-9-
for each committee. Stockholders may submit names of qualified candidates for
director, along with detailed on their backgrounds to our Secretary for referral
to our nominating and governance committee. Our nominating and governance
committee met one time during the past fiscal year.
Our board met seven times during the past fiscal year. Other than Messrs.
Ciffolillo and Long, each incumbent director attended at least 75% of the
meetings of our board and committees on which he served that were held during
the fiscal year.
Audit Committee Report
Management has the primary responsibility for our financial reporting
process, including our financial statements, while our board is responsible for
overseeing our accounting, auditing and financial reporting practices. Our
independent auditors have responsibility for examining our annual financial
statements and expressing an opinion on the conformity of those financial
statements with accounting principles generally accepted in the United States.
In assisting our board in fulfilling its oversight responsibility with respect
to our year ended June 30, 2003, our audit committee:
. reviewed and discussed the audited financial statements for our fiscal
year ended June 30, 2003 with management and Ernst & Young LLP, our
independent auditors;
. discussed with Ernst & Young the matters required to be discussed by
Statement on Auditing Standards No. 61, as amended by Statement of
Auditing Standards 90, relating to the conduct of the audit; and
. received the written disclosures and the letter from Ernst & Young
regarding its independence as required by Independence Standards Board
Standard No. 1.
Our audit committee also discussed Ernst & Young's independence with
Ernst & Young and considered whether the provision of non-audit services
rendered by Ernst & Young was compatible with maintaining its independence under
Securities and Exchange Commission rules governing the independence of a
company's outside auditors. See "Ratification of the Selection of Auditors."
Based on the foregoing review and discussions, our audit committee
recommended to our board that our audited financial statements for the fiscal
year ended June 30, 2003 be included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission for that year.
Respectfully,
Ross Manire, Chairman
Joseph Ciffolillo
Paul E. Fulchino
T. Michael Long
-10-
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation earned by our Chief
Executive Officer and our four other most highly compensated executive officers
during our fiscal years ended June 30, 2003, 2002 and 2001:
Long-Term
---------
Compensation Awards
-------------------
Annual Restricted Number of
Compensation Stock Securities
------------
Fiscal Awards Underlying All Other
Year Salary Bonus ($) Options(#) Compensation
---- ------ ----- ------ ---------- ------------
Richard J. Effress ......................... 2003 $291,511 $48,586 $635,054 (a) 50,000 (b) --
Chairman and Chief Executive Officer 2002 268,750 28,400 -- 100,000 (b) --
2001 250,000 50,000 -- 300,000 (b) --
Daniel C. Croteau .......................... 2003 232,219 19,352 288,140 (c) 20,000 (b) --
Senior Vice President - Corporate 2002 206,458 11,619 -- 41,620 (b) --
Development 2001 152,083 30,751 -- 50,000 (b) 23,648 (d)
R. Richard Snider .......................... 2003 220,246 18,354 284,539 (e) 15,000 (b) --
Senior Vice President - Operations 2002 186,250 9,332 -- 15,000 (b) --
and Engineering Services 2001 170,000 30,641 -- 10,000 (b) --
Ralph Polumbo .............................. 2003 198,329 16,528 102,627 (f) 10,000 (b) --
Vice President - Human Resources and 2002 186,250 9,814 -- 25,000 (b) --
Integration 2001 175,000 35,000 -- -- --
William G. Ellerkamp ....................... 2003 184,485 25,374 1,659 (g) 8,500 (b) --
Vice President - Market Development 2002 178,750 9,332 -- -- --
2001 178,750 35,750 -- 27,500 (b) --
__________
(a) Reflects the value as of the date of grant of 2,513 shares that vested on
July 29, 2003 and 2,514 shares that will vest on July 29, 2004. Also
reflects the value as of the date of grant of: (i) 171,111 shares that
will vest in four equal installments on April 22, 2004, 2005, 2006 and
2007; (ii) 73,333 shares that will vest on April 22, 2009 or earlier, in
one or more installments, if our common stock meets certain price targets
prior to April 22, 2007; and (iii) 14,667 shares that will vest if our
common stock meets certain price targets prior to April 22, 2007. Based
on the closing price per share of our common stock on the Nasdaq Stock
Market on June 30, 2003, the last day of our most recently completed
fiscal year, the value of all of the foregoing shares of restricted stock
was $1,119,945. As discussed under "Security Ownership of Certain
Beneficial Owners and Management," these shares are beneficially owned by
a family limited partnership, the general partner of which is a limited
liability company in which the named executive officer's spouse holds a
majority interest and the named executive officer holds a minority
interest, and the limited partners of which are the named executive
officer's spouse and a trust established for the benefit of the named
executive officer's current and future children. Vesting of the foregoing
shares of restricted stock will accelerate in connection with a change of
control of MedSource as discussed under "-- Employment Arrangements" and
upon the death or disability of the named executive officer. Any
dividends that we declare on our common stock will be paid on the
foregoing shares of restricted stock, other than the 14,667 shares
referred to above.
(b) As discussed under "Ten-Year Option Repricing" below, the named executive
officer has exchanged these options (and, in some instances, certain
additional options) for new options to be granted at the first meeting of
our compensation and management development committee held after December
7, 2003.
(c) Reflects the value as of the date of grant of 1,028 shares that vested on
July 29, 2003 and 1,029 shares that will vest on July 29, 2004. Also
reflects the value as of the date of grant of: (i) 77,777 shares that
will vest in four equal installments on April 22, 2004, 2005, 2006 and
2007; (ii) 33,333 shares that will vest on April 22, 2009 or earlier, in
one or more installments, if our common stock meets certain price targets
prior to April 22, 2007; and (iii) 6,667 shares that will vest if our
common stock meets certain price targets prior to April 22, 2007. Based
on the closing price per share of our common stock on the Nasdaq Stock
Market on June 30, 2003, the last day of our most recently completed
fiscal year, the value of all of the foregoing shares of restricted stock
was $508,096. Vesting of the foregoing shares of restricted stock will
accelerate in connection with a change of control of MedSource as
discussed under "-- Employment Arrangements" and upon the death or
disability of the named executive officer. Any dividends that we declare
on our
-11-
common stock will be paid on the foregoing shares of restricted stock,
other than the 6,667 shares referred to above.
(d) We reimbursed the named executive for relocation-related expenses in
the amount listed under "All Other Compensation."
(e) Reflects the value as of the date of grant of 868 shares that vested on
July 29, 2003 and 869 shares that will vest on July 29, 2004. Also
reflects the value as of the date of grant of: (i) 77,777 shares that
will vest in four equal installments on April 22, 2004, 2005, 2006 and
2007; (ii) 33,333 shares that will vest on April 22, 2009 or earlier,
in one or more installments, if our common stock meets certain price
targets prior to April 22, 2007; and (iii) 6,667 shares that will vest
if our common stock meets certain price targets prior to April 22,
2007. Based on the closing price per share of our common stock on the
Nasdaq Stock Market on June 30, 2003, the last day of our most recently
completed fiscal year, the value of all of the foregoing shares of
restricted stock was $506,740. Vesting of the foregoing shares of
restricted stock will accelerate in connection with a change of control
of MedSource as discussed under "-- Employment Arrangements" and upon
the death or disability of the named executive officer. Any dividends
that we declare on our common stock will be paid on the foregoing
shares of restricted stock, other than the 6,667 shares referred to
above.
(f) Reflects the value as of the date of grant of 868 shares that vested on
July 29, 2003 and 869 shares that will vest on July 29, 2004. Also
reflects the value as of the date of grant of: (i) 62,223 shares that
will vest in four equal installments on April 22, 2004, 2005, 2006 and
2007; (ii) 26,667 shares that will vest on April 22, 2009 or earlier,
in one or more installments, if our common stock meets certain price
targets prior to April 22, 2007; and (iii) 5,333 shares that will vest
if our common stock meets certain price targets prior to April 22, 2007
Based on the closing price per share of our common stock on the Nasdaq
Stock Market on June 30, 2003, the last day of our most recently
completed fiscal year, the value of all of the foregoing shares of
restricted stock was $406,870. Vesting of the foregoing shares of
restricted stock will accelerate in connection with a change of control
of MedSource as discussed under "-- Employment Arrangements" and upon
the death or disability of the named executive officer. Any dividends
that we declare on our common stock will be paid on the foregoing
shares of restricted stock, other than the 5,333 shares referred to
above.
(g) Reflects the value as of the date of grant of 868 shares that vested on
July 29, 2003 and 869 shares that will vest on July 29, 2004. Based on
the closing price per share of our common stock on the Nasdaq Stock
Market on June 30, 2003, the last day of our most recently completed
fiscal year, the value of all of the foregoing shares of restricted
stock was $7,365. Vesting of the foregoing shares of restricted stock
will accelerate in connection with a change of control of MedSource as
discussed under "-- Employment Arrangements" and upon the death or
disability of the named executive officer. Any dividends that we
declare on our common stock will be paid on the foregoing shares of
restricted stock.
Option Grants during Year Ended June 30, 2003
The following table shows grants of stock options to our Chief
Executive Officer and to the other executive officers named in the Summary
Compensation Table above during our fiscal year ended June 30, 2003.
All options were granted under our 1999 stock plan. These options were
granted at exercise prices equal to the fair market value of our common stock as
determined by our board of directors on the dates of grant. The percentage of
options granted is based on options to purchase an aggregate of 671,750 shares
of our common stock granted by us during the fiscal year ended June 30, 2003 to
our employees, including the named executive officers.
-12-
The potential realizable value amounts in the last two columns of the
following chart are based on the assumption that our common stock appreciates at
the annual rate shown, compounded annually, from the date of grant until the
expiration of the 10-year term. These number are calculated based on the
requirements of the SEC and do not reflect our estimate of future stock price
growth.
Individual Grants Potential
Realizable Value
at Assumed
Number of Percent of Annual Rates of
Securities Total Options Stock Price
Underlying Granted to Exercise Appreciation
Options Employees in Price per Expiration for Option
Name Granted Fiscal Year (%) Share ($) Date 5% 10%
- ---- ------- --------------- --------- ---- -- ---
Richard J. Effress ....... 50,000(a) 7.4 11.47 (b) (b) (b)
Daniel C. Croteau ........ 20,000(a) 3.0 11.47 (b) (b) (b)
R. Richard Snider ........ 15,000(a) 2.2 11.47 (b) (b) (b)
Ralph M. Polumbo ......... 10,000(a) 1.5 11.47 (b) (b) (b)
William G. Ellerkamp ..... 8,500(a) 1.3 11.47 (b) (b) (b)
__________
(a) Would vest as to 25% of the shares underlying the option on each of the
first, second, third and fourth anniversary of the day of grant.
(b) As discussed under "Ten-Year Option Repricing" below, the named
executive officer has exchanged this option for a new option to be
granted at the first meeting of our compensation and management
development committee held after December 7, 2003.
Stock Option Values as of June 30, 2003
Neither our Chief Executive Officer nor any of the other executive
officers named in the Summary Compensation Table above exercised any options
during our year ended June 30, 2003. As discussed under "Ten-Year Option
Repricing" below, each of our named executive officers has exchanged certain
options for new options to be granted at the first meeting of our compensation
and Management Development Committee held after December 7, 2003.
Director Compensation
We compensate our non-employee directors at the rate of $12,500 per
year, payable, at their option, in cash or shares of our common stock. During
fiscal 2003, we did not grant our non-employee directors any options to purchase
shares of our common stock. Additionally, certain of our directors participated
in our option exchange offer during fiscal 2003, as described under "--Ten-Year
Option Repricing." During fiscal 2003, we granted each non-employee director
13,333 shares of restricted stock that vests over three years. We reimburse
directors for reasonable out-of-pocket expenses incurred in attending board and
committee meetings.
-13-
Equity Compensation Plan Information
The following table sets forth information about our equity
compensation plans as of June 30, 2003:
Number of securities
Number of securities to Weighted-average remaining available for
be issued upon exercise exercise price of future issuance
of outstanding options, outstanding options, under equity
Plan Category warrants and rights warrants and rights compensation plans
------------- ------------------- ------------------- ------------------
Equity compensation plans
approved by security
holders ..................... 1,409,933 $6.10 3,822,323 (a)
Equity compensation plans
not approved by security
holders ..................... -- -- --
--------------------------- ----------------------- --------------------
Total ........................ 1,409,933 $6.10 3,822,323
=========================== ======================= ====================
_____________
(a) Includes 273,773 shares available for issuance under our 2001 Employee
Stock Purchase Plan. The number of shares reserved for issuance under
the purchase plan is subject to an annual increase on the first day of
each fiscal year equal to the lowest of 750,000 shares, 2.5% of our
outstanding stock on that date or such lesser amount as may be
determined by our board of directors.
Ten-Year Option Repricing
On May 8, 2003, we offered our employees and directors the opportunity
to exchange any options granted to them under our 1999 stock plan for
replacement options to purchase shares of our common stock. We made this offer
as all of our outstanding options were at exercise prices significantly higher
than our then current stock price. For those who elected to participate in this
offer, the options they elected to exchange were cancelled and no longer valid
as of June 6, 2003, and we will grant replacement options at the first meeting
of our compensation and management development committee held after December 7,
2003. The replacement options will enable the holder to purchase one-half of the
number of shares exchanged, will have a term of 10 years from the date of grant
and will have an exercise price equal to the fair market value on the date the
new option is granted.
The following table sets forth information regarding options held by
the executive officers named in the Summary Compensation Table above that were
exchanged pursuant to our option exchange offer, which expired on June 6, 2003.
Our compensation and management development committee approved the option
exchanges in order to restore the incentive value of such options.
10-Year Option Repricing
Number of Length of
Securities Original Option
Underlying Market Price of Exercise Price at Time Remaining
Options Stock at Time of Time of New Exercise at DAte of
Name Date Repricing Repricing(a) Repricing Price Repricing
---- ---- --------- ------------ --------- ----- ---------
Richard J. Effress ... 6/6/03 300,000 $3.32 $16.24 (b) 11/21/10
6/6/03 100,000 3.32 17.00 (b) 11/13/11
6/6/03 50,000 3.32 11.47 (b) 8/12/12
Daniel C. Croteau .... 6/6/03 15,000 3.32 (c) (b) 11/15/09
6/6/03 5,000 3.32 (c) (b) 4/19/10
6/6/03 10,000 3.32 16.24 (b) 6/20/10
6/6/03 20,000 3.32 16.24 (b) 9/7/10
6/6/03 30,000 3.32 20.00 (b) 6/27/11
6/6/03 1,620 3.32 17.00 (b) 11/13/11
6/6/03 6,667 3.32 17.00 (b) 11/13/11
-14-
6/6/03 33,333 3.32 17.00 (b) 1/17/12
6/6/03 20,000 3.32 11.47 (b) 8/12/12
R. Richard Snider ........ 6/6/03 75,000 3.32 14.00 (b) 1/17/10
6/6/03 10,000 3.32 17.00 (b) 2/6/11
6/6/03 5,000 3.32 17.00 (b) 11/13/11
6/6/03 10,000 3.32 17.00 (b) 1/17/12
6/6/03 15,000 3.32 11.47 (b) 8/12/12
Ralph M. Polumbo ......... 6/6/03 60,000 3.32 12.00 (b) 4/7/09
6/6/03 10,000 3.32 14.00 (b) 1/17/10
6/6/03 8,333 3.32 17.00 (b) 11/13/11
6/6/03 16,667 3.32 17.00 (b) 1/17/12
6/6/03 10,000 3.32 11.47 (b) 8/12/12
William G. Ellerkamp ..... 6/6/03 51,884 3.32 16.24 (b) 6/20/10
6/6/03 27,500 3.32 16.24 (b) 11/21/10
6/6/03 8,500 3.32 11.47 (b) 8/12/12
_________
(a) Represents the closing sales price of our common stock on the Nasdaq
Stock Market on June 6, 2003.
(b) In June 2003, the named executive officers exchanged options to
purchase the number of shares of our common stock set forth in the
above table with the exercise price indicated for the issuance of
225,000 shares of our common stock with an exercise price equal to the
closing sales price of our common stock on the Nasdaq stock market on
the date of the first meeting of our compensation and management
development committee held after December 7, 2003. The new options will
vest in four equal annual installments on each of the first four
anniversaries of the date the new options are granted and will have
other terms and conditions that will be substantially similar to those
of the cancelled options.
(c) The exercise price of one-fourth of the shares issuable upon exercise
of such options was $14.00, $15.40, $16.94, and $18.63, respectively.
In addition to the options surrendered by Messrs. Effress, Croteau,
Snider, Polumbo and Ellerkamp, the following executive officers surrendered
options to purchase the number of shares indicated: Mr. Dahl surrendered options
to purchase 30,000 shares of common stock with an exercise price of $8.25 per
share; and Mr. Kullback surrendered options to purchase 100,000 shares of common
stock with an exercise price of $8.25 per share.
Additionally, the following directors surrendered options to purchase
the number of shares indicated: Mr. Ciffolillo surrendered options to purchase
37,500 shares of common stock with an exercise price of $17.00 per share and
options to purchase 2,100 shares of common stock with an exercise price of
$13.19 per share; Mr. Galiardo surrendered options to purchase 3,750 shares of
common stock with an exercise price of $14.00 per share, options to purchase
3,750 shares of common stock with an exercise price of $15.40 per share, options
to purchase 3,750 shares of common stock with an exercise price of $16.94 per
share, options to purchase 3,750 shares of common stock with an exercise price
of $18.63 per share, options to purchase 22,500 shares of common stock with an
exercise price of $16.24 per share and options to purchase 2,100 shares of
common stock with an exercise price of $13.19 per share; Mr. Kidd surrendered
options to purchase 2,100 shares of common stock with an exercise price of
$13.19 per share; Mr. Long surrendered options to purchase 2,100 shares of
common stock with an exercise price of $13.19 per share; Mr. Manire surrendered
options to purchase 37,500 shares of common stock with an exercise price of
$16.24 per share and options to purchase 2,100 shares of common stock with an
exercise price of $13.19 per share; and Mr. Sloane surrendered options to
purchase 469 shares of common stock with an exercise price of $14.00 per share,
options to purchase 469 shares of common stock with an exercise price of $15.40
per share, options to purchase 469 shares of common stock with an exercise price
of $16.94 per share, options to purchase 468 shares of common stock with an
exercise price of $18.63 per share, options to purchase 2,812 shares of common
stock with an exercise price of $16.24 per share, options to purchase 32,813
shares of common stock with an exercise price of $17.00 per share and options to
purchase 2,100 shares of common stock with an exercise price of $13.19 per
share.
-15-
Employment Arrangements
We have entered into the following employment agreements with our Chief
Executive Officer and the other executive officers named in the Summary
Compensation Table above:
. our employment agreement with Mr. Effress that provides him with a
base salary of $309,000, subject to increase by the compensation and
management development committee, and a bonus opportunity of at least
100% of his base salary at target performance;
. our employment agreement with Mr. Croteau that provides him with a
base salary of $225,000, subject to increase by the compensation and
management development committee, and a bonus opportunity of at least
50% of his base salary at target performance; and
. our employment agreement with Mr. Snider that provides him with a base
salary of $240,000, subject to increase by the compensation and
managaement development committee, and a bonus opportunity of at lease
50% of his base salary at target performance; and
. our employment agreement with Mr. Polumbo that provides him with a
base salary of $206,000, subject to increase by the compensation and
managaement development committee, and a bonus opportunity of at lease
50% of his base salary at target performance; and
. our employment agreement with Mr. Ellerkamp that provides him with a
base salary of $190,600, subject to increase by the compensation and
managaement development committee, and a bonus opportunity of at lease
50% of his base salary at target performance; and
Additionally, Messrs. Effress, Croteau, Dahl, Ellerkamp, Kullback,
Polumbo, and Snider have entered into employment severance and termination
agreements that provide for them to receive an amount equal to their base salary
for one year following a termination by us without cause or following a
termination by them for good reason. The amount would be reduced by any amounts
they receive from any new employer during the year (but they will in any event
receive an amount at least equal to their base salary for six months) and
payment is conditioned upon their agreement not to compete with us or solicit
our employees or customers during that one-year period. If any of these
employees are terminated without cause or leave MedSource with good reason
within one year following a change of control of MedSource, we would be required
to pay them a lump sum equal to two times the highest annual cash compensation
they received during their three prior years of employment and would be required
to provide them with health benefits for 24 months following termination.
Receipt of the lump sum payment would not be conditioned upon their agreement
not to compete or solicit our employees or customers. In the event of a change
of control, the options and restricted stock held by Messrs. Effress, Croteau,
Dahl, Ellerkamp, Kullback, Polumbo and Snider will become immediately
exercisable in full.
Compensation and Management Development Committee Interlocks and Insider
Participation in Compensation Decisions
The members of our compensation and management development committee are
Messrs. Ciffolillo, Galiardo, Long and Sloane, all of whom are non-employee
directors.
-16-
REPORT WITH RESPECT TO EXECUTIVE COMPENSATION DETERMINATIONS
The following report with respect to our compensation policies applicable
to the determination of the compensation of our executive officers for fiscal
2003 is presented by our compensation and management development committee.
Executive Compensation.
Compensation of executive officers consists of:
. base salary;
. annual incentive compensation or bonus; and
. long term incentives, primarily stock options or restricted stock.
All determinations as to the compensation of an executive officer who is
also a member of our board is made on an individual basis by our board, based on
recommendations of our compensation and management development committee and
after consultation with senior management, although an executive officer who is
also a member of the board does not participate in the board's determination of
his own compensation. In making its decisions as to base salary, our board gives
effect to the executive's performance and responsibilities, inflationary trends,
competitive market conditions and other subjective factors, without ascribing
specific weights to these factors. Bonuses are based upon our performance, as
well as the executive's overall performance, contribution toward our
profitability, meeting corporate objectives and, in certain instances, meeting
specific corporate goals or completing specific programs or projects. The
compensation (salary and bonuses) of our executive officers is determined by our
compensation committee, who are all members of our board of directors, utilizing
similar subjective criteria. In addition, we used external consultants to
evaluate our executive officer's compensation against comparable companies'
executive officer compensation packages.
Base Salary. Base salary is annual cash compensation and is determined by
the executive's job responsibilities and competitive market factors, including
general or regional economic conditions and cost of living changes. Base salary
is reviewed and adjusted annually based on a salary range, which reflects
competitive salaries for executives with similar responsibilities.
Bonus. Annual incentive bonuses for executive officers are intended to
reflect our belief that a significant portion of the annual compensation of each
executive officer should be contingent upon our company's performance. To carry
out this philosophy, MedSource has implemented a Management Incentive Plan in
which bonuses are payable upon achievement of certain performance targets. Under
the MIP, our executive officers are eligible to earn bonuses of between 50% and
100% of their base salary.
At the beginning of each year, we determine a reference bonus for each
executive based on a competitive range, which reflects the executive's job
responsibilities and competitive market conditions. At year-end, we determine
the actual bonus to be paid to the executive based on our company's overall
performance, as well our assessment of the achievement of stated subjective
goals, which vary for each executive.
For our year ended June 30, 2003, we measured our company's performance
based on certain financial and non-financial objectives. Our executive officers
were eligible to earn 20% of their bonus based upon the extent that we achieved
certain company-wide strategic objectives and were eligible to earn the
remaining 80% of their bonus based upon the extent that we achieved certain
financial and non-financial targets. Based upon company-wide and individual
performance during fiscal 2003, our executive officers received bonuses ranging
from 6.7% of their base salary to 16.7% of their base salary.
-17-
Long-Term Incentive Compensation. We use stock-based compensation in the
form of stock options or restricted stock to link long-term executive
compensation to long-term increases in stockholder value. Our determination of
the number of stock options to be granted or restricted stock to be awarded is
based on competitive practices and the executive's level of responsibility. We
give consideration to the number of stock options or shares of restricted stock
previously granted to an executive in considering the appropriate size of an
award.
Historically we used stock options as the primary method of providing
long-term incentive compensation to key employees, including our executive
officers. Beginning in fiscal 2002, we also began issuing restricted stock
grants to provide long-term incentive to our key employees, including our
executive officers. We granted the restricted stock as part of the total bonus
payable to our key employees for fiscal 2002. We believe that stock options and
restricted stock foster the interest of key employees in seeking our long-term
growth, as well as linking their interests with the overall interest of
stockholders. In determining when to grant options and restricted stock and the
size of the award to any particular executive, we take into consideration
factors such as the executive's position, level of responsibility, value to us,
objectives, accomplishments and performance, the incentive and objectives
intended to be provided, when the last prior option was granted to the
individual, the individual's other compensation and the recommendation of senior
management. No one factor is given special weight, but decisions are made based
on an overall assessment of each individual.
Option Exchange
In June 2003, each of Messrs. Effress, Croteau, Ellerkamp, Polumbo, and
Snider agreed to exchange stock options held by them for options to purchase
one-half of the number of shares subject to such options, so long as they
continued to be employed by us at the first meeting of our compensation and
management development committee held after December 7, 2003. See the table
under the heading "Ten-Year Option Repricings" included elsewhere in this Proxy
Statement.
The compensation and management development committee approved the option
exchanges for Messrs. Effress, Croteau, Ellerkamp, Polumbo and Snider because we
believed that executive officers with equity incentives, the value of which
increases over time, creates performance incentives and helps us retain valuable
employees. The stock options surrendered by Messrs. Effress, Croteau, Ellerkamp,
Polumbo and Snider had exercise prices ranging from $11.47 to $20.00 per share,
significantly above the market price of our common stock. On the effective date
of the exchange, the closing market price of our common stock as reported by the
Nasdaq Stock Market was $3.32. Accordingly, we believed that the option exchange
program was an appropriate mechanism to create performance incentives and retain
these executives.
Chief Executive Officer Compensation
We used the same compensation philosophy and guidelines discussed above
to determine Mr. Effress's compensation in fiscal 2003. In determining the
fiscal 2003 annual compensation of Mr. Effress, our Chief Executive Officer, we
determined to increase his base salary to $309,000 per year, and established
financial and non-financial targets that would provide him with a bonus
opportunity equal to 100% of his base salary if those targets are achieved and
grant him options to purchase 50,000 shares of common stock, based upon Mr.
Effress's leadership, experience, knowledge and reputation in the industry in
which we conduct business, subject to re-evaluation during the year if
circumstances warrant. Mr. Effress's compensation package was evaluated against
other Chief Executive Officer compensation packages of comparable companies by
an external consultant.
-18-
Certain Tax Legislation
Section 162(m) of the Internal Revenue Code of 1986 ("Section 162(m)")
generally precludes a public company from taking a federal income tax deduction
for annual compensation in excess of $1,000,000 paid to its chief executive
officer or any of its four other most highly compensated executive officers.
Certain "performance based compensation," however, is excluded from the
deduction limitation. We believe that all of the fiscal 2003 compensation of our
executive officers, including compensation resulting from the exercise of stock
options, is deductible.
Respectfully,
John Galiardo, Chairman
Joseph Ciffolillo
T. Michael Long
Carl S. Sloane
-19-
STOCKHOLDER RETURN PERFORMANCE GRAPH
Our common stock has been listed on the Nasdaq Stock Market's National
Market since March 27, 2002. The following graph compares the cumulative total
stockholder return to holders of our common stock with the Nasdaq National
Market and the Nasdaq Medical Equipment Index. The comparison assumes $100 was
invested on March 27, 2002 in our common stock and in each of the comparison
groups, and assumes reinvestment of dividends (we paid no dividends during the
periods):
COMPARISON OF 15 MONTH CUMULATIVE TOTAL RETURN*
AMONG MEDSOURCE TECHNOLOGIES, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE
NASDAQ MEDICAL EQUIPMENT INDEX
[PERFORMANCE GRAPH]
MEDSOURCE TECHNOLOGIES INC
Cumulative Total Return
-----------------------------------------------------------------------
3/27/02 3/02 6/02 9/02 12/02 3/03 6/03
MEDSOURCE TECHNOLOGIES, INC. 100.00 108.00 102.08 62.67 54.08 15.08 35.33
NASDAQ STOCK MARKET (U.S.) 100.00 101.04 80.54 64.62 73.72 74.17 89.42
NASDAQ MEDICAL EQUIPMENT 100.00 101.09 92.48 84.08 84.15 85.39 99.08
-20-
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than 10%
of our common stock, to file initial reports of ownership, and reports of
changes of ownership, of our equity securities with the Securities and Exchange
Commission and furnish copies of those reports to us. Based solely upon a review
of the copies of the reports furnished to us to date and representations that no
reports were required, we believe that all reports required to be filed by such
persons with respect to our fiscal year ended June 30, 2003 were timely filed,
except that a report of changes in Beneficial Ownership on Form 4 of Mr. Polumbo
was filed late (such report disclosed the disposal by Mr. Polumbo of 889 shares
of our common stock as payment for withholding taxes due in connection with the
vesting of certain shares of restricted stock).
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Whitney & Co. and The 1818 Fund III each have the right to require us
to register their shares under the Securities Act, subject to the right of the
underwriters in an underwritten public offering to decrease the number of shares
offered by them due to market conditions If either of them makes such a request,
then Messrs. Effress, Galiardo, Kidd, Kelly, Manire and Sloane and other
stockholders have the right to require us to register their shares under the
Securities Act, subject to the right of the underwriters in an underwritten
public offering to decrease the number of shares offered by them due to market
conditions.
RATIFICATION OF SELECTION OF AUDITORS
Our board has, subject to stockholder ratification, selected Ernst &
Young as the independent auditors to audit our financial statements for the
fiscal year ending June 30, 2004.
Audit Fees
Audit fees billed and expected to be billed by Ernst & Young for its
audits of the annual financial statements of the Company and its subsidiaries
for the year ended June 30, 2003 and for its reviews of the financial statements
included in Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission for that year were $195,500.
Financial Information Systems Design and Implementation Fees
We did not engage Ernst & Young to provide advice regarding financial
information systems design or implementation during the fiscal year ended June
30, 2003.
All Other Fees
Fees billed and expected to be billed by Ernst & Young for all other
services rendered to us during our year ended June 30, 2003 were $321,100,
including audit related services of $98,500 and non-audit related services of
$222,600. Audit related services principally include fees for accounting
consultants and assistance with due diligence related to acquisitions. Non-audit
related fees consist of tax related services.
In connection with the standards for independence of our independent
public accountants promulgated by the Securities and Exchange Commission, our
audit committee has considered whether the provision of such services is
compatible with maintaining the independence of Ernst & Young.
-21-
Anticipated Attendance by Ernst & Young at the Annual Meeting
Ernst & Young has indicated to us that it intends to have a
representative present at our annual meeting who will be available to respond to
appropriate questions. This representative will have the opportunity to make a
statement if he or she so desires.
Required Vote
A resolution will be submitted to stockholders at our annual meeting
for the ratification of our board's selection of Ernst & Young as the
independent auditors to audit our financial statements for the fiscal year
ending June 30, 2003. The affirmative vote of a majority of the votes cast at
our annual meeting in person or by proxy will be required to adopt this
resolution. Our board recommends a vote "FOR" this resolution. Abstentions and
broker non-votes will have no effect on the outcome of the vote on this
proposal.
If the resolution selecting Ernst & Young as independent public
accountants is adopted by our stockholders, our board nevertheless retains the
discretion to select different auditors should it then deem it in our best
interests. Any such future selection need not be submitted to a vote of
stockholders.
Our board recommends a vote "FOR" this resolution.
-22-
MISCELLANEOUS
Cost of Soliciting Proxies
We will bear the expense of soliciting proxies in the enclosed form. We
have retained Georgeson Shareholder Services, a proxy solicitation firm, to
solicit proxies in connection with the annual meeting at a cost of approximately
$1,200 plus expenses. In addition, we may reimburse banks, brokerage firms and
other custodians, nominees and fiduciaries representing beneficial owners of
shares for their expenses in forwarding soliciting materials to such beneficial
owners. Proxies may also be solicited by certain of our directors, officers and
employees, personally or by telephone, telegram, facsimile or other means of
communication. No additional compensation will be paid for such services.
Householding of Annual Meeting Materials
Some banks, brokers and other nominee record holders may be
participating in the practice of "householding" proxy statements and annual
reports. This means that only one copy of our proxy statement or annual report
to stockholders may have been sent to multiple stockholders in each household.
We will promptly deliver a separate copy of either document to any stockholder
upon written or oral request to our Marketing and Communications Manager at 110
Cheshire Lane, Suite 100, Minneapolis, Minnesota 55305, (952) 807-1234. Any
stockholder who wishes to receive separate copies of the annual report to
stockholders and proxy statement in the future, or any stockholder who is
receiving multiple copies and would like to receive only one copy per household,
should contact the stockholder's bank, broker, or other nominee record holder,
or the stockholder may contact our Marketing and Communications Manager at the
above address or phone number.
Stockholder Proposals
From time to time stockholders may present for consideration at
meetings of stockholders proposals that may be proper subjects for inclusion in
the proxy statement and form of proxy distributed in connection with those
meetings. In order to be so included, such proposals must be submitted in
writing on a timely basis. Stockholder proposals intended to be included in our
proxy statement and form of proxy to be used in connection with our 2004 annual
meeting of stockholders, which we expect to be held on or about November 4,
2004, must be received by us by June 1, 2004. Any such proposals, as well as any
questions relating thereto, should be directed to MedSource Technologies, Inc.,
110 Cheshire Lane, Suite 100, Minneapolis, Minnesota 55305, Attention: Corporate
Secretary.
Our certificate of incorporation and bylaws, as presently in effect,
require stockholders who intend to nominate directors or propose business at any
annual meeting to provide timely notice of such intended action, as well as
certain additional information, to us. To be timely, such notice and information
must be received by our Corporate Secretary at 110 Cheshire Lane, Suite 100,
Minneapolis, Minnesota 55305 not less than 90 nor more than 120 days prior to
date of the annual meeting. However, in the event less than 100 days' notice or
prior public disclosure of the date of the annual meeting is given or made to
stockholders, advance notice of nominations or business proposed by a
stockholder to be timely must be received by us not later than the close of
business on the tenth calendar day following the date on which such notice or
public disclosure of the date of the annual meeting was mailed or such public
disclosure was made. Copies of our bylaws are available upon request made to our
Corporate Secretary.
By Order of the Board of Directors
William J. Kullback, Secretary
Minneapolis, Minnesota
October 2, 2003
-23-
Appendix A
MEDSOURCE TECHNOLOGIES, INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
Organization
This charter governs the operations of the audit committee
("committee"). The committee shall be appointed by the Board of Directors
("Board") and shall comprise at least three directors including one director
designated to serve as chairperson. Each member of the committee is to be
independent of management and the Company. Members of the committee shall be
considered independent if they have no relationship that may interfere with the
exercise of their independence from management and the Company. All committee
members shall be financially literate, or shall become financially literate
within a reasonable period of time after appointment to the committee, and at
least one member shall have accounting or related financial management
expertise.
Statement of Policy
The audit committee shall provide assistance to the board of directors
in fulfilling its oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the annual independent audit of the
Company's financial statements, and the legal compliance and ethics programs as
established by management and the board. In so doing, the committee is
responsible for maintaining free and open communication between the committee,
independent auditors, and management of the Company. In discharging its
oversight role, the committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and personnel
of the Company and the power to retain outside counsel or other experts for this
purpose.
Responsibilities
The primary responsibility of the audit committee is to oversee the
Company's financial reporting process on behalf of the Board and report the
results of its activities to the Board. Management is responsible for preparing
and certifying the Company's financial statements, and the independent auditors
are responsible for auditing those financial statements. In carrying out its
responsibilities, the committee's policies and procedures should remain flexible
in order to best react to changing conditions and circumstances. The committee
should take the appropriate actions to set the overall corporate expectation for
quality financial reporting, sound business risk practices, and ethical
behavior.
Processes
The principal recurring processes of the audit committee for carrying
out its oversight responsibilities are detailed in the following paragraphs.
The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable to
the Board and the committee as representatives of the Company's shareholders.
The committee shall have the ultimate authority and responsibility to evaluate
and, where appropriate, recommend the replacement of the independent auditors.
The committee shall have the sole authority and responsibility to evaluate and
discuss with the auditors their independence from management and the Company
including the matters in the written disclosures required by the Independence
Standards Board and shall consider the compatibility of all services with the
auditors' independence.
Annually, the committee shall review and recommend to the board the selection of
the Company's independent auditors, subject to shareholders' approval.
The committee shall discuss with the independent auditors the overall
scope and plans for their audit(s) including the adequacy of staffing and
compensation. The committee, subject to pre-established limits, shall approve
any special projects or any consultative engagement on accounting or auditing
matters to be performed by the Company's auditors. Also, the committee shall
discuss with management and the independent auditors the adequacy and
effectiveness of the accounting and financial controls, including the company's
system to monitor and manage business risk, and legal and ethical compliance
programs. In addition, the committee is responsible for overseeing the process
of monitoring compliance to the company's code of business conduct as well as
reviewing any cases of noncompliance to the code. The committee shall meet
separately with the independent auditors, with and without management present,
to discuss the results of their examinations.
The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the Company's
Quarterly Reports on form 10-Q. Also, the committee shall discuss the results of
quarterly reviews and any other matters required to be communicated to the
committee by the independent auditors under generally accepted auditing
standards. The chair of the committee may represent the entire committee for the
purposes of this review.
The committee should ensure that any presentation of pro-forma
financial information is reconciled to GAAP financial statements in all of the
Company's filings and other presentations of financial information. Any
amendments to guidance provided to the public should be reviewed in advance by
the committee.
The committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report on Form
10-K (or the annual report to shareholders if distributed prior to the filing of
Form 10-K), including their judgment about the quality, not just acceptability,
of accounting principles, the reasonableness of significant judgments, and the
clarity of the disclosures in the financial statements. Also, the committee
shall discuss the results of the annual audit and any other matters required to
be communicated to the committee by the independent auditors under generally
accepted auditing standards.
Lastly, the committee will review its charter at least annually and
modify as appropriate.
The above reference processes are set forth as guidelines with the
mandate that the committee supplement them as appropriate to properly execute
its duties and responsibilities.
A-2
PROXY MEDSOURCE TECHNOLOGIES, INC. PROXY
Proxy for Annual Meeting of Stockholders - November 4, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints, as proxies for the undersigned, Richard J.
Effress and William J. Kullback, or either of them, with full power of
substitution, to vote all shares of the capital stock of MedSource Technologies,
Inc., a Delaware corporation (the "Company"), that the undersigned is entitled
to vote at the Company's annual meeting of stockholders to be held on Tuesday,
November 4, 2003, at 2:00 p.m., New York time, at the offices of Jenkens &
Gilchrist Parker Chapin LLP, 405 Lexington Avenue, New York, New York 10174,
receipt of notice of which meeting and the proxy statement accompanying the same
being hereby acknowledged by the undersigned, and at any adjournments or
postponements thereof, upon the matters described in the notice of meeting and
proxy statement and upon such other business as may properly come before the
meeting or any adjournments or postponements thereof, hereby revoking any
proxies heretofore given.
Each properly executed proxy will be voted in accordance with the
specifications made below and in the discretion of the proxies on any other
matter that may come before the meeting. Where no choice is specified, this
proxy will be voted FOR all listed nominees to serve as directors and FOR each
of the proposals set forth below.
The Board of Directors recommends a vote FOR all listed nominees and FOR
Proposal 2
<s>
1. Election of three directors [_]..FOR all nominees listed [_]..WITHHOLD AUTHORITY
(except as marked to the contrary) to vote for all listed nominees
Nominees: John W. Galiardo and Carl S. Sloane
(Instruction: To withhold authority to vote for any individual nominee, circle
that nominee's name in the list provided above.)
2. Proposal to ratify and approve the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June 30, 2004.
[_] FOR [_] AGAINST [_] ABSTAIN
PLEASE MARK THIS PROXY ON THIS SIDE AND DATE AND SIGN THIS PROXY ON THE REVERSE
SIDE
The shares represented by this proxy
will be voted in the manner directed. In the
absence of any direction, the shares will be
voted FOR each nominee named in Proposal 1
and FOR Proposal 2 and in accordance with
their discretion on such other matters as may
properly come before the meeting.
Dated: ________________________________, 2003
_____________________________________________
_____________________________________________
Signature(s)
(Signature(s) should conform to names as
registered. For jointly owned shares, each
owner should sign. When signing as attorney,
executor, administrator, trustee, guardian or
officer of a corporation, please give full
title).
PLEASE MARK THIS PROXY ON THE REVERSE SIDE AND DATE AND SIGN THIS PROXY ON THIS
SIDE