<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
I-FLOW CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(5) Total fee paid:
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[ ] 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.
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<PAGE> 2
I-FLOW CORPORATION
20202 WINDROW DRIVE
LAKE FOREST, CALIFORNIA 92630
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of I-Flow Corporation:
The Annual Meeting of Shareholders of I-Flow Corporation (the "Company")
will be held at the Company's primary facility which is located at 20202 Windrow
Drive, Lake Forest, California, 92630, on Thursday, May 21, 1998 at 9:30 a.m.,
Pacific Time, for the following purposes:
1. To elect eight directors to serve for the coming year and until their
successors are elected and qualified. Management has nominated for
director the eight persons specified in the accompanying Proxy
Statement.
2. To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
The close of business on March 31, 1998 has been fixed as the record
date for determination of shareholders entitled to receive notice of and to vote
at the Annual Meeting and any adjournment thereof.
Your attention is directed to the accompanying Proxy Statement. To
constitute a quorum for the conduct of business at the Annual Meeting, it is
necessary that holders of a majority of all outstanding shares of Common Stock
be present in person or be represented by proxy. To assure representation at the
Annual Meeting, you are urged to date and sign the enclosed proxy and return it
promptly in the enclosed envelope.
By Order of the Board of Directors
Donald M. Earhart
Chief Executive Officer
Lake Forest, California
Dated: April 9, 1998
<PAGE> 3
I-FLOW CORPORATION
20202 WINDROW
LAKE FOREST, CALIFORNIA 92630
------------------
PROXY STATEMENT
Your proxy is solicited by the Board of Directors of I-Flow Corporation
(the "Company") for use at the Annual Meeting of Shareholders on Thursday, May
21, 1998, or at any adjournment or postponement thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders. This Proxy
Statement and accompanying form of proxy will be first mailed to shareholders on
or about April 9, 1998. The Company's principal address is 20202 Windrow Drive,
Lake Forest, CA 92630.
The Company will bear the cost of solicitation of proxies. Proxies may
be solicited in person or by telephone, facsimile, telegraph or cable by
personnel of the Company who will not receive any additional compensation for
such solicitation. In addition, the Company will request brokers or other
persons holding stock in their names or in the names of their nominees to
forward proxies and proxy material to the beneficial owners of such stock and
will reimburse them for expenses incurred in so doing.
VOTING
Only shareholders of record at the close of business on March 31, 1998
(the "Record Date") are entitled to notice of, and to vote at, the Annual
Meeting. As of the Record Date, the Company had 13,417,655 shares of common
stock (the "Common Stock") and 656,250 shares of Series B Preferred Stock (the
"Preferred Stock") outstanding. The Preferred Stock is convertible into 700,000
shares of Common Stock. Shares of Common Stock and the Common Stock equivalent
shares of Preferred Stock (the "Voting Shares") each have one vote per share,
except that shareholders may have cumulative voting rights with respect to the
election of directors, and vote together as a class on the matters referred to
in the accompanying Notice of Annual Meeting of Shareholders. A majority of the
Voting Shares outstanding on the Record Date and entitled to vote at the Annual
Meeting, present in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. Abstentions and 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 for purposes of
determining the outcome of any vote and will have no effect on the election of
directors.
In voting for directors, each shareholder has the right to cumulate his
votes and give one candidate a number of votes equal to the number of directors
to be elected, multiplied by the number of votes to which his shares are
entitled, or to distribute his total votes on the same principle among as many
candidates as he desires, and the eight candidates receiving the highest number
of votes will be elected. In order for one or all shareholders to be entitled to
cumulate votes, one shareholder must give notice prior to the voting of his
intention to cumulate his votes. In the event that any person other than the
nominees named herein should be nominated for election as a director, the proxy
holders may, in the exercise of their best judgment, vote the proxies they
receive cumulatively to elect as directors as many of the nominees named herein
as the votes represented by the proxies held by them are entitled to elect.
Each proxy will be voted FOR the election of the eight director nominees
named herein, unless the shareholder otherwise directs in the shareholder's
proxy. Where the shareholder has appropriately directed how the proxy is to be
voted, it will be voted according to the shareholder's direction. Any
shareholder has the power to revoke the shareholder's proxy at any time before
it is voted at the Annual Meeting by submitting a written notice of revocation
to the Secretary of the Company or by filing a duly executed proxy bearing a
later date. A proxy will not be voted if the shareholder who executed it is
present at the Annual Meeting and elects to vote the shares represented thereby
in person.
<PAGE> 4
PRINCIPAL SHAREHOLDERS AND
STOCK OWNERSHIP OF MANAGEMENT
The table below sets forth information regarding the beneficial
ownership of the outstanding Common and Preferred Stock as of February 27, 1998,
of (i) each of the Company's directors and nominees and each of the executive
officers named in the summary compensation table found elsewhere in the Proxy
Statement, (ii) each person known by the Company to be the beneficial owner of
more than five percent of I-Flow Corporation outstanding Common or Preferred
Stock and (iii) all of the Company's directors and executive officers as a
group. Unless otherwise indicated, and except for voting and investment powers
held jointly with a person's spouse, the Company believes that the beneficial
owner has sole voting and investment power over such shares. As of February 27,
1998 there was an aggregate of 14,117,655 Common and Preferred shares
outstanding.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
SHARES OF PERCENTAGE SERIES B OF SERIES B
COMMON OF COMMON PREFERRED PREFERRED
STOCK STOCK STOCK STOCK
NAME AND ADDRESS OF BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED OWNED OWNED
---------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Proactive Partners(1) 896,108(2) 6.35% 656,250(13) 100.00%
50 Osgood Place
San Francisco, CA 94133
Donald M. Earhart 1,150,510(3) 7.57% -- --
20202 Windrow Drive
Lake Forest, CA 92630
Charles C. McGettigan 629,731(4) 4.46% 447,917(14) 68.25%
Henry T. Tai, Ph.D., M.D 467,417(5) 3.31% -- --
Joel S. Kanter 384,137(6) 2.72% -- --
John H. Abeles, M.D 349,869(7) 2.48% -- --
James J. Dal Porto 122,821(8) * -- --
Gayle L. Arnold 29,528(9) * -- --
Jack H. Halperin 18,725(10) * -- --
Erik H. Loudon 17,100(11) * -- --
All Directors and Executive
Officers as a group(9 Persons) 3,157,013(12) 20.45% 447,917(14) 68.25%
</TABLE>
* Less than 1%
(1) "Proactive Partners" consists of three San Francisco based merchant
banking funds, Proactive Partners L.P., Lagunitas Partners, L.P., and Fremont
Proactive Partners, L.P. Charles C. McGettigan, a director of the Company, is a
general partner of Proactive Partners, L.P. and Fremont Proactive Partners,
L.P.; an affiliate of Mr. McGettigan is a general partner of Lagunitas Partners,
L.P.
(2) Includes (i) 196,108 shares of the Company's Common Stock held by
"Proactive Partners" and (ii) 656,250 shares of Series B Preferred Stock held by
"Proactive Partners" which is convertible at any time to 700,000 shares of the
Company's Common Stock. 129,946 shares of Common Stock and 447,917 shares of
Series B Preferred Stock which is convertible at any time to 477,780 shares of
Common Stock owned by Proactive Partners, L.P., Fremont Proactive Partners, L.P.
and affiliates thereof are also included below in the beneficial ownership of
Charles C. McGettigan.
2
<PAGE> 5
(3) Includes (i) 54,300 shares of Common Stock held of record by Mr.
Earhart, (ii) 9,591 shares of Common Stock held of record by Mr. Earhart's
immediate family, and (iii) 1,086,619 shares of Common Stock issuable upon the
exercise of stock options held by Mr. Earhart which are exercisable within 60
days. Does not include 13,333 shares issuable upon exercise of options granted
to Mr. Earhart, but not exercisable within 60 days.
(4) Includes (i) 4,730 shares of Common Stock held of record by Mr.
McGettigan, (ii) 129,946 shares of Common Stock held by Proactive Partners, L.P.
and Fremont Proactive Partners, L.P., two funds in which Mr. McGettigan is a
general partner and which are also included above in the beneficial ownership of
"Proactive Partners", (iii) 447,917 shares of Series B Preferred Stock which is
convertible at any time to 477,780 shares of Common Stock held by Proactive
Partners, L.P. and Fremont Proactive Partners, L.P., and (iv) 17,275 shares of
Common Stock issuable upon exercise of stock options held by Mr. McGettigan
which are exercisable within 60 days. Does not include 12,825 shares issuable
upon exercise of stock options granted to Mr. McGettigan, but not exercisable
within 60 days.
(5) Includes (i) 449,067 shares of Common Stock held of record by Dr.
Tai, and (ii) 18,350 shares of Common Stock issuable upon exercise of stock
options held by Dr. Tai which are exercisable within 60 days. Does not include
16,050 shares issuable upon exercise of stock options granted to Dr. Tai, but
not exercisable within 60 days. The shares and options listed include shares
held by: (i) Henry T. Tai, M.D., Pension Plan, of which Dr. Tai is the
beneficiary; (ii) Dr. Tai's wholly owned corporation, Henry T. Tai, M.D., Inc.,
and (iii) Dr. Tai individually. Dr. Tai has sole voting and dispositive power
with respect to all shares.
(6) Includes (i) 300,000 shares of Common Stock held of record by Walnut
Capital Corporation, a corporation having Mr. Kanter as its President, (ii)
66,862 shares of Common Stock held of record by Windy City, Inc., a corporation
having Mr. Kanter as its President and (iii) 17,275 shares of Common Stock
issuable upon exercise of options held by Windy City, Inc which are exercisable
within 60 days. Does not include 12,825 shares issuable upon exercise of stock
options granted to Windy City, Inc., but not exercisable within 60 days. Mr.
Kanter does not own any of the voting securities of Windy City, Inc. or Walnut
Capital Corporation.
(7) Includes (i) 331,519 shares of Common Stock held of record by
Northlea Partners Ltd., a limited partnership, of which Dr. Abeles is the
general partner (as to which Dr. Abeles disclaims beneficial ownership except to
the extent of his pecuniary interest), and (ii) 18,350 shares of Common Stock
issuable upon exercise of stock options held by Northlea Partners, Ltd. which
are exercisable within 60 days. Does not include 16,050 shares issuable upon
exercise of options granted to Northlea Partners, Ltd., but not exercisable
within 60 days.
(8) Includes (i) 11,000 shares of Common Stock held of record by Mr. Dal
Porto, and (ii) 111,821 shares of Common Stock issuable upon exercise of stock
options held by Mr. Dal Porto which are exercisable within 60 days. Does not
include 163,505 shares issuable upon exercise of stock options granted to Mr.
Dal Porto, but not exercisable within 60 days.
(9) Includes 29,528 shares of Common Stock issuable upon exercise of
stock options held by Ms. Arnold which are exercisable within 60 days. Does not
include 49,741 shares issuable upon exercise of stock options granted to Ms.
Arnold, but not exercisable within 60 days.
(10) Includes (i) 1,450 shares of Common Stock held of record by Mr.
Halperin, and (ii) 17,275 shares of Common Stock issuable upon exercise of stock
options held by Mr. Halperin which are exercisable within 60 days. Does not
include 12,825 shares issuable upon exercise of stock options granted to Mr.
Halperin, but not exercisable within 60 days.
(11) Includes 17,100 shares of Common Stock issuable upon exercise of
stock options held by Mr. Loudon which are exercisable within 60 days. Does not
include 12,825 shares issuable upon exercise of stock options granted to Mr.
Loudon, but not exercisable within 60 days.
(12) Includes (i) 129,946 shares of Common Stock and 447,917 shares of
Series B Preferred Stock, convertible into 477,780 shares of Common Stock held
by Proactive Partners, L.P. and Fremont Proactive Partners, L.P., two funds in
which Mr. McGettigan is a general partner and which are also included above in
the beneficial ownership of "Proactive Partners" and Mr. McGettigan and (ii)
300,000 shares of Common Stock held by Walnut Capital which are also included
above in the beneficial
3
<PAGE> 6
ownership of Mr. Kanter. Does not include 309,979 shares of Common Stock
issuable upon exercise of stock options held by certain officers and directors,
which are not exercisable within 60 days.
(13) Includes 656,250 shares of Series B Preferred Stock held by
"Proactive Partners" which is convertible at any time to 700,000 shares of the
Company's Common Stock. 447,917 shares of Series B Preferred Stock which is
convertible at any time to 477,780 shares of Common Stock owned by Proactive
Partners, L.P., Fremont Proactive Partners, L.P. and affiliates thereof are also
included below in the beneficial ownership of Charles C.
McGettigan.
(14) Includes 447,917 shares of Series B Preferred Stock, convertible
into 477,780 shares of Common Stock, held by Proactive Partners, L.P. and
Fremont Proactive Partners, L.P., two funds in which Mr. McGettigan is a general
partner and which are also included in the beneficial ownership of "Proactive
Partners" and Mr. McGettigan.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The directors to be elected at the Annual Meeting are to serve a term
expiring at the Annual Meeting in 1999 and until their successors have been
elected and qualified. The number of authorized members of the Company's Board
of Directors is currently eight. Unless the vote is withheld by the shareholder,
proxies will be voted FOR the election of the nominees listed below. If any
nominee should become unavailable for election, the proxies will be voted for
the election of a substitute nominee selected by the Board of Directors. It is
not expected, however, that any nominee will be unavailable for election.
Nominees receiving the greatest number of votes at the Annual Meeting up to the
number of authorized directors will be elected.
The following persons will be nominated at the Annual Meeting to serve
as a director of the Company:
<TABLE>
<CAPTION>
DIRECTOR
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE SINCE
---- ---------------------------------- --- -----
<S> <C> <C> <C>
John H. Abeles, M.D. President of MedVest, Inc., a consulting and 53 1985
venture capital firm in the medical products
industry; currently serves on the Boards of
Directors of Dusa Pharmaceuticals, Inc.,
Encore Medical Inc., PharmaPrint Corp. and
Oryx Technology, Inc.
Henry Tsutomu Tai, Founder of the Company; practicing consultant 54 1990
Ph.D., M.D. in hematology and oncology, he holds a (Formerly
Bachelor of Arts degree in Molecular Biology Chairman
from Harvard University, a Ph.D. in Molecular of the
Biology and an M.D. from the University of Board from
Southern California; Secretary of the Company 1985 to
since 1990. 1988)
Donald M. Earhart Chairman of the Board (since March 1991),
Chief Executive Officer (since July 1990), 53 1990
and President of the Company (since June
1990); President of Optical Division of
Allergan, Inc. from 1986 to 1990; currently
serves on the Board of Directors of Abacus
Investments, Ltd.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
DIRECTOR
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE SINCE
---- ---------------------------------- --- -----
<S> <C> <C> <C>
Jack H. Halperin, Esq. Corporate and securities attorney who has 51 1991
been in private practice since 1988; member
of Bresler and Bab, a New York law firm
from 1987 to 1988; member of Solinger,
Grosz & Goldwasser, P.C. from 1981 to 1987;
currently serves on the Boards of Directors
of AccuMed International, Inc., Memry
Corporation and Pacific Pharmaceuticals,
Inc.
Joel S. Kanter President of Windy City, Inc., an investment 41 1991
management firm; CEO and a Director of Walnut
Financial Services, Inc., a diversified
financial services and consulting company;
former Managing Director of Investor's
Washington Service, a Washington D.C. based
service that provides information for
corporations and institutional money
managers; currently serves on the Boards of
Directors of Greystone Medical Corp.,
Osteoimplant Technologies, Inc., Paragon
Health Network, Inc. and Walnut Financial
Services, Inc.
Erik H. Loudon Managing Director of EHL Investment Services 59 1991
Limited in the Channel Islands; Director of
Sarasin Investment Management, Ltd. in London
from 1985 to 1989; currently serves on the
Boards of Directors of Emerge Capital
Luxembourg, Leaf Asset Management Luxembourg,
and Fotolabo S.A. Switzerland.
Charles C. McGettigan General partner since 1991 of Proactive 53 1992
Partners, L.P., a merchant banking fund;
co-founder in 1988 of McGettigan, Wick & Co.,
Inc., an investment banking firm; Principal,
Corporate Finance, of Hambrecht & Quist, Inc.
from 1984 to 1988; currently serves on the
Boards of Directors of Cuisine Solutions,
Inc., Digital Dictation, Inc., Modtech, Inc.,
Onsite Energy, Inc., PMR Corporation, Phoenix
Network, Inc., Sonex Research, Inc.
Tanknology-NDE, Inc. and Wray-Tech
Instruments, Inc.
James J. Dal Porto Joined the Company in October 1989 as
Controller. Promoted to Treasurer in 45 1996
October 1990, to Vice President of Finance
and Administration in March 1991, to
Executive Vice President, Chief Financial
Officer in March 1993 and to Chief Operating
Officer in February 1994.
</TABLE>
BOARD COMMITTEES & MEETINGS
The Board of Directors held a total of eight meetings during the year
ended December 31, 1997.
The Board of Directors has an Audit Committee with Joel Kanter, Jack
Halperin and John Abeles as its members. The Audit Committee reviews with
management and the Company's independent public accountants such matters as the
Company's internal accounting controls and procedures, the plan and results of
the audit
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<PAGE> 8
engagement and suggestions of the accountants for improvements in accounting
procedures. It considers the type and scope of services, both of an audit and a
non-audit character, to be performed by the independent public accountants and
reviews the respective costs related to the performance of such services. During
each Committee meeting, members of the Committee and representatives of the
accountants have an opportunity for discussions outside the presence of
management, if desired. There were two Audit Committee meetings during the year
ended December 31, 1997.
The Board of Directors has a Compensation Committee with Henry Tai, Eric
Loudon and Charles McGettigan as its members. The purpose of the Compensation
Committee is to set policy concerning Board compensation, to administer and
grant options under the Stock Option Plans and to review compensation issues
concerning officers and key employees of the Company. There were two
Compensation Committee meetings during the year ended December 31, 1997.
The Company does not have a nominating committee.
BOARD COMPENSATION
Outside members of the Board of Directors are compensated by the Company
for meetings (excluding committee meetings) attended and all directors are
reimbursed for their travel expenses. In calendar year 1997, Messrs. Abeles,
Tai, Kanter, Halperin, McGettigan and Loudon were considered to be outside
members of the Board of Directors. The cash compensation for the outside
directors in calendar year 1997 was $500 per meeting for telephonic attendance
and $750 per meeting for in-person meeting attendance. In addition, outside
directors receive stock options pursuant to the Non-Employee Director Stock
Option Plan as described below. The total amount of director's fees paid by the
Company in calendar year 1997 was $27,000.
The Company has a Non-Employee Director Stock Option Plan (the "Plan"),
which was approved by the shareholders at the Annual Shareholders meeting on May
4, 1992 (and amended at the Annual Shareholders meeting on May 11, 1995). Under
the terms of the Plan (as amended), effective on the first business day of each
calendar year, commencing January 2, 1992, each outside director then serving is
automatically granted options, expiring five years from the date of grant, to
purchase 10,000 shares of the Company's Common Stock at an exercise price equal
to the market price of the Company's Common Stock on the date of grant. These
options vest on a quarterly basis throughout the calendar year. New non-employee
directors joining the Board after the first business day of the calendar year
receive options to purchase a pro rated portion of the 10,000 shares. As of
December 31, 1997, options to purchase 185,000 shares at exercise prices ranging
from $1.63 to $5.44 per share, were outstanding and exercisable under the Plan.
On January 2, 1998, options to purchase an additional 60,000 shares at an
exercise price of $3.56 per share, were issued under the Plan. On February 5,
1998, the Board of Directors approved a program for the cancellation and regrant
of certain options, under which options under the Plan to purchase 160,000
shares at prices ranging from $3.56 to $5.44 per share were cancelled and new
options were granted to purchase 91,200 shares at a price of $2.49 per share.
Options granted under the Plan expire at the earlier of five years from the date
of grant or two years after termination of the option holder's status as a
director.
REPORT OF THE COMPENSATION COMMITTEE
This report is being included pursuant to the Securities and Exchange
Commission rules designed to enhance disclosure of public companies' executive
compensation policies. This report addresses the Company's policies for fiscal
year 1997 as they affected the Chief Executive Officer and the Company's other
executive officers, including the named executive officers in this Proxy
Statement.
COMPENSATION PHILOSOPHY
The Compensation Committee of the Board of Directors (the "Committee")
is responsible for establishing, reviewing and revising the Company's executive
compensation programs and policies. The Committee is composed of three
non-employee directors and administers the Company's executive compensation
programs, including the Company's stock incentive plans. The Company's executive
compensation program is designed to provide competitive levels of base
compensation in order to attract, retain and motivate high quality employees,
tie
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<PAGE> 9
individual total compensation to individual performance and the success of the
Company, and align the interests of the Company's executive officers with those
of its shareholders. In 1997, the Company's executive compensation program
consisted of base salary and annual cash bonuses and stock option grants.
EXECUTIVE COMPENSATION COMPONENTS
The Committee attempts to set base salary for the Company's executive
officers at levels that are competitive with compensation paid to top executives
of similarly situated companies, and not significantly below cash compensation
available to the Company's key executives through alternative employment.
However, because of the Company's current and historical need to conserve its
cash resources, a significant portion of the rewards for Company or individual
performance have generally taken the form of stock-based awards. Additionally,
in accordance with the Company's compensation philosophy that total compensation
should vary with Company performance, a large part of each executive officers'
potential total compensation is dependent on the performance of the Company as
measured through its performance-based compensation program as set forth below.
The Company had a short-term incentive plan in which executive officers
participated in fiscal year 1997 -- the Management Incentive Program (the
"MIP"). The MIP focuses participants (officers and other key employees) on
achieving key financial and strategic objectives that are expected to lead to
the creation of value for the Company's shareholders and provide participants
the opportunity to earn cash bonuses and stock option awards commensurate with
performance. The MIP establishes predetermined performance goals and target
awards for the Company on an annual basis. Actual performance compared to these
goals determines the percentage used to calculate the bonus pool for cash
bonuses and stock option grants at the end of the year. The MIP is annually
reviewed and approved early in the fiscal year by the Committee and the Board of
Directors. In determining the allocation of awards from the bonus pool to
individual executive officers, the Committee, with the input of the Company's
Chief Executive Officer, emphasizes Company performance and the contributions
made by those individuals to that performance. The Committee believes that such
a retrospective analysis is most appropriate and practicable for a rapidly
growing enterprise like the Company, which experiences many changes and operates
in an uncertain environment and without the same types of standard measures of
performance as are available to more seasoned companies.
The Committee administers the Company's 1996 Stock Incentive Plan,
pursuant to which the Company may grant various stock-based awards intended to
compensate Company personnel and align the interests of the recipients with
those of the Company's shareholders. To date, only stock options have been
granted under the Plan, although the Committee may, in the future, utilize other
types of incentive awards available under the Plan. (The Committee also
administers options previously granted under the Company's 1987 - 1988 Incentive
Stock Option Plan and Non-statutory Stock Option Plan.)
Because of the Company's need to conserve cash, the Committee has used
stock options to reward executives for individual and Company performance and to
provide incentives for pursuit of the Company's goals. The Committee believes
that these grants serve two purposes. First, they help to make up for any
discrepancy between the cash compensation paid by the Company and salaries and
bonuses available from other employers who would compete for the services of the
Company's executives. Second, the option grants are intended to give the
recipients a meaningful stake in the Company's long-term performance, with any
ultimate realization of significant value from those options being commensurate
with returns on investments in the Company's stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Company faces significant challenges in the coming years and will
rely heavily upon the Chief Executive Officer for leadership, strategic
direction, and operational effectiveness. During the remainder of the decade,
the Company's goals include succeeding in expanding its domestic and
international marketing and sales distribution network, forming additional
strategic alliances and building a strong organization to support the Company's
anticipated growth. The Chief Executive Officer will have ultimate
responsibility for these goals as part of maximizing shareholders' returns on
their investments in the Company and the Committee believes shareholders are
best served if the Chief Executive Officer has significant incentives to meet
these expectations. The Chief
7
<PAGE> 10
Executive Officer's salary increased from $200,000 to $240,000 effective
February 1, 1997 based on performance for the year ended December 31, 1996. The
factors which the Committee considered in setting his base salary were his
individual performance and pay practices of peer companies relating to
executives of similar responsibility.
Cash bonuses and option grants to the Chief Executive Officer made
during the fiscal year 1997 related to performance for the fiscal year-ended
December 31, 1996 and the Company's significant achievements in fiscal 1996. The
Chief Executive Officer received a $150,000 bonus (consisting of $35,000 in cash
and $115,000 in deferred compensation to be paid by the Company only upon the
exercise of stock options to purchase 24,892 shares of the Company's Common
Stock) and an option to purchase 150,000 shares of Common Stock. The
achievements in 1996 included (1) completing the acquisition of Block Medical,
Inc., (2) negotiating an agreement with SoloPak Pharmaceuticals, Inc., which
brought the Company $4.3 million in licensing fees, and (3) increasing total
revenues by 37% and earnings before costs associated with the acquisition of
Block Medical, Inc. by 144%.
The Committee set the level of the option grants made to the Chief
Executive Officer on the basis of its qualitative evaluation of the Chief
Executive Officer's contributions. The Committee did not attempt to apply any
specific quantitative measures to the Chief Executive Officer's option-based
compensation, or to provide any specific dollar value of compensation to the
Chief Executive Officer, due to the difficulty in determining the long-term
value of an investment in the Company's stock.
COMPENSATION COMMITTEE
Henry Tsutomu Tai, Ph.D., M.D.
Charles C. McGettigan
Erik H. Loudon
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services
rendered in all capacities during the fiscal years ended December 31, 1997, 1996
and 1995 of the present Chief Executive Officer and all other executive officers
whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
Awards
------------------------------------------------------- ($)
($) Securities All Other
($) Other Annual Underlying Compen-
($) Bonus Compensation Options sation
Name and Principal Position Year Salary (a) (b) (#) (c)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart(d) 1997 $240,000 $150,000 $ 15,729 150,000 $ 13,398
President & Chief Executive 1996 200,000 125,000 7,212 225,000 13,094
Officer 1995 200,000 80,000 6,827 150,000 --
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
James J. Dal Porto(d) 1997 140,000 100,000 8,077 50,000 --
Executive Vice President & 1996 115,320 85,000 4,435 110,000 --
Chief Operating Officer 1995 115,320 35,000 7,540 50,000 --
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Gayle L. Arnold 1997 105,000 40,000 -- 20,000 --
Chief Financial Officer 1996 92,000 23,000 -- 30,000 --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
(a) Bonuses awarded for each year were paid in February of the following
year. The 1997 bonus for Mr. Earhart included $35,000 in cash and
$115,000 in deferred compensation to be paid by the Company only upon
the exercise of stock options to purchase 24,892 shares of the
Company's Common Stock. The 1997 bonus for Mr. Dal Porto included
$60,000 in cash and $40,000 in deferred compensation to be paid by the
Company only upon the exercise of stock options to purchase 8,658
shares of the Company's Common Stock. The 1997 bonus for Ms. Arnold
included $20,000 in cash and $20,000 in deferred compensation to be
paid by the Company only upon the exercise of stock options to purchase
4,329 shares of the Company's Common Stock. The 1996 bonus for Mr.
Earhart included $40,000 in cash and $85,000 in deferred compensation
to be paid by the Company only upon the exercise of stock options to
purchase 19,495 shares of the Company's Common Stock. The 1996 bonus
for Mr. Dal Porto included $35,000 in cash and $50,000 in deferred
compensation to be paid by the Company only upon the exercise of stock
options to purchase 11,468 shares of the Company's Common Stock. The
1996 bonus for Ms. Arnold included $8,000 in cash and $15,000 in
deferred compensation to be paid by the Company only upon the exercise
of stock options to purchase 3,440 shares of the Company's Common
Stock. The 1995 bonus for Mr. Earhart included $40,000 in cash and
$40,000 in deferred compensation to be paid by the Company only upon
the exercise of stock options to purchase 9,174 shares of the Company's
Common Stock.
(b) Accrued vacation paid in the 1997, 1996 and 1995 calendar years.
(c) Insurance premiums paid by the Company in the 1997 and 1996 calendar
years with respect to term-life insurance for the benefit of the
executive.
(d) Terms and conditions of employment of Mr. Earhart and Mr. Dal Porto are
outlined in Employment Agreements they have with the Company which are
described elsewhere herein under the caption "Employment Contracts".
The following table shows information regarding stock options granted to
the named executive officers during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Individual Grants
- -----------------------------------------------------------------------------------------------
Number of % of Total Market
Securities Options Price Per
Underlying Granted to Exercise Share on
Options Employees or Base Date of Grant Date
Granted in Fiscal Price Grant Expiration Present
Name (#) Year 1997 ($/Share) ($/Share) Date Value ($)(c)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart 150,000(a) 37.8% $4.62 $5.44 12/30/2006 $508,500
James J. Dal Porto 50,000(b) 12.6% $4.62 $5.44 12/30/2001 $132,000
Gayle L. Arnold 20,000(b) 5.0% $4.62 $5.44 12/30/2001 $ 52,800
</TABLE>
(a) All options are immediately vested and exercisable upon the date of grant.
(b) These options vest 20% after one year from the date of grant, and the
remainder on a pro rata daily basis over the next four years. All options
become immediately exercisable upon the disposition of all or substantially
all of the Company's assets or capital stock.
(c) The present value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model.
The following table shows certain information concerning stock option
exercises by named executive officers during fiscal year 1997 and the value of
options held by such executives at 1997 year end.
9
<PAGE> 12
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at Fiscal Year End Fiscal Year End
- -------------------------------------------------------------------------------------------------------------
Shares
Acquired Value (a) (a)
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart -- -- 1,247,869 13,333 $1,158,983 $ 41,666
James J. Dal Porto -- -- 165,821 148,305 202,329 58,251
Gayle L. Arnold -- -- 45,528 48,241 51,187 18,183
</TABLE>
(a) Value of unexercised in-the-money options is based on the Nasdaq last
sale price on December 31, 1997 ($3.38 per share).
On February 5, 1998, the Board of Directors approved a program for the
cancellation and regrant of all options held by employees and directors with an
exercise price greater than the market price on that date. Under this program
options included above for (i) Mr. Earhart to purchase 375,000 shares at prices
ranging from $4.36 to $4.62 were cancelled and new options were granted to
purchase 213,750 shares at a price of $2.49, (ii) Mr. Dal Porto to purchase
160,000 shares at prices ranging from $4.36 to $4.62 were cancelled and new
options were granted to purchase 91,200 shares at a price of $2.49, and (iii)
Ms. Arnold to purchase 50,000 shares at prices ranging from $4.36 to $4.62 were
cancelled and new options were granted to purchase 28,500 shares at a price of
$2.49.
EMPLOYMENT CONTRACTS
Donald Earhart joined the Company in June 1990 as the President and
Chief Operating Officer. Mr. Earhart became the Chief Executive Officer of the
Company in July 1990 and Chairman of the Board in March 1991. Upon the
commencement of his employment, Mr. Earhart entered into a written employment
agreement with the Company pursuant to which he will serve as a Chief Executive
Officer of the Company for a minimum base salary of $200,000 per annum, subject
to adjustment upward by the Board of Directors, plus a bonus to be determined
annually by the Board based upon attainment of goals set by the Board. Mr.
Earhart's salary is currently $240,000 per annum. Under the employment
agreement, Mr. Earhart is entitled to a severance payment equal to two (2) times
his annual salary plus the previous year's bonus if the employment is terminated
by the Company without cause, or if the employment is terminated by the employee
for good reason after a change of control of the Company, as defined. Mr.
Earhart was granted fully vested options to purchase 120,000 shares of the
Company's Common Stock at an exercise price of $2.20 per share, expiring October
24, 2001, at the time his employment commenced. All option grants to Mr. Earhart
from the commencement of his employment to the end of the 1997 fiscal year are
included in the Aggregated Option Exercise Table above. The specific options
granted in the 1997 fiscal year are indicated in the above Option Grant Table.
Mr. Earhart's employment agreement is renewable annually at the discretion of
the Board of Directors.
In September 1996, Mr. Dal Porto entered into a written employment
agreement with the Company whereby he is entitled to a severance payment equal
to one (1) times his annual salary plus immediate vesting of all stock options
granted up to the time of termination if the employment is terminated by the
Company without cause, or if he is asked to accept a significant change in job
responsibility, relocate or accept a reduction in salary and/or benefits. In the
event of a change in control of the Company, as defined, the Company agrees to
employ Mr. Dal Porto for a period of one year after the change in control or pay
him in lieu of employment for the same compensation including incentive
compensation and all benefits.
10
<PAGE> 13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Henry Tsutomu Tai, a member of the Company's Compensation Committee,
has been the Secretary of the Company since 1990. Dr. Tai does not receive any
compensation from the Company for his services as Secretary.
The Company retained Jack H. Halperin, Esq., a director of the Company,
during fiscal year 1997 and may retain him during the current fiscal year to
provide legal services for the Company. The amount of fees paid to Jack H.
Halperin, Esq. in fiscal year 1997 did not exceed five percent of the law firm's
gross revenues for the firm's last full fiscal year.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Company's Common Stock for the five years ended December 31, 1997 with the
Nasdaq Stock Market Composite Index and the Surgical and Medical Instruments and
Apparatus Industry Index (SIC Code 3841). The graph assumes that $100 was
invested on January 1, 1993 in the Company's Common Stock and each index and
that all dividends were reinvested. No cash dividends have been declared on the
Company's Common Stock. The comparisons in the graph are required by the
Securities and Exchange Commission and are not intended to forecast or be
indicative of possible future performance of the Company's Common Stock.
[PERFORMANCE GRAPH]
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Compensation Committee Interlocks and Insider Participation".
AUDITORS
The firm of Deloitte & Touche LLP has served as the Company's
independent public accountants for the calendar year ended December 31, 1997 and
has been selected to serve for the fiscal year ended December 31, 1998. A
representative of Deloitte & Touche LLP is expected to be present at the Annual
Meeting, at which time such representative will be given an opportunity to make
a statement, if desired, and to respond to appropriate shareholder questions.
11
<PAGE> 14
ANNUAL REPORTS
The Company's Annual Report for the calendar year ended December 31,
1997, including audited financial statements, is being mailed to shareholders
along with this Proxy Statement. In addition, the Company has filed an Annual
Report on Form 10-K for its calendar year ended December 31, 1997 with the
Securities and Exchange Commission. SHAREHOLDERS MAY OBTAIN A COPY OF THE FORM
10-K ANNUAL REPORT INCLUDING FINANCIAL STATEMENTS, WITHOUT CHARGE, BY WRITING
GAYLE ARNOLD, CHIEF FINANCIAL OFFICER OF THE COMPANY AT THE ADDRESS LISTED
ABOVE.
OTHER BUSINESS
At the time of the preparation of this Proxy Statement, the Company's
Board of Directors had not been informed of any other matters which would be
presented for action at the Annual Meeting. If any other matters are properly
presented, the persons named in the accompanying form of Proxy will vote or
refrain from voting in accordance with their best judgment.
1999 SHAREHOLDER PROPOSALS
Shareholders who wish to include proposals for action at the Company's
1999 Annual Meeting of Shareholders in next year's proxy statement and proxy
card must cause their proposals to be received in writing by the Company at its
address set forth on the first page of this Proxy Statement no later than
December 2, 1998. Such proposals should be addressed to the Company's Secretary,
and may be included in next year's proxy statement if they comply with certain
rules and regulations promulgated by the Commission.
Shareholders who do not present proposals for inclusion in the Proxy
Statement but who still intend to submit a proposal at the 1999 Annual Meeting
must, in accordance with the Company's Bylaws, provide timely written notice of
the matter to the Secretary of the Company. To be timely, a shareholder's
written notice must be delivered to or mailed and received at the principal
executive offices of the Company not less than 60 days nor more then 90 days
prior to the Annual Meeting as originally scheduled. If less than 70 days notice
or prior public disclosure of the date of the scheduled Annual Meeting is given,
then notice of the proposed business matter must be received by the Secretary
not later than the close of business on the tenth day following the day on which
such notice of the date of the scheduled Annual Meeting was mailed or the day on
which such public disclosure was made, whichever first occurs. Any notice to the
Secretary must include as to each matter the shareholder proposes to bring
before the meeting: (i) a brief description of the proposal desired to be
brought before the Annual Meeting and the reasons for conducting such business
at the Annual Meeting; (ii) the name and record address of the shareholder
proposing such business and any other shareholders known by such shareholder to
be supporting such proposal; (iii) the class and number of shares of the
Company's stock which are beneficially owned by the shareholder and (iv) any
financial interest of the shareholder in such proposal.
By Order of the Board of Directors
Donald M. Earhart
Dated: April 9, 1998 Chief Executive Officer
<PAGE> 15
I-FLOW CORPORATION
PROXY SOLICITED BY BOARD OF DIRECTORS
Donald M. Earhart and James J. Dal Porto, and each of them, with full power
of substitution, hereby are appointed proxies to vote the common stock of the
undersigned in I-FLOW CORPORATION at the annual meeting of shareholders on May
21, 1998, and at any adjournment thereof, as set forth below, if not otherwise
directed or as to any other matter, in accordance with their discretion.
(PLEASE SIGN AND DATE ON THE REVERSE SIDE)
<PAGE> 16
[ X ] Please mark your votes
as in this example
WITH WITHHOLD
Authority to vote for all nominees Authority to vote
for directors (except as indicated for all nominees
to the contrary below) listed below.
[ ] [ ]
1.
INSTRUCTIONS: To withhold authority in vote for any individual nominee, line
through the name.
Donald M. Earhart Dr. John H. Abetes Dr. Henry T. Tai
Joel S. Kanter Jack H. Halperin Erik H. Loudon
Charles C. McGettigan James J. Dal Porto
(Continued from other side)
Management recommends that you vote WITH authority to vote on all nominees for
director.
This proxy will be voted as directed. Unless otherwise directed, this Proxy
will be voted FOR the election of the eight director nominees set forth in the
accompanying Proxy Statement.
PLEASE DATE, SIGN AND RETURN THIS
PROXY IN THE ENCLOSED ENVELOPE
SIGNATURE(S)_____________________________________ DATE_________________ , 1998
____________________________________________
(Shares of Common Stock)
NOTE: Please sign exactly as name appears hereon.
