<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:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
<PAGE> 2
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 Sutton Place Hotel which is located at 4500
MacArthur Blvd., Newport Beach, California, 92660, on Thursday, May 13, 1999 at
9:30 a.m., Pacific Time, for the following purposes:
1. To elect seven directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected and qualified.
Management has nominated for director the seven 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, 1999 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 5, 1999
<PAGE> 3
I-FLOW CORPORATION
20202 WINDROW DRIVE
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
13, 1999, or at any adjournment or postponement thereof, for 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 7, 1999. 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, 1999
(the "Record Date") are entitled to notice of, and to vote at, the Annual
Meeting. As of the Record Date, the Company had 14,225,317 shares of common
stock (the "Common Stock") and 131,667 shares of Series B Preferred Stock (the
"Preferred Stock") outstanding. The Preferred Stock is convertible into 140,445
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,
but will not be counted for purposes of determining the outcome of any vote,
although they will have the same effect as a negative vote.
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. The seven 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 seven 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 that 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 Voting Shares as of March 1, 1999, 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 this 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 Stock 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 March 1, 1999 there were
14,365,762 Voting Shares outstanding.
<TABLE>
<CAPTION>
NAME OF NUMBER OF VOTING SHARES PERCENTAGE OF VOTING SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED** BENEFICIALLY OWNED
---------------- ----------------------- ---------------------------
<S> <C> <C>
Donald M. Earhart 1,363,535(1) 8.72%
20202 Windrow Drive
Lake Forest, CA 92630
Henry T. Tai, Ph.D., M.D. 482,967(2) 3.35%
Joel S. Kanter 397,512(3) 2.76%
John H. Abeles, M.D. 390,419(4) 2.71%
James J. Dal Porto 181,387(5) 1.25%
Gayle L. Arnold 53,088(6) *
Jack H. Halperin 31,600(7) *
Erik H. Loudon 29,600(8) *
All Directors and Executive
Officers as a group (8 Persons) 2,930,108(9) 18.29%
</TABLE>
* Less than 1%
** There is no preferred stock held by affiliates.
(1) Includes (i) 76,300 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) 1,277,644 shares of Common Stock issuable upon the
exercise of stock options held by Mr. Earhart which are exercisable within 60
days.
(2) Includes (i) 449,067 shares of Common Stock held of record by Dr.
Tai, and (ii) 33,900 shares of Common Stock issuable upon exercise of stock
options held by Dr. Tai which are exercisable within 60 days. Does not include
7,500 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.
(3) 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, (iii) 1,050 shares of Common
Stock held of record by Mr. Kanter's immediate family, and (iv) 29,600 shares of
Common Stock issuable upon exercise of options held by Windy City, Inc. which
are exercisable within 60 days. Does not include 7,500 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.
2
<PAGE> 5
(4) Includes (i) 356,519 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) 33,900 shares of Common Stock
issuable upon exercise of stock options held by Northlea Partners, Ltd. which
are exercisable within 60 days. Does not include 7,500 shares issuable upon
exercise of options granted to Northlea Partners, Ltd., but not exercisable
within 60 days.
(5) Includes (i) 11,000 shares of Common Stock held of record by Mr.
Dal Porto, and (ii) 170,387 shares of Common Stock issuable upon exercise of
stock options held by Mr. Dal Porto which are exercisable within 60 days. Does
not include 144,939 shares issuable upon exercise of stock options granted to
Mr. Dal Porto, but not exercisable within 60 days.
(6) Includes 53,088 shares of Common Stock issuable upon exercise of
stock options held by Ms. Arnold, which are exercisable within 60 days. Does not
include 61,181 shares issuable upon exercise of stock options granted to Ms.
Arnold, but not exercisable within 60 days.
(7) Includes (i) 3,000 shares of Common Stock held of record by Mr.
Halperin, and (ii) 29,600 shares of Common Stock issuable upon exercise of stock
options held by Mr. Halperin which are exercisable within 60 days. Does not
include 7,500 shares issuable upon exercise of stock options granted to Mr.
Halperin, but not exercisable within 60 days.
(8) Includes 29,600 shares of Common Stock issuable upon exercise of
stock options held by Mr. Loudon, which are exercisable within 60 days. Does not
include 7,500 shares issuable upon exercise of stock options granted to Mr.
Loudon, but not exercisable within 60 days.
(9) Includes (i) 300,000 shares of Common Stock held of record by
Walnut Capital Corporation, and 66,862 shares of Common Stock held of record by
Windy City, Inc., corporations having Mr. Kanter as their President, which are
also included above in the beneficial ownership of Mr. Kanter and (ii) 356,519
shares of Common Stock held by Northlea Partners Ltd., which are also included
above in the beneficial ownership of Dr. Abeles. Does not include 243,620 shares
of Common Stock issuable upon exercise of stock options held by certain officers
and directors, which are not exercisable within 60 days.
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 2000 and until their successors have been
elected and qualified. The number of authorized members of the Company's Board
of Directors is currently seven. There is currently a vacancy on the board,
created by the resignation of Charles McGettigan effective June 1, 1998. The
Board intends to fill this vacancy when an appropriate successor can be found.
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.
3
<PAGE> 6
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 venture 54 1985
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, Ph.D., Founder of the Company; practicing consultant in 55 1990
M.D. hematology and oncology, he holds a Bachelor of Arts (Formerly
degree in Molecular Biology from Harvard University, a Chairman of
Ph.D. in Molecular Biology and an M.D. from the the Board
University of Southern California; currently Secretary from 1985 to
of the Company. 1988)
Donald M. Earhart Chairman of the Board (since March 1991), Chief 54 1990
Executive Officer (since July 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.
Jack H. Halperin, Esq. Corporate and securities attorney who has been in 52 1991
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 Nocopi
Technologies, Inc.
Joel S. Kanter President of Windy City, Inc., an investment 42 1991
management firm; President and CEO 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 Encore Medical Group, Inc.,
Magna-Labs, Inc., Mariner Post-Acute Network, Inc. and
Walnut Financial Services, Inc.
Erik H. Loudon Joint-Managing Director of Columbus Asset Management 60 1991
Limited in London; Managing Director of EHL Investment
Services Limited in the Channel Islands; currently
serves on the Boards of Directors of Emerge Capital
Luxembourg and Leaf Asset Management Luxembourg;
Director of Sarasin Investment Management, Ltd. in
London from 1985 to 1989.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
DIRECTOR
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE SINCE
---- ---------------------------------- --- --------
<S> <C> <C> <C>
James J. Dal Porto Joined the Company in October 1989 as Controller. 46 1996
Promoted to Treasurer in 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, 1998.
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 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 Audit Committee meeting, members of the Audit 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, 1998.
The Board of Directors has a Compensation Committee with Henry Tai and
Eric Loudon 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, 1998.
The Company does not have a nominating committee.
All incumbent directors in 1998 attended at least 75% of the meetings
of the Board of Directors and all committees on which they may have served.
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 1998, Messrs. Abeles,
Tai, Kanter, Halperin, and Loudon were considered to be outside members of the
Board of Directors. Mr. Charles McGettigan was also a director of the Company
prior to June 1998, at which time he resigned to pursue other interests. The
cash compensation for the all of the outside directors in calendar year 1998 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 1998 was
$27,750.
The Company has a Non-Employee Director Stock Option Plan (the "Plan"),
which was approved by the shareholders at the Annual Meeting of Shareholders
meeting on May 4, 1992 (and amended at the Annual Meeting of Shareholders
meeting on May 11, 1995). Under the terms of the Plan (as amended), effective on
the first business day of each calendar year, 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
5
<PAGE> 8
calendar year receive options to purchase a pro rated portion of the 10,000
shares. On February 5, 1998, the Board of Directors approved a program for the
cancellation and regrant of certain options, under which options under the
Non-Employee Director Stock Option 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 $2.50 per share. As of December
31, 1998, options to purchase 144,100 shares at exercise prices ranging from
$1.88 to $3.56 per share, were outstanding and exercisable under the Plan. On
January 4, 1999 options to purchase an additional 50,000 shares at an exercise
price of $1.44 per share, were issued under the Plan. 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 1998 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 two
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 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 1998, 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 has a short-term incentive plan in which executive officers
participated in fiscal year 1998 -- 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
6
<PAGE> 9
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. The Company's long-term 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. However, as the Company
did not meet it's overall performance goals for the year ended December 31, 1997
relating to revenues and earnings, there were no salary increases to the top
executives in 1998. The Chief Executive Officer's salary remained at $240,000
for the 1998 fiscal year. There were also no cash bonuses or option grants to
the Chief Executive Officer made during the fiscal year 1998 related to
performance for the fiscal year-ended December 31, 1997.
OPTION REPRICINGS
On February 5, 1998, the Board of Directors approved a program for the
cancellation and regrant of certain options. The Board of Directors approved the
program as an incentive to retain the services of program participants,
including executive officers. At the time the program was approved, certain
options held by directors and employees were exercisable at prices above the
then current market price of the Company's common stock. Pursuant to the
program, anyone electing to participate would receive new options for
substantially fewer shares than the number of shares underlying the options to
be canceled. More specifically, under the program, all directors and employees
could elect to relinquish their existing options with exercise prices ranging
from $3.56 to $5.44 per share, in return for options to purchase 43% fewer
shares at an exercise price of $2.50 per share (the then current market price).
Under the program: (i) options held by Mr. Earhart to purchase 375,000
shares at prices ranging from $4.36 to $4.62 were cancelled and new options to
purchase 213,750 shares at a price of $2.50 were granted, (ii) options held by
Mr. Dal Porto to purchase 160,000 shares at prices ranging from $4.36 to $4.62
were cancelled and new options to purchase 91,200 shares at a price of $2.50
were granted, and (iii) options held by Ms. Arnold to purchase 50,000 shares at
prices ranging from $4.36 to $4.62 were cancelled and new options to purchase
28,500 shares at a price of $2.50 were granted.
7
<PAGE> 10
The following table shows certain information concerning the repricing
of stock options held by the named executive officers during the last ten years.
TEN-YEAR OPTION REPRICINGS*
<TABLE>
<CAPTION>
Length of
Securities Market Original Option
Underlying Price at Exercise Term Remaining
Number of Time of Price at New at Date of
Options Repricing Time of Exercise Repricing
Name and Principal Position Date Repriced (#) ($) Repricing ($) Price($) (Years)
--------------------------- ---- ------------ --------- ------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart 2/91 120,000 $2.50 $4.55 $2.50 9.3
President & Chief Executive 10/91 4,938 $2.20 $4.05 $2.20 9.4
Officer 10/91 120,000 $2.20 $2.50 $2.20 9.3
10/91 120,000 $2.20 $3.60 $2.20 9.3
2/98 128,250(a) $2.50 $4.36 $2.50 7.9
2/98 85,500(a) $2.50 $4.62 $2.50 8.9
James J. Dal Porto 2/91 8,000 $2.50 $5.00 $2.50 3.7
Executive Vice President, Chief 2/91 2,000 $2.50 $4.05 $2.50 4.2
Operating Officer 10/91 10,000 $2.20 $2.50 $2.20 4.3
10/91 10,000 $2.20 $2.50 $2.20 4.4
10/91 20,000 $2.20 $3.60 $2.20 4.3
2/98 62,700(a) $2.50 $4.36 $2.50 2.9
2/98 28,500(a) $2.50 $4.62 $2.50 3.9
Gayle L. Arnold 10/91 3,000 $2.20 $4.05 $2.20 4.4
Chief Financial Officer 2/98 17,100(a) $2.50 $4.36 $2.50 2.9
2/98 11,400(a) $2.50 $4.62 $2.50 3.9
</TABLE>
* All share and per-share data has been retroactively adjusted for a
one-for-five reverse stock split effective May 11, 1992.
COMPENSATION COMMITTEE
Henry Tsutomu Tai, Ph.D., M.D.
Erik H. Loudon
8
<PAGE> 11
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services
rendered in all capacities during the fiscal years ended December 31, 1998, 1997
and 1996 of the present Chief Executive Officer and all other executive officers
whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation ------------
-------------------------- Securities ($)
($) Underlying All Other
($) Bonus Options Compensation
Name and Principal Position Year Salary (a) (#) (c)
--------------------------- ---- ------ --- ---------- ------------
<S> <C> <C> <C> <C> <C>
Donald M. Earhart (d) 1998 $240,000 $ - 213,750(b) $7,751
President & Chief Executive 1997 240,000 150,000 150,000
Officer 1996 200,000 125,000 225,000
James J. Dal Porto (d) 1998 140,000 - 121,200(b)
Executive Vice President, Chief 1997 140,000 100,000 50,000
Operating Officer 1996 115,320 85,000 110,000
Gayle L. Arnold (d) 1998 101,200 - 55,500(b)
Chief Financial Officer 1997 101,200 40,000 20,000
1996 92,000 23,000 30,000
</TABLE>
(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 $15,000 in
deferred compensation to be paid by the Company only upon the exercise
of stock options to purchase 3,440 shares of the Company's Common
Stock.
(b) Includes options granted pursuant to the Company's 1998 option
repricing program discussed herein in the Report of the Compensation
Committee.
(c) Insurance premiums paid by the Company in the 1998, 1997 and 1996
calendar years with respect to term-life insurance for the benefit of
the executive.
(d) Terms and conditions of employment of Mr. Earhart, Mr. Dal Porto and
Ms. Arnold are outlined in Employment Agreements they have with the
Company which are described elsewhere herein under the caption
"Employment Contracts".
9
<PAGE> 12
The following table shows information regarding stock options granted
to the named executive officers during fiscal year 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------------
% of Total Market
Number of Options Price Per
Securities Granted to Share on Grant Date
Underlying Employees Exercise or Date of Present
Options Granted in Fiscal Base Price Grant Expiration Value ($)
Name (#) Year 1998 ($/Share) ($/Share) Date (d)
---- --------------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart 213,750(a)(b) 13.3% $2.50 $2.50 2/05/08 $488,567
James J. Dal Porto 91,200(a)(c) 5.7% $2.50 $2.50 2/05/03 $113,974
30,000(c) 1.9% $2.50 $2.50 2/05/03 37,491
Gayle L. Arnold 28,500(a)(c) 1.8% $2.50 $2.50 2/05/03 $ 35,617
7,000(c) 0.4% $2.50 $2.50 2/05/03 8,748
20,000(c) 1.2% $2.18 $2.18 3/31/03 21,746
</TABLE>
(a) Includes options granted pursuant to the Company's 1998 option
repricing program discussed herein in the Report of the Compensation
Committee.
(b) All options are immediately vested and exercisable upon the date of
grant.
(c) These options vest 20% after one year from the date of grant, and the
remainder on a pro rata daily basis over the next four years. All
options become immediately exercisable upon the disposition of all or
substantially all of the Company's assets or capital stock.
(d) The present value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model assuming a 76%
volatility, a risk-free interest rate of 5% and an expected life of 5
years.
The following table shows certain information concerning stock option
exercises by named executive officers during fiscal year 1998 and the value of
options held by such executives at 1998 year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options at Fiscal
at Fiscal Year End Year End
Shares ------------------------------ ------------------------------
Acquired on Value (a) (a)
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart - - 1,086,619 13,333 $71,717 $12,933
James J. Dal Porto - - 135,120 140,206 10,670 7,200
Gayle L. Arnold - - 38,846 60,423 970 2,700
</TABLE>
(a) Value of unexercised in-the-money options is based on the NASDAQ last
sale price on December 31, 1998 ($1.22 per share).
10
<PAGE> 13
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. 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 his 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. 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 1998 fiscal year are
included in the Summary Compensation Table and Aggregated Option Exercise Table
above. The 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 his 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, 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.
In June 1998, Ms. Arnold entered into a written employment agreement
with the Company whereby she is entitled to a severance payment equal to
six-months of her base salary plus immediate vesting of all stock options
granted up to the time of termination if her employment is terminated by the
Company without cause, or if she 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, the Company agrees to employ Ms.
Arnold for a period of six-months after the change in control or pay her in lieu
of employment for the same compensation including incentive compensation and all
benefits.
For each of the aforementioned agreements, a change in control of the
Company is defined as the occurrence of any of the following: (i) any "person"
(as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") is or becomes a "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the voting power of the
then outstanding securities of the Company; (ii) during any period of two
consecutive calendar years there is a change of 25% or more in the composition
of the Board of Directors of the Company in office at the beginning of the
period except for changes approved by at least two-thirds of the Directors then
in office who were Directors at the beginning of the period; (iii) the
stockholders of the Company approve an agreement providing for (A) the merger or
consolidation of the Company with another corporation where the stockholders of
the Company, immediately after the merger or consolidation, would not
beneficially own, immediately after the merger or consolidation, shares
entitling such stockholders to 50% or more of all votes (without consideration
of the rights of any class of stock to elect Directors by a separate class vote)
to which all stockholders of the Company issuing cash or securities in the
merger of consolidation would be entitled in the election of directors or where
the members of the Board, immediately prior to the merger or consolidation,
would not, immediately after the merger or consolidation, constitute a majority
of the Board of Directors of the Company issuing cash or securities in the
merger or consolidation or (B) the sale or other disposition of all or
substantially all the assets of the Company, or a liquidation, dissolution or
statutory exchange of the Company; or (iv) any person has commenced, or
announced an intention to commence, a tender offer or exchange offer for 30% or
more of the voting power of the then-outstanding securities of the Company.
11
<PAGE> 14
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.
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, 1998 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, 1994 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.
<TABLE>
<CAPTION>
1/1/94 1/1/95 1/1/96 1/1/97 1/1/98 1/1/99
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
I-Flow Corporation 100 128.2051 340.3846 348.7179 216.6667 78.20513
Industry Index 100 96.99846 142.8369 166.7901 203.9784 281.6954
Nasdaq Market Index 100 106.3547 161.4075 151.1926 173.2156 195.8257
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best of the Company's knowledge, no person subject to Section 16
of the Exchange Act failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during the most recent fiscal year.
AUDITORS
The firm of Deloitte & Touche LLP has served as the Company's
independent public accountants for the calendar year ended December 31, 1998 and
has been selected to serve for the fiscal year ended December 31, 1999. 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.
12
<PAGE> 15
ANNUAL REPORTS
The Company's Annual Report for the calendar year ended December 31,
1998, 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, 1998 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.
2000 SHAREHOLDER PROPOSALS
Shareholders who wish to include proposals for action at the Company's
2000 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, 1999. 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 2000 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 5, 1999 Chief Executive Officer
13
<PAGE> 16
I-FLOW CORPORATION
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints Donald M. Earhart and James J. Dal
Porto, and each of them, as Proxies, each with the power to appoint such Proxy's
substitute, and hereby authorizes them to represent and vote as designated below
all the shares of Common Stock of I-Flow Corporation held of record by the
undersigned on March 31, 1999 at the Annual Meeting of Shareholders to be held
on May 13, 1999, and at any adjournments or postponements thereof. The proposals
referred to below are described in the Proxy Statement for the Annual Meeting.
Management recommends that you vote FOR all nominees for director
listed below.
1. Election of Directors:
<TABLE>
<S> <C>
FOR |_| All nominees listed below (except WITHHOLD |_| Authority to vote for all
as indicated to the contrary below) nominees listed below.
</TABLE>
INSTRUCTIONS: To withhold authority to vote for any individual nominee, line
through the nominee's name.
<TABLE>
<S> <C> <C> <C>
Donald M. Earhart Dr. John H. Abeles Dr. Henry T. Tai Joel S. Kanter
Jack H. Halperin Erik H. Loudon James J. Dal Porto
</TABLE>
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
<PAGE> 17
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE SEVEN DIRECTOR NOMINEES SET FORTH IN
THE ACCOMPANYING PROXY STATEMENT.
-----------------------------------
(Shares of Common Stock)
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or authorized officer. If a
partnership, limited liability company or other entity, please sign entity's
full name by authorized person.
Signature __________________________________________ Date:___________, 1999
