<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sections 240.14a-11(c) or 240.14a-12
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] No fee 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 Hyatt Regency Irvine which is located at 17900
Jamboree Boulevard, Irvine, California, 92614, on Thursday, May 18, 2000 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 named in the accompanying Proxy Statement.
2. To amend the existing Non-Employee Director Stock Option Plan
by increasing the number of shares that may be issued under
the plan from 400,000 to 600,000 and by extending the option
exercise period as described in the Proxy Statement.
3. To amend the existing 1996 Stock Incentive Plan by increasing
the number of shares that may be issued under the plan from
2,500,000 to 6,000,000 as described in the Proxy Statement.
4. 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, 2000 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, 2000
<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 at 9:30 a.m. on
Thursday, May 18, 2000, 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, 2000. The Company's principal address is 20202
Windrow Drive, Lake Forest, CA 92630. The Annual Meeting will be held at the
Hyatt Regency Irvine, 17900 Jamboree Boulevard, Irvine, California, 92614.
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, 2000
(the "Record Date") are entitled to notice of, and to vote at, the Annual
Meeting. As of the Record Date, the Company had 14,977,153 shares of common
stock (the "Common Stock") outstanding. Shares of Common 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
or her 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 or her
shares are entitled, or to distribute his or her total votes on the same
principle among as many candidates as he or she 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 or her intention to cumulate his or her 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 chooses 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, 2000, 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, 2000 there were
14,920,207 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 1,382,326(1) 8.53%
20202 Windrow Drive
Lake Forest, CA 92630
Henry Tsutomu Tai, Ph.D., M.D 492,967(2) 3.30%
John H. Abeles, M.D 375,419(3) 2.51%
James J. Dal Porto 179,562(4) 1.20%
Joel S. Kanter 107,512(5) *
Gayle L. Arnold 57,344(6) *
Jack H. Halperin 42,600(7) *
Erik H. Loudon 7,500(8) *
All Directors and Executive
Officers as a group (8 Persons) 2,645,230(9) 16.06%
</TABLE>
* Less than 1%
(1) Includes (i) 81,300 shares of Common Stock held of record by Mr.
Earhart, (ii) 14,391 shares of Common Stock held of record by Mr. Earhart's
immediate family, and (iii) 1,286,635 shares of Common Stock issuable upon the
exercise of stock options held by Mr. Earhart which are exercisable within 60
days. Does not include 280,050 shares issuable upon exercise of stock options
granted to Mr. Earhart, but not exercisable within 60 days.
(2) Includes (i) 459,067 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 Tsutomu Tai, M.D., Pension Plan, of which Dr. Tai is the
beneficiary; (ii) Dr. Tai's wholly owned corporation, Henry Tsutomu 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) 341,519 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.
(4) Includes (i) 83,682 shares of Common Stock held of record by Mr.
Dal Porto, and (ii) 95,880 shares of Common Stock issuable upon exercise of
stock options held by Mr. Dal Porto which are exercisable within 60 days.
2
<PAGE> 5
Does not include 199,130 shares issuable upon exercise of stock options granted
to Mr. Dal Porto, but not exercisable within 60 days.
(5) Includes (i) 76,862 shares of Common Stock held of record by Windy
City, Inc., a corporation having Mr. Kanter as its President, (ii) 1,050 shares
of Common Stock held of record by Mr. Kanter's immediate family, and (iii)
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.
(6) Includes (i) 20,400 shares of Common Stock held of record by Ms.
Arnold, and (ii) 36,944 shares of Common Stock issuable upon exercise of stock
options held by Ms. Arnold, which are exercisable within 60 days. Does not
include 83,987 shares issuable upon exercise of stock options granted to Ms.
Arnold, but not exercisable within 60 days.
(7) Includes (i) 13,000 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 7,500 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) 76,862 shares of Common Stock held of record by Windy
City, Inc., a corporation having Mr. Kanter as its President, which are also
included above in the beneficial ownership of Mr. Kanter and (ii) 341,519 shares
of Common Stock held by Northlea Partners Ltd., which are also included above in
the beneficial ownership of Dr. Abeles. Does not include 600,667 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 2001 and until their successors have been
elected and qualified. The number of authorized members of the Company's Board
of Directors is currently seven. 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 55 1985
venture capital firm in the medical products
industry; currently serves on the Boards of
Directors of Ampersand Medical, Dusa
Pharmaceuticals, Inc., Encore Medical Inc.,
PharmaPrint Corp. and Oryx Technology, Inc.
Henry Tsutomu Tai, Ph.D., M.D. Founder of the Company; practicing consultant 56 1990
in hematology and oncology, he holds a Bachelor
of Arts degree in Molecular Biology from
Harvard University, a Ph.D. in Molecular
Biology and an M.D. from the University of
Southern California; currently Secretary of the
Company. Dr. Tai was Chairman of the Board from
1985 to 1988.
Donald M. Earhart Chairman of the Board (since March 1991), Chief 55 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.
Jack H. Halperin, Esq. Corporate and securities attorney who has been 53 1991
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. and Memry Corporation.
Joel S. Kanter President of Windy City, Inc., an investment 43 1991
management firm; 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 61 1991
Management Limited in London; Director of EHL
Investment Services Limited in the British
Virgin Islands; currently serves on the Boards
of Directors of Blue Chip Selection Luxembourg;
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 47 1996
Controller. 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 four meetings during the year
ended December 31, 1999.
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, 1999.
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, 1999.
The Company does not have a nominating committee.
All incumbent directors in 1999 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 1999, Messrs. Abeles,
Tai, Kanter, Halperin, and Loudon were considered to be outside members of the
Board of Directors. The cash compensation for the all of the outside directors
in calendar year 1999 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 1999 was $12,750.
The Company has a Non-Employee Director Stock Option Plan (the "Plan"),
which was approved by the shareholders at the Annual Meeting of Shareholders on
May 4, 1992 (and amended at the Annual Meeting of Shareholders 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 calendar year receive options to
purchase a pro rated portion of the 10,000 shares. As of December 31, 1999,
options to purchase 131,100 shares at exercise prices ranging from $1.44 to
$3.56 per share were outstanding and exercisable under the
5
<PAGE> 8
Plan. On January 3, 2000, options to purchase an additional 50,000 shares at an
exercise price of $3.88 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 compensation policies
for fiscal year 1999 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 1999, 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 corporate officer's incentive plan in
which corporate officers participated in fiscal year 1999 -- the Corporate
Officer Incentive Plan (the "COIP"). The COIP focuses participants (those
individuals holding the offices of CEO, COO and CFO) 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 COIP
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 COIP 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.
6
<PAGE> 9
Because of the Company's desire 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.
COMPENSATION COMMITTEE
Henry Tsutomu Tai, Ph.D., M.D.
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, 1999, 1998
and 1997 of the present Chief Executive Officer and all other executive officers
whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------- ------------
Securities ($)
($) Underlying All Other
($) Bonus Options Compensation
Name and Principal Position Year Salary (a) (#) (b)
--------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Donald M. Earhart(c) 1999 $252,000 $ 80,000 120,000 $11,611
President & Chief Executive 1998 240,000 -- 213,750 7,751
Officer 1997 240,000 150,000 150,000
James J. Dal Porto(c) 1999 147,000 $ 50,000 40,000 5,022
Executive Vice President, Chief 1998 140,000 -- 121,200
Operating Officer 1997 140,000 100,000 50,000
Gayle L. Arnold(c) 1999 106,260 $ 25,000 15,000
Chief Financial Officer 1998 101,200 -- 55,500
1997 101,200 40,000 20,000
</TABLE>
7
<PAGE> 10
(a) Bonuses awarded for each year were based on performance for the
previous year. The 1999 bonus for Mr. Earhart included $20,000 in cash
and $60,000 in deferred compensation to be paid by the Company only
upon the exercise of stock options to purchase 57,692 shares of the
Company's Common Stock. 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 $20,000 in deferred compensation to be
paid by the Company only upon the exercise of stock options to purchase
4,329 shares of the Company's Common Stock.
(b) Insurance premiums paid by the Company in the 1999 and 1998 calendar
years with respect to term-life insurance for the benefit of the
executive.
(c) Terms and conditions of employment of Mr. Earhart, Mr. Dal Porto and
Ms. Arnold are outlined in Employment Agreements they have with the
Company which are described elsewhere herein under the caption
"Employment Contracts".
The following table shows information regarding stock options granted
to the named executive officers during fiscal year 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------------------------------------------
% of Total Market
Number of Options Price Per
Securities Granted to Share on Grant Date
Underlying Employees Exercise or Date of Present
Options Granted in Fiscal Base Price Grant Expiration Value ($)
Name (#)(a) Year 1999 ($/Share) ($/Share) Date (b)
---- --------------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart 120,000 19.9% $1.04 $1.22 12/31/08 $130,054
James J. Dal Porto 40,000 6.6% $1.04 $1.22 12/31/03 $22,786
Gayle L. Arnold 15,000 2.5% $1.04 $1.22 12/31/03 $8,545
</TABLE>
(a) These options vest 20% after one year from the date of grant, and the
remainder on a pro rata daily basis over the next four years. All
options become immediately exercisable upon the disposition of all or
substantially all of the Company's assets or capital stock.
(b) The present value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model assuming 75%
volatility, a risk-free interest rate of 5.7% and an expected life of 5
years.
8
<PAGE> 11
The following table shows certain information concerning stock option
exercises by named executive officers during fiscal year 1999 and the value of
options held by such executives at 1999 year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options at Fiscal
at Fiscal Year End Year End
Shares ------------------------------ ------------------------------
Acquired on Value (a) (a)
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Earhart -- -- 1,157,487 120,157 $2,190,221 $351,959
James J. Dal Porto 72,682 $164,286 124,219 118,107 229,982 227,802
Gayle L. Arnold 20,400 $ 43,123 27,801 51,468 36,058 99,597
</TABLE>
(a) Value of unexercised in-the-money options is based on the Nasdaq last
sale price on December 31, 1999 ($3.97 per share).
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 1999 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.
9
<PAGE> 12
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.
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, 1999 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>
1/1/1994 1/1/1995 1/1/1996 1/1/1997 1/1/1998 1/1/1999
-------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
I-Flow Corporation 100 265.5 272 169 61 198.5
Industry Index 100 151.75929 142.157975 162.86075 182.44174 221.94483
Nasdaq Market Index 100 141.33488 173.89217 213.07314 300.24782 542.43044
</TABLE>
10
<PAGE> 13
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.
PROPOSAL NO. 2
PROPOSAL TO AMEND THE COMPANY'S NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
The Board of Directors has unanimously adopted a resolution approving
and recommending to the shareholders for their adoption at the Annual Meeting an
amendment to the Company's Non-Employee Director Stock Option Plan, as
previously amended on May 11, 1995, increasing the maximum number of shares of
Common Stock authorized for issuance under the plan from 400,000 to 600,000 and
increasing the exercise term for options granted under the plan from five to 10
years after the date of grant. Outstanding options previously granted to
non-employee directors are shown under Principal Shareholders and Stock
Ownership of Management in this proxy statement.
NEW PLAN BENEFITS
The Company's non-employee directors are eligible for option awards
under this plan. By voting in favor of this Proposal No. 2, additional shares
will be reserved for issuance and the term of new option awards will be
extended. It is not possible to calculate the value of future awards as they
depend on future stock performance. The exercise price for option awards made to
non-employee directors under this plan is equal to the fair market value of the
Company's common Stock on the date of the grant.
FEDERAL INCOME TAX CONSEQUENCES
Non-employee directors are not eligible for incentive stock option
awards under the Internal Revenue Code. As a result, all options awarded under
this plan are treated as non-statutory stock options. For federal income tax
purposes, the principal effect of this classification is: (i) income is realized
by the recipient upon the exercise of the option; (ii) income that the recipient
may realize is taxed as ordinary income; and (iii) the Company may be able to
deduct from its taxable income an amount equal to the income realized by the
recipient.
PURPOSE OF THE PROPOSED AMENDMENT
The Board believes that the amendment to the Non-Employee Director
Stock Option Plan is in the best interests of the Company and its shareholders
as it will allow the Company to grant additional options to present or future
non-employee directors to provide customary incentives.
VOTE REQUIRED FOR APPROVAL
The affirmative votes of a majority of those shares present in person
or represented by proxy is required for the approval of this proposal. Thus,
abstentions and broker-non-votes will have the same effect as a vote of "no."
The Board urges shareholders to vote "YES" for this proposal.
11
<PAGE> 14
PROPOSAL NO. 3
PROPOSAL TO AMEND THE COMPANY'S 1996
STOCK INCENTIVE PLAN
On March 24, 2000, the Board of Directors approved the grant of
contingent stock options to its executive officers to purchase an aggregate of
1,500,000 shares of the Company's Common Stock at an exercise price of $8.00 per
share. This grant is subject to shareholder approval of this Proposal No. 3.
These options will fully vest if, at any time during the five years from the
date of grant, the Company's Common Stock maintains a value, as measured by the
last sale price listed on the Nasdaq SmallCap Market or comparable exchange, of
$8.00 for twenty (20) consecutive trading days. The $8.00 exercise price was
determined by the Board of Directors based upon an increase in the market value
of the stock of 15% compounded annually over a five-year period, from February
24, 2000, which was the date that the program for the options was originally
agreed upon by the Board of Directors. Additionally, the Board of Directors
unanimously adopted a resolution approving and recommending to the shareholders
for their adoption at the Annual Meeting an amendment to the Company's 1996
Stock Incentive Plan, increasing the maximum number of shares of Common Stock
authorized for issuance under the plan from 2,500,000 to 6,000,000. The plan
currently has approximately 1,020,000 shares available to cover future
issuances. It is the Board of Directors' intention that a portion of the
additional shares authorized under the 1996 Stock Incentive Plan would be
utilized for the aforementioned grant of stock options as well as for similar
above market grants in the future, with the remainder to be utilized for general
corporate purposes. Outstanding options previously granted to executive officers
are shown under Executive Compensation in this proxy statement.
NEW PLAN BENEFITS
If this Proposal No. 3 is approved by shareholders at the Annual
Meeting, the Chief Executive Officer, the Chief Operating Officer and the Chief
Financial Officer will each receive an option to purchase up to 500,000 shares
of I-Flow Corporation Common Stock at a price of $8.00 per share. As of March
21, 2000, the last reported price for I-Flow Corporation Common Stock, as
reported on the Nasdaq SmallCap Market, was $5.00. The future dollar value of
this grant is presently unascertainable as it depends on future stock
performance.
FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that 12,500 shares of each executive's option grants
will be treated as incentive stock options for federal income tax purposes. To
the extent these options are treated as such, the award recipients may qualify
for the lower capital gains income tax. The Company will not be able to declare
the value of that portion of these option grants as a deductible business
expense, however, if these options are treated as incentive stock options. It is
anticipated that the balance of the options will be non-statutory stock options.
For federal income tax purposes, the principal effect of this classification is:
(i) income is realized by the recipient upon the exercise of the option; (ii)
income that the recipient may realize is taxed as ordinary income; and (iii) the
Company may be able to deduct from its taxable income an amount equal to the
income realized by the recipient.
PURPOSE OF THE PROPOSED AMENDMENT
The Board believes that the amendment to the 1996 Stock Incentive Plan
is in the best interests of the Company and its shareholders as it will allow
the Company to grant additional options to present or future executive officers
to provide customary incentives.
VOTE REQUIRED FOR APPROVAL
The affirmative votes of a majority of those shares present in person
or represented by proxy is required for the approval of this proposal. Thus,
abstentions and broker-non-votes will have the same effect as a vote of "no."
The Board urges shareholders to vote "YES" for this proposal.
12
<PAGE> 15
AUDITORS
The firm of Deloitte & Touche LLP has served as the Company's
independent public accountants for the calendar year ended December 31, 1999 and
has been selected to serve for the fiscal year ended December 31, 2000. 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.
ANNUAL REPORTS
The Company's Annual Report on Form 10-K for the calendar year ended
December 31, 1999, including audited financial statements, is being mailed to
shareholders along with this Proxy Statement.
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.
2001 SHAREHOLDER PROPOSALS
Shareholders who wish to include proposals for action at the Company's
2001 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, 2000. 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 Securities and Exchange Commission.
Shareholders who do not present proposals for inclusion in the Proxy
Statement but who still intend to submit a proposal at the 2001 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, 2000 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, 2000 at the Annual Meeting of Shareholders to be held
on May 18, 2000, 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 and a vote FOR Proposals 2 and 3.
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.
Donald M. Earhart Dr. John H. Abeles Dr. Henry T. Tai Joel S. Kanter
Jack H. Halperin Erik H. Loudon James J. Dal Porto
2. Proposal by the Company to amend the existing Non-Employee Director Stock
Option Plan by increasing the number of shares that may be issued under the
plan from 400,000 to 600,000 and by extending the option exercise period as
described in the Proxy Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal by the Company to amend the existing 1996 Stock Incentive Plan by
increasing the number of shares that may be issued under the plan from
2,500,000 to 6,000,000 as described in the Proxy Statement
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
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 AND FOR PROPOSALS 2 AND 3 DESCRIBED ABOVE.
------------------------
(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: , 2000
----------------------------------- ---------------
Printed Name(s)
-------------------------------
Title (if Applicable)
------------------------
