SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
SCHEDULE 14D-9
(RULE 14d-101)
SOLICITATION/RECOMMENDATION
STATEMENT UNDER SECTION 14(d)(4)
OF THE SECURITIES EXCHANGE ACT
OF 1934
(Amendment
No. )
I-FLOW CORPORATION
(Name of Subject
Company)
I-FLOW CORPORATION
(Name of Person Filing
Statement)
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class of
Securities)
449520303
(CUSIP Number of Class of
Securities)
James J. Dal Porto
Executive Vice President and Chief Operating Officer
20202 Windrow Drive, Lake Forest, CA 92630
(949) 206-2700
(Name, address and telephone
number of person authorized to receive notices
and communications on behalf of
the person filing statement)
Copies to:
Gibson, Dunn & Crutcher LLP
3161 Michelson Drive, Suite 1200
Irvine, California 92612
(949) 451-3800
Attention: Mark W. Shurtleff, Esq.
Terrence
R. Allen, Esq.
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Check the box if the filing relates solely to preliminary
communications made before the commencement of a tender offer.
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Item 1.
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Subject
Company Information.
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The name of the subject company is I-Flow Corporation, a
Delaware corporation (the Company). The address of
the principal executive offices of the Company is 20202 Windrow
Drive, Lake Forest, California 92630. The telephone number of
the Company at its principal executive offices is
(949) 206-2700.
The title of the class of equity securities to which this
Solicitation/Recommendation Statement on
Schedule 14D-9
(together with the exhibits and annexes hereto, this
Statement) relates is the common stock of the
Company, par value $0.001 per share, together with the
associated purchase rights issued pursuant to the Rights
Agreement, dated as of March 8, 2002, and as thereafter
amended, between the Company and American Stock
Transfer & Trust Company, as Rights Agent (the
Rights and, together with the shares of the
Companys common stock, the Shares). As of
October 18, 2009, there were 24,463,356 Shares issued
and outstanding.
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Item 2.
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Identity
and Background of Filing Person.
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The filing person of this Statement is the subject company,
I-Flow Corporation. The Companys name, business address
and business telephone number are set forth in Item 1
above, which information is incorporated by reference herein.
The Companys website is www.iflo.com. The information on
the Companys website should not be considered part of this
Statement.
The
Offer
This Statement relates to the tender offer commenced by Boxer
Acquisition, Inc., a Delaware corporation
(Purchaser), disclosed in a Tender Offer Statement
on Schedule TO, dated as of October 20, 2009 (as may
be amended or supplemented from time to time, the
Schedule TO), to purchase all of the
outstanding Shares at a price of $12.65 per Share net to the
seller in cash, without interest and less any required
withholding taxes (the Offer Price), upon the terms
and subject to the conditions set forth in Purchasers
offer to purchase, dated as of October 20, 2009 (as may be
amended or supplemented from time to time, the Offer to
Purchase and, together with the related Letter of
Transmittal, the Offer). Purchaser is a wholly owned
subsidiary of Kimberly-Clark Corporation, a Delaware corporation
(Parent). The Offer was commenced by Purchaser on
October 20, 2009 and expires at 12:00 midnight, New York
City time, on Tuesday, November 17, 2009 (
i.e.
, the
end of the day on November 17, 2009), unless it is extended
or terminated in accordance with its terms. The Offer is
conditioned on, among other matters, there being validly
tendered and not validly withdrawn before the expiration of the
Offer at least a majority of the Shares then outstanding on a
fully diluted basis, as described in the Offer to Purchase (the
Minimum Condition).
The Offer is being made pursuant to the Agreement and Plan of
Merger, dated as of October 8, 2009, by and among the
Company, Parent and Purchaser (as may be amended or supplemented
from time to time, the Merger Agreement). The Merger
Agreement provides that, following the acceptance for payment of
Shares by Purchaser pursuant to the Offer (the Acceptance
Time), Purchaser will merge with and into the Company (the
Merger), with the Company continuing as the
surviving corporation in the Merger as a wholly owned subsidiary
of Parent. The Merger will be completed in one of two ways. If,
following the Acceptance Time and any subsequent offering period
as described in the next sentence, Purchaser owns more than 90%
of the Shares then outstanding, then the Merger will occur
promptly after the Acceptance Time or subsequent offering
period, as applicable, pursuant to Section 253 of the
Delaware General Corporation Law (the DGCL).
Following the Acceptance Time, if Purchaser owns more than 50%
but less than 90% of the Shares then outstanding, Purchaser may
in its sole discretion provide one or more subsequent offering
periods pursuant to
Rule 14d-11
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), until February 17, 2010 (the
Outside Date), subject to extension of the Outside
Date pursuant to the Merger Agreement for 30 calendar days if
the waiting periods under applicable foreign antitrust laws or
under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR
Act), have not expired or been terminated, and up to an
incremental 120 calendar days if the waiting periods under
applicable foreign antitrust laws have not expired or been
terminated.
If, following the Acceptance Time or the last subsequent
offering period, if any, Purchaser owns more than 50% but less
than 90% of the Shares then outstanding, then the Company will
call and hold a special meeting of its stockholders to adopt and
approve the Merger Agreement, and the Merger will occur promptly
after such
1
stockholder approval. If the conditions to the Offer have been
satisfied and Purchaser completes the purchase of Shares
tendered pursuant to the Offer, then Purchaser will have
sufficient votes to adopt the Merger Agreement without the need
for any of the Companys other stockholders to vote in
favor of such adoption. In the Merger, each outstanding Share
(other than Shares held by Parent, Purchaser or stockholders who
properly exercise appraisal rights, if any, under
Section 262 of the DGCL), will be converted into the right
to receive the same consideration paid per Share pursuant to the
Offer, without interest and less any required withholding taxes
(the Merger Consideration).
The Schedule TO states that the principal executive offices
of Parent and Purchaser are located at 351 Phelps Drive, Irving,
Texas 75038 and that the telephone number at such principal
executive offices is
(972) 281-1200.
A copy of the Merger Agreement is filed herewith as Exhibit
(e)(1) and is incorporated by reference herein. A copy of the
Offer to Purchase is filed herewith as Exhibit (a)(2) and is
incorporated by reference herein, including the terms and
conditions of the Offer, related procedures and withdrawal
rights, the description of the Merger Agreement and other
arrangements described and contained in Sections 1, 2, 3,
4, 11, 15 and 16 of the Offer to Purchase. The Form of Letter of
Transmittal is filed herewith as Exhibit (a)(3) and is
incorporated by reference herein.
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Item 3.
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Past
Contacts, Transactions, Negotiations and
Agreements.
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Except as described in this Statement, including the Information
Statement of the Company attached to this Statement as
Annex B, or documents incorporated herein by reference, to
the knowledge of the Company, as of the date of this Statement,
there exists no material agreement, arrangement or
understanding, or any actual or potential conflict of interest,
between the Company or its affiliates, on the one hand, and
(i) the Company and any of the Companys executive
officers, directors or affiliates, or (ii) Parent,
Purchaser or their respective executive officers, directors or
affiliates, on the other hand.
The
Merger Agreement
The summary of the Merger Agreement and the descriptions of the
terms and conditions of the Offer, related procedures and
withdrawal rights and other arrangements described and contained
in Sections 1, 2, 3, 4, 11, 15 and 16 of the Offer to
Purchase, which is filed herewith as Exhibit (a)(2), are
incorporated herein by reference. Such summary and descriptions
are qualified in their entirety by reference to the Merger
Agreement, which is filed herewith as Exhibit (e)(1) and is
incorporated by reference herein.
The Merger Agreement is included as an exhibit to this Statement
to provide additional information regarding the terms of the
transactions described herein and is not intended to provide any
other factual information or disclosure about the Company,
Parent or Purchaser. The representations, warranties and
covenants contained in the Merger Agreement were made only for
purposes of such agreement and as of a specific date, were
solely for the benefit of the parties to such agreement (except
as to certain indemnification obligations), are subject to
limitations agreed upon by the contracting parties, including
being qualified by disclosure schedules made for the purposes of
allocating contractual risk between and among the parties
thereto instead of establishing these matters as facts, and may
be subject to standards of materiality applicable to the
contracting parties that differ from those applicable to
investors. Moreover, information concerning the subject matter
of the representations and warranties may change after the date
of the Merger Agreement, which subsequent information may or may
not be fully reflected in the Companys public disclosures.
Investors are not third-party beneficiaries under the Merger
Agreement and, in light of the foregoing reasons, should not
rely on the representations, warranties and covenants or any
descriptions thereof as characterizations of the actual state of
facts or condition of the Company, Parent or Purchaser or any of
their respective subsidiaries or affiliates.
The
Tender and Support Agreement
All of the directors and executive officers of the Company
entered into a Tender and Support Agreement, dated as of
October 8, 2009, with Parent and Purchaser (the
Tender and Support Agreement), pursuant to which,
among other matters, the directors and executive officers agreed
to tender their Shares in the Offer and to vote in favor of the
Merger, subject to the terms and conditions of the Tender and
Support Agreement. These stockholders hold a total of
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2,134,793 Shares, including 248,052 shares of unvested
restricted stock, which represent approximately 8.7% of the
outstanding Shares as of October 18, 2009. In addition,
they hold options that are exercisable prior to the scheduled
expiration date of the Offer for a total of 861,914 Shares.
They are not obligated to exercise these options, but they have
agreed to tender any Shares issuable upon such exercise.
The foregoing summary is qualified in its entirety by reference
to the Tender and Support Agreement, which is filed herewith as
Exhibit (e)(2) and is incorporated by reference herein.
Interests
of the Companys Executive Officers
The Companys executive officers are Donald M. Earhart, the
Companys Chairman of the Board of Directors (the
Board), President and Chief Executive Officer; James
J. Dal Porto, a member of the Board and the Companys
Executive Vice President, Chief Operating Officer and Secretary;
and James R. Talevich, the Companys Chief Financial
Officer. Messrs. Earhart, Dal Porto and Talevich
(collectively, the Executive Officers) will benefit
from the following arrangements with the Company in connection
with the transactions contemplated by the Merger Agreement.
Change In
Control Agreements
In June 2001, each of the Executive Officers entered into a
change in control agreement with the Company, which was
subsequently amended on February 23, 2006 and
February 21, 2008 (collectively, as amended, the
Change in Control Agreements).
Under the Change in Control Agreements, the Acceptance Time will
constitute a change in control with respect to the Company. The
Merger Agreement requires Purchaser to accept the Shares as soon
as the Minimum Condition is satisfied, assuming all other
conditions applicable to the Offer are then satisfied or duly
waived by Parent or Purchaser, provided that the Offer must be
held open for a minimum of 20 business days pursuant to
Rule 14e-1(a)
under the Exchange Act.
Acceleration
of Equity Incentives
Pursuant to the Change in Control Agreements, all unvested stock
options, unvested restricted stock units and unvested restricted
stock held by the Executive Officers will immediately and
automatically vest at the Acceptance Time.
Severance
Benefits
Each of the Executive Officers will additionally be entitled to
certain severance benefits described in the Change in Control
Agreements if his employment with the Company is terminated
within 90 days prior to or three years following a change
in control, unless he is terminated for cause, voluntarily
resigns, dies or becomes disabled (a Qualifying
Termination). The Change in Control Agreements deem an
Executive Officers resignation following a material change
in his responsibilities, status, base salary, authority or
location of workplace to be other than voluntary. In this
regard, the Change in Control Agreements provide that an
Executive Officers authority and responsibilities will be
conclusively deemed to have been materially changed if, without
the Executive Officers written consent, the Executive
Officer no longer has the same title, authority,
responsibilities or reporting responsibilities, in each case
with respect to a publicly held parent company that is not
controlled by another entity or person.
The severance benefits under the Change in Control Agreements
primarily consist of a lump sum cash payment equal to a
specified multiple of the sum of (i) the Executive
Officers annual base salary in effect at the time of the
termination of his employment plus (ii) an amount equal to
the average annual bonus earned by him in the three previous
full fiscal years (the sum of the amounts described in the
foregoing clauses (i) and (ii) being referred to as
the Base Amount). Mr. Earhart is entitled to a
cash payment equal to three times his Base Amount, Mr. Dal
Porto is entitled to a cash payment equal to two and one-half
times his Base Amount and Mr. Talevich is entitled to a
cash payment equal to two times his Base Amount.
Under the Change in Control Agreements, each Executive Officer
is also entitled to receive any bonus, or pro rata portion
thereof, earned for the fiscal year in which he is terminated.
For the current fiscal year, the applicable
3
bonus plan is the Companys 2009 Executive Performance
Incentive Plan (the 2009 EPIP), which is discussed
in more detail below. No 2010 fiscal year bonus plan has been
adopted.
Each Executive Officer (including his family) is additionally
entitled to post-termination insurance coverage, with the same
benefits and total coverage as received under the Companys
group medical insurance programs that had been made available to
him (including his family) before the termination, unless he
obtains coverage through another employer. Mr. Earhart is
entitled to such coverage for three years, Mr. Dal Porto is
entitled to such coverage for two and one-half years and
Mr. Talevich is entitled to such coverage for two years.
The Change in Control Agreements further provide that an
incremental payment will be made to any Executive Officer who is
required to pay excise taxes in connection with the receipt of
the foregoing benefits, such that the net amount received by the
Executive Officer will be equal to the total payments that would
have been received had such taxes not been incurred.
The foregoing summaries are qualified in their entirety by
reference to the Change in Control Agreements and the Summary of
the Terms of the 2009 EPIP, which are attached hereto as
Exhibits (e)(5) through (14) and are incorporated by
reference herein.
2009
Executive Performance Incentive Plan
Pursuant to the terms of the 2009 EPIP and the Merger Agreement,
at the Acceptance Time (and assuming the Acceptance Time occurs
by December 31, 2010), the awards to the Executive Officers
under the 2009 EPIP will be deemed earned and payable, with no
proration, at the higher of (i) the year-to-date (as of
October 8, 2009) actual percentage achievement against
the targets set by the Board under the 2009 EPIP or (ii) an
assumed percentage achievement of 100% against such targets. All
awards under the 2009 EPIP will be deemed earned in 2009 for the
purpose of determining the Base Amounts under the Change in
Control Agreements.
Based on the Companys operating performance through
October 8, 2009, the Company expects that the actual
percentage achievement against the targets through
October 8, 2009 will be less than 100%. Therefore, pursuant
to the terms of the 2009 EPIP, the Executive Officers as a group
will be entitled to receive 100% of the full plan-year target
awards, which consist of an aggregate cash incentive award of
$1,250,000 and an aggregate equity incentive award of
180,000 shares of restricted stock (all of which
immediately vest pursuant to the 2009 EPIP and the Change in
Control Agreements). The allocation of the aggregate awards
among the Executive Officers will be determined by the
Companys compensation committee (the Compensation
Committee)
and/or
the
Board based on their assessment of the contributions of each
Executive Officer.
The summary of the plan document herein is qualified in its
entirety by reference to the Summary of the Terms of the 2009
EPIP, which is attached hereto as Exhibit (e)(14) and is
incorporated by reference herein.
Employment
Agreements
The severance payments under the Change in Control Agreements
are in lieu of any severance payments that the Executive
Officers might otherwise receive from the Company in the event
of a change in control, unless the Executive Officers
employment is terminated outside of the period covered by the
Change in Control Agreements or as a result of a disability or
death, in which event the Executive Officers entitlement
to severance benefits, if any, will be governed by his
employment agreement, as described below.
The Company has entered into written employment agreements with
each of the Executive Officers (collectively, as amended, the
Employment Agreements). Pursuant to the Employment
Agreements, each Executive Officer receives a minimum base
salary, plus a bonus to be determined annually by the Board
based on and subject to attainment of certain goals set by the
Board. Each Executive Officer also receives other benefits, such
as insurance coverage, automobile allowances and paid vacation.
Additionally, the Company provides each Executive Officer with
life insurance policies with a coverage amount equal to at least
two times his annual base salary.
4
The Employment Agreements also provide for a severance payment
in the event that the employment of an Executive Officer is
terminated without cause or, subject to certain notice and cure
periods, he resigns because his job location is transferred more
than thirty miles from his current place of employment without
his consent.
Mr. Earhart would be entitled to a severance payment
consisting of a cash payment equal to three times the sum of
(i) his annual salary in effect at the time of such
termination plus (ii) an amount equal to the average annual
bonus earned in the previous three full fiscal years.
Mr. Dal Porto would be entitled to a severance payment
consisting of a cash payment equal to two times the sum of
(i) his annual salary in effect at the time of such
termination plus (ii) an amount equal to the average annual
bonus earned in the previous three full fiscal years.
Mr. Talevich would be entitled to a severance payment
consisting of a cash payment equal to the sum of (i) his
annual salary in effect at the time of such termination plus
(ii) an amount equal to the average annual bonus earned in
the previous three full fiscal years.
In addition to the severance payment described above, each
Executive Officer would be entitled to receive any bonus, or pro
rata portion thereof, earned for the fiscal year in which his
employment is terminated without cause or he resigns because his
job location is transferred more than thirty miles from his
current place of employment without his consent. Further, in the
event the Executive Officer is terminated without cause or he
resigns because his job location is transferred more than thirty
miles from his current place of employment without his consent,
all of the Executive Officers outstanding and unvested
options, restricted stock and other equity-based awards would
immediately become fully vested and, to the extent relevant,
exercisable, and all of his outstanding options and any stock
appreciation rights would remain exercisable for the remainder
of their term (but in no event later than the last day prior to
the day that any extension would cause such options or stock
appreciation rights to become subject to Section 409A of
the Internal Revenue Code).
Each Executive Officer would also be entitled to continued
participation in the group medical insurance programs that had
been made available to him (including his family) before his
termination, unless he obtains coverage through another employer
for the period of time set forth in the applicable Employment
Agreement. Mr. Earhart would be entitled to such coverage
for three years, Mr. Dal Porto would be entitled to such
coverage for two years and Mr. Talevich would be entitled
to such coverage for one year. As discussed above, however, the
severance provisions in the Employment Agreements will only
apply if the Executive Officer is terminated outside the period
covered by the Change in Control Agreements or as a result of a
disability or death.
The foregoing summaries are qualified in their entirety by
reference to the Employment Agreements, all of which are
attached hereto as Exhibits (e)(15) through (23) and are
incorporated by reference herein.
Unvested
Restricted Stock Held by Executive Officers
Pursuant to the Change in Control Agreements, each share of
unvested restricted stock held by each Executive Officer will
immediately vest at the Acceptance Time. Pursuant to the Merger
Agreement, each Executive Officer will be entitled to receive
the Offer Price for each share of unvested restricted stock at
or before the effective time of the Merger (the Effective
Time).
5
Quantitative
Summary
The table below reflects the amount of compensation payable to
each of the Executive Officers in the event that the Acceptance
Time and a Qualifying Termination occur in 2009 or,
alternatively, in 2010 (the Executive Officers would be entitled
to such compensation only once). The amounts shown assume the
Offer Price of $12.65 per Share.
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Change in
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Change in
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Control
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Control
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(Qualifying
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(Qualifying
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Potential Executive
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Termination in
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Termination in
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Name and Principal Position
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Benefits and Payments
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2009) Total ($)
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2010) Total ($)
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Donald M. Earhart
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Cash Severance(1)(2)
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5,453,502
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5,352,581
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Chairman, President &
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Bonus under 2009 EPIP(3)
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1,763,500
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1,763,500
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Chief Executive Officer
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Equity Stock Awards Unvested and Accelerated(4)
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1,410,792
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1,410,792
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Healthcare(5)
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27,132
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27,132
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Tax Gross-ups
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Total
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8,654,926
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8,554,005
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James J. Dal Porto
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Cash Severance(1)(6)
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2,996,391
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2,940,319
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Executive Vice President &
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Bonus under 2009 EPIP(3)
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1,175,667
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1,175,667
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Chief Operating Officer
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Equity Stock Awards Unvested and Accelerated(4)
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940,541
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940,541
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Healthcare(5)
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54,358
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54,358
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Tax Gross-ups
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Total
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5,166,957
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5,110,885
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James R. Talevich
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Cash Severance(1)(7)
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1,398,567
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1,376,133
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Chief Financial Officer
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Bonus under 2009 EPIP(3)
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587,833
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587,833
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Equity Stock Awards Unvested and Accelerated(4)
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470,277
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470,277
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Healthcare(5)
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28,814
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28,814
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Tax Gross-ups
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Total
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2,485,491
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2,463,057
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(1)
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Please refer to the following table for the calculations of cash
severance amounts and the assumptions underlying such
calculations.
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(2)
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The net cash severance that Mr. Earhart would receive after
taxes, based on a 43.78% effective tax rate, would be $4,865,799
or $4,809,062 in 2009 or 2010, respectively.
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(3)
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All shares of restricted stock granted under the 2009 EPIP will
immediately vest pursuant to the 2009 EPIP and the Change in
Control Agreements. The Compensation Committee has not yet
determined the allocation of the cash and restricted stock award
pool under the 2009 EPIP. However, this table assumes that the
award pool for 2009 will be allocated in the same manner as the
award pool was allocated for 2008 (
i.e.,
as follows: Mr.
Earhart, one-half of the award pool; Mr. Dal Porto, one-third;
and Mr. Talevich, one-sixth). This assumption is made solely for
illustrative purposes. The Compensation Committee retains
complete discretion in determining the allocation of the award
pool.
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(4)
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The value of the restricted stock vesting was calculated by
multiplying the number of unvested shares on October 18,
2009 by the Offer Price of $12.65 per share.
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(5)
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The value of the healthcare amount represents the estimate of
the cost of continued coverage under the Companys group
medical insurance programs after termination for each named
executive officer. The amount is calculated based on the amount
paid in 2008 for healthcare premiums, including reimbursement of
out-of-pocket
costs for medical, dental and vision benefits covered by the
Companys ExecuCare program multiplied by the number of
years of coverage as provided in the Change in Control Agreement
for each of the Executive Officers. Mr. Earhart is entitled
to three years of medical coverage. Mr. Talevich is
entitled to two years of medical coverage. Mr. Dal Porto is
entitled to two and
one-half
years of medical coverage. Actual value of healthcare amount
will vary depending on actual cost of medical benefits received
after termination.
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(6)
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The net cash severance that Mr. Dal Porto would receive
after taxes, based on a 43.78% effective tax rate, would be
$2,904,863 or $2,873,340 in 2009 or 2010, respectively.
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(7)
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The net cash severance that Mr. Talevich would receive
after taxes, based on a 43.78% effective tax rate, would be
$1,397,343 or $1,384,731 in 2009 or 2010, respectively.
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The following table sets forth the calculations of the cash
severance amounts in the summary table above:
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Cash Severance Payment
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Current
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Qualifying
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Qualifying
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Executive
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Base
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2006
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2007
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2008
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2009
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Termination in
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Termination in
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Officer
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Salary
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Bonus(1)
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Bonus(1)
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Bonus(1)
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|
|
Bonus(2)
|
|
|
2009(3)(4)
|
|
|
2010(3)(5)
|
|
|
Donald M. Earhart
|
|
$
|
470,000
|
|
|
$
|
1,864,421
|
|
|
$
|
1,885,824
|
|
|
$
|
293,257
|
|
|
$
|
1,763,500
|
|
|
$
|
5,453,502
|
|
|
$
|
5,352,581
|
|
James J. Dal Porto
|
|
$
|
300,000
|
|
|
$
|
1,242,953
|
|
|
$
|
1,257,212
|
|
|
$
|
195,504
|
|
|
$
|
1,175,667
|
|
|
$
|
2,996,391
|
|
|
$
|
2,940,319
|
|
James R. Talevich
|
|
$
|
250,000
|
|
|
$
|
621,485
|
|
|
$
|
628,612
|
|
|
$
|
97,754
|
|
|
$
|
587,833
|
|
|
$
|
1,398,567
|
|
|
$
|
1,376,133
|
|
|
|
|
(1)
|
|
The cash value of restricted stock awards included in the bonus
amount is equal to the fair market value of such awards on the
grant date.
|
|
(2)
|
|
The Compensation Committee has not yet determined the allocation
of the cash and restricted stock award pool under the 2009 EPIP.
However, this table assumes that the award pool for 2009 will be
allocated and paid in the same manner as the award pool was
allocated for 2008 (
i.e.
, as follows: Mr. Earhart,
one-half of the award pool; Mr. Dal Porto, one-third; and
Mr. Talevich, one-sixth). This assumption is made solely
for illustrative purposes. The Compensation Committee retains
complete discretion in determining the allocation of the award
pool.
|
|
(3)
|
|
Mr. Earhart would be entitled to a cash payment equal to
three times his Base Amount. Mr. Dal Porto would be
entitled to a cash payment equal to two and one-half times his
Base Amount. Mr. Talevich would be entitled to a cash
payment equal to two times his Base Amount.
|
|
(4)
|
|
Pursuant to the Change in Control Agreements, these values are
calculated using the Executive Officers bonus amounts for
2006, 2007 and 2008.
|
|
(5)
|
|
Pursuant to the Change in Control Agreements, these values are
calculated using the Executive Officers bonus amounts for
2007, 2008 and 2009.
|
Interests
of Non-Employee Directors
The non-employee directors of the Board are as follows:
|
|
|
|
|
Name
|
|
Position
|
|
|
John H. Abeles, M.D.
|
|
|
Director
|
|
Jack H. Halperin, Esq.
|
|
|
Director
|
|
Joel S. Kanter
|
|
|
Director
|
|
Erik H. Loudon
|
|
|
Director
|
|
Henry Tsutomu Tai, Ph.D., M.D.
|
|
|
Director
|
|
Treatment
of Equity Awards
The non-employee directors are not party to the Change in
Control Agreements with the Company. As a result, any stock
options, restricted stock units or unvested restricted stock
held by the non-employee directors will be treated in accordance
with the Merger Agreement. The Merger Agreement provides that at
the Effective Time, (i) each outstanding stock option under
the Companys equity incentive plans, whether vested or
unvested, will be canceled, and in exchange each holder thereof
will receive an amount in cash equal to the excess (if any) of
the Offer Price over the exercise price per Share, multiplied by
the number of Shares subject to such stock option;
(ii) each restricted stock unit, whether vested or
unvested, under the Companys equity incentive plans that
is outstanding will be canceled, and in exchange each holder
thereof will receive an amount in cash equal to the product of
the Offer Price and the number of restricted stock units; and
(iii) each share of unvested restricted stock granted under
the Companys equity incentive plans will vest and
thereafter be canceled and converted into the right to receive
the Offer Price, on the terms and conditions set forth in the
Merger Agreement. Restricted stock that had previously
7
vested will, like the other Shares, be canceled and converted
into the right to receive the Offer Price, on the terms and
conditions set forth in the Merger Agreement.
The non-employee directors of the Company do not hold any
options to acquire Shares with an exercise price below the Offer
Price and do not hold any restricted stock units.
Unvested
Restricted Stock Held by Non-Employee Directors
On December 4, 2008, the Board authorized the grant of
5,000 shares of restricted stock to each of the
non-employee directors of the Company, effective January 2,
2009. Typically, these shares would vest on the first
anniversary of the grant date. Pursuant to the Merger Agreement,
however, at the Effective Time, each share of unvested
restricted stock held by the non-employee directors will vest
and thereafter be canceled and converted into the right to
receive the Offer Price, on the terms and conditions set forth
in the Merger Agreement. Each non-employee director will be
entitled to receive the Offer Price for his 5,000 shares of
unvested restricted stock for a total of $63,250. The five
non-employee directors will collectively be entitled to receive
a total of $316,250 for their 25,000 shares of unvested
restricted stock.
Other
Interests of Executive Officers and Non-Employee
Directors
Company
Stock Options
Currently, Mr. Earhart is the only director or Executive
Officer with outstanding options to acquire Shares with exercise
prices below the Offer Price. All of the options held by
Mr. Earhart have previously vested pursuant to their terms.
Pursuant to the Merger Agreement, the Companys 1996 Stock
Incentive Plan (the 1996 Plan) and the
Companys Amended and Restated 2001 Equity Incentive Plan
(the 2001 Plan), any stock options outstanding at
the Effective Time will be canceled, and in exchange
Mr. Earhart will receive an amount in cash equal to the
excess of the Offer Price over the exercise price per Share,
multiplied by the number of Shares subject to such stock option.
The following table sets forth the payments Mr. Earhart
will receive for his outstanding stock options as described
above, assuming that all of them remain outstanding at the
Effective Time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
Exercise
|
|
|
Market
|
|
|
Outstanding
|
|
|
Total Option
|
|
Grantee
|
|
Date
|
|
Shares
|
|
|
Price(1)
|
|
|
Value
|
|
|
& Exercisable
|
|
|
Spread(2)
|
|
|
Donald M. Earhart
|
|
12/31/99
|
|
|
192,000
|
|
|
$
|
3.37
|
|
|
$
|
3.97
|
|
|
|
192,000
|
|
|
$
|
1,781,760
|
|
Donald M. Earhart
|
|
12/31/99
|
|
|
66,766
|
|
|
$
|
0.00
|
|
|
$
|
3.97
|
|
|
|
66,766
|
|
|
$
|
844,590
|
|
Donald M. Earhart
|
|
12/31/99
|
|
|
40,366
|
|
|
$
|
0.00
|
|
|
$
|
3.97
|
|
|
|
40,366
|
|
|
$
|
510,629
|
|
Donald M. Earhart
|
|
1/1/01
|
|
|
113,282
|
|
|
$
|
0.00
|
|
|
$
|
1.50
|
|
|
|
113,282
|
|
|
$
|
1,433,017
|
|
Donald M. Earhart
|
|
1/1/01
|
|
|
105,000
|
|
|
$
|
1.28
|
|
|
$
|
1.50
|
|
|
|
105,000
|
|
|
$
|
1,193,850
|
|
Donald M. Earhart
|
|
1/4/01
|
|
|
25,000
|
|
|
$
|
1.28
|
|
|
$
|
1.50
|
|
|
|
25,000
|
|
|
$
|
284,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
6,048,096
|
|
|
|
|
(1)
|
|
For certain grants of Company Stock Options with respect to
which the exercise price is to be paid by the Company, the
effective price to the grantee of $0.00 is shown.
|
|
(2)
|
|
Based on the Offer Price of $12.65, less the effective exercise
price of the unexercised stock options.
|
The summaries of the 2001 Plan and the 1996 Plan are qualified
in their entirety by reference to such plans, which are attached
hereto as Exhibits (e)(3) and (4), respectively, and are
incorporated by reference herein.
In addition to the options held by Mr. Earhart, the
unvested restricted shares held by the Executive Officers
discussed above (which will be accelerated at the Acceptance
Time pursuant to the Change in Control Agreements) and the
unvested restricted shares held by the non-employee directors
(which will be accelerated at the Effective Time pursuant to the
Merger Agreement), each of the directors and Executive Officers
of the Company currently holds Shares that are required to be
tendered in the Offer, pursuant to the terms and conditions of
the Tender and Support Agreement, as follows:
Mr. Earhart 835,379 Shares,
Mr. Talevich 77,531 Shares, Mr. Dal
Porto 237,298 Shares,
Dr. Abeles 332,500 Shares,
Mr. Halperin 23,000 Shares,
Mr. Kanter 72,893 Shares,
Mr. Loudon 14,000 Shares and
Dr. Tai 294,140 Shares. The directors and
Executive Officers, together with
8
any parties through whom they may possess beneficial ownership
of such shares, will receive an aggregate amount of $23,867,274
for these 1,886,741 Shares at the Acceptance Time.
Indemnification
The Merger Agreement provides that, after the Effective Time and
for a period of six years thereafter, Parent will, or will cause
the surviving company to, indemnify and hold harmless each
current (as of the Effective Time) and each former officer and
director of the Company or its subsidiaries (collectively, the
Indemnified Parties) from and against any and all
claims, losses, liabilities, damages, judgments, inquiries,
fines and fees, costs and expenses, including actual
attorneys fees and disbursements, incurred in connection
with any action, whether civil, criminal, administrative or
investigative, arising out of or pertaining to the fact that
such person is or was an officer or director of the Company or
any of its subsidiaries at or prior to the Effective Time,
whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent permitted under applicable law and
required under the certificate of incorporation and bylaws of
the Company (or, as relevant, those of a subsidiary) as in
effect on the date of the Merger Agreement. In the Merger
Agreement, Parent and the Company agreed that for a period of
six years after the Effective Time, all rights to
indemnification and exculpation from liabilities for acts or
omissions occurring at or prior to the Effective Time and rights
to advancement of expenses relating thereto now existing in
favor of any Indemnified Party as provided in the certificate of
incorporation of the Company (or, as relevant, those of a
subsidiary), the bylaws of the Company (or, as relevant, those
of a subsidiary) or in any indemnification agreement between an
Indemnified Party and the Company (or, as relevant, a
subsidiary) shall not be amended, repealed or otherwise modified
in any manner that would adversely affect any rights of the
Indemnified Parties thereunder. Prior to the Effective Time,
Parent will pay for and cause to be obtained and put into effect
by the Effective Time, one or more prepaid tail
insurance policies for the individuals who were covered under
the Companys or its subsidiaries existing
directors and officers insurance policies as of the
date of the Merger Agreement, with a claims period of at least
six years from the Effective Time, with terms and conditions
that are, when taken as a whole, at least as favorable as the
directors and officers liability insurance and
fiduciary liability insurance policies currently maintained by
the Company and its subsidiaries, for claims arising from facts
or events that occurred at or prior to the Effective Time. The
maximum aggregate premium for such tail insurance
policies that Parent will be required to expend is an amount
equal to three hundred percent of the annual directors and
officers insurance premiums for the Companys and its
subsidiaries current fiscal year. The foregoing rights are
not exclusive of any other rights the Indemnified Parties have
to indemnification, whether pursuant to law, contract or
otherwise.
Each of the Companys directors and Executive Officers has
entered into an indemnification agreement with the Company
(collectively, the Indemnification Agreements). The
Indemnification Agreements provide that the Company will
indemnify the directors and Executive Officers of the Company to
the fullest extent permitted by law against expenses and damages
if the Indemnified Party is, or is threatened to be made, a
party to or participant in a legal proceeding by reason of his
status as a director, officer, employee, agent or fiduciary of
the Company or by reason of the fact that he is or was serving
at the request of the Company as a director, officer, employee,
agent or fiduciary of any other entity (including, but not
limited to, another corporation, partnership, joint venture,
trust or employee benefit plan) or by reason of anything done or
not done by the Indemnified Party in any such capacity. The
Indemnification Agreements further provide that the Company will
advance the expenses of the directors and Executive Officers
incurred in any such proceedings prior to final disposition of
the claim. In any dispute concerning the entitlement of any
director or Executive Officer to indemnification, the directors
and Executive Officers will be presumed entitled to
indemnification, and the Company will have the burden of proving
otherwise.
The foregoing summaries are qualified in their entirety by
reference to the Merger Agreement and the form of
Indemnification Agreement, which are attached hereto as Exhibits
(e)(1) and (e)(24), respectively, and are incorporated herein by
reference.
Representation
on the Companys Board of Directors
The Merger Agreement provides that, after Purchaser has caused
payment to be made for the Shares tendered pursuant to the Offer
(which would mean that the Minimum Condition and all other
conditions to the Offer have been satisfied or duly waived by
Purchaser), Parent will be entitled to elect or designate the
number of directors on
9
the Companys Board, rounded up to the next whole number,
as is equal to the product of the total number of directors
multiplied by the percentage that the aggregate number of Shares
beneficially owned by Parent, Purchaser and their affiliates
bears to the total number of Shares then outstanding. The
Company has agreed, upon request of Parent, to use all
commercially reasonable efforts, subject to compliance with
applicable laws and the certificate of incorporation and bylaws
of the Company, to cause Parents designees to be elected
or appointed to the Board, including increasing the size of the
Board
and/or
seeking the resignation of one or more incumbent directors. The
Company has also agreed to use all commercially reasonable
efforts, subject to compliance with applicable laws and the
certificate of incorporation and bylaws of the Company, to cause
individuals designated by Parent to have equivalent
representation on each committee of the Board and on each board
of directors of each subsidiary of the Company. In connection
with the foregoing, the Company is providing to its stockholders
an Information Statement pursuant to Section 14(f) of the
Exchange Act and
Rule 14f-1
thereunder, which is attached as Annex B to this
Schedule 14D-9
and is incorporated by reference herein.
Notwithstanding the foregoing, the Merger Agreement provides
that the Company will use its commercially reasonable efforts to
ensure that at least three of the members of the Board as of
October 8, 2009, who are independent (the Independent
Directors), for purposes of Rule 10A-3 under the Exchange
Act, remain on the Board until the Merger has been consummated.
The Board has selected Mr. Halperin, Mr. Kanter and
Dr. Tai as the Independent Directors, and they have agreed
to so act. If there are fewer than three Independent Directors
on the Board for any reason, the Board will cause a person
designated by the remaining Independent Directors to fill such
vacancy, and the person so designated will be deemed an
Independent Director for all purposes of the Merger Agreement.
The foregoing summary is qualified in its entirety by reference
to the Merger Agreement, which is filed herewith as Exhibit
(e)(1) and is incorporated by reference herein.
|
|
Item 4.
|
The
Solicitation or Recommendation.
|
At a meeting held on October 7, 2009, the Board unanimously
(i) determined that the Offer, the Merger and the other
transactions contemplated by the Merger Agreement were fair to,
and in the best interests of, the Company and its stockholders;
(ii) adopted and approved the Merger Agreement and approved
the execution, delivery and performance of the Merger Agreement
and the consummation of the transactions contemplated by the
Merger Agreement, including the Offer and the Merger, and
declared the advisability of the Merger Agreement and the
transactions contemplated by the Merger Agreement, in accordance
with the relevant provisions of the DGCL; (iii) resolved to
recommend that the Companys stockholders tender their
shares of common stock in the Offer and, if required by the
DGCL, directed that the Merger Agreement be submitted to the
stockholders of the Company for their adoption and approval;
(iv) confirmed the treatment of stock options, restricted
stock units and unvested restricted stock granted under the
Companys equity incentive plans, in accordance with the
terms of the Merger Agreement as described in Item 3 of
this Statement; (v) approved the preparation, execution and
delivery of an amendment to the Rights Agreement to exempt
therefrom the Merger Agreement, the Tender and Support
Agreements and the transactions contemplated thereby; and
(vi) adopted a resolution rendering the limitations on
business combinations contained in Section 203 of the DGCL
inapplicable to the Offer, the Merger Agreement and the other
transactions contemplated by the Merger Agreement.
THE
COMPANYS BOARD UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS
ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE
OFFER.
Background
of the Offer
The following chronology summarizes the key meetings and events
that led to the signing of the Merger Agreement. During this
period, representatives of the Company held many conversations,
both by telephone and in person, about possible strategic and
restructuring alternatives, including the sale of the Company,
the sale of certain assets or subsidiaries of the Company, and
capital raising or other investment transactions. The chronology
below covers only the key events leading up to the Merger
Agreement and does not purport to catalogue every conversation
among representatives of the Company or between representatives
of the Company and other parties.
10
The Company began exploring strategic alternatives in November
2005. In February 2006, the Board decided that the first step
toward realizing maximum stockholder value would be a sale of
its former subsidiary, InfuSystem, Inc. Following the
consummation of the sale of InfuSystem, Inc. in October 2007,
the Board continued its exploration of strategic options and, on
January 3, 2008, engaged Goldman, Sachs & Co.
(Goldman Sachs) to assist with the process of
exploring strategic alternatives. The Board selected Goldman
Sachs as its financial advisor, after interviewing and
considering a number of potential financial advisors, because
Goldman Sachs is an internationally recognized investment
banking firm that has substantial expertise in the
Companys industry and experience in transactions similar
to the transactions contemplated by the Merger Agreement as well
as in transactions that represented potential strategic
alternatives.
On April 1, 2008, representatives from the Company and
Parent held an initial teleconference to preliminarily discuss
possible joint venture or product distribution opportunities
regarding infection control, pain management and critical care
products.
Effective April 1, 2008, the Company and Parent entered
into a Confidential Disclosure Agreement which provided that,
for a one-year term, the parties may disclose confidential and
proprietary information to one another for the purposes
described in the preceding paragraph. The agreement required,
among other things, that each party generally not disclose the
other partys confidential information for a term of three
years.
On May 29, 2008, representatives from the Company and
Parent met at the Companys offices in Lake Forest,
California. The Company representatives outlined the
Companys immediate and longer-term corporate objectives.
The parties also discussed product distribution opportunities.
Following the May 29, 2008 meeting, the Company and Parent
held periodic discussions regarding product distribution
opportunities. By the end of September 2008, the companies
agreed to cease discussions due to their inability to reach a
mutually agreeable distribution arrangement.
Approximately one year later, during the week of May 11,
2009, a Goldman Sachs representative had a telephonic
conversation with a third party (Party A) on a range
of different topics, including an inquiry from Party A regarding
a potential strategic transaction with the Company at a
significant premium to the market price at that time. Goldman
Sachs informed Party A that the Board was planning to meet the
next week and that discussions could potentially continue
following that time depending on the outcome of the Boards
discussions.
On May 21, 2009, the Board convened an in-person meeting at
which representatives of Goldman Sachs presented the Board with
a market and industry update, reviewed preliminary financial
analysis and discussed Goldman Sachs preliminary list of
parties that might be interested in an acquisition of the
Company. At that meeting the Board authorized Goldman Sachs to
initiate a formal sales process designed to inform and solicit
bids from a broad range of potential bidders, including both
U.S. and foreign potential buyers.
Promptly after May 21, 2009, the Company began to prepare
an electronic data room wherein interested parties that executed
confidentiality agreements and submitted acceptable preliminary
proposals could review extensive documentation pertaining to the
Company and its subsidiaries.
On April 1, 2009, an executive from a portfolio company
created by another third party specifically for the purpose of
acquiring medical device companies (collectively, Party
B) had an in-person meeting with Company management
regarding Party Bs potential interest in a transaction
with the Company. After May 21, 2009, Mr. Earhart
suggested that the executive contact Goldman Sachs regarding the
possible participation of Party B in a sale process.
On June 3, 2009, Party B contacted Goldman Sachs to request
additional information about the Company. On June 4, 2009,
Party B and Goldman Sachs engaged in an initial discussion
regarding the sale process.
During the week of June 15, 2009, at the Companys
request, Goldman Sachs began contacting potentially interested
parties. Ultimately, Goldman Sachs contacted 40 potentially
interested parties, 39 of which were potentially interested in
acquiring the Company for strategic reasons and one of which
(Party B) was potentially interested in acquiring the
Company as a financial investment. As noted above, Party B
initiated contact with the Company. Goldman Sachs otherwise
focused on contacting strategic bidders, as financial bidders
were not expected to be competitive relative to strategic
bidders.
11
On June 16, 2009, Goldman Sachs made an initial telephone
call to Parent regarding a possible strategic transaction with
the Company. Goldman Sachs stated that it had been retained by
the Company to serve as the Companys financial advisor in
exploring strategic options available to the Company, including
a possible sale of the Company. Goldman Sachs also noted that it
had initiated a competitive auction process to identify
potential purchasers of the Company and was contacting Parent to
determine its interest.
On June 29, 2009, Goldman Sachs contacted another third
party (Party C) via telephone regarding a potential
strategic transaction with the Company.
On July 1, 2009, Company management and Goldman Sachs met
with Party A to discuss a possible transaction. The parties held
a preliminary discussion regarding the issues presented by the
transaction. The Companys management also responded to
certain questions presented by Party A.
On or about July 14, 2009, Goldman Sachs sent letters to
the interested parties (including Parent) instructing them as to
the procedures to follow in pursuing a possible acquisition of
the Company, including the date on which preliminary proposals
were due from all interested parties.
On July 22, 2009, at the Companys request, Goldman
Sachs contacted another third party (Party D)
regarding Party Ds interest in signing a confidentiality
agreement and participating in the sale process.
Between June 16, 2009 and July 30, 2009, the Company
executed confidentiality agreements with 14 potential buyers to
allow for the exchange of information, including confidentiality
agreements with Parent and Parties A, B, C and D (the
confidentiality agreement with Parent was entered into on
June 30, 2009). The 14 potential buyers included
U.S. and foreign companies. During this time, Goldman Sachs
sent each of the potential buyers that executed a
confidentiality agreement a detailed memorandum that described
various aspects of the Company and its subsidiaries and other
confidential information that was prepared by the Company and
its advisors in preparation for a possible transaction (the
Confidential Information Memorandum).
On August 6, 2009, the Company received preliminary
proposals from Parties A, B, C and D, each of which indicated an
interest to acquire all of the outstanding Shares in exchange
for cash. The proposals ranged from $8.76 per Share to $14.00
per Share with $8.76 representing a price specifically proposed
by one party and $14.00 representing the high end of a range of
prices proposed by another party. None of the proposals was
subject to any financing condition.
Parent also sent a preliminary proposal to Goldman Sachs on
August 6, 2009. Under Parents proposal, all
outstanding Shares of the Company would be acquired for an
amount between $8.50 and $9.50 per Share in cash. Parent also
proposed the possibility of consideration payable in shares of
Parents common stock or a combination of such stock and
cash. While the proposal stated that the source of the cash
could be from public debt markets or bank debt, the transaction
would not be subject to any financing contingencies.
The other nine parties that entered into confidentiality
agreements with the Company either declined to proceed further
or did not submit a preliminary proposal.
On August 11, 2009, the Board met telephonically to discuss
the preliminary proposals and discuss potential responses.
Goldman Sachs provided a comprehensive report and analysis of
the process to date. The five preliminary proposals that had
been received were reviewed and analyzed. After this discussion,
Goldman Sachs was excused from the meeting and the Board
continued with its deliberations. This included a review of the
risks to the Company and its stockholders from the increasing
number of chondrolysis complaints. The Board thereafter
authorized Goldman Sachs and the Companys management to
continue to move forward in its discussions with all five
potential buyers.
On August 12, 2009, Goldman Sachs notified Parent that the
Board had met on August 11, 2009 to review
participants preliminary proposals. Goldman Sachs stated
that, based on Parents August 6, 2009 preliminary
proposal, Parent would be invited to participate in the second
round of the sale process.
On August 12, 2009 and August 13, 2009, Goldman Sachs
provided additional information to the bidders in response to
the preliminary proposals. Following receipt of this
information, Party D decided to cease pursuing a potential
transaction.
12
On August 14, 2009, Parent and Parties A, B and C were
given access to the electronic data room. Between
August 14, 2009 and September 29, 2009, these bidders
reviewed the contents of the electronic data room, met with the
Companys management and made various site visits to the
Company to engage in due diligence.
On or about August 28, 2009, Goldman Sachs sent a
second-round process letter to each of Parent and Parties A, B
and C inviting each to submit a final proposal for the
acquisition of 100% of the outstanding capital stock of the
Company no later than Tuesday, September 29, 2009. The
second-round process letter was accompanied by a draft merger
agreement (the Initial Merger Agreement) for the
proposed acquisition and encouraged the interested parties to
submit a marked draft of the Initial Merger Agreement by
Tuesday, September 22, 2009.
On September 18, 2009, Party C informed the Company that it
was no longer interested in pursuing a potential transaction
with the Company at that time.
On September 23, 2009, Parent submitted a revised draft of
the Initial Merger Agreement to Goldman Sachs. On
September 28, 2009, Sidley Austin LLP (Sidley
Austin), legal counsel to Parent, and representatives from
Citigroup Global Markets Inc. (Citi), financial
advisor to Parent, had conversations with the Companys
legal counsel, Gibson, Dunn & Crutcher LLP (Gibson
Dunn), and representatives from Goldman Sachs regarding
material issues with respect to such revised draft of the
Initial Merger Agreement. Neither Party A nor Party B submitted
a revised draft of the Initial Merger Agreement.
In the days leading up to September 29, 2009, Goldman Sachs
contacted Party A to determine whether Party A was interested in
submitting a final proposal, but Party A did not submit such a
proposal.
Parent submitted a final proposal to Goldman Sachs on
September 29, 2009 to purchase all of the outstanding
Shares for a cash price of $12.00 per Share. Parents
proposal was not subject to any financing contingencies. The
proposal was contingent upon Parent and the Company reaching
mutual agreement on the terms and conditions of a merger
agreement and would be subject to customary closing conditions
to a tender offer and merger. Parent also stated that it
believed a transaction could be announced as early as the week
of October 5, 2009.
Party B also submitted a final proposal on September 29,
2009, based on substantial due diligence, discussions with
management and the Confidential Information Memorandum, for
$9.00 per Share in cash. Party B also alternatively expressed
interest in potentially making a cash investment in the Company
in exchange for a minority stake and assuming management control
of the Company.
Between September 29, 2009 and October 2, 2009,
Goldman Sachs engaged in discussions with both Parent and Party
B regarding their final proposals and requested that Parent
submit an increased final proposal. On October 1, 2009,
Gibson Dunn sent a revised draft of the Initial Merger Agreement
to Sidley Austin. On October 2, 2009 and based on these
discussions, Parent agreed to increase its proposal to $12.65 in
cash per Share, which Parent characterized as its best and final
proposal. Sidley Austin had further conversations with Gibson
Dunn regarding material issues with respect to the revised draft
of the Initial Merger Agreement.
Also on October 2, 2009, the Board met telephonically to
discuss the final proposals and the increase in Parents
proposal price. At the meeting, Gibson Dunn advised the Board on
its fiduciary duties in connection with a potential sale of the
Company, reviewed a memorandum on this subject that was
previously distributed to the Board on September 29, 2009,
and responded to questions. The Board extensively discussed the
proposed transaction as well as other strategic alternatives
available to the Company. The Board discussed with Gibson Dunn
the implications of specific terms of Parents proposal and
what effect those terms would have on the timing and structure
of the transaction. The Board also discussed the potential
obstacles presented by the proposal and consulted with its
advisors regarding those matters. Goldman Sachs presented
various financial analyses related to the Company and responded
to Board questions. The extensive Board discussions also
included a risk evaluation of the chondrolysis cases filed
against the Company. Before the meeting was concluded, the Board
authorized Goldman Sachs and the Companys management to
move forward with negotiations with Parent.
From October 3 through October 7, 2009, Gibson Dunn,
Goldman Sachs, Sidley Austin, Citi, the Company and Parent
continued to discuss the revised Initial Merger Agreement and
certain provisions that were still subject to further
negotiation, including representations and warranties,
conditions to closing, the definition of Material
13
Adverse Effect and events triggering the payment of a
termination fee. At the conclusion of such discussions, on
October 7, 2009, Gibson Dunn sent to Sidley Austin a
substantially final draft of the Merger Agreement.
On October 7, 2009, the Board held an in-person meeting to
review the substantially final draft of the Merger Agreement.
The Board reviewed the various strategic alternatives that the
Board had explored or pursued. Gibson Dunn again provided a
description of the Boards fiduciary duties related to the
potential sale of the Company. Gibson Dunn also provided a
detailed summary of the material provisions of the proposed
Merger Agreement and the proposed Tender and Support Agreement
and responded to questions.
At the same meeting, representatives of Goldman Sachs presented
various financial analyses related to the Company and the
proposed transaction and delivered an oral opinion, which was
subsequently confirmed by delivery of a written opinion, that as
of the date of its opinion and based upon and subject to the
factors, assumptions, qualifications and limitations on the
review set forth therein, the $12.65 per Share in cash to be
paid to the holders (other than Parent, Purchaser and their
affiliates) of Shares pursuant to the Merger Agreement was fair
from a financial point of view to such holders.
After extensive discussion, the Board unanimously
(i) determined that the Offer, the Merger, and the other
transactions contemplated by the Merger Agreement were fair to,
and in the best interests of, the Company and its stockholders;
(ii) adopted and approved the Merger Agreement and approved
the execution, delivery and performance of the Merger Agreement
and the consummation of the transactions contemplated by the
Merger Agreement, including the Offer and the Merger, and
declared the advisability of the Merger Agreement and the
transactions contemplated by the Merger Agreement, in accordance
with the relevant provisions of the DGCL; (iii) resolved to
recommend that the Companys stockholders tender their
shares of common stock in the Offer and, if required by the
DGCL, directed that the Merger Agreement be submitted to the
stockholders of the Company for their adoption and approval;
(iv) confirmed the treatment of stock options, restricted
stock units and unvested restricted stock granted under the
Companys equity incentive plans, in accordance with the
terms of the Merger Agreement as described in Item 3 of
this Statement; (v) approved the preparation, execution and
delivery of an amendment to the Rights Agreement to exempt
therefrom the Merger Agreement, the Tender and Support
Agreements and the transactions contemplated thereby; and
(vi) adopted a resolution rendering the limitations on
business combinations contained in Section 203 of the DGCL
inapplicable to the Offer, the Merger Agreement and the other
transactions contemplated by the Merger Agreement.
The Merger Agreement, substantially in the form approved by the
Board, was subsequently executed and delivered by the Company,
Parent and Purchaser on October 8, 2009. On October 9,
2009, and prior to the opening of trading on The Nasdaq Stock
Market and the New York Stock Exchange, the Company and Parent
issued a joint press release announcing that they had entered
into the Merger Agreement.
Reasons
for the Recommendation of the Offer and the Merger
In evaluating the Offer, the Merger and the Merger Agreement,
the Board consulted with the Companys management, legal
counsel and financial advisor. In reaching its decision that the
Offer and the Merger are advisable and fair to, and in the best
interests of, the Companys stockholders, and in reaching
its recommendation that stockholders tender their Shares in the
Offer and, if applicable, vote in favor of the Merger, the Board
considered a number of reasons, including the following material
reasons, that the Board viewed as supporting its recommendation.
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Strategic Alternatives to Sale
Transaction.
Throughout the process that the
Board conducted to evaluate strategic alternatives available to
the Company, the Board considered possible alternatives to the
proposed transaction with Parent, including continuing to
execute on its strategic plan as an independent company. The
Board concluded (after taking into account the current and
historical financial condition, results of
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operations, competitive position, business prospects,
opportunities and strategic objectives of the Company, including
the potential risks involved in achieving those prospects and
objectives) that on a risk-adjusted basis, the Offer Price is
greater than the long-term value inherent in the Company as a
stand-alone entity.
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Solicitation of Other Parties Prior to Execution of the
Merger Agreement.
The Board considered that it,
with the assistance of Goldman Sachs, had discussions with
numerous third parties in connection with the Boards
strategic review process, and determined that Parents
offer was the most attractive offer for the Companys
stockholders resulting from that process.
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Risks and Uncertainties Associated With Chondrolysis-Related
Product Liability Claims
. The Board carefully
considered the uncertainties and attendant risks relating to the
increasing number of chondrolysis-related product liability
claims being experienced by the Company and its competitors. The
Board noted multiple uncertainties regarding these claims,
including the outcome of litigation concerning these claims and
the effect such outcome may have on the Company and the industry
generally, the lack of a current scientific consensus as to the
cause or causes of chondrolysis, and the availability and
sufficiency of insurance covering these claims. The Board
further noted that the first chondrolysis product liability
lawsuit pending against the Company was set to go to trial in
Oregon state court in January 2010. The Board carefully
considered the risks associated with an adverse outcome in this
lawsuit or any other chondrolysis litigation involving the
Company, including the precedential risk of an adverse outcome
in such litigation involving other industry participants. The
Board noted that the Company faced the risk of potential
uninsured losses from the disposition of chondrolysis claims,
ongoing and significant expenses and diversion of management
attention and resources in connection with the defense of these
claims, and the risk that adverse developments with respect to
these claims (including adverse findings of scientific studies
regarding chondrolysis) could materially adversely affect the
demand for and marketability of the Companys products and
materially adversely affect the Companys results of
operations and financial condition.
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The Financial Presentation and Opinion of Goldman,
Sachs & Co.
The Board considered the
financial presentation, dated October 7, 2009, and oral
opinion of Goldman Sachs (which was confirmed in writing by
delivery of Goldman Sachs written opinion dated
October 8, 2009) to the effect that, based on and
subject to the various assumptions and limitations set forth in
the written opinion and as of the date of such opinion, the
Offer Price to be paid to the holders of Shares (other than
Parent, Purchaser and their affiliates) pursuant to the Merger
Agreement was fair, from a financial point of view, to such
holders. The opinion of Goldman Sachs is discussed in further
detail below and the full text of the written opinion of Goldman
Sachs, which sets forth the assumptions made, procedures
followed, matters considered and limitations on the review
undertaken by Goldman Sachs in connection with the opinion, is
attached hereto as Annex A.
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Timing and Certainty of Completion.
The Board
considered the anticipated timing and degree of certainty of
consummation of the Offer, including the structure of the
transaction as a tender offer for all Shares. This transaction
structure may enable the Companys stockholders to receive
the Offer Price and obtain the benefits of the transaction more
promptly than might be the case in other transaction structures.
In terms of relative certainty of closing, the Board noted that
post-signing chondrolysis-related events (among other
exclusions) would not be a basis for the Merger Agreement to be
terminated.
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Ability to Respond to Certain Unsolicited Takeover
Proposals.
The Board considered the
Companys ability under certain circumstances to engage in
negotiations or discussions with, and to provide information to,
any third party that, after the date of the Merger Agreement,
were to make a bona fide competing acquisition proposal.
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Ability to Terminate the Merger Agreement to Accept a
Superior Proposal.
The Board considered the
Companys ability, following possible receipt of a
competing acquisition proposal after the date of the Merger
Agreement (but prior to the Acceptance Time) that is more
favorable from a financial point of view to the Companys
stockholders, to change its recommendation with respect to the
Offer and the Merger and terminate the Merger Agreement if
certain conditions are satisfied, including that the competing
proposal is bona fide, that the Company has complied with
applicable provisions of the Merger Agreement, that (after
consulting with the Companys outside counsel and financial
advisor) the Board determines in good faith that the proposal is
more favorable to the Companys stockholders from a
financial point of view and is
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reasonably likely to be completed on the terms proposed on a
timely basis and that the failure to pursue the proposal would
constitute a breach of the Boards fiduciary duties to the
stockholders of the Company, notwithstanding that the Company
would be required to pay Parent a termination fee
and/or
expenses of up to $12,836,000 in the aggregate.
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In addition to the reasons set forth above, the Board considered
the following potentially negative reasons not to consummate the
Offer and the Merger:
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Discouraging Other Prospective Buyers.
The
Board considered that entering into a definitive agreement with
Parent, and that certain provisions of the Merger Agreement,
such as the non-solicitation and termination fee provisions, may
have the effect of discouraging other prospective buyers from
pursuing a more advantageous business combination with the
Company.
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Transaction Costs.
The Board considered the
significant costs involved in connection with entering into the
Merger Agreement and completing the Offer and the Merger and the
related disruptions to the operation of the Companys
business, including the risk that the operations of the Company
would be disrupted by employee concerns or departures, or
changes to or termination of the Companys relationships
with its customers, suppliers
and/or
distributors, following announcement of the Offer and the Merger.
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Interim Restrictions on Business.
The Board
considered that, pursuant to the Merger Agreement, the Company
is required to obtain Parents consent before it can take a
variety of actions during the period of time between the signing
of the Merger Agreement and the closing of the Merger.
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Effect of Failure to Complete
Transactions.
The Board considered the potential
adverse effect on the Companys business, stock price and
ability to attract and retain key management personnel if the
Offer and the Merger were announced but not consummated.
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Interests of Management.
The Board considered
the fact that some of the Companys executives may have
interests in the Offer and the Merger that are different from,
or in addition to, those of the Companys stockholders, as
a result of agreements referred to in Item 3 of this
Statement.
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The Board concluded, however, that many of these risks could be
managed or mitigated by the Company or were unlikely to have a
material effect on the Company, the Offer or the Merger and
that, overall, the risks, uncertainties, restrictions and
potentially negative reasons not to consummate the Offer and the
Merger were outweighed by the potential benefits of the Offer
and the Merger.
The Board did not assign relative weights to the foregoing
reasons or determine that any factor was of particular
importance. Rather, the members of the Board viewed their
position and recommendation as being based on the totality of
the information presented to and considered by them. Individual
members of the Board may have given different weight to
different factors.
The foregoing discussion of reasons considered by the Board is
not meant to be exhaustive but includes the material reasons
considered by the Board in approving the Merger Agreement and
the transactions contemplated by the Merger Agreement and in
recommending that stockholders accept the Offer, tender their
Shares and approve the Merger Agreement and the Merger.
Intent to
Tender
After reasonable inquiry and to the best knowledge of the
Company, the directors and Executive Officers of the Company who
own Shares intend to tender in the Offer all such Shares that
each person owns of record or beneficially. See Item 3 for
a discussion of the Tender and Support Agreement to which all of
the directors and Executive Officers of the Company are parties
and for a discussion of the treatment of common stock held by
such persons at the time of the Merger and the treatment of
outstanding stock options, restricted stock units and unvested
restricted stock held by such persons in connection with the
Merger.
16
Opinion
of Goldman, Sachs & Co.
Goldman Sachs rendered its opinion to the Board that, as of
October 8, 2009 and based upon and subject to the factors
and assumptions set forth therein, the $12.65 per Share in cash
to be paid to the holders (other than Parent, Purchaser and
their affiliates) of Shares pursuant to the Merger Agreement was
fair from a financial point of view to such holders.
The full text of the written opinion of Goldman Sachs, dated
October 8, 2009, which sets forth assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Annex A and incorporated by reference herein. Goldman Sachs
provided its opinion for the information and assistance of the
Board in connection with its consideration of the transactions
contemplated by the Merger Agreement (the
Transactions). The Goldman Sachs opinion is not a
recommendation as to whether or not any holder of Shares should
tender such Shares in connection with the Offer or how any
holder of Shares should vote with respect to the Transactions,
or any other matter.
In connection with rendering the opinion described above and
performing its related financial analyses, Goldman Sachs
reviewed, among other things:
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the Merger Agreement;
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annual reports to stockholders and Annual Reports on Form
10-K
of the
Company for the five fiscal years ended December 31, 2008;
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certain interim reports to stockholders and Quarterly Reports on
Form 10-Q
of the Company;
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certain other communications from the Company to its
stockholders;
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certain publicly available research analyst reports for the
Company; and
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certain internal financial analyses and forecasts for the
Company prepared by its management, as approved for Goldman
Sachs use by the Company (the Forecasts).
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Goldman Sachs also held discussions with members of the senior
management of the Company regarding their assessment of the past
and current business operations, financial condition, and future
prospects of the Company, including certain regulatory and
litigation risks. In addition, Goldman Sachs reviewed the
reported price and trading activity for the Shares, compared
certain financial and stock market information for the Company
with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the healthcare
industry specifically and in other industries generally and
performed such other studies and analyses, and considered such
other factors, as Goldman Sachs considered appropriate.
For purposes of rendering the opinion described above, Goldman
Sachs relied upon and assumed, without assuming any
responsibility for independent verification, the accuracy and
completeness of all of the financial, legal, accounting, tax and
other information provided to, discussed with or reviewed by it
and Goldman Sachs does not assume any liability for any such
information. In that regard, Goldman Sachs assumed with the
consent of the Company that the Forecasts had been reasonably
prepared on a basis reflecting the best then-currently available
estimates and judgments of the management of the Company. In
addition, Goldman Sachs did not make an independent evaluation
or appraisal of the assets and liabilities (including any
contingent, derivative or off-balance-sheet assets and
liabilities) of the Company or any of its subsidiaries, nor was
any evaluation or appraisal of the assets or liabilities of the
Company or any of its subsidiaries furnished to Goldman Sachs.
Goldman Sachs assumed that all governmental, regulatory or other
consents and approvals necessary for the consummation of the
Transactions will be obtained without any adverse effect on the
expected benefits of the Transactions in any way meaningful to
its analysis. Goldman Sachs also assumed that the Transactions
will be consummated on the terms set forth in the Merger
Agreement, without the waiver or modification of any term or
condition the effect of which would be in any way meaningful to
its analysis. In addition, Goldman Sachs did not express any
opinion as to the impact of the Transactions on the solvency or
viability of the Company or Parent or the ability of the Company
or Parent to pay its obligations when they come due, and Goldman
Sachs opinion does not address any legal, regulatory, tax
or accounting matters nor does it address the underlying
business decision of the Company to engage
17
in the Transactions or the relative merits of the Transactions
as compared to any strategic alternatives that may be available
to the Company. Goldman Sachs opinion addresses only the
fairness from a financial point of view, as of the date of the
opinion, of the $12.65 per Share in cash to be paid to the
holders (other than Parent, Purchaser and their affiliates) of
Shares pursuant to the Merger Agreement. Goldman Sachs
opinion does not express any view on, and does not address, any
other term or aspect of the Merger Agreement or the Transactions
or any term or aspect of any other agreement or instrument
contemplated by the Merger Agreement or entered into or amended
in connection with the Transactions, including, without
limitation, the fairness of the Transactions to, or any
consideration received in connection therewith by, the holders
of any other class of securities, creditors or other
constituencies of the Company; nor as to the fairness of the
amount or nature of any compensation to be paid or payable to
any of the officers, directors or employees of the Company, or
class of such persons in connection with the Transactions,
whether relative to the $12.65 per Share in cash to be paid to
the holders (other than Parent, Purchaser and their affiliates)
of Shares pursuant to the Merger Agreement or otherwise. Goldman
Sachs opinion was necessarily based on economic, monetary
market and other conditions, as in effect on, and the
information made available to it as of, the date of the opinion
and Goldman Sachs assumed no responsibility for updating,
revising or reaffirming its opinion based on circumstances,
developments or events occurring after the date of its opinion.
Goldman Sachs opinion was approved by a fairness committee
of Goldman Sachs.
The following is a summary of the material financial analyses
delivered by Goldman Sachs to the Board in connection with
rendering the opinion described above. The following summary,
however, does not purport to be a complete description of the
financial analyses performed by Goldman Sachs, nor does the
order of analyses described represent relative importance or
weight given to those analyses by Goldman Sachs. Some of the
summaries of the financial analyses include information
presented in tabular format. The tables must be read together
with the full text of each summary and are alone not a complete
description of Goldman Sachs financial analyses. Except as
otherwise noted, the following quantitative information, to the
extent that it is based on market data, is based on market data
as it existed on or before October 6, 2009 and is not
necessarily indicative of current market conditions.
Historical Stock Trading Analysis.
Goldman
Sachs reviewed the historical trading prices and volumes for the
Shares for the two-year period ended October 6, 2009. In
addition, Goldman Sachs analyzed the consideration to be paid to
holders of Shares pursuant to the Merger Agreement in relation
to (1) the closing price of the Shares on October 6,
2009 and the closing prices of Shares one month, three months,
six months and twelve months prior; (2) the volume-weighted
average prices for the three-month, six-month, twelve-month and
two-year periods ending October 6, 2009; and (3) the
high closing price of the Shares for the twelve-month period
ended October 6, 2009.
This analysis indicated that the price per Share to be paid to
holders pursuant to the Merger Agreement represented:
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a premium of 3.7% based on the closing market price per Share of
$12.20 on October 6, 2009;
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a premium of 41.3% based on the closing market price per Share
of $8.95 one month prior on September 8, 2009;
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a premium of 93.4% based on the closing market price per Share
of $6.54 three months prior on June 6, 2009;
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a premium of 230.3% based on the closing market price per Share
of $3.83 six months prior on April 6, 2009;
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a premium of 68.7% based on the closing market price per Share
of $7.50 twelve months prior on October 6, 2008;
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a premium of 44.2% based on the volume-weighted average closing
price per Share of $8.77 for the
three-month
period ended October 6, 2009;
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a premium of 83.7% based on the volume-weighted average closing
price per Share of $6.89 for the
six-month
period ended October 6, 2009;
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a premium of 122.2% based on the volume-weighted average closing
price per Share of $5.69 for the
twelve-month
period ended October 6, 2009;
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a premium of 26.5% based on the volume-weighted average closing
price per Share of $10.00 for the
two-year
period ended October 6, 2009; and
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a premium of 1.6% based on the high closing price per Share of
$12.45 for the twelve-month period ended October 6, 2009.
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Discounted Cash Flow Analysis.
Goldman Sachs
performed an illustrative discounted cash flow analysis on the
Company using the Forecasts to determine indications of implied
equity values per Share based on the present value as of
September 30, 2009 of the standalone, unlevered, after-tax
estimated free cash flows of the Company and net operating
losses available to the Company. Goldman Sachs calculated
indications of net present value of free cash flows for the
Company for the years ending December 31, 2009 through
December 31, 2014 using discount rates ranging from 12.5%
to 14.5%, based on a weighted average cost of capital analysis
for the Company. Goldman Sachs also applied perpetuity growth
rates ranging from 1.0% to 5.0%, based on guidance of the
Companys management, to the projected cash flows for the
year ending December 31, 2014 to calculate a range of
illustrative terminal values for the Company. These illustrative
terminal values were then discounted to calculate implied
indications of present values using discount rates ranging from
12.5% to 14.5%. This analysis resulted in a range of implied
present values of the equity value per Share of $10.61 to
$16.61. Using the same range of discount rate assumptions and a
3.0% perpetuity growth rate, Goldman Sachs also performed an
illustrative sensitivity analysis on a range of levels of
achievement of the Companys U.S. revenue forecasts
for its
ON-Q
®
products, which resulted in a range of implied present values of
the equity value per Share of $7.37 to $14.02.
Selected Transactions Analysis.
Goldman Sachs
analyzed certain information relating to the following selected
transactions in the healthcare industry since January 2007
(listed by acquirer then target):
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September 2009:
Covidien plc
Aspect Medical Systems, Inc.
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May 2009:
Covidien, Ltd. VNUS
Medical Technologies, Inc.
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January 2009:
Abbott Laboratories
Advanced Medical Optics Inc.
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December 2008:
Johnson &
Johnson Mentor Corporation
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November 2008:
Johnson &
Johnson Omrix Biopharmaceuticals, Inc.
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September 2008:
Getinge AB
Datascope Corporation
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July 2008:
General Electric
Company Vital Signs, Inc.
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May 2008:
Nordic Capital Fund VII and
Avista Capital Partners L.P. ConvaTec business of
Bristol-Myers
Squibb Company
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April 2008:
Kinetic Concepts Inc.
LifeCell Corporation
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February 2008:
MEDRAD, Inc. Possis
Medical, Inc.
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December 2007:
Koninklijke Philips Electronics
N.V. Respironics, Inc.
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November 2007:
Olympus Corporation
Gyrus Group plc
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November 2007:
Getinge AB Cardiac
Surgery and Vascular Surgery businesses of Boston Scientific
Corporation
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July 2007:
Medtronic, Inc. Kyphon
Inc.
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July 2007:
Teleflex Inc. Arrow
International Inc.
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July 2007:
ev3, Inc. FoxHollow
Technologies, Inc.
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July 2007:
ReAble Therapeutics,
Inc. DJO Incorporated
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May 2007:
Warburg Pincus LLC
Bausch & Lomb Incorporated
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May 2007:
Cardinal Health, Inc.
VIASYS Healthcare Inc.
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March 2007:
Smith & Nephew
plc Plus Orthopedics Holdings AG
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February 2007:
Cytyc Corporation
Adiana, Inc.
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January 2007:
Investor AB and Morgan Stanley
Principal Investments Mölnlycke Health Care AB
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January 2007:
Onex Corporation
Health Group of Eastman Kodak Company
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January 2007:
Advanced Medical Optics
Inc. IntraLase Corp.
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For each of the selected transactions, Goldman Sachs calculated
and compared enterprise value, which is the equity consideration
paid plus the book value of debt, less cash, as a multiple of
latest twelve months sales, enterprise value as a multiple of
latest twelve months earnings before interest, taxes,
depreciation and amortization, or EBITDA, enterprise value as a
multiple of latest twelve months earnings before interest and
taxes, or EBIT, and the premium of the per share equity
consideration to the per share equity valuation one month prior
to announcement. While none of the companies that participated
in the selected transactions are directly comparable to the
Company, the companies that participated in the selected
transactions are companies with operations that, for the
purposes of analysis, may be considered similar to certain of
the Companys results, market size and product profile.
The following table presents the results of this analysis:
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Selected Transactions
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Proposed
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Range
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Median
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Transaction
|
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Enterprise Value/Latest Twelve Months Sales
|
|
1.0x - 9.0x
|
|
3.5x
|
|
1.9x
|
Enterprise Value/Latest Twelve Months EBITDA
|
|
9.9x - 42.9x
|
|
18.6x
|
|
287.2x
|
Enterprise Value/Latest Twelve Months EBIT
|
|
11.6x - 61.0x
|
|
26.0x
|
|
Not Meaningful(1)
|
Premium to One Month Prior Closing Price
|
|
9.5% - 297.8%
|
|
33.2%
|
|
41.3%
|
|
|
|
(1)
|
|
The Company has negative Latest Twelve Months EBIT and so the
multiple is not meaningful.
|
Present Value of Future Share Price
Analysis.
Goldman Sachs performed an illustrative
analysis of the implied present value of the future price per
Share, which is designed to provide an indication of the present
value of a theoretical future value of a companys equity
as a function of such companys estimated future earnings
and its assumed price to future earnings per share multiple. For
this analysis, Goldman Sachs used the Companys earnings
projections for the year 2011 as set forth in the Forecasts.
Goldman Sachs calculated the implied present values per Share by
applying price to forward earnings per share multiples ranging
from 15.0x to 25.0x to an earnings per share estimate of $0.67
provided by the Companys management, discounted to
September 30, 2009, using discount rates ranging from 12.5%
to 14.5%. This analysis resulted in a range of implied present
values of $8.55 to $14.56 per Share.
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the
summary set forth above, without considering the analyses as a
whole, could create an incomplete view of the processes
underlying Goldman Sachs opinion. In arriving at its
fairness determination, Goldman Sachs considered the results of
all of its analyses and did not attribute any particular weight
to any factor or analysis considered by it. Rather, Goldman
Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the
results of all of its analyses. No company or transaction used
in the above analyses as a comparison is directly comparable to
the Company or Parent or the Transactions.
Goldman Sachs prepared these analyses for purposes of Goldman
Sachs providing its opinion to the Board as to the
fairness from a financial point of view of the $12.65 per Share
in cash to be paid to the holders (other than Parent, Purchaser
and their affiliates) of Shares pursuant to the Merger
Agreement. These analyses do not purport to be appraisals nor do
they necessarily reflect the prices at which businesses or
securities actually may be sold. Analyses based upon forecasts
of future results are not necessarily indicative of actual
future results, which may be significantly more or less
favorable than suggested by these analyses. Because these
analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or
their respective
20
advisors, none of the Company, Goldman Sachs or any other person
assumes responsibility if future results are materially
different from those forecast.
The Merger Consideration was determined through
arms-length negotiations between the Company and Parent
and was approved by the Board. Goldman Sachs provided advice to
the Company during these negotiations. Goldman Sachs did not,
however, recommend any specific amount of consideration to the
Company or the Board or that any specific amount of
consideration constituted the only appropriate consideration for
the Transactions.
As described above, Goldman Sachs opinion to the Board was
one of many factors taken into consideration by the Board in
making its determination to approve the Merger Agreement. The
foregoing summary does not purport to be a complete description
of the analyses performed by Goldman Sachs in connection with
the fairness opinion and is qualified in its entirety by
reference to the written opinion of Goldman Sachs attached as
Annex A.
Goldman Sachs and its affiliates are engaged in investment
banking and financial advisory services, commercial banking,
securities trading, investment management, principal investment,
financial planning, benefits counseling, risk management,
hedging, financing, brokerage activities and other financial and
non-financial activities and services for various persons and
entities. In the ordinary course of these activities and
services, Goldman Sachs and its affiliates may at any time make
or hold long or short positions and investments, as well as
actively trade or effect transactions, in the equity, debt and
other securities (or related derivative securities) and
financial instruments (including bank loans and other
obligations) of third parties, the Company, Parent and any of
their respective affiliates or any currency or commodity that
may be involved in the Transactions for their own account and
for the accounts of their customers. Goldman Sachs acted as
financial advisor to the Company in connection with, and
participated in certain of the negotiations leading to, the
Transactions. Goldman Sachs also has provided certain investment
banking and other financial services to Parent and its
affiliates from time to time, including having acted as
co-manager with respect to a public offering of Parents
Floating Rate Notes due July 30, 2010, 6.125% Notes
due August 1, 2017 and 6.625% Notes due August 1,
2037 (aggregate principal amounts $450,000,000, $950,000,000 and
$700,000,000, respectively) in July 2007; and as joint
book-running manager with respect to a public offering of
Parents 7.5% Notes due November 1, 2018
(aggregate principal amount $500,000,000) in October 2008.
Goldman Sachs also may provide investment banking and other
financial services to the Company, Parent and their respective
affiliates in the future. In connection with the above-described
services Goldman Sachs has received, and may receive in the
future, compensation.
The Board selected Goldman Sachs as its financial advisor, after
interviewing and considering a number of potential financial
advisors, because Goldman Sachs is an internationally recognized
investment banking firm that has substantial expertise in the
Companys industry and experience in transactions similar
to the Transactions as well as in transactions that represented
potential strategic alternatives. Pursuant to a letter agreement
dated January 3, 2008, the Company engaged Goldman Sachs to
act as its financial advisor in connection with the evaluation
of potential strategic alternatives. Pursuant to the terms of
such letter agreement and a subsequent engagement letter dated
October 7, 2009, the Company has agreed to pay Goldman
Sachs a transaction fee of $5,000,000 (which consists of a
$1,000,000 fee that was paid upon announcement of the Merger
Agreement and a $4,000,000 fee that is payable at the Acceptance
Time). In addition, the Company has agreed to reimburse Goldman
Sachs for its reasonable expenses, including attorneys
fees and disbursements, and to indemnify Goldman Sachs and
related persons against various liabilities, including certain
liabilities under the federal securities laws.
|
|
Item 5.
|
Persons/Assets
Retained, Employed, Compensated or Used.
|
Goldman,
Sachs & Co.
The Company has retained Goldman Sachs as its financial advisor
in connection with the Transactions. For services rendered in
connection with the Transactions, the Company has agreed to pay
Goldman Sachs a transaction fee of $5,000,000 (which consists of
a $1,000,000 fee that was paid upon announcement of the Merger
Agreement and a $4,000,000 fee that is payable at the Acceptance
Time). In addition, the Company has agreed to reimburse Goldman
Sachs for its reasonable expenses, including attorneys
fees and disbursements, and to indemnify Goldman Sachs and
related persons against various liabilities, including certain
liabilities under the federal securities laws.
21
|
|
Item 6.
|
Interest
in Securities of the Subject Company.
|
No transactions in Shares have been effected during the past
60 days by the Company or any subsidiary of the Company or,
to the best of the Companys knowledge after a review of
Form 4 filings, by any Executive Officer, director or
affiliate of the Company.
|
|
Item 7.
|
Purposes
of the Transaction and Plans or Proposals.
|
Except as set forth in this Statement, the Company is not
currently undertaking and is not engaged in any negotiations in
response to the Offer that relate to: (i) a tender offer
for or other acquisition of Shares; (ii) an extraordinary
transaction, such as a merger, reorganization or liquidation,
involving the Company or any subsidiary of the Company;
(iii) a purchase, sale or transfer of a material amount of
assets of the Company or any subsidiary of the Company; or
(iv) any material change in the present dividend rate or
policy, or indebtedness or capitalization, of the Company.
Except as set forth in this Statement, there are no
transactions, resolutions of the Board, agreements in principle
or signed contracts in response to the Offer that relate to one
or more of the events referred to in the preceding paragraph.
|
|
Item 8.
|
Additional
Information.
|
Rights
Agreement
In connection with the Merger Agreement, the Board adopted and
approved, and the Company entered into, an amendment to the
Rights Agreement to render the Rights Agreement inapplicable to
the transactions contemplated by the Merger Agreement, including
the Offer and the Merger.
Delaware
General Corporation Law
The Company is incorporated under the laws of the State of
Delaware. The following provisions of the DGCL are therefore
applicable to the Offer and the Merger, and the Tender and
Support Agreement.
Short-Form Merger
Under Section 253 of the DGCL, if Purchaser acquires,
pursuant to the Offer or otherwise, at least 90% of the
outstanding Shares, Purchaser will be able to effect the Merger
after the completion of the Offer without a vote by the
Companys stockholders. Under the terms of the Merger
Agreement and subject to the conditions contained therein,
Purchaser has the option, exercisable after its purchase of
Shares pursuant to the Offer, to purchase from the Company such
number of Shares that, when added to the number of Shares owned
by Purchaser, will constitute one Share more than 90% of the
outstanding Shares on a fully diluted basis, as described in the
Merger Agreement. However, such option will not be exercisable
for a number of Shares in excess of the Companys
authorized and unissued Shares, if the issuance of Shares upon
exercise of the option would require approval of the
Companys stockholders under the rules and regulations of
The Nasdaq Stock Market or if, after the exercise of the option,
Parent and Purchaser would not hold a sufficient number of
Shares to effect the Merger without a vote by the Companys
stockholders. Purchaser may exercise the option at any point
within 20 business days of the Acceptance Time. If Purchaser
does not acquire at least 90% of the outstanding Shares pursuant
to the Offer, such option or otherwise, a vote by the
Companys stockholders will be required under the DGCL to
effect the Merger. If a vote by the Companys stockholders
is required, the Company will be required to comply with the
federal securities laws and regulations, the DGCL and the
provisions of its certificate of incorporation and by-laws
governing votes of its stockholders. Among other matters, the
Company will be required to prepare and distribute a proxy
statement or information statement and, as a consequence, a
longer period of time will be required to effect the Merger.
This will delay payment of the Merger Consideration to
stockholders who do not tender their Shares in the Offer. It is
a condition to the completion of the Offer that more than 50% of
the fully diluted Shares (together with the Shares that are
directly or indirectly held by Purchaser), as described in the
Merger Agreement, be tendered in the Offer. In addition, Parent
and Purchaser will cause all of the Shares acquired by them in
the Offer or otherwise owned by them, if any, to be voted in
favor of the adoption of the Merger Agreement. If the Minimum
Condition is satisfied
22
and the Offer is consummated, the Shares owned by Purchaser
would represent more than 50% of the outstanding Shares,
comprising voting power sufficient to approve the Merger
Agreement without the vote of any other stockholder.
Accordingly, adoption of the Merger Agreement would be assured.
Appraisal
Rights
Holders of Shares will not have appraisal rights in connection
with the Offer. If the Merger is consummated, holders of Shares
at the Effective Time may have the right pursuant to the
provisions of Section 262 of the DGCL to dissent and demand
appraisal of their Shares. If appraisal rights are applicable,
dissenting stockholders who comply with the applicable statutory
procedures will be entitled, under Section 262 of the DGCL,
to receive a judicial determination of the fair value of their
Shares (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) and to receive
payment of such fair value in cash, together with a fair rate of
interest, if any. Any such judicial determination of the fair
value of the Shares could be based upon factors other than, or
in addition to, the amount of the Merger Consideration or the
market value of the Shares. The value so determined could be
more or less than the Merger Consideration. Holders of Shares
should be aware that an opinion of an investment banking firm as
to the fairness, from a financial point of view, of the
consideration payable in a merger is not an opinion as to, and
does not in any manner address, fair value under
Section 262 of the DGCL.
With respect to the Merger, if no vote of the Companys
stockholders is required because Parent effects the Merger
pursuant to Section 253 of the DGCL, then appraisal rights
will be available in connection with such Merger.
Appraisal rights cannot be exercised at this time. If appraisal
rights become available in connection with the Merger, the
Company will provide additional information to the holders of
Shares concerning their appraisal rights and the procedures to
be followed in order to perfect their appraisal rights before
any action has to be taken in connection with such rights.
Merger
Moratorium Law
Section 203 of the DGCL prevents an interested
stockholder (generally defined as a person that
beneficially owns 15% or more of a corporations voting
stock) from engaging in a business combination
(which includes a merger, consolidation, a sale of a significant
amount of assets, and a sale of stock) with a Delaware
corporation for three years following the date such person
became an interested stockholder unless:
(i) before such person became an interested stockholder,
the board of directors of the corporation approved either the
transaction in which the interested stockholder became an
interested stockholder or the business combination;
(ii) upon consummation of the transaction in which the
interested stockholder became an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of
shares outstanding, stock held by directors who are also
officers and by employee stock plans that do not allow plan
participants to determine confidentially whether to tender
shares); or
(iii) following the transaction in which such person became
an interested stockholder, the business combination is
(x) approved by the board of directors of the corporation
and (y) authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the
outstanding voting stock of the corporation not owned by the
interested stockholder.
The Board approved the Merger Agreement and the Transactions
contemplated thereby for purposes of Section 203 of the
DGCL on October 7, 2009, as described in Item 4 of
this Statement above. Therefore, the restrictions of
Section 203 of the DGCL will not apply to the Merger or the
Transactions contemplated by the Merger Agreement.
23
Antitrust
Laws
United
States
Under the HSR Act and the rules that have been promulgated
thereunder by the Federal Trade Commission (the
FTC), certain acquisition transactions may not be
consummated unless certain information has been furnished to the
Antitrust Division of the Department of Justice and the FTC and
certain waiting period requirements have been satisfied. The
purchase of Shares by Parent pursuant to the Offer is subject to
such requirements. Accordingly, the Offer will not be
consummated until such time as Parent and the Company have filed
a Notification and Report Form with respect to the Offer and the
applicable waiting period has expired.
Foreign
Competition Law Filings
The purchase of Shares by Purchaser pursuant to the Offer may be
subject to the competition laws of certain foreign countries,
which may require the filing of information with, or the
obtaining of approval of, regulatory authorities. As of the date
hereof, Parent has advised the Company that Parent believes that
it (and potentially the Company) will be required to make such
filings in Brazil.
Top-Up
Option
The summary of the
Top-Up
Option in Section 11 of the Offer to Purchase is
incorporated herein by reference.
Projected
Financial Information
The Company does not, as a matter of course, publicly disclose
projections as to its future financial performance. However, in
connection with Parents due diligence review, the Company
provided financial forecasts of its operating performance to
Parent and, as described above, to its financial advisor,
Goldman Sachs. The financial forecasts were updated during the
process leading to the Offer to reflect developments and changes
in circumstances deemed to affect such forecasts. Updated
financial forecasts were provided to Parent prior to the
submission of its final proposal. The updated financial
forecasts summarized below (the Projections) were
used by Goldman Sachs in connection with its analyses as set
forth above.
The Projections are summarized in this Statement solely for the
purpose of providing the Companys stockholders with access
to certain of the information considered by the Board, made
available to Parent and other potential purchasers in connection
with the Offer and the Merger and used by Goldman Sachs in its
analyses. The Projections are not summarized in this Statement
for the purpose of inducing any holder of Shares to tender their
Shares in the Offer.
The Projections do not take into account any changes in the
Companys operations or capital structure that may result
from the Offer and the Merger, nor do they fully reflect the
potential impact of the chondrolysis claims that have been
filed, or may in the future be filed, against the Company.
It is not possible to predict with certainty whether the
assumptions made in preparing the Projections will be valid, and
actual results may prove to be materially higher or lower than
those contained in the Projections. The Projections are
subjective in many respects and thus are susceptible to multiple
interpretations and periodic revisions based upon actual
experience as well as business, legal and legislative
developments.
In addition, the Projections reflect numerous judgments,
estimates and assumptions with respect to industry performance,
general business, economic, regulatory, market and financial
conditions and other future events and matters, as well as
matters specific to the Companys business, many of which
are difficult to predict, inherently uncertain or beyond the
Companys control. The summary of the Projections in this
Statement should not be regarded as an indication that the
Company, Parent or anyone else who received this information
considered it a reliable predictor of future events, and this
information should not be relied upon as such.
The Projections do not purport to take into account all
circumstances or events occurring after the date they were
prepared, nor do they take into account the effect of any
failure to occur of the Offer or the Merger and should not be
viewed as accurate or continuing in that context. There can be
no assurance that the Projections will be realized or that
actual results will not be significantly higher or lower than
projected. The Projections cover multiple
24
years and such information by its nature becomes less reliable
with each successive year. Except as otherwise required by law,
the Company does not intend to update or otherwise revise the
Projections to reflect circumstances existing since their
preparation, to reflect the occurrence of unanticipated events
even in the event that any or all of the underlying assumptions
are shown to be in error, or to reflect changes in general
economic or industry conditions.
The Projections were prepared solely for use by potential
purchasers of the Company and not with a view toward public
disclosure or toward complying with generally accepted
accounting principles, the published guidelines of the SEC
regarding Projections or the guidelines established by the
American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information. Neither the Companys independent registered
public accounting firm, nor any other independent accountants,
have compiled, reviewed, examined or performed any procedures
with respect to the Projections, nor have they expressed any
opinion or any other form of assurance on such information or
its achievability, and they assume no responsibility for, and
disclaim any association with, the Projections.
The summary of the Projections herein will not be deemed an
admission or representation by the Company that they are viewed
by the Company as material information of the Company.
The information discussed in this section includes
forward-looking statements and is subject to risks and
uncertainties that could cause actual results to differ
materially from the results forecasted in the Projections,
including the various risks set forth in the Companys
periodic reports.
The information regarding the Projections should be evaluated,
if at all, in conjunction with the historical financial
statements and other information regarding the Company contained
elsewhere in this Statement and the Companys public
filings with the SEC.
In light of the foregoing factors and
the uncertainties inherent in the Projections, stockholders are
cautioned not to place undue, if any, reliance on the following
summary of the Projections.
I-Flow
Corporation Summary of Projections
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending December 31,
|
|
($ in millions, except per share amounts)
|
|
2009E
|
|
|
2010E
|
|
|
2011E
|
|
|
2012E
|
|
|
2013E
|
|
|
2014E
|
|
|
Total Revenue
|
|
$
|
141
|
|
|
$
|
162
|
|
|
$
|
202
|
|
|
$
|
243
|
|
|
$
|
285
|
|
|
$
|
330
|
|
Gross Profit
|
|
$
|
102
|
|
|
$
|
119
|
|
|
$
|
148
|
|
|
$
|
172
|
|
|
$
|
199
|
|
|
$
|
227
|
|
EBIT
|
|
$
|
(6
|
)
|
|
$
|
7
|
|
|
$
|
24
|
|
|
$
|
39
|
|
|
$
|
56
|
|
|
$
|
73
|
|
Net Income (Loss)
|
|
$
|
(5
|
)
|
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
25
|
|
|
$
|
36
|
|
|
$
|
47
|
|
Diluted EPS
|
|
$
|
(0.19
|
)
|
|
$
|
0.27
|
|
|
$
|
0.67
|
|
|
$
|
1.00
|
|
|
$
|
1.41
|
|
|
$
|
1.83
|
|
Forward-Looking
Statements
Certain statements by the Company in this Statement and in other
reports and statements released by the Company are and will be
forward-looking in nature and express the Companys current
opinions about trends and factors that may impact future
operating results. Statements that use words such as
may, will, should,
believes, predicts,
estimates, projects,
anticipates or expects or use similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to material risks,
assumptions and uncertainties, which could cause actual results
to differ materially from those currently expected, and readers
are cautioned not to place undue reliance on these
forward-looking statements. Except as required by law, the
Company undertakes no obligation to publish revised
forward-looking statements to reflect the occurrence of
unanticipated or subsequent events. Readers are also urged to
carefully review and consider the various disclosures made by
the Company in this report that seek to advise interested
parties of the risks and other factors that affect the
Companys business. Interested parties should also review
the Companys reports on
Forms 10-K
for the year ended December 31, 2008,
10-Q
and
8-K
and
other reports that are periodically filed with the Securities
and Exchange Commission, as they may be amended. The risks
affecting the Companys business include, among others: the
risk that the Offer or the Merger will not be consummated; the
risk that the Companys business will be adversely impacted
during the pendency of the Offer and the Merger, whether as a
result of announcement of the Offer or otherwise; physician
acceptance of infusion-based therapeutic regimens; potential
inadequacy of insurance to cover
25
existing and future product liability claims; implementation of
the Companys direct sales strategy; successful integration
of the Companys acquisition of AcryMed Incorporated and
further development and commercialization of AcryMeds
technologies; dependence on the Companys suppliers and
distributors; the Companys continuing compliance with
applicable laws and regulations, such as the Medicare Supplier
Standards and Food, Drug and Cosmetic Act, and the
Medicares and FDAs concurrence with
managements subjective judgment on compliance issues,
including those related to the recent FDA warning letter; the
reimbursement system currently in place and future changes to
that system; product availability, acceptance and safety;
competition in the industry; technological changes; intellectual
property challenges and claims; economic and political
conditions in foreign countries; currency exchange rates;
inadequacy of booked reserves (including those related to the
chondrolysis litigation); future impairment write-downs; and
reliance on the success of the home health care industry. All
forward-looking statements, whether made in this report or
elsewhere, should be considered in context with the various
disclosures made by the Company about its business.
The following Exhibits are filed herewith:
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
(a)(1)
|
|
|
Joint press release issued by I-Flow Corporation and
Kimberly-Clark Corporation on October 9, 2009, incorporated
by reference to I-Flow Corporations preliminary
communication filed under cover of
Schedule 14D-9
on October 9, 2009.
|
|
(a)(2)
|
|
|
Offer to Purchase, dated as of October 20, 2009,
incorporated by reference to Exhibit (a)(1)(A) to the
Schedule TO of Kimberly-Clark Corporation and Boxer
Acquisition, Inc. filed on October 20, 2009.
|
|
(a)(3)
|
|
|
Form of Letter of Transmittal, incorporated by reference to
Exhibit (a)(1)(B) to the Schedule TO of Kimberly-Clark
Corporation and Boxer Acquisition, Inc. filed on
October 20, 2009.
|
|
(a)(4)
|
|
|
Opinion, dated as of October 8, 2009, of Goldman,
Sachs & Co. (attached hereto as Annex A).*
|
|
(a)(5)
|
|
|
Information Statement pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and
Rule 14f-1
thereunder (attached hereto as Annex B).*
|
|
(e)(1)
|
|
|
Agreement and Plan of Merger, dated as of October 8, 2009,
by and among Kimberly-Clark Corporation, Boxer Acquisition, Inc.
and I-Flow Corporation, incorporated by reference to
Exhibit 2.1 of I-Flow Corporations Current Report on
Form 8-K
filed on October 9, 2009.
|
|
(e)(2)
|
|
|
Tender and Support Agreement, dated as of October 8, 2009,
by and between Kimberly-Clark Corporation, Boxer Acquisition,
Inc. and the I-Flow directors and executive officers identified
therein, incorporated by reference to Exhibit 99.2 of
I-Flow Corporations Current Report on
Form 8-K
filed on October 9, 2009.
|
|
(e)(3)
|
|
|
I-Flow Corporation Amended and Restated 2001 Equity Incentive
Plan, incorporated by reference to exhibit with this title filed
with the Companys Current Report on
Form 8-K
filed on June 1, 2005.
|
|
(e)(4)
|
|
|
1996 Stock Incentive Plan, incorporated by reference to exhibit
with this title filed with the Companys Definitive Proxy
Statement filed on March 27, 1996.
|
|
(e)(5)
|
|
|
Agreement Re: Change in Control with Donald M. Earhart, dated as
of June 21, 2001, incorporated by reference to exhibit with
this title filed with the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
(e)(6)
|
|
|
Amendment No. 1 to Agreement Re: Change in Control with
Donald M. Earhart, dated as of February 23, 2006,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on March 1, 2006.
|
|
(e)(7)
|
|
|
Amendment No. 2 to Agreement Re: Change in Control with
Donald M. Earhart, dated as of February 21, 2008,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(8)
|
|
|
Agreement Re: Change in Control with James J. Dal Porto, dated
as of June 21, 2001, incorporated by reference to exhibit
with this title filed with the Companys Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
(e)(9)
|
|
|
Amendment No. 1 to Agreement Re: Change in Control with
James J. Dal Porto, dated as of February 23, 2006,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on March 1, 2006.
|
26
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
(e)(10)
|
|
|
Amendment No. 2 to Agreement Re: Change in Control with
James J. Dal Porto, dated as of February 21, 2008,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(11)
|
|
|
Agreement Re: Change in Control with James R. Talevich, dated as
of June 21, 2001, incorporated by reference to exhibit with
this title filed with the Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
(e)(12)
|
|
|
Amendment No. 1 to Agreement Re: Change in Control with
James R. Talevich, dated as of February 23, 2006,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on March 1, 2006.
|
|
(e)(13)
|
|
|
Amendment No. 2 to Agreement Re: Change in Control with
James R. Talevich, dated as of February 21, 2008,
incorporated by reference to exhibit with this title filed with
the Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(14)
|
|
|
Summary of the Terms of the 2009 Executive Performance Incentive
Plan (as amended on August 11, 2009), incorporated by
reference to exhibit with this title filed with the
Companys Current Report on
Form 8-K
filed on August 17, 2009.
|
|
(e)(15)
|
|
|
Employment Agreement with Donald M. Earhart, dated as of
May 16, 1990, incorporated by reference to exhibit with
this title filed with the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 1990.
|
|
(e)(16)
|
|
|
Amendment No. 1 to Employment Agreement with Donald M.
Earhart, dated as of June 21, 2001, incorporated by
reference to exhibit with this title filed with the
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
(e)(17)
|
|
|
Amendment No. 2 to Employment Agreement with Donald M.
Earhart, dated as of February 23, 2006, incorporated by
reference to exhibit with this title filed with the
Companys Current Report on
Form 8-K
filed on March 1, 2006.
|
|
(e)(18)
|
|
|
Amendment No. 3 to Employment Agreement with Donald M.
Earhart, dated as of February 21, 2008, incorporated by
reference to exhibit with this title filed with the
Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(19)
|
|
|
Amended and Restated Employment Agreement with James J. Dal
Porto, dated as of June 21, 2001, incorporated by reference
to exhibit with this title filed with the Companys
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
(e)(20)
|
|
|
Amendment No. 1 to Amended and Restated Employment
Agreement with James J. Dal Porto, dated as of February 23,
2006, incorporated by reference to exhibit with this title filed
with the Companys Current Report on
Form 8-K
filed on March 1, 2006.
|
|
(e)(21)
|
|
|
Amendment No. 2 to Amended and Restated Employment
Agreement with James J. Dal Porto, dated as of February 21,
2008, incorporated by reference to exhibit with this title filed
with the Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(22)
|
|
|
Amended and Restated Employment Agreement for James R. Talevich,
dated as of May 24, 2007, incorporated by reference to
exhibit with this title filed with the Companys Current
Report on
Form 8-K
filed on May 29, 2007.
|
|
(e)(23)
|
|
|
Amendment No. 1 to Amended and Restated Employment
Agreement with James R. Talevich, dated as of February 21,
2008, incorporated by reference to exhibit with this title filed
with the Companys Current Report on
Form 8-K
filed on February 26, 2008.
|
|
(e)(24)
|
|
|
Form of Indemnification Agreement, incorporated by reference to
exhibit with this title filed with the Companys Current
Report on
Form 8-K
filed on March 1, 2006.
|
|
Annex A
|
|
|
Opinion, dated as of October 8, 2009, of Goldman,
Sachs & Co.*
|
|
Annex B
|
|
|
Information Statement pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and
Rule 14f-1
thereunder.*
|
27
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is
true, complete and correct.
I-FLOW CORPORATION
|
|
|
|
By:
|
/s/ James
R. Talevich
|
Name: James R. Talevich
|
|
|
|
Title:
|
Chief Financial Officer
|
Dated: October 20, 2009
28
ANNEX A
[GOLDMAN,
SACHS & CO. LETTERHEAD]
PERSONAL
AND CONFIDENTIAL
October 8, 2009
Board of Directors
I-Flow Corporation
20202 Windrow Drive
Lake Forest, CA 92630
Gentlemen:
You have requested our opinion as to the fairness from a
financial point of view to the holders (other than
Kimberly-Clark Corporation (Parent), Boxer
Acquisition, Inc., a wholly owned subsidiary of Parent
(Merger Sub) and their affiliates) of the
outstanding shares of common stock, par value $0.001 per share
(the Shares), of I-Flow Corporation (the
Company) of the $12.65 per Share in cash to be paid
to such holders pursuant to the Agreement and Plan of Merger,
dated as of October 8, 2009 (the Agreement), by
and among Parent, Merger Sub and the Company.
Goldman, Sachs & Co. and its affiliates are engaged in
investment banking and financial advisory services, commercial
banking, securities trading, investment management, principal
investment, financial planning, benefits counseling, risk
management, hedging, financing, brokerage activities and other
financial and non-financial activities and services for various
persons and entities. In the ordinary course of these activities
and services, Goldman, Sachs & Co. and its affiliates
may at any time make or hold long or short positions and
investments, as well as actively trade or effect transactions,
in the equity, debt and other securities (or related derivative
securities) and financial instruments (including bank loans and
other obligations) of third parties, the Company, Parent and any
of their respective affiliates or any currency or commodity that
may be involved in the transaction contemplated by the Agreement
(the Transaction) for their own account and for the
accounts of their customers. We have acted as financial advisor
to the Company in connection with, and have participated in
certain of the negotiations leading to, the Transaction. We
expect to receive fees for our services in connection with the
Transaction, the principal portion of which is contingent upon
consummation of the Transaction, and the Company has agreed to
reimburse our expenses arising, and indemnify us against certain
liabilities that may arise, out of our engagement. In addition,
we have provided certain investment banking and other financial
services to Parent and its affiliates from time to time,
including having acted as co-manager with respect to a public
offering of Parents Floating Rate Notes due July 30,
2010, 6.125% Notes due August 1, 2017 and
6.625% Notes due August 1, 2037 (aggregate principal
amounts $450,000,000, $950,000,000 and $700,000,000,
respectively) in July 2007; and as joint book-running manager
with respect to a public offering of Parents
7.5% Notes due November 1, 2018 (aggregate principal
amount $500,000,000) in October 2008. We also may provide
investment banking and other financial services to the Company,
Parent and their respective affiliates in the future. In
connection with the above-described services we have received,
and may receive, compensation.
In connection with this opinion, we have reviewed, among other
things, the Agreement; annual reports to stockholders and Annual
Reports on
Form 10-K
of the Company for the five fiscal years ended December 31,
2008; certain interim reports to stockholders and Quarterly
Reports on
Form 10-Q
of the Company; certain other communications from the Company to
its stockholders; certain publicly available research analyst
reports for the Company; and certain internal financial analyses
and forecasts for the Company prepared by its management, as
approved for our use by the Company (the Forecasts).
We also have held discussions with members of the senior
management of the Company regarding their assessment of the past
and current business operations, financial condition and future
prospects of the Company, including certain regulatory and
litigation risks. In addition, we have reviewed the reported
price and trading activity for the Shares, compared certain
financial and stock market information for the Company with
similar information for certain other companies the securities
of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the healthcare industry
specifically and in other industries generally and performed
such other studies and analyses, and considered such other
factors, as we considered appropriate.
A-1
For purposes of rendering this opinion, we have relied upon and
assumed, without assuming any responsibility for independent
verification, the accuracy and completeness of all of the
financial, legal, regulatory, tax, accounting and other
information provided to, discussed with or reviewed by us, and
we do not assume any liability for any such information. In that
regard, we have assumed with your consent that the Forecasts
have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of
the Company. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities (including
any contingent, derivative or off-balance-sheet assets and
liabilities) of the Company or any of its subsidiaries and we
have not been furnished with any such evaluation or appraisal.
We have assumed that all governmental, regulatory or other
consents and approvals necessary for the consummation of the
Transaction will be obtained without any adverse effect on the
expected benefits of the Transaction in any way meaningful to
our analysis. We also have assumed that the Transaction will be
consummated on the terms set forth in the Agreement, without the
waiver or modification of any term or condition the effect of
which would be in any way meaningful to our analysis. In
addition, we are not expressing any opinion as to the impact of
the Transaction on the solvency or viability of the Company or
Parent or the ability of the Company or Parent to pay its
obligations when they come due, and our opinion does not address
any legal, regulatory, tax or accounting matters.
Our opinion does not address the underlying business decision of
the Company to engage in the Transaction, or the relative merits
of the Transaction as compared to any strategic alternatives
that may be available to the Company. This opinion addresses
only the fairness from a financial point of view, as of the date
hereof, of the $12.65 per Share in cash to be paid to the
holders (other than Parent, Merger Sub and their affiliates) of
Shares pursuant to the Agreement. We do not express any view on,
and our opinion does not address, any other term or aspect of
the Agreement or Transaction or any term or aspect of any other
agreement or instrument contemplated by the Agreement or entered
into or amended in connection with the Transaction, including,
without limitation, the fairness of the Transaction to, or any
consideration received in connection therewith by, the holders
of any other class of securities, creditors, or other
constituencies of the Company; nor as to the fairness of the
amount or nature of any compensation to be paid or payable to
any of the officers, directors or employees of the Company, or
class of such persons in connection with the Transaction,
whether relative to the $12.65 per Share in cash to be paid to
the holders (other than Parent, Merger Sub and their affiliates)
of Shares pursuant to the Agreement or otherwise. Our opinion is
necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available
to us as of, the date hereof and we assume no responsibility for
updating, revising or reaffirming this opinion based on
circumstances, developments or events occurring after the date
hereof. Our advisory services and the opinion expressed herein
are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of
the Transaction and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with
respect to such Transaction or any other matter. This opinion
has been approved by a fairness committee of Goldman,
Sachs & Co.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the $12.65 per Share in cash to be paid
to the holders (other than Parent, Merger Sub and their
affiliates) of Shares pursuant to the Agreement is fair from a
financial point of view to such holders.
Very truly yours,
(GOLDMAN, SACHS & CO.)
A-2
ANNEX B
I-FLOW
CORPORATION
20202 Windrow Drive
Lake Forest, California 92630
(949) 206-2700
INFORMATION
STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934
AND
RULE 14f-1
THEREUNDER
GENERAL
INFORMATION
This information statement (this Information
Statement) is being mailed to stockholders of I-Flow
Corporation, a Delaware corporation (the Company),
on or about October 20, 2009, and relates to the tender
offer commenced by Boxer Acquisition, Inc., a Delaware
corporation (Purchaser) to purchase all of the
outstanding shares of the Companys common stock, par value
$0.001 per share, together with the associated purchase rights
issued pursuant to the Rights Agreement, dated as of
March 8, 2002, and as thereafter amended, between the
Company and American Stock Transfer &
Trust Company, as Rights Agent (the Rights and,
together with the shares of the Companys common stock, the
Shares). Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in the
Solicitation/Recommendation Statement on
Schedule 14D-9
(the
Schedule 14D-9)
filed by the Company with the Securities and Exchange Commission
(the SEC) and mailed to the Companys
stockholders, in each case, on October 20, 2009. Unless the
context indicates otherwise, in this Information Statement the
terms us, we, and our refer
to the Company.
This Information Statement is being mailed to you in accordance
with Section 14(f) of the Securities Exchange Act of 1934,
as amended (the Exchange Act) and
Rule 14f-1
promulgated thereunder. The information set forth herein
supplements certain information set forth in the
Schedule 14D-9.
However, in accordance with Section 14(f) of the Exchange
Act and
Rule 14f-1
promulgated thereunder, the information set forth herein is of
the dates required by the applicable items of Schedule 14A
of Regulation 14A. Such dates may not be as recent as the
dates used for similar disclosure in the
Schedule 14D-9,
so readers are cautioned to consider the information set forth
herein in conjunction with the information set forth in the
Schedule 14D-9.
You are receiving this Information Statement in connection with
the possible election or appointment of persons designated by
Purchaser to a majority of seats on the Board of Directors of
the Company (the Board). There will be no vote or
other action by stockholders of the Company in connection with
this Information Statement. Voting proxies regarding Shares are
not being solicited from any stockholder in connection with this
Information Statement. You are urged to read this Information
Statement carefully. You are not, however, required to take any
action in connection with this Information Statement.
This Information Statement relates to the tender offer commenced
by Purchaser, disclosed in a Tender Offer Statement on
Schedule TO, dated as of October 20, 2009 (as may be
amended or supplemented from time to time, the
Schedule TO), to purchase all of the
outstanding Shares at a price of $12.65 per Share net to the
seller in cash, without interest and less any required
withholding taxes (the Offer Price), upon the terms
and subject to the conditions set forth in Purchasers
offer to purchase, dated October 20, 2009 (as may be
amended or supplemented from time to time, the Offer to
Purchase and, together with the Letter of Transmittal, the
Offer). Purchaser is a wholly owned subsidiary of
Kimberly-Clark Corporation, a Delaware corporation
(Parent). The Offer was commenced by Purchaser on
October 20, 2009 and expires at 12:00 midnight, New York
City time, on Tuesday, November 17, 2009 (
i.e.
, the
end of the day on November 17, 2009), unless it is extended
or terminated in accordance with its terms. The Offer is
conditioned on, among other matters, there being validly
tendered and not validly withdrawn before the expiration of the
Offer at least a majority of the Shares then outstanding on a
fully diluted basis, as described in the Offer to Purchase (the
Minimum Condition).
The Offer is being made pursuant to the Agreement and Plan of
Merger, dated as of October 8, 2009, by and among the
Company, Parent and Purchaser (as may be amended or supplemented
from time to time, the Merger Agreement). The Merger
Agreement provides that, following the acceptance for payment of
Shares by Purchaser
B-1
pursuant to the Offer (the Acceptance Time),
Purchaser will merge with and into the Company (the
Merger), with the Company continuing as the
surviving corporation in the Merger as a wholly owned subsidiary
of Parent. The Merger will be completed in one of two ways. If,
following the Acceptance Time and any subsequent offering period
as described in the next sentence, Purchaser owns more than 90%
of the Shares then outstanding, then the Merger will occur
promptly after the Acceptance Time or subsequent offering
period, as applicable, pursuant to Section 253 of the
Delaware General Corporation Law (the DGCL).
Following the Acceptance Time, if Purchaser owns more than 50%
but less than 90% of the Shares then outstanding, Purchaser may
in its sole discretion provide one or more subsequent offering
periods pursuant to
Rule 14d-11
under the Exchange Act until February 17, 2010, subject to
extension pursuant to the Merger Agreement for 30 calendar days
if the waiting periods under applicable foreign antitrust laws
or under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, has not expired
or been terminated, and up to an incremental 120 calendar days
if the waiting periods under applicable foreign antitrust laws
have not expired or been terminated.
If, following the Acceptance Time or the last subsequent
offering period, if any, Purchaser owns more than 50% but less
than 90% of the Shares then outstanding, then the Company will
call and hold a special meeting of its stockholders to adopt and
approve the Merger Agreement, and the Merger will occur promptly
after such stockholder approval. If the conditions to the Offer
have been satisfied and Purchaser completes the purchase of
Shares tendered pursuant to the Offer, then Purchaser will have
sufficient votes to adopt the Merger Agreement without the need
for any of the Companys other stockholders to vote in
favor of such adoption. In the Merger, each outstanding Share
(other than Shares held by Parent, Purchaser or stockholders who
properly exercise appraisal rights, if any, under
Section 262 of the DGCL), will be converted into the right
to receive the same consideration paid per Share pursuant to the
Offer, without interest and less any required withholding taxes
(the Merger Consideration).
The Merger Agreement requires us to cause the Parent Designees
(as defined below) to be elected or appointed to the Board under
certain circumstances described below.
All information contained in this Information Statement
concerning Parent, Purchaser and the Parent Designees has been
furnished to us by Parent. Although the Company has no knowledge
that any such information is untrue, the Company takes no
responsibility for the accuracy or completeness of information
contained in this Information Statement with respect to Parent,
Purchaser or any of their subsidiaries or affiliates (including
the Parent Designees, as defined below) or for any failure by
Parent or Purchaser to disclose any events that have occurred
that may affect the significance or accuracy of any such
information.
THE
PARENT DESIGNEES
Subject to the terms of the Merger Agreement, applicable law and
applicable rules of The Nasdaq Stock Market
(Nasdaq), after Purchaser has caused the payment to
be made for Shares tendered pursuant to the Offer representing
at least such number of Shares as will satisfy the Minimum
Condition, Parent will be entitled to elect or designate the
number of directors on the Board, rounded up to the next whole
number, as is equal to the product of the total number of
directors multiplied by the percentage that the aggregate number
of Shares beneficially owned by Parent, Purchaser and their
affiliates bears to the total number of Shares then outstanding.
Upon request of Parent, the Company has agreed to take all
actions necessary, subject to compliance with applicable laws
and the certificate of incorporation and bylaws of the Company,
to cause Parents designees to be elected or appointed to
the Board, including increasing the size of the Board
and/or
seeking the resignation of one or more incumbent directors. The
Company has agreed to use all commercially reasonable efforts,
subject to compliance with applicable laws and the certificate
of incorporation and bylaws of the Company, to cause individuals
designated by Parent to constitute at least the same percentage
as is on the Board of each committee of the Board and each board
of directors of each subsidiary of the Company. Notwithstanding
the foregoing, the Merger Agreement provides that we will use
our commercially reasonable efforts to ensure that at least
three of the members of the Board as of October 8, 2009,
who are independent for purposes of
Rule 10A-3
under the Exchange Act (the Independent Directors),
remain on the Board until the Merger has been consummated. The
Board has selected Mr. Halperin, Mr. Kanter and
Dr. Tai as the Independent Directors, and they have agreed
to so act. If there are fewer than three Independent Directors
on the
B-2
Board for any reason, the Board will cause a person designated
by the remaining Independent Directors to fill such vacancy who
shall be deemed to be an Independent Director for all purposes
of the Merger Agreement.
Following the election or appointment of Parents designees
and until the Effective Time, the approval of a majority of the
Independent Directors (or if there shall be only one Independent
Director, of such Independent Director) will be required to
authorize any amendment or termination of the Merger Agreement
by us, any extension of time for performance of any obligation
or action thereunder by Parent or Purchaser or any waiver or
exercise of any of our rights under the Merger Agreement.
Parent has informed us that its designees (the Parent
Designees) will be selected by Parent from among the
individuals listed below. Parent has advised us that none of the
Parent Designees to our Board have, during the past five years,
(1) been convicted in a criminal proceeding (excluding
traffic violations or misdemeanors), (2) been a party to
any judicial or administrative proceeding that resulted in a
judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to,
U.S. federal or state securities laws, or a finding of any
violation of U.S. federal or state securities laws,
(3) filed a petition under federal bankruptcy laws or any
state insolvency laws or has had a receiver appointed to the
persons property or (4) been subject to any judgment,
decree or final order enjoining the person from engaging in any
type of business practice.
Parent has informed us that none of the Parent Designees is
currently a director of, or holds any position with, the Company
or any of our subsidiaries. Parent has informed us that none of
the Parent Designees or any of their immediate family members
(i) has a familial relationship with any directors, other
nominees or executive officers of the Company or any of our
subsidiaries or (ii) has been involved in any transactions
with the Company or any of our subsidiaries, in each case, that
are required to be disclosed pursuant to the rules and
regulations of the SEC, except as may be disclosed herein. Each
Parent Designee is a citizen of the United States, unless
otherwise noted. The business address of each Parent Designee is
351 Phelps Drive, Irving, Texas 75038.
Robert E. Abernathy
, 54, was elected Group
President North Atlantic Consumer Products of Parent
in March 2008. He is responsible for Parents consumer
business in North America and Europe and the related customer
development and supply chain organizations. Mr. Abernathy
joined Parent in 1982. His past responsibilities in Parent have
included overseeing its businesses in Asia, Latin America,
Eastern Europe, the Middle East and Africa, as well as
operations and major project management in North America. He was
appointed Vice President North American Diaper
Operations in 1992; Managing Director of Parent Australia Pty.
Limited in 1994; Group President of Parents
Business-to-Business segment in 1998 and Group
President Developing and Emerging Markets in 2004.
He is a director of The Lubrizol Corporation, a publicly held
company that produces and supplies specialty chemical products
in the global transportation, industrial and consumer markets.
Joanne B. Bauer
, 54, was elected President
Global Health Care of Parent in 2006. She is responsible for
Parents global health care business, which includes a
variety of medical supplies and devices. Ms. Bauer joined
Parent in 1981. Her past responsibilities have included various
marketing and management positions in the Adult Care and Health
Care businesses. She was appointed Vice President of KimFibers,
Ltd. in 1996; Vice President of Global Marketing for Health Care
in 1998; and President of Health Care in 2001.
Robert W. Black
, 50, was elected Group
President Developing and Emerging Markets of Parent
in March 2008. He is responsible for Parents businesses in
Asia, Latin America, Eastern Europe, the Middle East and Africa.
His past responsibilities have included overseeing Parents
strategy, mergers and acquisitions, global competitiveness and
innovation efforts. Prior to joining Parent in 2006 as Senior
Vice President and Chief Strategy Officer, Mr. Black served
as Chief Operating Officer of Sammons Enterprises, a
multi-faceted conglomerate, from 2004 to 2005. From 1994 to
2004, Mr. Black held various senior leadership positions in
marketing, strategy, corporate development and international
management with Steelcase, Inc., a leading office furniture
products and related services company. As President of Steelcase
International from 2000 to 2004, he led operations in more than
130 countries.
Christian A. Brickman
, 44, was elected Senior Vice
President and Chief Strategy Officer of Parent in September
2008. He is responsible for leading the development and
monitoring of Parents strategic plans and processes to
enhance Parents enterprise growth initiatives. Prior to
joining Parent in 2008, Mr. Brickman served as
B-3
a Principal of McKinsey & Company, Inc., a management
consulting firm, from 2003 to 2008, and as an Associate
Principal from 2001 to 2003.
Mark A. Buthman
, 48, was elected Senior Vice President
and Chief Financial Officer of Parent in 2003. Mr. Buthman
joined Parent in 1982. He has held various positions of
increasing responsibility in the operations, finance and
strategic planning areas of Parent. Mr. Buthman was
appointed Vice President of Strategic Planning and Analysis in
1997 and Vice President of Finance in 2002.
Thomas J. Falk
, 51, was elected Chairman of the Board and
Chief Executive Officer of Parent in 2003 and President and
Chief Executive Officer in 2002. Prior to that, he served as
President and Chief Operating Officer since 1999. Mr. Falk
previously had been elected Group President Global
Tissue, Pulp and Paper in 1998, where he was responsible for
Parents global tissue businesses. Earlier in his career,
Mr. Falk had responsibility for Parents North
American Infant Care, Child Care and Wet Wipes businesses.
Mr. Falk joined Parent in 1983 and has held other senior
management positions in Parent. He has been a director of Parent
since 1999. He also serves on the board of directors of Catalyst
Inc., a nonprofit organization working globally with businesses
and the professions to build inclusive workplaces and expand
opportunities for women and business, and the University of
Wisconsin Foundation, and serves as a governor of the
Boys & Girls Clubs of America.
Lizanne C. Gottung
, 53, was elected Senior Vice President
and Chief Human Resources Officer of Parent in 2002. She is
responsible for leading the design and implementation of all
human capital strategies to Parent, including global
compensation and benefits, talent management, diversity and
inclusion, organizational effectiveness and corporate health
services. Ms. Gottung joined Parent in 1981. She has held a
variety of human resources, manufacturing and operational roles
of increasing responsibility with Parent, including Vice
President of Human Resources from 2001 to 2002. She is a
director of Louisiana Pacific Corporation, a publicly traded
company that is a leading manufacturer of building products.
Thomas J. Mielke
, 51, was elected Senior Vice
President Law and Government Affairs and Chief
Compliance Officer of Parent in 2007. His responsibilities
include Parents legal affairs, internal audit and
government relations activities. Mr. Mielke joined Parent
in 1988. He held various positions within the legal function and
was appointed Vice President and Chief Patent Counsel in 2000,
and Vice President and Chief Counsel North Atlantic
Consumer Products in 2004.
Anthony J. Palmer
, 49, was elected Senior Vice President
and Chief Marketing Officer of Parent in 2006. He also assumed
leadership of Parents innovation organization in March
2008. He is responsible for leading the growth of
enterprise-wide strategic marketing capabilities and the
development of high-return marketing programs to support
Parents business initiatives. Prior to joining Parent in
2006, he served in a number of senior marketing and general
management roles at the Kellogg Company, a producer of cereal
and convenience foods, from 2001 to 2006, where he was most
recently managing director of Kelloggs U.K. business. Mr.
Palmer is a citizen of Australia.
Jan B. Spencer
, 54, was elected President
Global K-C Professional of Parent in 2006. He is responsible for
Parents global professional business, which includes
commercial tissue and wipers, and skin care, safety and
Do-It-Yourself products. Mr. Spencer joined Parent in 1979.
His past responsibilities have included various sales and
management positions in Europe and the U.S. He was
appointed Vice President Research, Development &
Engineering in the Away From Home sector in 1996; Vice
President, Wiper Business in 1998; Vice President, European
Operations, Engineering, Supply Chain in the K-C Professional
sector in 2000; President, KCP Europe in 2002; President, KCP
North America in 2003; and President K-C
Professional North Atlantic in 2004. Mr. Spencer is a citizen of
Great Britain.
CERTAIN
INFORMATION CONCERNING THE COMPANY
As of October 18, 2009, there were 24,463,356 Shares
outstanding. The Shares are the only class of our voting
securities outstanding that is entitled to vote at a meeting of
our stockholders. Each Share entitles the record holder to one
vote on all matters submitted to a vote of the stockholders.
B-4
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information regarding the beneficial
ownership of our outstanding common stock as of October 18,
2009 by:
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each person known by us to beneficially own 5% or more of our
common stock;
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each of our directors and nominees;
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each of our named executive officers; and
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all of our directors and executive officers as a group.
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Number of Shares
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Percentage of Shares
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of Common Stock
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of Common Stock
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Name and Address of Beneficial Owner(1)
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Beneficially Owned(2)
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Beneficially Owned(3)
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Kimberly-Clark Corporation
351 Phelps Drive
Irving, Texas 75038
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2,996,707
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(4)
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11.8
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%
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FMR, LLC
82 Devonshire Street
Boston, Massachusetts 02109
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2,739,192
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(5)
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11.2
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State of Wisconsin Investment Board
P.O. Box 7842
Madison, WI 53707
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2,436,277
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(6)
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10.0
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Janus Capital Management LLC(7)
151 Detroit Street
Denver, CO 80206
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1,410,289
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(7)
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5.8
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(7)
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Kleinheinz Capital Partners, Inc. et al.(8)
301 Commerce Street, Suite 1900
Fort Worth, Texas 76102
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1,300,000
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(8)
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5.3
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(8)
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Donald M. Earhart
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1,628,818
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(9)
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6.5
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John H. Abeles, M.D.
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347,500
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(10)
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1.4
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James J. Dal Porto
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391,649
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(11)
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1.6
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Jack H. Halperin
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38,000
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(12)
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*
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Joel S. Kanter
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87,893
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(13)
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*
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Erik H. Loudon
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29,000
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(14)
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*
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Henry T. Tai, Ph.D., M.D.
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309,140
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(15)
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1.3
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James R. Talevich
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164,707
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(16)
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*
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All directors and executive officers as a group (8 persons)
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2,996,707
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(17)
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11.8
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*
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Less than 1%
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(1)
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Unless otherwise indicated, the address of each person in this
table is
c/o I-Flow
Corporation, 20202 Windrow Drive, Lake Forest, California 92630.
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(2)
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The table includes the number of shares underlying options that
are exercisable within 60 days after October 18, 2009
and all restricted stock granted prior to October 18, 2009,
without regard to restrictions. Except as indicated in the
footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to
community property laws. All information with respect to
beneficial ownership is based on filings made by the respective
beneficial owners with the Securities and Exchange Commission or
information provided to us by such beneficial owners.
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(3)
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Percentage of ownership is calculated in accordance with
Rule 13d-3(d)(1)
under the Exchange Act. As of October 18, 2009, there were
24,463,356 shares of our common stock outstanding.
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B-5
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(4)
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Parent and Purchaser may be deemed to share the voting and
investment power of all shares and options beneficially owned by
the directors and executive officers of the Company, pursuant to
the Tender and Support Agreement (the Tender and Support
Agreement), dated as of October 8, 2009, among
Parent, Purchaser and the directors and executive officers,
whereby the directors and executive officers have agreed to
tender such shares into the Offer, to vote in favor of the
Merger and to comply with certain other provisions of the Tender
and Support Agreement, subject to the terms and conditions
therein. Parent and Purchaser have disclaimed beneficial
ownership of these shares and options.
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(5)
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Based on the information contained in a Schedule 13G, filed
with the Securities and Exchange Commission on June 10,
2009. Fidelity Management & Research Company
(Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficial owner of
2,736,792 shares or 11.187% of the Shares as a result of
acting as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of
1940. The ownership of one investment company, Fidelity Advisors
Small Cap Fund, amounted to 2,455,292 Shares or 10.037% of
the Shares outstanding. Fidelity Advisors Small Cap Fund has its
principal business office at 82 Devonshire Street, Boston,
Massachusetts 02109. Edward C. Johnson 3d and FMR LLC, through
its control of Fidelity, and the funds each has sole power to
dispose of the 2,736,792 shares owned by the Funds. Members
of the family of Edward C. Johnson 3d, Chairman of FMR LLC, are
the predominant owners, directly or through trusts, of
Series B voting common shares of FMR LLC, representing 49%
of the voting power of FMR LLC. The Johnson family group and all
other Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC. Neither FMR LLC nor Edward C. Johnson 3d,
Chairman of FMR LLC, has the sole power to vote or direct the
voting of the shares owned directly by the Fidelity Funds, which
power resides with the Funds Boards of Trustees. Fidelity
carries out the voting of the shares under written guidelines
established by the Funds Boards of Trustees. Pyramis
Global Advisors Trust Company (PGATC), 900
Salem Street, Smithfield, Rhode Island, 02917, an indirect
wholly-owned subsidiary of FMR LLC and a bank as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934, is the
beneficial owner of 2,400 shares or 0.0098% of the
outstanding Shares as a result of its serving as investment
manager of institutional accounts owning such shares. Edward C.
Johnson 3d and FMR LLC, through its control of Pyramis Global
Advisors Trust Company, each has sole dispositive power
over 2,400 shares and sole power to vote or to direct the
voting of 0 Shares owned by the institutional accounts
managed by PGATC as reported above.
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(6)
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Based on the information contained in Amendment No. 2 to
the Schedule 13G, filed with the Securities and Exchange
Commission on January 30, 2009.
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(7)
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Based on the information contained in Amendment No. 1 to
the Schedule 13G, filed with the Securities and Exchange
Commission on February 17, 2009. Janus Capital has a direct
89.9% ownership stake in INTECH Investment Management LLC and a
direct 78.4% ownership stake in Perkins Investment Management
LLC. Due to such ownership structure, holdings for Janus
Capital, Perkins and INTECH are aggregated for purposes of the
above referenced Schedule 13G filing. As a result of these
companies roles as investment advisers or sub-adviser to
various investment companies (collectively, the Managed
Portfolios), Janus Capital may be deemed to be beneficial
owner of 1,410,289 shares or 5.8% of our common stock.
However, Janus Capital does not have the right to receive any
dividends from, or the proceeds from the sale of, the securities
held in the Managed Portfolios and disclaims any ownership
associated with such rights.
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(8)
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Based on the information contained in Amendment No. 1 to
the Schedule 13G, filed with the Securities and Exchange
Commission on February 17, 2009. In addition to Kleinheinz
Capital Partners, Inc. (Kleinheinz), the reporting
persons include: Kleinheinz Capital Partners LDC
(LDC) (Address:
c/o Walkers
SPV Limited, Walker House, 87 Mary Street, George Town, Grand
Cayman, KYI-9002 Cayman Islands); and John Kleinheinz (Address:
301 Commerce Street, Suite 1900, Fort Worth, Texas
76102). Kleinheinz, LDC and John Kleinheinz may be deemed the
beneficial owners of 1,300,000 shares (5.3% of common stock
beneficially owned). Kleinheinz, LDC and John Kleinheinz, as
principal of both entities, have the sole power to vote and
dispose of the 1,300,000 shares of common stock
beneficially owned.
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B-6
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(9)
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Includes (i) 913,431 shares of common stock held of
record by Mr. Earhart, (ii) 33,473 shares of
common stock held of record by Mr. Earharts spouse,
and (iii) 681,914 shares of common stock issuable upon
the exercise of stock options held by Mr. Earhart that are
exercisable within 60 days. The voting and investment power
of all shares and options beneficially owned by Mr. Earhart
may be deemed to be shared because Mr. Earhart entered into
the Tender and Support Agreement. Pursuant to the Tender and
Support Agreement, subject to the terms and conditions therein,
Mr. Earhart has agreed to tender such shares into the
Offer, to vote in favor of the Merger and to comply with certain
other provisions of the Tender and Support Agreement.
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(10)
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Includes (i) 10,000 shares of common stock held of
record by Dr. Abeles, (ii) 327,500 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
therein) and (iii) 10,000 shares of common stock
issuable upon the exercise of stock options held by Northlea
Partners, Ltd. that are exercisable within 60 days. The
voting and investment power of all shares and options
beneficially owned by Dr. Abeles may be deemed to be shared
because Dr. Abeles entered into the Tender and Support
Agreement. Pursuant to the Tender and Support Agreement, subject
to the terms and conditions therein, Dr. Abeles has agreed
to tender such shares into the Offer, to vote in favor of the
Merger and to comply with certain other provisions of the Tender
and Support Agreement.
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(11)
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Includes (i) 311,649 shares of common stock held of
record by Mr. Dal Porto and (ii) 80,000 shares of
common stock issuable upon the exercise of stock options held by
Mr. Dal Porto that are exercisable within 60 days. The
voting and investment power of all shares and options
beneficially owned by Mr. Dal Porto may be deemed to be
shared because Mr. Dal Porto entered into the Tender and
Support Agreement. Pursuant to the Tender and Support Agreement,
subject to the terms and conditions therein, Mr. Dal Porto
has agreed to tender such shares into the Offer, to vote in
favor of the Merger and to comply with certain other provisions
of the Tender and Support Agreement.
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(12)
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Includes (i) 28,000 shares of common stock held of
record by Mr. Halperin and (ii) 10,000 shares of
common stock issuable upon the exercise of stock options held by
Mr. Halperin that are exercisable within 60 days. The
voting and investment power of all shares and options
beneficially owned by Mr. Halperin may be deemed to be
shared because Mr. Halperin entered into the Tender and
Support Agreement. Pursuant to the Tender and Support Agreement,
subject to the terms and conditions therein, Mr. Halperin
has agreed to tender such shares into the Offer, to vote in
favor of the Merger and to comply with certain other provisions
of the Tender and Support Agreement.
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(13)
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Includes (i) 35,000 shares of common stock held of
record by Mr. Kanter, (ii) 41,893 shares of
common stock held of record by Windy City, Inc., a Delaware
corporation (Windy City),
(iii) 1,000 shares of common stock held of record by
Mr. Kanters spouse, and (iv) 10,000 shares
of common stock issuable upon the exercise of options held by
Mr. Kanter that are exercisable within 60 days. Of
this amount, 41,893 shares of common stock are pledged as
security. Mr. Kanter is the President of Windy City and a
member of its board of directors. As a result, he has voting and
dispositive power as to shares of our stock held by Windy City.
Mr. Kanter disclaims any and all beneficial ownership of
securities held by Windy City. The voting and investment power
of all shares and options beneficially owned by Mr. Kanter
may be deemed to be shared because Mr. Kanter entered into
the Tender and Support Agreement. Pursuant to the Tender and
Support Agreement, subject to the terms and conditions therein,
Mr. Kanter has agreed to tender such shares into the Offer,
to vote in favor of the Merger and to comply with certain other
provisions of the Tender and Support Agreement.
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(14)
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Includes (i) 19,000 shares of common stock held of
record by Mr. Loudon and (ii) 10,000 shares of
common stock issuable upon the exercise of stock options held by
Mr. Loudon that are exercisable within 60 days. Of
this amount, 1,500 shares of common stock are pledged as
security. The voting and investment power of all shares and
options beneficially owned by Mr. Loudon may be deemed to
be shared because Mr. Loudon entered into the Tender and
Support Agreement. Pursuant to the Tender and Support Agreement,
subject to the terms and conditions therein, Mr. Loudon has
agreed to tender such shares into the Offer, to vote in favor of
the Merger and to comply with certain other provisions of the
Tender and Support Agreement.
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(15)
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Includes (i) 299,140 shares of common stock held of
record by Dr. Tai, (ii) 640 shares of common
stock held of record by Dr. Tais spouse, and
(iii) 10,000 shares of common stock issuable upon the
exercise of stock options
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B-7
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held by Dr. Tai that are exercisable within 60 days.
The voting and investment power of all shares and options
beneficially owned by Dr. Tai may be deemed to be shared
because Dr. Tai entered into the Tender and Support
Agreement. Pursuant to the Tender and Support Agreement, subject
to the terms and conditions therein, Dr. Tai has agreed to
tender such shares into the Offer, to vote in favor of the
Merger and to comply with certain other provisions of the Tender
and Support Agreement.
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(16)
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Includes (i) 114,707 shares of common stock held of
record by Mr. Talevich and (ii) 50,000 shares of
common stock issuable upon the exercise of stock options held by
Mr. Talevich that are exercisable within 60 days. The
voting and investment power of all shares and options
beneficially owned by Mr. Talevich may be deemed to be
shared because Mr. Talevich entered into the Tender and
Support Agreement. Pursuant to the Tender and Support Agreement,
subject to the terms and conditions therein, Mr. Talevich
has agreed to tender such shares into the Offer, to vote in
favor of the Merger and to comply with certain other provisions
of the Tender and Support Agreement.
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(17)
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In addition to the shares and options beneficially owned by the
officers, directors and the immediate family members of such
officers and directors, this number includes
(i) 41,893 shares of common stock beneficially owned
by Windy City and (ii) 337,500 shares of common stock,
including options exercisable within 60 days, beneficially
owned by Northlea Partners, Ltd.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the name, age, and position of each of our
directors and executive officers as of October 18, 2009.
Class I
Directors: Currently Serving Until the 2012 Annual
Meeting
James J. Dal Porto
, 56, has been a director since 1996.
Mr. Dal Porto joined us as Controller in October 1989 and
was promoted to Treasurer in October 1990, to Vice President of
Finance and Administration in March 1991, to Executive Vice
President and Chief Financial Officer in March 1993, and to
Chief Operating Officer in February 1994. Mr. Dal Porto was
appointed Corporate Secretary in 2004. From 1984 to 1989,
Mr. Dal Porto served as Financial Planning Manager and
Manager of Property Accounting and Local Taxation at CalComp, a
high technology manufacturing company. Mr. Dal Porto holds
a B.S. in Economics from the University of California, Los
Angeles and an M.B.A. from California State University,
Northridge.
Jack H. Halperin, Esq.
, 63, has been a director
since 1991. Mr. Halperin is a corporate and securities
attorney who has been in private practice since 1989. He was a
member of Solinger, Grosz & Goldwasser, P.C. from
1981 to 1987 and then a member of Bresler and Bab from 1987 to
1988. Mr. Halperin holds a B.A. degree from Columbia
University and a J.D. degree from New York University Law
School. From 1992 to 2004, he served on the board of directors
of Memry Corporation, a publicly held manufacturer of components
for medical devices. He also serves on the board of directors of
Green Energy Resources, Inc., a publicly held wood biomass
supplier to the commercial power and utility industry and
Etubics Corporation, a privately held biopharmaceutical company
that is developing next generation vector vaccines
for protection and therapeutic uses.
Class II
Directors: Currently Serving Until the 2010 Annual
Meeting
Joel S. Kanter
, 52, has been a director since
1991. Mr. Kanter has been the President of Windy
City, Inc., a privately held investment management firm, since
1986. Mr. Kanter currently serves on the board of directors
of the following public companies: Magna-Lab, Inc., a medical
products company; Medgenics, Inc., an Israel-based biotechnology
company; Pet DRx Corporation, an owner and operator of
veterinary hospitals; and WaferGen Bio-systems, Inc., a company
that develops, manufactures and sells diagnostic devices that
assist in genetic prototyping for the pharmaceutical industry
and other research institutions.
Erik H. Loudon
, 71, has been a director since
1991. Since 1978, Mr. Loudon has been the
Director of EHL Investment Services Limited, a privately held
company in the British Virgin Islands that provides investment
management services for private clients. Mr. Loudon
currently serves on the board of directors of the following
public investment funds, since the year noted: Emerge Capital
Luxembourg (1985); and Leaf Asset Management Luxembourg (1985).
B-8
Class III
Directors: Currently Serving Until the 2011 Annual
Meeting
John H. Abeles, M.D.
, 64, has been a director since
1985. Dr. Abeles has been the President of MedVest, Inc., a
privately held consulting and venture capital firm in the
medical products industry, since before 1990. He currently
serves on the board of directors of the following public
companies since the year noted: CytoCore, Inc., formerly
Molecular Diagnostics, Inc., a medical products company (1996);
DUSA Pharmaceuticals, Inc., a biopharmaceutical company (1995);
Oryx Technology Corp., a technology development company (1989);
and CombiMatrix Corporation, a biotechnology company (2006). He
also serves on the board of directors of the following private
companies: Alison Raffaele Cosmetics, Inc., a cosmetics company;
ContraFect Inc., a biotechnology company; Etubics Corporation, a
biopharmaceutical company that is developing next
generation vector vaccines for protection and therapeutic
uses; UniMedica Inc., a web-enabled Medical School education
consulting and publishing firm; Baystar BioSciences, a
biotechnology company; Medezrin Ltd., a London-based
biotechnology company; MediSync, a contract research
organization financing entity; and ProMed Capital Group LLC, a
private venture investment concern in Israel-based healthcare
technology. Dr. Abeles is on the advisory board of
Prescient Medical, Inc., a privately held medical technology
company and Mercator Medical Corporation, a privately held
medical technology company. Since 1992, he has also been a
general partner of Northlea Partners, Ltd., a privately held
family limited partnership. Since 1998, he has also served as
Assistant Professor, Clinical Pharmacology and Therapeutics at
the International University of Health Sciences. Since 1997,
Dr. Abeles has served as a Director of Higuchi Bio-Science
Institute, University of Kansas, and since 2001 has served as
Director of College of Chemistry Advisory Board, University of
California.
Donald M. Earhart
, 65, has been a director since 1990 and
the chairman of our board of directors since March 1991.
Mr. Earhart joined us as President and Chief Operating
Officer in June 1990 and has been our Chief Executive Officer
since July 1990. Mr. Earhart has over 30 years of
experience in the medical products industry. Prior to joining
us, from 1986 to 1990, Mr. Earhart was a corporate officer
and the President of the Optical Division of Allergan, Inc.
Before 1986, he was a corporate officer and
Division President of Bausch and Lomb and was an operations
manager of Abbott Laboratories. He has also served as an
engineering consultant at Peat, Marwick, Mitchell &
Co. and as an engineer with Eastman Kodak Company.
Mr. Earhart holds a Bachelor of Engineering degree from
Ohio State University and an M.B.A. from Roosevelt University.
Henry Tsutomu Tai, Ph.D., M.D.,
66, served as
the chairman of our board of directors from 1985 to 1988 and has
been a director continuously since 1990. Dr. Tai is the
founder of I-Flow Corporation, although he has never been
employed by the Company. Since 1977, he has been a practicing
consultant in hematology and oncology. Currently, Dr. Tai
is the President of Garfield Hematology and Oncology Consultants
Medical Group, Inc., a medical consulting company. Dr. Tai
holds a B.A. in Molecular Biology from Harvard University and a
Ph.D. in Molecular Biology and an M.D. from the University of
Southern California.
Executive
Officers
There are three executive officers of the Company,
Mr. Earhart, Mr. Dal Porto and James R. Talevich.
Biographical information for Mr. Earhart and Mr. Dal
Porto, who are also directors, is set forth above.
Mr. Talevich
, 59, joined the Company as Chief
Financial Officer in August 2000. Prior to joining the Company,
he was Chief Financial Officer of Gish Biomedical, Inc., a
publicly held medical device company, from 1999 to 2000, and
Chief Financial Officer of Tectrix Fitness Equipment, Inc., a
privately held manufacturing company, from 1995 to 1999. Prior
to 1995, he held financial management positions with
Mallinckrodt Medical, Inc., Sorin Biomedical, Inc., a medical
products subsidiary of Fiat S.p.A., Pfizer, Inc., Sensormedics
Corporation, a privately held medical device company, Baxter
Travenol Laboratories, Inc. and KPMG Peat Marwick.
Mr. Talevich holds a B.A. in Physics from California State
University, Fullerton, an M.B.A. from the University of
California at Los Angeles, and is a Certified Public Accountant.
Related
Party Transactions
No director, executive officer, nominee for election as a
director or any beneficial holder of more than five percent of
our outstanding capital stock had any material interest, direct
or indirect, in any reportable transaction with us during the
2008 fiscal year, or since the commencement of the current
fiscal year, or any reportable business relationship with us
during such time.
B-9
Review of
Related Person Transactions
Our audit committee reviews all relationships, transactions and
arrangements in which the Company and any director, nominee for
director, greater than five percent beneficial holder of our
stock or any immediate family member of any of the foregoing are
participants (Interested Transactions) to determine
whether such persons have a direct or indirect material interest
and whether to approve, disapprove or ratify an Interested
Transaction. We have written policies and procedures for
monitoring and seeking approval in connection with any
Interested Transaction. The chair of the audit committee is
authorized to approve or ratify any Interested Transactions with
a related party in which the aggregate amount involved is
expected to be less than $100,000. Our finance department
assists in monitoring Interested Transactions and our audit
committee reviews, approves (or disapproves) or ratifies
Interested Transactions. In considering whether to approve or
ratify an Interested Transaction, the audit committee takes into
account, among other factors it deems appropriate, whether the
Interested Transaction is on terms no less favorable than terms
generally available to an unaffiliated third party under the
same or similar terms and conditions and the extent of the
related persons interest in the Interested Transaction. In
addition, our written policy provides that no director shall
participate in any discussion or approval of an Interested
Transaction for which he or she is a related party, except that
the director shall provide all material information concerning
the Interested Transaction to the audit committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors,
executive officers and stockholders who beneficially own more
than ten percent of any class of our equity securities to file
reports with the Securities and Exchange Commission on
Forms 3, 4 and 5 for the purpose of reporting their
ownership of and transactions in our equity securities. Based on
a review of the copies of such reports furnished to us, we
believe that, except as set forth below, all Section 16(a)
filing requirements for the fiscal year ended December 31,
2008 were complied with on a timely basis. Each of our
independent directors filed one late Form 4 on
February 25, 2008 that included the late reporting of a
grant of 5,000 shares of restricted stock to each
independent director on January 2, 2008.
GOVERNANCE
PRINCIPLES
Board
Committees, Meetings and Related Matters
Our board of directors has three standing committees: an audit
committee, a compensation committee, and a corporate governance
and nominating committee. All directors serving on these
committees have been determined by our board of directors to be
independent. The committees operate under written
charters that we have adopted, and which are available for
viewing by accessing our website at
www.iflo.com
, then
Investors, then Corporate Governance.
The table below provides 2008 membership and meeting information
for each of the board committees
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Corporate
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Governance &
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Name
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Audit
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Compensation
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Nominating
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Dr. Abeles
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X
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X
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X
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Mr. Halperin(3)
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X
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(2)
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X
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X
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(1)
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Mr. Kanter
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X
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(1)(2)
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X
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X
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Mr. Loudon
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X
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X
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Dr. Tai
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X
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(1)
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X
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2008 Meetings
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9
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2
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3
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(1)
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Committee chairman
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(2)
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Audit Committee financial expert
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(3)
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Lead independent director
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B-10
During our fiscal year ended December 31, 2008, our board
of directors met seven times, three of which meetings were
telephonic. All directors attended at least 75% of the aggregate
total of (i) board meetings and (ii) meetings of the
committees on which they served.
Our board of directors has adopted a policy that encourages our
directors to attend our annual stockholder meetings. The 2008
annual meeting of stockholders was attended by all of our
incumbent directors.
Director
Independence
Our board of directors has affirmatively determined that
Dr. Abeles, Mr. Halperin, Mr. Kanter,
Mr. Loudon and Dr. Tai are independent
within the meaning of the Nasdaq Marketplace
Rule 4200(a)(15). During this review, the board considered
transactions and relationships between each director or any
member of his or her immediate family and the Company and its
subsidiaries and affiliates. As provided in our Corporate
Governance Guidelines, the purpose of this review was to
determine whether any such relationships or transactions were
inconsistent with a determination that the director is
independent. Neither Mr. Earhart nor Mr. Dal Porto
were deemed to be independent because each is an
executive officer of the Company.
Audit
Committee
It is the responsibility of the audit committee to oversee our
accounting and financial reporting processes and the audits of
our financial statements. In addition, the audit committee
assists the board of directors in its oversight of our
compliance with legal and regulatory requirements. The specific
duties of the audit committee include: monitoring the integrity
of our financial process and systems of internal controls
regarding finance; accounting and legal compliance; selecting
our independent registered public accounting firm; monitoring
the independence and performance of our independent registered
public accounting firm; providing an avenue of communication
among the independent registered public accounting firm, our
management and our board of directors; and annually evaluating
the performance of the audit committee and the adequacy of the
audit committees charter. The audit committee has the
authority to conduct any investigation that it deems appropriate
to fulfill its responsibilities, and it has direct access to all
of our employees and to the independent registered public
accounting firm. The audit committee also has the ability to
retain, at our expense and without further approval of the board
of directors, special legal, accounting or other consultants or
experts as it deems necessary in the performance of its duties.
The audit committee met nine times during 2008, and otherwise
accomplished its business without formal meetings. The current
members of the audit committee are Dr. Abeles,
Mr. Halperin and Mr. Kanter. Mr. Kanter is the
chairman of the audit committee. Our board of directors has
determined that each of Dr. Abeles, Mr. Halperin and
Mr. Kanter is independent within the meaning of
the enhanced director independence standards contained in Nasdaq
Marketplace Rule 4350(d) and the rules and regulations
adopted by the Securities and Exchange Commission (the
SEC) that relate specifically to members of audit
committees. Our board of directors has also determined that
Mr. Halperin and Mr. Kanter each qualify as an
audit committee financial expert, as that term is
used in Item 407(d)(5) of
Regulation S-K.
Compensation
Committee
It is the responsibility of the compensation committee to assist
the board of directors in the discharge of the board of
directors responsibilities regarding the compensation of
our employees and directors. With the assistance of the
compensation committee, the board is responsible for
establishing executive compensation, including the following:
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determining the Companys compensation philosophy,
objectives and policies;
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reviewing and approving all elements and amounts of compensation
and benefits provided to the Companys executive
officers; and
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annually evaluating the performance of the chief executive
officer.
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In assisting the board with discharging its duties relating to
executive compensation, the compensation committee is
responsible for the following:
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making recommendations to the board regarding the corporate
goals and objectives relevant to the chief executive
officers compensation, evaluating the chief executive
officers performance in light of such goals and
objectives, and recommending the chief executive officers
compensation elements and amounts to the
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B-11
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board based on such evaluation. The chief executive officer may
not be present during the compensation committees voting
and deliberations regarding his compensation;
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making recommendations to the board regarding the corporate
goals and objectives relevant to executive officer compensation
(other than the chief executive officer), evaluating such
executive officers performance in light of such goals and
objectives, and recommending the executive officers
compensation elements and amounts to the board based on this
evaluation;
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reviewing at least annually director compensation and benefits
and, if necessary or appropriate, making recommendations to the
board regarding changes in director compensation;
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administering the Companys incentive compensation plans,
including its equity-based incentive plans;
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examining and making recommendations to the board with respect
to the Companys overall compensation structure, policies
and programs, including, without limitation, salary, incentive,
stock, deferred, retirement and health benefits, and assessing
whether such programs establish appropriate and adequate
incentives;
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making recommendations to the board regarding the creation,
amendment, modification and termination of the Companys
compensation and employee benefit plans;
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annually evaluating the adequacy of the compensation
committees charter and recommending changes to the board
as necessary; and
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performing such other duties and responsibilities as are
consistent with the purpose of the compensation committee and as
the board or the compensation committee may deem appropriate.
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The compensation committee is composed of five members, each of
whom is an independent director as defined by applicable Nasdaq
requirements. Each year, the compensation committee reviews
compensation matters and makes recommendations to the board as
to the matters listed above. The compensation committee meets at
least twice per year at in-person meetings and as needed from
time to time at additional meetings, including telephonic
meetings. As noted earlier, the board ultimately makes
compensation decisions.
From time to time, the compensation committee retains a
compensation consultant to advise the compensation committee
with respect to compensation matters, input on best practices
and other developments in executive compensation, and to
otherwise assist the compensation committee with its duties. In
2008, the compensation committee engaged WNB Consulting LLC (the
Consultant). The Consultant, which has been retained
by the compensation committee each year since 2004, reports
directly to, and is retained directly by, the compensation
committee. The Consultant attends most of the meetings, either
in person or by telephone, of the compensation committee. In
consultation with the Consultant, the compensation committee
considers the reasonableness of the compensation paid to and
incentives established for the executive officers and the
directors. In conducting such evaluation, the compensation
committee reviews and considers information provided by the
Consultant regarding industry compensation practices and
developments and comparative data that aids the compensation
committee in evaluating executive and director compensation
levels. In 2008, the Consultant assisted the compensation
committee in establishing base salaries for each of the
executive officers and determining the structure of the
Executive Performance Incentive Plan (discussed below) for the
2008 fiscal year, including the performance objectives.
While the compensation committee discusses with the chief
executive officer his own compensation package, the board and
compensation committee ultimately make decisions regarding the
chief executive officers package based on the boards
and committees separate deliberations, with input from the
Consultant and with the chief executive officer not present. The
chief executive officer provides input to the compensation
committee with respect to decisions regarding our chief
operating officers and chief financial officers
compensation. As in the case of the chief executive officer,
compensation decisions regarding our chief operating officer and
chief financial officer are ultimately made by the board and
committee based on their separate deliberations, with input from
the Consultant.
The compensation committee met twice in 2008, and otherwise
accomplished its business without formal meetings. The current
members of the compensation committee are Dr. Abeles,
Mr. Halperin, Mr. Kanter, Mr. Loudon and
Dr. Tai. Dr. Tai is the chairman of the compensation
committee. The Compensation Committee Report is
included herein.
B-12
Corporate
Governance and Nominating Committee
It is the responsibility of the corporate governance and
nominating committee: to identify qualified individuals to
become board members; to consider and make recommendations to
the board regarding the composition of the board of directors,
its committees and the chairpersons thereof; and to monitor and
assess the effectiveness of the board of directors and its
committees. The specific duties of the corporate governance and
nominating committee include: identifying, screening and
recommending to the board of directors candidates for election
to the board of directors; evaluating director candidates
recommended by our stockholders; monitoring the independence of
current directors and nominees; and annually evaluating the
performance of the corporate governance and nominating committee
and the adequacy of the corporate governance and nominating
committees charter.
The corporate governance and nominating committee met three
times in 2008. Each of our non-employee directors
(Dr. Abeles, Mr. Halperin, Mr. Kanter,
Mr. Loudon and Dr. Tai) is a member of the corporate
governance and nominating committee. Mr. Halperin is the
chairman of the corporate governance and nominating committee.
Meetings
of Non-Management Directors
The non-management members of the board of directors regularly
meet without any members of management present during scheduled
executive sessions of meetings of the compensation committee and
corporate governance and nominating committee, both of which
committees are comprised solely of independent directors.
Lead
Independent Director
Our Corporate Governance Guidelines provide for the designation
of a Lead Independent Director. The Lead Independent
Director is elected annually by the independent directors and is
responsible for setting the agenda for and presiding over the
executive sessions of the independent directors, consulting with
and advising the Chairman regarding board meeting agendas,
schedules, information flow and any other functions that may be
specified to the position. Our Lead Independent Director is
currently Mr. Halperin.
Code of
Conduct
We have adopted a code of conduct that describes the ethical and
legal responsibilities of all of our employees and, to the
extent applicable, members of our board of directors. This code
includes, but is not limited to, the requirements of the
Sarbanes-Oxley Act of 2002 pertaining to codes of ethics for
chief executives and senior financial and accounting officers.
Our board of directors periodically reviews and approves this
code. Our employees agree in writing to comply with the code at
commencement of employment and periodically thereafter. Our
employees are encouraged to report suspected violations of the
code through various means, including through the use of an
anonymous toll-free telephone hotline. Our updated code of
conduct can be viewed on our website by accessing
www.iflo.com
, then Investors, then
Corporate Governance, then Code of Business
Conduct and Ethics Policy. If we make substantive
amendments to the code or grant any waiver, including any
implicit waiver, to our principal executive, financial or
accounting officer, or persons performing similar functions, we
will disclose the nature of such amendment or waiver on our
website
and/or
in a
report on
Form 8-K
in accordance with applicable rules and regulations.
Communications
with the Board of Directors
Our stockholders may communicate with our board of directors, a
committee of the board of directors or a director by sending a
letter addressed to the board of directors, a committee or a
director
c/o Corporate
Secretary, I-Flow Corporation, 20202 Windrow Drive, Lake Forest,
California 92630. All communications will be compiled by the
Corporate Secretary and forwarded to the board of directors, the
committee or the director accordingly.
Director
Nominations
The corporate governance and nominating committee regularly
assesses the appropriate size of the board of directors, and
whether any vacancies on the board of directors are expected due
to retirement or otherwise. In the event that vacancies are
anticipated or otherwise arise, the corporate governance and
nominating committee utilizes
B-13
a variety of methods for identifying and evaluating director
candidates. Candidates may come to the attention of the
corporate governance and nominating committee through current
directors, professional search firms, stockholders or other
persons. Once the corporate governance and nominating committee
has identified a prospective nominee, the corporate governance
and nominating committee will evaluate the prospective nominee
in the context of the then-current constitution of the board of
directors and will consider a variety of other factors,
including the prospective nominees business, finance and
financial reporting experience, and attributes that would be
expected to contribute to an effective board of directors. The
corporate governance and nominating committee seeks to identify
nominees who possess a wide range of experience, skills, areas
of expertise, knowledge and business judgment. Successful
nominees must have a history of superior performance or
accomplishments in their professional undertakings and should
have the highest personal and professional ethics and values.
The corporate governance and nominating committee does not
evaluate stockholder nominees differently than any other nominee.
Pursuant to procedures set forth in our bylaws, our corporate
governance and nominating committee will consider stockholder
nominations for directors if we receive timely written notice,
in proper form, of the intent to make a nomination at a meeting
of stockholders. To be timely, the notice must be received
within the time frame identified in our bylaws, a discussion of
which appears below under the heading Stockholder
Proposals. To be in proper form, the notice must, among
other matters, include each nominees written consent to
serve as a director if elected, a description of all
arrangements or understandings between the nominating
stockholder and each nominee and information about the
nominating stockholder and each nominee. These requirements are
detailed in our amended and restated bylaws, which were attached
as an exhibit to our Current Report on
Form 8-K
filed on April 3, 2009. A copy of our bylaws will be
provided upon written request to our Corporate Secretary.
Compensation
Committee Interlocks and Insider Participation
During 2008, there were no compensation committee interlocks and
no insider participation in compensation committee decisions
that were required to be reported under the rules and
regulations of the Securities Exchange Act of 1934, as amended
(the Exchange Act).
Corporate
Governance Guidelines
Our board of directors has adopted Corporate Governance
Guidelines to assist the board in the exercise of its
responsibilities and to promote more effective functioning of
the board and its committees. The guidelines provide details on
matters such as board membership criteria; selection of director
candidates, including the Chairman of the Board and Lead
Independent Director; board leadership development; director
independence and executive sessions of independent directors;
committee matters; board self-evaluation; board orientation and
continuing education; and succession planning.
Our Corporate Governance Guidelines are available for viewing by
accessing our website at
www.iflo.com
, then
Investors, then Governance Guidelines.
EXECUTIVE
COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis (CD&A)
Overview
Our executive compensation program is designed to attract,
retain and motivate high quality employees who have the ability
to produce strong business results and further the long-term
success of the Company and to reward such employees for
furthering the long-term success of the Company. The independent
directors of our board of directors, all of whom are
compensation committee members, are responsible for overseeing
our executive compensation program. In order to motivate our
executive officers and to achieve long-term stockholder value,
the Company maintains an equity and cash incentive program, and
the board utilizes this program as a significant part of total
compensation for the executive officers. Currently, our
executive officers are Donald M. Earhart, our President and
Chief Executive Officer; James J. Dal Porto, our Executive Vice
President, Chief Operating Officer
B-14
and Corporate Secretary; and James R. Talevich, our Chief
Financial Officer. For purposes of this CD&A, references to
the board refer to the independent directors of our
board of directors.
Our executive compensation program was specifically designed to
accomplish the following objectives for the year 2008 and going
forward:
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to align the financial interests of our executive officers with
those of our stockholders;
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to find the right balance between paying the executives fairly
within the Companys ability to pay;
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to find the appropriate balance between providing performance
incentives for management but also ensuring that the
stockholders retain a fair portion of the value created by those
efforts;
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to create the proper balance between rewarding current year
performance and recognizing that real value for both
stockholders and management will only be created with revenue
and earnings growth rates that exceed that of the industry at
large;
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to tie individual total compensation to both the
individuals and the Companys performance; and
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to provide competitive levels of base compensation in order to
attract, retain and motivate high quality employees who are
necessary to achieve our success and who provide continuity to
management of the Company.
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We face significant challenges in the coming years and will rely
heavily upon our chief executive officer and other executive
officers for leadership, strategic direction and operational
effectiveness. Our long-term goals include increasing the
awareness of our products, educating surgeons, hospitals and
patients as to the clinical and financial benefits of our
products, achieving the adoption of our products as a standard
of care for the treatment of post-surgical pain and wound sites,
and significantly growing revenues and stockholder value. Our
chief executive officer has ultimate responsibility for these
goals as part of maximizing our stockholders returns, and
the compensation committee believes that our stockholders are
best served if our chief executive officer and other executive
officers have significant incentives to meet the above
expectations.
Due to the Companys smaller size in earlier years and the
desire to minimize overhead expenses, our management structure
is such that each of our executive officers has more
responsibilities as compared to executive officers at most other
relatively similar companies. This lean
organizational structure and the corresponding additional
responsibilities that our executive officers have are taken into
consideration by the board and compensation committee when
analyzing and determining the appropriate levels of their
compensation.
Although we fine-tune our compensation programs as general
business conditions change, we believe it is important to
maintain consistency in our compensation philosophy and
approach. We recognize that value-creating performance by our
executive officers does not always translate immediately into
appreciation in the Companys stock price, particularly in
periods of severe economic stress such as the one we are
currently experiencing. Management and the compensation
committee are aware of the impact the current economic crisis
has had on the Companys stock price, but we continue to
reward managements strong operating performance based on
the belief that over time these results will be reflected by
stock price appreciation. That said, we believe that it is
appropriate for certain components of compensation to decline
during periods of economic stress, operating losses and
significantly lower stock prices.
As described in more detail below, our executive compensation
program uses a combination of fixed (base salary) and variable
(performance incentive plans) elements. The following are the
specific elements of compensation that are intended to achieve
the objectives described above: (1) base salary,
(2) annual cash and equity incentive awards based on the
performance of the Company and the individual, (3) benefits
and perquisites, and (4) post- employment benefits. The
board and compensation committee do not have any pre-established
policies with respect to the allocation of base salary and
incentive payments. Rather, the board and compensation committee
undertake an annual evaluation of how to allocate the total
compensation value between base salary and incentive payments
that takes into account factors such as current competitive
practices, projected compensation trends and the strategic needs
and direction of the business.
B-15
The compensation committee reviews the competitiveness of each
executive officers base salary, total annual cash
compensation and the present value of the expected future value
of equity compensation as compared to multiple sources of
compensation information, including proxy statements and
established compensation surveys, which either do not identify
specific companies or are based on a large number of companies.
The compensation committee does not compare against, and the
compensation committees consultant, WNB Consulting LLC
(the Consultant), does not present, compensation
information as to any specific company. In presenting this
general comparative information to the compensation committee,
the Consultant researches and analyzes data for similarly
situated executive officers at similar-sized companies in the
life sciences industry, and more specifically the medical
devices industry. Because of the Companys business
challenges and growth opportunities and the highly competitive
market for high quality, experienced executive talent, the
compensation committee considers a competitive position for
total direct compensation (base salary and total incentive
awards) for the Companys executive officers to be the
average of the competitive data information. The compensation
committee considers this average position for its experienced
executives to be appropriate for individual and Company
performance that meets specific goals and objectives. For
performance that exceeds the specific goals and objectives, the
compensation committee believes that it is appropriate for total
direct compensation to be higher than the average in the
relevant marketplaces. For performance that is below the
specific goals and objectives, the compensation committee
believes that it is appropriate for total annual direct
compensation to be below the average in the relevant
marketplaces. The compensation committee considers the potential
increase in the value of an equity grant, which is ultimately a
part of total compensation, from the grant date forward that
results from an increase in the market price of I-Flow stock to
align the executives interests with those of the
Companys stockholders.
Elements
of Compensation
Base
Salary
The board, upon the recommendation of the compensation
committee, establishes base salaries for our executive officers
at levels that are competitive with base salary compensation
that is paid to executive officers of similarly situated
companies, and not significantly below the base salaries
available to our key executives through alternative employment
at peer or other companies for which our executive
officers experience would be valuable. Base salary levels
are reviewed annually by the board and compensation committee
and may be adjusted based on factors such as the performance of
the Company, the scope of the executive officers
responsibilities, the performance of the executive officer
during the prior fiscal year, the executive officers
experience and the competitive marketplace. The board and the
compensation committee evaluate base salary levels together with
other components of the executive officers compensation in
determining the executive officers total compensation and
whether such total compensation is consistent with the
objectives of the Companys compensation program. The board
and compensation committee consider whether the base salary
levels are reasonable regardless of whether there may be any
incentive payments under the relevant performance-based
incentive plan. In determining base salaries, the board and the
compensation committee also consider and evaluate data provided
by various surveys and data sources that are provided by the
Consultant, which, based on such surveys, recommends a range for
base salaries. These surveys include companies in the life
sciences industry and durable and non-durable medical device
manufacturers.
For 2008, Mr. Earharts base salary increased to
$470,000 from $434,199 in 2007 and $434,199 in 2006.
Mr. Dal Portos base salary increased to $300,000 from
$274,116 in 2007 and $274,116 in 2006, and
Mr. Talevichs base salary increased to $250,000 from
$225,000 in 2007 and $225,000 in 2006. The compensation
committee increased the executive officers base salaries
in February 2008 to reflect their performance and market
comparables for their positions. Prior to the 2008 base salary
increases, Messrs. Earharts and Dal Portos base
salaries were not increased since 2004, and
Mr. Talevichs base salary was not increased since
2005.
For 2009, we implemented a salary freeze covering all our
executive officers.
Executive
Performance Incentive Plan
In order to motivate our executive officers to meet certain
annually specified performance objectives, we established the
Executive Performance Incentive Plan
(the
EPIP). The EPIP is a performance-based program, with
both short-term and longer-term incentive components, in which
our chief executive officer, chief operating
B-16
officer and chief financial officer participate. The EPIP
focuses our executive officers on achieving key financial and
strategic objectives that are expected to lead to the creation
of value for our stockholders and provides the executive
officers with an opportunity to earn cash and stock-based awards
that are tied to the Companys performance. The structure
and terms of the EPIP, or a comparable incentive plan (such as
the Corporate Officer Incentive Plan (the COIP),
which pre-dated the EPIP), are reviewed annually and approved in
the first quarter of the fiscal year by the board, based on
recommendations by the compensation committee. We re-named the
COIP program as the EPIP to reflect the performance-based nature
of the plan and to differentiate the plan from the COIP after
the stockholders re-approved the performance metrics in 2007 for
cash and equity awards made under the Companys 2001 Equity
Incentive Plan (the 2001 Plan). The EPIP establishes
predetermined performance goals and target awards on an annual
basis and sets forth threshold, target and maximum levels of
performance and award amounts. The Companys actual
performance is compared to the goals and that result determines
the aggregate achievement percentage used to calculate the pool
for cash and stock-based awards, if any, for the year. In recent
years, the EPIP and the COIP have been an important component of
our executive compensation program and have accounted for a
significant portion of the actual compensation earned by our
executive officers. The emphasis on short-term goals is based on
the competitive marketplace practices for short-term cash
incentives that focus on the importance of delivering annual
results to the financial marketplace.
In addition to short-term annual cash compensation, the EPIP
provides for longer-term compensation in the form of equity
grants. Prior to 2006, equity grants under predecessor incentive
plans were generally made using stock options issued under the
2001 Plan. Subsequent to the issuance of Statement of Financial
Accounting Standards No. 123(R),
Share-Based Payment
(SFAS 123(R)), the compensation committee
re-evaluated whether equity grants under the Companys
incentive plans should continue to consist primarily of options.
The compensation committee determined that a different form of
equity grant could be more cost-effective because of the
methodology of determining compensation expense for equity
awards under SFAS 123(R), while allowing for better
management of dilution resulting from the grant of equity
awards. The compensation committee determined that granting
restricted stock (issued under the 2001 Plan) under the
Companys incentive plans is preferable to granting options
due to, among other matters, greater alignment of executive
officer and stockholder interests by virtue of the executive
officers directly holding stock as well as the possibility of
less dilution of existing stockholders. Restricted stock grants
provide for longer-term incentive compensation due to vesting
requirements under the incentive plans. With respect to the
restricted stock that was issued to the executive officers based
on 2008 performance, the restricted stock vests 50% on each of
the first two anniversaries of the date of grant. In addition,
the executive officers have the ability to elect to receive
restricted stock instead of cash for all or a portion of their
cash incentive awards; any restricted stock so received is also
subject to vesting requirements. In sum, due to the vesting
requirements associated with restricted stock awarded under the
EPIP, our executive officers are provided with longer-term
performance incentives. In determining the allocation of the
aggregate of awards under the EPIP, the compensation committee
focuses on the contributions made by each member of the
executive team to our performance. The compensation committee
believes that such a retrospective analysis is most appropriate
and practicable for our Company given the nature of our
operations.
Payments
under the 2008 Executive Performance Incentive Plan
On February 21, 2008, the compensation committee
established the following performance criteria for the 2008
Executive Performance Incentive Plan (the 2008 EPIP)
pursuant to which our executive officers could earn cash and
equity incentive awards: (i) operating revenues other than
from AcryMed Incorporated (AcryMed), which was
acquired in 2008, (Qualifying Revenues) (60%
weighting), (ii) operating expenses from continuing
operations excluding AcryMed operating expenses, interest
income, interest expense, stock-based compensation, HAPC stock
impairment and certain board expenses as a percentage of
Qualifying Revenues (Operating Expenses) (35%
weighting), and (iii) operating profit from operations
other than from AcryMed and excluding interest income, interest
expense, income taxes, stock-based compensation, HAPC stock
impairment and certain board expenses (Operating
Profit) (5% weighting). The overall goal achievement
percentage was the sum of (i) the accomplishment percentage
of each performance target times (ii) the weighting for
each objective. Thus, if one or more targets was exceeded, the
overall goal achievement percentage could be greater than 100%.
All financial targets were considered to be plus or minus 1% of
the absolute number. In order to provide flexibility to
management to operate and grow the Company, awards could be
adjusted for any major events during the year;
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provided, however, that any adjustment was required to be
approved by the compensation committee and the board. The
allocation of the aggregate awards among the officers was
determined by the compensation committee and the board based on
their assessment of the contributions of each officer.
The specific performance targets relating to Qualifying
Revenues, Operating Expenses, and Operating Profit set by the
compensation committee for the 2008 EPIP were based on targeted
improvements in the financial performance of the Companys
continuing operations, excluding AcryMed. Payouts in connection
with the 2008 EPIP required achievement for continuing
operations that exceeded the performance that was necessary in
connection with the 2007 Corporate Officer Incentive Plan (the
2007 COIP). The specific performance targets that
were established in connection with the 2008 EPIP were
achievement of: (i) Qualifying Revenues of $138,200,000;
(ii) Operating Expenses as a percentage of revenues equal
to 75% of Qualifying Revenues; and (iii) Operating Profit
of $2,414,000. These specific performance targets were
aggressive and required the executive officers to achieve
significant improvement in financial performance. The difficulty
in achieving the specific performance targets is evidenced by
the year-to-year trend in goal achievement, where the executive
officers were paid at a lower percentage of the targeted awards
under the 2008 EPIP as compared to the 2007 COIP.
In order to receive a payout under the 2008 EPIP, a minimum
aggregate performance level of 85% was required. At an overall
goal achievement percentage of 100%, the cash incentive award
for the executive officers combined was an aggregate of
$1,000,000, and the equity incentive award for the executive
officers combined was an aggregate of 150,000 shares of
restricted stock. The maximum cash incentive award for the
executive officers combined was an aggregate of $2,200,000, and
the maximum equity incentive award for the three officers was an
aggregate of 225,000 shares of restricted stock. At the
minimum overall goal achievement percentage of 85%, the cash
incentive award for the executive officers combined was an
aggregate of $50,000, and the equity incentive award for the
three officers combined was an aggregate of 15,000 shares
of restricted stock. For amounts earned above or below the 100%
performance level, the exact amount was to be determined on a
non-linear graduated scale. All equity awards were to be in the
form of restricted stock granted pursuant to the 2001 Plan. The
restrictions on the restricted stock would lapse and the shares
would vest 50% on the first anniversary of the grant date and
50% on the second anniversary of the grant date. To be eligible
for cash or equity awards under the plan, all employees were
required to be on the Companys payroll through the date of
payment of the cash award.
After the completion of fiscal year 2008, the compensation
committee reviewed the executive officers and the
Companys performance in light of the performance goals set
forth in the 2008 EPIP. To account for certain abnormal
litigation and insurance expenses, the compensation committee
and the board determined it was appropriate to exclude
$10.9 million in estimated loss contingency that was
accrued in connection with ongoing litigation and include
approximately $3.5 million of insurance expense related to
the purchase of retroactive insurance policies to determine
appropriate awards under the 2008 EPIP. Based on this review,
the compensation committee determined that for fiscal year 2008,
achievement for funding of the cash and equity awards was 91% of
target. Accordingly, on February 19, 2009, the board
approved the following payments under the 2008 EPIP:
Donald M. Earhart:
As a result of his and the
Companys performance in fiscal year 2008, the compensation
committee recommended, and the board determined, that
Mr. Earhart was entitled to receive an incentive award of
$162,853 in cash and 30,047 shares of restricted stock.
James J. Dal Porto:
As a result of his and the
Companys performance in fiscal year 2008, the compensation
committee recommended, and the board determined, that
Mr. Dal Porto was entitled to receive an incentive award of
$108,569 in cash and 20,031 shares of restricted stock.
James R. Talevich:
As a result of his and the
Companys performance in fiscal year 2008, the compensation
committee recommended, and the board determined, that
Mr. Talevich was entitled to receive an incentive award of
$54,285 in cash and 10,016 shares of restricted stock.
Risk
As a matter of best practice, beginning in this year, the
compensation committee will review the relationship between our
risk management policies and practices and the incentive
compensation we provide to our named executives to confirm that
our incentive compensation does not encourage unnecessary and
excessive risks. The
B-18
compensation committee will also review the relationship between
risk management policies and practices, corporate strategy and
senior executive compensation.
Internal
Pay Equity
With respect to internal pay equity (
i.e.
, the
compensation of an executive officer of the Company as compared
to that of another executive officer), Mr. Earharts
total compensation for 2008 was materially higher than the other
named executive officers total compensation. While
Mr. Earharts base salary was higher than those of the
other named executive officers, his at risk
compensation was substantially higher than the other named
executive officers at risk compensation based
on his being the most accountable for the performance of the
Company.
Stock
Ownership Guidelines
The board of directors has adopted stock ownership guidelines to
align the interests of the board of directors and senior
management with those of our stockholders. Directors, executives
and other specified officers are required to retain and hold 50%
of the shares that they acquire from any equity incentive award
granted on or after January 2, 2006 (after subtracting
shares sold to pay for option exercise costs, and applicable
federal and state taxes which are assumed to be at the highest
marginal tax rates) unless, at the time of receipt of the
shares, the award holder owns shares (excluding unexercised
stock options and unvested stock grants) with a value at or in
excess of the following stock ownership guidelines:
(i) officers and key employees, including the chief
executive officer, chief financial officer and chief operating
officer two times then-current annual base salary;
and (ii) outside directors two times
then-current annual retainer (excluding supplemental retainers
for committee chair service or service as Lead Independent
Director). Award holders subject to the stock ownership
guidelines have until January 2, 2011 to satisfy the share
retention rules above. Award holders who become subject to the
guidelines after the initial adoption of the policy will have
five years to satisfy the share retention requirements. The
stock ownership requirements may be waived by the board in rare
instances where compliance would create severe hardship or
prevent an employee or director from complying with a court
order. Employees and directors who fail to achieve their
ownership target by the relevant deadline, or to maintain their
ownership target following initial achievement, will become
ineligible to receive incentive awards under our equity
incentive plans until such time as they meet or, as the case may
be, again meet the ownership target.
Employment
and Change In Control Agreements
We have entered into employment and change in control agreements
with each of our executive officers. We believe that the
interests of stockholders will be best served if the interests
of our executive officers are aligned with the
stockholders interests, and providing change in control
benefits should eliminate, or at least reduce, any reluctance of
executive officers to pursue potential change of control
transactions that may be in the best interests of stockholders.
Our agreements contain what is known as a double
trigger that is, there must be a change of
control and a termination of the executives employment in
order for payments to be due to the executive under the change
in control agreements. We opted for a double
trigger, rather than providing for severance payments
solely on the basis of a change of control, because this is more
consistent with our goal of encouraging the continued employment
of the executive following a change of control. The difference
in salary multiples between executives was selected based on
internal equities and demands of the job as well as the ability
of the specific executive to find a similar position following a
change of control. Specific information regarding these
agreements is provided under the headings Employment
Agreements and Change In Control Agreements
below.
Stock
Option Grant Practices
While we do not currently grant stock options to our executive
officers, we have previously used stock options as part of our
overall executive compensation program and may do so in the
future. Awards of options are approved by the board or the
compensation committee. It is the general policy of the Company
that the grant of any stock options to eligible employees occurs
without regard to the timing of the release of material,
non-public information. Under the Companys 2001 Equity
Incentive Plan, the exercise price of options is determined by
the plan administrator, and options may generally be granted at
an exercise price that is greater than or less than the fair
market value (as defined in the 2001 Equity Incentive Plan) of
the common stock at the date of grant. The Companys
general policy, however, is to only grant stock options with an
exercise price equal to or greater than the then-current fair
market value of the common stock at the date of grant.
B-19
Perquisites
and Other Benefits
Our executive officers receive perquisites and other benefits
under the current executive compensation program. In particular,
as disclosed under the 2008 Fiscal Year Perquisites and
Other Benefits Table, each of our executive officers
receives supplemental life and health insurance and
reimbursement of auto and gas expenses. Our executive officers
also participate in the same basic benefit programs that are
available to our other employees, including medical, dental and
employee benefit plans.
Tax
Deductibility of Pay
Section 162(m) of the Internal Revenue Code limits the
Companys federal income tax deduction to $1,000,000 for
compensation paid in a taxable year to an individual who, on the
last day of the taxable year, was (i) the chief executive
officer or (ii) among the four other highest compensated
executive officers whose compensation is reported in the summary
compensation table of the proxy statement (other than the chief
financial officer). However, performance-based
compensation is not subject to this deduction limit and is
thus fully deductible if certain conditions are met, including,
for example, if a previously approved plan is re-approved by
stockholders on a periodic basis (generally every five years).
In 2007, our stockholders re-approved the performance goals that
may be used by our compensation committee in administering the
2001 Plan.
The compensation committees policy is to generally
preserve corporate tax deductions by qualifying as
performance-based compensation that is over $1,000,000 and that
is paid to executive officers specified in the tables. To this
end, the board of directors and stockholders approved the 2001
Plan and stockholders re-approved the performance goals under
the 2001 Plan in 2007, which permits annual incentive awards and
stock options (and certain other awards) to qualify as
performance-based compensation not subject to the limitation on
deductibility. However, maintaining tax deductibility is but one
consideration among many and is not the most important
consideration in the design of the compensation program for our
executive officers. The compensation committee considers the
anticipated tax treatment both to the Company and the executive
in its review and approval of compensation grants and awards.
The deductibility of some types of compensation payments will be
contingent upon the timing of an executives vesting or
exercise of previously granted rights, and is also subject to
amendment or modification based on changes to applicable tax
law. The compensation committee may, from time to time, conclude
that certain compensation arrangements are in the best interest
of the Company and its stockholders and consistent with its
stated compensation philosophy and strategy despite the fact
that such arrangements might not, in whole or in part, qualify
for tax deductibility.
Compensation
Committee Report
The compensation committee of the board of directors has
reviewed the Compensation Discussion and Analysis (the
CD&A) and discussed the CD&A with
management. Based on its review and discussions with management,
the compensation committee recommended to the board of directors
that the CD&A be included in the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2008 and the proxy
statement for the 2009 annual stockholders meeting. This report
is provided by the following independent directors, who comprise
the Compensation Committee:
COMPENSATION COMMITTEE
Henry Tsutomu Tai, Ph.D., M.D., Chairman
John H. Abeles, M.D.
Jack H. Halperin, Esq.
Joel S. Kanter
Erik H. Loudon
B-20
Executive
Compensation Tables
Summary
Compensation Table
The following table sets forth the compensation paid during the
last three fiscal years to our chief executive officer, chief
financial officer and our other most highly compensated
executive officers who were serving as our executive officers at
the end of the fiscal year ended December 31, 2008
(collectively, the named executive officers).
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Non-Equity
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Stock
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Option
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Incentive Plan
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Compensation
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Total
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Name and Principal Position
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Year
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($)(1)
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($)
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($)(2)
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($)(3)
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($)(4)
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($)(5)
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($)
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Donald M. Earhart
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2008
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468,791
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2,006,734
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162,853
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132,208
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2,770,586
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Chief Executive Officer
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2007
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434,199
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1,426,204
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704,545
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133,858
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2,698,806
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2006
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437,682
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869,027
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48,098
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912,516
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104,361
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2,371,684
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James R. Talevich
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2008
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246,635
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629,959
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54,285
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79,491
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1,010,370
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Chief Financial Officer
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2007
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225,000
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436,553
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234,848
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61,476
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957,877
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2006
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217,600
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256,571
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8,336
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304,172
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31,330
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818,009
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James J. Dal Porto
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2008
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296,516
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1,259,902
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108,569
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92,111
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1,757,098
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Chief Operating Officer
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2007
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274,116
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873,097
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469,697
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90,558
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1,707,468
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2006
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277,599
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513,140
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13,151
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608,343
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82,911
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1,495,145
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(1)
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Actual amounts paid vary slightly from our named executive
officers base salaries due to the timing of payments
(currently, every two weeks), which can result in total payments
in one year that do not equal our named executive officers
base salaries.
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(2)
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The value reported in the Stock Awards column for each named
executive officer reflects the aggregate cost recognized in the
Companys financial statements for such stock awards for
fiscal years 2006, 2007 and 2008. The costs for stock awards
made during fiscal years 2006, 2007 and 2008 are determined in
accordance with SFAS 123(R) and, under SEC rules, disregard
adjustments for forfeiture assumptions. In accordance with
SFAS 123(R), the cost for stock awards is based on the
closing market value stock price on the date of grant and the
expense is recognized using the straight-lined method over the
requisite service period.
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(3)
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The value reported in the Option Awards column for each named
executive officer reflects the aggregate cost recognized in the
Companys financial statements for option awards occurring
in fiscal year 2006. No costs for option awards were recognized
for the named executive officers during fiscal years 2007 and
2008. The costs for option awards recognized during fiscal year
2006 are determined in accordance with SFAS 123(R) and,
under SEC rules, disregard adjustments for forfeiture
assumptions. In accordance with SFAS 123(R), the cost for
option awards is estimated based on the following assumptions:
volatility, risk-free interest rate, expected term and dividend.
The costs for option awards recognized during fiscal year 2006
consisted of option awards that were granted during fiscal years
2002 and 2004. The assumptions used in calculating the costs
include the following for option awards granted during fiscal
year 2002: volatility of 94%; risk-free interest rate of 3.04%;
expected term of five years; and no dividend yield. The
assumptions used in calculating the costs include the following
for option awards granted during fiscal year 2004: volatility of
90%; risk-free interest rate of 3.64%; expected term of five
years; and no dividend yield.
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(4)
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During fiscal years 2006, 2007 and 2008, the named executive
officers earned cash bonuses under the 2006 COIP, 2007 COIP and
2008 EPIP, respectively, which are included in this column.
Amounts shown are the amounts earned in each year. The cash
bonuses earned in 2006 under the 2006 COIP were paid in February
2007. The cash bonuses earned in 2007 under the 2007 COIP were
paid in February 2008. The cash bonuses earned in 2008 under the
2008 EPIP were paid in February 2009.
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(5)
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The amounts reported in the All Other Compensation column for
2008 include automobile allowances for Messrs. Earhart,
Talevich and Dal Porto in the amounts of $23,483 each, matching
contributions to the I-Flow Corporation Retirement Savings Plan
for Messrs. Earhart, Talevich and Dal Porto in the amounts
of $6,444, $3,684 and $6,534, respectively, amounts paid to
Messrs. Earhart, Talevich and Dal Porto for unused vacation
in the amounts of $44,829, $26,683 and $17,308, respectively, a
$500 cash prize received by Mr. Talevich for a
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B-21
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contest sponsored by the Company, and the amounts reported below
in the Perquisites and Other Benefits Table. The amounts
reported in the All Other Compensation column for 2007 include
automobile allowances for Messrs. Earhart, Talevich and Dal
Porto in the amounts of $23,483, $18,753 and $23,483,
respectively, matching contributions to the I-Flow Corporation
Retirement Savings Plan for Messrs. Earhart, Talevich and
Dal Porto in the amounts of $5,782, $3,355 and $4,887,
respectively, amounts paid to Messrs. Earhart and Dal Porto
for unused vacation in the amounts of $50,096 and $10,543,
respectively, and the amounts reported below in the Perquisites
and Other Benefits Table. The amounts reported in the All Other
Compensation column for 2006 include automobile allowances for
Messrs. Earhart, Talevich and Dal Porto in the amounts of
$23,483, $12,600 and $23,483, respectively, matching
contributions to the I-Flow Corporation Retirement Savings Plan
for Messrs. Earhart, Talevich and Dal Porto in the amounts
of $5,407, $3,104, and $5,444, respectively, amounts paid to
Messrs. Earhart and Dal Porto for unused vacation in the
amounts of $30,570 and $26,358, respectively, and the amounts
reported below in the Perquisites and Other Benefits Table.
|
Perquisites
and Other Benefits Table
The following table sets forth certain of the perquisites and
other benefits provided to named executive officers during 2008.
The amounts below are all included in the All Other
Compensation column of the Summary Compensation Table.
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Supplemental
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Auto and Gas
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Healthcare
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Life Insurance
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Other
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Total
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Name
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Year
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Expenses($)
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($)(1)
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($)
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($)
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($)
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Donald M. Earhart
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2008
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8,157
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9,044
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40,251
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57,452
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2007
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8,134
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8,533
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37,830
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54,497
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2006
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6,122
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4,265
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34,514
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44,901
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James R. Talevich
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2008
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5,556
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14,407
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5,178
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25,141
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2007
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3,056
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20,435
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5,177
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10,700
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(2)
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39,368
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2006
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2,942
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7,506
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5,178
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15,626
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James J. Dal Porto
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2008
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3,739
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21,743
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19,304
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44,786
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2007
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5,058
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17,324
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18,563
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10,700
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(2)
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51,645
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2006
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3,404
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7,066
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17,156
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27,626
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(1)
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The amounts reported in this column represent the insurance
premiums for primary medical, dental and vision benefits paid by
us on behalf of the named executive officers, including
reimbursement of out-of-pocket medical, dental and vision
benefits covered by our ExecuCare program.
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(2)
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The amount reported represents the cost of commemorative watches
provided to Messrs. Talevich and Dal Porto in connection
with the successful closing of the sale of InfuSystem, Inc., our
wholly owned subsidiary, to HAPC, Inc.
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B-22
Grants of
Plan-Based Awards in 2008
The following table provides information about equity and
non-equity awards granted to the named executive officers in
2008. There can be no assurance that the Grant Date Fair Value
of Stock and Option Awards will be the amounts realized by the
officers. The amount of the stock awards that were granted and
expensed in 2008 is shown in the Summary Compensation Table
above.
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All Other
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Stock
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Grant
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Awards;
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Date Fair
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Estimated Future Payouts Under
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Estimated Future Payouts Under
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Number of
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Value of
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Non-Equity Incentive Plan Awards(1)
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Equity Incentive Plan Awards(2)
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Shares of
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Stock and
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Grant
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Threshold
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Target
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Maximum
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Threshold
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Target
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Maximum
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Stock or
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Option
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Name
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Date
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($)
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($)
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($)
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($)
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($)
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($)
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Units (#)(3)
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Awards ($)
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Donald M. Earhart
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2/21/08
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82,955
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1,181,279(4
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2/21/08
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25,000
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500,000
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|
|
|
1,100,000
|
|
|
|
7,500
|
|
|
|
75,000
|
|
|
|
112,500
|
|
|
|
|
|
|
|
1,068,000(5
|
)
|
James R. Talevich
|
|
|
2/21/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,652
|
|
|
|
393,764(4
|
)
|
|
|
|
2/21/08
|
|
|
|
8,333
|
|
|
|
166,667
|
|
|
|
366,667
|
|
|
|
2,500
|
|
|
|
25,000
|
|
|
|
37,500
|
|
|
|
|
|
|
|
356,000(5
|
)
|
James J. Dal Porto
|
|
|
2/21/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,303
|
|
|
|
787,515(4
|
)
|
|
|
|
2/21/08
|
|
|
|
16,667
|
|
|
|
333,333
|
|
|
|
733,333
|
|
|
|
5,000
|
|
|
|
50,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
712,000(5
|
)
|
|
|
|
(1)
|
|
Represents the potential value of the payout for each named
executive officer under the 2008 EPIP as approved by the
independent directors of the board of directors on
February 21, 2008. The potential payouts were
performance-based and thus completely at risk. The actual cash
bonus paid to each named executive officer for his 2008
performance is reported as Non-Equity Incentive Plan
Compensation above in the Summary Compensation Table. In each
case, the named executive officers received a bonus below his
target amount based on 2008 performance.
|
|
(2)
|
|
Represents the potential number of restricted shares for each
named executive officer that may be issued under the 2008 EPIP
as approved by the independent directors of the board of
directors on February 21, 2008. On February 19, 2009,
pursuant to the 2008 EPIP, restricted stock was awarded to
Mr. Earhart, Mr. Dal Porto and Mr. Talevich in
the amounts of 30,047 shares, 20,031 shares and
10,016 shares, respectively.
|
|
(3)
|
|
Represents the total number of shares of restricted stock earned
pursuant to the 2007 COIP and granted on February 21, 2008.
These shares of restricted stock are subject to a two-year
vesting schedule under which 50% of the shares vest on the first
anniversary of the grant date and 50% of the shares vest on the
second anniversary of the grant date. In the event of a change
in control (as defined in the plan), all restricted stock
granted to Messrs. Earhart, Dal Porto and Talevich will
immediately vest and all restrictions with respect thereto will
immediately lapse.
|
|
(4)
|
|
Based on the closing price of the Companys stock on
February 21, 2008, the date of grant, which was $14.24 per
share. Grant date fair values represent the aggregate cost to be
recognized in the Companys financial statements for the
entire award using the straight-lined method over the requisite
service period. The determination of fair value disregards
adjustments for forfeiture assumptions.
|
|
(5)
|
|
Based on the closing price of the Companys stock on
February 21, 2008, the date of board approval of the 2008
EPIP, which was $14.24 per share. Grant date fair values of
estimated future payouts under equity incentive plan awards are
calculated based on the number of shares to be awarded upon
achievement of target. The determination of fair value
disregards adjustments for forfeiture assumptions.
|
B-23
Outstanding
Equity Awards at Fiscal Year-End 2008
The following table provides information on the current holdings
of stock option and stock awards by the named executive officers
as of December 31, 2008. The market value of the stock
awards is based on the closing market price of the
Companys common stock as of December 31, 2008, which
was $4.80 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Plan Awards;
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Plan Awards;
|
|
Market or
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Payout
|
|
|
|
|
|
|
Plan Awards;
|
|
|
|
|
|
|
|
Market
|
|
Unearned
|
|
Value of
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
Value of
|
|
Shares,
|
|
Unearned
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Number of
|
|
Shares or
|
|
Units or
|
|
Shares,
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Shares or
|
|
Units of
|
|
Other
|
|
Units or
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
Units of
|
|
Stock That
|
|
Rights
|
|
Other Rights
|
|
|
Options
|
|
Options
|
|
Unearned
|
|
Exercise
|
|
Option
|
|
Stock That
|
|
Have Not
|
|
That Have
|
|
That Have
|
|
|
(#)
|
|
(#)
|
|
Options
|
|
Price
|
|
Expiration
|
|
Have Not
|
|
Vested
|
|
Not Vested
|
|
Not Vested
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
(#)
|
|
($)
|
|
Date
|
|
Vested (#)
|
|
($)
|
|
(#)(6)
|
|
($)
|
|
Donald M. Earhart
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
13.55
|
|
|
|
1/2/09
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
(1)
|
|
|
288,000
|
|
|
|
|
40,366
|
|
|
|
|
|
|
|
|
|
|
|
3.37
|
|
|
|
12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
43,050
|
(2)
|
|
|
206,640
|
|
|
|
|
66,766
|
|
|
|
|
|
|
|
|
|
|
|
3.37
|
|
|
|
12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
(3)
|
|
|
180,000
|
|
|
|
|
192,000
|
|
|
|
|
|
|
|
|
|
|
|
3.37
|
|
|
|
12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
28,969
|
(4)
|
|
|
139,051
|
|
|
|
|
139,500
|
|
|
|
|
|
|
|
|
|
|
|
17.58
|
|
|
|
1/3/10
|
|
|
|
|
|
|
|
|
|
|
|
82,955
|
(5)
|
|
|
398,184
|
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
1.28
|
|
|
|
1/1/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,282
|
|
|
|
|
|
|
|
|
|
|
|
1.28
|
|
|
|
1/1/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
1.28
|
|
|
|
1/4/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James R. Talevich
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
13.55
|
|
|
|
1/2/09
|
|
|
|
|
|
|
|
|
|
|
|
20,001
|
(1)
|
|
|
96,005
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
17.58
|
|
|
|
1/3/10
|
|
|
|
|
|
|
|
|
|
|
|
10,138
|
(2)
|
|
|
48,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
(3)
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,657
|
(4)
|
|
|
46,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,652
|
(5)
|
|
|
132,730
|
|
James J. Dal Porto
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
13.55
|
|
|
|
1/2/09
|
|
|
|
|
|
|
|
|
|
|
|
40,001
|
(1)
|
|
|
192,005
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
17.58
|
|
|
|
1/3/10
|
|
|
|
|
|
|
|
|
|
|
|
20,276
|
(2)
|
|
|
97,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(3)
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,313
|
(4)
|
|
|
92,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,303
|
(5)
|
|
|
265,454
|
|
|
|
|
(1)
|
|
The restricted stock was granted on February 23, 2006 and
subject to a five-year vesting schedule under which 20% of the
shares vest on each anniversary of the grant date until the
fifth anniversary of the grant date.
|
|
(2)
|
|
The restricted stock was granted on February 23, 2006 and
subject to a three-year vesting schedule under which 25% of the
shares vest on the first anniversary of the grant date, 25% of
the shares vest on the second anniversary of the grant date, and
50% of the shares vest on the third anniversary of the grant
date.
|
|
(3)
|
|
The restricted stock was granted on February 23, 2006 and
subject to a three-year vesting schedule under which 50% of the
shares vest on the second anniversary of the grant date and 50%
of the shares vest on the third anniversary of the grant date.
|
|
(4)
|
|
The restricted stock was granted on February 22, 2007 and
subject to a two-year vesting schedule under which 50% of the
shares vest on the first and second anniversary of the grant
date.
|
|
(5)
|
|
The restricted stock was granted on February 21, 2008 and
subject to a two-year vesting schedule under which 50% of the
shares vest on the first and second anniversary of the grant
date.
|
|
(6)
|
|
In the event of a change in control (as defined in the 2001
Plan), all restricted stock granted to Messrs. Earhart, Dal
Porto and Talevich will immediately vest and all restrictions
with respect thereto will immediately lapse.
|
B-24
Option
Exercises and Stock Vested Table in Fiscal Year 2008
The following table provides information regarding stock option
exercises and restricted stock awards vested by the named
executive officers during 2008, including the number of shares
acquired upon exercise or vesting and the value realized. The
value realized for option awards was calculated based on the
difference between the closing market price per share of our
common stock on the date of exercise or vesting, as applicable,
and the applicable exercise price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
Value
|
|
Number of
|
|
Value
|
|
|
Shares Acquired
|
|
Realized on
|
|
Shares Acquired
|
|
Realized on
|
|
|
on Exercise
|
|
Exercise
|
|
on Vesting
|
|
Vesting
|
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)
|
|
Donald M. Earhart(1)
|
|
|
268,473
|
|
|
|
2,072,977
|
|
|
|
107,994
|
|
|
|
1,478,438
|
|
James R. Talevich(2)
|
|
|
2,025
|
|
|
|
7,958
|
|
|
|
33,891
|
|
|
|
463,968
|
|
James J. Dal Porto(3)
|
|
|
6,250
|
|
|
|
24,563
|
|
|
|
67,784
|
|
|
|
927,963
|
|
|
|
|
(1)
|
|
Mr. Earhart exercised the following stock options during
2008: 113,750 stock options on February 4, 2008, with an
exercise price of $2.50 per share; 120,000 stock options on
December 10, 2008 with an exercise price of $1.04 per
share; and 34,723 stock options on December 10, 2008 with
an exercise price of $11.52.
|
|
|
|
The following stock awards vested during 2008 for
Mr. Earhart: 28,968 shares on February 22, 2008
and 79,026 shares on February 23, 2008.
|
|
(2)
|
|
Mr. Talevich exercised the following stock options during
2008: 2,025 stock options on November 14, 2008, with an
exercise price of $11.52 per share.
|
|
|
|
The following stock awards vested during 2008 for
Mr. Talevich: 9,656 shares on February 22, 2008
and 24,235 shares on February 23, 2008.
|
|
(3)
|
|
Mr. Dal Porto exercised the following stock options during
2008: 6,250 stock options on November 14, 2008, with an
exercise price of $11.52 per share.
|
|
|
|
The following stock awards vested during 2008 for Mr. Dal
Porto: 19,312 shares on February 22, 2008 and
48,472 shares on February 23, 2008.
|
Employment
Agreements
Donald M. Earhart.
Mr. Earhart joined us
as President and Chief Operating Officer in June 1990 and has
been our Chief Executive Officer since July 1990. Upon the
commencement of his employment, we entered into a written
employment agreement with Mr. Earhart, which agreement was
subsequently amended in June 2001, February 2006 and February
2008. The employment agreement, as amended, is automatically
renewed annually unless Mr. Earhart is terminated by the
board of directors. Pursuant to the amended employment
agreement, Mr. Earhart receives a minimum base salary,
which is subject to adjustment upward by the board of directors
and which may not be reduced absent his consent once it is
increased, plus a bonus to be determined annually by the board
of directors based on attainment of goals set by the board.
Mr. Earhart also receives other benefits, such as insurance
coverage, an automobile allowance and paid vacation. We provide
Mr. Earhart with a life insurance policy providing coverage
equal to at least two times his annual base salary.
Mr. Earharts employment agreement also provides for a
severance payment if he is terminated without cause or if he
resigns because his job location is transferred without his
consent. The severance payment includes a cash payment equal to
three times the sum of (i) his annual salary in effect at
the time of termination plus (ii) an amount equal to the
average annual bonus earned in the previous three full fiscal
years. In addition, he is entitled to receive any bonus, or pro
rata portion thereof, earned for the fiscal year in which he is
terminated, together with any and all deferred and unpaid bonus
amounts earned by Mr. Earhart prior to June 21, 2001.
Lastly, all of Mr. Earharts outstanding and unvested
options, restricted stock and other equity-based awards will
immediately become fully vested and, to the extent relevant,
exercisable and all of his outstanding options and any stock
appreciation rights will remain exercisable for the remainder of
their term (but in no event later than the last day prior to the
day that any
B-25
extension would cause such options or stock appreciation rights
to become subject to Section 409A of the Internal Revenue
Code), and he is entitled to receive three years of continued
participation in our group medical insurance programs unless he
obtains coverage through another employer.
Mr. Earharts employment agreement also provides that
he is entitled to receive such additional, incremental severance
payments for which he would qualify under the terms of his
change in control agreement, which is discussed below.
On February 23, 2006 and February 21, 2008, in
connection with compliance with Section 409A of the
Internal Revenue Code, the board of directors approved
amendments to Mr. Earharts employment and change in
control agreements. Because Section 409A may subject
compensation or benefits paid in connection with an
employees termination of employment to additional taxes,
the amendments to the employment and change in control
agreements provide that if, at the time of
Mr. Earharts termination of employment, he is a
specified employee (as defined in
Section 409A), and one or more of the payments or benefits
received or to be received by him pursuant to his employment or
change in control agreement would constitute deferred
compensation subject to Section 409A, then no such payment
or benefit will be provided under the agreement until,
generally, six months after the date of his separation from
service. Furthermore, the 2006 amendments provide that, with
respect to a termination without cause or in the event of a
change in control (as defined in the employment and change in
control agreements), all forms of unvested, restricted and
outstanding equity-based awards (including options, restricted
stock and otherwise), not only stock options, immediately and
automatically become fully vested, have all restrictions lapse,
and (to the extent relevant) become exercisable. In addition,
the 2008 amendments provide fixed dates for certain severance
and bonus payments made upon a qualifying termination or change
in control and for certain disability payments. The amendments
also amend and restate the provisions of the agreements
generally requiring deferral of payments covered by
Section 409A under certain circumstances and permitting the
Company to reform provisions of the agreements to maintain to
the maximum extent practicable the original intent of the
applicable provisions without violating Section 409A.
James J. Dal Porto.
Mr. Dal Porto joined
us in October 1989 and has been our Executive Vice President and
Chief Operating Officer since February 1994. Upon the
commencement of his employment, we entered into a written
employment agreement with Mr. Dal Porto, which agreement
was subsequently amended in June 2001, February 2006 and
February 2008. The employment agreement, as amended, provides
for an initial base salary, which would be subject to adjustment
upward by the board of directors, plus a bonus to be determined
in accordance with the terms of each years management
bonus program as reasonably determined by the board of
directors. Mr. Dal Porto also receives other benefits, such
as insurance coverage, an automobile allowance and paid
vacation. We provide Mr. Dal Porto with a life insurance
policy providing coverage equal to at least two times his annual
base salary. Mr. Dal Portos employment agreement also
provides that he is entitled to a severance payment if he is
terminated without cause or if he resigns his employment because
his job location is transferred without his prior consent. The
severance payment is a cash payment equal to two times the sum
of (i) his annual salary plus (ii) an amount equal to
the average annual bonus earned by Mr. Dal Porto in the
previous three full fiscal years. He is also entitled to receive
any bonus, or relevant portion thereof, earned for the fiscal
year in which he is terminated. Upon a qualifying termination,
Mr. Dal Portos unvested and outstanding stock
options, restricted stock and other equity-based awards
immediately become fully vested and, to the extent relevant,
exercisable for their remaining term (but in no event later than
the last day prior to the day that any extension would cause
such options or stock appreciation rights to become subject to
Section 409A of the Internal Revenue Code). He is entitled
to receive two years of continued participation in our group
medical insurance programs, unless he obtains coverage through
another employer. Mr. Dal Portos employment agreement
also provides that he is entitled to receive such additional,
incremental severance payments for which he would qualify under
the terms of his change in control agreement, which is discussed
below.
On February 23, 2006 and February 21, 2008, the board
of directors also approved amendments to Mr. Dal
Portos employment and change in control agreements. The
amendments to the employment and change in control agreements
are substantially similar to those approved for Mr. Earhart
and Mr. Talevich and provide that if, at the time of
Mr. Dal Portos termination of employment, he is a
specified employee, and one or more of the payments or benefits
received or to be received by him would constitute deferred
compensation subject to Section 409A, then no such payment
or benefit will be provided under the agreement until,
generally, six months after the date of his separation from
service. Furthermore, the 2006 amendments provide that, with
respect to a termination without
B-26
cause or in the event of a change in control, all forms of
unvested, restricted and outstanding stock-based awards
(including options, restricted stock and otherwise), not only
stock options, immediately and automatically become fully
vested, have all restrictions lapse, and (to the extent
relevant) become exercisable. In addition, the 2008 amendments
provide fixed dates for certain severance and bonus payments
made upon a qualifying termination or change in control and for
certain disability payments. The amendments also amend and
restate the provisions of the agreements generally requiring
deferral of payments covered by Section 409A under certain
circumstances and permitting the Company to reform provisions of
the agreements to maintain to the maximum extent practicable the
original intent of the applicable provisions without violating
Section 409A.
James R. Talevich.
Mr. Talevich joined us
in August 2000 as our Chief Financial Officer. Upon the
commencement of his employment, we entered into a written
employment agreement with Mr. Talevich, which agreement was
subsequently amended in February 2006, May 2007 and February
2008. The employment agreement, as amended, provides for an
initial base salary, which would be subject to adjustment upward
by the board of directors, plus a bonus to be determined in
accordance with the terms of each years management bonus
program as reasonably determined by the board of directors.
Mr. Talevich also receives other benefits, such as
insurance coverage, an automobile allowance and paid vacation.
We provide Mr. Talevich with a life insurance policy
providing coverage equal to at least two times his annual base
salary. Mr. Talevichs employment agreement also
provides that he is entitled to a severance payment if he is
terminated without cause or if he resigns his employment because
his job location is transferred without his prior consent. The
severance payment is a cash payment equal to one times the sum
of (i) his annual salary plus (ii) an amount equal to
the average annual bonus earned by Mr. Talevich in the
previous three full fiscal years. He is also entitled to receive
any bonus, or relevant portion thereof, earned for the fiscal
year in which he is terminated. Upon a qualifying termination,
Mr. Talevichs unvested and outstanding stock options,
restricted stock and other equity-based awards immediately
become fully vested and, to the extent relevant, exercisable for
their remaining term (but in no event later than the last day
prior to the day that any extension would cause such options or
stock appreciation rights to become subject to Section 409A
of the Internal Revenue Code). He is entitled to receive one
year of continued participation in our group medical insurance
programs, unless he obtains coverage through another employer.
Mr. Talevichs employment agreement also provides that
he is entitled to receive such additional, incremental severance
payments for which he would qualify under the terms of his
change in control agreement, which is discussed below.
On February 23, 2006, and February 21, 2008, the board
of directors also approved amendments to
Mr. Talevichs employment and change in control
agreements. The amendments to the employment and change in
control agreements are substantially similar to those approved
for Mr. Earhart and Mr. Dal Porto and provide that if,
at the time of Mr. Talevichs termination of
employment, he is a specified employee, and one or more of the
payments or benefits received or to be received by him would
constitute deferred compensation subject to Section 409A,
then no such payment or benefit will be provided under the
agreement until, generally, six months after the date of his
separation from service. Furthermore, the 2006 amendments
provide that, with respect to a termination without cause or in
the event of a change in control, all forms of unvested,
restricted and outstanding stock-based awards (including
options, restricted stock and otherwise), not only stock
options, immediately and automatically become fully vested, have
all restrictions lapse, and (to the extent relevant) become
exercisable. In addition, the 2008 amendments provide fixed
dates for certain severance and bonus payments made upon a
qualifying termination or change in control and for certain
disability payments. The amendments also amend and restate the
provisions of the agreements generally requiring deferral of
payments covered by Section 409A under certain
circumstances and permitting the Company to reform provisions of
the agreements to maintain to the maximum extent practicable the
original intent of the applicable provisions without violating
Section 409A.
Change In
Control Agreements
Donald M. Earhart.
In June 2001,
Mr. Earhart entered into a change in control agreement that
provides for the payment of severance benefits in the event that
his employment is terminated in connection with a change in
control. In addition, as described further above,
Mr. Earharts change in control agreement was amended
on February 23, 2006 and February 21, 2008 to, among
other matters, comply with Section 409A of the Internal
Revenue Code. As amended, the severance benefits are payable if
his employment with us is terminated within 90 days prior
to or three years following a change of control, unless
Mr. Earhart is terminated for cause or the
B-27
termination is the result of Mr. Earharts voluntary
resignation (which does not include resignations resulting from
a material adverse change in responsibilities, status, base
salary, authority or location of workplace) or his death or
disability.
Mr. Earharts severance benefits generally consist of
a lump sum cash payment equal to three times the sum of
(i) his annual base salary in effect at the time of
termination plus (ii) an amount equal to the average annual
bonus earned in the three previous full fiscal years. He is also
entitled to receive any bonus, or pro rata portion thereof,
earned for the fiscal year in which he is terminated, and
coverage for three years under our group medical insurance
programs unless he obtains coverage through another employer. In
addition, Mr. Earharts change in control agreement
provides that an additional payment will be made to him if he is
required to pay excise taxes in connection with his receipt of
the foregoing benefits, such that the net amount received by
Mr. Earhart shall be equal to the total payments he would
have received had the tax not been incurred by him. The
severance payment to Mr. Earhart under the change in
control agreement is in lieu of any severance payments that he
might otherwise receive from us in the event of a change in
control;
provided, however
, that if Mr. Earhart is
terminated within 90 days prior to or three years after a
change in control as a result of a disability, then
Mr. Earharts benefits will be governed by his
employment agreement.
James J. Dal Porto.
In June 2001, Mr. Dal
Porto entered into a change in control agreement with us that
provides for the payment of severance benefits in the event that
his employment is terminated in connection with a change in
control. In addition, as described further above, Mr. Dal
Portos change in control agreement was amended on
February 23, 2006 and February 21, 2008 to, among
other matters, comply with Section 409A of the Internal
Revenue Code. As amended, the severance benefits are payable if
his employment with us is terminated within 90 days prior
to or two and one-half years following a change of control,
unless Mr. Dal Porto is terminated for cause or the
termination is the result of Mr. Dal Portos voluntary
resignation (which does not include resignations resulting from
a material adverse change in responsibilities, status, base
salary, authority or location of workplace) or his death or
disability.
Mr. Dal Portos severance benefits generally consist
of a lump sum cash payment equal to two and one-half times the
sum of (i) his annual base salary in effect at the time of
termination plus (ii) an amount equal to the average annual
bonus earned in the three previous full fiscal years. He is also
entitled to receive any bonus, or pro rata portion thereof,
earned for the fiscal year in which he is terminated, and
coverage for two and one-half years under our group medical
insurance programs unless he obtains coverage through another
employer. In addition, Mr. Dal Portos change in
control agreement provides that an additional payment will be
made to him if he is required to pay excise taxes in connection
with his receipt of the foregoing benefits, such that the net
amount received by Mr. Dal Porto shall be equal to the
total payments he would have received had the tax not been
incurred by him. The severance payment to Mr. Dal Porto
under the change in control agreement is in lieu of any
severance payments that he might otherwise receive from us in
the event of a change in control;
provided, however
,
that if Mr. Dal Porto is terminated within 90 days
prior to or two and one-half years after a change in control as
a result of a disability, then Mr. Dal Portos
benefits will be governed by his employment agreement.
James R. Talevich.
In June 2001,
Mr. Talevich entered into a change in control agreement
with us that provides for the payment of severance benefits in
the event that his employment is terminated in connection with a
change in control. In addition, as described further above,
Mr. Talevichs change in control agreement was amended
on February 23, 2006 and February 21, 2008 to, among
other matters, comply with Section 409A of the Internal
Revenue Code. As amended, the severance benefits are payable if
his employment with us is terminated within 90 days prior
to or two years following a change of control, unless
Mr. Talevich is terminated for cause or the termination is
the result of Mr. Talevichs voluntary resignation
(which does not include resignations resulting from a material
adverse change in responsibilities, status, base salary,
authority or location of workplace) or his death or disability.
Mr. Talevichs severance benefits generally consist of
a lump sum cash payment equal to two times the sum of
(i) his annual base salary in effect at the time of
termination plus (ii) an amount equal to the average annual
bonus earned in the three previous full fiscal years. He is also
entitled to receive any bonus, or pro rata portion thereof,
earned for the fiscal year in which he is terminated, and
coverage for two years under our group medical insurance
programs unless he obtains coverage through another employer. In
addition, Mr. Talevichs change in control
B-28
agreement provides that an additional payment will be made to
him if he is required to pay excise taxes in connection with his
receipt of the foregoing benefits, such that the net amount
received by Mr. Talevich shall be equal to the total
payments he would have received had the tax not been incurred by
him. The severance payment to Mr. Talevich under the change
in control agreement is in lieu of any severance payments that
he might otherwise receive from us in the event of a change in
control.
Potential
Payments Upon Termination or a Change in Control
The table below reflects the amount of compensation to each of
the named executive officers of the Company in the event of
termination of such executive officers employment for
specified reasons. The amount of compensation payable to each
named executive officer upon involuntary not-for-cause
termination, termination following a change of control and in
the event of disability of the executive officer is shown below.
The amounts shown assume that such termination was effective as
of December 31, 2008 and use the closing price of our
common stock as of December 31, 2008 ($4.80), and thus
include amounts earned through such time and are estimates of
the amounts that would be paid out to the executive officers
upon their termination. The actual amounts to be paid out can
only be determined at the time of such executive officers
separation from the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary,
|
|
|
|
|
|
|
|
|
Not-for-Cause or
|
|
Change in
|
|
|
|
|
|
|
Voluntary, Good
|
|
Control
|
|
|
|
|
|
|
Reason
|
|
(Qualifying
|
|
|
|
|
Potential Executive
|
|
Termination
|
|
Termination)
|
|
Disability
|
Name and Principal Position
|
|
Benefits and Payments
|
|
Total ($)
|
|
Total ($)
|
|
Total $(1)
|
|
Donald M. Earhart
|
|
Cash Severance(2)
|
|
|
8,976,495
|
|
|
|
8,976,495
|
|
|
|
692,647
|
|
Chairman, President &
|
|
Bonus(3)
|
|
|
307,079
|
|
|
|
307,079
|
|
|
|
|
|
Chief Executive Officer
|
|
Equity Stock Awards Unvested and Accelerated(4)
|
|
|
1,211,875
|
|
|
|
1,211,875
|
|
|
|
|
|
|
|
Healthcare, Life & Disability
|
|
|
147,885
|
|
|
|
147,885
|
|
|
|
|
|
|
|
Tax Gross-ups
|
|
|
|
|
|
|
3,505,828
|
|
|
|
|
|
|
|
Total
|
|
|
10,643,334
|
|
|
|
14,149,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James R. Talevich
|
|
Cash Severance(5)
|
|
|
1,090,726
|
|
|
|
2,181,452
|
|
|
|
4,091,999
|
|
Chief Financial Officer
|
|
Bonus(3)
|
|
|
102,362
|
|
|
|
102,362
|
|
|
|
|
|
|
|
Equity Stock Awards Unvested and Accelerated(4)
|
|
|
383,750
|
|
|
|
383,750
|
|
|
|
|
|
|
|
Healthcare, Life & Disability
|
|
|
19,585
|
|
|
|
39,170
|
|
|
|
|
|
|
|
Tax Gross-ups
|
|
|
|
|
|
|
816,027
|
|
|
|
|
|
|
|
Total
|
|
|
1,596,423
|
|
|
|
3,522,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Dal Porto
|
|
Cash Severance(6)
|
|
|
3,962,886
|
|
|
|
4,953,608
|
|
|
|
9,751,896
|
|
Executive Vice President &
|
|
Bonus(3)
|
|
|
204,718
|
|
|
|
204,718
|
|
|
|
|
|
Chief Operating Officer
|
|
Equity Stock Awards Unvested and Accelerated(4)
|
|
|
767,486
|
|
|
|
767,486
|
|
|
|
|
|
|
|
Healthcare, Life & Disability
|
|
|
82,094
|
|
|
|
102,618
|
|
|
|
|
|
|
|
Tax Gross-ups
|
|
|
|
|
|
|
1,818,974
|
|
|
|
|
|
|
|
Total
|
|
|
5,017,184
|
|
|
|
7,847,404
|
|
|
|
|
|
|
|
|
(1)
|
|
This column was calculated by multiplying 60% of Total
Compensation, as disclosed in the Summary Compensation Table, by
the number of years, prorated as of December 31, 2008,
until the named executive officer reaches the age of 65.
|
|
(2)
|
|
The net cash severance that Mr. Earhart would receive after
taxes, based on a 43.78% tax rate effective December 31,
2008, would be $5,046,585 for either an involuntary,
not-for-cause, or voluntary, good reason termination or for a
qualifying change in control and $389,406 for a disability.
|
|
(3)
|
|
The value of the bonus amount consists of the pro rata portion
of the amount earned under the 2008 EPIP, as of
December 31, 2008, which is 100% of the bonus awarded in
February of 2009. This amount includes the fair value as of
December 31, 2008 of restricted stock awards subject to a
two-year vesting schedule under which 50% of the shares vest on
the first and second anniversary of the grant date.
|
B-29
|
|
|
(4)
|
|
The value of the restricted stock vesting was calculated by
multiplying the number of unvested shares on December 31,
2008 by the closing market price of the Companys common
stock as of December 31, 2008, which was $4.80 per share.
|
|
(5)
|
|
The net cash severance that Mr. Talevich would receive
after taxes, based on a 43.78% tax rate effective
December 31, 2008, would be $613,206 for an involuntary,
not-for-cause, or voluntary, good reason termination, $1,226,412
for a qualifying change in control and $2,300,522 for a
disability.
|
|
(6)
|
|
The net cash severance that Mr. Dal Porto would receive
after taxes, based on a 43.78% tax rate effective
December 31, 2008, would be $2,227,935 for either an
involuntary, not-for-cause, or voluntary, good reason
termination, $2,784,918 for a qualifying change in control and
$5,482,516 for a disability.
|
Director
Compensation
Cash Compensation.
We compensate our
non-employee directors for attending meetings of the board of
directors, and we reimburse all directors for expenses incurred
in traveling to board meetings. For the prior fiscal year, each
non-employee director received $1,200 for each board or
committee meeting attended in person, $600 for all telephonic
meetings of less than 45 minutes duration and $1,200 for all
telephonic meetings of 45 minutes or more duration. In addition
to meeting attendance fees, we pay each non-employee director a
$4,000 quarterly retainer. During 2008, we also paid the
chairman of the audit committee, the chairman of the
compensation committee, and the Lead Independent Director an
annual retainer of $10,000 each. These annual retainers are in
addition to the non-employee director quarterly retainer. In
2008, the total amount of such fees paid to non-employee
directors was $207,200.
The table below shows the cash amounts paid to each non-employee
director for his service in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chair/Lead
|
|
|
|
|
|
|
|
|
|
Board
|
|
|
Board
|
|
|
Independent
|
|
|
Committee
|
|
|
Total
|
|
|
|
Retainer
|
|
|
Meeting
|
|
|
Director
|
|
|
Meeting
|
|
|
Amounts
|
|
|
|
Fees ($)
|
|
|
Fees ($)
|
|
|
Fees ($)
|
|
|
Fees ($)
|
|
|
Paid ($)
|
|
|
Dr. Abeles
|
|
|
16,000
|
|
|
|
7,200
|
|
|
|
|
|
|
|
15,000
|
|
|
|
38,200
|
|
Mr. Halperin
|
|
|
16,000
|
|
|
|
7,800
|
|
|
|
10,000(1
|
)
|
|
|
15,600
|
|
|
|
49,400
|
|
Mr. Kanter
|
|
|
16,000
|
|
|
|
7,800
|
|
|
|
10,000(2
|
)
|
|
|
15,600
|
|
|
|
49,400
|
|
Mr. Loudon
|
|
|
16,000
|
|
|
|
7,800
|
|
|
|
|
|
|
|
6,000
|
|
|
|
29,800
|
|
Dr. Tai
|
|
|
16,000
|
|
|
|
7,800
|
|
|
|
10,000(3
|
)
|
|
|
6,600
|
|
|
|
40,400
|
|
|
|
|
(1)
|
|
Lead Independent Director
|
|
(2)
|
|
Chairman of the Audit Committee
|
|
(3)
|
|
Chairman of the Compensation Committee
|
Equity Compensation.
Directors are also
eligible to receive stock options, restricted stock and other
stock-based awards pursuant to the I-Flow Corporation 2001
Equity Incentive Plan. Following the approval of proposals
considered at the 2002 annual meeting of stockholders, the board
of directors terminated the 1992 Non-Employee Director Stock
Option Plan, and instead of the pre-determined annual grants
under the 1992 Director Plan, each non- employee director
is eligible to receive grants of stock options and other
stock-based awards at the discretion of the board of directors.
Following a review of our director compensation practices during
2005, the compensation committee of the board of directors
recommended that the board of directors replace annual grants of
stock options to non-employee directors with annual grants of
restricted stock. On January 22, 2008, upon the
recommendation of the compensation committee, the board
authorized the grant of 5,000 shares of restricted common
stock to each of our non-employee directors. The shares of
restricted stock vested and all restrictions on transfer lapsed
on the first anniversary of the date of grant. During 2008, the
board granted an aggregate of 25,000 shares of restricted
stock to our non-employee directors.
B-30
On December 4, 2008, upon the recommendation of the
compensation committee, we authorized the grant of
5,000 shares of restricted stock to each of our
non-employee directors effective January 2, 2009. The
shares of restricted stock will vest and all restrictions on
transfer will lapse on the earlier of the first anniversary of
the date of grant or a change in control.
The following table shows 2008 compensation for our non-employee
directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
|
Paid in Cash
|
|
Stock
|
|
|
|
|
($)(1) Earned or
|
|
Awards
|
|
Total
|
|
|
Paid in Cash
|
|
($)(2)
|
|
($)
|
|
Dr. Abeles
|
|
|
38,200
|
|
|
|
89,154
|
|
|
|
127,354
|
|
Mr. Halperin
|
|
|
49,400
|
|
|
|
89,154
|
|
|
|
138,554
|
|
Mr. Kanter
|
|
|
49,400
|
|
|
|
89,154
|
|
|
|
138,554
|
|
Mr. Loudon
|
|
|
29,800
|
|
|
|
89,154
|
|
|
|
118,954
|
|
Dr. Tai
|
|
|
40,400
|
|
|
|
89,154
|
|
|
|
129,554
|
|
|
|
|
(1)
|
|
Represents amount of cash compensation earned in 2008 for board
and committee service.
|
|
(2)
|
|
Represents the dollar amount recognized for financial statement
reporting purposes with respect to the 2008 fiscal year for the
fair value of restricted stock awards outstanding in 2008, in
accordance with SFAS 123(R). The fair value of restricted stock
awards is calculated based on the closing price of the
Companys common stock on the date of grant. There can be
no assurance that the SFAS 123(R) amounts will be the
amounts realized by the named directors.
|
Audit
Committee Report
The audit committee has responsibility for overseeing our
accounting and financial reporting processes and the audits of
our financial statements. During 2008, management completed the
testing and evaluation of our system of internal control over
financial reporting in accordance with the requirements set
forth in Section 404 of the Sarbanes-Oxley Act of 2002 and
the rules and regulations promulgated thereunder. After the
evaluation was completed, management met with the audit
committee and reviewed the effectiveness of our internal control
over financial reporting. The audit committee also reviewed the
report of management contained in the Annual Report on
Form 10-K
of I-Flow Corporation for the year ended December 31, 2008
and the Report of Independent Registered Public Accounting Firm
of Deloitte & Touche LLP included in the Annual Report
on
Form 10-K
related to Deloitte & Touche LLPs audit of
(i) our consolidated financial statements and (ii) the
effectiveness of internal control over financial reporting. The
audit committee continues to oversee I-Flow Corporations
efforts related to its internal control over financial reporting
and managements evaluation of the same.
In addition, the audit committee of the board of directors has
reviewed and discussed the audited financial statements with
management, has discussed with the independent registered public
accounting firm the matters required to be discussed by
Statement on Auditing Standards No. 61 (Codification for
Statements on Auditing Standards), and has been timely briefed
by Deloitte & Touche LLP as required by
Section 204 of the Sarbanes-Oxley Act of 2002 and
Securities and Exchange Commission rules promulgated thereunder.
In addition, the audit committee has received the written
disclosures and the letter from Deloitte & Touche LLP
required by the applicable requirements of the Public Company
Accounting Oversight Board regarding Deloitte & Touche
LLPs communications with the audit committee concerning
independence and has discussed with Deloitte & Touche
LLP the independent registered public accounting firms
independence. Based on the review and discussions referred to
above, the audit committee recommended to the board of directors
that the audited financial statements be included in our Annual
Report on
Form 10-K
for the last fiscal year for filing with the Securities and
Exchange Commission.
AUDIT COMMITTEE
Joel S. Kanter, Chairman
John H. Abeles, M.D.
Jack H. Halperin, Esq.
B-31
Stockholder
Proposals
2010
Annual Meeting Proposals
Stockholders who wish to have proposals considered for inclusion
in the proxy statement and form of proxy for our 2010 annual
meeting of stockholders pursuant to
Rule 14a-8
under the Exchange Act must cause their proposals to be received
in writing by our Corporate Secretary at the address set forth
on the first page of this Information Statement no later than
December 17, 2009. Any proposal should be addressed to our
Corporate Secretary and may be included in next years
proxy materials only if such proposal complies with our bylaws
and the rules and regulations promulgated by the Securities and
Exchange Commission to be eligible for inclusion in our 2010
proxy materials.
Our bylaws further require that stockholder proposals made
outside of
Rule 14a-8
under the Exchange Act must be submitted in accordance with the
requirements of our bylaws. Our bylaws require that a
stockholder give our Corporate Secretary timely written notice
of any proposal or nomination of a director. To be timely, such
written notice must be delivered to or mailed and received at
our principal executive offices not less than 60 days nor
more than 90 days prior to a scheduled meeting (or annual
meeting, as applicable) of stockholders or, if less than
70 days notice or prior public disclosure of the date
of the scheduled meeting is given or made to stockholders, such
written notice must be so received not later than the close of
business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public
disclosure was made.
Furthermore, such notices must contain, among other matters, the
following additional information:
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the stockholders (and the beneficial owners, if any)
name and address;
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the stockholders (and the beneficial owners, if any)
holdings of our stock;
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a representation that the stockholder is a holder of record of
our equity securities;
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a representation that the stockholder intends to bring such
business in person or by proxy at the meeting;
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a reasonably detailed description of any business to be brought
before such meeting; and
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the reasons for conducting such business at the meeting and any
material interest in such business of the stockholder and the
beneficial owner, if any, on whose behalf the business is being
proposed.
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In addition, such notices relating to director nominations must
also contain, among other matters, the following additional
information:
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the stockholders (and the beneficial owners, if any)
name and address;
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the stockholders (and the beneficial owners, if any)
holdings of our stock;
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a representation that the stockholder is a holder of record of
our equity securities;
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a representation that the stockholder intends to make the
nomination in person or by proxy at the meeting;
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a description of any arrangement the stockholder has with the
individual the stockholder plans to nominate;
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the nominees name, age, business address and residence
address and biographical information;
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the nominees holdings of our stock; and
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the written consent of the nominee to serve as a director if
elected.
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If such notices relating to stockholder-proposed business or
director nominations are not received between the required dates
and do not satisfy the additional notice requirements set forth
above and as further described in Article II,
Section 2.10 and Section 2.11 of our bylaws, the
notices will be considered untimely and will not be acted upon
at our 2010 annual meeting of stockholders.
Incorporation
by Reference
The reports of the compensation committee and the audit
committee that appear herein shall not be deemed to be
soliciting material or to be filed with the Securities and
Exchange Commission under the Securities Act of 1933 or the
Exchange Act or incorporated by reference in any document so
filed.
B-32
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