ICUI-DEF14A-2012

ICU MEDICAL, INC.
951 Calle Amanecer
San Clemente, California 92673-6213

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held May 11, 2012


The 2012 Annual Meeting of Stockholders of ICU Medical, Inc. (the ''Company'') will be held by means of remote communication on the Internet at the Company’s web site, www.icumed.com, and by conference telephone at (800) 253-5274 and (408) 427-3711 for international, conference identification number 59348830, on Friday, May 11, 2012 at 9:00 a.m., Pacific Daylight Time, for the following purposes:

1.
To elect two directors of the Company to serve for a term of three years and until their successors have been elected and qualified;
2.
To ratify the selection of Deloitte & Touche LLP as the independent registered public accounting firm for the Company for the year ending December 31, 2012;
3.
To hold an advisory vote to approve named executive officer compensation;
4.
To consider a proposal to approve amendments to the ICU Medical, Inc. 2011 Stock Incentive Plan to increase the number of shares under that Plan; and
5.
To transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

The Board of Directors has determined that only holders of common stock of record at the close of business on March 19, 2012 will be entitled to receive notice of, and to vote at, the Annual Meeting or any adjournment thereof.

You may attend the Annual Meeting by either clicking on “Investors” and then clicking on “Annual Meeting” on our web site, www.icumed.com, or calling (800) 253-5274 and (408) 427-3711 for international, conference identification number 59348830, from a touch-tone telephone. If you hold stock certificates registered in your own name, you will need the control number printed on the attachment to the enclosed proxy card to verify that you are a stockholder of record. If your stock is held in “street name” by your broker or other nominee, you will need to provide the name of your broker or nominee to gain access to the Annual Meeting.


By Order of the Board of Directors
Scott E. Lamb, Secretary
San Clemente, CA
April 4, 2012

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING TO BE HELD ON MAY 11, 2012

The proxy statement and annual report to stockholders are available at http://ir.icumed.com.

YOUR VOTE IS IMPORTANT
Even if you plan to attend the Annual Meeting in person by means of remote communication, please complete, sign, date and return the enclosed proxy promptly or submit your proxy over the Internet or by telephone. If you are a stockholder of record and attend the Annual Meeting electronically, you may withdraw your proxy and vote in person via facsimile. You will find information on submitting your proxy over the Internet and by telephone and information about voting in person at the Annual Meeting on the reverse side of this notice.
THANK YOU FOR ACTING PROMPTLY




How do I submit my proxy?

You will have the opportunity to attend the Annual Meeting by means of remote communication and vote during the Annual Meeting if you choose. Whether or not you vote during the Annual Meeting, it is important that your shares be represented and voted. If you are a stockholder of record, you can give a proxy to have your shares voted at the Annual Meeting either:

by mailing the enclosed proxy card in the enclosed envelope;
electronically, using the Internet; or
over the telephone by calling a toll-free number.

The Internet and telephone proxy submission procedures are set up for your convenience and are designed to verify your identity, to allow you to give voting instructions, and to confirm that those instructions have been properly recorded. If you are a stockholder of record and you would like to submit your proxy by telephone or by using the Internet, please refer to the specific instructions on the attachment to the enclosed proxy card. Alternatively, you may submit your proxy by mail by returning your signed proxy card in the enclosed envelope. If we receive your proxy by mail, electronically or by telephone before the Annual Meeting, we will vote your shares as you direct.

If you hold your shares in “street name,” you must give voting instructions in the manner prescribed by your broker or nominee. Your broker or nominee has enclosed or provided a voting instruction card for you to use in directing the broker or nominee how to vote your shares.

How can I vote my shares in person at the meeting?

If you are a stockholder of record, as opposed to voting by proxy you may vote your shares during the Annual Meeting by facsimile. The procedures for voting during the Annual Meeting are designed to verify your identity and allow you to vote. You should retain the attachment to the proxy card enclosed with this Proxy Statement on which your unique control number appears. You will need to write this control number on your ballot to verify your identity.

To vote during the meeting, access the Company’s website at www.icumed.com, then click on the Investors tab, and click on the icon that says “Voting Ballot.” You may download and print the ballot. Alternatively, you may request that a ballot be faxed to you by calling Investor Relations at (800) 824-7890 any time before 4:00 PM PDT on May 10, 2012. After you have marked your votes and recorded your control number on your ballot, you may fax the ballot to the Company at (949) 366-8368. Ballots must be received before the polls are closed during the Annual Meeting to be counted. We anticipate that the polls will be open from approximately 9:05 to 9:20 AM PDT on May 11, 2012.

Even if you currently plan to attend the Annual Meeting, we recommend that you also submit your proxy as described above so that your vote will be counted if you later decide not to attend the Annual Meeting. If you vote by proxy and then decide to attend the Annual Meeting, you will be able to vote during the Annual Meeting, even if you have previously submitted your proxy.
    
How can I request proxy materials?

To request a print or electronic copy of our Proxy Statement, Annual Report to Stockholders and form of proxy, you may call our toll-free telephone number (800) 824-7890; e-mail us at ir@icumed.com or visit our Web site at www.icumed.com. You may also request that we send you proxy materials relating to future stockholders meetings in print or electronic form.

Your vote is important. Thank you for voting.




ICU MEDICAL, INC.

951 Calle Amanecer
San Clemente, California 92673

PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of ICU Medical, Inc. (the ''Company'') for use at the 2012 Annual Meeting of Stockholders (the “Annual Meeting”). The Annual Meeting is to be held by means of remote communication on the Internet at the Company’s web site, www.icumed.com, and by conference telephone at (800) 253-5274 and (408) 427-3711 for international, conference identification number 59348830, on Friday, May 11, 2012 at 9:00 a.m., Pacific Daylight Time, and at any adjournments thereof, for the purposes set forth herein and in the accompanying Notice.
The approximate date of mailing of this Proxy Statement, the Annual Report to Stockholders and the proxy card is April 4, 2012. The principal executive offices of the Company are located at 951 Calle Amanecer, San Clemente, California 92673.

Attendance by Remote Communication

The Annual Meeting will be held entirely by remote communication on the Internet, as permitted by Delaware law. There will be no physical location at which stockholders may attend the Annual Meeting, but stockholders may attend and participate in the meeting electronically. Stockholders who participate in the Annual Meeting by means of remote communication will be deemed to be present in person and will be able to vote during the Annual Meeting at the times that the polls are open. Stockholders who wish to attend the meeting should go to www.icumed.com, click on the Investors tab and click on the icon that says “Annual Meeting” or telephone (800) 253-5274 and (408) 427-3711 for international, conference identification number 59348830, at least 10 minutes before the beginning of the meeting to register their attendance and complete the verification procedures to confirm that they were stockholders of record as of March 19, 2012, the record date. Stockholders of record will need to provide the control number on the attachment to the enclosed proxy card to verify their identity.

Beneficial owners whose stock is held for them in street name by their brokers or other nominees may also attend the meeting by going to www.icumed.com, clicking on the Investors tab and clicking on the icon that says “Annual Meeting” or telephoning (800) 253-5274 and (408) 427-3711 for international, conference identification number 59348830, at least 10 minutes before the beginning of the meeting to register their attendance and complete the verification procedures to confirm that they were stockholders of record as the record date. Such beneficial owners may not vote at the meeting, and may only cause their shares to be voted by providing voting instructions to the persons who hold the beneficial owners’ shares for them. Beneficial owners will need to provide the name of the broker or other nominee that holds their shares to gain access to the meeting.

There is additional information about voting at the Annual Meeting on the opposite page. Stockholders may also obtain additional information about accessing and voting during the Annual Meeting by calling Investor Relations at (800) 824-7890.

Proxy Information

A stockholder giving a proxy may revoke it at any time before it is exercised by filing with the Secretary of the Company a written notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy holders will be suspended if the person executing the proxy is present at the Annual Meeting electronically and elects to vote in person. Subject to such revocation or suspension, all shares represented by each properly executed proxy received by the Company will be voted in accordance with the instructions indicated thereon, and if instructions are not indicated, will be voted in favor of (i) the election of the nominees for director named in, or otherwise nominated as set forth in this Proxy Statement, (ii) the ratification of the selection of the independent registered public accounting firm, (iii) approval, on an advisory basis, of our executive compensation, (iv) approval of amendments to the ICU Medical, Inc. 2011 Stock Incentive Plan (the “2011 Stock Incentive Plan”) and (v) in the discretion of the proxy holders, on any other business that comes before the meeting.

Record Date and Voting

As of March 19, 2012 the outstanding voting securities of the Company consisted of 14,087,555 shares of $0.10 par value common stock. Each stockholder of record at the close of business on March 19, 2012 is entitled to one vote for each share held as of that date on each matter submitted to a vote of stockholders. The presence in person electronically or by proxy of holders of a majority of the issued and outstanding common stock will constitute a quorum for the transaction of such business as shall

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properly come before the meeting.
Assuming that a quorum is present, the votes required to approve the matters before the Annual Meeting are as follows:
Election of Directors: The election of directors will be decided by a plurality of the votes. The two director nominees receiving the most votes will be elected. Abstentions and broker non-votes have no effect on these matters.

All other Matters (ratification of Deloitte & Touche LLP as the Company’s independent registered public accounting firm, advisory vote on executive compensation and the approval of the amendments to the 2011 Stock Incentive Plan): Stockholder approval of all other matters requires the votes cast affirmatively exceed the votes cast negatively on the respective matters. Shares voted to abstain on such matters and broker non-votes are not counted as votes cast affirmatively or negatively and will have no effect on the vote for these matters.
The term ''broker non-votes'' refers to shares held by a broker in street name that are present by proxy but are not voted pursuant to rules prohibiting brokers from voting on non-routine matters without instructions from the beneficial owner of the shares. Broker non-votes on non-routine matters are not counted as entitled to vote on a matter in determining the number of affirmative votes required for approval of the matter but are counted as present for quorum purposes. Of the proposals to be considered at the Annual Meeting, only the ratification of the selection of independent registered public accountants is considered to be a routine matter on which brokers may vote without instructions from beneficial owners. The election of directors, the advisory vote to approve named executive officer compensation and the approval of the amendments to the 2011 Stock Incentive Plan are considered non-routine matters on which your brokers may not vote without instructions from beneficial owners.
Board Recommendations
The Board of Directors recommends that you vote:

FOR the election of the two nominees for election to the Board of Directors to serve for a term of three years and until their successors have been elected and qualified;
FOR the ratification of Deloitte & Touche LLP as our independent registered public accounting firm for the year ended December 31, 2012;
FOR the approval, on an advisory basis, of our named executive officer compensation; and
FOR the approval of the amendments to the ICU Medical, Inc. 2011 Stock Incentive Plan.



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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information as to shares of common stock owned as of March 19, 2012, by (a) each director and nominee, (b) each named executive officer and (c) all directors and executive officers as a group. Unless otherwise indicated in the footnotes following the table, and subject to community property laws where applicable, the Company believes that the persons as to whom the information is given have sole voting and investment power over the shares listed as beneficially owned. The business address of Company’s directors and officers, the George A. Lopez, M.D. Second Family Limited Partnership and the Lopez Family Trust is 951 Calle Amanecer, San Clemente, California 92673.
Ownership of Management
 

Shares of Common Stock Owned
 
Options Exercisable within 60 days
 
Total Shares Beneficially Owned
 
Percent of Outstanding Shares (1)


 
George A. Lopez, M.D.
1,520,762

 
933,438
 
2,454,200

 
16.3
%
(2)
 
George A. Lopez, M.D. Second Family Limited Partnership
1,186,843

 

 
1,186,843

 
8.4
%
(3)
 
Jack W. Brown
11,250

 
67,375
 
78,625

 
*


 
John J. Connors
300

 
61,750
 
62,050

 
*


 
Michael T. Kovalchik III, M.D.
2,762

 
62,875
 
65,637

 
*


 
Joseph R. Saucedo

 
51,625
 
51,625

 
*


 
Richard H. Sherman, M.D.
67,801

 
39,250
 
107,051

 
0.8
%

 
Robert S. Swinney, M.D.
7,000

 
67,375
 
74,375

 
*

(4)
 
Alison D. Burcar

 
30,438
 
30,438

 
*


 
Richard A. Costello

 
61,013
 
61,013

 
*


 
Scott E. Lamb
1,923

 
55,000
 
56,923

 
*


 
Steven C. Riggs
2,286

 
63,750
 
66,036

 
*


 
All directors and named executive officers as a group (11 persons)
1,614,084

 
1,493,889
 
3,107,973

 
19.9
%

 
 
 
 
 
 
 
 
 
 
(1)
Based on total shares of common stock outstanding plus outstanding options to acquire common stock currently exercisable or exercisable within 60 days held by the beneficial owner whose percent of outstanding stock is calculated.
 
 
 
 
 
 
 
 
 
 
(2)
Includes the 1,186,843 shares owned by the George A. Lopez, M.D. Second Family Limited Partnership (the “Partnership”), as to which shares Dr. Lopez disclaims any beneficial ownership except to the extent described in Note (3). Includes 4,002 shares owned by the Lopez Family Trust. Dr. Lopez is a trustee and beneficiary of the Lopez Family Trust. Includes 173,950 shares held by Dr. Lopez as Trustee of the Lopez Charitable Remainder Trust #1 for the benefit of Dr. Lopez.
 
 
 
 
 
 
 
 
 
 
(3)
Dr. Lopez is the general partner of the Partnership and holds a one percent general partnership interest in the Partnership. As general partner, he has the power to vote and power to dispose of the 1,186,843 shares owned by the Partnership and may be deemed to be a beneficial owner of such shares. Trusts for the benefit of Dr. Lopez’s children, the Christopher George Lopez Children’s Trust and the Nicholas George Lopez Children’s Trust, own a 99% limited partnership interest in the Partnership. Dr. Lopez is not a trustee of and has no interest in his children’s Trusts. Except to the extent of the undivided one percent general partnership interest in the assets of the Partnership, Dr. Lopez disclaims any beneficial ownership of the shares owned by the Partnership.
 
 
(4)
Does not include 750 shares owned by Dr. Swinney's wife as to which he has no voting or investment power and disclaims any beneficial ownership.



5% or More Beneficial Ownership
 
Name and Address of Beneficial Owner
 
Shares of Common Stock Owned
 
Percent of Outstanding Shares (1)
 
 
 
River Road Asset Management, LLC
 
1,491,809

 
10.7
%
 
(1)(2)
 
462 South Fourth Street, Suite 1600, Louisville, KY 40202
 

 


 
 
 
 
 
 
 
 
 
 
 
Wellington Management Company, LLP
 
1,265,978

 
9.1
%
 
(1)(3)
 
75 State Street, Boston, MA 02109
 

 


 
 
 
 
 
 
 
 
 
 
 
Columbia Management Investment Advisers, LLC
 
995,249

 
7.1
%
 
(1)(4)
 
145 Ameriprise Financial Center, Minneapolis, MN 55474
 

 


 
 
 
 
 
 
 
 
 
 
 
BlackRock, Inc.
 
938,057

 
6.7
%
 
(1)(5)
 
40 East 52nd Street, New York, NY 10022
 

 
 
 
 
 
 
 
 
 
 
 
 
(1
)
Information included solely in reliance on information included in statements filed with the Securities and Exchange Commission ("SEC") pursuant Section 13(d) or 13(g) of the Securities Act of 1934, as amended, by the indicated holder.
 
 
 
 
 
 
 
 
(2
)
River Road Asset Management, LLC stated in its Schedule 13G/A filing with the SEC on February 9, 2012 that, of the 1,491,809 shares beneficially owned, it has sole voting power with respect to 1,295,829 shares and sole dispositive power with respect to all 1,491,809 shares.
 
 
 
 
 
 
 
 
(3
)
Wellington Management Company, LLP stated in its Schedule 13G/A filing with the SEC on February 14, 2012 that, of the 1,265,978 shares beneficially owned, it has shared voting power with respect to 864,478 shares and shared dispositive power with respect to all 1,265,978 shares.
 
 
 
 
 
 
 
 
(4
)
Columbia Management Investment Advisers, LLC stated in its Schedule 13G filing with the SEC on February 13, 2012 that, of the 995,249 shares beneficially owned, it has shared voting power with respect to 396,556 shares and shared dispositive power with respect to all 995,249 shares.
 
 
 
 
 
 
 
 
(5
)
Blackrock, Inc. stated in its Schedule 13G/A filing with the SEC on February 13, 2012 that, of the 938,057 shares beneficially owned, it has sole voting and sole dispositive power with respect to all 938,057 shares.


EXECUTIVE OFFICER AND DIRECTOR COMPENSATION


Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides important information on our executive compensation program. In this proxy statement, the term “named executive officers” represents the five executive officers named in the compensation tables that follow.

Executive Summary

Over the last decade, through two recessions, ICU Medical has been profitable and generated positive operating cash flow in every year, earning $240 million and generating $338 million of cash from operating activities, while maintaining a strong balance sheet and carrying no debt. Over the last five years, we have earned $147 million and generated $221 million of cash from operating activities, cumulatively, and used $108 million of available cash to purchase 3.0 million shares or 20% of our common stock. During this same five–year period our revenues grew more than 60% from growth in infusion therapy and expanding our product offerings to include critical care, oncology and other products. Also, during this same five-year period, our international sales grew more than 200% and were 24% of total sales in 2011, compared to 13% of total sales in 2007.

In 2011, we had a record year with revenue of $302 million, operating income of $65 million and operating cash flow of $64 million. This performance is a direct result of actions taken by Dr. Lopez and the ICU Medical leadership team over the last few years investing in the Company to expand our portfolio of products and markets, expanding our contract relationships with group purchasing organizations (GPOs) and direct customers, increasing our investments in these new products and markets and greatly expanding our sales, marketing, distribution and manufacturing capabilities for continued global growth and profitability for the Company.




Despite a challenging economic environment in recent years, we delivered strong financial results as seen in the year over year comparison set forth below. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for a more detailed description of our fiscal year 2011 financial results.

 
 
2011
 
2010
 
% change
Operating cash flow
 
$
64.5

 
$
33.1

 
95
%
Total revenue (in millions)
 
$
302.2

 
$
283.0

 
7
%
Net income (in millions)
 
$
44.7

 
$
29.9

 
49
%
Net income per share (diluted)
 
$
3.15

 
$
2.16

 
46
%

Our fiscal year 2011 financial performance was a key factor in the bonus and equity compensation decisions and outcomes for the 2011 fiscal year. For 2011, payment of semi-annual performance bonuses was based on achievement of the following financial goals, each of which was exceeded by the Company: (i) $295.8 million in total revenue, (ii) $49.9 million in operating income and (iii) $2.27 diluted earnings per share.

Our compensation programs are designed to align our named executive officers’ interests with those of our stockholders by establishing a direct and meaningful link between our business financial results and executive compensation. Consistent with our pay for performance philosophy, the Compensation Committee sets annual goals for the named executive officers’ incentive compensation with the objective of increasing stockholder value. Our named executive officers’ total compensation is comprised of a mix of base salary, performance-based bonuses and performance and time-based equity awards. We believe our executive compensation program helps attract, reward and retain talented leaders and provides them with incentives to create stockholder value.

We have made several changes to our compensation policies during 2011 and 2012 to further align executive compensation with our stockholders' interests and a pay for performance approach. For example, beginning in 2011 all of our named executive officers became participants in the Company's Performance Based Incentive Plan which conditions bonus awards on the achievement of performance-based metrics set at the beginning of each year. In addition, following approval last year of our 2011 Stock Incentive Plan which gave the Compensation Committee the ability to grant performance-based equity awards, the Committee has granted performance based restricted stock units ("RSUs") as a portion of our executive's equity compensation. Going forward, the Committee will look at increasing the percentage that such RSUs and other forms of performance-based wards comprise of total equity-based compensation for its executives.

Compensation Overview

The compensation of our executive officers includes base salary, performance-based bonuses and equity awards. Our executive compensation objectives are:

to provide competitive total pay opportunities that help attract, reward and retain leadership and key talent;
to establish a direct and meaningful link between business financial results, individual/team performance and rewards; and
to provide strong incentives to promote the profitability and growth of the Company, create shareholder value and reward superior performance.

The Compensation Committee believes that a critical factor in ensuring the Company’s ability to attract, retain and motivate its executive officers is ensuring that their compensation is competitive with companies that it considers to be competitors. In determining the appropriate level and form of compensation, the Compensation Committee reviews market data relating to the cash and equity compensation of similarly-sized medical device and life sciences companies that is provided by Compensia, a compensation consultant engaged by the Compensation Committee. The market data also includes a specific set of peer companies comprised of publicly-held health care equipment and supply companies with positive revenue growth, annual revenues of 0.5-2.0 times ICU's revenues and aggregate market values of 0.5-3.0 times ICU's aggregate market value. The peer companies used in our 2011 compensation assessment were Accuray, Align Technology, Analogic, AngioDynamics, ArthroCare, Bio-Reference Laboratories, Cantel Medical, eResearch Technology, Masimo, Medical Action Industries, Merit Medical Systems, Natus Medical, SonoSite, Symmetry Medical, Thoratec, Volcano, Wright Medical Group and Zoll Medical. All market data used for the comparative analyses comprises our ‘peer group’.


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The Company does not provide pension or other post-retirement benefits, other than matching contributions under the Company’s 401(k) retirement plan. The Company does not provide, except to the limited extent described in this discussion, any significant perquisites or other personal benefits to its officers.

In 2011, we established stock ownership guidelines for our directors and CEO. Our directors have up to five years to acquire and retain shares of the Company's common stock that equal or exceed three times the director's annual base retainer. Shares beneficially owned by the director, directly or indirectly, including vested restricted shares and shares represented by vested restricted stock units, count toward meeting the stock ownership guidelines. Our CEO has up to five years to acquire and retain shares of the Company's common stock that equal or exceed five times the CEO's annual salary. The Company prohibits pledging or hypothecating any securities owned by any of its employees or directors or “short selling” of its securities by any of its employees or directors.

The Compensation Committee reviews and determines the compensation of all executive officers. See “Compensation Committee” elsewhere in this Proxy Statement. In setting compensation levels for executive officers, the Compensation Committee considers each element of compensation separately as well as the aggregate value of all elements of compensation for each individual. Amounts realized or realizable from awards under prior bonus or incentive plans, including stock options, are not considered in setting current compensation levels. The significant compensation components are base salary, bonus pay and equity awards ("total direct compensation"). In addition, beginning in 2011, the Compensation Committee began including the Say-On-Pay vote results from the prior annual meeting of stockholders to assist in its evaluation of the compensation program for our named executive officers. The 2011 Say-On-Pay vote was significantly in favor of our executive compensation structure, confirming to the Compensation Committee that stockholders approved of the recent efforts of the Committee to more effectively align executive compensation with performance. For 2012, the Compensation Committee has positioned the targeted total direct compensation to be in the 65th percentile of the Company's peer group.

Components of Our Executive Compensation Program
Component
Form of compensation
Objectives and basis of compensation
Base Salary
Cash
Compensation is competitive based on the officer’s responsibilities and experience.
Generally set at the 50th-75th percentile of similar positions in our peer group, but may adjust upwards or downwards based on factors such as experience, longevity with the Company and unique requirements of the position.
Base salary is reviewed by the Compensation Committee annually or when position responsibilities change.
Performance-Based Incentive Plan
Cash
Bonus is intended to align the interests of the executive officer with the objectives of the Company, which are based on what the Company believes will produce the best return for the Company’s stockholders.
Bonus is based on the Company’s achievement of financial targets determined at the start of the fiscal year.
Bonus is a percentage of the officer’s salary.
Bonus payments are made semi-annually based on the percentage of the goal achieved at each period end.
The Compensation Committee may exercise its discretion to award case bonuses outside the Performance Based Incentive Plan in circumstances of special individual achievement.
Performance and Time-Based Equity Awards
Time-Based Stock Options/ Performance-Based Restricted Stock Grants
Stock options and restricted stock grants retain executives through long-term vesting and potential wealth accumulation.
Stock options and restricted stock grants promote profitability and growth of the Company.
Stock options and restricted stock grants are intended to make compensation practices consistent with our peer group. Performance-based RSUs are effective tools in better aligning equity compensation with performance.

The Company has entered into employment agreements with each of the named executive officers. For named executive officers other than Dr. Lopez, the term of the agreement is for semi-annual periods ending on June 30 and December 31, which are automatically renewed for successive six-month periods upon expiration, unless terminated by the Company.

6


The term of the agreement with Dr. Lopez is for an annual period ending December 31 and is automatically renewed for an annual period upon expiration, unless terminated by the Company. The agreements may be terminated by the Company with or without cause on sixty days notice. The terms of the agreements generally provide for a base salary and performance-based bonus target for each named executive; however, the agreements do not provide for a guaranteed term of employment. Upon termination of employment with the Company due to disability, the employment agreements also provide for a lump sum payment equal to 50% of the executive officer’s base salary for the term of the agreement. Other than these provisions requiring 60 days of notice for termination and the lump sum payment upon termination due to disability, we do not have severance agreements with any of our executive officers.

Base Executive Salaries

The Compensation Committee generally reviews base salaries annually and when position responsibilities change during the year.

In 2009, the Compensation Committee increased certain executive salaries based on data provided by Compensia. These increases were to make the officer’s total pay competitive with the total pay of officers in comparable positions in our peer group and to keep compensation internally equitable for Messrs. Lamb, Riggs and Costello. Salaries were increased effective July 1, 2009 for Dr. Lopez from $500,000 to $588,000, Mr. Riggs from $260,000 to $300,000 and Mr. Costello from $260,000 to $300,000, respectively. Mr. Lamb’s salary initially increased to $250,000 effective January 1, 2009 and to $300,000 effective July 1, 2009.

In 2010, base annual salaries were increased on January 1, 2010 to $670,000 for Dr. Lopez, $341,000 for Mr. Lamb, $330,000 for Mr. Riggs and $336,000 for Mr. Costello. These increases were to make the total pay competitive with the total pay of comparable positions of companies in our peer group and to keep the compensation internally equitable for Messrs. Lamb, Riggs and Costello. Ms. Burcar’s salary remained at $195,000 because of her position change from Vice President of Marketing to Vice President of Product Development, which was not included in the peer group analysis performed in 2009.

In 2011, the Compensation Committee increased certain executive salaries based on data provided by Compensia. These increases were to make the total pay for these positions competitive with the total pay in comparable positions in our peer group. On January 1, 2011 the base annual salaries for Mr. Lamb and Ms. Burcar were adjusted to $361,600 and $225,000, respectively.

For 2012, the Compensation Committee increased executive salaries by 3% for a cost of living adjustment. On January 1, 2012 the base annual salaries were $690,100 for Dr. Lopez, $372,448 for Mr. Lamb, $339,900 for Mr. Riggs, $346,080 for Mr. Costello and $231,750 for Ms. Burcar.

The following table presents each named executive officer’s earned salary for 2011, 2010 and 2009 and his or her estimated salary for 2012 and the percentile such salary represents compared to our peer group.

 
 
2012
 
2011
 
2010
 
2009
Named Executive Officer
 
Salary*
%**
 
Salary*
%**
 
Salary*
%**
 
Salary*
%**
George A. Lopez
 
690,100

50th-75th
 
$670,000
75th
 
$670,000
75th
 
$544,000
50th
Scott E. Lamb
 
372,448

50th-75th
 
$361,600
75th
 
$341,000
75th
 
$275,000
25th-50th
Steven C. Riggs
 
339,900

50th-75th
 
$330,000
75th
 
$330,000
>75th
 
$280,000
>75th
Richard A. Costello
 
346,080

>75th
 
$336,000
>75th
 
$336,000
>75th
 
$280,000
50th-75th
Alison D. Burcar
 
231,750

25th-50th
 
$225,000
50th
 
$195,000
#
 
$195,000
#

*Salary = Earned salary for the years 2011, 2010 and 2009, estimated amount to be earned for 2012 based on salaries as of January 1, 2012.
**% = Percentile of earned salary compared to our peer group for years 2011, 2010 and 2009, estimated percentile of 2012 salary compared to our peer group.

# Ms. Burcar’s responsibilities changed in 2009 to oversee product development from marketing. We did not have a salary analysis done on her new position for 2009 and 2010.

Performance-Based Bonuses

In addition to base salaries, all of our named executive officers were eligible to earn semi-annual merit bonuses based on annual financial goals for 2009. All named executive officers, except Dr. Lopez, were eligible for semi-annual merit bonuses based on annual financial goals for 2010. Dr. Lopez did not participate in the merit bonus program in 2010 because he

7


participated solely in the Performance-Based Incentive Plan, as discussed in further detail below under the heading “2008 Performance-Based Incentive Plan”. For 2011, this discretionary semi-annual merit bonus program was terminated for our executive officers, and, all of our named executive officers participated solely in the non-discretionary Performance-Based Incentive Plan.

Merit Bonuses

The following table presents the merit bonus percentage for each year as a percentage of the named executive officer’s salary.
        
Named Executive Officer
 
First half of 2009
 
Second half of 2009
 
2010
 
2011
George A. Lopez, M.D.
 
100
%
 
100
%
 
N/A*

 
N/A*
Scott E. Lamb
 
35
%
 
50
%
 
60
%
 
N/A*
Steven C. Riggs
 
35
%
 
50
%
 
50
%
 
N/A*
Richard A. Costello
 
35
%
 
50
%
 
50
%
 
N/A*
Alison D. Burcar
 
30
%
 
30
%
 
30
%
 
N/A*

*Dr. Lopez participated solely in the Performance-Based Incentive Plan in 2010. All named executive officers participated in the Performance-Based Incentive Plan in 2011.

The 2009 bonus target increases for Mr. Riggs and Mr. Costello and the 2009 and 2010 bonus target increases for Mr. Lamb were to make the officer’s compensation more competitive with our peer group. The Compensation Committee sets Dr. Lopez’s bonus percentage at a higher percentage of his base salary than those of other officers because it believes that in view of his overall responsibility for the success of the Company, it is appropriate that a larger portion of his compensation be contingent on performance.

For 2009, payment of semi-annual merit bonuses was based on achievement of the following financial goals: (i) $215.4 million in total revenue, (ii) $93.0 million in gross profit and (iii) $33.0 million in operating income. Each of the 2009 performance targets were met, and the bonuses were paid at 100% of the targeted amount, resulting in payments of $544,000 for Dr. Lopez, $118,750 for Mr. Lamb, $120,500 for Mr. Riggs, $120,500 for Mr. Costello and $58,500 for Ms. Burcar.

For 2010, payment of semi-annual merit bonuses was based on achievement of the following financial goals: (i) $265.0 million in total revenue, (ii) $39.0 million in operating income and (iii) $1.82 diluted earnings per share. Each of the 2010 performance targets was met and the bonuses were paid at 100% of the targeted amount. Payments were made in the amount of $204,600 for Mr. Lamb, $165,250 for Mr. Riggs, $168,000 for Mr. Costello and $58,500 for Ms. Burcar. In addition to the awards paid pursuant to the merit bonus program, the Compensation Committee approved additional cash bonuses to Mr. Lamb and Ms. Burcar of $100,000 and $80,000, respectively, for exceptional performance in the 2010 fiscal year.

2008 Performance-Based Incentive Plan

Our 2008 Performance-Based Incentive Plan (the “Performance-Based Incentive Plan”) was approved by stockholders in 2008 and is intended to qualify under the performance-based compensation exception set forth in Section 162(m) of the Internal Revenue Code (the “Code”). Until 2011, Dr. Lopez was the only participant in the Performance-Based Incentive Plan. Pursuant to the terms of the plan, the Compensation Committee sets potential bonus amounts and performance targets, and actual earnings are determined based on the Company’s achievement of the performance targets.

The performance targets for Dr. Lopez in 2009 were as follows: (i) $223.6 million to $236.0 million in total revenue, (ii) $21.5 million to $26.0 million in revenues from certain new products and (iii) $35.0 million to $36.9 million in operating income. Dr. Lopez earned $160,000 in 2009 based on the Company’s achievement of 100% of the operating income goal and 60% of the total revenue goal. The Company did not achieve the revenue goal with respect to the new products. Dr. Lopez was eligible to receive the maximum payout of $500,000 if all performance targets had been achieved. In March of 2012, as a result of adjustments made to the Company's 2009 financial statements, it was determined that the amounts paid to Dr. Lopez exceeded by $55,000 the amount that should have been payable to him under the Performance-Based Plan for 2009 based on the adjusted operating income and total revenue numbers for that year . Dr. Lopez has agreed with the Compensation Committee that his salary for the remainder of 2012 will be reduced by $55,000 to address this issue.


8


For 2010, Dr. Lopez was eligible to earn a bonus from 88% to 170% of his total salary, depending on the percentage achieved of the 2010 performance targets. The performance targets for Dr. Lopez in 2010 were as follows: (i) $261.0 million to $278.3 million in total revenue, (ii) $37.8 million to $42.9 million operating income and (iii) $1.77 to $2.00 diluted earnings per share. Dr. Lopez earned the maximum bonus of $1,137,500 in 2010 based on the Company’s achievement of more than 100% of the total revenue, operating income and diluted earnings per share goals. As described above, in 2009, Dr. Lopez earned $160,000 out of a maximum of $500,000 and in 2008, Dr. Lopez earned $90,000 out of a maximum payout of $500,000.

For 2011, all cash bonus compensation to our named executive officers was made pursuant to the Performance-Based Incentive Plan, except for a $5,000 additional cash bonus approved by the Compensation Committee for Ms. Burcar for her efforts in connection with the launch of our new Neutron product. The corporate goals paid 70% of the officer’s target award if threshold performance was achieved and 140% of the target award if maximum “stretch” performance was achieved. The following table presents the target bonus award and the eligible bonus range as a percentage of total salary for each named executive officer.
 
 
 
 
% of salary bonus range if performance targets are met
Named Executive Officer
 
% of salary target award
 
Threshold performance
 
Stretch performance
George A. Lopez, M.D.
 
125
%
 
88
%
 
175
%
Scott E. Lamb
 
60
%
 
38
%
 
82
%
Steven C. Riggs
 
50
%
 
32
%
 
68
%
Richard A. Costello
 
50
%
 
32
%
 
68
%
Alison D. Burcar
 
30
%
 
19
%
 
41
%
The performance metric targets were total revenue, operating income and diluted earnings per share, accounting for 100% of Dr. Lopez’s award and 90% of the award for each of the other named executive officers. In the case of officers other than Dr. Lopez, he or she had a specific financial individual goal for the other 10%. The individual component was only paid if the goal was fully met. The metric targets for all named executive officers in 2011 were as follows: (i) $266.2 million to $325.4 million in total revenue, (ii) $44.9 million to $56.9 million operating income and (iii) $2.04 to $2.59 diluted earnings per share. The officers were paid for 100% of the bonus attributed to the revenue goal and 140% of the bonus attributed to the operating income goal and the diluted earnings per share goal. The individual goal for our Chief Financial Officer was a successful implementation of our ERP system in our European facilities and was fully met. The individual goal for our Vice President of Operations was for full production capabilities for custom kits in our Mexico facility with $1 million of annual run rate of sell-through and was fully met. The individual goal for the Vice President of Sales was achieving $15 million of standard oncology sales and was fully met. The individual goal for the Vice President of Product Development was to achieve $1 million in sales of our Neutron product, which was not met because of the timing of the product launch.
The following table presents target and stretch bonus payouts and the actual amounts earned for each named executive officer for 2011.
Named Executive Officer
 
Salary
 
Potential bonus payout of target at 100%
 
Potential stretch bonus payout
 
Potential maximum bonus payout
 
Actual bonus paid
 
Actual bonus paid % of salary
George A. Lopez
 
$
670,000

 
$
837,500

 
$
335,000

 
$
1,172,500

 
$
1,061,833

 
158
%
Scott E. Lamb
 
$
361,600

 
$
216,960

 
$
78,106

 
$
295,066

 
$
269,030

 
74
%
Steven C. Riggs
 
$
330,000

 
$
165,000

 
$
59,400

 
$
224,400

 
$
204,600

 
62
%
Richard A. Costello
 
$
336,000

 
$
168,000

 
$
60,480

 
$
228,480

 
$
208,320

 
62
%
Alison D. Burcar
 
$
225,000

 
$
67,500

 
$
24,300

 
$
91,800

 
$
76,950

 
34
%
In 2012, all cash bonus compensation to our named executive officers will be made pursuant to the Performance-Based Incentive Plan. The metrics will be total revenue, operating income and diluted earnings per share, accounting for 100% of Dr. Lopez’s award and 90% of the award for each of the other named executive officers. In the case of officers other than Dr. Lopez, he or she has a specific financial individual goal for the other 10%. The corporate goals pay 70% of the officer’s target award if threshold performance is achieved and 140% of the target award if maximum “stretch” performance is achieved. The

9


individual component will only be paid if the goal is fully met.
The potential 2012 bonus percentage of salary for all named executive officers remains the same as 2011, except Ms. Burcar, whose target award percentage increased from 30% to 50%. Ms. Burcar's bonus percentage was increased to more closely align her total cash compensation with her peer group. The following table presents the 2012 target bonus award and the eligible bonus range as a percentage of total salary for each named executive officer.
        
 
 
 
 
% of salary bonus range if performance targets are met
Named Executive Officer
 
% of salary target award
 
Threshold performance
 
Stretch performance
George A. Lopez, M.D.
 
125
%
 
88
%
 
175
%
Scott E. Lamb
 
60
%
 
38
%
 
82
%
Steven C. Riggs
 
50
%
 
32
%
 
68
%
Richard A. Costello
 
50
%
 
32
%
 
68
%
Alison D. Burcar
 
50
%
 
32
%
 
68
%


The following table presents the 2012 target and stretch bonus payout amounts for each named executive officer.
    
Named Executive Officer
 
Salary
 
Potential bonus payout of target at 100%
 
Potential stretch bonus payout
 
Potential maximum bonus payout
George A. Lopez
 
$
690,100

 
$
862,625

 
$
345,050

 
$
1,207,675

Scott E. Lamb
 
$
372,448

 
$
223,469

 
$
80,449

 
$
303,918

Steven C. Riggs
 
$
339,900

 
$
169,950

 
$
61,182

 
$
231,132

Richard A. Costello
 
$
346,080

 
$
173,040

 
$
62,294

 
$
235,334

Alison D. Burcar
 
$
231,750

 
$
115,875

 
$
41,715

 
$
157,590

Performance and Time-Based Equity Awards
We issue equity awards to our officers and certain employees to make compensation practices consistent with practices of companies in our peer group and because we believe equity-based compensation is generally preferred by our officers. The use of equity awards further promotes our efforts to encourage the profitability and growth of the Company through the establishment of strong incentives.
The following table presents the option grants for each named executive officer for 2009-2011 and the 2012 option and restricted stock grants.
 
 
Time based option grants
 
Performance-based restricted share grants
Name
 
2009
 
2010
 
2011
 
Feb 2012
 
Feb 2012
George A. Lopez, M.D.
 
90,000

 
80,000

 
80,000

 
88,857

 
8,409

Scott E. Lamb
 
30,000

 
30,000

 
30,000

 
23,772

 
2,520

Steven C. Riggs
 
30,000

 
30,000

 
30,000

 
20,683

 
2,193

Richard A. Costello
 
30,000

 
30,000

 
30,000

 
13,847

 
1,468

Alison D. Burcar
 
13,000

 
6,000

 
20,000

 
9,421

 
999

For 2009-2011, Messrs. Lamb, Riggs and Costello were awarded the same number of options in recognition of the Compensation Committee’s assessment of their relatively similar scope of responsibility. Also for 2009-2011, Dr. Lopez and Ms. Burcar have relatively larger and smaller roles, respectively, in the management of the Company than the other named

10


executive officers, which is reflected in the size of their respective grants. The awards in 2009-2011 were issued in the first and third quarters of each year.
In determining the equity awards, the Compensation Committee reviews data compiled by Compensia that includes comparisons to the officer’s peer group as well as our operating performance and individual performance to determine the number of options to be granted to each officer. In 2011, the grant date fair value of options awarded to Dr. Lopez, Messrs. Lamb, Riggs and Costello were between the 25th and 50th percentile of their respective positions within our peer group. The grant date fair value of the options awarded to Ms. Burcar was greater than the 75th percentile of her respective peer group.  The executive officer’s compensation is reviewed as a total compensation package that includes salary, bonus and equity. In setting the number of options awarded the Compensation Committee did not target any specific percentile; however, the Compensation Committee believes that the fair value of option awards is consistent with our general practice of awarding total compensation generally in the range of the 65th to 75th percentile, with adjustments upwards or downwards based on factors such as experience, longevity with the Company and unique requirements of the position.
Beginning in 2012, the Compensation Committee adjusted the methodology for equity awards, based on data provided by Compensia. Total direct compensation (cash and equity) is targeted at approximately the 65th percentile of the executive officer's peer group. The equity awards will be granted to achieve the targeted total direct compensation at the 65th percentile of the executive's peer group, after backing out total estimated cash compensation. The executive officers will receive 25% of their targeted value for equity awards as performance-based restricted stock and 75% of their targeted value for equity awards in the form of time-based stock options. The restricted stock awards will be based on one-year performance periods and measured against a total shareholder return metric ("TSR"). If the TSR is equal or greater than the 33rd percentile of the peer group index, 50% of the award would be earned. If the TSR is equal or greater than the 50th percentile of the peer companies, 100% of the award would be earned. If the TSR is equal or greater than the 75th percentile of the peer companies, 200% of the award would be earned. Vesting of the restricted stock award will be 1/3 on the three anniversary dates of the award. Beginning in 2012, equity awards will be made once per year, in the first quarter of each year.

Long-Term Retention Plan

The Long-Term Retention Plan (“LTRP”) was established in 2005 as a discretionary deferred compensation plan under which discretionary cash payments could be made to officers six years after an award was made. Under the LTRP, the Compensation Committee periodically determined, after advice from and consultation with, the CEO, the award to each participant other than the CEO. The Compensation Committee determined the award to the CEO, without advice from or consultation with the CEO. The amounts of the annual awards were discretionary, and did not bear a relationship to the officers’ other compensation or performance.

Awards, other than awards to the CEO, could be paid or not paid at the sole discretion of the CEO on the sixth anniversary of the award; provided, however that awards could be paid sooner if Dr. Lopez ceases to be CEO. Awards to Dr. Lopez could be paid or not paid at the sole discretion of the Compensation Committee on the sixth anniversary of the award or sooner if Dr. Lopez was terminated or replaced as CEO without cause (as defined in the LTRP). To receive payment of an award, a participant had to have been continually employed by the Company from the time that the award was made until the time that payment is due.

There were no grants under the LTRP in 2008, 2009 or 2010. The Company curtailed future awards to officers under the LTRP because it has re-established the use of stock options. The payment due date for the 2005 awards was January 29, 2011. On January 28, 2011, the Compensation Committee determined to pay out the maturing 2005 awards in full. However, the Committee determined not to make any payments in the future as to the 2006 and 2007 awards and also determined that no additional awards would be made under the LTRP in the future, effectively terminating the plan.

The amounts paid in 2011 to the named executive officers with respect to the 2005 awards under the LTRP were as follows:
        
 Officer
 
 
George A. Lopez, M.D.
 
$
1,000,000

Scott E. Lamb
 
$
200,000

Alison D. Burcar
 
$
220,000

Richard A. Costello
 
$
333,000

Steven C. Riggs
 
$
400,000



11


Payments upon Termination in Connection with a Change in Control

The Company entered into a retention agreement with Dr. Lopez in February 2010 that subsequently was amended in November 2010. The amended agreement provides that, if within 24 months after a change in control of the Company his employment is terminated for other than cause, disability or death or for “good reason,” he will be entitled to any unpaid salary or unpaid prorated bonus for the year of termination, 360% of his annual salary and target bonus, continuation of benefits for two years and any stock options he holds will vest in full. The November 2010 amendment to the retention agreement eliminated the excise tax gross up payment provisions in the original agreement pursuant to which the Company had agreed to pay and make Dr. Lopez whole in the event that any of the payments or benefits payable to Dr. Lopez under the agreement would constitute “parachute payments” within the meaning of Section 280G of the Code, including payment of any excise taxes imposed by Section 4999 of the Code. The November 2010 amendment to Dr. Lopez’s agreement eliminated these tax gross up provisions and now provides that in the event that Dr. Lopez’s payments or benefits would be subject to such excise taxes, the payments and benefits under the agreement would be either (i) delivered in full or (ii) reduced such that no portion of the payments or benefits would be subject to the excise tax, whichever is more favorable to Dr. Lopez on an after tax basis. Also, the Company will pay the commercially reasonable fees for an outplacement firm.

In February 2010, the Company entered into retention agreements with Mr. Lamb, Mr. Costello, Mr. Riggs and Ms. Burcar which provide that, if within 12 months after a change in control of the Company, as defined in the agreements, their employment is terminated for other than cause, disability or death or for “good reason” within 12 months after a “change in control” the officer will be entitled to any unpaid salary or unpaid prorated bonus for the year of termination, plus 120% of their annual salary and target bonus and continuation of benefits for one year and the Company will pay up to $10,000 for services for an outplacement firm for the officer. In addition, any stock options held by the officer will vest in full. The retention agreements with the Company’s other named executives do not contain any tax gross-up provisions but, instead provide for the same most favorable excise tax option as in Dr. Lopez’s amended agreement.
 
For the purposes of these agreements, a change in control generally means the following:
the acquisition by an individual, entity or group of beneficial ownership of 50% or more of either the outstanding common stock or voting securities of the Company; or
a change in the composition of the majority of the Board of Directors, which is not supported by a majority of the current Board of Directors; or
a major corporate transaction, such as a reorganization, merger or consolidation or sale or disposition of all or substantially all of the Company’s assets (unless certain conditions are met); or
approval of the stockholders of the Company of a complete liquidation or dissolution of the Company.



12


Summary Compensation Table

The following table shows all compensation awarded to, earned by or paid to each of the Company’s principal executive officer, principal financial officer and the next three most highly compensated executive officers whose 2011 total compensation exceeded $100,000 (collectively, the “named executive officers”). All amounts except for those set forth in the “Equity Awards” column are included in the year earned rather than the year actually paid; a portion of certain amounts, other than salary, may be paid in the following year.

SUMMARY COMPENSATION TABLE
Name and principal position
Year
 Salary ($)
 Bonus ($)(1)
 Equity awards ($)(2)
 Non-equity incentive plan compensation ($)(3)
 All other compensation ($)(4)
 Total ($)
George A. Lopez, M.D., Chairman of the Board, President and Chief Executive Officer
2011
670,000


898,640

1,061,833

1,008,770

3,639,243

2010
670,000


849,641

1,137,500

32,989

2,690,130

2009
544,000


1,202,850

704,000

8,137

2,458,987

Scott E. Lamb, Treasurer and Chief Financial Officer
2011
361,600


336,990

269,030

210,095

1,177,715

2010
341,000

100,000

318,615

204,600

7,399

971,614

2009
275,000


400,950

118,750

8,575

803,275

Steven C. Riggs, Vice President of Operations
2011
330,000


336,990

204,600

408,894

1,280,484

2010
330,000


318,615

165,250

11,766

825,631

2009
280,000


400,950

120,500

7,318

808,768

Richard A. Costello, Vice President of Sales
2011
336,000


336,990

208,320

333,000

1,214,310

2010
336,000


318,615

168,000


822,615

2009
280,000


400,950

120,500


801,450

Alison D. Burcar, Vice President of Product Development
2011
225,000

5,000

224,660

76,950

221,641

753,251

2010
195,000

80,000

62,628

58,500


396,128

2009
195,000


199,608

58,500


453,108


(1)
The 2010 bonuses for Mr. Lamb and Ms. Burcar were additional cash bonuses approved by the Compensation Committee for exceptional performance in the 2010 fiscal year. The 2011 bonus for Ms. Burcar was an additional cash bonus approved by the Compensation Committee for her efforts in 2011 in connection with the launch of our new Neutron product.

(2)
Represents the grant date fair value of stock options granted in the period. See Note 5 in the Company’s Consolidated Financial Statements included in its 2011 Annual Report on Form 10-K for assumptions made in valuation of stock options.
(3)
The 2011 amounts for all named executive officers represent the achievement of each respective officer's fiscal year 2011 performance and stretch performance goals, consistent with the terms of the Performance-Based Incentive Plan. The 2010 amount for Dr. Lopez represents the achievement of his fiscal year 2010 performance and stretch performance goals, consistent with the terms of the Performance-Based Incentive Plan. The 2009 amount for Dr. Lopez includes $544,000 from the achievement of goals associated with his merit bonus and $160,000 for achievement of his fiscal year 2009 performance goals, consistent with the terms of the Performance-Based Incentive Plan. The 2010 and 2009 amounts for Mr. Lamb, Mr. Riggs, Mr. Costello and Ms. Burcar are from the achievement of goals associated with their respective merit bonuses.
(4)
Other compensation for Dr. Lopez in 2011 includes a lump sum payment of $1,000,000 in connection with the effective termination of the LTRP ("the LTRP payout") and $8,770 from the Company's match on Dr. Lopez's 401(k) contributions. Other compensation for Mr. Lamb in 2011 includes $200,000 from the LTRP payout and $10,095 from the Company's match on Mr. Lamb's 401(k) contributions. Other compensation for Mr. Riggs in 2011 includes $400,000 from the LTRP payout and $8,864 from the Company's match on Mr. Rigg's 401(k) contributions. Other compensation for Mr. Costello in 2011 is from the LTRP payout. Other compensation for Ms. Burcar in 2011 includes $220,000 from the LTRP payout and $1,641 from the Company's match on Ms. Burcar's 401(k) contributions. Other compensation for Dr. Lopez in 2010 includes $25,000 for a donation made by the Company on behalf of Dr. Lopez and $7,989 is the Company’s match on Dr. Lopez’s 401(k) contributions. Other compensation for Mr. Lamb and Mr. Riggs in 2010 and 2009 and Dr. Lopez for 2009 is the Company’s match on the officer’s 401(k) contributions.



13


Grants of Plan-Based Awards

The following table presents awards in 2011 under the Company’s various incentive award plans.

GRANTS OF PLAN-BASED AWARDS FOR 2011
 
 
 
 
Estimated possible payouts under non-equity incentive plan awards
 
All other option awards: number of securities underlying options (#)
 
Exercise or base price of option awards ($/sh)
 
Grant date fair value of stock and option awards
Name
Grant date
 
Threshold ($)
 
Target ($)
 
Maximum ($)
 
 
 
George A. Lopez, M.D.

 

 

 

 

 

 

 
Performance bonus (1)

 
$

 
$
837,500

 
$
1,172,500

 

 

 

 
Stock option (2)
02/02/11
 

 

 

 
40,000

 
$
43.12

 
$
466,499

 
Stock option (2)
07/20/11
 

 

 

 
40,000

 
$
43.62

 
$
432,141

Scott E. Lamb

 

 

 

 

 

 

 
Performance bonus (1)

 
$

 
$
216,960

 
$
295,066

 

 

 

 
Stock option (2)
02/02/11
 

 

 

 
15,000

 
$
43.12

 
$
174,937

 
Stock option (2)
07/20/11
 

 

 

 
15,000

 
$
43.62

 
$
162,053

Steven C. Riggs

 

 

 

 

 

 

 
Performance bonus (1)

 
$

 
$
165,000

 
$
224,400

 

 

 

 
Stock option (2)
02/02/11
 

 

 

 
15,000

 
$
43.12

 
$
174,937

 
Stock option (2)
07/20/11
 

 

 

 
15,000

 
$
43.62

 
$
162,053

Richard A. Costello

 

 

 

 

 

 

 
Performance bonus (1)

 
$

 
$
168,000

 
$
228,480

 

 

 

 
Stock option (2)
02/02/11
 

 

 

 
15,000

 
$
43.12

 
$
174,937

 
Stock option (2)
07/20/11
 

 

 

 
15,000

 
$
43.62

 
$
162,053

Alison D. Burcar

 

 

 

 

 

 

 
Performance bonus (1)

 
$

 
$
67,500

 
$
91,800

 

 

 

 
Stock option (2)
02/02/11
 

 

 

 
10,000

 
$
43.12

 
$
116,625

 
Stock option (2)
07/20/11
 

 

 

 
10,000

 
$
43.62

 
$
108,035

(1)
Performance bonus is payable under the Performance-Based Incentive Plan if certain financial achievements by the Company in 2011 were met or exceeded. The amounts earned by our named executive officers from this bonus arrangement in 2011 are reflected in the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table. The material terms of the Performance-Based Incentive Plan are above discussed above under the caption “Performance-Based Bonuses.”
(2)
Options to purchase common stock of the Company were granted in 2011 to employees under the 2003 Stock Option Plan. The exercise price of options granted under the 2003 Plan is the fair market value of a share of common stock on the date of grant. All options granted under the 2003 Stock Option Plan in 2011 expire ten years from issuance and vest over four years, 25% on the first anniversary of issuance and the balance vests ratably on a monthly basis over the remaining 36 months.




14


Outstanding Equity Awards at December 31, 2011

The following table contains information about stock options of the Company held at December 31, 2011, by the named executive officers of the Company.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2011
 
 
 Number of securities underlying unexercised options (#)
 
 
 
 
 
 
 
 
Name
 
Exercisable
 
Unexercisable
 
 Option exercise Price ($)
 
Option vesting date(s)
 
 
 
Option expiration date
George A. Lopez, M.D.
 
75,000

 

 
$
19.46

 
03/09/02-03/09/04
 
(2)
 
03/09/12
 
 
75,000

 

 
$
25.62

 
06/08/02-06/08/04
 
(2)
 
06/08/12
 
 
75,000

 

 
$
23.77

 
09/10/02-09/10/04
 
(2)
 
09/10/12
 
 
75,000

 

 
$
28.62

 
12/09/02-12/09/04
 
(2)
 
12/09/12
 
 
75,000

 

 
$
33.55

 
03/08/03-12/31/04
 
(3)
 
03/08/13
 
 
75,000

 

 
$
30.18

 
06/09/03-12/31/04
 
(3)
 
06/09/13
 
 
50,000

 

 
$
36.03

 
09/09/03-12/31/04
 
(3)
 
09/09/13
 
 
50,000

 

 
$
36.87

 
12/09/03-12/31/04
 
(3)
 
12/09/13
 
 
50,000

 

 
$
26.15

 
03/09/04-03/09/06
 
(2)
 
03/09/14
 
 
100,000

 

 
$
31.20

 
10/16/04
 
(6)
 
04/16/14
 
 
50,000

 

 
$
32.68

 
06/09/04-12/31/04
 
(3)
 
06/09/14
 
 
50,000

 

 
$
29.27

 
09/09/04-12/31/04
 
(3)
 
09/09/14
 
 
50,000

 

 
$
34.18

 
12/09/04-12/31/04
 
(3)
 
12/09/14
 
 
100,000

 

 
$
32.92

 
10/16/05
 
(6)
 
04/16/15
 
 

 
60,000

 
$
35.00

 
08/14/12
 
(1)
 
08/14/17
 
 

 
20,000

 
$
25.51

 
03/11/13
 
(1)
 
03/11/18
 
 

 
40,000

 
$
28.39

 
07/22/13
 
(1)
 
07/22/18
 
 

 
45,000

 
$
32.07

 
02/04/14
 
(1)
 
02/04/19
 
 
27,188

 
17,812

 
$
38.85

 
07/22/10-07/22/13
 
(5)
 
07/22/19
 
 
18,333

 
21,667

 
$
32.31

 
02/04/11-02/04/14
 
(5)
 
02/04/20
 
 
14,167

 
25,833

 
$
37.00

 
07/21/11-07/21/14
 
(5)
 
07/21/20
 
 

 
40,000

 
$
43.12

 
02/02/12-02/02/15
 
(5)
 
02/02/21
 
 

 
40,000

 
$
43.62

 
07/20/12-07/20/15
 
(5)
 
07/20/21
 
 
1,009,688

 
310,312

 
 
 
 
 
 
 
 
Scott E. Lamb
 
1,500

 

 
$
37.83

 
12/31/04
 
(3)
 
01/31/15
 
 
3,500

 

 
$
32.92

 
10/16/05
 
(6)
 
04/16/15
 
 
20,000

 

 
$
40.96

 
08/01/11
 
(1)
 
08/08/16
 
 

 
20,000

 
$
35.00

 
08/14/12
 
(1)
 
08/14/17
 
 

 
10,000

 
$
25.51

 
03/11/13
 
(1)
 
03/11/18
 
 

 
10,000

 
$
28.39

 
07/22/13
 
(1)
 
07/22/18
 
 

 
15,000

 
$
32.07

 
02/04/14
 
(1)
 
02/04/19
 
 
9,062

 
5,938

 
$
38.85

 
07/22/10-07/22/13
 
(5)
 
07/22/19
 
 
6,875

 
8,125

 
$
32.31

 
02/04/11-02/04/14
 
(5)
 
02/04/20
 
 
5,313

 
9,687

 
$
37.00

 
07/21/11/07/21/14
 
(5)
 
07/21/20
 
 

 
15,000

 
$
43.12

 
02/02/12-02/02/15
 
(5)
 
02/02/21
 
 

 
15,000

 
$
43.62

 
07/20/12-07/20/15
 
(5)
 
07/20/21
 
 
46,250

 
108,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15


 
 
 Number of securities underlying unexercised options (#)
 
 Option exercise Price ($)
 
Option vesting date(s)
 
 
 
Option expiration date
Name
 
Exercisable
 
Unexercisable
 
 
 
 
 
Steven C. Riggs
 
3,750

 

 
$
25.80

 
06/12/02-06/12/04
 
(2)
 
06/12/12
 
 
7,500

 

 
$
30.32

 
01/02/03-12/31/04
 
(3)
 
01/02/13
 
 
8,000

 

 
$
30.09

 
06/04/03-12/31/04
 
(3)
 
06/04/13
 
 
3,750

 

 
$
29.86

 
07/01/03-12/31/04
 
(3)
 
07/01/13
 
 
3,500

 

 
$
36.04

 
09/20/03-12/31/04
 
(3)
 
09/20/13
 
 
1,000

 

 
$
35.75

 
10/05/03-12/31/04
 
(3)
 
10/05/13
 
 
3,500

 

 
$
29.57

 
09/02/04-12/31/04
 
(3)
 
09/02/14
 
 
3,500

 

 
$
33.77

 
12/31/04
 
(3)
 
02/13/15
 
 
3,500

 

 
$
31.20

 
10/16/04
 
(6)
 
04/16/15
 
 
7,000

 

 
$
32.92

 
10/16/05
 
(6)
 
04/16/15
 
 

 
20,000

 
$
35.00

 
08/14/12
 
(1)
 
08/14/17
 
 

 
10,000

 
$
25.51

 
03/11/13
 
(1)
 
03/11/18
 
 

 
10,000

 
$
28.39

 
07/22/13
 
(1)
 
07/22/18
 
 

 
15,000

 
$
32.07

 
02/04/14
 
(1)
 
02/04/19
 
 
9,062

 
5,938

 
$
38.85

 
07/22/10-07/22/13
 
(5)
 
07/22/19
 
 
6,875

 
8,125

 
$
32.31

 
02/04/11-02/04/14
 
(5)
 
02/04/20
 
 
5,313

 
9,687

 
$
37.00

 
07/21/11-07/21/14
 
(5)
 
07/21/20
 
 

 
15,000

 
$
43.12

 
02/02/12-02/02/15
 
(5)
 
02/02/21
 
 

 
15,000

 
$
43.62

 
07/20/12-07/20/15
 
(5)
 
07/20/21
 
 
66,250

 
108,750

 

 

 

 

Richard A. Costello
 
10,000

 

 
$
36.04

 
01/02/04
 
(4)
 
09/20/13
 
 
1,000

 

 
$
36.17

 
09/28/03-12/31/04
 
(3)
 
09/28/13
 
 
13

 

 
$
30.35

 
01/02/04
 
(4)
 
02/05/14
 
 
10,000

 

 
$
32.61

 
01/01/07
 
(4)
 
04/08/15
 
 
10,000

 

 
$
32.92

 
10/16/05
 
(6)
 
04/16/15
 
 

 
20,000

 
$
35.00

 
08/14/12
 
(1)
 
08/14/17
 
 

 
10,000

 
$
25.51

 
03/11/13
 
(1)
 
03/11/18
 
 

 
10,000

 
$
28.39

 
07/22/13
 
(1)
 
07/22/18
 
 

 
15,000

 
$
32.07

 
02/04/14
 
(1)
 
02/04/19
 
 
9,062

 
5,937

 
$
38.85

 
07/22/10-07/22/13
 
(5)
 
07/22/19
 
 
6,875

 
8,125

 
$
32.31

 
02/04/11-02/04/14
 
(5)
 
02/04/20
 
 
5,313

 
9,688

 
$
37.00

 
07/21/11-07/21/14
 
(5)
 
07/21/20
 
 

 
15,000

 
$
43.12

 
02/02/12-02/02/15
 
(5)
 
02/02/21
 
 

 
15,000

 
$
43.62

 
07/20/12-07/20/15
 
(5)
 
07/20/21
 
 
52,263

 
108,750

 

 

 

 

Alison D. Burcar
 
2,500

 

 
$
36.04

 
09/20/03-12/31/04
 
(3)
 
09/20/13
 
 
20,000

 

 
$
41.96

 
07/15/11
 
(1)
 
07/15/16
 
 

 
20,000

 
$
35.00

 
08/14/12
 
(1)
 
08/14/17
 
 

 
10,000

 
$
25.51

 
03/11/13
 
(1)
 
03/11/18
 
 

 
10,000

 
$
28.39

 
07/22/13
 
(1)
 
07/22/18
 
 

 
10,000

 
$
32.07

 
02/04/14
 
(1)
 
02/04/19
 
 
1,813

 
1,187

 
$
38.85

 
07/22/10-07/22/13
 
(5)
 
07/22/19
 
 
458

 
542

 
$
32.31

 
02/04/11-02/04/14
 
(5)
 
02/04/20
 
 
1,771

 
3,229

 
$
37.00

 
07/21/11-07/21/14
 
(5)
 
07/21/20
 
 

 
10,000

 
$
43.12

 
02/02/12-02/02/15
 
(5)
 
02/02/21
 
 

 
10,000

 
$
43.62

 
07/20/12-07/20/15
 
(5)
 
07/20/21
 
 
26,542

 
74,958

 

 

 

 


16



(1)
Vests five years from date of grant.
(2)
Vested one-third annually.
(3)
Scheduled to vest one-third annually. Vesting of unvested shares was accelerated on 12/31/04.
(4)
Vested upon achievement of certain performance goals, as specified in the option agreement.
(5)
Vests one quarter after one year, monthly for 36 months thereafter.
(6)
Vested six months from date of grant.


Option Exercises

The following table contains information about stock options of the Company exercised during 2011, by the named executive officers of the Company.

 
 
Option awards
Name
 
Number of shares acquired on exercise (#)
 
 Value realized on exercise ($)
George A. Lopez, M.D.
 
375,000

 
$
15,827,969

Scott E. Lamb
 

 
$

Steven C. Riggs
 
3,750

 
$
169,133

Richard A. Costello
 
21,000

 
$
884,070

Alison D. Burcar
 

 
$



Potential Payments upon Termination or Change in Control

As described in Compensation Discussion and Analysis, the Company has arrangements with all named executive officers to make certain payments in the event of a termination of their employment in connection with a change in control of the Company.

Payments to Dr. Lopez would have included the following if the change in control and termination of employment had occurred at December 31, 2011. Dr. Lopez would have received a lump sum payment based on 360 percent of his annual salary and total potential performance bonus for 2011 payable within 30 days after the date of termination. Annual benefits would continue for dental insurance, life insurance and disability insurance to December 31, 2013. Unvested stock options would vest. The Company would have paid commercially reasonable fees to an executive outplacement firm for Dr. Lopez. If any of these payments or benefits were subject to excise tax under Section 4999 of the Code, Dr. Lopez would have been entitled to the payments and benefits either (i) delivered in full or (ii) reduced such that no portion of the payments or benefits would be subject to the excise tax, whichever would be more favorable to Dr. Lopez on an after tax basis. However, as a result of the November 2010 amendment to Dr. Lopez’s retention agreement, he is no longer entitled to receive any tax gross-up or tax reimbursement payments in connection with these payments. Under Section 162(m) of the Internal Revenue Code of 1986, as amended, the Company would not be entitled to a tax deduction for any amounts paid to Dr. Lopez to the extent that such payments plus other compensation in the year of termination of employment, excluding compensation that qualifies as performance-based compensation, exceed $1 million.

Payments to Mr. Lamb, Mr. Riggs, Mr. Costello and Ms. Burcar would have included the following if the change in control and termination of employment had occurred at December 31, 2011. Each officer would have received 120 percent of their annual salary and total potential performance bonus for 2011, payable within 60 days of the date of termination. Annual benefits for medical insurance, dental insurance, vision insurance, life insurance and disability insurance would continue through to December 31, 2012. Unvested stock options would vest. The Company would have paid up to $10,000 to an executive outplacement firm for each officer.

The following table summarizes the option data and payments that would have been made if a named executive officer were terminated in connection with a change in control of the Company on December 31, 2011.


17


 
 
George A. Lopez, M.D.
 
Scott E. Lamb
 
Steven C. Riggs
 
Richard A. Costello
 
Alison D. Burcar
Number of options that would accelerate
 
310,312

 
108,750

 
108,750

 
108,750

 
74,958

 
 
 
 
 
 
 
 
 
 
 
Intrinsic value of accelerated options
 
$
2,957,614

 
$
1,020,972

 
$
1,020,972

 
$
1,020,972

 
$
762,911

Salary
 
$
2,412,000

 
$
433,920

 
$
396,000

 
$
403,200

 
$
270,000

Bonus
 
$
3,822,599

 
$
322,836

 
$
245,520

 
$
249,984

 
$
92,340

Benefits
 
$
1,030

 
$
8,248

 
$
8,244

 
$
8,248

 
$
8,244

Executive placement costs*
 
$

 
$
10,000

 
$
10,000

 
$
10,000

 
$
10,000

Total
 
$
9,193,243

 
$
1,795,976

 
$
1,680,736

 
$
1,692,404

 
$
1,143,495

 
 
 
 
 
 
 
 
 
 
 
*Dr. Lopez is entitled to commercially reasonable executive placement costs.

As described in Compensation Discussion and Analysis, upon termination of employment with the Company due to disability, the named executive officers would receive a lump sum payment equal to 50% of the executive officer’s respective base salary. Payments if a termination due to disability had occurred at December 31, 2011 would have been: $335,000 to Dr. Lopez, $180,800 to Mr. Lamb, $165,000 to Mr. Riggs, $168,000 to Mr. Costello and $112,500 to Ms. Burcar.


Compensation of Directors

In 2011, we paid our non-employee directors an annual retainer of $35,000, plus $1,000 per day for attendance at meetings of the Board of Directors or $500 if the meeting is telephonic. Our lead director is paid an additional annual retainer of $15,000. Pay for attendance at meetings of the Audit Committee of the Board of Directors by the Chairperson of the Committee is $1,500 per day or $750 if the meeting is telephonic and for other Board of Director attendees is $1,000 per day or $375 if the meeting is telephonic. Pay for attendance at meetings of the Compensation Committee and Nominating Governance Committee of the Board of Directors by the Chairperson of the Committee is $1,500 per day or $750 if the meeting is telephonic and for other Board of Director attendees is $750 per day or $375 if the meeting is telephonic. Each Chairperson of a Committee of the Board of Directors also receives an annual retainer. The annual retainer for the Audit Committee Chairperson, the Compensation Committee Chairperson and the Nominating Governance Committee Chairperson is $18,500, $7,500 and $5,000, respectively.

The Company adopted a program effective January 1, 2008 to grant each director who is not an employee of the Company an option to purchase 1,500 shares of common stock quarterly on the date that is two days after the public announcement of the Company’s earnings for the immediately preceding quarter. Options granted in 2008 and the first half of 2009 become exercisable in four equal annual installments commencing one year after the grant date. Options granted in the second half of 2009 and thereafter become exercisable after one year. In the event of a change in control of the Company, the vesting of the options will accelerate. All the option grants expire ten years after the grant date.

In February 2012, the directors received a quarterly option grant to purchase 1,875 shares of our common stock. These options will become exercisable one year after the grant date and expire ten years after the grant date. The February 2012 option grant is expected to be the last quarterly option grant to the directors as the Compensation Committee has adopted a new methodology for director equity compensation. Beginning with the May 2012 annual meeting of the stockholders, our non-employee directors will be entitled to receive an annual equity grant of options and restricted stock units valued at $110,000 in the aggregate to replace their former quarterly stock option grants. Half of this annual equity package will consist of restricted stock units and the other half will consist of stock options with the value of the February 2012 option granted included for this purpose. The restricted stock units and stock options will vest fully on the first anniversary of the grant date or the next annual meeting of the stockholders, whichever is earlier.

The following table shows all compensation awarded to, earned by or paid to each of the Company’s directors in 2011 who were not employees of the Company.


18


2011 DIRECTOR COMPENSATION
        


Name
 

Fees earned or
paid in cash ($)
 
Option awards ($)
(1)(2)
 


Total ($)
Jack W. Brown
 
$
54,375

 
$
40,845

 
$
95,220

John J. Connors
 
$
51,875

 
$
40,845

 
$
92,720

Michael T. Kovalchik, III, M.D.
 
$
79,250

 
$
40,845

 
$
120,095

Joseph R. Saucedo
 
$
80,125

 
$
40,845

 
$
120,970

Richard H. Sherman, M.D.
 
$
59,500

 
$
40,845

 
$
100,345

Robert S. Swinney, M.D.
 
$
46,625

 
$
40,845

 
$
87,470


(1)
In 2011, each director listed above was granted options to purchase common stock of the Company as follows: February 2, 2011, 1,500 options with a grant date fair value of $11,374; April 20, 2011, 1,500 options with a grant date fair value of $10,528; July 20, 2011, 1,500 options with a grant date fair value of $9,656; October 19, 2011, 1,500 options with a grant date fair value of $9,287. See Note 5 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for assumptions used in valuation of these options.

(2)
At December 31, 2011, directors held options to purchase shares of common stock of the Company as follows: Mr. Brown 71,875; Mr. Connors 66,250; Dr. Kovalchik 67,375; Mr. Saucedo 65,125; Dr. Sherman 71,875; and, Dr. Swinney 71,875.


Equity Compensation Plan Information

We have a 2011 Stock Incentive Plan under which we may grant restricted stock or options to purchase our common stock to our employees, directors and consultants. We had a 2001 Directors’ Stock Option Plan under which we granted options to purchase our common stock to our directors, which plan expired in November 2011. We also had a 1993 Stock Incentive Plan and a 2003 Stock Option Plan, under which we granted options to purchase common stock to the employees, which plans expired in January 2005 and May 2011, respectively.  We also have an Employee Stock Purchase Plan.  All plans were approved by our stockholders.  Further information about the plans is in Note 5 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  Certain information about the plans at December 31, 2011, is as follows:
 
 
 
 
 
Number of shares remaining
Number of shares to be issued upon
 
Weighted-average exercise
 
available for future issuance under
exercise of outstanding options,
 
price of outstanding
 
equity compensation plans
warrants and rights
 
options, warrants and rights
 
(excluding shares reflected in column (a))
(a)
 
(b)
 
(c)*
2,745,428

 
$
33.28

 
1,168,553

 
*As of December 31, 2011, there were 381,853 shares of common stock available for issuance under our Employee Stock Purchase Plan, which are included in this amount.

Transactions with Related Persons

Since the beginning of 2010, the Company has not entered into or participated in any transaction required to be disclosed by Item 404(a) of Regulation of S-K.

Policies and Procedures Regarding Transactions with Related Persons

The Company attempts to review all related person transactions to ensure fairness to the Company and proper disclosure under SEC rules. Pursuant to the Audit Committee charter, the Audit Committee is responsible for reviewing and approving all related person transactions. Additionally, the Board of Directors conducts annual reviews of each director to determine such director’s independence. We also require each of our executive officers and directors to complete a questionnaire that is intended to identify transactions or potential transactions that require disclosure under SEC rules or create a potential conflict of interest. In determining whether to approval a related party transaction, the Audit Committee considers the general fairness of the transaction to the Company, including the material terms and conditions of the proposed transaction, the related party’s interest, the amount involved in the transaction and whether the transaction is on terms comparable to terms available in a transaction involving an unrelated third party.

19



Pursuant to our written Code of Business Conduct and Ethics, each executive officer or director must receive approval of the Nominating/Governance Committee or the Board of Directors prior to engaging in certain transactions that are likely to involve a conflict of interest.


Director Independence

The Board of Directors has determined that Messrs. Brown, Connors and Saucedo and Drs. Kovalchik, Sherman and Swinney are independent directors as defined by the NASDAQ Listing Rules. During the course of its review, the Board of Directors considers transactions and relationships between each director (and such director’s immediate family) and the Company and its affiliates against the independence requirements of NASDAQ, and in the case of the Audit Committee, the SEC rules.



Board Meetings and Committees and Attendance at Meetings

During 2011, the Board met eleven times, the Compensation Committee met ten times, the Audit Committee met eight times and the Nominating Committee met five times. All directors, except Dr. Swinney, attended more than 75% of the total of all meetings of the Board and any committees on which he serves. Dr. Swinney was absent from certain meetings in 2011 due to an accident that required extended hospitalization. Dr. Swinney attended 64% of the Board meetings, 80% of the Compensation Committee meetings and 60% of the Nominating/Corporate Governance Committee meetings in 2011.

It is the policy of the Company to invite and encourage all members of the Board of Directors to attend the annual meeting of stockholders, which was held by remote communication. In 2011, four directors attended the annual meeting.


Director Legal Proceedings

During the past ten years, no director, executive officer or nominee for our Board of Directors has been involved in any legal proceedings that are material to an evaluation of their ability or integrity to become our director or executive officer. During the past ten years, no director, executive officer or nominee for our Board of Directors has had judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity; judicial or administrative proceedings based on violations of federal or state securities, commodities, banking, or insurance laws and regulations, or any settlement of such actions; or any disciplinary sanctions or orders imposed by stock, commodities, or derivatives exchanges or other self-regulatory organizations.


Board Leadership Structure

Dr. Lopez has served as the President, CEO and Chairman of the Board since 1989 and founded the Company in 1984. The Board of Directors believes that Dr. Lopez is best situated to serve as Chairman of Board based upon his significant leadership position with the Company and his extensive knowledge about the Company’s business and industry. In addition, the Board of Directors believes that Dr. Lopez’s combined roles as Chairman and President and CEO position him to effectively identify strategic priorities for the Company and to lead Board discussions on the execution of Company strategy. While each of the Company’s non-employee directors brings unique contributions to our Board of Directors, Dr. Lopez’s company-specific experience and expertise allow him to effectively direct Board discussions and focus Board decision-making on those items most important to the Company’s overall success. The Board of Directors believes that the combined role of Chairman and President and CEO helps promote the Company’s overall strategic development and facilitates the efficient flow of information between management and the Board.

In January 2011, the Board appointed Michael T. Kovalchik, III, M.D. as the Board’s Lead Independent Director. The independent directors regularly meet in executive sessions in connection with regular meetings of the Board, which executive sessions are presided over by Dr. Kovalchik.



20


Board Oversight of Risk

The Board of Directors is responsible for oversight of the various risks facing the Company. In this regard, the Board seeks to understand and oversee the most critical risks relating to our business, allocate responsibilities for the oversight of risks among the full Board and its committees, including its Audit, Nominating Corporate Governance, and Compensation Committees, and see that management has in place effective systems and processes for managing risks facing us. Overseeing risk is an ongoing process and risk is inherently tied to our strategy and to strategic decisions. Accordingly, the Board considers risk throughout the year and with respect to specific proposed actions. While the Board is responsible for oversight and direction, management is charged with identifying risk and establishing appropriate internal processes and an effective internal control environment to identify and manage risks and to communicate information about risk to the Board. Committees of the Board also play an important role in risk oversight, including the Audit Committee, which oversees our processes for assessing risks and the effectiveness of our internal controls. In fulfilling its duties, the Audit Committee considers information from our independent registered public accounting firm, Deloitte and Touche, LLC, and our internal auditors. Additionally, the Compensation Committee periodically reviews the Company’s compensation policies and profile with management to ensure that compensation supports the Company’s goals and strategic objectives without creating risks that may have a material adverse effect on the Company.


Compensation Policies and Practices and Risk Management
The Compensation Committee considers potential risks when reviewing and approving compensation programs. We have designed our compensation programs, including our incentive compensation plans, with specific features to address potential risks while rewarding employees for achieving long-term financial and strategic objectives through prudent business judgment and appropriate risk taking. The following elements have been incorporated in our programs available for our executive officers:
·        A Balanced Mix of Compensation Components - The target compensation mix for our executive officers is composed of salary, annual cash incentives and long-term equity incentives.
·        Multiple Performance Factors - Our incentive compensation plans use both company-wide metrics (accounting for 90% or more of the weighting under our incentive plan for our named executive officers) and individual performance (accounting for 10% or less of the weighting under our incentive plan for our named executive officers), which encourage focus on the achievement of objectives for the overall benefit of the Company.
·        Capped Incentive Awards - Annual incentive awards are capped at 140% of target.
·        Multi-year Vesting - Equity awards vest over multiple years requiring long-term commitment on the part of employees.
·        Benchmarking - The Compensation Committee has compared our executive compensation to our peers to ensure our compensation program is consistent with industry practice.
·        Corporate Governance Programs - We have implemented corporate governance guidelines, a code of conduct and other corporate governance measures and internal controls.    
The Compensation Committee also reviews the key design elements of our compensation programs in relation to industry practices, as well as the means by which any potential risks may be mitigated, such as through our internal controls and oversight by management and the board of directors. 


Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics for Directors and Officers. A copy is available on the Company’s website, www.icumed.com. The Company will disclose any future amendments to, or waivers from, the Code of Business Conduct and Ethics for Directors and Officers on our website within four business days following the date of the amendment or waiver.





Nominating / Corporate Governance Committee

The Nominating/Corporate Governance Committee (the “Nominating Committee”) consists of Mr. Connors and Drs. Kovalchik, Sherman (Chairman) and Swinney, each of whom the Board of Directors has determined is independent as defined by the Nasdaq Listing Rules. The Nominating Committee operates pursuant to a written charter adopted by the Board of Directors on July 25, 2003, a copy of which can be found on the Company’s website, www.icumed.com. The Nominating Committee’s role is to recommend to the Board of Directors policies on Board composition and criteria for Board membership, to identify individuals qualified to serve as directors and approve candidates for director and to recommend directors for appointment to committees of the Board of Directors. The Nominating Committee also makes recommendations to the Board of Directors concerning the Company’s corporate governance guidelines and codes of ethics and business conduct, oversees internal investigations of conduct of senior executives, if necessary, and conducts evaluations of the performance of the Board of Directors.

In evaluating and determining whether to recommend a person as a candidate for election as a director, the Nominating Committee considers, among other things, relevant management and/or industry experience; values such as integrity, accountability, judgment and adherence to high performance standards; independence pursuant to the guidelines set forth in the Nasdaq Listing Rules; diversity; ability and willingness to undertake the requisite time commitment to Board service; and an absence of conflicts of interest with the Company.

While the Nominating Committee does not have a specific policy in place, it believes that diversity brings different perspectives to a board of directors which leads to a more varied approach to board issues. The Company has a general non-discrimination policy, which the Nominating Committee observes when considering candidates for the board of directors. While not giving specific weight to any aspect of diversity, the Board of Directors believes that its current composition has an appropriate level of diversity with respect to ethnicity and professional experience.

The Nominating Committee may employ a variety of methods for identifying and evaluating nominees for director. The Nominating Committee will assess the need for particular expertise on the Board of Directors, the upcoming election cycle of the Board 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 Nominating Committee will consider various potential candidates for director that may come to the Nominating Committee’s attention through current directors, the Company’s professional advisors, stockholders or others.

The Nominating Committee will consider candidates recommended by stockholders. The deadlines and procedures for stockholder recommendations of director candidates are discussed below under “Nomination of Directors and Submission of Stockholder Proposals.” Following verification of the stockholder status of persons proposing candidates, the Nominating Committee will make an initial analysis of the qualifications of any candidate recommended by stockholders or others pursuant to the criteria summarized above to determine whether the candidate is qualified for service on the Company’s Board before deciding to undertake a complete evaluation of the candidate. Other than the verification of compliance with procedures and stockholder status, and the initial analysis performed by the Nominating Committee, a potential candidate nominated by a stockholder will be treated like any other potential candidate during the review process by the Nominating Committee.

The Nominating Committee has approved and recommended to the Board the nominations of Jack W. Brown and Richard H. Sherman, M. D. for re-election as directors at the Annual Meeting. The Nominating Committee considered the candidates’ past contributions to the Board of Directors, their willingness to continue to serve and the benefits of continuity in the membership of the Board of Directors and determined that the re-election of the two candidates was appropriate.

Audit Committee

The Board of Directors has an Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, which consists of three directors, Messrs. Brown, Connors and Saucedo (Chairman) all of whom are independent directors as defined by the Nasdaq Listing Rules and Rule 10A(3)(b)(1) of the Exchange Act. As more fully described in the Audit Committee Charter, the Audit Committee oversees the accounting and financial reporting processes of the Company and audits of its financial statements.

The Company’s Board of Directors adopted a revised Audit Committee charter on July 25, 2003, a copy of which can be found on the Company’s web site, www.icumed.com.

The Board of Directors has determined that Joseph R. Saucedo is an “audit committee financial expert” and is “independent,” as those terms are defined by applicable Nasdaq Listing Rules and Securities and Exchange Commission (“SEC”) regulations.

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Audit Committee Report

The Company’s audited consolidated financial statements are included in the Company’s Annual Report on Form 10-K. The Audit Committee has reviewed and discussed those financial statements with management of the Company and has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. Further, the Committee has received the written disclosures and the letter from the independent auditors required by applicable requirements of the Public Company Accounting Board regarding the independent auditor’s communications with the audit committee concerning independence, and has discussed the independent auditor’s independence with them. Based on these reviews and discussions, the Audit Committee has recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual on Form 10-K.

AUDIT COMMITTEE
Joseph R. Saucedo, Chairman
John J. Connors
Jack W. Brown
Compensation Committee

The Board of Directors has a Compensation Committee, consisting of Messrs. Brown and Saucedo, Drs. Kovalchik (Chairman), Sherman and Swinney. The Board has determined that all members of the Compensation Committee, none of whom are employees, former employees of, or consultants to, the Company are independent directors as defined by the Nasdaq Listing Rules. The Compensation Committee operates pursuant to a charter adopted by the Board of Directors, a copy of which can be found on the Company’s website, www.icumed.com. The Compensation Committee discharges the responsibilities of the Board of Directors relating to executive and director compensation. It reviews the performance of the Company and the CEO, sets performance objectives, establishes the compensation of the CEO, recommends to the Board of Directors the compensation of the other executive officers and authorizes the grant of options to employees, and awards under the bonus and incentive plans. The Compensation Committee engaged Compensia to consult on the performance-based compensation structure and awards, including the Performance-Based Incentive Plan and to provide market data and other analysis for compensation of executive officers and Board members. Prior to making its decisions for executive officers other than the CEO, the Compensation Committee receives recommendations from the CEO as to the amounts and types of compensation and other awards for those executive officers.

Compensation Committee Report

The Company’s Compensation Discussion and Analysis (CD&A) is included elsewhere in this Proxy Statement. The Compensation Committee has reviewed and discussed the CD&A with management of the Company. Based on these reviews and discussions, the Compensation Committee has recommended to the Board of Directors that the CD&A be included in this Proxy Statement.

COMPENSATION COMMITTEE
Michael T. Kovalchik III, M.D., Chairman
Jack W. Brown
Joseph R. Saucedo
Richard H. Sherman, M.D.
Robert S. Swinney, M.D.



Shareholder Communications

The Company’s Board of Directors has an established process for stockholder communications and it can be found on the Company’s website, www.icumed.com.

In the past year, the Board of Directors did not receive any stockholder communications that it considered material and therefore took no action.



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Compensation Committee Interlocks and Insider Participation

During 2011, no member of the Compensation Committee was a current or former employee or officer of the Company, and no interlocking relationship existed, between any member of our compensation committee and any member of any other company’s board of directors or compensation committee. The Compensation Committee consists of Messrs. Brown and Saucedo, Drs. Kovalchik (Chairman), Sherman and Swinney.


Compliance with Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s officers and directors and persons who own more than 10% of the Company’s common stock to file reports on prescribed forms regarding ownership of and transactions in the common stock with the SEC and to furnish copies of such forms to the Company. Based solely on a review of the forms received by it and written representations that no Forms 5 were required to be filed, the Company believes that with respect to 2011 all Section 16(a) filings were filed on a timely basis.


Proposals Requiring Your Vote

Proposal 1 - Election of Directors

Nominees and Directors

Two of the seven directors currently constituting the Board of Directors are to be elected at the Annual Meeting to hold office until the 2015 Annual Meeting and until their successors are elected and qualified. The Company's Board of Directors is divided into three classes. Each year a different class of directors is elected at the Annual Meeting to a three-year term.

In the election of directors, the Board recommends that you vote FOR Jack W. Brown and Richard H. Sherman, M.D. , who are now members of the Board and whose current terms of office are expiring.
It is not anticipated that the nominees will decline or be unable to serve as directors. If, however, that should occur, the proxy holders will vote the proxies in their discretion for any nominee designated to fill the vacancy by the Company’s Nominating/Corporate Governance Committee.

The following are summaries of the background, business experience and descriptions of the principal occupations of the directors.

Jack W. Brown

Mr. Brown, 72, has been a director since 1992. He is the former Chairman of the Board and President of Gish Biomedical, Inc., a manufacturer of disposable medical devices for cardiovascular surgery and vascular access devices. His experience includes management positions at Bentley Laboratories and Baxter Laboratories. Mr. Brown has a background in manufacturing, marketing and product development. The Board believes that Mr. Brown’s leadership experience at a medical device company gives him a breadth of knowledge and a unique perspective on the competitive nature of the industry. Mr. Brown’s current term expires in 2012.

Richard H. Sherman, M.D.

Dr. Sherman, 65, has been a director since 1990, and serves as chair of the Governance Committee. He is a physician in private practice with privileges in Internal Medicine and Cardiology at Bayhealth Medical Center, Milford, Delaware. He established and directed the Noninvasive Cardiology Laboratory, and the Cardiac Rehabilitation Program for Milford Memorial Hospital. He has been elected to local, county and state medical leadership positions and has served on non-profit and private boards and their committees. Currently he serves on the Credentials Committee of Bayhealth Medical Center and the Budget and Finance Committee of the Medical Society of Delaware. He is an active participant in the National Association of Corporate Directors programs. The Board is well served by Dr. Sherman’s broad medical and leadership experience. Dr. Sherman’s term expires in 2012.





George A. Lopez, M.D.

Dr. Lopez, 64, has been a director since 1984. He is the founder of the Company and has served as Chairman of the Board, President and CEO since 1989. The Board has nominated Dr. Lopez for election as a director due to his knowledge of the day-to-day operations of the Company, particularly in the areas of research, product development and manufacturing processes. His extensive experience with the Company and industry knowledge provides an invaluable insight to the Board on issues involving the Company and its goals. Furthermore, the Board believes that including the CEO as a director is an efficient way of ensuring continuity between the development and execution of the Company’s business strategies. Dr. Lopez’s current term expires in 2013.

Robert S. Swinney, M.D.

Dr. Swinney, 66, has been a director since 1998 and previously served as a director from 1989 to October 1995. Dr. Swinney has more than 30 years experience as a critical care physician in a large, public teaching hospital, where he has formerly served as the critical care unit director and Chair of the ICU Committee. Dr. Swinney also has as experience in private primary care practice and emergency medicine. He holds two patents for medical products and, in his daily work, is frequently called upon to examine and evaluate new medical products. The Board is well served by Dr. Swinney’s medical and leadership experience. Additionally, the Board has benefitted from Dr. Swinney’s work with patents, which has provided him with a high level of technical expertise and as well as his ongoing work, which keep him current on new developments in medical technology. Dr. Swinney’s current term expires in 2013.

John J. Connors, Esq.

Mr. Connors, 72, has been a director since 1992 and previously served as a director from December 1988 to July 1989. He is a patent attorney and the founder of Connors & Associates PC, a professional law corporation specializing in intellectual property law. Mr. Connors is a member of the Orange County Bar Association, the Orange County Patent Law Association, the Los Angeles Intellectual Property Law Association, and the Association of Corporate Patent Counsel. The Board has determined to nominate Mr. Connors for election in part because it believes that his considerable technical knowledge, particularly his experience in the areas of patent acquisition, patent infringement, and the negotiation of the sale and licensing of intellectual property, brings a unique and valued perspective to the Board. Mr. Connors’ current term expires in 2014.

Michael T. Kovalchik, III, M.D.

Dr. Kovalchik, 66, has been a director since 1989 and serves as Chair of the Compensation Committee. Dr. Kovalchik is a physician and the Director of DaVita Healthcare Kidney Center, Torrington, Connecticut. He serves as Chairman of the Ethics Committee, Charlotte Hungerford Hospital, Torrington, Connecticut. The Board has determined to nominate Dr. Kovalchik for election in part due to his extensive medical knowledge and his compensation committee leadership experience. Dr. Kovalchik’s current term expires in 2014.

Joseph R. Saucedo

Mr. Saucedo, 69, has been a director since 2001 and serves as Chair of the Audit Committee. He is Chairman and President of Bolsa Resources, Inc., a business management consulting firm that provides both management consulting and financial accounting function support to manufacturing companies. He has a Masters in Business Administration. Mr. Saucedo’s 30 years of financial and accounting experience include serving as President and CEO of a financial institution where he was responsible for overseeing the performance of the company, as an auditor for a major auditing firm, and currently, the review, analysis and evaluation of clients’ financial statements and financial consulting to manufacturing concerns. The Board has determined to nominate Mr. Saucedo to the Board in part because it believes that his financial knowledge and experience is valuable to the Board, particularly with respect to his service on the Audit Committee. Additionally, his wide range of experiences from the CEO of a financial institution to an auditor at a major auditing firm provide him with insight into all financial aspects of a company. The Board has determined that Mr. Saucedo is an “audit committee financial expert” and is “independent,” as those terms are defined by applicable Nasdaq Listing Rules and SEC regulations. Mr. Saucedo’s current term expires in 2014.


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Proposal 2 - Selection of Auditors
Deloitte & Touche, LLP (“Deloitte”) has been the Company’s independent registered public accounting firm since its selection by the Audit Committee on March 19, 2008. Deloitte was most recently ratified by the stockholders at the 2011 Annual Meeting as the independent registered public accounting firm of the Company for the year ending December 31, 2011.
The Audit Committee has appointed Deloitte to continue as the independent registered accounting firm of the Company for the year ended December 31, 2012. Representatives of Deloitte are expected to be present at the Annual Meeting and will have an opportunity to make a statement if they so desire and respond to appropriate questions. The Board of Directors recommends that you vote FOR the ratification of the appointment of Deloitte.
Fees Paid to Auditors
It is the policy of our Audit Committee to have the engagement of our independent registered public accounting firm to perform any audit or non-audit services approved in advance by the Audit Committee. Such approval authority is delegated to the Chairman of the Audit Committee on behalf of the Audit Committee as permitted by the Audit Committee Charter. In 2011 and 2010, all fees to our auditors were pre-approved by the Audit Committee.

Deloitte was our independent registered public accounting firm in 2011 and 2010. Fees billed by Deloitte for 2011 and 2010 were as follows:

 
 
2011
 
2010
Audit fees
 
$
666,975

 
$
969,647

Audit related fees
 
$

 
$

Tax fees
 
$

 
$

All other fees *
 
$
28,679

 
$
185,800

*Fees associated with due diligence in connection with an acquisition opportunity
Proposal 3 - Advisory Vote to Approve Named Executive Officer Compensation

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Board of Directors is requesting that stockholders approve, pursuant to a non-binding vote, the compensation of the Company’s named executive officers as disclosed in this Proxy Statement.

We conducted our first advisory vote on executive compensation last year at our 2011 Annual Meeting. While this vote was not binding on the Company, our Board of Directors or our Compensation Committee, we believe that it is important for our shareholders to have an opportunity to vote on this proposal on an annual basis as a means to express their views regarding our executive compensation philosophy, our compensation policies and programs, and our decisions regarding executive compensation, all as disclosed in our proxy statement. Our Board of Directors and our Compensation Committee value the opinions of our stockholders and, to the extent there is any significant vote against the compensation of our named executive officers as disclosed in the proxy statement, we will consider our shareholders' concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns. In addition to our annual advisory vote on executive compensation, we are committed to ongoing engagement with our shareholders on executive compensation and corporate governance issues. These engagement efforts take place throughout the year through meetings, telephone calls and correspondence involving our senior management, directors and representatives of our shareholders.

At the 2011 Annual Meeting, more than 84% of the votes cast on the advisory vote on executive compensation proposal were in favor of our named executive officer compensation as disclosed in the proxy statement for that meeting, and as a result our named executive officer compensation was approved. The Board of Directors and Compensation Committee reviewed these final vote results and determined that, given the significant level of support, no changes to our executive compensation policies and decisions were necessary at this time based on the vote results. Nevertheless, as we have discussed in this Compensation Discussion and Analysis under the heading “Executive Summary”, the Compensation Committee has made important changes to our executive compensation programs in 2011 and 2012 which demonstrate its ongoing commitment to aligning the Company's executive compensation with the interests of our shareholders and current market practice, including a continuing move towards increasing pay for performance compensation methodologies.


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In light of the advisory vote at the 2011 Annual Meeting of stockholders on the frequency of “say-on-pay” advisory votes, the Compensation Committee of the Company's Board of Directors has unanimously recommended, and the Company's Board of Directors has unanimously approved, that the Company will hold an annual stockholder advisory vote on executive compensation, including a vote at the 2012 Annual Meeting. The Board of Directors encourages stockholders to review the Compensation Discussion and Analysis in this Proxy Statement, in connection with this advisory vote. The Compensation Discussion and Analysis describes our executive compensation program and the decisions made by the Compensation Committee and the Board of Directors with respect to the Company’s named executive officers for 2011.

 
As discussed in Compensation Discussion and Analysis, our named executive officers’ compensation is primarily comprised of base pay, bonus pay and equity awards and is based on the following.

Base pay is generally set at approximately the 50th to 75th percentile of similar positions in our peer group.
Cash bonus payouts are based on the Company’s annual performance against financial targets (total revenue, operating income and diluted earnings per share) and individual goals for our named executive officers except Dr. Lopez, whose bonus is based 100% on the annual performance metrics.
Equity awards are generally consistent with our peer group and to complement the overall compensation package to achieve a total compensation of approximately the 50th to 75th percentile of our peer group.

The Board of Directors believes that our executive compensation program is designed to meet the objectives discussed in the Compensation Discussion and Analysis. Accordingly the Board recommends that stockholders vote in favor of the following resolution:

 
RESOLVED, that the stockholders of ICU Medical, Inc. approve the compensation paid to the Company’s named executive officers as described in this Proxy Statement under “Executive Officer and Director Compensation,” including the Compensation Discussion and Analysis, the compensation tables and other narrative disclosure contained therein.
 

This advisory vote, commonly referred to as a “say-on-pay” advisory vote, is non-binding on the Board. Although the vote is non-binding, the Board and the Compensation Committee will review and thoughtfully consider the voting results when making future decisions concerning the compensation of the Company’s named executive officers.
 

The Board of Directors recommends a vote FOR approval of the compensation of the Company’s named executive officers.
Proposal 4 - Approval of Amendments to 2011 Stock Incentive Plan
General
We are asking our stockholders to approve amendments to our 2011 Stock Incentive Plan (the “2011 Plan”) to increase the number of shares which can be subject to wards thereunder by 750,000 shares and to change the number of shares counted against available shares for any 2011 Plan award other than options and SARs from the current 2.22:1 ratio to 2.09:1. On March 13, 2012, the Board of Directors approved these two amendments to the 2011 Plan subject to stockholder approval at the 2012 Annual Meeting. Approval of these amendments to the 2011 Plan requires that the votes cast affirmatively exceed the votes cast negatively on the matter
As of March 19, 2012, we have only 537,812 shares available for grant under the 2011 Plan. At the end of 2011, our Director's Stock Option Plan expired with 318,750 shares available for grant at the time of its expiration. The amendments will not only add to the 2011 Plan the number of shares that became unavailable when the Director's Stock Option Plan expired but also add an additional 431,250 shares to be used for future grants to eligible individuals under the 2011 Plan. Our intention continues to be that the 2011 Plan be used to attract and retain key talent, encourage stock ownership by our employees, non-employee directors and consultants, to better align with governance best practices, and to receive a federal income tax deduction for certain compensation paid under this plan.. We believe strongly that the approval of the 2011 Plan is essential to our ability to attract and retain outstanding and highly skilled employees, especially in the competitive labor markets in which we compete. These awards also are crucial to our ability to motivate employees to achieve our goals. The proposed terms of the 2011 Plan are designed to allow the Company to continue to attract, retain and motivate people whose skills and performance are critical to the Company's success. Unlike the time vested option awards under the 2003 Plan, the new 2011 Plan would permit the Compensation Committee to make equity awards that better accomplish the Committee's pay for

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performance goals. We will continue to monitor the environment in which we operate and make changes to our equity compensation program to help us meet our goals, including achieving long-term stockholder value.
The Board of Directors unanimously recommends a vote FOR the approval of the proposed amendment as to our 2011 Stock Incentive Plan.

A general description of the principal terms of the 2011 Plan is set forth below. This description is qualified in its entirety by the terms of the 2011 Plan, a copy of which is attached hereto as Annex A.

Burn Rate and Overhang
In administering our equity compensation program, we consider both our “burn rate” and our “overhang”. We define “burn rate” in a given year as the total number of Shares that underlie the equity compensation awards granted in that year, divided by the undiluted weighted average Shares outstanding during the year. Our burn rate in 2011 was 2.1% and our three year average burn rate from 2009-2011 was 1.9%.
We define “overhang” as of a given date as: the sum of the total number of Shares that underlie outstanding equity awards plus the total number of Shares available for issuance under our equity compensation plans as of such date (in aggregate these are referred to as “total plan Shares”); divided by the sum of total plan Shares and Shares outstanding as of such date. Our overhang as of December 31, 2011 was 22.0%, and on a pro forma basis (assuming the 750,000 increase to the number of shares in the 2011 Plan was authorized as of December 31, 2011) our overhang as of December 31, 2011 would have been 25.2%.
We believe that our overhang (both on an actual basis and on a pro forma basis) and our burn rate are reasonable in relation to our peer group and reflect a judicious use of equity for compensation purposes. Our overhang also reflects the fact that we encourage option holders to hold their awards for extended periods of time after vesting. We believe these both have the effect of extending the period during which the average equity award is reflected in the overhang calculation.
General Description
Purpose. The purposes of the 2011 Plan are to attract and retain the best available personnel, to provide additional incentives to our employees, consultants and directors through ownership of our Shares, and to promote the success of the Company's business.
Shares Reserved for Issuance under the 2011 Plan. The maximum aggregate number of Shares which may be issued pursuant to all awards under the 2011 Plan currently is 901,700 (i.e. 650,000 Shares plus the 251,700 that remained available for grants under the 2003 Plan which has been displaced by the 2011 Plan). If the proposed amendments to the 2011 Plan are approved by our stockholders, the number of shares which may be issued pursuant to awards under the 2011 will be 1,651,700 shares. In addition, any Shares that would otherwise return to the 2003 Plan as a result of the forfeiture, termination or expiration of awards previously granted will be available under the 2011 Plan. The number of Shares available under the 2011 Plan is subject to adjustment in the event of a stock split, reverse stock split, stock dividend, combination or reclassification of Shares or other similar change in our Shares or our capital structure.
The maximum number of Shares with respect to which options and stock appreciation rights that may be granted to a participant during a calendar year is five hundred thousand (500,000) Shares. For awards of restricted stock and restricted stock units that are intended to be performance-based compensation under Section 162(m) of the Code, the maximum number of Shares subject to such awards that may be granted to a participant during a calendar year is two hundred fifty thousand (250,000) Shares. The foregoing limitations will be adjusted proportionately by the plan administrator in the event of a stock split, reverse stock split, stock dividend, combination or reclassification of Shares or other similar change in our Shares or our capital structure, and its determination shall be final, binding and conclusive.
Share Counting. Shares issued in connection with options and SARs are charged against the 2011 Plan's share reserve on the basis of one (1) Share for each Share issued in connection with such awards (and shall be counted as one (1) Share for each Share that is returned or deemed not to have been issued from the 2011 Plan). Each Share subject to awards other than options and stock appreciation rights are currently charged against the 2011 Plan's share reserve on the basis of 2.22 Shares for each Share issued in connection with such awards (and are counted as 2.22 Shares for each Share that is returned or deemed not to have been issued from the 2011 Plan). If the proposed amendments to the 2011 Plan are approved by stockholders this 2.22:1

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share ratio will be changed to 2.09. Any Shares covered by an award which is forfeited, canceled, expires or is settled in cash, is deemed not to have been issued for purposes of determining the maximum number of Shares which may be issued under the 2011 Plan. Shares that have been issued under the 2011 Plan pursuant to an award are not be returned to the 2011 Plan and do not become available for future grant under the 2011 Plan, except where unvested Shares are forfeited or repurchased by the Company at the lower of their original purchase price or their fair market value. Shares tendered or withheld in payment of an option exercise price, Shares withheld by the Company to pay any tax withholding obligation, and all Shares covered by the portion of a stock appreciation right that is exercised are not be returned to the 2011 Plan and do not become available for future issuance under the 2011 Plan.
Administration. The 2011 Plan is administered, with respect to grants to officers, employees, directors, and consultants, by the 2011 Plan administrator (the “Administrator”), defined as the Board or one (1) or more committees designated by the Board. The Compensation Committee currently acts as the Administrator. With respect to grants to Officers and Directors, the Compensation Committee is to be constituted in such a manner as to satisfy applicable laws, including Rule 16b-3 promulgated under the Exchange Act and Section 162(m) of the Code.
No Repricings without Stockholder Approval. The Company must obtain stockholder approval prior to (i) the reduction of the exercise price of any option or the base appreciation amount of any stock appreciation right awarded under the 2011 Plan or (ii) the cancellation of an option or stock appreciation right at a time when its exercise price or base appreciation amount exceeds the fair market value of the underlying Shares, in exchange for another option, restricted stock or other award or for cash (unless the cancellation and exchange occurs in connection with a Corporate Transaction). Notwithstanding the foregoing, cancelling an option or stock appreciation right in exchange for another option, stock appreciation right, restricted stock, or other award with an exercise price, purchase price or base appreciation amount that is equal to or greater than the exercise price or base appreciation amount of the original option or stock appreciation right is not subject to stockholder approval.
Terms and Conditions of Awards. The 2011 Plan provides for the grant of stock options, restricted stock, restricted stock units, dividend equivalent rights and stock appreciation rights (collectively referred to as “awards”). Stock options granted under the 2011 Plan may be either incentive stock options under the provisions of Section 422 of the Code, or nonqualified stock options. Incentive stock options may be granted only to employees. Awards other than incentive stock options may be granted to our employees, consultants and directors or to employees, consultants and directors of our related entities. To the extent that the aggregate fair market value of the Shares subject to options designated as incentive stock options which become exercisable for the first time by a participant during any calendar year exceeds $100,000, such excess options are treated as nonqualified stock options. Under the 2011 Plan, awards may be granted to such employees, consultants or directors who are residing in non-U.S. jurisdictions as the Administrator may determine from time to time. Each award granted under the 2011 Plan is designated in an award agreement.
Subject to applicable laws, the Administrator has the authority, in its discretion, to select employees, consultants and directors to whom awards may be granted from time to time, to determine whether and to what extent awards are granted, to determine the number of Shares or the amount of other consideration to be covered by each award (subject to the limitations set forth under the above, to approve award agreements for use under the 2011 Plan, to determine the terms and conditions of any award (including the vesting schedule applicable to the award), to amend the terms of any outstanding award granted under the 2011 Plan, to construe and interpret the terms of the 2011 Plan and awards granted, to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable non-U.S. jurisdictions and to take such other action not inconsistent with the terms of the 2011 Plan, as the Administrator deems appropriate.
The term of any award granted under the 2011 Plan is stated in the applicable award agreement but may not exceed a term of more than ten years (or five years in the case of an incentive stock option granted to any participant who owns stock representing more than 10% of our combined voting power or any parent or subsidiary of us), excluding any period for which the participant has elected to defer the receipt of the Shares or cash issuable pursuant to the award pursuant to a deferral program the Administrator may establish in its discretion.
The 2011 Plan authorizes the Administrator to grant incentive stock options at an exercise price not less than 100% of the fair market value of our common stock on the date the option is granted (or 110%, in the case of an incentive stock option granted to any employee who owns stock representing more than 10% of our combined voting power or any parent or subsidiary of us). In the case of nonqualified stock options, stock appreciation rights, and awards intended to qualify as performance-based compensation, the exercise price, base appreciation amount or purchase price, if any, shall be not less than 100% of the fair market value per Share on the date of grant. In the case of all other awards granted under the 2011 Plan, the exercise or purchase price is determined by the Administrator. The exercise or purchase price is generally payable in cash, check, Shares or with respect to options, payment through a broker-dealer sale and remittance procedure or a “net exercise” procedure.

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Under the 2011 Plan, the Administrator may establish one or more programs under the 2011 Plan to permit selected participants the opportunity to elect to defer receipt of consideration payable under an award. The Administrator also may establish under the 2011 Plan separate programs for the grant of particular forms of awards to one or more classes of participants.
Section 162(m) of the Code. The maximum number of Shares with respect to which options and stock appreciation rights may be granted to a participant during a calendar year is five hundred thousand (500,000) Shares. The foregoing limitation will be adjusted proportionately by the Administrator in the event of a stock split, reverse stock split, stock dividend, combination or reclassification of Shares or other similar change in our Shares or our capital structure. Under Code Section 162(m) no deduction is allowed in any taxable year of the Company for compensation in excess of $1 million paid to the Company's “covered employees.” An exception to this rule applies to compensation that is paid to a covered employee pursuant to a stock incentive plan approved by stockholders and that specifies, among other things, the maximum number of Shares with respect to which options and stock appreciation rights may be granted to eligible participants under such plan during a specified period. Compensation paid pursuant to options granted under such a plan and with an exercise price equal to the fair market value of common stock on the date of grant is deemed to be inherently performance-based, since such awards provide value to participants only if the stock price appreciates. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitation, if any option or stock appreciation right is canceled, the canceled award will continue to count against the maximum number of Shares with respect to which an award may be granted to a participant.
For awards of restricted stock and restricted stock units that are intended to be performance-based compensation under Section 162(m) of the Code, the maximum number of Shares subject to such awards that may be granted to a participant during a calendar year is two hundred fifty thousand (250,000) Shares. The foregoing limitation will be adjusted proportionately by the plan administrator in the event of a stock split, reverse stock split, stock dividend, combination or reclassification of Shares or other similar change in our Shares or our capital structure. In order for restricted stock and restricted stock units to qualify as performance-based compensation, the Administrator must establish a performance goal with respect to such award in writing not later than 90 days after the commencement of the services to which it relates (or, if earlier, the date after which 25% of the period of service to which the performance goal relates has elapsed) and while the outcome is substantially uncertain. In addition, the performance goal must be stated in terms of an objective formula or standard.
Under Code Section 162(m), a “covered employee” is the Company's chief executive officer and the three other most highly compensated officers of the Company other than the chief financial officer.
The 2011 Plan includes the following performance criteria that may be considered by the Administrator when granting performance-based awards: (i) change in Share price, (ii) operating earnings, operating profit margins, earnings before interest, taxes, depreciation, or amortization, net earnings, earnings per Share (basic or diluted) or other measure of earnings; (iii) total stockholder return; (iv) operating margin; (v) gross margin; (vi) balance sheet performance, including debt, long or short term, inventory, accounts payable or receivable, working capital, or stockholders' equity; (vii) return measures, including return on invested capital, sales, assets, or equity; (viii) days' sales outstanding; (ix) operating income; (x) net operating income; (xi) pre-tax profit; (xii) cash flow, including cash flow from operations, investing, or financing activities, before or after dividends, investments, or capital expenditures; (xiii) revenue; (xiv) expenses, including cost of goods sold, operating expenses, marketing and administrative expense, research and development, restructuring or other special or unusual items, interest, tax expense, or other measures of savings; (xv) earnings before interest, taxes and depreciation; (xvi) economic value created or added; (xvii) market share; (xviii) sales or net sales; (xix) sales or net sales of particular products; (xx) gross profits; (xxi) net income; (xxii) inventory turns; (xxiii) revenue per employee; and (xxiv) implementation or completion of critical projects involving acquisitions, divestitures, process improvements, product or production quality, attainment of other strategic objectives relating to market penetration, geographic expansion, product development, regulatory or quality performance, innovation or research goals. The performance criteria may be applicable to the Company, any parent or subsidiary of the Company, and/or any individual business units of the Company or any parent or subsidiary of the Company.
Change in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by outstanding awards, the number of Shares that have been authorized for issuance under the 2011 Plan, the exercise or purchase price of each outstanding award, the maximum number of Shares that may be granted subject to awards to any participant in a calendar year, and the like, will be proportionally adjusted by the Administrator in the event of (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification or similar event affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company or (iii) any other transaction with respect to our Shares including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or

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property), reorganization, liquidation (whether partial or complete), distribution of cash or other assets to stockholders other than a normal cash dividend, or any similar transaction; provided, however, that conversion of any convertible securities of the Company will not be deemed to have been “effected without receipt of consideration.” Any such adjustment is made by the Administrator and its determination shall be final, binding and conclusive.
Corporate Transaction. Effective upon the consummation of a Corporate Transaction, all outstanding awards under the 2011 Plan will terminate unless the awards are assumed in connection with the Corporate Transaction. In addition, except as provided otherwise in an individual award agreement, for the portion of each award that is neither assumed nor replaced, such portion of the award shall automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at fair market value) for all of the Shares (or other consideration) at the time represented by such portion of the award, immediately prior to the specified effective date of such Corporate Transaction, provided that the Grantee's Continuous Service has not terminated prior to such date.
Change in Control. Except as provided otherwise in an individual award agreement, in the event of a Change in Control (other than a Change in Control which also is a Corporate Transaction), each award which is at the time outstanding under the 2011 Plan automatically shall become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at fair market value), immediately prior to the specified effective date of such Change in Control, for all of the Shares (or other consideration) at the time represented by such award, provided that the Grantee's Continuous Service has not terminated prior to such date.
Amendment, Suspension or Termination of the 2011 Plan. The Board may at any time amend, suspend or terminate the 2011 Plan. The 2011 Plan will terminate on May 13, 2021 unless earlier terminated by the Board. To the extent necessary to comply with applicable provisions of federal securities laws, state corporate and securities laws, the Code, applicable rules of any stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents of the jurisdiction, the Company shall obtain stockholder approval of any such amendment to the 2011 Plan in such a manner and to such a degree as required.
Certain Federal Tax Consequences
The following summary of the federal income tax consequences of the 2011 Plan transactions is based upon federal income tax laws in effect on the date of this Proxy Statement. This summary does not purport to be complete, and does not discuss state, local or non-U.S. tax consequences.
Nonqualified Stock Options. The grant of a nonqualified stock option under the 2011 Plan will not result in any federal income tax consequences to the participant or to the Company. Upon exercise of a nonqualified stock option, the participant is subject to income taxes at the rate applicable to ordinary compensation income on the difference between the option exercise price and the fair market value of the Shares at the time of exercise. This income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the income recognized by the participant, subject to possible limitations imposed by Section 162(m) of the Code and so long as the Company withholds the appropriate taxes with respect to such income (if required) and the participant's total compensation is deemed reasonable in amount. Any gain or loss on the participant's subsequent disposition of the Shares will receive long or short-term capital gain or loss treatment, depending on whether the Shares are held for more than one year following exercise. The Company does not receive a tax deduction for any such gain.
A nonqualified stock option can be considered deferred compensation and subject to Section 409A of the Code. A nonqualified stock option that does not meet the requirements of Code Section 409A can result in the acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.
Incentive Stock Options. The grant of an incentive stock option under the 2011 Plan will not result in any federal income tax consequences to the participant or to the Company. A participant recognizes no federal taxable income upon exercising an incentive stock option (subject to the alternative minimum tax rules discussed below), and the Company receives no deduction at the time of exercise. In the event of a disposition of stock acquired upon exercise of an incentive stock option, the tax consequences depend upon how long the participant has held the Shares. If the participant does not dispose of the Shares within two years after the incentive stock option was granted, nor within one year after the incentive stock option was exercised, the participant will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the Shares and the exercise price. The Company is not entitled to any deduction under these circumstances.
If the participant fails to satisfy either of the foregoing holding periods (referred to as a “disqualifying disposition”), he or she must recognize ordinary income in the year of the disposition. The amount of ordinary income generally is the lesser of

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(i) the difference between the amount realized on the disposition and the exercise price or (ii) the difference between the fair market value of the stock at the time of exercise and the exercise price. Any gain in excess of the amount taxed as ordinary income will be treated as a long or short-term capital gain, depending on whether the stock was held for more than one year. The Company, in the year of the disqualifying disposition, is entitled to a deduction equal to the amount of ordinary income recognized by the participant, subject to possible limitations imposed by Section 162(m) of the Code and so long as the participant's total compensation is deemed reasonable in amount.
The “spread” under an incentive stock option-i.e., the difference between the fair market value of the Shares at exercise and the exercise price-is classified as an item of adjustment in the year of exercise for purposes of the alternative minimum tax. If a participant's alternative minimum tax liability exceeds such participant's regular income tax liability, the participant will owe the larger amount of taxes. In order to avoid the application of alternative minimum tax with respect to incentive stock options, the participant must sell the Shares within the calendar year in which the incentive stock options are exercised. However, such a sale of Shares within the year of exercise will constitute a disqualifying disposition, as described above.
Stock Appreciation Rights. Recipients of stock appreciation rights (“SARs”) generally should not recognize income until the SAR is exercised (assuming there is no ceiling on the value of the right). Upon exercise, the recipient will normally recognize taxable ordinary income for federal income tax purposes equal to the amount of cash and fair market value of the shares, if any, received upon such exercise. Recipients who are employees will be subject to withholding for federal income and employment tax purposes with respect to income recognized upon exercise of a SAR. Recipients will recognize gain upon the disposition of any shares received on exercise of a SAR equal to the excess of (i) the amount realized on such disposition over (ii) the ordinary income recognized with respect to such shares under the principles set forth above. That gain will be taxable as long or short-term capital gain depending on whether the shares were held for more than one year. We will be entitled to a tax deduction to the extent and in the year that ordinary income is recognized by the recipient, subject to possible limitations imposed by Section 162(m) of the Code and so long as we withhold the appropriate taxes with respect to such income (if required) and the recipient's total compensation is deemed reasonable in amount.
A SAR can be considered non-qualified deferred compensation and subject to Section 409A of the Code. A SAR that does not meet the requirements of Code Section 409A can result in the acceleration of income recognition, an additional 20% tax obligation, plus penalties and interest.
Restricted Stock. The grant of restricted stock will subject the recipient to ordinary compensation income on the difference between the amount paid for such stock and the fair market value of the Shares on the date that the restrictions lapse. This income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the ordinary income recognized by the recipient, subject to possible limitations imposed by Section 162(m) of the Code and so long as the Company withholds the appropriate taxes with respect to such income (if required) and the participant's total compensation is deemed reasonable in amount. Any gain or loss on the recipient's subsequent disposition of the Shares will receive long or short-term capital gain or loss treatment depending on how long the stock has been held since the restrictions lapsed. The Company does not receive a tax deduction for any such gain.
Recipients of restricted stock may make an election under Section 83(b) of the Code (“Section 83(b) Election”) to recognize as ordinary compensation income in the year that such restricted stock is granted, the amount equal to the spread between the amount paid for such stock and the fair market value on the date of the issuance of the stock. If such an election is made, the recipient recognizes no further amounts of compensation income upon the lapse of any restrictions and any gain or loss on subsequent disposition will be long or short-term capital gain to the recipient. The Section 83(b) Election must be made within thirty days from the time the restricted stock is issued.
Restricted Stock Units. Recipients of restricted stock units generally should not recognize income until such units are converted into cash or Shares. Upon conversion, the recipient will normally recognize taxable ordinary income for federal income tax purposes equal to the amount of cash and fair market value of the Shares, if any, received upon such conversion. Recipients who are employees will be subject to withholding for federal income and employment tax purposes with respect to income recognized upon conversion of the restricted stock units. P