10-K/A 1 a2013form10-ka.htm 10-K/A 2013 Form 10-K/A


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission File Number: 001-34607
ARTHROCARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
Incorporation or organization
 
94-3180312
(I.R.S. Employer
Identification No.)
 
 
 
7000 West William Cannon, Austin, TX 78735
(Address of principal executive offices and zip code)
(512) 391-3900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class                                 Name of each exchange on which registered
Common Stock, par value $0.001 par value                    NASDAQ
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


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Large accelerated filer ý
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 (Do not check if a
smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No ý
As of June 30, 2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $975,265,320 (based upon the closing sales price of such stock as reported by NASDAQ on such date).
As of March 14, 2014, the number of outstanding shares of the Registrant's Common Stock was 34,465,776.

DOCUMENTS INCORPORATED BY REFERENCE
None.


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TABLE OF CONTENTS



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EXPLANATORY NOTE
We hereby amend Part III and Part IV of our annual report on Form 10-K for the fiscal year ended December 31, 2013 (the "Last Fiscal Year") filed with the Securities and Exchange Commission (the "SEC") on February 13, 2014 (the “Original Filing”), to include information previously contemplated to be incorporated by reference. In addition, the reference on the cover page of the Original Filing to the incorporation by reference of the information called for by Part III of the Form 10-K to the Company’s definitive proxy statement for the 2014 annual meeting of stockholders is hereby amended to delete that reference. As a result of the announced entry into an Agreement and Plan of Merger (the "Merger Agreement") with Smith & Nephew, Inc. ("Parent"), Rosebud Acquisition Corporation, a wholly owned subsidiary of Parent ("Merger Subsidiary") and Smith & Nephew plc ("Parent Holdco"), pursuant to which the Company agreed to be acquired by Parent and become a wholly-owned subsidiary of Parent (the "Merger"), the information that was previously contemplated to be incorporated by reference to the Company's definitive proxy statement for the 2014 annual shareholders meeting is included in this amendment. No other information in the Original Filing is amended hereby.
Except for the amended information referred to above, this Form 10-K/A continues to describe conditions as of the date of the Original Filing and the Company has not modified or updated other disclosures presented in the Original Filing. This Form 10-K/A does not reflect events occurring after the filing of the Original Filing or modify or update disclosures (including, except as otherwise provided herein, the exhibits to the Original Filing) affected by subsequent events. Accordingly, this Form 10-K/A should be read in conjunction with the Company’s filings made with the SEC subsequent to the date of the Original Filing.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), new certifications of our principal executive officer and principal financial officer are being filed or furnished as exhibits to this Amendment No. 1 on Form 10-K/A.


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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS OF THE COMPANY
Set forth below is information regarding the Board of Directors, including each director's age as of April 30, 2014, his or her positions and offices held with the Company and certain biographical information:
Name of Nominee(1)
 
Age
 
Position and Offices Held in the Company
 
Director Since
David Fitzgerald
 
80
 
Director, President and CEO
 
April 2003
Christian P. Ahrens(2)
 
37
 
Director
 
September 2009
Gregory A. Belinfanti(3)
 
39
 
Director
 
September 2009
Barbara D. Boyan, Ph.D.(2)(3)
 
65
 
Director
 
March 2004
James G. Foster(4)
 
69
 
Director
 
August 2002
Terrence E. Geremski(4)
 
66
 
Director
 
December 2006
Fabiana Lacerca-Allen (4)
 
47
 
Director
 
December 2013
Tord B. Lendau(4)
 
57
 
Director
 
June 2001
Peter L. Wilson(2)(3)
 
69
 
Director
 
June 2001
_______________________________________________________________________________

(1)
There are no family relationships among any directors or executive officers of the Company.
(2)
Member of Compensation Committee
(3)
Member of Nominating and Corporate Governance Committee
(4)
Member of Audit Committee
DAVID FITZGERALD
David Fitzgerald became a director of the Company in April 2003 and President and Chief Executive Officer in February 2009. Mr. Fitzgerald spent twenty-five years in management positions at Pfizer, Inc., serving as President and Chief Executive Officer of its Howmedica division during his last fifteen years with the company, prior to retiring in 1996. Mr. Fitzgerald has served as a Director for public companies such as: LifeCell Corporation from 2001 to 2008 and Chairman of Orthovita, Inc. from 2002 to 2009. He holds a B.S. from American International College and a M.B.A. from New York University. The Board nominated Mr. Fitzgerald to serve as a director due to his extensive years of executive experience in leading and directing global, technology-dependent medical device companies. Following the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors, with Mr. Fitzgerald abstaining, approved the waiver for Mr. Fitzgerald of the Company's policy that all directors resign after reaching 75 years of age.
CHRISTIAN P. AHRENS
Christian P. Ahrens became a director of the Company in September 2009. He is currently a Managing Director of One Equity Partners ("OEP") and, prior to joining OEP in 2001, worked at Goldman Sachs. Mr. Ahrens currently serves on the board of directors of certain private portfolio companies of OEP. Mr. Ahrens received his A.B. from Princeton University. OEP and the Board of Directors nominated Mr. Ahrens to serve as a director due to his extensive capital markets experience.
GREGORY A. BELINFANTI
Gregory A. Belinfanti became a director of the Company in September 2009. Mr. Belinfanti is currently a Managing Director of OEP and, prior to joining OEP in 2006, served as a Vice President in the Investment Banking division of Lehman Brothers, specializing in Global Healthcare. He currently serves on the board of directors of certain private portfolio companies of OEP. Mr. Belinfanti received his B.A. from New York University and his J.D. from Harvard Law School. OEP and the Board of Directors nominated Mr. Belinfanti to serve as a director due to his extensive capital markets experience.
BARBARA D. BOYAN
Barbara D. Boyan, Ph.D. became a director of the Company in March 2004. Beginning January 1, 2013, Dr. Boyan became Dean of the School of Engineering at the Virginia Commonwealth University in Richmond Virginia, where she also holds the William H. and Alice T. Goodwin Chair in Biomedical Engineering. From 2002 until 2012, Dr. Boyan was a Professor in the Wallace H. Coulter Department of Biomedical Engineering at Georgia Tech and Emory University, Georgia

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Institute of Technology in Atlanta, Georgia. During the same time frame, Dr. Boyan has also held the Price Gilbert, Jr. Chair in Tissue Engineering at the Georgia Institute of Technology. In 2012, Dr. Boyan was elected to the National Academy of Engineering. Dr. Boyan was Deputy Director for Research, Georgia Tech/Emory Center for Engineering of Living Tissues, Georgia Institute of Technology, until 2008 when she assumed the position of Associate Dean for Research and Innovation in Georgia Tech's College of Engineering. From 1981 to 2002, Dr. Boyan was Professor and Vice Chair for Research, Department of Orthopedics at the University of Texas Health Science Center at San Antonio, where she also served as Director, Industry University Cooperative Research Center and Director, Center for the Enhancement of the Biology/Biomaterials Interface. Dr. Boyan is a founder of Osteobiologics, Inc., an orthopedic device company that was acquired by Smith & Nephew. She also served on the board of directors of IsoTis, Inc. and presently serves on the boards of Carticept Medical, Inc and Cativa, Inc. Most recently, she founded SpherIngenics, Inc., a stem cell delivery company, and serves as its Chief Scientific Officer. Dr. Boyan is a consultant to several companies, including: Exactech, Inc.; Musculoskeletal Transplant Foundation; NuVasive, Inc.; Spineology, Inc.; Henry Schein, Inc.; Ace Medical, Inc; and Institut Straumann AG. Dr. Boyan has also served on the board of directors of various charitable and non-profit organizations, and educational institutions, including the International Conferences on the Chemistry and Biology of Mineralized Tissue, the International Conferences on the Growth Plate and the Dentistry Division of the American Association for the Advancement of Science. Dr. Boyan is also a member of the following committees of the American Academy of Orthopedic Surgeons: Women's Health Initiatives and the Orthopedic Device Forum. Dr. Boyan holds a B.A., M.A. and Ph.D. in biology from Rice University. The Board of Directors nominated Dr. Boyan to serve as a director due to her extensive experience with medical device research, development and technology.
JAMES FOSTER
James Foster became a director of the Company in August 2002. From December 1994 until he retired in June 2001, Mr. Foster was Vice President and General Manager of Medtronic Heart Valves, a division of Medtronic, Inc. From February 1984 to December 1994, Mr. Foster held various positions at Medtronic, including Vice President of Cardiac Surgery Sales & Strategic Planning in 1994, Vice President and General Manager of Medtronic Neurological Implantables from 1992 to 1994, Vice President and General Manager of Medtronic Interventional Vascular from 1990 to 1992 and Vice President and General Manager of Medtronic Blood Systems from 1984 to 1989. Mr. Foster was a director of LifeCell Corporation from March 1995 until it was acquired by KCI in June 2008. Mr. Foster holds a master's degree in management from the Sloan School at MIT and a B.S. from St. Joseph's University in Philadelphia. The Board of Directors nominated Mr. Foster to serve as a director due to his extensive experience in medical technology sales and marketing, as well as business leadership experience.
TERRENCE GEREMSKI
Terrence Geremski became a director of the Company in December 2006. From 2001 to 2006, Mr. Geremski was Senior Vice President Finance and Chief Financial Officer of Carpenter Technology Corporation, an international manufacturer and distributor of specialty metals and engineered products. From 1992 to 2000, Mr. Geremski served as Executive Vice President and Chief Financial Officer as well as a Board member of Guilford Mills, Inc., a North Carolina-based international textile company. He also served as Vice President and Controller and various other management positions for Varity Corporation from 1979-1991. Mr. Geremski has also been an auditor and tax manager with Price Waterhouse in Chicago, IL and Toledo, OH. The Board of Directors nominated Mr. Geremski to serve as a director due to his extensive finance, capital markets, public company reporting, and governance experience.
FABIANA LACERCA-ALLEN
Fabiana Lacerca-Allen became a director of the Company in December 2013. Ms. Lacerca-Allen is currently the Chief Compliance Officer of Elan Corporation, plc, an Irish public company trading on the New York Stock Exchange and Irish Stock Exchange focusing on industry-leading neuroscience biotechnology. Over the last twenty years, she has held positions of increased responsibility where she managed legal and compliance matters globally, and as a senior executive has assisted in the delineation, implementation and execution of strategic initiatives. Previously she served from 2007 until 2010, as Senior Vice President and Chief Compliance Officer of Mylan, Inc., a global pharmaceutical company, and served, from 2004-2007, as Legal Compliance Director for Bristol-Myers Squibb Company, a global pharmaceutical company. In 2004, Ms. Lacerca-Allen was a Senior Lead Attorney for Microsoft Corporation, and from 1999-2004, she was the Director, Legal Affairs, Canadian Region for Merck Sharp & Dohme. Ms. Lacerca-Allen has also held various positions with AT&T Capital, NBS Technologies, Karelia International Consulting, The University of California, McKenna & Cuneo, Karelia SRL, and the Industry of Commerce of Argentina. She holds a Law degree from the Universidad de Buenos Aires Law School, and a LLM from the University of California, Los Angeles, School of Law and maintains leadership positions in international lawyers and compliance organizations. The Board of Directors nominated Ms. Lacerca-Allen to serve as a director due to her extensive experience implementing and managing global compliance and legal programs, including programs with periodic governmental certification requirements.
TORD LENDAU

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Tord Lendau became a director of the Company in June 2001. Mr. Lendau currently is on the Board of Directors of Vitrolife AB, and since November 2012 Chairman of the Board of CytaCoat AB. From 2006 to 2010, Mr. Lendau was the General Manager of Sandvik MedTech AB, a contract manufacturer in medical devices. From 2003 to 2006, Mr. Lendau was the Chairman of Diamyd, a public Swedish biotech company focusing on the development of pharmaceuticals for the treatment of autoimmune diabetes and pain. From 2002 to 2006, Mr. Lendau was the Chief Executive Officer of Artimplant AB, a biomaterials company. From 1998 to 2002, Mr. Lendau was President of Noster Systems AB, a medical device company developing a system to detect the bacteria that causes stomach ulcers. From 1997 to 1998, he acted as President of ArthroCare Europe AB, overseeing the start-up of its international operations. Mr. Lendau was Vice President and General Manager of Medtronic/Synectics from 1996 to 1997 after the acquisition of Synectics Medical AB by Medtronic, Inc. Prior to this acquisition, from 1991 to 1996, Mr. Lendau was the CEO of Synectics Medical AB. Mr. Lendau studied in M.Sc. at Linköping University and has a B.S. degree in Electronics. The Board of Directors nominated Mr. Lendau to serve as a director due to his extensive medical device industry management and directorship experience, as well as business acquisition experience.
PETER WILSON
Peter Wilson became a director of the Company in June 2001. Mr. Wilson currently serves on the board of directors of Conceptus, Inc. Mr. Wilson was President and Chief Executive Officer of Patient Education Systems from 1995 to 1998. Between 1992 and 1994, Mr. Wilson was an independent consultant in healthcare business development and marketing. From 1972 to 1992, Mr. Wilson worked for Procter & Gamble/Richardson Vicks, where he held various positions, including President of Richardson Vicks, Vice President/General Manager of Procter & Gamble Vicks Healthcare, President/General Manager of the Vidal Sassoon Division and President/General Manager of the Personal Care Division. Mr. Wilson holds an M.B.A. in marketing from Columbia University and a B.A. from Princeton University. The Board of Directors nominated Mr. Wilson to serve as a director due to extensive directorship and product sales and marketing experience.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of April 30, 2014 are as follows:

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Name
 
Age
 
Position
 
Executive Officer
Since
David Fitzgerald
 
80

 
President and Chief Executive Officer, Director
 
February 2009
Todd Newton
 
51

 
Executive Vice President, Chief Financial Officer and Chief Operating Officer
 
April 2009
James L. Pacek
 
64

 
Senior Vice President, Global Markets and Sales Operations
 
December 2008
Scott Schaffner
 
44

 
Senior Vice President and General Manager, Sports Medicine
 
January 2010
Jean Woloszko
 
56

 
Chief Technology Officer and Senior Vice President of Research and Development
 
May 2010
Richard Rew
 
46

 
Senior Vice President, General Counsel and Secretary
 
December 2008
Gayle Wiley
 
60

 
Senior Vice President and Chief Human Resources Officer
 
September 2013
Fred Dinger
 
53

 
Senior Vice President and General Manager, ENT
 
January 2014
Bruce Prothro
 
52

 
Chief Regulatory Officer and Senior Vice President of Quality Systems and Assurance
 
May 2010
DAVID FITZGERALD
David Fitzgerald became a director of the Company in April 2003 and President and Chief Executive Officer in February 2009. Mr. Fitzgerald spent twenty-five years in management positions at Pfizer, Inc., serving as President and Chief Executive Officer of its Howmedica division during his last fifteen years with the company, prior to retiring in 1996. Mr. Fitzgerald has served as a Director for public companies such as: LifeCell Corporation from 2001 to 2008 and Chairman of Orthovita, Inc. from 2002 to 2009. He holds a B.S. from American International College and a M.B.A. from New York University.
TODD NEWTON
Todd Newton joined the Company in April 2009. Prior to joining ArthroCare, he served in various executive officer roles at Synenco Energy, Inc. from 2004 to 2008, including as President and Chief Executive Officer; President and Chief Operating Officer; and Executive Vice President and Chief Financial Officer. Before joining Synenco Energy, Mr. Newton served in various roles at Deloitte & Touche LLP from 1984 to 2004, and was a partner in the firm from 1994 to 2004. Mr. Newton earned a Bachelor's Degree in Business Administration from the University of Texas at San Antonio, from which he graduated in 1984. Mr. Newton is a member of the Texas State Society of Certified Public Accountants.
JAMES PACEK
James Pacek returned to ArthroCare in November 2006 as Vice-President and General Manager, Interventional Therapies. Mr. Pacek was named Senior Vice President, Strategic Business Units in December 2008 and Senior Vice President, Global Markets and Sales Operations in April 2011. He joined ArthroCare from the Sorin Group, where he held the position of President of ELA Medical. Mr. Pacek originally joined ArthroCare in October of 1999, as Managing Director and General

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Manager, AngioCare division. Prior to joining ArthroCare in 1999, Mr. Pacek held progressive sales, marketing and general management responsibilities with American Hospital Supply, Baxter, and Medtronic including a role as Vice President Business Unit Operations for Medtronic Europe. Mr. Pacek holds a Bachelor's Degree in Business Administration from the University of Illinois.
JEAN WOLOSZKO
Jean Woloszko joined the Company in 1998 as Medical Director and was promoted to Vice-President, Research and Development in 1999 and to his current position in 2010. Prior to joining ArthroCare, he served in various medical, research and academic positions in Europe and in the US. He also was principal manager of research and medical affairs at Medtronic. He holds a Doctorate in Bioengineering from the University of Illinois, Chicago and received his medical degree from the Université de Montpellier (France). He also holds a certification in Biomechanics and in Rehabilitation Medicine.
SCOTT SHAFFNER
Scott Schaffner joined the Company in January 2010 and currently is the Senior Vice president and General Manager, Sports Medicine. Prior to joining ArthroCare, Mr. Schaffner was employed by Zimmer Spine (originally Abbott Spine/Spinal Concepts) and held positions of increasing responsibility, from 2001 - 2009, including Group Product Manager, Director of Marketing, Division Vice President of Sales and Marketing and Division President. Scott also worked at Medtronic for nearly a decade from 1992 to 2001, in the company's Neurological and Cardiovascular businesses and consulted overseas with Deloitte & Touche. Scott earned a bachelor degree in business from the University of Minnesota in 1992 and a master's in business administration from Stanford University's Graduate School of Business in 1996.
RICHARD REW
Richard Rew joined the Company in July 2006 as Vice President of Legal Affairs and was named Senior Vice President and General Counsel in December 2008. He joined ArthroCare from Activant Solutions Inc., a software and services company. Mr. Rew served as General Counsel of Activant beginning in 2000, became Secretary in 2002, and became Vice President, General Counsel & Secretary in 2005. Prior to Activant, he served as General Counsel for publicly traded EZCORP Inc. from 1996 to 2000. Mr. Rew holds a B.A., Plan II Honors Program from the University of Texas at Austin and a J.D. from the University of Oklahoma. Mr. Rew is a member of the State Bar of Texas.
GAYLE WILEY
Gayle Wiley joined the Company in September 2013. Before joining ArthroCare, Ms. Wiley was Vice President, HR for the CRV and the Emerging Markets businesses of Boston Scientific Corporation. Prior to that she served as Senior Vice President, Global Human Resources, Vignette Corporation, Austin, Texas, a leading web content management software company. Ms. Wiley also worked for International Business Machines (IBM), where she served as an HR Executive for IBM’s European Software Group (Europe, Middle East and Africa), based in Paris, France for five years. Gayle has also held Human Resources positions of increasing responsibility for Tivoli Systems, Inc.; CompuCom Systems, Inc. and Abbott Laboratories. Gayle earned a BS and MS in Education from Henderson State University.
FRED DINGER
Fred Dinger joined the Company in July 2013 when ArthroCare acquired Entrigue Surgical, Inc. Mr. Dinger was President and CEO of Entrigue from 2007 to 2013. Prior to ENTrigue, he served as President and CEO at C2M Medical and OsteoBiologics, Vice President and Chief Operating Officer at A-Med Systems, Vice President of Research and Development at Xomed Surgical Products and Linvatec Corporation, and Supervising Engineer in the Space and Strategic Avionics Division at Honeywell. Mr. Dinger earned a Bachelor of Science in Mechanical Engineering from Cornell University and a Master of Science in Engineering Management from University of South Florida. He holds numerous device and method patents as inventor and has served on the Board of Directors for several privately held medical device companies and a faith-based charity.
BRUCE PROTHRO
Bruce Prothro joined the Company in October 1998 as Vice President, Regulatory Affairs and Quality Assurance. He served in this position until April 2002, when he became Vice President, Operational Planning, Quality and Regulatory Affairs. In November 2002, he became the Vice President and General Manager, Coblation Technologies and Regulatory Affairs. In May of 2010, Mr. Prothro was promoted to Chief Regulatory Officer and Senior Vice President, Quality Systems and Assurance. Prior to joining ArthroCare, Mr. Prothro was employed with KeraVision, Inc. and held positions of increasing responsibility including Director of Regulatory Affairs and Compliance. Mr. Prothro earned a B.S. degree in Chemistry from the University of California, Berkeley.


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BOARD MEETINGS AND COMMITTEES
The Board of Directors has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. From time to time, the Board of Directors has created other ad hoc committees for special purposes. The Board of Directors currently has an ad hoc Transactions Committee, composed of Messrs. Wilson, Geremski, Belinfanti, and Mr. Foster (as an alternate) and a Negotiation Committee composed of Messrs. Wilson, Geremski and Belinfanti. The Board of Directors has determined that Messrs. Ahrens, Belinfanti, Foster, Lendau, Wilson, Geremski, and Dr. Boyan, which individuals constitute a majority of the Board of Directors, are independent under the NASDAQ listing standards.
Board Leadership Structure.    The Board of Directors has a lead independent director. The Company has separated the position of Chief Executive Officer and Lead Director. Currently the Lead Director is Mr. Wilson. The role of the Lead Director is to lead board meetings and ensure that the Board of Directors is achieving its objectives. As noted above, the Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each Committee has a different Chairperson, and all members of the Committees serve on the Board of Directors. The Company believes this leadership structure is the best for the Company because it spreads duties evenly among board members so that power and influence is shared throughout the Board of Directors.
Board's Role in Oversight of Risk.    The Board of Directors does not have a separate risk oversight body but rather manages risk directly. The Board of Directors mitigates risks through discussing with management the appropriate level of risk for the Company and evaluating the risk information received from management. The Audit Committee receives updates from senior management and assesses risk in satisfaction of their risk management role in accordance with the audit committee charter. The Company's Internal Audit Department, Compliance Department, Compliance Committee (a management body), Legal Department, and, when specific expertise is required, outside advisors also participate in the day-to-day risk management activities of the Company. The Company's senior internal audit officer and its senior compliance officer regularly report directly to the Audit Committee.
Audit Committee.    The Company's Audit Committee is a separately-designated standing audit committee established in accordance with Exchange Act Section 3(a)(58)(A). During the Last Fiscal Year, the Company's Audit Committee consisted of Messrs. Foster, Lendau, Geremski and Ms. Lacerca-Allen (who joined the committee upon becoming a Director in December 2013). Mr. Geremski served as the committee chair for the entirety of the Last Fiscal Year. The Audit Committee is responsible for, among other duties, reviewing the Company's internal audit, compliance and accounting processes, reviewing the results and scope of services provided by the Company's independent registered public accounting firm and reviewing and discussing audited financial statements, management's assessment of internal control over financial reporting under Section 404 of the Sarbanes Oxley Act of 2002 and other related matters with the management of the Company; discussing with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended and adopted by the Public Company Accounting Oversight Board obtaining the written disclosures from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the audit committee concerning independence; discussing with the independent accountant the independent accountant's independence; and recommending to the Board of Directors that the audited financial statements be included in the Company's annual report on Form 10-K for the Last Fiscal Year for filing with the Securities and Exchange Commission. During the Last Fiscal Year, the Audit Committee held eight meetings.
Our Board of Directors has determined that each of the members who have served on the Audit Committee during their respective terms during the Last Fiscal Year are independent under the applicable SEC and NASDAQ rules. Furthermore, the Board of Directors has determined that Mr. Geremski is an "audit committee financial expert," as defined by the SEC rules and is, therefore, considered "financially sophisticated" under NASDAQ listing standards. No current member of the Audit Committee serves on more than three audit committees of publicly-held companies.
The Board of Directors has adopted an Audit Committee Charter which is available on our website at www.arthrocare.com. We intend to post all amendments, if any, to our Audit Committee Charter on our website.
Compensation Committee.    During the Last Fiscal Year, the Compensation Committee consisted of Messrs. Ahrens, Wilson and Dr. Boyan. The purpose of the Compensation Committee is to review and make recommendations to the Board of Directors regarding all forms of compensation to be provided to the executive officers and employees of the Company. The Committee's policy is to ensure that senior management will be accountable to the Board of Directors through the effective application of compensation policies applicable to the Company's executive officers, including performance goals and stock and incentive compensation. In addition, the Committee strives to attract and retain key management talent, to support the achievement of the Company's business strategies through the establishment of appropriate compensation components, to ensure the integrity of the Company's compensation and benefit practices and to safeguard the interests of the Company's stockholders. The Committee is responsible for, among other duties, reviewing and approving the compensation arrangements

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for the Company's senior management and any compensation plans in which the executive officers and directors are eligible to participate and acting as administrator of the Company's stock option plans, employee stock purchase plan and such other equity participation plans as may be adopted by the Board of Directors. The Committee's role includes coordination and cooperation with other Board committees, management, external auditors, counsel and other committee advisors. Our Board of Directors has determined that the three members who served on the Compensation Committee during the Last Fiscal Year are independent under applicable SEC rules and NASDAQ listing standards.
The Company has adopted a Compensation Committee Charter, a copy of which is available on our website at www.arthrocare.com. We intend to post all amendments, if any, to our Compensation Committee Charter on our website.
Nominating and Corporate Governance Committee.    During the Last Fiscal Year, the Nominating and Corporate Governance Committee consisted of Dr. Boyan and Messrs. Belinfanti and Wilson, who served as the committee chair. The Nominating and Corporate Governance Committee is responsible for, among other duties, identifying appropriate candidates for nomination to membership on the Board of Directors and executive officer succession planning. The Nominating and Corporate Governance Committee is also responsible for reviewing director nominees recommended by stockholders of the Company. The procedures for making such a recommendation are described in the Company's bylaws. Our Board of Directors has determined that the three members who served on the Nominating and Corporate Governance Committee during the Last Fiscal Year are independent under applicable SEC rules and NASDAQ listing standards.
DIRECTOR ATTENDANCE POLICY
All incumbent directors attended at least 75 percent of the aggregate number of meetings of the Board of Directors and meetings of the committees of the Board of Directors on which he or she served. All incumbent directors also attended the 2013 Annual Meeting of Stockholders held on May 22, 2013. Our Board of Directors has adopted a practice whereby the Annual Meeting of Stockholders is scheduled on a date that maximizes director attendance.
DIRECTOR COMPENSATION
During 2013, our non-employee directors were provided compensation in the form of cash and equity, with basic director fees targeted at a mix of 40 percent cash and 60 percent in deferred stock units ("DSUs").
Director Equity Awards
Upon election to the Board, a new non-employee director receives an initial equity grant valued at $175,000 in DSUs, with the exact number of DSUs granted determined based on the closing price of our common stock on the date of grant. The initial DSUs vest over five years, with 20 percent vesting on each of the first five anniversaries of the grant date, subject to continued service. Upon annual re-election to the Board, each non-employee director receives a grant of DSUs with a value of $110,000, with the exact number of DSUs granted determined based on the closing price of our common stock on the date of grant. The annual DSUs vest over three years, with 1/3 vesting on each anniversary of the grant date, subject to continued service. Vesting of all DSUs will be fully accelerated for any director (i) upon the death or disability of such director if the disability reasonably prevents continued service as a director or (ii) upon a change in control (which will include the Merger). Actual delivery to each director of vested shares under all such DSUs will be deferred until retirement, resignation or other departure from membership on the Board by such director.
Cash Compensation
Cash compensation is paid quarterly. If a director holds two chairmanships or is the Lead Director and chairman of a committee, that director will receive the higher amount of compensation associated with the two positions. 2013 director compensation is outlined below:
2013 Director CompensationAnnual Cash and Equity Value
Position
 
Annual Cash
Retainer(1)
 
DSUs(2)
 
Target Total Value
Cash and Equity
Director
 
$
63,038

 
$
110,000

 
$
173,038

Lead Independent Director
 
$
94,556

 
$
110,000

 
$
204,556

Audit Chair
 
$
84,050

 
$
110,000

 
$
194,050

Compensation Chair
 
$
78,797

 
$
110,000

 
$
188,797

Nominating and Corporate Governance Committee (3)
 
$
73,544

 
$
110,000

 
$
183,544


11



_______________________________________________________________________________

(1)
The annual retainer was effective January 1, 2013.
(2)
The amount reflects the target 2013 grant date value of DSUs. The DSUs vest over three years, with 1/3 vesting to occur on each of the first three anniversaries of the grant date.
(3)
The Lead Independent Director also chaired the Nominating and Corporate Governance Committee and thus there was no additional compensation related to this chair position in 2013.
Director Stock Ownership Guidelines
In addition, all non-employee directors are encouraged to own shares of our common stock valued at five times the base annual cash retainer within four years of their initial election to the Board of Directors.
Shares that satisfy the ownership requirement are as follows:
Shares purchased on the open market;
Shares owned through the exercise and hold of Stock Appreciation Rights (SARs), and Options;
Vested and retained shares of common stock;
Vested deferred restricted stock awards; and
Shares held in trust for the benefit of the director or his or her family member living in the same household.
As of March 14, 2014 all directors, except Ms. Lacerca-Allen, had met the stock ownership guidelines.
2013 Director Compensation Table
The below table summarizes non-employee director compensation during the last fiscal year. We do not provide additional compensation to our employee director, David Fitzgerald, for his service on the Board of Directors.

Name
 
Fees Earned
or Paid
in Cash ($)(1)
 
Stock
Awards(2)
 
 
 
Total
Christian P. Ahrens
 
$
78,797

 
$
110,000

 
 
 
$
188,797

Gregory A. Belinfanti
 
$
63,038

 
$
110,000

 
 
 
$
173,038

Barbara D. Boyan, PhD
 
$
63,038

 
$
110,000

 
 
 
$
173,038

James G. Foster
 
$
63,038

 
$
110,000

 
 
 
$
173,038

Terrence E. Geremski
 
$
84,050

 
$
110,000

 
 
 
$
194,050

Fabiana Lacerca-Allen
 
$

 
$
175,000

 
 
 
$
175,000

Tord B. Lendau
 
$
63,038

 
$
110,000

 
 
 
$
173,038

Peter L. Wilson
 
$
94,556

 
$
110,000

 
 
 
$
204,556

_______________________________________________________________________________

(1)
The Fees Earned or Paid in Cash column consists of annual retainer fees for 2013. The annual retainer fees are accrued and paid quarterly in accordance with the director compensation policy in effect at the beginning of the relevant quarter.
(2)
The number reported equals the grant date fair value of DSUs issued to directors for their services as board members, calculated as the closing trading price of our common stock on the date of grant times the number of shares issued. The following are the number of stock options, stock awards and DSUs outstanding at December 31, 2013 for each independent director: Mr. Ahrens and Mr. Belinfanti each have: 7,308 of vested DSUs, 7,245 of unvested DSUs and 3,404 of unvested RSUs, Dr. Boyan: 51,432 of exercisable options, 11,129 of vested DSUs and 7,245 of unvested DSUs, Mr. Foster: 21,623 of exercisable options, 11,754 of vested DSUs and 7,245 of unvested DSUs, Mr. Geremski: 11,814 of exercisable stock options, 11,816 of vested DSUs and 7,245 of unvested DSUs, Mr. Lendau: 21,432 of exercisable options, 10,867 of vested DSUs and 7,245 of unvested DSUs, Mr. Wilson: 22,005 of exercisable options, 12,291 of vested DSUs and 7,245 of unvested DSUs, and Ms. Lacerca-Allen: 4,508 unvested DSUs.

COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholders and others may contact an individual director, our Board of Directors as a group, a committee of our Board of Directors, or a specified group of directors, including the non-employee directors as a group, by the following means:

12



 
 
 
Mail:
 
ArthroCare Corporation
c/o Lead Independent Director
7000 W. William Cannon, Building One,
Austin, Texas 78735
Our Lead Independent Director is currently Peter L. Wilson. Please clearly specify in each communication the applicable addressee or addressees you wish to contact as well as the general topic of the communication. You should also include the following information in your communication: (i) your name, mailing address and telephone number; (ii) the number and type of the Company's securities you hold; and (iii) if you are not a record owner of the Company's securities, the name of the record owner of the Company's securities beneficially owned by you.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and officers and persons who own more than 10 percent of a registered class of the Company's equity securities to file reports of ownership and reports of changes in the ownership with the SEC. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of the forms submitted to it during the Last Fiscal Year, the Company believes that, during the Last Fiscal Year, all such reports were timely filed.
CODE OF ETHICS
The Company has adopted a Code of Business Conduct and Ethics, which is intended to qualify as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under. The Code of Business Conduct and Ethics applies to all of our directors, officers, employees and agents. A copy of the Code of Ethics is available on our website at www.arthrocare.com. We intend to post any amendments to, or waivers from, if any, our Code of Business Conduct and Ethics on our website.


13



ITEM 11.    EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Our Compensation Discussion and Analysis, or CD&A, discusses the total compensation for our Chief Executive Officer, or CEO, Chief Financial Officer and Chief Operating Officer, or CFO, and the other three most highly compensated executive officers for Last Fiscal Year which we refer to collectively as the Named Executive Officers, or NEOs.
The compensation programs for the NEOs also apply to our other executive officers. The terms "we," "our," and "the Company" refer to ArthroCare and not to the Compensation Committee.
Summary
We have adopted a performance-based compensation philosophy for our executive officers that seeks to provide incentives to achieve both short-term and long-term business objectives, align the interests of executive officers and the interests of our stockholders and allow us to recruit and retain talented individuals in a competitive marketplace.
What are the objectives of our executive officer compensation program?
        For all executive officers, compensation is intended to meet the objectives described below. The Compensation Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and long-term basis, linked to specific, measurable results intended to increase the value of the Company, and that such compensation should assist us in attracting and retaining key executives critical to its long-term success.
        In establishing executive officer compensation, the Compensation Committee’s objectives are to:
recruit, reward, motivate and retain key officers;
ensure that an appropriate relationship exists between executive pay and the creation of long-term Company value; and
align the interests of our executives with the interests of our stockholders.
        To meet these objectives, we have adopted the following pay for performance based practices:
provide base salary, merit raises, promotional raises, and a portion of their annual cash bonus based on the executive officers’ individual responsibilities and performance;
provide a significant short-term incentive through an annual cash bonus plan that is based mostly upon achieving our corporate financial goals;
provide discretionary long-term incentives usually in the form of stock options, “Options”, and restricted stock units, “RSUs”, to attract and retain key executives with longer-term incentives that promote Company value; and,
provide performance based long-term incentives in the form of performance share awards that were granted in 2012, linked to the achievement of financial goals over a three-year period that further align the long-term interests of management with those of stockholders.
        Our overall compensation program is structured to attract, motivate and retain highly qualified executive officers by paying them competitively, consistent with our success and their contribution to that success. The Compensation Committee allocates total compensation between cash and equity compensation based on benchmarking to the Peer Group discussed below. The balance between equity and cash compensation among NEOs, and separately among members of the senior executive management team, is evaluated annually using the above criteria.
How is compensation determined?
        The Compensation Committee, operating under a written charter adopted by the Board of Directors, has the primary authority to determine and recommend to the Board of Directors the amount and nature of compensation available to our executive officers. The Compensation Committee is comprised entirely of independent directors, as defined by NASDAQ. In 2013, the Compensation Committee used the services of Radford, an independent compensation consultant to obtain, summarize and advise on competitive compensation data and assist in setting the compensation for our executive officers. The consultants from Radford report directly to the Compensation Committee and the Compensation Committee has sole authority to engage and terminate its own outside compensation consultants. In compliance with the disclosure requirements of the SEC, regarding the independence of compensation consultants, Radford addressed each of the six independence factors established by the SEC with the Compensation Committee. Its responses affirmed the independence of Radford on executive compensation matters. Based on this assessment, the Compensation Committee determined that the engagement of Radford does not raise any conflicts of interest or similar concerns. The Compensation Committee also evaluated the independence of other outside advisors to the Compensation Committee, including outside legal counsel, considering the same independence

14



factors and concluded their work for the Compensation Committee does not raise any conflicts of interest. The Compensation Committee also uses senior management staff as needed to gather internal data and prepare analyses as requested by the Compensation Committee.
        To aid the Compensation Committee in making its determination and recommendations to the Company’s Board of Directors, the CEO provides annual recommendations to the Compensation Committee regarding the compensation levels of all executive officers, excluding himself. The CEO provides the Compensation Committee with his assessment of the performance of officers reporting directly to him and other key executives. Shortly after the end of each fiscal year, the Compensation Committee engages in a comprehensive performance review of all executive employees of the Company before it approves any annual cash bonuses or equity grants.
        The Compensation Committee reviews all components of the executive officers’ compensation, including annual base salary, bonuses based on corporate and individual performance and equity compensation. The Compensation Committee also reviews accumulated realized and unrealized stock option, stock appreciation right, restricted stock unit and restricted stock holdings for the executive officers. The dollar value to the executive and cost of the actual and projected payout obligations under potential severance and change-in-control scenarios are also reviewed by the Compensation Committee and the CEO.
        How do we determine the amount for each element of executive officer compensation?
        The Compensation Committee analyzes both internal and external compensation levels in its review of the executive officers’ compensation, including the NEOs’ compensation. It reviewed the average total target cash compensation for each officer and the average number and value of equity-based awards in comparison to other employee job category levels for an internal company compensation comparison on both a single year and historical basis. In addition, the Compensation Committee used a market analysis conducted by Radford to ascertain the relative compensation positions of the executive officers compared to peers at similar companies. All elements of executive officers’ compensation were considered. In order to determine the competitive market within the peer groups, data from multiple sources was examined, including the Radford 2013 Global Survey for Public Medical Device Companies with revenue between $125 million and $1.2 billion, and Peer Group (as outlined below) proxy statements that contain data for senior positions and officers at comparable medical device companies.
        Any revisions to compensation levels are then proposed by the CEO, excluding himself, based on internal and external comparisons, and a review of Company and individual performance against goals, objectives, and job criteria. Any revisions to CEO compensation levels are proposed by the Compensation Committee. In order to attract, retain and motivate its executives, the Compensation Committee believes that aggregate executive officer remuneration should generally fall between the 50th and 75th percentile of remuneration provided by the Peer Group and the Radford market data. This approach ensures that our compensation cost structures will allow us to remain competitive in our markets and to meet the compensation goals stated above. In certain circumstances, we may target pay outside this range to help attract or retain executives, as necessary, or to recognize differences in their qualifications, responsibilities, time in the job, role criticality and potential.
        Equity grant guidelines for the prospective fiscal year are then set by job level, using market survey data and the current internal equity grant guidelines to determine the appropriate annual grant levels for the upcoming year.
        For the Last Fiscal Year, in establishing the member companies of the Peer Group, the Compensation Committee considered other medical technology competitors for executive positions and companies of a similar size and scope as the Company, as measured by market capitalization, revenue, number of employees, and scope of business. Specifically, the Peer Group was chosen to include companies that had a number of employees ranging from approximately 1/3 to three times that of the Company (i.e. 580-5,250 employees), revenue between approximately 1/3 and three times that of the Company (i.e. $125M to $1.2B in revenue) and a market cap of approximately 1/3 to three times that of the Company (i.e. a market cap between $350M and $3.1B). The Peer Group consists of leading medical technology companies from the Medical Instruments and Supplies and Medical Appliances and Equipment industry sectors. In August 2012 and August 2013 the Compensation Committee used Radford to review our Peer Group as well as to obtain, summarize and advise on the competitive compensation data to assist in setting the executive officers’ compensation. The tables below reflect the Peer Group established in August 2012 as well as the revised group which was established in August 2013.
        The Compensation Committee reevaluates this Peer Group on an annual basis to ensure that the individual companies within the Peer Group are comparable to us as measured by market capitalization, revenue, number of employees, and scope of business. In addition, companies may be excluded due to mergers and acquisitions.
        August, 2012 Peer Group Changes.    American Medical Systems Holdings, Inc. was removed because it was acquired by Endo Health Solutions Inc; Sonosite Inc. was removed because it was acquired by Fujifilm; and Zoll Medical Corp. was removed because it was acquired by the Asahi Kasei Corporation. Medical Action Industries was removed because its market capitalization had fallen to a point that the Compensation Committee believed they no longer fit the criteria to be included as a peer company. Cyberonics, Inc, and Insulet Corporation were added to the peer group to replace those removed because each of

15



the companies was within the Compensation Committee’s established peer group guidelines and their operations were most closely aligned with our own operations.
        August 2013 Peer Group Changes.    Cantel Medical Corporation and Natus Medical, Inc. were removed because of their focus on equipment manufacturing. Globus Medical, Inc. and Tornier, Inc. were added due to similar size and their product focus.
Peer Group Companies August 2012
Accuray, Inc.
 
Align Technology Inc.
 
AngioDynamics, Inc.
Cantel Medical Corp
 
ConMed Corporation
 
Cyberonics, Inc.
Greatbach, Inc.
 
Haemonetics Corp.
 
ICU Medical Inc.
Insulet Corporation
 
Integra Lifesciences Holdings Corp.
 
Masimo Corp.
Merit Medical Systems Inc.
 
Natus Medical Incorporated
 
Nuvasive, Inc.
NxStage Medical, Inc.
 
Orthofix International
 
Symmetry Medical Inc.
Thoratec Corp.
 
Volcano Corp.
 
Wright Medical Group Inc.
Peer Group Companies August 2013
Accuray, Inc.
 
Align Technology Inc.
 
AngioDynamics, Inc.
ConMed Corporation
 
Cyberonics, Inc.
 
Globus Medical, Inc.
Greatbach, Inc.
 
Haemonetics Corp.
 
ICU Medical Inc.
Insulet Corporation
 
Integra Lifesciences Holdings Corp.
 
Masimo Corp.
Merit Medical Systems Inc.
 
Nuvasive, Inc.
 
NxStage Medical, Inc.
Orthofix International
 
Symmetry Medical Inc.
 
Thoratec Corp.
Tornier, Inc.
 
Volcano Corp.
 
Wright Medical Group Inc.
In setting annual cash compensation (salary plus target bonus), we aim to provide compensation that generally falls between the 50th and 75th percentiles of the annual total cash compensation of executive officers performing similar job functions at Peer Group Companies. The annual review indicated that we are providing annual total cash compensation to our executive officers in the aggregate approximating the 50th to 75th percentile of the Peer Group and Radford market data.
Stockholder Advisory Vote on Executive Compensation
Our Compensation Committee also evaluates the opinions of our stockholders pursuant to our annual “say-on-pay” vote. At our 2013 Annual General Meeting of Stockholders, approximately 96 percent of the shares represented in person or by proxy at the meeting and entitled to vote approved, in non-binding advisory votes, the compensation of our NEOs. In light of the approval by a substantial majority of our stockholders of the compensation programs described in our 2012 proxy statement, the Compensation Committee did not implement changes to our executive compensation philosophies as a result of the stockholders’ advisory vote. The compensation for each of the Company’s NEOs for the Last Fiscal Year reflects each individual’s performance and the changes regarding Company’s financial and operating performance. The Compensation Committee determined that we will hold a “say-on-pay” vote every year; however, as a result of the Merger, we will not be holding a “say-on-pay” advisory vote in fiscal year 2014 for compensation paid to our NEOs in the Last Fiscal Year.
Compensation Risk Assessment
Consistent with the SEC’s disclosure requirements, the Compensation Committee has assessed our compensation programs for all employees. The Compensation Committee has concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. In connection with its approach to establishing and reviewing our compensation programs, the Compensation Committee considered came to this conclusion based on the following analysis:
Base compensation: this is a fixed amount based on market data, and accordingly, does not create any incentive for our employees to take undue risks.
Annual cash incentive opportunity: this element focuses on the achievement of annual (rather than long-term) Company and individual goals, but does not represent a significant percentage of our employees’ total compensation. For our NEOs, the Compensation Committee believes that this annual bonus program appropriately balances risk and the desire to focus the NEOs on specific annual goals important to our success, and that it does not encourage an NEO to take unnecessary or excessive risks which could have a material adverse effect on the Company.

16



Discretionary long-term equity incentive awards: this element further aligns our employees’ interests with those of our stockholders and constitutes a significant percentage of the overall compensation provided to our NEOs. The Compensation Committee believes that these awards do not encourage our employees to take unnecessary or excessive risks which could have a material adverse effect on the Company, as the ultimate value of the equity awards is tied to the long-term price of our stock. In addition, grants are only made periodically pursuant to our equity compensation grant policy as described below. Such awards are subject to long-term vesting schedules, and for our NEOs in conjunction with our NEO Stock Ownership Guidelines, help ensure that our NEOs have significant value tied to long-term stock price performance.
Performance long-term equity incentive awards granted in 2012: the Compensation Committee believes that these awards do not encourage our employees to take unnecessary or excessive risks which could have a material adverse effect on the Company, as the ultimate value of the equity awards is tied to the long-term price of our stock. The program is performance based and tied to the achievement of the Company’s financial goals.
401(k) plan and general benefit programs: these compensation programs are available to all employees, and because of the limited compensatory value and non-discriminatory nature of such programs, do not create an incentive for our employees to take undue risks.
        The Compensation Committee monitors our compensation programs on an annual basis and expects to make modifications as necessary to address any changes in the Company’s business or risk profile.
What are the elements of our executive officer compensation program and why do we provide each element?
The major elements that comprise our compensation program include: (i) base salary; (ii) annual cash bonus incentive opportunities (target bonus) tied mostly to the Company's performance; (iii) long-term equity based incentive awards, which includes discretionary awards and, in 2012, performance based equity awards; (iv) retirement benefits through a qualified defined contribution (401(k)) plan; and (v) other benefit programs generally available to all U.S. employees. The Compensation Committee believes that these elements of compensation, when combined, are effective, and will continue to be effective, in achieving the overall objectives of our compensation program. The following table sets forth each of the major elements:
 
 
 
 
 
 
 
Element
 
Description
 
Performance /
Job Considerations
 
Primary Objectives
Base Salary
 
Fixed cash amount
 
Increased based upon individual performance against goals, objectives and job criteria such as executive qualifications, responsibilities, role criticality, and potential
 
Recruit qualified executives, retention of executives
Annual Cash Incentive Opportunity
 
Short-term incentive, annual bonus plan
 
Amount of actual payment based on achievement of annual corporate financial goals, key strategic and operating objectives and individual performance objectives.
 
Promote achievement of short-term financial goals and strategic and operating objectives
Long-Term Equity Based Incentives
 
 
 
 
 
 
Discretionary Long-Term Equity Incentive Awards
 
Equity based awards, includes SARs, SOs, RS, and RSUs
 
Size of equity awards is based upon the executive's job position, individual performance, and future contribution
 
Align the interests of executives with interest of stockholders, retention, create shareholder value
Equity Incentive Awards
 
Performance based equity awards
 
To provide additional incentives for particular performance goals determined by the compensation committee to be key to our success
 
Align the interests of executives with interest of stockholders, retention, create shareholder value
Retirement and Welfare Benefits
 
401(k) plan, health and insurance benefits
 
None, benefits offered to broad workforce
 
Recruit qualified employees and retention
In addition, we have entered into employment agreements with our CEO, Mr. Fitzgerald, and our Executive Vice President, CFO and COO, Mr. Newton, as well as continuity or severance agreements with the other NEOs and executive officers. These agreements are discussed below under, "Employment Agreement with David Fitzgerald", "Employment Agreement with Todd Newton", and "Continuity Agreements with the NEOs."

17



The Fiscal 2013 Total Direct Compensation table below summarizes the levels established by the Compensation Committee with respect to salary, target bonus, stock and target total direct compensation. We discuss each element of the table in the narrative that follows.
2013 Total Direct Compensation
Name
 
Salary
 
Cash Bonus (1)
 
Discretionary Long-Term
Incentives (2)
 
Total Direct
Compensation
David Fitzgerald, President and CEO
 
$
580,000

 
$
436,160

 
$
1,249,991

 
$
2,266,151

Todd Newton, Executive Vice President, CFO and COO
 
$
400,557

 
$
266,931

 
$
620,794

 
$
1,288,282

James L. Pacek, Senior Vice President, Global Markets and Sales Operations and General Manager, ENT
 
$
327,116

 
$
155,216

 
$
276,277

 
$
758,609

Bruce Prothro, Chief Regulatory Officer and Senior Vice President of Quality Systems and Assurance
 
$
291,613

 
$
124,139

 
$
239,188

 
$
654,940

Jean Woloszko, CTO/Senior Vice President Research and Development
 
$
293,083

 
$
124,765

 
$
322,080

 
$
739,928

_______________________________________________________________________________

(1)
See the discussion of "annual cash incentive opportunity" below for a description of the bonus plan and target bonus amounts.
(2)
These amounts reflect the grant date fair value of RSUs and the grant date Black Scholes value of Options. The grant date fair value of stock awards equals the closing stock price on the date of grant multiplied by the number of shares awarded. These amounts do not reflect whether the recipient has actually realized or will realize a financial benefit from the awards.

Base Compensation for the Fiscal Years 2011, 2012 and 2013
Name
 
December 31,
2011 Salary
 
December 31,
2012 Salary
 
December 31,
2013 Salary
David Fitzgerald, President and CEO
 
$
548,375

 
$
564,826

 
$
580,000

Todd Newton, Executive Vice President, CFO and COO
 
$
336,528

 
$
370,200

 
$
400,557

James L. Pacek, Senior Vice President, Global Markets and Sales Operations and General Manager, ENT
 
$
300,150

 
$
308,554

 
$
327,116

Bruce Prothro, Chief Regulatory Officer and Senior Vice President of Quality Systems and Assurance
 
$
276,750

 
$
284,499

 
$
291,613

Jean Woloszko, CTO/Senior Vice President Research and Development
 
$
276,750

 
$
285,053

 
$
293,083

Performance-Based Compensation
Annual Cash Incentive Opportunity
We structure our annual cash bonus program to reward executive officers based mainly on our performance and, to a lesser degree, an assessment of the individual executive's contribution to that performance. The corporate component of the total cash bonus available is dependent on the Company's achievement of specific financial objectives tied to the annual Board approved operating plan. The individual component of the total cash bonus is based on an assessment of each individual

18



executive's personal performance as evaluated by the CEO or, in the case of the CEO, by the Board of Directors.
The key financial targets of the Company under the 2013 Executive Bonus Plan were total revenue, adjusted operating margin and free cash flow, in each case as defined in the plan. The potential bonus earned by each executive was subject to certain bonus multipliers based on under-achievement or over-achievement of the Company's goals.
For 2013, the Executive Bonus Plan for the CEO had 100 percent of his target bonus potential based on the achievement of Company financial goals, which could be adjusted for his personal performance at the discretion of the Company's Board of Directors. The NEOs, excluding the CEO, had 90 percent of their target bonus potential based on the achievement of Company goals and 10 percent based on the assessment of their personal performance and contribution, as evaluated by the CEO. The maximum payout was capped at 160 percent of target bonus potential for all of the NEOs.
The financial goals as set forth in our 2013 Executive Bonus Plan were as follows:
Company Financial Objective Criteria *
 
Relative
Weight
 
Downside and
Upside
Bonus Multiplier
Total Revenue
 
60
%
 
1:3 Ratio
Adjusted Operating Margin
 
20
%
 
1:3 Ratio
Free Cash Flow
 
20
%
 
1:3 Ratio
_______________________________________________________________________________
* The weighted average threshold bonus achievement level must be 94 percent of the target amount for bonus to be earned.
Under the 2013 Executive Bonus Plan, "threshold bonus achievement level" means the minimum percentage of financial objectives achievement at which a bonus is payable, or 94 percent. If the weighted average actual achievement ratio compared to the target achievement ratio is below 94 percent, bonuses are not earned. Achievement of weighted average Total Revenue, Adjusted Operating Margin, and Free Cash Flow results equal to or greater than 94 percent are subject to the 1:3 multiplier. For example, if the Bonus Achievement Level is 94 percent, then the executive officers are eligible for 82 percent of their target bonus potential. The 6 percent shortfall is multiplied by 3 to reduce bonus potential by 18 percent. At 100 percent achievement, executive officers are eligible for 100 percent of their target bonus potential. If, the Bonus Achievement Level is 110 percent, then executive officers are eligible for 130 percent of their target bonus potential. The 10 percent overachievement is multiplied by 3 to increase the bonus potential by 30 percent.
The Company financial objectives in the 2013 Executive Bonus Plan could have been adjusted at the discretion of the Board of Directors to account for unusual events such as extraordinary transactions, asset dispositions and purchases, and mergers and acquisitions if, and to the extent that, the Board of Directors considers the effect of such events indicative of Company performance.
The 2013 Executive Bonus Plan Calculations for Fiscal 2013—Company Performance table below summarizes the financial targets, actual achievement and the calculations that determined the bonus payments awarded to the NEOs for achievement of Company financial objectives for 2013. The table contains numbers regarding past company financial targets and goals. These targets and goals are disclosed in the limited context of our compensation plan and should not be understood to be statements of managements' expectations or estimates of future results or other guidance. We specifically caution investors not to apply these statements to other contexts.
2013 Executive Bonus Plan Calculations for Fiscal 2013—Company Performance
Financial Objectives
 
2013 Target
(in 000's)
 
2013 Annual
Achievement
(in 000's)
 
Percentage
Achieved
 
Weight
 
Bonus
Percentage
Achieved
 
Bonus
Percentage
Payout(1)
Total Revenue
 
$
393,109

 
$
377,789

 
96.1
%
 
60.0
%
 
57.7
%
 
 

Adjusted Operating Margin(2)
 
19.0
%
 
18.3
%
 
96.1
%
 
20.0
%
 
19.2
%
 
 

Adjusted Free Cash Flow(3)
 
$
68,000

 
$
73,186

 
107.6
%
 
20.0
%
 
21.5
%
 
 

Total
 
 

 
 

 
 

 
100.0
%
 
98.0
%
 
94.0
%
_______________________________________________________________________________

(1)
For every 1% of over/under achievement there is a 3% payout affect (1:3 ratio).

19



(2)
Adjusted operating margin is GAAP operating income, excluding "Investigation and Restatement" costs, for the calendar year 2013.
(3)
Adjusted Free Cash Flow shall mean earnings before "Investigation and Restatement" costs, Interest, Tax, Depreciation, Amortization and non-cash equity Compensation adjusted for income taxes paid, changes in working capital and operational capital expenditures for the calendar year ended 2013. Working capital is defined as the sum of accounts receivable, inventory and other non-cash current assets less accounts payable, accrued liabilities and other current liabilities, other than those current assets and liabilities related to income taxes. For clarity, an increase in net Working Capital will be a reduction in Adjusted Free Cash Flow and a decrease in net Working Capital will be an increase in Adjusted Free Cash Flow.
As previously mentioned, for the NEO's other than the CEO, 90 percent of the targeted annual bonus was based on the achievement of our financial performance goals. The remaining 10 percent of the targeted annual bonus was based on the CEO's assessment of the respective NEO's individual performance and contribution. The individual assessment of each NEO was determined by the CEO and reviewed by the Compensation Committee.
The personal performance achievement scale that was used for all other employees who are eligible to participate in the 2013 Corporate Bonus Plan was also used for the NEOs for consistency in plan administration.
The final amounts paid to our NEOs for the Last Fiscal Year performance are set forth in the table below:

Name
 
Bonus
Target
(%)
 
Bonus
Target
($)
 
Corporate
Goal
Weight
 
Corporate
Performance
 
Individual
Performance
Goal
Weight
 
Final
Bonus
Percentage
 
Final
Bonus
Payment
David Fitzgerald, President and CEO
 
80
%
 
$
464,000

 
100
%
 
94
%
 
%
 
 
 
$
436,160

Todd Newton, Executive Vice President, CFO and COO
 
70
%
 
$
280,390

 
90
%
 
94
%
 
10
%
 
95
%
 
$
266,931

James L. Pacek, Senior Vice President, Global Markets and Sales Operations and General Manager, ENT
 
50
%
 
$
163,558

 
90
%
 
94
%
 
10
%
 
95
%
 
$
155,216

Bruce Prothro, Chief Regulatory Officer and Senior Vice President of Quality Systems and Assurance
 
45
%
 
$
131,226

 
90
%
 
94
%
 
10
%
 
95
%
 
$
124,319

Jean Woloszko, CTO/Senior Vice President Research and Development
 
45
%
 
$
131,887

 
90
%
 
94
%
 
10
%
 
95
%
 
$
124,765

Long-Term Equity Based Incentives
Discretionary Long-Term Equity Incentive Awards
Our executive officers and other key employees are eligible to participate in discretionary and periodic equity awards, typically in the form of Options and RSUs, granted as part of our policy to provide management with longer-term incentives that promote building value in the Company. The grants are the most important part of our pay for performance compensation philosophy. The grants to executive officers, if made, are normally made at the first regularly scheduled Board of Directors meeting after the close of the fiscal year and are closely tied to, the executive's job position and individual performance, and retention considerations.
Options are granted with a per share exercise price of 100 percent of the market closing price of our underlying stock on the date of grant. Options have a seven year term and typically vest over four years subject to the holder's continued service through each vesting date. RSUs are generally issued for a nominal purchase price and typically vest over a five-year period subject to the holder's continued service through each vesting date. The Board of Directors has the ultimate responsibility of overseeing our stock incentive plans and has delegated the authority to the Compensation Committee to carry out these responsibilities.
There have been no grants in 2014 to any of our NEOs.
Performance Based Long-Term Equity Awards
In 2012 the Compensation Committee retained the compensation consultants from Radford to assist in the development

20



of a supplemental performance based long-term incentive program (the "LTIP") for the CEO and the other executive officers. The LTIP was adopted by the Board of Directors on January 6, 2012 which provides the executive officers of the Company the opportunity to earn shares of the Company's Common Stock (the "Performance Shares") under the Company's Amended and Restated 2003 Incentive Stock Plan.
The LTIP has a three year performance period from January 1, 2012 through December 31, 2014 (the "Performance Period") at which point the ending value of the Company's common stock must be at least $35.00 (adjusted for stock splits, etc.) for any awards to vest. In addition, vesting of the LTIP awards is dependent on three performance conditions: total revenue for the year ending December 31, 2014, cumulative adjusted operating income over the Performance Period and cumulative free cash flows over the Performance Period (See the 2013 Executive Bonus Plan Calculations for Fiscal 2013—Company Performance footnote 2 and 3 in the table above for a definition of adjusted operating income and free cash flows). The performance criteria were set at levels believed by the Compensation Committee to represent Company performance above historical rates and at the top of its peer group. Although attaining these objectives would require greater than normal effort by the executive officers, doing so could lead to significant increases in stockholder value.
Vesting of the earned shares, if any, will occur on the date that the Company files its Form 10-K for the year ended December 31, 2014 (the “Determination Date”). Subject to the participant’s continued employment through the Determination Date, the Company will settle 50 percent of the earned Performance Shares on the thirtieth day following the Determination Date and 25 percent of the shares on each of the next two anniversaries of the Determination Date, in each case, subject to earlier settlement upon a change in control or a pro-rated settlement upon retirement, death or disability. If the participant is terminated without cause or resigns for good reason after vesting but prior to settlement, the participant will continue to receive the shares upon settlement.
In the event of a change in control after December 31, 2014, all shares earned will be fully vested and the ownership requirements will be nullified. In the event of a change in control before December 31, 2014 (which would include the Merger), the participants will earn and vest in shares based on proportional performance to the date of the change in control against the targets, adjusted for the shorter measurement period.
In the event of the retirement of a participant, a participant’s death or a participant’s permanent disability, the number of shares earned will be calculated based on performance for the full Performance Period and prorated based on the amount of time that the participant was employed by the Company during the Performance Period.
Final payout of the performance based long-term incentive program will be subject to the certification of the performance achievement by the Compensation Committee. The Compensation Committee will have discretion to adjust the targets in the event of a material extraordinary event. The financial metrics will be calculated by the Chief Financial Officer and reviewed by the Compensation and Audit Committees. The financial metrics calculation will be based on audited financial statements as contained in public filings. Certain “add-back” and “adjustments” will be made for extraordinary legal and restatement costs related to incidents occurring before 2010 and the Compensation Committee will determine at the time of any future acquisitions if these will have a material extraordinary impact on the metrics and will recommend changing the metrics at that time if necessary.
As of March 14, 2014, Company executive officers held an aggregate of 399,994 Performance Shares (at target), which the Company currently estimates will be deemed to vest immediately prior to the effective time of the Merger with respect to an aggregate of 133,329 shares of Company common stock, which constitutes one-third of the target number of shares of Company common stock subject to all awards of Performance Shares.
The performance achievement for the Performance Period associated with awards of Company Performance Shares will be assessed immediately prior to the effective time of the Merger (using the last business day of the last completed fiscal quarter prior to the effective time of the Merger for any Performance Period ongoing at the effective time of the Merger), and the vesting of such Company Performance Share awards will be accelerated based upon such performance achievement, (but in no event will less than one-third of the target number of shares subject to each award of Company Performance Shares vest).
The table below sets forth information regarding the Company Performance Shares held by each of the Company's NEOs, as of March 14, 2014.

21



 
 
Number of Shares-End of Performance Period 2012-2014 (1)(2)
Name
 
Target
 
Expected to Vest
David Fitzgerald, President and CEO
 
57,142

 
19,047

Todd Newton, Executive Vice President, CFO and COO
 
57,142

 
19,047

James L. Pacek, Senior Vice President, Global Markets and Sales Operations and General Manager, ENT
 
57,142

 
19,047

Bruce Prothro, Chief Regulatory Officer and Senior Vice President of Quality Systems and Assurance
 
57,142

 
19,047

Jean Woloszko, CTO/Senior Vice President Research and Development
 
57,142

 
19,047

_______________________________________________________________________________

(1)
The cumulative shares at target under the LTIP is 400,000, with a threshold of 200,000 shares and a maximum of 600,000 shares. As of March 14, 2014, there were seven officers participating in the LTIP, so the target for an individual officer would be 57,142 shares.
(2)
This amount constitutes one-third of the target number of shares and are expected to vest immediately prior to the effective date of the merger.
Named Executive Officer Stock Ownership Guidelines
Effective October 21, 2010, the Compensation Committee adopted stock ownership guidelines for the NEOs. The guidelines, which are not mandatory, are designed to encourage our NEOs to maintain an equity stake in the Company, and by doing so, appropriately link their interests with those of other stockholders. The NEOs should maintain an ownership level equal to a multiple of base salary as described in the table below. For the purposes of assessing the guidelines, the Company's stock shall be valued based on a rolling average of the Company's closing share price of the NASDAQ over the prior six months. Should a fluctuation in share price or increase in salary result in a NEO's ownership falling below the suggested level, he/she is encouraged to take appropriate actions to come back into compliance.
Shares that satisfy the ownership requirement are as follows:
Shares purchased on the open market;
Shares acquired through the Company's Employee Stock Purchase Plan or 401(k) Plan;
Shares owned through the exercise and hold of SARs, and Options;
Vested and retained shares of common stock; and,
Shares held in trust for the benefit of the officer or his or her family member living in the same household.
Ownership Guidelines by Role
 
 
 
Role
 
Ownership Guidelines
CEO
 
2.5 times current salary
CFO
 
1.5 times current salary
Named Executive Officer
 
1.0 times current salary
As of March 14, 2014, Messrs. Fitzgerald, Newton, Pacek and Woloszko met these stock ownership guidelines.

22



Defined Contribution Plans
We have a Section 401(k) Savings/Retirement Plan, or the 401(k) Plan, to cover our U.S. employees, including NEOs. The 401(k) Plan permits eligible employees of the Company to defer a portion of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) Plan. In 2013, we made annual matching contributions to the 401(k) Plan in an amount equal to a dollar of Company stock for each dollar of participant contributions, up to a maximum of $2,500 in our stock. Eligible employees will receive a maximum of $625 per quarter with any additional matching contributions made at the end of the fiscal year for employees who may be hired throughout the fiscal year. While eligible participants may receive the stock matching contributions quarterly, 401(k) Plan participants are eligible to vest in current and future stock matching contributions after the first year of employment following date of hire. Our eligible employees may begin participating in the 401(k) Plan immediately upon date of hire.
We do not provide defined benefit plans or deferred compensation plans to our NEOs or to other employees.
Continuity Agreements with the NEOs
Pursuant to the continuity agreements with each of Messrs. Pacek and Woloszko, in the event of a termination of employment without "cause" at any time prior to the occurrence of a "change in control" or after the 24-month period following a "change in control" (each, as defined in the applicable continuity agreement) of the Company, subject to the executive executing and not revoking a release against the Company, the executive will be entitled to receive (i) severance pay for a term of six months immediately commencing with the termination of the executive's employment with the Company, at a rate equal to the executive's base salary, not including bonus, in effect immediately prior to the executive's termination, and (ii) reimbursements, not to exceed $650 per month, for the amount of his premium payment for group health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, which we refer to as COBRA, until the earlier of (A) the time that the executive no longer constitutes a qualified beneficiary (as such term is defined in Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code) and (B) the date six months following the executive's termination. If the executive's employment is terminated as a result of the executive's disability or death, then the executive will not be entitled to receive severance or other benefits under the continuity agreement, but will be eligible for those benefits as may be established under our existing severance and benefits plans and policies at the time of the disability or death. Mr. Prothro is not eligible for severance benefits outside a change in control pursuant to his continuity agreements.
In addition, pursuant to the continuity agreements for Messrs. Pacek, Prothro and Woloszko, if the executive's employment with the Company terminates in an "involuntary termination" at any time within 24 months after a change in control, then, subject to the executive (except for Mr. Prothro) executing and not revoking a release against the Company, the executive will be entitled to receive (i) severance pay payable in installments during the 24-month period following the executive's termination of employment at a rate equal to the executive's "current compensation" (as defined below), (ii) reimbursements, not to exceed $650 per month, for the amount of his premium payment for group health coverage pursuant to COBRA until the earlier of (A) the time that the executive no longer constitutes a qualified beneficiary and (B) the date 24 months following the executive's termination (provided that if our obligations cease due to the executive no longer constituting a qualified beneficiary, we will make a lump sum payment to the executive, on the 18 months following the date of the executive's termination of employment, equal to the product of the last monthly reimbursement paid to the executive multiplied by six), (iii) executive-level outplacement services for 24 months at our expense, not to exceed $15,000, and (iv) accelerated vesting with respect to 100% of the shares underlying any outstanding Options, SARs or RSUs. "Current compensation" means an amount equal to the greater of (i) the executive's base compensation earned in the fiscal year preceding the fiscal year of the executive's termination; or (ii) the executive's base compensation for the fiscal year of the executive's termination, including 100% of any bonus which the executive could have earned during such fiscal year, assuming the achievement of all relevant executive and Company goals, milestones and performance criteria.
Under the continuity agreements, "Change in Control" means the occurrence of any of the following events: (i) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50 percent of the total voting power represented by the voting securities of us or such surviving entity outstanding immediately after such merger or consolidation; (ii) the approval by our stockholders of a plan of complete liquidation of the Company or an agreement for the sale or disposition of all or substantially all of our assets; or (iii) a change in the composition of the Board of Directors, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are our directors as of the date the continuity agreement was entered into, or (B) are elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with any transaction described in subsections (i) or (ii) or in connection with an actual or threatened proxy contest relating to the election of our directors.

23



Under the continuity agreements, "Involuntary Termination" means (i) without the executive's express written consent, the assignment to the executive of any duties or the significant reduction of the executive's duties, either of which is inconsistent with the executive's position with the Company and his/her responsibilities in effect immediately prior to such assignment, or the removal of the executive from such position and responsibilities; (ii) without the executive's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the executive immediately prior to such reduction; (iii) a reduction by the Company in the base compensation of the executive as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction, with the result that the executive's overall benefits package is significantly reduced; (v) the relocation of the executive to a facility or a location more than 30 miles from the executive's then present location, without the executive's express written consent; (vi) any purported termination of the executive by the Company that is not effected for disability or for Cause, or any purported termination for which the grounds relied upon are not valid; or (vii) the failure of the Company to obtain the assumption of the continuity agreement; provided, however, that no Involuntary Termination shall be deemed to have occurred if any such successor substitutes an agreement for the continuity agreement providing comparable severance benefits to those provided for in the continuity agreement.
Upon a change in control, the vesting of 50% of any outstanding unvested Options, SARs and RSUs that the executives then hold will be accelerated as of such change in control. Upon a change in control that constitutes a "hostile takeover", the vesting of 100% of any outstanding unvested Options, SARs and RSUs that the executives then hold will be accelerated as of such change in control. Under the continuity agreements, the definition of "Hostile Takeover" means any person (as such term is used in Section 13(d) and 14(d) of the Exchange act) becoming the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of our securities representing 50 percent or more of the total voting power represented by our then outstanding voting securities, without the approval of our Board of Directors.
Under their continuity agreements, Messrs. Pacek, Prothro and Woloszko are eligible for Company reimbursement of any golden parachute excise tax paid or payable by them in connection with the Merger. In the event that any payment or other benefit under the continuity agreement would be subject to the excise tax imposed by Section 4999 of the Code, then the executive will be entitled to receive an additional payment from us, equal to 100% of any excise tax actually paid or payable by the executive in connection with the benefits under the continuity agreement, plus an additional payment from us in such amount that, after payment of all taxes (including, without limitation, any interest and penalties on such taxes and the excise tax), the executive retains an amount equal to the reimbursement payment. As described below, we did not include this excise tax reimbursement provision in the new employment agreements for Messrs. Fitzgerald and Newton.
If the NEO's employment is terminated as a result of the executive's disability or death, then the NEO will not be entitled to receive severance or other benefits under the continuity agreement, but will be eligible for those benefits as may be established under our existing severance and benefits plans and policies at the time of the disability or death.
Employment Agreement with David Fitzgerald
We have entered into an amended and restated employment agreement with Mr. Fitzgerald in connection with his employment with the Company. Under this agreement, if Mr. Fitzgerald's employment is involuntarily terminated without cause or he resigns due to a constructive termination of his employment (an "involuntary termination," as defined in Mr. Fitzgerald's employment agreement) within 24 months following a "change in control" (as defined in Mr. Fitzgerald's employment agreement), subject to Mr. Fitzgerald executing and not revoking a release against the Company, Mr. Fitzgerald would be entitled to receive (i) severance payable in installments equal to the sum of (A) his base salary (on a monthly basis) multiplied by 24 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by two, (ii) reimbursement equal to $1,500 per month for 24 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA, and (iii) the accelerated vesting of all of Mr. Fitzgerald's outstanding equity awards as to 100% of the unvested shares at the time of the involuntary termination.
In the event Mr. Fitzgerald's employment is terminated as a result of an involuntary termination at any time prior to the occurrence of a change in control or after the 24-month period following a change in control, subject to Mr. Fitzgerald executing and not revoking a release against the Company, Mr. Fitzgerald would be entitled to receive (i) severance in a lump-sum payment in an amount equal to (A) his base salary (on a monthly basis) multiplied by 18 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination of employment occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by 1.5, and (ii) reimbursement equal to $1,500 per month for 18 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA. If Mr. Fitzgerald's employment is terminated as a result of his death or disability, he will not be entitled to any other severance or other benefits, except that the vesting of all of Mr. Fitzgerald's outstanding equity awards will be automatically accelerated.

24



Upon a change in control, the vesting of all of Mr. Fitzgerald's outstanding equity awards will be accelerated as to 100% of the then-unvested shares. The amended and restated employment agreement also provides for automatic acceleration of vesting of Mr. Fitzgerald's equity awards in the event of the formal acceptance by our Board of Directors of Mr. Fitzgerald's resignation under circumstances acceptable to our Board of Directors. In addition, in the event of Mr. Fitzgerald's resignation as described in the previous sentence, each Option held by Mr. Fitzgerald which was granted to him while he was serving as our President and Chief Executive Officer will remain exercisable until the first anniversary of his resignation or, if earlier, the date on which the Option would have expired without regard to his resignation or service with the Company.
Employment Agreement with Todd Newton
We have entered into an employment agreement with Mr. Newton in connection with his employment with the Company, which was amended in January 2009 and January 2012. Under Mr. Newton's amended employment agreement, if Mr. Newton's employment is involuntarily terminated without cause or he resigns due to a constructive termination of his employment (an "involuntary termination" as defined in Mr. Newton's employment agreement) within 24 months following a "change in control" (as defined in Mr. Newton's employment agreement), subject to Mr. Newton executing and not revoking a release against the Company, Mr. Newton would be entitled to receive (i) severance equal to the sum of (A) his base salary (on a monthly basis) multiplied by 24 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by two, (ii) reimbursement equal to $1,500 per month for 24 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA, and (iii) the accelerated vesting of all of Mr. Newton's outstanding equity awards as to 100% of the unvested shares at the time of the involuntary termination.
In the event Mr. Newton's employment is terminated as a result of an involuntary termination at any time prior to the occurrence of a change in control or after the 24-month period following a change in control, subject to Mr. Newton executing and not revoking a release against the Company, Mr. Newton would be entitled to receive (i) severance in a lump-sum payment in an amount equal to (A) his base salary (on a monthly basis) multiplied by 12 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan), and (ii) reimbursement equal to $1,500 per month for 12 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA. If Mr. Newton's employment is terminated as a result of his death or disability, he will not be entitled to any other severance or other benefits.
Upon a change in control, the vesting of all of Mr. Newton's outstanding equity awards will be accelerated as to 50% of the then-unvested Options and SARs and 100% of the then-unvested RSUs. Upon a change in control that constitutes a "hostile takeover" (as defined in Mr. Newton's employment agreement), the vesting of 100% of any outstanding unvested equity awards that Mr. Newton then holds will be accelerated as of such change in control.
Other Elements of Compensation and Perquisites Offered to Executive Officers
In addition to the elements of executive compensation discussed above, the NEOs are eligible to receive health care coverage that is generally available to other employees of the Company. We also offer a number of other benefits to the NEOs pursuant to benefit programs that provide for broad-based employee participation. These benefit programs include the employee stock purchase plan, medical, dental and vision insurance, long-term and short-term disability insurance, life and accidental death and dismemberment insurance, health and dependent care flexible spending accounts, educational assistance, employee assistance, the 401(k) Plan (as described above) and certain other benefits. Many employees are also eligible for variable pay under sales incentive plans and/or the company bonus plan.
The availability of the benefit programs allows us to attract, recruit and retain employees. The benefit programs provide employees access to quality healthcare and assists employees in meeting their financial and retirement goals. We also believe this assists in increasing employee loyalty to the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Last Fiscal Year, Messrs. Ahrens, Foster and Wilson and Dr. Boyan served as members of the Compensation Committee of the Board of Directors. None of such Compensation Committee members has ever been an officer or employee of the Company or any of its subsidiaries. In addition, during the Last Fiscal Year, no member of our Board of Directors or of our Compensation Committee, and none of our executive officers, served as a member of the board of directors or compensation committee of an entity that has one or more executive officers serving as members of our Board of Directors or our Compensation Committee.
SUMMARY EXECUTIVE OFFICER COMPENSATION
The following summary compensation table sets forth the 2013, 2012, and 2011 compensation earned by the Company's Chief Executive Officer, the Company's Chief Financial Officer, and the next three most highly compensated executive officers

25



of the Company who were serving as executive officers as of December 31, 2013.

Name and
Principal Position
 
Year
 
Salary
 
Stock
Awards
(1)
 
Option
Awards
(2)
 
Non-Equity
Incentive
Plan
Compensation
(3)
 
All Other
Compensation
(4)
 
Total
David Fitzgerald
 
2013
 
$
580,000

 
$
1,249,991

 
$

 
$
436,160

 
$
3,700

 
$
2,269,851

President and Chief Executive Officer
 
2012
 
$
564,826

 
$
970,880

 
$
154,115

 
$
397,638

 
$
3,746

 
$
2,091,205

 
 
2011
 
$
548,375

 
$
1,207,416

 
$
178,767

 
$
425,539

 
$
3,700

 
$
2,363,797

Todd Newton
 
2013
 
$
400,557

 
$
337,074

 
$
283,720

 
$
266,931

 
$
2,500

 
$
1,290,782

Senior Vice President, Chief Financial
 
2012
 
$
370,200

 
$
248,152

 
$
293,290

 
$
198,131

 
$
2,500

 
$
1,112,273

Officer and Chief Operating Officer
 
2011
 
$
336,528

 
$
196,533

 
$
293,695

 
$
168,769

 
$
2,500

 
$
998,025

James L. Pacek
 
2013
 
$
327,116

 
$
181,697

 
$
94,580

 
$
155,216

 
$
2,500

 
$
761,109

Senior Vice President, Global Markets
 
2012
 
$
308,554

 
$
127,841

 
$
151,092

 
$
137,615

 
$
2,500

 
$
727,602

 
 
2011
 
$
300,150

 
$
168,453

 
$
204,319

 
$
146,023

 
$
2,500

 
$
821,445

Bruce Prothro
 
2013
 
$
291,613

 
$
163,530

 
$
75,658

 
$
124,139

 
$
2,500

 
$
657,440

Chief Regulatory Officer
 
2012
 
$
284,499

 
$
123,772

 
$
146,182

 
$
111,638

 
$
2,500

 
$
668,591

and Senior Vice President of Quality Systems and Assurance
 
2011
 
$
276,750

 
$
123,717

 
$
146,182

 
$
122,296

 
$
160,689

 
$
829,634

Jean Woloszko
 
2013
 
$
293,038

 
$
218,029

 
$
104,051

 
$
124,765

 
$
2,500

 
$
742,383

Chief Technology Officer and Senior Vice President
 
2012
 
$
285,053

 
$
154,659

 
$
182,780

 
$
113,394

 
$
2,500

 
$
738,386

of Research and Development
 
2011
 
$
276,750

 
$
140,372

 
$
204,319

 
$
122,670

 
$
3,222

 
$
747,333

_______________________________________________________________________________

(1)
The grant date fair value of stock awards granted in 2013, 2012 and 2011 under the Company's Amended and Restated 2003 Incentive Stock Plan. On January 2012 the Company granted RSU's to the NEOs for the 2012-2014 performance cycle, which will vest only if certain identified targets are met as more fully described in the "Performance Based Long-Term Equity Section". If performance is achieved the RSUs will vest assuming the executive officer remains employed by us through the vesting date.
(2)
The grant date fair value of stock options granted in 2013, 2012 and 2011 under the Company's Amended and Restated 2003 Incentive Stock Plan, calculated in accordance with US GAAP guidance for share based payments. The grant date fair value of stock options equals the Black-Scholes value on the date of grant multiplied by the number of shares awarded.
(3)
Represents bonus amounts paid in accordance with the 2013, 2012 and 2011 Executive Officer Bonus Plan. Refer to "Performance Based Compensation" section of the Company's CD&A.
(4)
For 2013, the All Other Compensation column consists of $1,200 for Mr. Fitzgerald for a health allowance and $2,500 401(k) contribution match in the Company's stock made to all the Named Executive Officers. For 2012, the All Other Compensation column consists of $1,246 for Mr. Fitzgerald for a health allowance and $2,500 401(k) contribution match in the Company's stock made to all of the Named Executive Officers. For 2011, the All Other Compensation column consists of $1,200 for Mr. Fitzgerald for a health allowance, $142,082 of moving allowances and $16,107 of special pay to Mr. Prothro and special pay of $722 to Mr. Woloszko and $2,500 401(k) contribution match in the Company's stock made to all of the Named Executive Officers.
Grants of Plan-Based Awards Table
The following table provides information pertaining to stock compensation grants made to our Chief Executive Officer and each of our other NEOs during the Last Fiscal Year.




26



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1)
 
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (2)
 
All Other
Option
Awards:
Number of
Securities
Underlying
Options (3)
 
Exercise or
Base Price
of Option
Awards
($/Sh)
 
Grant Date
Fair Value
of Stock
and Option
Awards
 
 
 
 
Grant
Date
 
 
 
 
 
Name
 
Threshold
 
Target
 
Maximum
 
 
 
 
David Fitzgerald
 
 
 
$
380,480

 
$
464,000

 
$
603,200

 
 
 
 
 
 
 
 
 
 
 
 
2/20/2013
 
 
 
 
 
 
 
34,955
 
 
 
$
35.76

 
$
1,249,991

 
 
Todd Newton
 
 
 
$
229,920

 
$
380,390

 
$
364,507

 
 
 
 
 
 
 
 
 
 
 
 
2/20/2013
 
 
 
 
 
 
 
9,426
 
 
 
$
35.76

 
$
337,074

 
 
 
 
2/20/2013
 
 
 
 
 
 
 
 
 
28,549
 
$
35.76

 
$
283,720

 
 
James L. Pacek
 
 
 
$
134,118

 
$
163,558

 
$
212,625

 
 
 
 
 
 
 
 
 
 
 
 
2/20/2013
 
 
 
 
 
 
 
5,081
 
 
 
$
35.76

 
$
181,697

 
 
 
 
2/20/2013
 
 
 
 
 
 
 
 
 
9,517
 
$
35.76

 
$
94,580

 
 
Bruce Prothro
 
 
 
$
107,605

 
$
131,226

 
$
170,594

 
 
 
 
 
 
 
 
 
 
 
 
2/20/2013
 
 
 
 
 
 
 
4,573
 
 
 
$
35.76

 
$
163,530

 
 
 
 
2/20/2013
 
 
 
 
 
 
 
 
 
7,613
 
$
35.76

 
$
75,658

 
 
Jean Woloszko
 
 
 
$
108,147

 
$
131,887

 
$
171,453

 
 
 
 
 
 
 
 
 
 
 
 
2/20/2013
 
 
 
 
 
 
 
6,097
 
 
 
$
35.76

 
$
218,029

 
 
 
 
2/20/2013
 
 
 
 
 
 
 
 
 
10,470
 
$
35.76

 
$
104,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_______________________________________________________________________________

(1)
For Non-Equity Incentive Plan Awards, this column shows the threshold, target and maximum amounts for each of the NEOs under the 2013 Executive Officer Bonus Plan. The threshold level represents a bonus payout at 82% of target, target level represents a bonus payout at 100% of target and the maximum level represents bonus payout at 130% of target.
(2)
RSUs grant date fair value is calculated in accordance with ASC 718 and based on the closing price of our stock on the date of grant. RSUs vest over a three year period for Mr. Fitzgerald and over a five year period for all other NEOs.
(3)
Refer to Note 12, "Stockholders' Equity", in the Notes to Consolidated Financial Statements included in the 2013 Annual Report on Form 10-K for the relevant assumptions used to determine the valuation of our option awards using the Black-Scholes valuation method in accordance with ASC 718. These amounts do not reflect whether the recipient has actually realized or will realize a financial benefit from the awards. The potential appreciation in our stock price above the exercise price of the stock options, not the fair value used for accounting purposes at grant, motivates our executive officers. Awards vest over four years subject to continued employment.
Outstanding Awards at Fiscal Year End Table
The following table provides information pertaining to the equity-based awards of our Chief Executive Officer and each of our other NEOs that were outstanding as of December 31, 2013.

 
 
Option Awards
 
Stock Awards
Name
 
Number of
Securities Underlying
Unexercised Options
Exercisable
 
 
 
Number of
Securities Underlying
Unexercised Options
Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expiration
Date(1)
 
Number of
Shares or
Units of Stock
That Have Not
Vested
 
 
 
Market Value
of Shares or
Units of Stock
That Have Not
Vested
 
Equity Incentive
Plan Awards:
Number of
Unearned
Shares That
Have Not Vested
 
Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares That
Have Not Vested
David Fitzgerald
 
10,000

 
(11
)
 
 

 
$
24.69

 
5/26/2014
 
 

 
 
 
 

 
 

 
 

 
 
10,000

 
(2
)
 
 

 
$
40.78

 
5/24/2014
 
 

 
 
 
 

 
 

 
 

 
 
1,814

 
(2
)
 
 

 
$
44.50

 
5/29/2015
 
 

 
 
 
 

 
 

 
 

 
 
4,254

 
(4
)
 
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
157,235

 
(4
)
 
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
5,489

 
(3
)
 
620

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
5,050

 
(3
)
 

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
7,443

 
(3
)
 
1,039

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
12,053

 
(9
)
 
$
485,013

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
24,666

 
(9
)
 
$
992,560

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
34,955

 
(9
)
 
$
1,406,589

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

 
19,047

(10
)
$
766,451

Todd Newton
 
17,019

 
(6
)
 
1

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 


27



 
 
62,979

 
(6
)
 
1

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
13,280

 
(8
)
 
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,758

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
12,985

 
(5
)
 
1,590

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,806

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
10,626

 
(5
)
 
8,753

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
 
 
(5
)
 
3,276

 
$
35.76

 
2/20/2020
 
 
 
 
 
 
 
 
 
 
 
 
5,947

 
(5
)
 
19,326

 
$
35.76

 
2/20/2020
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

 
 

 
 
 
3,000

 
(7
)
 
$
120,720

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
3,531

 
(7
)
 
$
142,087

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
7,565

 
(7
)
 
$
304,416

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
9426

 
(7
)
 
$
379,302

 
 
 
 
 
 
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

 
19,047

(10
)
$
766,451

James L. Pacek
 
8,456

 
(5
)
 
 

 
$
43.51

 
3/5/2015
 
 

 
 
 
 

 
 

 
 

 
 
15,778

 
(5
)
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
34,222

 
(5
)
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,526

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
9,034

 
(5
)
 
194

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,485

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
5,474

 
(5
)
 
2,985

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
 
 
(5
)
 
2,884

 
$
35.76

 
2/20/2020
 
 

 
 
 
 

 
 

 
 

 
 
1,982

 
(5
)
 
4,651

 
$
35.76

 
2/20/2020
 
 

 
 
 
 

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
3,027

 
(7
)
 
$
121,806

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
3,897

 
(7
)
 
$
156,815

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
5,081

 
(7
)
 
$
204,459

 
 

 
 

 
 
 

 
 
 
 

 
 

 
 
 
 

 
 
 
 

 
19,047

(10
)
$
(766,451
)
Bruce Prothro
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 

 
 

 
 

 
 
2,055

 
(5
)
 
 
 
$
24.38

 
3/10/2014
 
 

 
 
 
 

 
 

 
 

 
 
2771

 
(5
)
 
 
 
$
36.08

 
2/27/2014
 
 

 
 
 
 

 
 

 
 

 
 
12,597

 
(5
)
 
 
 
$
23.50

 
12/16/2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5
)
 
3,526

 
$
33.39

 
2/17/2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5
)
 
3,373

 
$
26.24

 
2/28/2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5
)
 
2,400

 
$
35.76

 
2/20/2020
 
 
 
 
 
 
 
 
 
 
 
 
134

 
(5
)
 
 
 
$
24.38

 
3/10/2014
 
 
 
 
 
 
 
 
 
 
 
 
27,403

 
(5
)
 
 
 
$
23.50

 
12/16/2016
 
 
 
 
 
 
 
 
 
 
 
 
9,034

 
(5
)
 
194

 
$
33.39

 
2/17/2018
 
 
 
 
 
 
 
 
 
 
 
 
5,297

 
(5
)
 
2,889

 
$
26.24

 
2/28/2019
 
 
 
 
 
 
 
 
 
 
 
 
1,586

 
(5
)
 
3,627

 
$
35.76

 
2/20/2020
 
 
 
 
 
 
 
 
 
 
 
 
14,550

 
(5
)
 
 
 
$
36.08

 
2/27/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,000

 
(7
)
 
$
201,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,522

 
(7
)
 
$
101,485

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,772

 
(7
)
 
$
151,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,573

 
(7
)
 
$
184,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19,047

(10
)
$
766,451

Jean Woloszko
 
2,771

 
(5
)
 
 

 
$
36.08

 
2/27/2014
 
 

 
 
 
 

 
 

 
 

 
 
14,457

 
(5
)
 
 

 
$
36.08

 
2/27/2014
 
 

 
 
 
 

 
 

 
 

 
 
2,298

 
(5
)
 
 

 
$
43.51

 
3/5/2015
 
 

 
 
 
 

 
 

 
 

 
 
8,507

 
(5
)
 
 

 
$
43.51

 
3/5/2015
 
 

 
 
 
 

 
 

 
 

 
 
9,407

 
(5
)
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
25,936

 
(5
)
 

 
$
23.50

 
12/16/2016
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,526

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
9,034

 
(5
)
 
194

 
$
33.39

 
2/17/2018
 
 

 
 
 
 

 
 

 
 

 
 
 

 
(5
)
 
3,738

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
6,622

 
(5
)
 
4,089

 
$
26.24

 
2/28/2019
 
 

 
 
 
 

 
 

 
 

 
 
 
 
(5
)
 
2,790

 
$
35.76

 
2/20/2020
 
 

 
 
 
 

 
 

 
 

 
 
2,181

 
(5
)
 
5,499

 
$
35.76

 
2/20/2020
 
 

 
 
 
 

 
 

 
 


28



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