<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file Number: 0-18338
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I-Flow Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0121984
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20202 Windrow Drive Lake Forest, CA 92630
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(Address of principal executive offices) (Zip Code)
(714) 206-2700
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(Registrant's telephone number, including area code)
2532 White Road Irvine, CA 92614
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(Former name, former address and former fiscal year,
if changed since last report)
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.
[ x ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of June 30, 1997, there were 12,241,234 shares outstanding of
Common Stock and 656,250 shares outstanding of Series B Preferred
Stock.
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I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three and six-month
periods ended June 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II: Other Information 11
Signatures 12
</TABLE>
2
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I-FLOW CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 937,000 $ 1,651,000
Royalty receivable -- 1,000,000
Accounts receivable, net 5,046,000 3,514,000
Inventories 4,211,000 3,352,000
Prepaids and other 205,000 141,000
------------ ------------
Total current assets 10,399,000 9,658,000
------------ ------------
PROPERTY:
Furniture, fixtures and equipment 3,701,000 3,264,000
Less accumulated depreciation (1,611,000) (1,326,000)
------------ ------------
Property, net 2,090,000 1,938,000
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OTHER ASSETS
Goodwill and other intangibles, net 4,221,000 4,831,000
Notes receivable and other 1,226,000 807,000
------------ ------------
TOTAL $ 17,936,000 $ 17,234,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,739,000 $ 1,156,000
Accrued payroll and related expenses 825,000 1,271,000
Deferred revenue 262,000 429,000
Current portion of long-term debt 1,000,000 1,000,000
Restructuring reserve 305,000 824,000
Other liabilities 51,000 73,000
------------ ------------
Total current liabilities 4,182,000 4,753,000
------------ ------------
LONG-TERM DEBT 2,000,000 2,500,000
LONG-TERM RESTRUCTURING RESERVE COMMITMENTS AND CONTINGENCIES 350,000 384,000
SHAREHOLDER EQUITY:
Preferred stock - no par value; 5,000,000 shares authorized;
656,250 series B shares issued and outstanding at June 30,
1997 and 1996, respectively (aggregate preference on
liquidation is $1,575,000) 1,494,000 1,494,000
Common stock - no par value; 40,000,000 shares authorized;
12,241,234 and 12,081,159 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 33,610,000 33,036,000
Common stock warrants 615,000 615,000
Accumulated deficit (24,315,000) (25,548,000)
------------ ------------
Net shareholders' equity 11,404,000 9,597,000
------------ ------------
TOTAL $ 17,936,000 $ 17,234,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Net sales $5,034,000 $ 970,000 $9,332,000 $1,686,000
Interest income and other 23,000 139,000 30,000 227,000
Licensing fees -- 1,300,000 -- 2,600,000
---------- ---------- ---------- ----------
Total revenue 5,057,000 2,409,000 9,362,000 4,513,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,058,000 536,000 3,806,000 906,000
Selling and marketing 827,000 445,000 1,620,000 732,000
General and administrative 966,000 639,000 2,060,000 1,311,000
Product development 278,000 238,000 605,000 470,000
---------- ---------- ---------- ----------
Total costs and expenses 4,129,000 1,858,000 8,091,000 3,419,000
Income before taxes 928,000 551,000 1,271,000 1,094,000
Income taxes (31,000) -- (37,000) --
---------- ---------- ---------- ----------
NET INCOME $ 897,000 $ 551,000 $1,234,000 $1,094,000
========== ========== ========== ==========
NET INCOME PER SHARE $ 0.07 $ 0.05 $ 0.09 $ 0.10
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 13,659,187 12,773,754 13,628,829 12,519,436
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,234,000 $ 1,094,000
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization 559,000 119,000
Changes in operating assets and liabilities:
Royalty receivable 1,000,000 --
Accounts receivable (1,532,000) 457,000
Inventories (859,000) (450,000)
Prepaid expenses and other (64,000) (53,000)
Accounts payable, accrued and other liabilities (595,000) 5,000
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Net cash provided by (used by) operating activities (257,000) 1,172,000
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CASH FLOWS FROM INVESTMENT ACTIVITIES:
Property acquisitions (including rental and demonstration
equipment) (437,000) (248,000)
Change in other assets (83,000) (157,000)
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Net cash used by investing activities (520,000) (405,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long term debt (500,000) --
Proceeds from exercise of stock options and warrants 563,000 4,048,000
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Net cash provided by financing activities 63,000 4,048,000
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (714,000) 4,815,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,651,000 5,628,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 937,000 $10,443,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
I-FLOW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) which, in
the opinion of management, are necessary to present fairly the financial
position of the Company at June 30, 1997 and the results of its operations
and its cash flows for the six-month periods ended June 30, 1997 and 1996.
Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission although the Company
believes that the disclosures in the financial statements are adequate to
make the information presented not misleading.
The financial statements included herein should be read in conjunction
with the financial statements of the Company, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 filed with
the Securities and Exchange Commission on March 31, 1997.
Certain amounts previously reported have been reclassified to conform with
the presentation at June 30, 1997.
2. Bank Financing
The Company has a financing agreement with a bank which provides for a
working capital line of credit of $4,000,000 expiring in July 1998. There
were no borrowings under the line during the quarter ended June 30, 1997.
3. Earnings Per Share
In 1997, earnings per share is based on the modified treasury stock
method. Under this method, earnings per share is based on the weighted
average number of common shares outstanding during the year, the assumed
exercise of all options and warrants, the use of proceeds of such assumed
exercises to acquire 20% of the common stock with any remaining proceeds
being used to retire Company debt.
6
<PAGE> 7
4. Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Share (EPS)", was issued in February 1997. Under FAS 128, the Company
will be required to disclose basic EPS and diluted EPS for all periods for
which an income statement is presented, which will replace disclosure
currently being made for primary EPS and fully-diluted EPS. FAS 128
requires adoption for fiscal periods ending after December 15, 1997. Pro
forma disclosures of basic EPS and diluted EPS for the current reporting
and comparable periods in the prior year are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings Per Share:
Basic $.07 $.05 $.10 $.10
Diluted $.07 $.05 $.09 $.10
</TABLE>
7
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain disclosures made by the Company in this report and in other
reports and statements released by the Company are and will be
forward-looking in nature, such as comments which express the Company's
opinions about trends and factors which may impact future operating
results. Disclosures which use words such as the Company "believes,"
"anticipates," or "expects" or use similar expressions are intended to
identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
from those expected and readers are cautioned not to place undue reliance
on these forward-looking statements. The Company undertakes no obligation
to republish revised forward-looking statements to reflect the occurrence
of unanticipated events. Readers are also urged to carefully review and
consider the various disclosures made by the Company in this report which
seek to advise interested parties of the risks and other factors that
affect the Company's business, as well as in the Company's periodic
reports on Forms 10-K, 10-Q, and 8-K filed with the Securities and
Exchange Commission. The risks affecting the Company's business include
reliance on the success of the Home Health Care Industry, the
reimbursement system currently in place, competition in the industry,
technological changes and product availability and the integration of
Block Medical, Inc. Any such forward-looking statements, whether made in
this report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business.
Results of Operations
Net sales during the three and six-month periods ended June 30, 1997 were
$5,034,000 and $9,332,000, respectively, compared to $970,000 and
$1,686,000 for the same periods in the prior year. However, during the
three and six-month periods ended June 30, 1996, the Company received
licensing fees of $1,300,000 and $2,600,000, respectively which brought
total revenues for these periods to $2,409,000 and $4,513,000,
respectively. There were no licensing fees during the six months ended
June 30, 1997. The increase in net sales for the three and six-month
periods ended June 30, 1997 was primarily due to sales generated by the
Company's subsidiary, Block Medical, Inc. ("Block"), of $3,835,000 and
$7,405,000, respectively. Block was acquired by the Company on July 22,
1996. Interest income decreased during the three and six month periods
ended June 30, 1997 compared to the prior year, due to the use of funds
for the acquisition of Block in July 1996.
In March 1996, SoloPak Pharmaceuticals, Inc. ("SoloPak") purchased the
exclusive right and license to manufacture and sell certain of the
Company's products in the United States and Puerto Rico. Pursuant to the
agreement, SoloPak paid the Company $1.3 million in consideration of the
license in March 1996 and guaranteed royalties of $1.0 million during each
of the three succeeding quarters in 1996. Additionally, SoloPak agreed to
pay I-Flow a royalty equal to two percent of SoloPaks' net sales of the
products for the 1997 and 1998 calendar years. Royalties due for the
8
<PAGE> 9
quarter ended June 30, 1997 were not significant. Per the terms of the
agreement, I-Flow has the right of first refusal to supply SoloPak with
services and assistance in assembling the products until February 1998.
The Company retained the right to sell the products outside the United
States and Puerto Rico.
Cost of sales of $2,058,000 and $3,806,000 were incurred during the three
and six-month periods ended June 30, 1997, respectively. As a percentage
of net sales, cost of sales decreased by 14% and 13% for the three and six
month periods ended June 30, 1997 compared to the same periods in the
prior year. This increase in gross profit on sales is primarily the result
of the increased sales volume and cost savings associated with the move of
a substantial portion of the Company's manufacturing to its manufacturing
plant in Mexico acquired as part of the acquisition of Block.
Selling and marketing expenses for the three and six-month periods ended
June 30, 1997 increased over the same periods in the prior year by
$382,000, or 86% and $888,000, or 121%, respectively. This increase is
primarily a result of an increase in the internal sales force which
increased from four to 15 people as a result of the acquisition of Block.
General and administrative expenses for the three and six-month periods
ended June 30, 1997 increased over the same periods in the prior year by
$327,000, or 51% and $749,000, or 57%, respectively. These expenses
primarily represent costs for administrative personnel, facilities and
other administrative items. These costs have increased primarily as a
result of the acquisition of Block.
Product development expenses for the three and six-month periods ended
June 30, 1997 increased over the same periods in the prior year by
$40,000, or 17% and $135,000, or 29%, respectively. With the acquisition
of Block, the Company increased its engineering staff and the number of
new products under development. The Company will continue to incur product
development expenses as it continues its efforts to introduce new
improved-technology, cost-efficient products into the market.
Financial Condition
During the six-month period ended June 30, 1997, funds of $257,000 were
used by operating activities consisting of non-cash expenses of $559,000
less net changes in operating assets and liabilities of $2,050,000
combined with a net income of $1,234,000. These changes in operating
assets and liabilities consisted of a net increase in accounts and royalty
receivables of $532,000 combined with increases in inventories, prepaid
expenses and other of $923,000 and a reduction in accounts payable and
other liabilities of $595,000.
9
<PAGE> 10
The Company recorded a restructuring charge of $1,552,000 at December 31,
1996 to provide for expenses related to consolidating Block's operations
with its own in 1997. The restructuring charge was comprised of expenses
for severance, relocation, moving and lease abandonment. During the
six-month period ended June 30, 1997 charges to the restructuring reserve
of $388,000 were made for lease payments and expenses. Management believes
the reserve is sufficient and anticipates that the remaining cash outflow
should be completed by September 30, 1997.
The Company used funds for investing activities during the three-month
period ended June 30, 1997 by acquiring furniture, fixtures, equipment and
other assets aggregating $520,000 for use in its consolidated operations.
During the six-month period ended June 30, 1997, funds of $63,000 were
provided by financing activities consisting primarily of proceeds from the
exercise of stock options and Series H warrants of $563,000 net of
payments on long-term debt of $500,000.
As of June 30, 1997, the Company had available funds of $937,000 and net
receivables of $5,046,000. To date, the Company has financed its
operations and working capital requirements primarily through equity
financings and bank borrowings. Management believes the Company's funds
are sufficient to provide for its short-term projected needs for
operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
10
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PART II - OTHER INFORMATION
Items 1. - 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 14, 1997, the Company held its annual Shareholders'
Meeting.
(b) Donald M. Earhart, Jack H. Halperin, Dr. John H. Abeles,
Erik H. Loudon, Dr. Henry T. Tai, Charles C. McGettigan,
Joel S. Kanter and James J. Dal Porto were elected as
directors of the Company at the Annual Shareholders'
Meeting.
(c) A total of 11,575,644 of the outstanding voting securities
were represented at the Annual Shareholders by proxy or in
person. All matters voted upon and approved at the Annual
Shareholders' Meeting were as follows:
(1) The separate tabulation of the votes for each Director
elected is as follows, with no abstentions, or broker
non-votes:
<TABLE>
<CAPTION>
Director Nominee Votes For Votes Against
---------------- --------- -------------
<S> <C> <C>
Donald M. Earhart 11,511,557 64,087
Jack H. Halperin 11,511,557 64,087
Dr. John H. Abeles 11,512,057 63,587
Erik H. Loudon 11,511,557 64,087
Dr. Henry T. Tai 11,512,057 63,587
Charles C. McGettigan 11,512,057 63,587
Joel S. Kanter 11,512,057 63,587
James J. Dal Porto 11,512,057 63,587
</TABLE>
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The list of exhibits contained in the
accompanying Index to Exhibits is herein incorporated
by reference.
(b) During the quarter ended June 30, 1997, the Company
filed a Current Report on Form 8-K dated April 25, 1997
reporting that the Company entered into a lease
agreement for a new primary facility.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I-FLOW CORPORATION
(Registrant)
Date: August 13, 1997 /s/ DONALD M. EARHART
------------------------------
Donald M. Earhart,
Chairman, President and CEO
Date: August 13, 1997 /s/ GAYLE L. ARNOLD
------------------------------
Gayle L. Arnold,
Vice President, Finance, Chief
Financial Officer (Principal
Financial Officer)
12
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INDEX TO EXHIBITS
Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:
Exhibit No. Exhibit
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3.1 (1) Restated Articles of Incorporation of the Company
3.2 (2) Certificate of Amendment to Restated Articles of
Incorporation dated June 14, 1991
3.3 (3) Certificate of Amendment to Restated Articles of
Incorporation dated May 12, 1992
10.1 (4) Lease Agreement Between Industrial Developments
International, Inc. as Landlord and I-Flow
Corporation as Tenant
27 Financial Data Schedule
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(1) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended September 30, 1990.
(2) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-41207-LA) declared effective
August 8, 1991.
(3) Incorporated by reference to exhibit with this title filed with the
Company's Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
(4) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated April 25, 1997.
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 937,000
<SECURITIES> 0
<RECEIVABLES> 5,046,000
<ALLOWANCES> 0
<INVENTORY> 4,211,000
<CURRENT-ASSETS> 10,399,000
<PP&E> 3,701,000
<DEPRECIATION> (1,611,000)
<TOTAL-ASSETS> 17,936,000
<CURRENT-LIABILITIES> 4,182,000
<BONDS> 0
0
1,494,000
<COMMON> 34,225,000
<OTHER-SE> (24,315,000)
<TOTAL-LIABILITY-AND-EQUITY> 17,936,000
<SALES> 5,034,000
<TOTAL-REVENUES> 5,057,000
<CGS> 2,058,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,071,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 928,000
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 897,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 897,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
