<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 March 31, 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
---------
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.)
2532 White Road, Irvine, CA 92614
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714)553-0888
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(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 March 31, 1997, there were 12,081,159 shares outstanding of Common
Stock and 656,250 shares outstanding of Series B Preferred Stock.
<PAGE> 2
I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 3
Statements of Operations for the three-month
periods ended March 31, 1997 and 1996 (Unaudited) 4
Statements of Cash Flows for the three-month periods
ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II: Other Information 12
Signatures 13
</TABLE>
2
<PAGE> 3
I-FLOW CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,191,000 $ 1,651,000
Royalty receivable -- 1,000,000
Accounts receivable, net 3,847,000 3,514,000
Inventories 3,719,000 3,352,000
Prepaids and other 149,000 141,000
------------ ------------
Total current assets 8,906,000 9,658,000
------------ ------------
PROPERTY:
Furniture, fixtures and equipment 3,320,000 3,091,000
Rental and demonstration equipment 155,000 173,000
------------ ------------
Total property 3,475,000 3,264,000
Less accumulated depreciation (1,451,000) (1,326,000)
------------ ------------
Property, net 2,024,000 1,938,000
------------ ------------
OTHER ASSETS
Goodwill and other intangibles, net 4,716,000 4,831,000
Notes receivable and other 909,000 807,000
------------ ------------
TOTAL $ 16,555,000 $ 17,234,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,115,000 $ 1,156,000
Accrued payroll and related expenses 780,000 1,271,000
Deferred revenue 330,000 429,000
Current portion of long-term debt 1,000,000 1,000,000
Restructuring reserve 683,000 824,000
Other liabilities 57,000 73,000
------------ ------------
Total current liabilities 3,965,000 4,753,000
------------ ------------
Long-term debt 2,250,000 2,500,000
Long-term restructuring reserve 360,000 384,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares
authorized; 656,250 series B shares issued and
outstanding at March 31, 1996 and 1995, 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; 12,070,506 and 12,081,159 shares
issued and outstanding at March 31, 1997 and
December 31, 1997, respectively 33,091,000 33,036,000
Common stock warrants 615,000 615,000
Accumulated deficit (25,220,000) (25,548,000)
------------ ------------
Net shareholders' equity 9,980,000 9,597,000
------------ ------------
TOTAL $ 16,555,000 $ 17,234,000
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
I-FLOW CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
REVENUE:
Net sales $ 4,265,000 $ 717,000
Interest income & other 37,000 88,000
Licensing fee -- 1,300,000
----------- -----------
Total revenue 4,302,000 2,105,000
----------- -----------
COSTS AND EXPENSES:
Cost of sales 1,748,000 370,000
Selling and marketing 793,000 287,000
General and administrative 1,081,000 661,000
Product development 326,000 232,000
----------- -----------
Total costs and expenses 3,948,000 1,550,000
Income before taxes 354,000 555,000
Income taxes (17,000) (12,000)
----------- -----------
NET INCOME $ 337,000 $ 543,000
=========== ===========
NET INCOME PER SHARE $ 0.03 $ 0.05
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 14,210,925 13,163,201
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
I-FLOW CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 337,000 $ 543,000
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 260,000 55,000
Changes in operating assets and liabilities:
Royalty receivable 1,000,000
Accounts receivable (333,000) 1,066,000
Inventories (367,000) (267,000)
Prepaid expenses and other (8,000) (13,000)
Accounts payable and accrued liabilities (813,000) (395,000)
---------- ----------
Net cash provided by operating activities 76,000 989,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (including rental and
demonstration equipment) (211,000) (52,000)
Change in other assets (120,000) (3,000)
---------- ----------
Net cash used by investing activities (331,000) (55,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (250,000) --
Proceeds from exercise of stock options and warrants 56,000 2,385,000
Other (11,000)
---------- ----------
Net cash provided by (used by) financing activities (205,000) 2,385,000
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (460,000) 3,319,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,651,000 5,628,000
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,191,000 $8,947,000
========== ==========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
I-FLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 March 31, 1997 and the results of its operations and its cash
flows for the three-month periods ended March 31, 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 March 31, 1997.
2. COMMON STOCK OPTIONS AND WARRANTS
The Company has stock option plans which currently provide for the
granting of options to employees, officers, consultants and directors.
Stock option activity for the three-month period ended March 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Shares Exercise
Subject to Price per
Options Share
--------- -------------
<S> <C> <C>
Balance, December 31, 1996 2,849,635 $0.25 - $5.38
Granted 33,000 $4.00 - $4.75
Cancelled/Expired (473) $2.13 - $2.69
Exercised 20,083 $2.13 - $3.60
--------- -------------
Balance, March 31, 1997 2,862,079 $0.25 - $5.38
========= =============
</TABLE>
6
<PAGE> 7
Options to purchase 1,545,095 shares of the Company's common stock were
exercisable at March 31, 1997 at exercise prices ranging from $0.25 to
$5.38 per share.
Outstanding warrants as of March 31, 1997 are summarized below.
<TABLE>
<CAPTION>
Shares
Subject to Exercise Price
Description Warrants Per Share Expiration Date
----------- ---------- --------------- ----------------
<S> <C> <C> <C>
Series F Warrants 607,032 $2.40 to $4.80 October 1997
Series H Warrants 150,000 $2.75 to $3.25 June 1997
Acquisition Warrants 250,000 $4.62 July 2001
</TABLE>
3. BANK FINANCING
The Company has a financing agreement with a bank which provides for a
working capital line of credit of $3,000,000 expiring in July 1997. There
were no borrowings under the line during the quarter ended March 31, 1997.
4. 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. The effect of the modified treasury
stock method is to increase net income by $21,000 for purposes of the
earnings per share calculation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128) in March
1997, effective for financial statements issued after December 15, 1997.
The statement provides simplified standards for the computation and
presentation of earnings per share (EPS), making EPS comparable to
international standards. SFAS 128 requires dual presentation of "Basic"
and "Diluted" EPS, by entities with complex capital structures, replacing
"Primary" and "Fully Diluted" EPS under APB Opinion No. 15.
7
<PAGE> 8
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from common stock equivalents,
similar to fully diluted EPS, but uses only the average stock price during
the period as part of the calculation.
Data utilized in calculating pro forma earnings per share under the SFAS
128 statement are as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Basic:
Net income $ 337,000 $ 543,000
Weighted average number of common shares 12,775,655 10,507,818
Diluted:
Net income $ 337,000 $ 543,000
Weighted average number of common and
common equivalent shares outstanding 14,210,925 12,773,754
</TABLE>
The following table reconciles the net income applicable to common
shareholders, basic and diluted shares, and EPS for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------------------------------ -----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------- ----------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income $337,000 $543,000
BASIC EPS
Income applicable to common
shareholders $337,000 12,775,655 $.03 $543,000 10,507,818 $.05
Effect of dilutive securities:
Warrants and stock options 1,435,270 2,655,383
DILUTED EPS
Income applicable to common
shareholders and assumed
conversions $337,000 14,210,925 $.02 $543,000 13,163,201 $.04
</TABLE>
8
<PAGE> 9
6. SUBSEQUENT EVENT
In April 1997, the Company entered into a noncancelable operating lease
for a new 51,000 square foot building for its primary facility. Monthly
rent under the agreement is $32,000. The lease agreement contains certain
scheduled rent increases and expires in June 2007.
9
<PAGE> 10
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 period 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 were $4,265,000 during the three-month period ended March 31,
1997 compared to $717,000 for the same period in the prior year. However,
during the three month period ended March 31, 1996, the Company received a
licensing fee of $1,300,000 which brought total revenues for the
three-month period ended March 31, 1996 to $2,105,000. The increase in net
sales for the period was due to sales from the Company's subsidiary, Block
Medical, Inc. ("Block"), of $3,579,000. Block was acquired by the Company
on July 22, 1996.
In March 1996, SoloPak Pharmaceuticals, Inc. ("SoloPak") purchased the
exclusive right and license to manufacture and sell certain of the
Companys' 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 will pay
I-Flow a royalty equal to two percent of SoloPaks' net sales of the
products for the 1997 and 1998 calendar years. No royalties were due
during the quarter ended March 31, 1997. Per the terms of the agreement,
I-Flow has the right of first refusal to supply SoloPak with services and
assistance in
10
<PAGE> 11
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 were $1,748,000 during the three-month period ended March
31, 1997 compared to $370,000 for the same period in the prior year. As a
percentage of net sales, cost of sales decreased compared to the same
period in the prior year by 11%. This increase in gross profit on sales is
primarily the result of the increased sales volume and cost savings
associated with the addition of a manufacturing plant in Mexico as part of
the acquisition of Block.
Selling and marketing expenses for the three-month period ended March 31,
1997 increased over the same period in the prior year by $506,000 or 176%.
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 Medical.
General and administrative expenses for the three-month period ended March
31, 1997 increased over the same period in the prior year by $420,000, or
64%. 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 in July 1996.
Product development expenses for the three-month period ended March 31,
1997 increased compared to those for the same period in the prior year by
$94,000, or 41%. 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 three-month period ended March 31, 1997, funds of $76,000 were
provided by operating activities consisting of non-cash expenses of
$260,000 less net changes in operating assets and liabilities of $521,000
combined with a net income of $337,000. These changes in operating assets
and liabilities consisted of a net decrease in accounts and royalty
receivables of $667,000 offset by an increase in inventories, prepaid
expenses and other of $375,000 and a reduction in accounts payable and
accrued liabilities of $813,000.
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
three-month period ended March 31, 1997 charges to the restructuring
reserve of $165,000 were made for
11
<PAGE> 12
lease payments and expenses. Management believes the reserve is sufficient
and anticipates that the remaining cash outflow should be substantially
completed by June 30, 1997.
The Company used funds for investing activities during the three-month
period ended March 31, 1997 by acquiring furniture, fixtures, equipment
and other assets aggregating $331,000 for use in its consolidated
operations.
During the three-month period ended March 31, 1997, funds of $205,000 were
used by financing activities consisting primarily of payments on notes
payable.
As of March 31, 1997, the Company had available funds of $1,191,000 and
net receivables of $3,847,000. 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
12
<PAGE> 13
PART II - OTHER INFORMATION
Items 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) During the quarter ended March 31, 1997, the
Company filed no Current Reports on Form 8-K.
13
<PAGE> 14
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: May 13, 1997 /s/ DONALD M. EARHART
---------------------------
Donald M. Earhart,
Chairman, President and CEO
Date: May 13, 1997 /s/ GAYLE L. ARNOLD
---------------------------
Gayle L. Arnold,
Vice President, Finance,
Chief Financial Officer
14
<PAGE> 15
INDEX TO EXHIBITS
Set forth below is a list of the exhibits included as part of this report:
Exhibit No. Exhibit
----------- -------
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
27 Financial Data Schedule
- -----------------
(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.
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,191,000
<SECURITIES> 0
<RECEIVABLES> 3,847,000
<ALLOWANCES> 0
<INVENTORY> 3,719,000
<CURRENT-ASSETS> 8,906,000
<PP&E> 3,475,000
<DEPRECIATION> (1,451,000)
<TOTAL-ASSETS> 16,555,000
<CURRENT-LIABILITIES> 3,965,000
<BONDS> 0
0
1,494,000
<COMMON> 33,706,000
<OTHER-SE> (25,220,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,555,000
<SALES> 4,265,000
<TOTAL-REVENUES> 4,302,00
<CGS> 1,748,000
<TOTAL-COSTS> 3,948,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 354,000
<INCOME-TAX> (17,000)
<INCOME-CONTINUING> 337,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337,000
<EPS-PRIMARY> $.03
<EPS-DILUTED> $.03
</TABLE>
