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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (IRS Employer Identification No.)
incorporation or organization)
2532 WHITE ROAD, IRVINE, CA 92614
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 553-0888
------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of class)
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 X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]
[COVER PAGE 1 OF 2 PAGES]
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The aggregate market value of the 11,446,097 shares of voting Common Stock of
the registrant held by non-affiliates of the registrant on February 28, 1997,
based on the last sale price of such stock on such date was $55,799,723.
Registrant's outstanding stock as of February 28, 1997 was 12,078,429 shares of
Common Stock and 656,250 shares of Series B Preferred Stock. The Series B
Preferred Stock is convertible by the holders thereof at any time into 700,000
shares of the Company's Common Stock and vote with the Common Stock as a single
class on all matters submitted to holders of Common Stock. All the Preferred
Stock is held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to portions of
the registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the registrant's year ended December 31, 1996.
Certain Information required by Parts II and IV is incorporated by reference to
portions of the registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996.
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PART I
ITEM 1. BUSINESS
THE COMPANY
I-Flow Corporation (the "Company" or "I-Flow") designs, develops,
manufactures and markets technically advanced, ambulatory infusion systems that
administer antibiotics, analgesics, chemotherapeutic agents, hormones,
nutrients, hydration therapies and other medical treatments to patients. The
Company's devices are designed for portability, convenience, reliability,
economy and technical sophistication such that cost effective healthcare may be
delivered at various sites, most frequently, the home, hospitals and physician
offices.
The Company was incorporated in the State of California in July 1985. The
Company's corporate offices are located at 2532 White Road, Irvine, California
92614. The telephone number is (714) 553-0888.
ACQUISITION OF BLOCK MEDICAL, INC.
On July 3, 1996, the Company entered into an agreement for the purchase
of substantially all of the assets of Block Medical, Inc. ("Block"), a
wholly-owned subsidiary of Hillenbrand Industries. Block was a San Diego
based manufacturer and marketer of ambulatory infusion devices. The
transactions contemplated by this agreement were consummated on July 22, 1996.
The assets were acquired for an aggregate purchase price of approximately $18
million (including costs). The purchase price has been allocated to the net
assets acquired, in-process research and development, goodwill and other
intangibles. The amount allocated to in-process research and development of
$4.9 million has been expensed as of the acquisition date. Consideration for
the purchase consisted of: $15,000,000 in cash, 433,018 shares of I-Flow
Corporation Common Stock with a value of $2,000,000 as of the date of closing,
and a warrant to purchase 250,000 shares of I-Flow Corporation Common Stock at
an exercise price of $4.62, expiring July 22, 2001, valued at $615,000 at the
date of closing.
THE PRODUCTS
I-Flow offers the health care professional a complete line of
cost-effective infusion therapy devices designed to meet the needs of today's
managed care environment both in the hospital and alternate site setting. The
I-Flow family of technically advanced infusion products are portable,
reliable, economical and versatile.
ELASTOMERICS
The patented HOMEPUMP Eclipse(R) and HOMEPUMP Eclipse "C" Series are
durable, portable and compact elastomeric infusion systems designed to deliver
medications such as antibiotics, pain medication, and chemotherapy drugs in a
wide range of volumes and delivery times needed to meet today's sometimes
complex protocols. The HOMEPUMP Eclipse is the
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market leader in elastomeric technology and provides the health care
professional with a device that is both safe and extremely easy to teach
patients to self-administer.
SYRINGE DELIVERY SYSTEMS
The Medi-SIS(TM) 20 and Medi-SIS 60 Syringe Infusion Systems are
designed to provide an accurate IV push delivery from a syringe. This
cost-effective syringe system delivers IV medications over a 15, 30 or 60
minute period. The Medi-SIS Syringe Infusion System provides the health care
professional with a reusable, mechanical delivery system that can replace
gravity based systems while providing a low cost, accurate delivery with less
teaching time required for patients.
The Band-It(TM) Syringe Delivery System, and the Band-It One Dose(TM)
System deliver a variety of medications such as antibiotics, diuretics, and
other low volume drugs. The Band-It utilizes a standard Becton-Dickinson 10 or
20 cc syringe to infuse over 15 to 30 minutes, providing the lowest cost per
dose while still providing a safe and accurate alternative to gravity or IV
push methods.
NON-ELECTRONIC IV BAG DELIVERY SYSTEMS
The Liberty(TM) 100 and Liberty 1000 IV Bag Infusion Systems deliver
medications from standard Abbott Laboratories or Baxter International IV bags.
The Liberty System provides a safe, easy to use means of providing a controlled
infusion, eliminating the need to teach patients to count drops, use a roller
clamp etc. The I-Flow Liberty system encourages improved patient compliance,
while providing a low cost means of infusion delivery.
The PARAGON(TM) ambulatory infusion pump provides accurate and cost
effective delivery of IV medications, including chemotherapy, heparin and
analgesics, which require precise and reliable delivery over extended periods
of time. The companion product SIDEKICK utilizes a patented spring technology
to deliver IV antibiotics over a shorter time period. These products are sold
internationally, outside of the United States.
The Rely-A-Flow(TM) Gravity Set eliminates roller clamps and reduces
the risk of over infusion using gravity. Flow control tubing precisely
controls the rate of infusion, providing a safe and cost-effective method for
delivering medications from standard IV fluid containers at a controlled rate
of flow.
ELECTRONIC PUMPS
VoiceLink(R) represents the "standard for tele-medicine". With
VoiceLink, the only piece of equipment a caregiver needs is a telephone. No
computer to carry and no special software to learn. Remote programming and
monitoring is as simple as dialing a telephone and following the verbal
instructions from a voice mail-like system. VoiceLink and a standard touch tone
telephone or cellular phone is all that is needed. The Company is currently
reviewing possibilities for licensing the VoiceLink technology for other
applications.
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Verifuse Plus is the only infusion device available today that can be
used with the VoiceLink. The Verifuse Plus is a multi-therapy ambulatory
infusion pump with features similar to pumps currently on market.
Vivus 4000(R) is the only ambulatory, multi-channel, multi-therapy
infusion pump available. It provides accurate and safe remote programming of
four individual protocols, including flushing, regardless of complexity.
THE MARKET
Alternate site health care has grown significantly in the past few years.
Ambulatory infusion devices are one of the fastest growing segments in the
alternate-site health care marketplace. An ambulatory pump allows patients to
leave the hospital earlier, making it very attractive to cost-conscious
hospitals and to patients who favor home treatment. Alternate site revenues
for infusion devices were estimated at $400 million in 1995 and are expected to
reach approximately $600 million by the year 2000. The field has been
identified by marketing research analysts as one of the fastest growing
segments in U.S. health care with revenues rising in excess of 20% annually.
COMPETITION
The intravenous ("IV") drug and nutrient infusion segment of the alternate
site health care industry is highly competitive. The Company competes in this
market based on price, service and product performance. Some of the
competitors have significantly greater resources than the Company for research
and development, manufacturing and marketing, and may be better able to compete
for a share of the market, even in areas in which the Company's products may be
superior. The industry is subject to technological changes and there can be no
assurance that the Company will be able to maintain any existing technological
lead long enough to establish its products and to sustain profitability.
The Company has focused its product development efforts on products in the
ambulatory infusion systems market. Amounts spent on Company-sponsored
product development activities are disclosed in the Financial Statements
included elsewhere herein.
SALES AND DISTRIBUTION
Distribution of the Company's products is currently managed directly
through its internal sales force as well as through a number of regional
medical product distributors. As of February 1997, the Company had 15 internal
sales representatives located throughout the United States. The Company is
actively pursuing additional distribution arrangements for its products.
In November 1994, the Company signed an exclusive national distribution
agreement with SoloPak Pharmaceuticals Inc. ("SoloPak") for the SIDEKICK,
PARAGON and elite product lines. During the year ended December 31, 1994, the
Company received a $500,000
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non-refundable fee in consideration for an option included in the agreement for
the purchase of the U.S. distribution rights for these products in June of
1996. In March 1996, this agreement was superseded with a new agreement in
which SoloPak purchased the exclusive right and license to manufacture and sell
the products in the U.S. and Puerto Rico. Pursuant to the new agreement,
SoloPak paid the Company $1.3 million in consideration of the license in March
1996 and guaranteed royalties of $1.0 million per quarter during each of the
three succeeding quarters in 1996. Additionally, SoloPak will pay I-Flow a
royalty equal to two percent of their net sales of the products for the 1997
and 1998 calendar years. Per the terms of the agreement, I-Flow has the right
of first refusal to supply SoloPak with services and assistance in assembling
the completed products until March 1998. The Company retained the rights to
sell the products outside the United States and Puerto Rico.
The Company sells several of its products into the international market
and has signed agreements with distributors in various countries. Currently,
the Company is selling its products through distributors in Canada, Brazil,
the Benelux Countries, Germany, England, Ireland, Italy, Mexico, Spain, Korea,
Australia, New Zealand and Israel. Aggregate sales to countries outside of the
United States represented approximately 30% and 21% of the Company's revenues
for the years ended December 31, 1996 and 1995, respectively. The Company does
not have any capital investments in overseas operations.
MANUFACTURING AND OPERATIONS
Electromechanical assembly, calibration, pre and post-assembly quality
assurance inspection and testing, and final packaging for all products have
historically been performed at I-Flow facilities by I-Flow employees using
parts and materials acquired from a variety of outside vendors. The Company
maintains a separate warehouse facility for its components and finished
products. Printed circuit board manufacture and component integration are
performed externally, with I-Flow obtaining custom circuit boards and then
providing the electronic materials and engineering specifications to an outside
assembler.
With the acquisition of substantially all the assets of Block Medical,
Inc. in July 1996, the Company acquired Block's wholly-owned subsidiary, a
manufacturing plant in Northern Mexico. This plant has been in operation since
1994 and has historically performed and is currently performing the manufacture
of all of Block's disposable IV infusion devices and tubing sets. The Company
intends to maintain the plant in Mexico and to manufacture a substantial
portion of its products there. The Company regularly reviews the use of
outside vendors for production versus internal manufacturing, analyzing factors
such as the quality of the products received from vendors, the costs of the
products, timely delivery and employee utilization.
In each of the years ended December 31, 1996, 1995 and 1994, the Company
incurred expenses of $1,139,000, $840,000 and $720,000, respectively, for
research and development.
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PATENTS AND TRADEMARKS
The Company has filed U.S. patent applications for substantially all of
its products. The Company received a patent for the Band-It Drug Delivery
System in 1995 and the Medi-SIS Syringe Delivery System in 1997.
In December 1996, the Company received a patent for the use of its newly
acquired VoiceLink technology for programming electronic infusion devices using
only a touch-tone telephone. Copyrights have been obtained for the Vivus 4000
programming software. The product names "HOMEPUMP Eclipse", "VoiceLink" and
"Vivus 4000" are registered trademarks and trademark applications are pending
for most of the Company's other products. There can be no assurance that
pending patent or trademark applications will be approved or that any patents
will provide competitive advantages for the Company's products or will not be
challenged or circumvented by competitors.
REGULATIONS GOVERNING THE COMPANY'S MANUFACTURING OPERATIONS
Development and manufacture of I-Flow products are regulated by the U.S.
Food, Drug and Cosmetic Act. The Food and Drug Administration ("FDA"), which
administers this Act, has issued a number of regulations that dictate the
method by which new products are allowed to enter the U.S. market, and the
documentation and control of the manufacturing processes. In August 1995, the
Company received its biannual inspection from the FDA at its corporate facility
in Irvine, California. In July 1996, the Company's newly acquired subsidiary,
Block Medical, Inc. received an inspection from the FDA for its facility in
San Diego, California. There were no reportable conditions found during either
inspection.
In addition to the FDA, the State of California has a set of similar
regulations and requires annual production-site inspections to maintain the
relevant manufacturing license. State regulations also address the storage and
handling of certain chemicals and disposal of their wastes.
Products intended for export shipment are also subject to additional
regulations, including compliance with ISO 9000. In May 1995, the Company
received ISO 9001 certification, which ensures that I-Flow's products meet
specified uniform standards of quality and testing. The Company was also
granted permission to use the CE mark on its products, which reflects approval
of the Company's products for export into 18 member countries of the European
Community. In December 1996, the operations of Block Medical were also added
to the Company's ISO certification and permission was granted to use the CE
mark on the Block products.
The Company has passed all regulatory inspections and believes that it is
currently in compliance with all relevant federal, state and international
requirements in all material respects.
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EMPLOYEES
As of February 28, 1997, the Company had a total of 96 full-time employees
in the United States and 140 employees in its wholly-owned subsidiary in
Mexico. No U.S. employees are covered by a collective bargaining agreement
with a union. The Company considers its relationship with its employees to be
very good. The Company also uses temporary employees as needed, mainly in
manufacturing.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is currently negotiating a noncancelable operating lease for a
new 51,000 square foot building in Lake Forest, California, for its primary
facility. The lease agreement will contain certain scheduled rent increases
(which are accounted for on a straight-line basis) and will expire in June
2007. The Company also leases a facility for its manufacturing plant in
Northern Mexico.
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 1997, the Company was involved in a legal proceeding in
the normal course of operations. Although the outcome of the litigation cannot
be determined as of February 28, 1997, in the opinion of management any
resulting future liability will not have an adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers and directors of the Company as of February 28, 1997. There are no
family relationships between any of the executive officers or directors of the
Company. The executive officers are chosen annually at the first meeting of
the Board of Directors following the annual meeting of shareholders and serve
at the pleasure of the Board of Directors.
Name (Age) Position
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Donald M. Earhart (52) President, Chief Executive Officer
and Chairman of the Board
Henry T. Tai, Ph.D., M.D. (53) Secretary and Director
John H. Abeles, M.D. (52) Director
Joel S. Kanter (40) Director
Jack H. Halperin (50) Director
Erik H. Loudon (58) Director
Charles C. McGettigan (52) Director
James J. Dal Porto (44) Executive Vice President,
Chief Operating Officer
Gayle L. Arnold (35) Vice President Finance,
Chief Financial Officer
and Treasurer
DONALD M. EARHART, former Corporate Officer and President of the Optical
Division of Allergan, Inc., (from 1986 to 1990) has been Chairman of the Board
since March 1991, and Chief Executive Officer since July 1990. Mr. Earhart
joined the Company as President and Chief Operating Officer in June 1990. Mr.
Earhart, who holds a Bachelor of Engineering from Ohio State University and a
Masters Degree in Business Administration from Roosevelt University, has over
23 years experience in the medical products industry. Prior to his employment
at Allergan, he was a Corporate Officer and Division President of Bausch and
Lomb, and was an operations manager of Abbott Laboratories. He has also served
as an engineering consultant at Peat, Marwick, Mitchell & Co., and as an
engineer with Eastman Kodak Company. Mr. Earhart currently serves on the
Boards of Directors of Abacus Investments, Ltd. and Oncometrics Imaging Corp.
HENRY T. TAI, PH.D., M.D. is the initial progenitor of the Company's
product and business concept in multiple-drug infusion systems. Dr. Tai was a
director from 1985 to 1988, and has been a director and Secretary of the
Company since 1990. Dr. Tai has been a practicing hematologist and cancer
specialist since 1977. Dr. Tai holds a Bachelor of Arts degree in Molecular
Biology from Harvard University, a Ph.D. in Molecular Biology and an M.D. from
the University of Southern California. He has done postdoctoral research in
the molecular biology of tumor virus DNA at the Weizman Institute of Science in
Israel and at the California Institute of Technology. He is a consultant in
hematology and medical oncology and has an academic appointment at the
University of Southern California School of Medicine, where he is conducting
research on cancer metastases.
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JOHN H. ABELES, M.D. has been a director since 1985 and served as
Chairman of the Board from 1988 to March 1991. Dr. Abeles has been President
of MedVest, Inc., a general consulting and venture capital firm in the medical
industry, since January 1980. Dr. Abeles is the general partner of Northlea
Partners, a family investment partnership which is a shareholder in the
Company. Dr. Abeles holds an M.D. from the University of Birmingham, England,
and he currently serves on the Boards of Directors of AccuMed International,
Inc., Dusa Pharmaceuticals, Inc., Healthcare Acquisition Corporation and Oryx
Technology, Inc.
JOEL S. KANTER was elected as a director in March 1991. Mr. Kanter has
been President of Windy City, Inc., an investment management firm since 1986.
In February 1995, he became President of Walnut Financial Services, Inc. Mr.
Kanter was the former managing director of Investor's Washington Service, a
Washington D.C. based service that provided information for corporations and
institutional money managers from 1985 to 1986. Mr. Kanter currently serves on
the Boards of Directors of GranCare, Inc., Healthcare Acquisition Corporation,
Medcross, Inc., Osteoimplant Technologies, Inc., Vitalink Pharmacy Services,
Inc. and Walnut Financial Services, Inc.
JACK H. HALPERIN, ESQ. is a corporate and securities attorney who has been
in private practice since 1988. Mr. Halperin was formerly a member of Bresler
and Bab, a New York law firm from 1987 to 1988. Prior to that Mr. Halperin was
a member of Solinger, Grosz & Goldwasser, P.C. from 1981 to 1987. Mr. Halperin
currently serves on the Boards of Directors of AccuMed International, Inc.,
Memry Corporation and Xytronics, Inc. Mr. Halperin holds an A.B. (summa cum
laude) from Columbia College and a J.D. degree from New York University School
of Law where he was Note and Comment Editor of the Law Review.
ERIK H. LOUDON is the Managing Director of EHL Investment Services Limited
in the Channel Islands. He was a Director of Sarasin Investment Management,
Ltd. in London from 1985 to 1989; and he currently serves on the Boards of
Directors of Emerge Capital, Luxembourg, Fotolabo, S.A., Switzerland, and Leaf
Asset Management, Luxembourg.
CHARLES C. MCGETTIGAN was elected as a director of the Company in October
1992. He was a founding partner in 1991 and is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P. Mr. McGettigan was a co-founder of McGettigan, Wick & Co., Inc., an
investment banking firm in 1988. From 1984 to 1988, he was a Principal,
Corporate Finance, of Hambrecht & Quist, Inc. Prior to that, Mr. McGettigan
was a Senior Vice President of Dillon, Read & Co., Inc. He currently serves on
the Boards of Directors of Digital Dictation, Inc., Modtech, Inc., NDE
Environmental, Inc., Onsite Energy, Inc., PMR Corporation, Phoenix Network,
Inc., Sonex Research, Inc. and Wray-Tech Instruments, Inc. Mr. McGettigan is a
graduate of Georgetown University, and received his MBA in Finance from the
Wharton School at the University of Pennsylvania.
JAMES J. DAL PORTO joined the Company in October 1989 to serve as
Controller. Mr. Dal Porto was promoted to Treasurer in October 1990, to Vice
President of Finance and Administration in March 1991, to Executive Vice
President, Chief Financial Officer in March 1993 and to Chief Operating Officer
in February 1994. Mr. Dal Porto served as Financial
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Planning Manager and Manager of Property Accounting and Local Taxation at
CalComp, a high technology manufacturing company, from 1984 to 1989. Mr. Dal
Porto holds a Bachelor of Science degree in Economics from the University of
California, Los Angeles, and a Masters in Business Administration from
California State University, Northridge.
GAYLE L. ARNOLD joined the Company in April 1991 to serve as Controller,
was promoted to Vice President, Finance in February 1994 and given the
additional office of Treasurer in May 1996. Prior to joining the Company, Ms.
Arnold served as Manager with the accounting firm, Deloitte & Touche LLP where
she was employed from 1984 to 1991. Ms. Arnold is a Certified Public
Accountant and holds a Bachelor of Business Administration degree from the
University of Texas, Austin.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Small-Cap Market under the
symbol "IFLO." The Company's Series B Preferred Stock is not publicly traded,
but is convertible by the holder at any time into shares of Common Stock. The
table below sets forth the high and low sales prices of the Company's Common
Stock as reported by The Nasdaq Small-Cap Market.
High Low
---- ---
1995
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1st Quarter $3.38 $1.75
2nd Quarter $3.13 $2.50
3rd Quarter $3.69 $2.56
4th Quarter $6.06 $2.44
1996
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1st Quarter $5.50 $3.81
2nd Quarter $5.94 $3.69
3rd Quarter $4.94 $3.81
4th Quarter $5.44 $4.06
American Stock Transfer & Trust Company is the Company's transfer agent
for its Common Stock. As of February 28, 1997, the Company had approximately
500 shareholders of record, and based upon information received from nominee
holders, the Company believes it has in excess of 9,000 total beneficial
holders.
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The Company has not paid, and does not currently expect to pay in the
foreseeable future, cash dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Financial Data" shown on page 6 of the
Company's 1996 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which appears on pages 7 to 9 of
the Company's 1996 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
The financial statements, including the notes thereto, included on
pages 11 through 21 of the Company's 1996 Annual Report to Shareholders
together with the section entitled "Independent Auditors Report" included on
page 10 are included herein by reference.
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(b) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO ADDITIONS BALANCE
BEGINNING COSTS AND FOR BUSINESS AT END
CLASSIFICATION OF PERIOD EXPENSES ACQUISITION DEDUCTIONS OF PERIOD
- -------------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts $ 42,000 $ 205,000 $247,000
Reserve for obsolete
inventories 240,000 221,000 461,000
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts 247,000 262,000 509,000
Reserve for obsolete
inventories 461,000 $296,000 165,000
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts 509,000 $ 29,000 413,000 125,000
Reserve for obsolete
inventories 165,000 1,169,000 567,000 767,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended December 31,
1996 and the information from the section entitled "Executive Officers of the
Registrant" following Part I, Item 4 of this Report.
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ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders under the caption "Executive Compensation" which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders under the caption "Principal Shareholders and Stock Ownership
of Management" which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended December 31,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders under the caption "Certain Other Transactions" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 1996.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements
The following financial statements of the Company and independent
auditors' report are included on pages 10 to 21 of the Company's 1996
Annual Report to Shareholders and are incorporated herein by
reference.
Annual Report
Page(s)
-------------
Independent Auditors' Report 10
Financial Statements
Consolidated Balance Sheets, December 31, 1996 and 1995 11
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 12
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 13
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 14
Notes to Consolidated Financial Statements 15
The following are included herein:
Page in This
Report
------------
Independent Auditors' Report 17
The Financial Statements and Independent Auditors' Report listed in the
above index which are included in the Company's 1996 Annual Report to
Shareholders are hereby incorporated herein by reference. With exception
of the items referred to above and in Items 6, 7, and 8, the Company's
Annual Report to Shareholders for the fiscal year ended December 31, 1996
is not deemed filed as part of this Report.
Page in This
(2) Financial Statement Schedules included herein: Report
------------
Schedule II - "Valuation and Qualifying Accounts" 13
All other schedules are omitted as the required information is
inapplicable.
(3) Exhibits
The list of exhibits contained in the accompanying Index to Exhibits
is herein incorporated by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1996
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By Donald M. Earhart /s/
----------------------------
Donald M. Earhart,
Chairman, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities indicated on March 28, 1997:
Signature Title
--------- -----
Donald M. Earhart /s/ Chairman, President and Chief Executive Officer
- ---------------------------
Donald M. Earhart
James J. Dal Porto /s/ Executive Vice President and Chief Operating
- --------------------------- Officer
James J. Dal Porto
Gayle L. Arnold /s/ Vice President, Finance (Principal Financial and
- --------------------------- Accounting Officer)
Gayle L. Arnold
John H. Abeles /s/ Director
- ---------------------------
John H. Abeles, M.D.
Jack H. Halperin /s/ Director
- ---------------------------
Jack H. Halperin
Joel S. Kanter /s/ Director
- ---------------------------
Joel S. Kanter
Erik H. Loudon /s/ Director
- ---------------------------
Erik H. Loudon
Charles C. McGettigan /s/ Director
- ---------------------------
Charles C. McGettigan
Henry T. Tai /s/ Director and Secretary
- ---------------------------
Henry T. Tai, Ph.D., M.D.
16
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
I-Flow Corporation:
We have audited the financial statements of I-Flow Corporation as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996, and have issued our report thereon dated February 12, 1997. Such
financial statements and report are included in your Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of I-Flow Corporation listed in Item 8. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 12, 1997
17
<PAGE> 18
INDEX TO EXHIBITS
Set forth below is a list of the exhibits included as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
3.1 (2) Restated Articles of Incorporation of the Company
3.2 (3) Certificate of Amendment to Restated Articles of Incorporation dated
June 14, 1991
3.3 (5) Certificate of Amendment to Restated Articles of Incorporation dated
May 12, 1992
3.4 (5) Certificate of Determination covering Company's Series B Preferred
Stock filed with the Secretary of State on October 5, 1992
3.5 (3) Restated Bylaws as of July 22, 1991 of the Company
4.1 (5) Specimen Common Stock Certificate
4.2 (1) Warrant Agreement between the Company and American Stock Transfer
& Trust Company, as Warrant Agent, dated February 13, 1990
4.3 (6) Form of Warrant (Class F) dated October 5, 1992 included in units sold
in 1992 private placement of Preferred Stock
4.4 (7) Form of Warrant (Class H) dated June 3, 1994, issued in conjunction with
a consulting agreement
4.5 (10) Form of Warrant dated July 22, 1996, issued in conjunction with
the acquisition of Block Medical, Inc.
10.1 (2) (8) Employment Agreement with Donald M. Earhart dated May 16, 1990
10.2 (5) (8) 1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option
Plan Restated as of March 23, 1992
10.3 (4) (8) 1992 Non-Employee Director Stock Option Plan
10.4 (9) License and Transfer Agreement with SoloPak Pharmaceuticals Inc.,
dated March 6, 1996
10.5(8) (11) 1996 Stock Incentive Plan
10.6(10) Agreement for Purchase and Sale of Assets dated as of July 3, 1996 By and
Among I-Flow Corporation, Block Medical, Inc. and Hillenbrand Industries, Inc.
10.7 Employment Agreement with James J. Dal Porto dated September 6, 1996
13 1996 Annual Report to Shareholders (not deemed to be filed herein except
for certain portions which have been incorporated herein by reference)
21 List of Subsidiaries
23.1 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
18
<PAGE> 19
(1) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-32263-LA) declared effective
February 1, 1990.
(2) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended September 30, 1990.
(3) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-41207-LA) declared effective
August 8, 1991.
(4) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1991.
(5) 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.
(6) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1992.
(7) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1994.
(8) Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to applicable rules of the Securities
and Exchange Commission.
(9) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1995.
(10) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated July 22, 1996.
(11) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#333-16547) declared effective
November 20, 1996.
19
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT dated as of September 6, 1996 by and between I-Flow
Corporation (the "Company"), having its principal address at 2532 White Road,
Irvine, CA 92614 and James J. Dal Porto ("Employee").
WHEREAS, the Company wishes to encourage Employee to continue to
render services to the Company by granting Employee certain rights upon
termination or upon a "Change in Control" as hereinafter defined,
WHEREAS, the Employee wishes to enter into this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. Employment.
----------
The Company agrees to employ Employee and Employee agrees to serve in
such employment capacities as may be requested from time to time by the
Chief Executive Officer or the Board of Directors of the Company.
Employee hereby accepts such employment upon the terms and conditions
set forth herein. Nothing in this Agreement is intended to create and
should not be interpreted to create an employment contract for any
specified length of time between Company and Employee.
2. Termination of Employment.
-------------------------
Employee's employment may be terminated at any time, without cause, by
either party upon sixty days written notice. Employee's employment may
be terminated at any time for cause, without notice. For purposes of
this Agreement, cause shall be defined to include but shall not be
limited to dishonesty, nonperformance of duties, immoral conduct
detrimental to the Company, conviction of a felony, or unfaithfulness
or a failure to act or not act in accordance with the direction of the
Company.
3. Severance Pay.
-------------
(a) Termination of Employment for Cause. In the event Employee's
employment by Company is terminated for cause, or Employee
voluntarily resigns, Company shall have no obligations to pay any
severance pay to Employee.
1
<PAGE> 2
(b) Termination for Reasons Other than Cause. The Employee shall
be entitled to a severance package consisting of (i) a one time
payment equal to one year of his base salary at the time of
termination and (ii) immediate vesting of all Stock Options
granted up to the time of termination, with the exercise period
being no less than one year from the date of termination. To
receive this severance package one of the following must be
true:
(1) The Employee is terminated without cause.
(2) The Employee is asked to accept a significant change in
job responsibility that is clearly a demotion.
(3) The Employee is asked to relocate in order to remain
employed.
(4) The Employee is asked to accept a reduction in salary
and/or benefits.
4. Change in Control.
-----------------
(a) In the event of a Change in Control as hereinafter defined, all
of Employee's Stock Options shall immediately vest and becomes
fully exercisable and the exercise period remaining shall be no
less than one year from the date of Change in Control.
(b) In the event of a Change in Control as hereinafter defined,
all of Employee's Sock Options shall immediately vest and
become fully exercisable and the exercise period remaining
shall be no less than one year from the date of Change in
Control.
(b) "Change in Control" shall mean the occurrence of any of the
following: (i) any "person" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 30%
or more of the voting power of the then outstanding securities
of the Corporation; (ii) during any period of two consecutive
calendar years there is a change of 25% or more in the
composition of the Board of Directors of the Corporation in
office at the beginning of the period except for changes
approved by at least two-thirds of the Directors then in office
who were Directors at the beginning of the period; (iii) the
stockholders of the Corporation approve an agreement providing
for (A) the merger or consolidation of the Corporation with
another corporation where the stockholders of the Corporation,
immediately after the merger or consolidation, would not
beneficially own, immediately after the merger or
consolidation, shares
2
<PAGE> 3
entitling such stockholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect Directors
by a separate class vote) to which all stockholders of the
corporation issuing cash or securities in the merger of
consolidation would be entitled in the election of directors or
where the members of the Board, immediately prior to the merger or
consolidation, would not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors of
the corporation issuing cash or securities in the merger or
consolidation or (B) the sale or other disposition of all or
substantially all the assets of the Corporation, or a liquidation,
dissolution or statutory exchange of the Corporation; or (iv) any
person has commenced, or announced an intention to commence, a
tender offer or exchange offer for 30% or more of the voting power
of the then-outstanding securities of the Corporation.
5. Nothing herein shall be construed as requiring the Company to
continue the employment of Employee except in the circumstances
herein stated.
6. This Agreement shall be governed and construed in accordance with
the laws of the State of California.
7. This Agreement shall be binding upon successors and assigns of
the Company by merger, consolidation, purchase of assets or
otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above stated.
I-FLOW CORPORATION
By: /s/ DONALD M. EARHART By: /s/ JAMES J. DAL PORTO
------------------------------- ---------------------------
Donald M. Earhart James J. Dal Porto
Chairman, President & CEO Employee
3
<PAGE> 1
EXHIBIT 13
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
(Amounts in thousands, except Year Ended December 31,
------------------------------------------------
per share amounts) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:(1)
Revenue:
Net sales $ 9,153 $ 9,737 $ 6,321 $ 5,436 $ 1,437
Rental income 113 60 72 212 478
Other fees 4,600 250 500 - -
Interest and other income 67 96 208 60 62
- ----------------------------------------------------------------------------------
Total revenue 13,933 10,143 7,101 5,708 1,977
Costs and expenses:
Cost of sales 3,954 4,422 4,062 3,623 1,477
Selling and marketing 2,617 1,483 1,948 1,356 1,551
General and administrative 4,336 2,329 2,044 2,119 2,324
Product development 1,139 840 720 1,246 844
Purchased in-process research
and development costs 4,900 - - - -
Goodwill writedown 2,800 - - - -
Restructuring costs 1,552 - - - -
- ----------------------------------------------------------------------------------
Total costs and expenses 21,298 9,074 8,774 8,344 6,196
- ----------------------------------------------------------------------------------
Income (loss) before taxes (7,365) 1,069 (1,673) (2,636) (4,219)
Income taxes 60 - - - -
- ----------------------------------------------------------------------------------
Net income (loss) $(7,425) $ 1,069 $(1,673) $(2,636) $(4,219)
- ----------------------------------------------------------------------------------
Net income (loss) per share(2) $ (0.68) $ 0.12 $ (0.20) $ (0.44) $ (0.87)
- ----------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding(2) 10,849 9,247 8,177 5,990 4,857
- ----------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 4,521 $ 6,958 $ 3,564 $ 5,270 $ 3,464
Total assets 17,234 9,107 6,209 7,737 5,348
Net shareholders' equity 9,597 7,728 4,181 5,812 4,240
===================================================================================
</TABLE>
(1) Certain amounts previously reported have been reclassified to conform with
the presentation at December 31, 1996.
(2) See Note 1 of Notes to Consolidated Financial Statements.
1
<PAGE> 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.
Consolidated Results of Operations - For the Year Ended December 31, 1996
Compared to the Year Ended December 31, 1995
Net sales during the year ended December 31, 1996 were $9,153,000 compared to
$9,737,000 for the prior year. Sales to a major distributor were $6,508,000
for the year ended December 31, 1995, whereas there were no sales to this
distributor during 1996. However, during the year ended December 31, 1996, the
Company received licensing fees of $4,300,000 from such distributor, which
brought total revenues for the year to $13,933,000 compared to $10,143,000 for
the prior year. Included in net sales for the year ended December 31, 1996
were sales from the Company's new subsidiary, Block Medical, Inc., of
$5,227,000. Block Medical, Inc. was acquired by the Company on July 22, 1996.
Export sales were $4,186,000, or 30% of total revenues, for the year ended
December 31, 1996 compared to $2,100,000, or 21% of total revenues, for the
year ended December 31, 1995.
In November 1994, the Company signed an exclusive distribution agreement with
SoloPak Pharmaceuticals, Inc. ("SoloPak") for the SideKick(TM), Paragon(TM),
and elite(TM) product lines. In March 1996, the SoloPak distribution agreement
was superseded with a new agreement in which SoloPak purchased the exclusive
right and license to manufacture and sell the products in the United States and
Puerto Rico. Pursuant to the new agreement, SoloPak paid the Company $4.3
million in consideration of the license in 1996. Additionally, SoloPak agreed
to pay I-Flow a royalty equal to two percent of SoloPak's net sales of the
products for the 1997 and 1998 calendar years. 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.
2
<PAGE> 3
In July 1996, the Company purchased substantially all of the assets of Block
Medical, Inc. ("Block"), a wholly-owned subsidiary of Hillenbrand Industries,
Inc. (Note 2 of Notes to Consolidated Financial Statements). Block, which
manufactures and sells portable infusion devices for the alternative site
market, is headquartered in San Diego, California and has a manufacturing
facility in Northern Mexico. Block had revenues of approximately $13.5 million
for the fiscal year ended December 2, 1995.
In addition to revenue growth, the Company believes that the acquisition of
Block brings several other strategic advantages to the Company, one of which is
an expanded product line with single-dose, one-time use infusion pumps and a
new electronic device with advanced remote programming technology. The Company
also believes the acquisition will help it become more profitable through the
use of its manufacturing plant in Mexico and the corresponding reduction in
direct labor costs. The Company also seeks to strengthen its sales and
marketing with Block's established 15 person sales force and a strong customer
base.
Cost of sales of $3,954,000, including intangible amortization of $125,000,
were incurred during the year ended December 31, 1996 compared to $4,422,000
for the prior year. As a percentage of net sales, cost of sales excluding
intangible amortization, decreased by 4% for the year ended December 31, 1996
compared to the prior year. This increase in gross profit on sales is
primarily the result of a higher percentage of sales to foreign customers, and
the move of a substantial portion of the Company's manufacturing to its newly
acquired plant in Mexico during the second half of the year.
Selling and marketing expenses for the year ended December 31, 1996 increased
over the prior year by $1,134,000, or 76%. These higher expenses primarily
resulted from the increased internal sales force from four people to 15 people
as a result of the acquisition of Block.
General and administrative expenses of $4,336,000, which included amortization
of intangibles of $652,000, were incurred during the year ended December 31,
1996 compared to $2,329,000 for the prior year. This represented an increase
over the prior year of $2,007,000, or 86%. The remaining expenses primarily
represent costs for administrative personnel, facilities and other
miscellaneous items which have increased primarily as a result of the
acquisition of Block. As the Company integrates the operations of Block with
its own and recognizes the synergies of the businesses, these costs are
expected to decrease.
Product development expenses for the year ended December 31, 1996 increased
compared to those for the prior year by $299,000, or 36%. 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.
In conjunction with the acquisition of Block, the Company allocated $4.9
million of the purchase price to in-process research and development costs at
the date of acquisition. Additionally, during the year ended December 31,
1996, the Company recorded a writedown of goodwill of $2.8 million due to
impairment of value. The Company recorded a restructuring charge of $1,552,000
to provide for expenses related to consolidating Block's facilities with its
own in 1997. The $1,552,000 restructuring charge was comprised of
approximately $788,000 in severance and relocation expenses, $380,000 in moving
expenses and $384,000 in lease abandonment. The portion of the restructuring
reserve which relates to lease abandonment has been classified as a
3
<PAGE> 4
long-term liability as payments will be made through March 2001. The Company
anticipates that substantially all of the remaining restructuring reserve will
be expensed during 1997.
Results of Operations - For the Year Ended December 31, 1995 Compared to the
Year Ended December 31, 1994
Total revenues for the year ended December 31, 1995 were $10,143,000 compared
to $7,101,000 for the prior year. This represents an increase of 43%. This
increase in sales is due to increased sales for the Company's SideKick and
Paragon products. In April 1994, the Company changed its primary U.S.
distributor for these products and sales to the new distributor accounted for
the majority of the increase in revenue. Export sales were over $2,100,000, or
21% of total revenues, for the year ended December 31, 1995 compared to
$1,300,000, or 18% of total revenues, for the year ended December 31, 1994.
Cost of sales of $4,422,000 were incurred during the year ended December 31,
1995, compared to $4,062,000 for the prior year. As a percentage of revenues,
cost of sales decreased by 14% for the year ended December 31, 1995 compared to
the prior year. The increase in gross profit is primarily the result of
manufacturing efficiencies which have occurred due to increased production and
a change in the product mix to increased Paragon product sales as a percent of
total sales. Paragon products have a gross margin which is approximately 15 to
20% higher than SideKick products.
Selling and marketing expenses for the year ended December 31, 1995 decreased
over the prior year by $465,000 or 24%. This decrease was due primarily to a
reduction in the Company's internal sales force as the Company generated
most of its sales through outside distributors in 1995.
General and administrative expenses for the year ended December 31, 1995
increased from the prior year by $285,000 or 14%. These expenses primarily
represent costs for administrative personnel, facilities and other
miscellaneous items. These costs have increased primarily as a result of
increased operations during 1995.
Product development expenses for the year ended December 31, 1995 increased
compared to those for the prior year by $120,000 or 17% as the Company
continued its efforts to introduce new improved-technology, cost-efficient
products into the market.
Liquidity and Capital Resources
During the year ended December 31, 1996, funds of $2,476,000 were provided by
operating activities consisting of non-cash expenses of $9,470,000 plus net
changes in operating assets and liabilities of $431,000 which exceeded a net
loss of $7,425,000. The changes in operating assets and liabilities (net of
the effects of the acquisition of Block) consisted of an increase in accounts
receivable of $506,000 and an increase in accounts payable and other
liabilities of $734,000 less an increase in inventories and prepaid expenses of
$203,000. The increase in these operating assets and liabilities is due to the
combined operations for I-Flow and Block during the latter portion of 1996.
4
<PAGE> 5
The Company used funds for investing activities during the year ended December
31, 1996 by acquiring property (including rental and demonstration equipment)
of $821,000. The Company used funds of $15,803,000 for the acquisition of
substantially all of the assets of Block Medical, Inc. (Note 2 of Notes to
Consolidated Financial Statements). Additionally, there was an increase in
other assets of $126,000 due to new notes receivable relating to capital
leases.
During the year ended December 31, 1996, funds of $10,135,000 were provided by
financing activities consisting of an increase in notes payable of $3,500,000
and proceeds from the exercise of stock options and Series G Warrants of
$6,635,000.
As of December 31, 1996, the Company had cash and cash equivalents of
$1,651,000 and net receivables of $4,514,000. To date, the Company has financed
its operations and working capital requirements primarily through equity
financings. Management believes the Company's available funds are sufficient
to provide for its short-term projected needs for operations and fund future
capital expenditures, if any.
The Company has a working capital line of credit with a bank expiring in August
1997. Under the line of credit, the Company may borrow up to the lesser of
$3,000,000 or 75% of eligible accounts receivable, as defined, at a bank's
prime rate plus 1% (9.25% at December 31, 1996). There were no borrowings
under the line as of December 31, 1996.
In conjunction with the acquisition of Block, the Company entered into a
$4,000,000 note payable with a bank ($3,500,000 outstanding at December 31,
1996) due in equal monthly installments of principal of $83,333 plus interest
at the bank's prime rate plus 1.5% (9.75% at December 31, 1996) through July
2000. The note is collateralized by substantially all of the Company's assets
and requires the Company to comply with certain covenants. As of December 31,
1996, the Company was in compliance with all such covenants.
5
<PAGE> 6
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
I-Flow Corporation:
We have audited the accompanying consolidated balance sheets of I-Flow
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of I-Flow Corporation as of December
31, 1996 and 1995, and the results of its consolidated operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 12, 1997
6
<PAGE> 7
CONSOLIDATED BALANCE SHEETS I-Flow Corporation
December 31, December 31,
(Amounts in thousands except per share amounts) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,651 $ 5,628
Royalty receivable 1,000 -
Accounts receivable, less allowance for doubtful
accounts of $125 and $509 at December 31, 1996
and 1995, respectively 3,514 1,567
Inventories (Note 1) 3,352 1,067
Prepaid expenses and other 141 75
- --------------------------------------------------------------------------------
Total current assets 9,658 8,337
- --------------------------------------------------------------------------------
Property:
Furniture, fixtures and equipment 3,091 1,494
Rental and demonstration equipment 173 156
- --------------------------------------------------------------------------------
Total property 3,264 1,650
Less accumulated depreciation (1,326) (1,155)
- --------------------------------------------------------------------------------
Net property 1,938 495
- --------------------------------------------------------------------------------
Other assets:
Goodwill and other intangibles, net (Note 2) 4,831 257
Notes receivable and other 807 18
- --------------------------------------------------------------------------------
Total other assets 5,638 275
- --------------------------------------------------------------------------------
Total assets 17,234 9,107
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,156 260
Accrued payroll and related expenses 1,271 553
Deferred revenue 429 516
Current portion of long-term debt (Note 3) 1,000 -
Restructuring reserve (Note 2) 824 -
Other liabilities 73 50
- --------------------------------------------------------------------------------
Total current liabilities 4,753 1,379
- --------------------------------------------------------------------------------
Long-term debt (Note 3) 2,500 -
Long-term restructuring reserve (Note 2) 384 -
Commitments and contingencies (Note 6)
- --------------------------------------------------------------------------------
Shareholders' equity (Note 4)
Preferred stock, no par value; 5,000,000
shares authorized, 656,250 series B
shares issued and outstanding at December
31, 1996 and 1995 (aggregate preference
on liquidation of $1,575,000) 1,494 1,494
Common stock, no par value; 40,000,000 shares
authorized, 12,050,076 and 9,259,225 shares
issued and outstanding at December 31, 1996
and 1995, respectively 33,036 24,278
Common stock warrants 615 -
Accumulated deficit (25,548) (18,044)
- --------------------------------------------------------------------------------
Total shareholders' equity 9,597 7,728
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity 17,234 9,107
================================================================================
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS I-Flow Corporation
Year ended December 31,
(Amounts in thousands except ---------------------------
per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------
Revenues:
Net sales $ 9,153 $ 9,737 $ 6,321
Rental income 113 60 72
Licensing and other fees 4,600 250 500
Interest and other income 67 96 208
- ---------------------------------------------------------------------------
Total revenues 13,933 10,143 7,101
Costs and expenses (Notes 2, 3 and 6):
Cost of sales 3,954 4,422 4,062
Selling and marketing 2,617 1,483 1,948
General and administrative 4,336 2,329 2,044
Product development 1,139 840 720
Purchased in process research and
development costs 4,900 - -
Goodwill writedown 2,800 - -
Restructuring costs 1,552 - -
- ---------------------------------------------------------------------------
Total costs and expenses 21,298 9,074 8,774
- ---------------------------------------------------------------------------
Income (loss) before taxes (7,365) 1,069 (1,673)
Income taxes (Note 5) 60 - -
- ---------------------------------------------------------------------------
Net income (loss) $(7,425) $ 1,069 $(1,673)
===========================================================================
Net income (loss) per share $ (0.68) $0.12 $ (0.20)
===========================================================================
Weighted average number of common and
common equivalent shares 10,849 9,247 8,177
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 9
Consolidated Statements of Shareholders' Equity I-Flow Corporation
<TABLE>
<CAPTION>
For the years ended December 31, Preferred Stock Common Stock
1994, 1995 and 1996 ------------------ ------------------ Common Stock Accumulated
(Amounts in thousands) Shares Amount Shares Amount Warrants Deficit Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 656 $1,494 8,169 $21,600 $ - $(17,282) $ 5,812
Common stock issued for payment
of preferred stock dividends 33 79 (79)
Stock options granted with exercise
prices below market value 42 42
Net loss (1,673) (1,673)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 656 1,494 8,202 21,721 - (19,034) 4,181
Exercise of common stock warrants
and options (net of costs of $29) 1,026 2,434 2,434
Common stock issued for payment
of preferred stock dividends 31 79 (79)
Stock options granted with exercise
prices below market value 44 44
Net income 1,069 1,069
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 656 1,494 9,259 24,278 - (18,044) 7,728
Exercise of common stock warrants
and options (net of costs of $78) 2,336 6,635 6,635
Common stock and warrants issued
for acquisition 433 2,000 615 2,615
Common stock issued for payment
of preferred stock dividends 22 79 (79)
Stock options granted with exercise
prices below market value 44 44
Net loss (7,425) (7,425)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 656 $1,494 12,050 $33,036 $615 $(25,548) $ 9,597
=====================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
9
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS I-Flow Corporation
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
(Amounts in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,425) $1,069 $(1,673)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
In process research and development costs 4,900 - -
Restructuring costs 1,552 - -
Goodwill writedown 2,800 - -
Depreciation and amortization 1,154 188 251
Compensation expense for stock option grants 44 44 42
Increase (decrease) in inventory obsolescense reserve (567) (296) 221
Increase (decrease) in allowance for doubtful accounts (413) 262 205
Changes in operating assets and liabilities, net of effect of business
acquisition:
(Increase) decrease in receivables (506) 798 (2,536)
Decrease in inventories 227 269 170
(Increase) decrease in prepaid and other expenses (24) 16 26
Increase (decrease) in accounts payable and accrued liabilities 734 (649) 103
- -------------------------------------------------------------------------------------------------------------------
Total adjustments 9,901 632 (1,518)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,476 1,701 (3,191)
Cash flows from investing activities:
Property acquisitions (821) (243) (202)
Property disposals 162 - -
Cash paid for acquisition, net of cash received (15,803) - -
Increase in other assets (126) (98) (124)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,588) (341) (326)
Cash flows from financing activities:
Proceeds from issuance of note payable 4,000 - -
Payments on note payable (500) - -
Proceeds from exercise of stock options and warrants 6,635 2,434 -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,135 2,434 -
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,977) 3,794 (3,517)
Cash and cash equivalents at beginning of year 5,628 1,834 5,351
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,651 $5,628 $ 1,834
===================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 175 - -
- -------------------------------------------------------------------------------------------------------------------
Income tax payments $ 35 $ 17 -
- -------------------------------------------------------------------------------------------------------------------
Liabilities issued and assumed in connection with
acquisition:
Fair value of assets acquired (including intangibles) $18,004 - -
Cash outflows for business acquisition (15,803) - -
Common stock and warrants issued 2,615 - -
- -------------------------------------------------------------------------------------------------------------------
Liabilities issued and assumed $4,816 - -
===================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
10
<PAGE> 11
Notes to Consolidated Financial Statements
1. General and Summary of Significant Accounting Policies
Nature of Operations - I-Flow Corporation ("the Company") was incorporated on
July 17, 1985 and is engaged in the manufacturing and marketing of ambulatory
infusion systems for use in the intravenous administration of drugs, nutrients
and similar medical treatments. The Company sells its products primarily to
customers in the home health care industry.
Principals of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash in the
bank, money-market funds and U.S. Treasury bills with an original maturity date
of 90 days or less.
Royalty Receivable - Royalty receivable consists of a guaranteed royalty
payment due from SoloPak Pharmaceuticals, Inc. for the quarter ended December
31, 1996 (see below). Payment for the royalty was received in January 1997.
Inventories - Inventories are stated at the lower of first-in, first-out cost
or market. Inventories consisted of the following as of December 31, 1996 and
1995:
December 31, December 31,
1996 1995
----------- -----------
Raw Materials $2,822,000 $ 928,000
Work in Process 110,000 63,000
Finished Goods 1,187,000 241,000
Reserve for Obsolescence (767,000) (165,000)
---------- ----------
Total $3,352,000 $1,067,000
========== ==========
Other Assets - Goodwill and other intangibles are amortized on a straight-line
basis over three to fifteen years. Patents of $365,000 and $257,000 (net of
accumulated amortization), included in other assets as of December 31, 1996 and
1995, respectively, are amortized over periods ranging from two to seven years.
Property - Property (including rental and demonstration equipment) is stated
at cost and depreciated using the straight-line method over the estimated
useful lives of the related assets, ranging from two to seven years. Rental
and demonstration equipment consists of products held by customers under
month-to-month rental agreements or on loan to customers for evaluation.
11
<PAGE> 12
Deferred Revenue - The Company has received deposits under the terms of
distribution agreements with certain foreign companies which entitled them to
exclusive distribution rights for certain of the Company's products in those
countries. Such funds will be applied to future sales to these distributors.
As of December 31, 1996, $429,000 remained in deferred revenues.
Revenues - Revenue from sales is recognized when products are shipped to
customers. Rental income is recorded monthly when earned.
In April 1994, the Company signed a non-exclusive distribution agreement for
the SideKick, Paragon and elite products with SoloPak Pharmaceuticals, Inc.
("SoloPak"). In November 1994, this agreement was superseded with a new
agreement allowing SoloPak exclusive rights to distribute these products in the
United States. Under the terms of the November 1994 agreement, during the year
ended December 31, 1994, the Company received a $500,000 non-refundable fee in
consideration for the option.
In March 1996, SoloPak purchased the exclusive rights and license to
manufacture and sell the SideKick and Paragon products in the U.S and Puerto
Rico. Pursuant to the new 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 their net sales of
the products for the 1997 and 1998 calendar years. Per the terms of the
agreement, I-Flow has the right of first refusal to supply SoloPak with
services and assistance in assembling completed products until February 1998.
The Company retained the rights to sell the products outside the United States
and Puerto Rico.
Also in 1996, the Company expanded its international sales agreement with its
German distributor, Fresenius AG, to sell the Paragon and SideKick products in
22 countries in Europe. The expanded agreement expires in December 2000 and
provided I-Flow with an initial licensing fee of $300,000.
Net Income (Loss) Per Share - Net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Certain Common Stock equivalents were not considered in the
net income (loss) per share calculation because the effect would be
anti-dilutive.
New Accounting Pronouncement - In October 1995, the Financial Accounting
Standard board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock Based Compensation." The Company has determined
that it will not change to the fair market value method and will continue to
use Accounting Principle Board Opinion No. 25 for measurement and recognition
of employee stock based transactions (Note 4).
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and
12
<PAGE> 13
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Customer Concentrations - The Company sells primarily on credit terms to
customers in the home health care industry. During the years ended December
31, 1996, 1995 and 1994, one customer accounted for 31%, 64% and 55% of total
revenues from operations, respectively. Export sales accounted for 30%, 21%
and 18% of total revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Export sales were primarily to certain European and Far Eastern
countries. The loss of, or reduction in sales to any such customers would have
a material adverse effect on the Company's business, operating results and
financial condition.
Supplier Concentrations - Certain of the Company's products utilize components
that are available in the short term only from a single or a limited number of
sources. Any inability to obtain components in the amounts needed on a timely
basis or at commercially reasonable prices could result in delays in product
introductions or interruption in product shipments or increases in product
costs, which could have a material adverse effect on the Company's business,
operating results and financial condition until alternative sources could be
developed or designed and manufacturing changes could be completed. Any such
design or manufacturing changes or increased costs could result in significant
expenses in a particular quarter and therefore could adversely affect operating
results for any quarter or other period.
2. ACQUISITION OF BLOCK MEDICAL, INC.
On July 22, 1996, the Company purchased substantially all of the assets of
Block Medical, Inc. ("Block"). The assets were acquired for an aggregate
purchase price of approximately $18 million. The purchase price has been
allocated to the net assets acquired, in-process research and development,
goodwill and other intangibles. The amount allocated to in-process research
and development of $4.9 million has been expensed as of the acquisition date.
Consideration for the purchase consisted of: $15,000,000 in cash, 433,018
shares of I-Flow Corporation Common Stock with a value of $2,000,000 as of the
date of closing, and a warrant to purchase 250,000 shares of I-Flow Corporation
Common Stock at an exercise price of $4.62, expiring July 22, 2001, valued at
$615,000 at the date of closing.
The Company recorded a restructuring charge of $1,552,000 to provide for
expenses related to consolidating Block's facilities with its own in 1997. The
$1,552,000 restructuring charge was comprised of approximately $788,000 in
severance and relocation expenses, $380,000 in moving expenses and $384,000 for
lease abandonment. The portion of the restructuring reserve which relates to
lease abandonment has been classified as a long-term liability as payment will
be made through March 2001. The Company anticipates that substantially all of
the remaining restructuring reserve will be expended during 1997.
13
<PAGE> 14
The unaudited consolidated pro forma results of operations for the years ended
December 31, 1996 and 1995, as if the Block Medical acquisition had occurred at
the beginning of 1995, are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Total revenues $22,071,000 $23,571,000
Net loss $(3,068,000) $(8,823,000)
Net loss per share $ (0.26) $ (0.91)
</TABLE>
The pro forma information presented above does not purport to be indicative of
the results that actually would have been obtained if the combined operations
had been conducted during the periods presented and is not intended to be a
projection of future results.
3. BANK FINANCING AND LONG TERM DEBT
During the year ended December 31, 1995, the Company entered into a financing
agreement with a bank which provides for a working line of credit expiring in
August 1997. Under the line of credit, the Company may borrow up to the lesser
of $3,000,000 or 75% of eligible accounts receivable, as defined, at a bank's
prime rate plus 1% (9.25% at December 31, 1996). There were no borrowings
outstanding under the line as of December 31, 1996.
In conjunction with the acquisition described in Note 2, the Company entered
into a $4,000,000 note payable with a bank ($3,500,000 outstanding at December
31, 1996) due in equal monthly installments of principal of $83,333 plus
interest at the bank's prime rate plus 1.5% (9.75% at December 31, 1996)
through July 2000. The note is collateralized by substantially all of the
Company's assets and requires the Company to comply with certain covenants. As
of December 31, 1996, the Company was in compliance with all such covenants.
4. COMMON STOCK WARRANTS AND OPTIONS
During 1994, the Company issued Series H warrants for the purchase of 150,000
shares of the Company's Common Stock in conjunction with a consulting
agreement. The exercise price for these warrants was equal to the fair market
value of the Common Stock at the date of grant.
In July 1995, an aggregate of 758,681 of the Company's Common Stock was issued
upon exercise of warrants for net proceeds of $1,707,000.
14
<PAGE> 15
In July 1996, the Company issued warrants for the purchase of 250,000 shares of
the Company's Common Stock in conjunction with the acquisition of Block
("Acquisition Warrants") (Note 2). The exercise price for these warrants was
equal to the fair market value of the Common Stock at the date of grant.
During the year ended December 31, 1996, Series G Warrants for 1,999,255 shares
of the Company's Common Stock were exercised raising net proceeds of
$5,998,000.
Outstanding warrants as of December 31, 1996 are summarized below.
<TABLE>
<CAPTION>
Shares Subject to Exercise Price
Description Warrants Per Share Expiration Date
----------- -------- --------- ---------------
<S> <C> <C> <C>
Underwriter Warrants 46,051 $6.79 February 1997
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>
The Company has an employee stock option plan (the 1987 - 1988 Plan) which
currently provides for granting options to employees, officers and consultants
to purchase up to 2,000,000 shares of the Company's Common Stock at exercise
prices not less than 100% of the fair market value of the Company's Common
Stock at the date of grant (110% for incentive options granted to holders of
greater than 10% of the Company's outstanding voting stock). Options granted
become exercisable at such times as determined by the Compensation Committee of
the Board of Directors and expire on various dates up to ten years from the
date of grant.
In May 1996, the shareholders of the Company approved a new stock incentive
plan (the "1996 Plan") which provides for the grant of stock options (including
incentive stock options or nonqualified stock options), restricted stock, stock
appreciation rights, stock payments, dividend equivalents, stock bonuses, stock
sales, phantom stock and other stock-based benefits to directors, officers,
employees, consultants, and advisors of the Company and its affiliated
entities. Stock options granted under the 1996 Plan may be incentive stock
options intended to qualify under the provisions of Section 422 of the Internal
Revenue Code ("Code") or non-qualified stock options which do not so qualify.
The maximum number of shares of Common Stock which may be the subject of awards
granted under the 1996 Plan may not exceed 2,500,000 shares in the aggregate,
subject to adjustments for stock splits or other adjustments as discussed
below. The shares available under the 1996 Plan may either be authorized and
unissued shares or shares reacquired by the Company through open market
purchases or otherwise. If any award granted under the 1996 Plan expires,
terminates or is forfeited before the exercise thereof or the payment in full
thereof, the shares covered by the unexercised or unpaid portion will become
available for new grants under the 1996 Plan. The 1996 Plan provides for the
granting of options to purchase shares of the Company's Common Stock at a price
equal to 85% of the quoted market price on the date of grant. Options granted
become exercisable at such
15
<PAGE> 16
times as determined by the Compensation Committee of the Board of Directors and
expire on various dates up to ten years from the date of grant.
The Company has a stock option plan which provides for the granting of options
to non-employee directors to purchase up to 400,000 shares of the Company's
Common Stock at exercise prices not less than the fair market value of the
Company's Common Stock at the date of grant. Under the terms of the plan,
options to purchase 10,000 shares of the Company's Common Stock are to be
granted to each non-employee director serving in such capacity as of the first
business day of January of each year as long as the plan remains in existence.
Options granted become exercisable in four equal installments, with one
installment occurring at the end of each calendar quarter subsequent to the
date of grant. The options expire at the earlier of five years from the date
of grant or two years after termination of the options holder's status as a
director. As of December 31, 1996, options to purchase 165,715 shares at
exercise prices ranging from $1.63 to $5.38, were outstanding and exercisable
under the plan. On January 2, 1997, options to purchase an additional 60,000
shares of the Company's Common Stock at an exercise price of $5.44 per share
were issued under the plan.
Activity under all of the plans is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Price per Average
Shares Share Price
---------- ------ -----
<S> <C> <C> <C>
Balance, January 1, 1994 1,228,554 $0.25 - 5.15 $ --
Granted 757,309 0.25 - 2.38 1.59
Canceled/Expired (183,772) 0.25 - 5.00 2.70
-------------
Balance, December 31, 1994 1,802,091 0.25 - 5.15 2.01
Granted (weighted average fair value
of $4.54) 773,677 1.88 - 4.36 3.88
Canceled/Expired (58,602) 1.25 - 5.00 2.18
Exercised (38,278) 1.31 - 2.38 1.76
-------------
Balance, December 31, 1995 2,478,888 0.25 - 5.15 2.59
Granted (weighted average fair value
of $7.29) 753,372 4.25 - 5.38 4.55
Canceled/Expired (45,547) 3.25 - 4.13 3.53
Exercised (337,078) 0.25 - 3.60 2.13
-------------
Balance, December 31, 1996 2,849,635 $0.25 - 5.38 $3.06
=============
</TABLE>
Certain of these options were issued under an employment agreement between the
Company and its president (Note 6). As of December 31, 1996, there were
options for 238,000 and 2,056,000 shares available for grant under the 1987 -
1988 Plan and the 1996 Plan, respectively. Options to purchase 1,788,437 were
exercisable as of December 31, 1996.
16
<PAGE> 17
The Company has issued options outside of the option plans to purchase an
aggregate of 541,500 shares of its Common Stock to certain key employees at
exercise prices below fair market value for services rendered. Compensation
expense related to these options aggregating $44,000 has been recorded for the
years ended December 31, 1996, 1995 and 1994. As of December 31, 1996, 354,560
of these options are exercisable. All other terms of the options are the same
as those issued under the 1996 Plan (described above).
The Company has adopted the disclosure-only provisions of the SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's option plans been determined based on the fair value at the grant
date for awards in 1996 consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
decreased/increased to the pro forma amounts indicated below:
Amounts in thousands, except per Years Ended December 31,
share amounts 1996 1995
---- ----
Net income (loss) - as reported $(7,425) $ 1,069
Net income (loss) - pro forma $(8,057) $ 618
Earnings (loss) per share - as reported $ (0.68) $ 0.12
Earnings (loss) per share - pro forma $ (0.74) $ 0.07
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1995 and 1996: no dividend yield; expected volatility of 27% in 1995
and 45% in 1996; risk-free interest rate of 6.5%; and expected lives of 5
years.
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- --------------- ----------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.25 - $1.00 85,330 6.40 $0.25 72,130 $0.25
$1.01 - $2.00 752,370 5.15 $1.59 580,740 $1.61
$2.01 - $3.00 386,821 4.21 $2.28 370,920 $2.27
$3.01 - $4.00 309,705 3.45 $3.16 296,014 $3.16
$4.01 - $5.00 1,247,409 4.39 $4.44 400,633 $4.45
$5.01 - $6.00 68,000 3.56 $5.35 68,000 $5.35
--------- ----- --------- -----
Total 2,849,635 $3.06 1,788,437 $2.74
========= ===== ========= =====
</TABLE>
17
<PAGE> 18
5. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109 -
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are established for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
tax rates expected to be in effect when such assets or liabilities are realized
or settled.
Total Federal and state taxes on income for the years ended December 31, 1996,
1995 and 1994 are summarized as follows:
Years Ended December 31,
Currently payable: 1996 1995 1994
- ------------------ ---- ---- ----
Federal $49,000 $ -- $ --
State 11,000 -- --
------- ------- -------
Total $60,000 $ -- $ --
======= ======= =======
Taxes on income vary from the statutory Federal income tax rate applied to
earnings before taxes on income as the result of the following:
Years Ended December 31,
1996 1995 1994
---- ---- ----
[S] [C] [C] [C]
Statutory Federal income tax
rate applied to earnings before
taxes on income $(2,578,000) $ 374,000 $(586,000)
Increase (decrease) in taxes
resulting from:
State taxes, net of Federal benefit (1,027,000) 65,000 (51,000)
Research and development credits (42,000) -- --
Change in valuation allowance 3,751,000 (442,000) 633,000
Other (44,000) 3,000 4,000
----------- --------- ---------
Total 60,000 $ -- $ --
=========== ========= =========
18
<PAGE> 19
As of December 31, 1996 and 1995, the Company had a net deferred tax asset of
approximately $9,943,000 and $6,191,000, respectively, with a valuation
allowance of $9,943,000 and $6,191,000, comprised of the following:
Years Ended December 31,
Deferred Tax Assets: 1996 1995
- -------------------- ---- ----
Net operating loss carryforwards $ 5,474,000 $ 5,760,000
Amortization of goodwill and other intangibles 3,329,000 --
Reserves not currently deductible 360,000 348,000
Accrued restructuring 523,000 --
State taxes (649,000) --
Credits 475,000 --
Deferred revenue 186,000 --
Accrued compensation and related costs 108,000 40,000
Excess depreciation 94,000 39,000
Other 43,000 4,000
----------- -----------
Subtotal
Less valuation allowance 9,943,000 6,191,000
(9,943,000) (6,191,000)
----------- -----------
$ 0 $ 0
----------- -----------
Primarily all of the above temporary differences will reverse in 1997, except
for the goodwill and other intangibles and the net operating loss carryforwards
which expire beginning 2000 through 2009. Due to certain tax regulations,
future use of the loss carryforwards is restricted. The impact of the
restricted amount has not been calculated as of December 31, 1996.
6. COMMITMENTS AND CONTINGENCIES
In June 1990, the Company entered into an employment agreement with the
President of the Company that expires on June 4, 1999. Under the terms of the
agreement, the President will receive a minimum base salary of $200,000 per
year for the term of this contract, with salary reviews conducted annually by
the Board of Directors.
In 1996, the Board of Directors approved a deferred compensation plan under
which certain key employees may be granted options under the 1996 Plan (Note 4)
for which the Company will pay 100% of the total exercise price upon exercise
of the options by the employee. These options will vest one-third upon the
expiration of one year following the date of grant, an additional one-third
upon the expiration of two years following the date of grant and all remaining
options upon the expiration of three years following the date of grant.
Compensation expense of $44,000 relating to the plan was recorded in 1996.
19
<PAGE> 20
The Company is currently in the process of negotiating a noncancelable
operating lease for a new 51,000 square foot building for its primary facility.
The lease agreement (if consummated) will contain certain scheduled rent
increases (which are accounted for on a straight-line basis) and will expire in
June 2007. Future minimum lease payments under the proposed lease are as
follows:
Year Ended December 31,
1997 $ 225,000
1998 386,000
1999 386,000
2000 386,000
2001 386,000
Thereafter $2,301,000
----------
Total $4,070,000
==========
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $291,000,
$201,000 and $175,000, respectively.
The Company is involved in a litigation matter arising from the normal course
of operations. Although the liability at December 31, 1996 cannot be
ascertained, in the opinion of management any resulting future liability will
not have a material adverse effect on the Company's financial position and
results of operations
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan in which any full time employee may
participate. Employer contributions to the plan are discretionary. No
employer contributions were authorized during the years ended December 31,
1996, 1995 or 1994. The Company does not provide post-retirement benefits to
its employees.
20
<PAGE> 1
EXHIBIT 21
I-FLOW CORPORATION
LIST OF SUBSIDIARIES
Following is a list of subsidiaries of the Company which are included in the
Company's consolidated financial statements:
State of Jurisdiction
Name of Incorporation
- ---- ---------------------
Block Medical, Inc. California
Block Medical de Mexico, S.A. de C.V. Mexico
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63500 and 333-16547 on Form S-8 and in Registration Statement Nos. 33-80384
and 333-21493 on Form S-3 of our reports dated February 12, 1997, appearing,
and incorporated by reference, in the Annual Report on Form 10-K of I-Flow
Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,651
<SECURITIES> 0
<RECEIVABLES> 4,639
<ALLOWANCES> (125)
<INVENTORY> 3,352
<CURRENT-ASSETS> 9,658
<PP&E> 3,091
<DEPRECIATION> (173)
<TOTAL-ASSETS> 17,234
<CURRENT-LIABILITIES> 4,753
<BONDS> 0
0
1,494
<COMMON> 33,036
<OTHER-SE> (24,933)
<TOTAL-LIABILITY-AND-EQUITY> 17,234
<SALES> 9,153
<TOTAL-REVENUES> 13,933
<CGS> 3,954
<TOTAL-COSTS> 21,298
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,365)
<INCOME-TAX> 60
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,425)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> 0.00
</TABLE>
