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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 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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)
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<S> <C>
CALIFORNIA 33-0121984
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
20202 WINDROW DRIVE, LAKE FOREST, CA 92630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 206-2700
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. [X]
The aggregate market value of the 11,992,998 shares of voting Common Stock
of the registrant held by non-affiliates of the registrant on February 27, 1998,
based on the last sale price of such stock on the Nasdaq Small Cap Market on
such date was $31,481,620.
Registrant's outstanding stock as of February 27, 1998 was 13,417,655 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, except as otherwise provided by law or
the Certificate of Determination of Preferences of Series B Preferred Stock,
votes 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 1998 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, 1997.
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, 1997.
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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. These
compact, portable devices simplify and improve patient care, while reducing
costs through innovative product design. They are used most frequently in 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 20202 Windrow Drive, Lake Forest,
California 92630. The telephone number is (714) 206-2700 and its web site is
located at www.i-flowcorp.com.
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, Inc. Block was a San Diego, California
based manufacturer and marketer of ambulatory infusion devices. The transactions
contemplated by this agreement were consummated on July 22, 1996.
ACQUISITION OF INFUSYSTEMS II, INC. AND VENTURE MEDICAL, INC.
On February 9, 1998, the Company entered into an agreement and plan of
merger contemplating the merger of Infusystems II, Inc. and Venture Medical,
Inc. with and into a wholly-owned subsidiary of I-Flow. The transactions
contemplated by this agreement were consummated on February 11, 1998.
Infusystems II and Venture Medical (collectively referred to as
"Infusystem") is a leading ambulatory infusion pump management firm based in
Madison Heights, Michigan. By delivering pumps from a variety of manufacturers
to private medical practices and clinics across the country, Infusystem uses a
unique approach to service the cancer infusion therapy market. InfuSystem
specializes in providing ambulatory infusion pumps and the related disposables
used primarily for cancer treatments. Infusystem believes it has captured
approximately 30% of the total target physician and clinical ambulatory pump
market for outpatient chemotherapy treatment.
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 is 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 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.
The ONE-STEP KVO(TM) is a new elastomeric infusion device intended to be
used as an alternative to flushing and as a means to help prevent catheter
occlusions. There are several hundred million flushes performed on catheters in
the U.S. every year and the process is expensive, cumbersome and difficult to
perform correctly. The complication rates for PICC line catheters exceed 20%,
many of which are attributable
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to improper flushing techniques. The ONE-STEP KVO not only helps prevent
complications associated with flushing, but it is significantly more cost
effective and easy to use. The ONE-STEP KVO is well suited for hospitals,
skilled nursing facilities and home healthcare environments.
Syringe Delivery Systems
The Medi-SIS(TM) 20 and Medi-SIS 60 Syringe Infusion Systems are designed
to provide an accurate intravenous ("IV") push delivery from a syringe. This
cost-effective syringe system delivers IV medications in single doses or in
multi-doses from one syringe over periods from 5 minutes to 12 hours. The
Medi-SIS Syringe Infusion System provides the healthcare 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 supply 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, Liberty 250 and Liberty 1000 IV Bag Infusion Systems
deliver medications from standard Abbott Laboratories, Inc. or Baxter
International, Inc. 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
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
Verifuse(TM), Verifuse Plus(TM) and the I-Flow VIP(TM) are the only
infusion devices available today that can be used with the VOICELINK(R). These
electronic infusion pumps are multi-therapy, ambulatory infusion devices with
features similar to pumps currently on market.
VOICELINK represents the "standard for tele-medicine". With VOICELINK, the
only piece of equipment a caregiver needs is a telephone. There is 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.
Vivus 4000(R) is the only ambulatory, multi-channel, multi-therapy
electronic infusion pump available. It provides accurate and safe remote
programming and delivery of four individual protocols regardless of complexity.
THE MARKET
Alternate site healthcare has grown significantly in the past few years.
Ambulatory infusion devices are one of the fastest growing segments in the
alternate site healthcare marketplace. An ambulatory pump allows patients to
leave the hospital earlier, making it very attractive to cost-conscious
hospitals and to patients who
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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. This field has been identified by marketing research
analysts as one of the fastest growing segments in the U.S. healthcare market
with revenues rising in excess of 20% annually.
Infusystem's market further extends the reach of I-Flow's products into
physician offices and clinics, which specialize in cancer treatment. There are
over 7,000 physicians and clinics in the cancer treatment market, of which the
Company serves over 500. In addition, the Company also serves over 500 hospitals
and hospital outpatient centers. Two of I-Flow's newer products, the ONE-STEP
KVO and the Medi-SIS Syringe Infusion System, are well suited for the hospital
market. There has been tremendous growth in the number of hospital outpatient
centers as hospitals attempt to broaden the geographic reach within their
communities.
COMPETITION
The IV drug and nutrient infusion segment of the alternate site healthcare
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 and, with certain of its new products, it is
expanding its market to include hospitals. Amounts spent on Company-sponsored
product development activities are disclosed in the Statements of Operations 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 1998, the Company and its newly acquired
subsidiary, InfuSystem, had approximately 20 internal sales representatives
located throughout the United States. The Company is actively pursuing
additional distribution arrangements for its products.
In March 1998, the Company entered into a letter of intent with B. Braun
Medical Inc., a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flow's HOMEPUMP Eclipse,
HOMEPUMP Eclipse C-Series and One-Step KVO elastomeric products in the United
States. This relationship will strengthen I-Flow's existing distribution network
in the home care/alternate site market and open yet another new channel of
distribution directly into hospitals through the nationwide reach of B. Braun's
125 direct sales professionals.
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 the 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 36%, 30% and 21% of the Company's
revenues for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company does not have any capital investments in any foreign operations except
for its plant in Mexico.
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. Printed circuit board
manufacture and component integration are performed externally, with I-Flow
obtaining custom circuit boards and then
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providing the electronic materials and engineering specifications to an outside
assembler. In July 1997, the Company consolidated its U.S. operations to a new
facility in Lake Forest, California.
With the acquisition of substantially all the assets of Block 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, 1997, 1996 and 1995, the Company
incurred expenses of $1,035,000, $1,139,000 and $840,000, respectively, for
research and development.
PATENTS AND TRADEMARKS
The Company has filed U.S. patent applications for substantially all of its
products. The Company received a patent for the Medi-SIS Syringe Delivery System
in 1997 bringing the total number of patents now held by the Company to 40.
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. The Company regularly
receives its biannual inspections from the FDA, and to date, there have been no
reportable conditions found during these inspections.
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 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.
EMPLOYEES
As of February 27, 1998, the Company and its newly acquired subsidiary,
InfuSystem, had a total of 120 full-time employees in the United States and the
Company had 119 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.
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ITEM 2. DESCRIPTION OF PROPERTY
In July 1997, the Company entered into a noncancelable operating lease for
a new 51,000 square foot building in Lake Forest, California, for its primary
facility. The lease agreement contains certain scheduled rent increases (which
are accounted for on a straight-line basis) and expires in June 2007 (see Note 6
of Notes to Consolidated Financial Statements). The Company also leases a
facility for its manufacturing plant in Northern Mexico and a facility for the
operation of its newly acquired subsidiary in Detroit, Michigan.
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 1998, the Company was involved in legal proceedings in
the normal course of operations. Although the outcome of the litigations cannot
be determined as of February 28, 1998, in the opinion of management any
resulting future liability will not have a material adverse effect on the
Company, taken as a whole.
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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of February 28, 1998. 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, subject to the terms
of any employment agreement, serve at the pleasure of the Board of Directors.
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NAME (AGE) POSITION
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Donald M. Earhart (53)........................ President, Chief Executive Officer and
Chairman of the Board
Henry Tsutomu Tai, Ph.D., M.D. (54)........... Secretary and Director
James J. Dal Porto (44)....................... Executive Vice President, Chief Operating
Officer and Director
Gayle L. Arnold (36).......................... Chief Financial Officer and Treasurer
</TABLE>
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 Board of Directors of
Abacus Investments, Ltd.
HENRY TSUTOMU TAI, PH.D., M.D. is the initial progenitor of the Company's
product and business concept in multiple-drug infusion systems and founding
director. Dr. Tai was Chairman of the Board from 1985 to 1988, and has been a
director and Secretary of the Company since 1990. Dr. Tai has been a consultant
in hematology and oncology since 1977. Dr. Tai holds a Bachelor of Arts degree
in Molecular Biology from Harvard University, a Ph.D. in Molecular Biology and a
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.
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
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1994. Mr. Dal Porto served as Financial 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 a 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.
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HIGH LOW
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1996
1st Quarter............................................... $5.50 $3.81
2nd Quarter............................................... $5.94 $3.69
3rd Quarter............................................... $4.94 $3.81
4th Quarter............................................... $5.44 $4.06
1997
1st Quarter............................................... $5.88 $4.00
2nd Quarter............................................... $4.31 $3.88
3rd Quarter............................................... $5.00 $3.91
4th Quarter............................................... $5.13 $2.56
</TABLE>
American Stock Transfer & Trust Company is the Company's transfer agent for
its Common Stock. As of February 27, 1998, 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.
The Company has not paid, and does not currently expect to pay in the
foreseeable future, cash dividends on its Common Stock.
In July 1995, an aggregate of 758,681 shares of the Company's Common Stock
were issued upon exercise of various warrants issued to holders in previous
private placements at an exercise price of $2.25 per share, for net proceeds of
$1,707,000. In January and February 1996, an aggregate of 1,999,255 shares of
the Company's Common Stock were issued upon exercise of Series G warrants,
which were issued to holders in a private placement in March 1991, at an
exercise price of $3.00 per share, for net proceeds of $5,998,000. The Company
relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended. On February, 28 1997, the Company's
Registration Statement on Form S-3 (Registration No. 333-21493) relating to the
sale by certain selling shareholders of shares of common stock which were
previously issued, shares of common stock issuable upon the exercise of
outstanding warrants and shares of common stock issuable upon exercise of
outstanding options, became effective. The shares of Common Stock issued upon
exercise of such warrants were included in the Registration Statement.
On July 3, 1996, the Company entered into an Agreement for Purchase and
Sales of Assets (the "Asset Agreement") by and among the Company, Block Medical,
Inc., a Delaware corporation ("Block") and Hillenbrand Industries, Inc., an
Indiana corporation and the parent of Block ("Hillenbrand") which contemplated
the purchase by the Company or its wholly-owned subsidiary of substantially all
of the assets of Block from Block and Hillenbrand. The transactions contemplated
by the Asset Agreement were consummated on July 22, 1996. Consideration for the
purchase included 433,018 shares of the Company's Common Stock (issued to
Hillenbrand) and a warrant to purchase 250,000 shares of the Company's Common
Stock at an exercise price of $4.62, expiring July 22, 2001 (issued to
Hillenbrand), exercisable at anytime. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended. The shares of Common Stock issuable upon exercise of Hillenbrand's
Warrant were included in their Registration Statement on form S-3 (Registration
No. 333-21493) filed by the Company in February 1997.
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(Registration No. 333-21493) relating to the sale by certain selling
shareholders of shares of common stock which were previously issued, shares of
common stock issuable upon the exercise of outstanding warrants and shares of
common stock issuable upon exercise of outstanding options, became effective.
On February 9, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with, InfuSystems II, Inc. ("InfuSystem"), Venture
Medical, Inc. ("VMI") and the shareholders of InfuSystem and VMI, contemplating
the merger of InfuSystem and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystem were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998 (the
"Effective Time"). In the Merger, all of the outstanding shares of Common Stock
of VMI and InfuSystem were exchanged for shares of Common Stock of the Company.
The aggregate number of shares of Common Stock of the Company issued in the
Merger to the shareholders of VMI and InfuSystem was 972,372 shares. In
accordance with the terms of the Merger Agreement, 59,395 shares of the
Company's Common Stock were issued to Amherst Capital partners, LLC ("Amherst"),
investment banker for InfuSystems and VMI, as payment of Amherst's fees and
expenses in connection with the Merger. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to the Merger Agreement, the Company is obligated to use its best
commercially reasonable efforts to register the shares of Common Stock within
six months after the Effective Time.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Consolidated Financial Data" shown on page 5
of the Company's 1997 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 6 to 9 of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
The financial statements, including the notes thereto, included on pages 11
through 26 of the Company's 1997 Annual Report to Shareholders together with the
section entitled "Independent Auditors Report" included on page 11 are
incorporated herein by reference.
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(b) Financial Statement Schedules
SCHEDULE II --
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED
AT TO COSTS ADDITIONS BALANCE
BEGINNING AND FOR BUSINESS AT END
CLASSIFICATION OF PERIOD EXPENSES ACQUISITION DEDUCTIONS OF PERIOD
-------------- --------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
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
Year ended December 31, 1997:
Allowance for doubtful accounts........... 125,000 338,000 463,000
Reserve for obsolete inventories.......... 767,000 612,000 244,000 1,135,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND 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 1998 Annual Meeting of
Shareholders under the caption "Election of Directors" 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, 1997 and the information from the section
entitled "Executive Officers of the Registrant" following Part I, Item 4 of this
Report.
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 1998 Annual Meeting of
Shareholders under the captions "Executive Compensation," "Compensation
Committee Interlock Insider Participation" and "Stock Performance Graph" 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, 1997.
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 1998 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, 1997.
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 1998 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related 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, 1997.
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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 26 of the Company's 1997 Annual Report
to Shareholders and are incorporated herein by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE(S)
-------------
<S> <C>
Independent Auditors' Report................................ 10
Financial Statements
Consolidated Balance Sheets, December 31, 1997 and 1996... 11
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... 12
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995........... 13
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... 14
Notes to Financial Statements............................. 15
</TABLE>
The following are included herein:
<TABLE>
<CAPTION>
PAGE IN THIS
REPORT
------------
<S> <C>
Independent Auditors' Report................................ 12
</TABLE>
The Financial Statements and Independent Auditor's Report listed in the
above index which are included in the Company's 1997 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, 1997 is not
deemed filed as part of this Report.
(2) Financial Statement Schedules included herein:
<TABLE>
<CAPTION>
PAGE IN THIS
REPORT
------------
<S> <C>
Schedule II -- "Valuation and Qualifying Accounts".......... 9
</TABLE>
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, 1997.
10
<PAGE> 11
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: /s/ DONALD M. EARHART
------------------------------------
Donald M. Earhart,
Chairman, President & CEO
Dated: March 30, 1998
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 30, 1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DONALD M. EARHART Chairman, President and Chief Executive Officer
- ------------------------------------------------
Donald M. Earhart
/s/ JAMES J. DAL PORTO Executive Vice President, Chief Operating Officer
- ------------------------------------------------ and Director
James J. Dal Porto
/s/ GAYLE L. ARNOLD Chief Financial Officer (Principal Financial and
- ------------------------------------------------ Accounting Officer)
Gayle L. Arnold
/s/ JOHN H. ABELES Director
- ------------------------------------------------
John H. Abeles, M.D.
/s/ JACK H. HALPERIN Director
- ------------------------------------------------
Jack H. Halperin
/s/ JOEL S. KANTER Director
- ------------------------------------------------
Joel S. Kanter
/s/ ERIK H. LOUDON Director
- ------------------------------------------------
Erik H. Loudon
/s/ CHARLES C. MCGETTIGAN Director
- ------------------------------------------------
Charles C. McGettigan
/s/ HENRY TSUTOMU TAI Director and Secretary
- ------------------------------------------------
Henry Tsutomu Tai, Ph.D., M.D.
</TABLE>
11
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
I-Flow Corporation:
We have audited the consolidated financial statements of I-Flow Corporation
as of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated February 19,
1998. Such financial statements and report are included in I-Flow Corporation's
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 consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 19, 1998
12
<PAGE> 13
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 Restated Articles of Incorporation of the Company(2)
3.2 Certificate of Amendment to Restated Articles of
Incorporation dated June 14, 1991(3)
3.3 Certificate of Amendment to Restated Articles of
Incorporation dated May 12, 1992(5)
3.4 Certificate of Determination covering Company's Series B
Preferred Stock filed with the Secretary of State on October
5, 1992(5)
3.5 Restated Bylaws as of July 22, 1991 of the Company(3)
4.1 Specimen Common Stock Certificate(5)
4.2 Warrant Agreement between the Company and American Stock
Transfer & Trust Company, as Warrant Agent, dated February
13, 1990(1)
4.3 Form of Warrant dated July 22, 1996, issued in conjunction
with the acquisition of Block Medical, Inc.(8)
10.1 Employment Agreement with Donald M. Earhart dated May 16,
1990(2)(6)*
10.2 1987-1988 Incentive Stock Option Plan and Non-Statutory
Stock Option Plan Restated as of March 23, 1992(5)(6)*
10.3 1992 Non-Employee Director Stock Option Plan(4)(6)
10.4 License and Transfer Agreement with SoloPak Pharmaceuticals
Inc., dated March 6, 1996(7)
10.5 1996 Stock Incentive Plan(6)(9)*
10.6 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.(8)
10.7 Employment Agreement with James J. Dal Porto dated September
6, 1996(10)*
10.8 Lease Agreement Between Industrial Developments
International, Inc. as Landlord and I-Flow Corporation as
Tenant dated April 14, 1997(11)
10.9 Agreement and Plan of Merger by and among I-Flow
Corporation, I-Flow Subsidiary, Inc., Venture Medical, Inc.,
and InfuSystems II, Inc. and the Shareholders of Venture
Medical, Inc. and InfuSystems II, Inc.(12)
13 1997 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>
- ------------
(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) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(7) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1995.
13
<PAGE> 14
(8) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated July 22, 1996.
(9) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#333-16547) declared effective November
20, 1996.
(10) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1996.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(11) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated April 14, 1997.
(12) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated February 9, 1998.
14
<PAGE> 1
EXHIBIT 13
I-FLOW CORPORATION
1997 ANNUAL REPORT
1
<PAGE> 2
FINANCIAL HIGHLIGHTS I-FLOW CORPORATION
OPERATING RESULTS
<TABLE>
<CAPTION>
(Amounts in thousands, except Years Ended December 31,
per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------
<C> <C> <C> <C>
Total revenue $ 17,742 $ 13,892 $ 10,047
Operating income (loss) 779 (7,406) 973
Net income (loss) per share $ 0.03 $ (0.68) $ 0.12
- --------------------------------------------------------------------------
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(Amount in thousands) 1997 1996
- --------------------------------------------------------------------------
<C> <C> <C>
ASSETS
Current assets $10,040 $9,658
Property & equipment, net 2,231 1,938
Other assets 5,363 5,638
- --------------------------------------------------------------------------
Total assets $17,634 $17,234
- --------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities $5,467 $4,753
Long-term debt 1,579 2,500
Shareholders' equity 10,588 9,597
- --------------------------------------------------------------------------
Total liabilities & shareholders' equity $17,634 $17,234
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 3
MESSAGE TO SHAREHOLDERS
To Our Shareholders:
Fiscal 1997 was a year of progress and challenges for I-Flow as we (1)
transitioned from a Company generating mostly licensing revenues to one of
product sales and (2) began developing a strong distribution channel to support
this change, both domestically and internationally. The transition began in the
fourth quarter of 1997 and will continue through the first half of fiscal 1998.
We are concentrating our efforts on establishing strong partnerships with large
healthcare companies that can gain us visibility with national healthcare
providers, both in the hospital and in the alternate site market.
During the year, revenue reached a new record. We successfully launched
several important new products. The Company was awarded two new patents, and
entered into two new master purchasing agreements with large hospital networks.
Early in 1998, we completed an acquisition that adds to our base of business and
opens new distribution channels for our products. And in March 1998, we
established a letter of intent with a major distributor of infusion products in
the United States that we believe will contribute significantly to the Company's
future growth. These accomplishments added real value to our Company and moved
us forward in the implementation of our strategic plan -- to be a leading
supplier of high quality, low cost IV infusion devices to the world, for the
delivery of medicines.
Earnings for the year would have been significantly better if we had
not had a lower than expected fourth quarter. The fourth quarter was negatively
impacted by lower-than-anticipated shipments to a major European distributor,
order delays due to the economic uncertainty in Asia (and particularly Korea),
and the temporary impact of the reorganization of our domestic distribution
channels. This reorganization is necessary if we are to continue achieving
strong revenue growth in the future.
NEW PRODUCTS
To further strengthen our position as the leading low-cost provider of
reliable, affordable infusion systems, I-Flow introduced two more innovative
infusion systems in 1997:
- The Eclipse(R) C-Series is specifically designed for chemotherapy
infusion, optimized for appropriate flow rates and the higher viscosities of
chemotherapeutic drugs. With our acquisition of InfuSystems II, Inc. and Venture
Medical, Inc. in 1998, we acquired two of the market leaders to distribute this
family of oncology products.
- Late in the year we began marketing the ONE-STEP KVO(TM), which
substantially eliminates the need for IV flushing, is very cost-effective and
reduces the occurrence of occluded catheters and other complications associated
with catheter maintenance. This is both a hospital product and an alternate-site
product. With the proposed agreement with B. Braun Medical, Inc., we will be
able to introduce this product to their domestic hospital accounts using their
125 person sales force.
NATIONAL SALES CONTRACTS
To help us meet our objectives for sustained domestic and international
growth, I-Flow entered into three new national sales contracts in 1997:
2
<PAGE> 4
- A three year national agreement with Shared Services Healthcare, Inc.
(SSH), a non-profit purchasing organization for 1,200 acute care and alternate
site members in the southeastern United States, which gives I-Flow the
opportunity to market its entire line of mechanical and electronic infusion
products to each of SSH's facility members.
- A three year Government Service Agreement (GSA) with the U.S.
Department of Veteran Affairs, which adds all of I-Flow's infusion therapy
devices to the Federal Supply Schedule (FSS). This GSA contract together with
the previously negotiated Distribution and Pricing Agreement (DAPA) with the
Defense Personnel Support Center (DPSC), makes I-Flow's infusion systems
available to all U.S. Government medical treatment facilities around the world.
- A three year agreement to provide Fresenius Medical Care in the
United States with eighty percent of their elastomeric pump requirements.
PATENTS
I-Flow was awarded two U.S. Patents during the year, bringing the total
number of patents now held by the Company to 40:
- A patent for our VOICELINK(TM) remotely programmable infusion therapy
system, a tele-medicine technology for the remote monitoring and programming of
intravenous (IV) infusion pumps via a touch tone telephone. VOICELINK bridges
the gap between the limitations of managed care and the need for monitoring IV
patients who are at home, and we believe that this technology has the potential
to become the industry standard for remote monitoring and programming.
- A patent for the Medi-SIS(TM) syringe infusion system, the lowest
cost method of administering intravenous (IV) fluids available today. With an
average cost per infusion of less than half that of gravity-based IV drip
systems, until now the most cost-effective method of IV fluid delivery, Medi-SIS
sets a new standard for cost savings, ease of use, and reliability.
ACQUISITION
Early in 1998, I-Flow acquired privately-held Venture Medical, Inc. and
InfuSystems II, Inc., two Michigan based national ambulatory infusion pump
management and distribution companies (referred to jointly as InfuSystem), which
service the oncology market. In addition to adding more than $5 million of
incremental revenue to our sales base in 1998, this acquisition is important
because it provides I-Flow with a new channel of distribution--directly into the
offices of oncologists and hematologists. InfuSystem is presently a leading
supplier of infusion devices to physicians and their expertise in distributing
to physicians opens the door to establishing additional channels for our
ambulatory infusion products in the hospital-based pain management and bone
marrow transplant segments of the industry.
DISTRIBUTION AGREEMENT
In March 1998 we signed a letter of intent with B. Braun Medical Inc.
("B. Braun"), a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flow's HOMEPUMP
Eclipse(R), HOMEPUMP Eclipse C-Series and ONE-STEP KVO elastomeric products in
the United States. This relationship will strengthen I-Flow's existing
distribution network in the home care/alternate site
3
<PAGE> 5
market and open yet another new channel of distribution directly into hospitals
through the nationwide reach of B. Braun's 125 direct sales professionals.
FINANCIAL RESULTS
For the year ended December 31, 1997, revenue rose 27% to a record
$17,742,000 from $13,892,000 for 1996. Revenue for 1996 included licensing fees
of $4,600,000; there were no licensing fees for 1997. Net income for the year
was $365,000, or $0.03 per share. This compares to a net loss of $7,425,000, or
$0.68 per share, for 1996, which included the write-off of purchased in-process
R&D, a goodwill write down, and a restructuring charge related to the
acquisition of Block Medical totaling $9,252,000.
OUTLOOK
The healthcare marketplace is changing, and cost-containment pressures
are causing third-party payers to reassign complex therapies from the
traditional hospital setting to less costly environments, including the home,
nursing home, outpatient clinic, hospice facility and the physician's office. As
described in this report, during 1997 we created a variety of new opportunities
for I-Flow to prosper in this new healthcare environment, including the
acquisition of InfuSystem which gives us an immediate presence in the
oncologist's office and future inroads to other physicians' offices. In
addition, with the recent agreement with B. Braun Medical, Inc., we now have a
vehicle to sell our products to hospitals as well as to national home care
providers.
We recently applied for FDA permission to market a new pain management
kit for use by orthopedic surgeons. Preliminary results from more than 25
patients has shown a significant reduction in pain after surgery and a
significant reduction in the time for rehabilitation of the repaired limb, all
with a reduction in the use of oral pain medications and their unpleasant side
effects. Once permission to market is received, we intend to begin selling this
new pain kit to orthopedic surgeons through a yet unnamed distribution partner.
We are committed to our strategic road map for expansion through
acquisition and corporate partnering and the expansion into new markets by using
our existing patented technologies; telemedicine applications for pumps,
respirators, monitors, etc. using VOICELINK, mechanical delivery systems for
medicines using springs or our elastomeric pumps. We believe this is the best
way to further strengthen our position as a leading provider of affordable
mechanical and electronic infusion systems, and to build long-term value for our
shareholders.
Thank you for your interest and support. We look forward to reporting
our progress to you.
Sincerely,
Donald M. Earhart
Chairman, President and Chief Executive Officer
4
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA I-Flow Corporation
<TABLE>
<CAPTION>
(Amounts in thousands, except Year Ended December 31,
per share amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:(1)(3)
Revenue:
Net sales $ 17,678 $ 9,153 $ 9,737 $ 6,321 $ 5,436
Rental income and other 64 139 60 72 212
Other fees -- 4,600 250 500 --
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 17,742 13,892 10,047 6,893 5,648
Cost of sales 8,450 3,954 4,422 4,062 3,623
- ---------------------------------------------------------------------------------------------------------------------
Gross Profit 9,292 9,938 5,625 2,831 2,025
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Selling and marketing 3,197 2,617 1,483 1,948 1,356
General and administrative 4,281 4,336 2,329 2,044 2,119
Product development 1,035 1,139 840 720 1,246
Purchased in-process research
and development costs -- 4,900 -- -- --
Goodwill writedown -- 2,800 -- -- --
Restructuring costs -- 1,552 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 8,513 17,344 4,652 4,712 4,721
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) 779 (7,406) 973 (1,881) (2,696)
Interest income (expense) (334) 41 96 208 60
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 445 $ (7,365) $ 1,069 $ (1,673) $ (2,636)
Income taxes 80 60 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 365 $ (7,425) $ 1,069 $ (1,673) $ (2,636)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (2) $ 0.03 $ (0.68) $ 0.12 $ (0.20) $ (0.44)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding (2) 13,730 10,849 9,247 8,177 5,990
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:(3)
Working capital $ 4,573 $ 4,905 $ 6,958 $ 3,564 $ 5,270
Total assets 17,634 17,234 9,107 6,209 7,737
Long-term obligations 1,579 2,884 -- -- --
Total shareholders' equity 10,588 9,597 7,728 4,181 5,812
=====================================================================================================================
</TABLE>
(1) Certain amounts previously reported have been reclassified to conform with
the presentation at December 31, 1997.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) In July 1996, the Company purchased substantially all of the assets of
Block Medical, Inc. See Note 2 of Notes to Consolidated Financial
Statements.
5
<PAGE> 7
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, demand in foreign countries, technological changes and product
availability. 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, 1997
Compared to the Year Ended December 31, 1996
Net product sales during the year ended December 31, 1997 were $17,678,000
compared to $9,153,000 for the prior year. In July 1996, the Company acquired
substantially all of the assets of Block Medical, Inc. ("Block"). Accordingly,
net product sales increased, as sales from Block were reported by the Company
for a full year in 1997 versus only a portion of the year in 1996. Additionally,
net product sales to international customers have increased substantially, as
export sales were $6,427,000, or 36% of total revenues, for the year ended
December 31, 1997 compared to $4,186,000, or 30% of total revenues, for the year
ended December 31, 1996.
In addition to revenue growth, the acquisition of Block has brought 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 acquisition has also increased
the Company's profitability through the use of its manufacturing plant in Mexico
and the corresponding reduction in direct labor costs.
Notwithstanding the year-to-year increase, net sales were less than anticipated
due to lower than forecasted sales from one of the Company's primary
international distributors. This distributor is currently undergoing certain
changes within its internal organization and is seeking to finalize the
acquisition of a major European homecare company. These changes within the
distributor have created a shortfall in current sales to the distributor that
may continue into 1998. Management believes, however, that these efforts by the
distributor will ultimately increase the sales of I-Flow products into the
European market. Additionally, international net sales were less than
anticipated due to the economic difficulties in Asia and, most particularly
Korea. In addition, a combination of changes in domestic distribution
arrangements together with current distributors' existing inventory levels may
adversely impact the Company's revenues generated by domestic distributors
during the first quarter of 1998.
6
<PAGE> 8
In March 1996, the Company sold the exclusive right and license to manufacture
and sell its SideKick(TM), Paragon(TM), and elite(TM) products in the United
States and Puerto Rico to SoloPak Pharmaceuticals, Inc. ("SoloPak"). Pursuant to
the agreement, SoloPak paid the Company $4.3 million in consideration of the
license and guaranteed royalties in 1996. The Company retained the right to sell
the products outside the United States and Puerto Rico.
Cost of sales of $8,450,000 were incurred during the year ended December 31,
1997, compared to $3,954,000 for the prior year. As a percentage of revenues,
cost of sales increased by 19 percentage points for the year ended December 31,
1997 compared to the prior year. The decrease in gross profit is primarily the
result of the lack of licensing fees in 1997 as compared to 1996.
Selling and marketing expenses for the year ended December 31, 1997 increased
over the prior year by $580,000 or 22%. This increase was due primarily to the
Company's additional sales and marketing activity during 1997 relating to its
increased sales. With the acquisition of Block in mid-1996, the Company
significantly expanded its product line and sales efforts.
General and administrative expenses for the year ended December 31, 1997
increased from the prior year by $55,000 or 1%. 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 1997.
Product development expenses for the year ended December 31, 1997 decreased
compared to those for the prior year by $104,000 or 9%, primarily due to the
consolidation of the product development efforts of the Company with those of
Block in 1997.
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 this 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 Block of $5,227,000. Substantially all of the assets of Block were
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 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.
7
<PAGE> 9
In July 1996, the Company purchased substantially all of the assets of 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 alternate 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 its fiscal year ended December 2,
1995.
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.
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 write-down 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.
Liquidity and Capital Resources
During the year ended December 31, 1997, funds of $956,000 were used for
operating activities consisting of net income of $365,000 plus non-cash expenses
of $815,000 less net changes in operating assets and liabilities of $2,136,000.
The changes in operating assets and liabilities primarily consisted of an
increase in accounts receivable of $951,000 and an increase in inventories of
$1,074,000 as well as an increase in accounts payable and accrued liabilities of
$259,000 and a decrease in deferred revenues of $371,000.
The Company used funds for investing activities during the year ended December
31, 1997 by acquiring property of $906,000. Additionally, there was an increase
in other assets of $279,000 due to new notes receivable relating to capital
leases.
8
<PAGE> 10
During the year ended December 31, 1997, funds of $1,317,000 were provided from
financing activities consisting of net borrowings on the line of credit of
$1,500,000 and proceeds from the exercise of stock options and warrants of
$738,000 less payments on notes payable of $921,000. Additionally, foreign
exchange rates relating to the subsidiary in Mexico had a negative effect of
$112,000 on funds during the year.
As of December 31, 1997, the Company had cash and cash equivalents of $715,000
and net receivables of $5,127,000. To date, the Company has financed its
operations and working capital requirements primarily through equity and debt
financings. Management believes the Company's available funds are sufficient to
provide for its short-term projected needs for operations and to fund future
capital expenditures, if any. However, the Company may decide to sell additional
equity or increase its borrowings in order to fund increased product development
or for other purposes.
The Company has a working capital line of credit with a bank expiring in
February 1999. Under the line of credit, the Company may borrow up to the lesser
of $4,000,000 or 75% of eligible accounts receivable, as defined, at a bank's
prime rate plus .75% (9.25% at December 31, 1997). There were borrowings
outstanding and available funds for borrowing under the line of $1,500,000 and
$536,000, respectively, as of December 31, 1997.
In conjunction with the acquisition of Block, the Company entered into a
$4,000,000 note payable with a bank ($2,579,000 outstanding at December 31,
1997) due in equal monthly installments of principal of $83,333 plus interest at
the bank's prime rate plus 1.5% (10.0% at December 31, 1997) through July 2000.
In March 1998, the Company entered into an additional note payable with a bank
for $2,500,000 due in equal monthly installments of principal of $46,000 plus
interest at the bank's prime rate plus 1% beginning in October 1998 through
March 2003. Proceeds from the new note were used to pay off the outstanding
balance on the line of credit and for general working capital. The notes are
collateralized by substantially all of the Company's assets and require the
Company to comply with certain covenants. As of December 31, 1997, the Company
was in compliance with or had received a waiver for all such covenants.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with InfuSystems II, Inc. ("InfuSystems"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystems and VMI, contemplating the
merger of InfuSystems and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystems were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998. See
Note 8 in Notes to Consolidated Financial Statements.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used in many companies may need to be upgraded to comply with
such "Year 2000" requirements.
The Company is in the process of evaluating its own products for potential Year
2000 issues to make such products Year 2000 compliant. The Company does not
believe that there will be significant issues or costs associated with making
their products Year 2000 compliant; however, there can be no assurance that
such products do not contain undetected errors or defects associated with year
2000 date functions.
The Company has received confirmation from vendors of certain purchased
software used for internal operations that current releases or upgrades, if
installed, are designed to be Year 2000 compliant. The Company is in the
process of installing such upgrades to its current systems and believes that
substantially all of the upgrades will be completed by December 31, 1998.
The Company currently believes that becoming Year 2000 compliant will not have
a significant impact on the financial position or results of operations of the
Company. Although the Company is not aware of any material operational issues
or costs associated with preparing its products or internal information systems
for the year 2000, there can be no assurances that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed predominantly of third party software and hardware.
9
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of I-Flow Corporation:
We have audited the accompanying consolidated balance sheets of I-Flow
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
10
<PAGE> 12
CONSOLIDATED BALANCE SHEETS I-Flow Corporation
<TABLE>
<CAPTION>
(Amounts in thousands, except share amounts) December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 715 $ 1,651
Royalty receivable -- 1,000
Accounts receivable, less allowance for doubtful accounts of
$463 and $125 at December 31, 1997 and 1996, respectively (Note 3) 5,127 3,514
Inventories (Note 1) 4,058 3,352
Prepaid expenses and other 140 141
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 10,040 9,658
- ------------------------------------------------------------------------------------------------------------------------
Property:
Furniture, fixtures and equipment 3,982 3,091
Rental and demonstration equipment 188 173
- ------------------------------------------------------------------------------------------------------------------------
Total property 4,170 3,264
Less accumulated depreciation (1,939) (1,326)
- ------------------------------------------------------------------------------------------------------------------------
Net property 2,231 1,938
- ------------------------------------------------------------------------------------------------------------------------
Other assets:
Goodwill and other intangibles, net (Note 2) 3,983 4,831
Notes receivable and other 1,380 807
- ------------------------------------------------------------------------------------------------------------------------
Total other assets 5,363 5,638
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 17,634 $ 17,234
========================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,828 $ 1,156
Accrued payroll and related expenses 895 1,271
Deferred revenue 58 429
Current portion of long-term debt (Note 3) 1,000 1,000
Line of credit (Note 3) 1,500 --
Restructuring reserve (Note 2) -- 824
Other liabilities 186 73
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,467 4,753
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 3) 1,579 2,500
Long-term restructuring reserve (Note 3) -- 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, 1997 and 1996 (aggregate
preference on liquidation of $1,575) 1,494 1,494
Common stock, no par value; 40,000,000 shares authorized, 12,393,619 and
12,050,076 shares issued and outstanding at December 31, 1997 and 1996,
respectively 33,853 33,036
Common stock warrants 615 615
Accumulated deficit (25,374) (25,548)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,588 9,597
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 17,634 $ 17,234
========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS I-Flow Corporation
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands, except per share amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 17,678 $ 9,153 $ 9,737
Rental income and other 64 139 60
Licensing and other fees -- 4,600 250
Total revenues 17,742 13,892 10,047
Cost of sales 8,450 3,954 4,422
- -------------------------------------------------------------------------------------------------
Gross profit 9,292 9,938 5,625
Expenses (Notes 2, 3 and 6):
Selling and marketing 3,197 2,617 1,483
General and administrative 4,281 4,336 2,329
Product development 1,035 1,139 840
Purchased in process research and development costs -- 4,900 --
Goodwill writedown -- 2,800 --
Restructuring costs -- 1,552 --
- -------------------------------------------------------------------------------------------------
Total expenses 8,513 17,344 4,652
- -------------------------------------------------------------------------------------------------
Operating income (loss) 779 (7,406) 973
Interest income (expense) (334) 41 96
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes 445 (7,365) 1,069
Income taxes (Note 5) 80 60 --
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 365 $ (7,425) $ 1,069
=================================================================================================
Net income (loss) per share, basic and diluted $ 0.03 $ (0.68) $ 0.12
=================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY I-Flow Corporation
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ------------------- Common Stock Accumulated
(Amounts in thousands) Shares Amount Shares Amount Warrants Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 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
Exercise of common stock warrants
and options 323 738 738
Common stock issued for payment
of preferred stock dividends 20 79 (79)
Cumulative translation adjustment (112) (112)
Net income 365 365
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 656 $ 1,494 12,393 $ 33,853 $ 615 $(25,374) $ 10,588
===================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS I-Flow Corporation
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 365 $ (7,425) $ 1,069
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
In process research and development costs (1,208) 4,900 --
Restructuring costs -- 1,552 --
Goodwill writedown -- 2,800 --
Depreciation and amortization 1,167 1,154 188
Compensation expense for stock option grants 150 44 44
Change in inventory obsolescence reserve 368 (567) (296)
Change in allowance for doubtful accounts 338 (413) 262
Changes in operating assets and liabilities, net of effect of business
acquisition:
Receivables (951) (506) 798
Inventories (1,074) 227 269
Prepaid and other expenses 1 (24) 16
Accounts payable and accrued liabilities 146 798 (397)
Deferred revenues (371) (87) (195)
Other liabilities 113 23 (57)
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments 1,321 9,901 632
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (956) 2,476 1,701
Cash flows from investing activities:
Property acquisitions (906) (821) (243)
Property disposals -- 162 --
Cash paid for acquisition, net of cash received -- (15,803) --
Change in other assets (279) (126) (98)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,185) (16,588) (341)
Cash flows from financing activities:
Net borrowings on line of credit 1,500
Proceeds from issuance of note payable -- 4,000 --
Payments on note payable (921) (500) --
Proceeds from exercise of stock options and warrants 738 6,635 2,434
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used) in financing activities 1,317 10,135 2,434
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (112) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (936) (3,977) 3,794
Cash and cash equivalents at beginning of year 1,651 5,628 1,834
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 715 $ 1,651 $ 5,628
=======================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 365 $ 175 --
- -----------------------------------------------------------------------------------------------------------------------
Income tax payments $ 80 $ 35 $ 17
- -----------------------------------------------------------------------------------------------------------------------
Preferred stock dividend paid in Common Stock $ 79 $ 79 $ 79
- -----------------------------------------------------------------------------------------------------------------------
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.
14
<PAGE> 16
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.
Fair Value of Financial Instruments - Pursuant to SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, the Company is required to estimate
the fair value of all financial instruments included on its balance sheet at
December 31, 1997. The Company considers the carrying value of such amounts in
the financial statements to approximate their fair value due to (1) the
relatively short period of time between origination of the instruments and their
expected realizations, (2) interest rates which approximate current market
rates, or (3) the overall immateriality of the amounts.
Inventories - Inventories are stated at the lower of first-in, first-out cost or
market. Inventories consisted of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------
<S> <C> <C>
Raw Materials $ 3,235,000 $ 2,822,000
Work in Process 359,000 110,000
Finished Goods 1,599,000 1,187,000
Reserve for Obsolescence (1,135,000) (767,000)
- ----------------------------------------------------------------
Total $ 4,058,000 $ 3,352,000
================================================================
</TABLE>
Other Assets - Goodwill and other intangibles are amortized on a straight-line
basis over five to fifteen years. Patents of $449,000 and $365,000 (net of
accumulated amortization), included in other assets as of December 31, 1997 and
1996, respectively, are amortized over periods ranging from two to seven years.
The Company assesses the recoverability of intangible assets at each balance
sheet date by determining whether the amortization of the balance over its
remaining useful life is recoverable through projected undiscounted operating
cash flows.
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.
15
<PAGE> 17
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.
Revenues - Revenue from sales is recognized when products are shipped to
customers. Rental income is recorded monthly when earned.
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. The expanded agreement provided I-Flow with an
initial licensing fee of $300,000.
Accounting for Stock Based Compensation - The Company accounts for stock-based
compensation awards to employees using the intrinsic value method in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees (Note 13).
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, ("SFAS No.
130"). This statement established standards for the reporting of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosures
prescribed by SFAS No. 130 are effective beginning with the first quarter of
calendar year 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, ("SFAS No. 131"). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosure about products and services, geographical areas and major customers.
The Company has not yet determined the impact ,if any, of adopting this new
standard. The disclosures prescribed by SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997.
Net Income (Loss) Per Share - In December 1997, the Company adopted SFAS No. 128
"Earnings per Share." SFAS No. 128 redefines earnings per share under generally
accepted accounting principles. Under the new standard, primary net income per
share is replaced by basic net income per share and fully diluted net income per
share is replaced by diluted net income per share. All historical earnings per
share information has been restated as required by SFAS No. 128.
Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods presented.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares
16
<PAGE> 18
of the Company's convertible preferred stock into common stock and the exercise
of all in-the-money stock options. Common equivalent shares have not been
included where inclusion would be antidilutive.
Basic earnings per share approximates diluted earnings per share for each period
represented. The following is a reconciliation between the number of shares used
in the basic and diluted net income per share calculations:
<TABLE>
<CAPTION>
Years Ended December 31,
(Amounts in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic net income (loss) per share
Weighted average number of shares outstanding 12,210 10,849 9,247
Effect of dilutive securities:
Preferred stock 700
Stock options 820
- ------------------------------------------------------------------------------------------------
Diluted net income (loss) per share
Weighted average number of shares outstanding 13,730 10,849 9,247
================================================================================================
</TABLE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and 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 and 1995, one customer accounted for 31%, and 64% of total revenues from
operations, respectively. There were no such significant customers during the
year ended December 31, 1997. Export sales accounted for 36%, 30% and 21% of
total revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. Export sales were primarily to certain European and Far Eastern
countries. The loss of, or reduction in sales to any such customers or
geographical areas 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.
Foreign Currency - The financial position and results of operations of the
Company's foreign subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
at the exchange rate in effect at each year end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are included in the accumulated foreign currency
17
<PAGE> 19
translation adjustments account in stockholders' equity. Realized gains or
losses from foreign currency transactions are included in operations as
incurred.
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 in 1996 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 restructuring was completed during 1997 and there was no
restructuring reserve remaining as of December 31, 1997.
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
February 1999. Under the line of credit, the Company may borrow up to the lesser
of $4,000,000 or 75% of eligible accounts receivable, as defined, at the prime
rate plus .75% (9.25% at December 31, 1997). There were borrowings outstanding
and available funds for borrowing under the line of $1,500,000 and $536,000,
respectively, as of December 31, 1997.
In conjunction with the acquisition described in Note 2, the Company entered
into a $4,000,000 note payable with a bank ($2,579,000 outstanding at December
31, 1997) due in equal monthly installments of principal of $83,333 plus
interest at the bank's prime rate plus 1.5% (10.0% at December 31, 1997)
18
<PAGE> 20
through July 2000. The notes are collateralized by substantially all of the
Company's assets and require the Company to comply with certain covenants. As of
December 31, 1997, the Company was in compliance with or had received a waiver
for all such covenants.
4. SHAREHOLDERS EQUITY, COMMON STOCK WARRANTS AND OPTIONS
The Company has 656,250 shares outstanding of its Series B Preferred Stock,
which is convertible at any time by the holders into an aggregate of 700,000
shares of the Company's Common Stock (subject to adjustment from time to time
as a result of certain dilutive events). The preferred shareholder is entitled
to receive an annual dividend of 5% payable in cash or in shares of Common
Stock valued at 80% of the market value thereof on the declaration date and
entitled to a liquidation preference of $2.40 per share. The preferred stock is
redeemable by the Company at the discretion of the Board at $2.40 per share,
plus any declared but unpaid dividends, at any time after the average closing
bid price for the Company's Common Stock equals or exceeds $7.20 per share for
over thirty (30) consecutive trading days.
In July 1995, an aggregate of 758,681 shares of the Company's Common Stock were
issued upon exercise of warrants for net proceeds of $1,707,000.
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), expiring in July 2001. The exercise price for
these warrants, $4.62 per share, was equal to the fair market value of the
Common Stock at the date of grant. Additionally, in conjunction with the
financing obtained for the acquisition (Note 3), the Company issued warrants to
the bank for the purchase of 60,000 shares of the Company's Common Stock at an
exercise price of $5.00 per share, expiring in July 2001.
During the year ended December 31, 1997, Series F Warrants to purchase 336,328
shares of Common Stock at exercise prices of $2.40 and $3.60 were exercised in a
cashless exchange for 56,814 shares of the Company's Common Stock. Series F
Warrants to purchase 270,704 shares of the Company's Common Stock at an exercise
price of $4.80 expired during the year. Also during the year, Series H Warrants
for 150,000 shares of the Company's Common Stock were exercised raising net
proceeds of $450,000.
The Company has an employee stock option plan (the 1987 - 1988 Plan) which
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 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. Options to
purchase 1,928,651 shares of the Company's Common Stock were available for grant
under the 1996 Plan as of December 31, 1997.
19
<PAGE> 21
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 (Note 6).
Compensation expense related to these options aggregating $150,000, $44,000 and
$44,000 has been recorded for the years ended December 31, 1997, 1996 and 1995,
respectively. All other terms of the options are the same as those issued under
the 1996 Plan (described above).
The Company also 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.
Options to purchase 215,000 shares of the Company's Common Stock were available
for grant under this plan as of December 31, 1997.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1995 1,802,091 $ 2.01
Granted (weighted average fair value of $4.54) 773,677 3.88
Canceled/Expired (58,602) 2.18
Exercised (38,278) 1.76
- -------------------------------------------------------------------------------------------
Balance, December 31, 1995 (1,462,687 exercisable
at a weighted average price of $2.17) 2,478,888 2.59
Granted (weighted average fair value of $7.29) 753,372 4.55
Canceled/Expired (45,547) 3.53
Exercised (337,078) 2.13
- -------------------------------------------------------------------------------------------
Balance, December 31, 1996 (1,788, 437 exercisable
at a weighted average price of $2.74) 2,849,635 3.06
Granted (weighted average fair value of $4.63) 218,000 4.61
Canceled/Expired (175,660) 3.98
Exercised (116,328) 2.48
- -------------------------------------------------------------------------------------------
Balance, December 31, 1997 (1,909,601 exercisable
at a weighted average price of $2.87) 2,775,647 $ 3.17
===========================================================================================
</TABLE>
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 stock option grants with exercise prices equal to the fair
value of the underlying shares at the grant date. Had compensation cost for the
Company's option plans been determined based on the fair value at the grant date
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:
20
<PAGE> 22
<TABLE>
<CAPTION>
Years Ended December 31,
(Amounts in thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 365 $ (7,425) $ 1,069
Net income (loss) - pro forma $ (146) $ (8,057) $ 618
Earnings (loss) per share - as reported $ 0.03 $ (0.68) $ 0.12
Earnings (loss) per share - pro forma $ (0.01) $ (0.74) $ 0.07
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 1997, 1996 and 1995: no dividend yield; expected volatility of 52% in
1997, 45% in 1996 and 27% in 1995; risk-free interest rate of 6.0% in 1997 and
6.5% in 1996 and 1995; and expected lives of 5 years.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Of Shares Contractual Exercise Of Shares Exercise
Prices Outstanding Life in Years Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.25 - $1.00 86,000 5.37 $0.25 49,634 $0.25
$1.01 - $2.00 749,000 4.16 $1.59 648,366 $1.59
$2.01 - $3.00 338,487 3.68 $2.26 330,640 $2.25
$3.01 - $4.00 401,470 3.76 $3.38 256,311 $3.14
$4.01 - $5.00 1,052,690 4.63 $4.44 484,650 $4.39
$5.01 - $6.00 148,000 3.37 $5.36 140,000 $5.37
- ---------------------------------------------------------------------------------------------------------------
Total 2,775,647 4.22 $3.17 1,909,601 $2.87
===============================================================================================================
</TABLE>
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, 1997,
1996 and 1995 are summarized as follows:
21
<PAGE> 23
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 79,000 $ 49,000 $ --
State 1,000 11,000 --
Deferred:
Federal 68,000 (2,186,000) 374,000
State 710,000 (1,566,000) 68,000
Change in valuation allowance (778,000) 3,752,000 (442,000)
- -----------------------------------------------------------------------------------------------------
Total $ 80,000 $ 60,000 $ --
====================================================================================================
</TABLE>
The reconciliation of the effective income tax rate to the statutory federal
rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory tax expense 35.0% 35.0% 35.0%
State taxes, net of Federal benefit, net -- (0.1%) --
of state valuation allowance
Research and development credits (6.7%) 0.1% --
Change in valuation allowance (15.3%) (34.9%) (35.0%)
Other 5.0% (0.2%) --
- ------------------------------------------------------------------------------------
Total 18.0% (0.1%) --
====================================================================================
</TABLE>
As of December 31, 1997 and 1996, the Company had a net deferred tax asset
comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
Deferred Tax Assets: 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 4,922,000 $ 5,474,000
Amortization of goodwill and other intangibles 3,090,000 3,329,000
Reserves not currently deductible 757,000 360,000
Accrued restructuring -- 523,000
State taxes (410,000) (649,000)
Tax credits 493,000 475,000
Deferred revenue 25,000 186,000
Accrued compensation and related costs 214,000 108,000
Depreciation 73,000 94,000
Other 1,000 43,000
- ----------------------------------------------------------------------------------------
Subtotal 9,165,000 9,943,000
Less valuation allowance (9,165,000) (9,943,000)
- ----------------------------------------------------------------------------------------
$ -- $ --
========================================================================================
</TABLE>
22
<PAGE> 24
At December 31, 1997, net operating loss carryforwards amounted to approximately
$14,100,000 and $1,600,000 for federal and state purposes, respectively, and
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, 1997.
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, 2000. 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 each of the three years following the date of grant. Compensation
expense of $150,000, $44,000 and $44,000 relating to the plan was recorded in
1997, 1996 and 1995, respectively.
In July 1997, the Company entered into a noncancelable operating lease for a new
51,000 square foot building for its primary facility. The lease agreement
contains certain scheduled rent increases (which are accounted for on a
straight-line basis) and expires in June 2007. Future minimum lease payments
under the lease are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
<S> <C>
1998 $ 386,000
1999 386,000
2000 386,000
2001 386,000
2002 407,000
Thereafter 1,928,000
---------------------------------------------------------------------
Total $ 3,879,000
=====================================================================
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $401,000,
$291,000 and $201,000, respectively.
The Company is involved in litigation matters arising from the normal course of
operations. Although the liability at December 31, 1997 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, 1997, 1996 or
1995. The Company does not provide post-retirement benefits to its employees.
23
<PAGE> 25
8. SUBSEQUENT ACQUISITION OF INFUSYSTEMS II, INC. AND VENTURE MEDICAL, INC.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with, InfuSystems II, Inc. ("InfuSystems"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystems and VMI, contemplating the
merger of InfuSystems and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystems were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998.
During the year ended December 31, 1997, the Company had approximately $684,000
of net product sales to InfuSystems and VMI.
In the Merger, all of the outstanding shares of Common Stock of VMI and
InfuSystems were exchanged for shares of Common Stock of the Company. The
aggregate number of shares of Common Stock of the Company issued in the Merger
to the shareholders of VMI and InfuSystems was 972,372 shares, valued at
approximately $2.9 million (subject to certain post-effective adjustments). As
contemplated by the Agreement, shares of Common Stock of the Registrant issued
in the Merger valued at $1.5 million (the "Escrowed Shares") were withheld and
were delivered to an escrow agent, to be deposited in escrow. The Escrowed
Shares, or cash equal to the closing value of the Escrowed Shares, will be held
for a period of two years during which time they will be subject to claims by
the Company to satisfy the obligations of InfuSystems, VMI and the shareholders
of InfuSystems and VMI under the Agreement (subject to the possible earlier
release of a portion of the Escrowed Shares in connection with collection of
certain accounts receivable). At each of the six month, one year, eighteen month
and two year anniversary of the closing, if the value of the Company's Common
Stock at such time is less than the value of its Common Stock as of the closing
($2.98 per share), then the Company will be obligated to pay additional amounts
as merger consideration. The additional amounts, if any, will be calculated
pursuant to the formula set forth in the Agreement. At the Company's election,
it may pay such additional merger consideration, if any, by the issuance of
additional shares of its Common Stock, in cash, or any combination thereof.
24
<PAGE> 26
CORPORATE OFFICE STOCK REGISTRAR & TRANSFER AGENT
I-Flow Corporation American Stock Transfer & Trust Company
20202 Windrow Drive 40 Wall Street
Lake Forest, California 92630 New York, NY 10005
(800) 448-3569 (800) 937-5449 or (212) 936-5100
(714) 206-2700
LEGAL COUNSEL ANNUAL MEETING OF SHAREHOLDERS
Gibson, Dunn & Crutcher LLP Thursday, May 21, 1998 at 9:30 a.m.
Jamboree Center, 4 Park Plaza at the Corporate Office, 20202 Windrow Drive
Irvine, CA 92614 Lake Forest, California 92630
INDEPENDENT AUDITORS FORM 10-K
Deloitte & Touche LLP A copy of I-Flow's annual report on Form
695 Town Center Drive 10-K filed with the Securities and Exchange
Costa Mesa, California 92626 Commission (including the financial
statements and financial statement schedules)
INVESTOR RELATIONS COUNSEL will be furnished without charge to
Neil Berkman & Associates shareholders of record upon written
1900 Avenue of the Stars request to:
Suite 2850 Gayle L. Arnold
Los Angeles, CA 90067 Chief Financial Officer
(310) 277-5162 I-Flow Corporation
20202 Windrow Drive
Lake Forest, California 92630
SECURITIES INFORMATION
I-FLOW Corporation's Common Stock is traded on The Nasdaq Small Cap Stock Market
under the symbol IFLO. The high and low transaction prices for the Common Stock
as reported by Nasdaq are set forth in the following table.
<TABLE>
<CAPTION>
1997 High Low 1996 High Low
- --------------------- ----- ----- ---------------------- ----- -----
<S> <C> <C> <C> <C> <C>
First Quarter $5.88 $4.00 First Quarter $5.50 $3.81
Second Quarter $4.31 $3.88 Second Quarter $5.94 $3.69
Third Quarter $5.00 $3.91 Third Quarter $4.94 $3.81
Fourth Quarter $5.13 $2.56 Fourth Quarter $5.44 $4.06
</TABLE>
There were approximately 500 shareholders of record of I-Flow's Common Stock on
February 27, 1998.
The Company has not paid, and does not expect to pay in the foreseeable future,
cash dividends on its common stock.
25
<PAGE> 27
<TABLE>
<S> <C>
Board of Directors -- I-Flow Corporation Key Management -- I-Flow Corporation
- -------------------------------------------- -------------------------------------------------------
Donald M. Earhart Donald M. Earhart
Chairman, President, and Chief Executive Chairman, President, and Chief Executive
Officer Officer
Henry T. Tai, Ph.D., M.D. James J. Dal Porto
Secretary; practicing hematologist and cancer Executive Vice President and Chief Operating
specialist; academic appointment at University Officer
of Southern California School of Medicine
Gayle L. Arnold
John H. Abeles, M.D. Chief Financial Officer
President of MedVest, Inc.; Director, AccuMed
International, Inc., Dusa Pharmaceuticals, Inc. Robert J. Bard
Healthcare Acquisition Corporation, and Onyx Vice President, Regulatory and Legal Affairs
Technology, Inc.
Roger L. Elyea
Jack H. Halperin, Esq. Vice President, Domestic Sales and Marketing
Director, Accumed International, Inc., Memry
Corporation and Xytronics, Inc. Donald L. Florey
Vice President, Manufacturing
Joel S. Kanter
President of Windy City, Inc. and Walnut Eric Mabry
Financial Services, Inc.; Director, GranCare, Vice President, International
Inc., Healthcare Acquisition Corporation,
Medcross, Inc., Osteoimplant Technologies, Inc., Roger D. Massengale
Vitalink Pharmacy Services, Inc. and Walnut Vice President, Marketing and Business
Financial Services, Inc. Development
Erik H. Loudon Kenneth W. Rake
Director, Emerge Capital, Luxembourg, Vice President, Engineering
Fotolabo, S.A. Switzerland, and Leaf Asset
Management, Luxembourg; Managing Director
of EHL Investment Services Limited Key Management -- InfuSystem, Inc. (a wholly-
owned subsidiary
Charles C. McGettigan -------------------------------------------------------
Director, Digital Dictation, Inc., Modtech, Inc.,
NDE Environmental, Inc., Onsite Energy, Inc. Steve E. Watkins
PMR Corporation, Phoenix Network, Inc., Sonex President
Research, Inc. and Wray-Tech Instruments, Inc.;
General partner of Proactive Investment Danny L. McColl
Managers, L.P., Co-founder of McGettigan, Vice President, Managed Care
Wick & Co.
Anthony E. Norkus
James J. Dal Porto Vice President, Sales
Executive Vice President and Chief Operating
Officer Janet L. Skonieczny
Vice President, Operations
</TABLE>
<PAGE> 1
EXHIBIT 21
I-FLOW CORPORATION
LIST OF SUBSIDIARIES
State of Jurisdiction
Name Of Incorporation
- ---- ----------------
Block Medical de Mexico, S.A. de C.V. Mexico
I-Flow International, Inc. U.S. Virgin Islands
Infusystem, Inc.* California
*Not included in the Company's Consolidated Financial Statements.
<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 I-Flow Corporation of our reports dated February
19, 1998, appearing, and incorporated by reference, in this Annual Report on
Form 10-K of I-Flow Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 5,590
<ALLOWANCES> 463
<INVENTORY> 4,058
<CURRENT-ASSETS> 10,040
<PP&E> 4,170
<DEPRECIATION> (1,939)
<TOTAL-ASSETS> 17,634
<CURRENT-LIABILITIES> 5,467
<BONDS> 0
0
1,494
<COMMON> 34,468
<OTHER-SE> (25,374)
<TOTAL-LIABILITY-AND-EQUITY> 17,634
<SALES> 17,768
<TOTAL-REVENUES> 17,714
<CGS> 8,450
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (337)
<INCOME-PRETAX> 445
<INCOME-TAX> (80)
<INCOME-CONTINUING> 365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 5,628 1,651
<SECURITIES> 0 0
<RECEIVABLES> 2,076 4,639
<ALLOWANCES> 509 125
<INVENTORY> 1,067 3,352
<CURRENT-ASSETS> 8,337 9,658
<PP&E> 1,650 3,264
<DEPRECIATION> (1,155) (1,326)
<TOTAL-ASSETS> 9,107 17,234
<CURRENT-LIABILITIES> 1,379 4,753
<BONDS> 0 0
0 0
1,494 1,494
<COMMON> 24,278 33,651
<OTHER-SE> (18,044) (25,548)
<TOTAL-LIABILITY-AND-EQUITY> 9,107 17,234
<SALES> 9,737 9,153
<TOTAL-REVENUES> 10,143 13,933
<CGS> 4,422 3,954
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,656 17,344
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 96 41
<INCOME-PRETAX> 1,069 (7,365)
<INCOME-TAX> 0 (60)
<INCOME-CONTINUING> 1,069 (7,425)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,069 (7,425)
<EPS-PRIMARY> .12 (.68)
<EPS-DILUTED> .12 (.68)
</TABLE>
