<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
-----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file Number: 0-18338
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I-Flow Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0121984
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20202 Windrow Drive, Lake Forest, CA 92630
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(Address of principal executive offices) (Zip Code)
(949) 206-2700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of September 30, 1998 there were 13,782,762 shares outstanding of
Common Stock and 526,250 shares outstanding of Series B Preferred Stock.
<PAGE> 2
I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the three and
nine-month periods ended September 30, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
Part II: Other Information 10
Signatures 12
</TABLE>
2
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I-FLOW CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,325,000 $ 715,000
Accounts receivable, net 7,104,000 5,127,000
Inventories 4,493,000 4,058,000
Prepaids and other 524,000 140,000
------------ ------------
Total current assets 13,446,000 10,040,000
------------ ------------
PROPERTY:
Furniture, fixtures and equipment 9,566,000 4,170,000
Less accumulated depreciation (5,876,000) (1,939,000)
------------ ------------
Property, net 3,690,000 2,231,000
------------ ------------
OTHER ASSETS
Goodwill and other intangibles, net 6,686,000 3,983,000
Notes receivable and other 1,039,000 1,380,000
------------ ------------
TOTAL $ 24,861,000 $ 17,634,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,636,000 $ 1,828,000
Accrued payroll and related expenses 1,112,000 895,000
Deferred revenue -- 58,000
Current portion of long-term debt 1,666,000 1,000,000
Borrowings under line-of-credit 2,342,000 1,500,000
Other liabilities 98,000 186,000
------------ ------------
Total current liabilities 6,854,000 5,467,000
------------ ------------
LONG-TERM DEBT 3,711,000 1,579,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares
authorized; 526,250 and 656,250 series B shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively (aggregate
preference on liquidation is $1,263,000) 1,198,000 1,494,000
Common stock - no par value; 40,000,000 shares
authorized; 13,782,762 and 12,393,619 shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 37,206,000 33,853,000
Common stock warrants 615,000 615,000
Accumulated deficit (24,723,000) (25,374,000)
------------ ------------
Net shareholders' equity 14,296,000 10,588,000
------------ ------------
TOTAL $ 24,861,000 $ 17,634,000
============ ============
</TABLE>
See accompanying notes to condolidated financial statements
3
<PAGE> 4
I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 6,574,000 $ 4,705,000 $ 16,539,000 $ 14,068,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 2,733,000 2,085,000 7,184,000 5,891,000
Selling and marketing 1,107,000 827,000 3,038,000 2,448,000
General and administrative 1,541,000 687,000 4,018,000 2,369,000
Product development 236,000 209,000 678,000 813,000
Amortization of intangibles 201,000 120,000 538,000 355,000
------------ ------------ ------------ ------------
Total costs and expenses 5,818,000 3,928,000 15,456,000 11,876,000
Operating profit 756,000 777,000 1,083,000 2,192,000
Interest income (expense) (204,000) (69,000) (521,000) (212,000)
Income taxes (15,000) (29,000) (37,000) (67,000)
------------ ------------ ------------ ------------
Net income $ 537,000 $ 679,000 $ 525,000 $ 1,913,000
============ ============ ============ ============
Net income per share
Basic $ 0.04 $ 0.05 $ 0.04 $ 0.15
============ ============ ============ ============
Diluted $ 0.04 $ 0.05 $ 0.04 $ 0.14
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 525,000 $ 1,913,000
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 1,528,000 1,176,000
Changes in operating assets and liabilities:
Royalty receivable -- 1,000,000
Accounts receivable 561,000 (2,180,000)
Inventories 249,000 (769,000)
Prepaid expenses and other (231,000) (96,000)
Accounts payable, accrued and other liabilities (1,854,000) (2,082,000)
----------- -----------
Net cash provided (used) by operating activities 778,000 (1,038,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (403,000) (789,000)
Change in other assets (13,000) (401,000)
----------- -----------
Net cash used by investing activities (416,000) (1,190,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in line of credit (1,243,000) 1,000,000
Change in notes payable 1,352,000 (753,000)
Proceeds from exercise of stock options and warrants 13,000 683,000
----------- -----------
Net cash provided by financing activities 122,000 930,000
----------- -----------
Effect of exchange rates on cash 126,000 --
NET DECREASE IN CASH AND CASH EQUIVALENTS 610,000 (1,298,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 715,000 1,651,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,325,000 $ 353,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 521,000 215,000
----------- -----------
Income tax payments 37,000 66,000
----------- -----------
Liabilities issued and assumed in connection
with acquisition:
Fair value of assets acquired (including intangibles) 8,254,000
Common stock issued 3,044,000
-----------
Liabilities issued and assumed 5,210,000
===========
</TABLE>
See accompanying notes to consolidated financial statements
5
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I-FLOW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial
position of the Company at September 30, 1998 and the results of its
operations and its cash flows for the nine-month periods ended September 30,
1998 and 1997. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to
rules and regulations of the Securities and Exchange Commission although the
Company believes that the disclosures in the financial statements are
adequate to make the information presented not misleading.
The financial statements included herein should be read in conjunction with
the financial statements of the Company, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission on March 31, 1998.
Certain amounts previously reported have been reclassified to conform with
the presentation at September 30, 1998.
2. EARNINGS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("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 have 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 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.
6
<PAGE> 7
The following is a reconciliation between the net income and the number of
shares used in the basic and diluted net income per share calculations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------ -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income 527 679 525 1,913
Less preferred stock dividends 14 19 42 57
------ ----- ---- ------
Net income available to
common shareholders 513 660 483 1,856
------ ----- ---- ------
Basic net income (loss) per share
Weighted average number
of shares outstanding 13,632 12,224 13,332 12,287
Effect of dilutive securities:
Preferred stock 570 700 570 700
Stock options 185 812 333 855
------ ----- ---- -----
Diluted net income (loss) per share
Weighted average number
of shares outstanding 14,387 13,736 14,235 13,842
====== ====== ====== ======
</TABLE>
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, for
the period ending September 30, 1998 and 1997. The Company has no reportable
differences between net income and comprehensive income. Therefore, no
statement of comprehensive income has been presented.
For the current year ending December 31, 1998, the Company will adopt SFAS
No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 131, which is based on the management approach to
segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products
and services, major customers and the material countries in which the entity
holds assets and reports revenue. The Company has not yet determined the
impact, if any, of adopting such standards on its consolidated financial
statements.
4. 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. ("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 acquisition was accounted for under the purchase
method of accounting and the purchase price has been allocated to the net
assets acquired and goodwill.
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-closing 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
anniversaries 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. Any additional amounts are to be calculated
pursuant to the formula set forth in the Agreement. At the Company's
election, it may pay such additional merger consideration, by the issuance
of additional shares of its Common Stock, in cash, or any combination
thereof. In August 1998, the Company issued 234,806 shares of its Common
Stock pursuant to the valuation floor provision for the six-month
anniversary. There was no incremental value ascribed to these additional
shares for purchase accounting of the acquisition.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain disclosures made by the Company in this report and in other reports
and statements released by the Company are and will be forward-looking in
nature, such as comments which express the Company's opinions about trends
and factors which may impact future operating results. Disclosures which use
words such as the Company "believes," "anticipates," or "expects" or use
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, which could
cause actual results to differ from those, expected and readers are
cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by
the Company in this report which seek to advise interested parties of the
risks and other factors that affect the Company's business, as well as in
the Company's periodic reports on Forms 10-K, 10-Q, and 8-K filed with the
Securities and Exchange Commission. The risks affecting the Company's
business include reliance on the success of the Home Health Care Industry,
the reimbursement system currently in place, competition in the industry,
demand in foreign countries, customer credit risks, 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.
RESULTS OF OPERATIONS
Net revenues during the three and nine-month period ended September 30, 1998
were $6,574,000 and $16,539,000, respectively, compared to $4,705,000 and
$14,068,000 for the same periods in the prior year, an increase of 40% and
18%, respectively. In February 1998, the Company acquired two new
subsidiaries, InfuSystems II, Inc. and Venture Medical, Inc., both of which
were national ambulatory infusion pump management and distribution companies
based in Detroit, Michigan. On February 11, 1998, these companies were
merged into InfuSystem, Inc. (formally, I-Flow Subsidiary, Inc.) a wholly
owned subsidiary of the Company. Revenues generated by InfuSystem, Inc. of
$1,650,000 and $4,361,000 for the periods from July 1, 1998 through
September 30, 1998 and February 11, 1998 (date of acquisition) through
September 30, 1998, were included in net revenues for the three and
nine-month periods ended September 30, 1998.
During 1998, the Company entered into an agreement with B. Braun Melsungen
AG (G.BRN), a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flow's elastomeric
infusion pumps in Western Europe, Eastern Europe, the Middle East, Asia
Pacific, South America and Africa. The initial purchase minimum for the
first eighteen months of this five-year agreement is approximately $4
million with shipments beginning in the second quarter. The Company also
recently entered into a similar agreement under which B. Braun of America,
Inc. will distribute I-Flow's elastomeric pumps to its full line IV solution
customers in the United States. These two new relationships are expected to
generate significant sales opportunities for the Company for the remainder
of 1998 and beyond. During the nine-month period ended September 30, 1998,
aggregate sales to these companies accounted for approximately 20% of the
Company's net revenues.
In September 1998, the Company entered into a letter of understanding with
Smith & Nephew, Inc., a leading worldwide healthcare company offering a
broad range of products for the care and repair of bone, joints, skin and
other soft tissue. Traded on the London Stock Exchange, Smith & Nephew had
1997 sales of $1.7 billion. Under the agreement, Smith & Nephew will become
the exclusive United States and Canadian distributor for orthopaedic surgery
applications of I-Flow's disposable PainBusterTM infusion pain management
kit. The letter of understanding calls for Smith & Nephew to purchase a
minimum of $2 million of PainBuster kits from I-Flow in 1998 and to enter
into a five year distribution agreement with purchase commitments for 1999
and beyond to be negotiated. During the three month period ended September
30, 1998, sales of the PainBuster to Smith & Nephew were $1 million.
I-Flow's PainBuster pain management system provides continuous infusion of a
non-narcotic, local anesthetic directly into the intraoperative site for
post operative pain management. I-Flow received approval in June 1998 from
the U.S. Food and Drug Administration to market the PainBuster in the United
States.
8
<PAGE> 9
Cost of sales of $2,733,000 and $7,184,000 were incurred during the three
and nine-month periods ended September 30, 1998, compared to $2,085,000 and
$5,891,000 in the prior year. As a percentage of net sales, cost of sales
was relatively unchanged compared to the same period in the prior year.
Selling and marketing expenses for the three and nine-month periods ended
September 30, 1998 increased over the same periods in the prior year by
$280,000 or 53% and $590,000 or 24%, respectively. This increase is due to
the addition of $301,000 and $735,000, for the three and nine-month periods
ended September 30, 1998 in such expenses for InfuSystem, Inc. Without the
InfuSystem, Inc. selling and marketing expenses, the Company's selling and
marketing expenses for the three and nine-month periods ended September 30,
1998 would have decreased by $21,000 and $145,000, respectively.
General and administrative expenses for the three and nine-month periods
ended September 30, 1998 increased $854,000 or 125% and $1,649,000 or 70%,
respectively, from the same periods in the prior year, due to the addition
of InfuSystem, Inc. For the three and nine-month periods ended September 30,
1998 InfuSystem, Inc. incurred general and administrative expenses of
$493,000 and $1,229,000, respectively. Without the InfuSystem, Inc. general
and administrative expenses, the Company's general and administrative
expenses for the three and nine-month periods ended September 30, 1998 would
have increased by $361,000 and $420,000, respectively.
Product development expenses for the three and nine-month periods ended
September 30, 1998 increased over the same period in the prior year by
$27,000, or 13% and decreased by $135,000 or 17%, respectively. The decrease
in the expenses for the nine-month period was primarily due to the
consolidating of the engineering efforts of Block Medical, Inc. with those
of the Company in late 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 1998, funds of $778,000
were used by operating activities consisting of net income of $525,000 plus
non-cash expenses of $1,528,000 less net changes in operating assets and
liabilities of $1,275,000. These changes in operating assets and liabilities
consisted of: (1) a decrease in accounts receivable of $561,000 due to
improved collections and (2) a decrease in inventory of $249,000 due to
higher sales, less (3) an increase in prepaid expenses and other of $231,000
due to the addition of InfuSystem and (3) a reduction in accounts payable
and other liabilities of $1,854,000 due to the timing of payments of trade
accounts payable.
The Company used funds for investing activities during the nine-month period
ended September 30, 1998 by acquiring leasehold improvements, furniture,
fixtures, equipment and other assets aggregating $416,000 for use in its
operations.
During the nine-month period ended September 30, 1998, funds of $122,000
were provided by financing activities consisting primarily of proceeds from
borrowings on notes payable of $2,500,000 net of payments on the notes
payable of $1,148,000 and a net reduction on the line of credit of
$1,243,000.
As of September 30, 1998, the Company had cash funds of $1,325,000 and net
receivables of $7,104,000. To date, the Company has financed its operations
and working capital requirements primarily through equity financings and
bank borrowings. Management believes the Company's funds are sufficient to
provide for its short and long-term projected needs for operations. However,
the Company may decide to sell additional equity or increase its borrowings
in order to fund increased product development or for other purposes.
9
<PAGE> 10
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 has determined that it will be necessary to modify or replace
portions of its hardware and software so that its computer systems properly
utilize dates beyond December 31, 1999. The Company believes that with
modifications and conversions, the Year 2000 issue can be managed, and the
associated risks mitigated. 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, however, is initiating
communications with its critical external relationships to determine the
extent to which the Company may be vulnerable to such parties' failure to
resolve their own Year 2000 issues. Where practicable, the Company will
assess and attempt to mitigate its risks with respect to failure of these
entities to be Year 2000 ready. The effect, if any, on the Company's results
of operations from the failure of such parties to be Year 2000 ready is not
reasonably estimable.
The Company is in the process of evaluating its own products for potential
Year 2000 issues and making such products Year 2000 compliant. The vast
majority of the Company's products are not date sensitive and the Company
does not directly rely on any of its ventors or customers systems. The
Company does not believe that there will be significant issues or costs
associated to make its 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 been using both external and internal resources to reprogram
or replace its software for the Year 2000 issues. To date, the amounts
incurred and expensed for developing and carrying out the plan have not had
a material effect on the Company's operations. The Company plans to complete
Year 2000 modifications, including testing, by early 1999. The total
remaining cost for addressing the Year 2000 issue of approximately $66,000,
which is based on management's current estimates, is not expected to be
material to the Company's operations. All remaining Year 2000 issues costs
will be funded through operating cash flows. 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.
Should the Company not be completely successful in mitigating internal and
external Y2K risks, this could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in
similar normal business activities at the Company or its vendors and
suppliers. The Company believes, that under a worst case scenario, it could
continue the majority of its normal business activities on a manual basis.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Not Applicable
Item 2. Changes in Securities and Use of Proceeds
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 InfuSystems 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 valued at $2.9 million. In accordance with
the terms of the Agreement, 59,395 shares of the Company's Common Stock were
issued to Amherst Capital Partners, L.L.C. (Amherst"), investment banker for
InfuSystems II, Inc. and Venture Medical, Inc., as payment of Amherst's fees
and expenses in connection with the Merger. At each of the six-month,
one-year, eighteen-month and two-year anniversaries 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. Any
additional amounts are to be calculated pursuant to the formula set forth in
the Agreement. At the Company's election, it may pay such additional merger
consideration, by the issuance of additional shares of its Common Stock, in
cash, or any combination thereof. In August 1998, the Company issued 234,806
shares of its Common Stock to the shareholders of VMI and InfuSystem and
Amerherst, pursuant to the valuation floor provision for the six-month
anniversary. There was no incremental value ascribed to these additional
shares for purchase accounting of the acquisition. 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 commercially reasonable best efforts to register the
shares of Common Stock within six months after the Effective Time.
Items 3.-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit
----------- -------
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 (4)
3.4 Certificate of Determination covering Company's Series B
Preferred Stock filed with the Secretary of State on October
5, 1992 (4)
3.5 Restated Bylaws as of July 22, 1991 of the Company (3)
4.1 Specimen Common Stock Certificate (4)
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. (5)
27 Financial Data Schedule
- -----------------
(1) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-32263-LA) declared effective
February 1, 1990.
11
<PAGE> 12
(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 Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
(5) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated July 22, 1996.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1998, the Company filed no
Current Reports on Form 8-K.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
I-FLOW CORPORATION
(Registrant)
Date: November 11, 1998 /s/ DONALD M. EARHART
----------------- -----------------------------------
Donald M. Earhart,
Chairman, President and CEO
Date: November 11, 1998 /s/ GAYLE L. ARNOLD
----------------- -----------------------------------
Gayle L. Arnold,
Vice President, Finance, Chief
Financial Officer
13
<PAGE> 14
INDEX TO EXHIBITS
Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:
Exhibit No. Exhibit
----------- -------
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 (4)
3.4 Certificate of Determination covering Company's Series B
Preferred Stock filed with the Secretary of State on October
5, 1992 (4)
3.5 Restated Bylaws as of July 22, 1991 of the Company (3)
4.1 Specimen Common Stock Certificate (4)
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. (5)
27 Financial Data Schedule
- -----------------
(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 Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
(5) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated July 22, 1996.
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