<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported) February 9, 1998
-----------------------
I-FLOW CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
California 0-18338 33-0121984
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Id. No.)
20202 Windrow Drive, Lake Forest, California 92630
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (929) 206-2700
--------------------
N/A
- --------------------------------------------------------------------------------
(Former name / former address, if changed since last report)
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
On February 9, 1998, I-Flow Corporation, a California corporation (the
"Registrant") entered into an Agreement and Plan of Merger (the "Agreement")
by and among the Registrant, I-Flow Subsidiary, Inc., a California
corporation, and a wholly owned subsidiary of the Registrant ("I-FlowSub"),
InfuSystems II, Inc., a Michigan corporation ("InfuSystems"), Venture
Medical, Inc., a Michigan corporation ("VMI") and the shareholders of
InfuSystems and VMI, contemplating the merger of InfuSystems and VMI with
and into I-FlowSub. Pursuant to the Agreement, VMI and InfuSystems were
merged with and into I-FlowSub (the "Merger") effective as of February 11,
1998 (the "Effective Time").
In the Merger, all of the outstanding shares of common stock of VMI and
InfuSystems were exchanged for shares of common stock of the Registrant. The
aggregate number of shares of common stock of the Registrant 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 by the Registrant and were delivered to U.S. Trust
Registrant of California, N.A., as 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 from the Effective Time
during which time they will be subject to claims by the Registrant and
I-FlowSub 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 by I-FlowSub 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 Registrant's common stock at such time is less than the
value of the Registrant's common stock as of the closing ($2.98 per share),
then the Registrant 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 Section 1.6(a)(ii) of the Agreement. At the
Registrant's election, the Registrant may pay such additional merger
consideration, if any, by the issuance of additional shares of the
Registrant's common stock, in cash, or any combination thereof.
In accordance with the terms of the Agreement, 59,395 shares of the
Registrant's common stock, valued at $177,000, were issued to Amherst
Capital Partners, L.L.C. ("Amherst"), investment banker for InfuSystems and
VMI, as payment of Amherst's fees and expenses in connection with the
Merger. In addition, in accordance with the terms of the Agreement, the
Registrant paid $50,000 to Cohen & Ellias, P.C., counsel for VMI and
InfuSystems, as partial payment of the fees and expenses of Cohen & Ellias,
P.C. incurred in connection with the Merger.
The amount of consideration paid in the Merger was determined through
negotiations between the parties. The terms of the Merger were approved by
the Boards of Directors
1
<PAGE> 3
and shareholders of I-FlowSub, InfuSystems and VMI and by the Board of
Directors of the Registrant.
There is no material relationship between InfuSystem, VMI and the Registrant
or any of its affiliates, any director or officer of the Registrant, or any
associate of any such director or officer. Steven E. Watkins, former
president of VMI and InfuSystem, has been appointed president of I-FlowSub
and has entered into an employment agreement with I-FlowSub.
(a) Financial Statements of Business Acquired.
Financial Statements of VMI and InfuSystems prepared pursuant to Regulation
S-X including a manually signed accountants' report, are provided herewith
as Exhibit 99.1.
(b) Pro Forma Financial Information.
The accompanying unaudited pro forma combined financial statements give
effect to the Merger. The acquisition has been accounted for using the
purchase method of accounting. Under this method of accounting the assets
and liabilities of the acquired businesses are combined with those of the
Registrant as of the effective date of the acquisition, the carrying values
of acquired assets are adjusted to reflect the portion of the total purchase
consideration allocable to each asset, on the basis of the estimated fair
values of the assets. The difference between the total consideration and the
aggregate carrying value of the acquired assets as so adjusted is recorded
as goodwill. The liabilities of the acquired business are recorded at their
fair value as of the effective date of the acquisition.
The Pro Forma Combined Balance Sheet presents the combined financial
position of the Registrant and VMI and InfuSystems as if the acquisition had
occurred on December 31, 1997. The Pro Forma Combined Statements of
Operations for the Year Ended December 31, 1997 present the combined results
of the Registrant and VMI and InfuSystems as if the acquisition had occurred
on January 1, 1997. VMI and InfuSystems' previous fiscal year ended December
31, 1997. As VMI and InfuSystems' reporting periods coincided with the
Registrant's reporting periods, there were no related adjustments to the pro
forma combined financial statements.
The pro forma financial statements are provided for comparative purposes and
have been prepared based upon the historical financial statements of the
Registrant and VMI and InfuSystems. The pro forma statements do not purport
to be indicative of the results which would actually have been obtained if
the acquisition had been effected on the date or dates indicated nor are
they necessarily indicative of the results of operations that may be
achieved in the future. The pro forma financial statements should be read in
conjunction with the historical financial statements and related notes
thereto of the Registrant and VMI and InfuSystems included herein or
incorporated herein by reference.
2
<PAGE> 4
I-FLOW CORPORATION
PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
UNAUDITED
(All amounts in thousands)
<TABLE>
<CAPTION>
VMI AND
I-FLOW INFUSYSTEMS PRO FORMA PRO FORMA
ASSETS CORPORATION COMBINED ADJUSTMENTS COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 715 $ 8 $ 723
Accounts receivable, net 5,127 2,186 $ (684)(d) 6,629
Advances to related companies -- 234 (234)(a) --
Inventory, net 4,058 441 4,499
Prepaid expenses and other 140 56 196
-------- -------- -------- --------
Total current assets 10,040 2,925 (918) 12,047
Property, net 2,231 2,569 (283)(d) 4,517
Goodwill and other intangibles, net 3,983 -- 3,338 (b) 7,321
Notes receivable and other 1,380 -- (238)(b) 1,142
-------- -------- -------- --------
TOTAL ASSETS $ 17,634 $ 5,494 $ 1,899 $ 25,027
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,828 $ 1,249 $ (684)(d) $ 2,393
Accrued payroll and related expenses 895 98 993
Advances from related companies -- 72 (72)(a) --
Distributions payable -- 120 (120)(a) --
Current portion of long-term debt 1,000 2,756 3,756
Line of credit 1,500 -- 1,500
Other liabilities 244 325 569
-------- -------- -------- --------
TOTAL CURRENT LIABILITIES 5,467 4,620 (876) 9,211
Long-term debt 1,579 444 2,023
Other long-term liabilities -- 162 162
-------- -------- -------- --------
TOTAL LIABILITIES 7,046 5,226 (876) 11,396
SHAREHOLDERS' EQUITY:
Preferred stock 1,494 -- 1,494
Common stock 33,853 9 3,034 (c) 36,896
Common stock warrants 615 -- 615
(Accumulated deficit)/retained earnings (25,374) 259 (259)(a) (25,374)
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 10,588 268 2,775 13,631
-------- -------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 17,634 $ 5,494 $ 1,899 $ 25,027
======== ======== ======== ========
</TABLE>
3
<PAGE> 5
I-FLOW CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(All amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
VMI AND
I-FLOW INFUSYSTEMS PRO FORMA PRO FORMA
CORPORATION COMBINED ADJUSTMENTS COMBINED
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 17,678 $ -- $ (684)(c) $ 16,994
Rental income and other 64 6,300 6,364
-------- -------- ------------ --------
Total revenue 17,742 6,300 (684) 23,358
Cost of sales 8,450 2,768 (401)(c) 10,817
-------- -------- ------------ --------
Gross profit 9,292 3,532 (283) 12,541
-------- -------- ------------ --------
Expenses:
Selling and marketing 3,197 1,122 4,319
General and administrative 4,281 1,962 223(a) 6,466
Product development 1,035 -- 1,035
-------- -------- ------------ --------
Total expenses 8,513 3,084 223 11,820
-------- -------- ------------ --------
Operating income 779 448 (506) 721
Interest expense 334 311 645
Income taxes 80 -- 80
-------- -------- ------------ --------
Net income $ 365 $ 137 $ (506) $ (4)
======== ======== ============ ========
Weighted average common shares and
common share equivalents 13,730 1,021(b) 14,751
======== ============ ========
Net income per share, basic and diluted $ 0.03 $ (0.00)
======== ========
</TABLE>
4
<PAGE> 6
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. Combined Balance Sheet Adjustments as of December 31, 1997.
The pro forma balance sheet adjustments relate to:
(a) elimination of certain assets and liabilities not acquired or assumed in
the transaction;
(b) net adjustment to goodwill and other intangibles to equal the difference
between the aggregate consideration paid in the acquisition and the
aggregate carrying value of the assets and liabilities acquired;
(c) issuance of Common Stock required for the consummation of the
acquisition (with an aggregate value of approximately $3,075,000 less a
reduction in the number of shares issued for net advances to related
companies of $32,000) and the elimination of VMI and InfuSystems equity
accounts upon consolidation.
(d) elimination of intercompany profits for equipment sales from the
Registrant to VMI and InfuSystems.
2. Pro Forma Adjustments to the Pro Forma Combined Statements of Operations for
the Year Ended December 31, 1997.
These pro forma adjustments represent the combined adjustments arising from
the acquisition as if such acquisition had occurred on January 1, 1997. The
adjustments relate to:
(a) recording of the amortization of goodwill;
(b) issuance of additional shares of Common Stock required for the
consummation of the acquisition.
(c) elimination of intercompany profits for equipment sales from the
Registrant to VMI and InfuSystems.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1(1) 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.
99.1 Venture Medical Inc. and InfuSystems II, Inc.
Combined Financial Statements for the Years Ended
December 31, 1997 and 1996 and Independent
Auditors' Report.
</TABLE>
(1) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated February 9, 1998.
5
<PAGE> 7
SIGNATURE
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 hereunto duly authorized.
I-FLOW CORPORATION
Date: April 23, 1998 By: /s/ Donald M. Earhart
-------------------------------
Donald M. Earhart
President and Chief Executive Officer
6
<PAGE> 8
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1(1) 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.
99.1 Venture Medical Inc. and InfuSystems II, Inc.
Combined Financial Statements for the Years Ended
December 31, 1997 and 1996 and Independent
Auditors' Report.
</TABLE>
(1) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated February 9, 1998.
7
<PAGE> 1
VENTURE MEDICAL INC. AND
INFUSYSTEM II, INC.
COMBINED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Venture Medical, Inc. and
Infusystem II, Inc.
We have audited the accompanying combined balance sheets of Venture Medical,
Inc. and Infusystem II, Inc. (the Companies), both of which are under common
ownership and common management, as of December 31, 1997 and 1996, and the
related combined statements of operations and retained earnings and of cash
flows for the years then ended. These financial statements are the
responsibility of the Companies' 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 audits 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 financial statements present fairly, in all material
respects, the combined financial position of Venture Medical, Inc. and
Infusystem II, Inc. at December 31, 1997 and 1996 and the combined results of
their operations and their combined cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 9, the 1996 combined financial statements have been
restated.
/s/ DELOITTE & TOUCHE
----------------------------
DELOITTE & TOUCHE
February 13, 1998
<PAGE> 3
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996 (RESTATED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(RESTATED)
<S> <C> <C>
ASSETS (NOTE 2)
CURRENT ASSETS:
Cash $ 8,219 $ 29,645
Accounts receivable, net of allowance for contractual
adjustments and doubtful accounts of $6,724,242 (1997) and
$4,117,098 (1996) 2,185,888 2,035,907
Advances to related companies (Note 7) 233,821 154,726
Inventories 440,879 224,608
Prepaid expenses and other current assets 55,702 70,797
----------- -----------
Total current assets 2,924,509 2,515,683
FIXED ASSETS:
Medical equipment leased to customers 4,824,049 4,200,495
Office equipment 656,459 633,305
Automobiles 8,095 8,095
Leasehold improvements 8,089 8,089
----------- -----------
5,496,692 4,849,984
Less accumulated depreciation and amortization (2,927,296) (2,325,476)
----------- -----------
Net fixed assets 2,569,396 2,524,508
----------- -----------
$ 5,493,905 $ 5,040,191
=========== ===========
</TABLE>
See notes to combined financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(RESTATED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,248,873 $ 480,012
Current portion of long-term debt (Note 2) 2,756,373 2,776,574
Advances from related companies (Note 7) 72,531 72,779
Distributions payable 119,681 7,182
Accrued compensation 97,602 107,103
Other accrued liabilities 325,632 275,385
---------- ----------
Total current liabilities 4,620,692 3,719,035
LONG-TERM DEBT (Note 2) 443,792 738,179
OTHER LONG-TERM LIABILITIES 161,650 322,617
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
SHAREHOLDERS' EQUITY:
Common stock (Note 3) 8,500 8,500
Paid-in capital 430 430
Retained earnings 258,841 251,430
---------- ----------
Total shareholders' equity 267,771 260,360
---------- ----------
$5,493,905 $5,040,191
========== ==========
</TABLE>
2
<PAGE> 5
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (RESTATED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(RESTATED)
<S> <C> <C>
NET REVENUE $ 6,300,197 $ 5,864,210
COST OF SALES 2,768,147 2,965,794
----------- -----------
GROSS MARGIN 3,532,050 2,898,416
EXPENSES:
Selling and administrative expenses 1,236,855 1,276,919
General and administrative expenses 1,847,189 1,725,636
----------- -----------
Total expenses 3,084,044 3,002,555
----------- -----------
INCOME (LOSS) FROM OPERATIONS 448,006 (104,139)
OTHER (EXPENSE) INCOME:
Interest expense (310,595) (264,691)
Gain on sale of fixed assets 53,894
----------- -----------
Total other expense (310,595) (210,797)
----------- -----------
NET INCOME (LOSS) 137,411 (314,936)
RETAINED EARNINGS, beginning of year 251,430 1,305,831
DISTRIBUTIONS TO SHAREHOLDERS (130,000) (739,465)
----------- -----------
RETAINED EARNINGS, end of year $ 258,841 $ 251,430
=========== ===========
</TABLE>
3
See notes to combined financial statements.
<PAGE> 6
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (RESTATED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 137,411 $ (314,936)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,315,161 1,286,133
Gain on sale of fixed assets (53,894)
Changes in operating assets and liabilities:
Accounts receivable, net (149,981) 166,896
Inventories (216,271) (98,052)
Prepaid expenses and other current assets 15,095 107,452
Accounts payable 768,861 (437,154)
Accrued compensation (9,501) 22,229
Other accrued liabilities 50,247 (18,959)
----------- -----------
Net cash provided by operating activities 1,911,022 659,715
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 57,616
Capital expenditures (1,360,049) (1,710,653)
Advances to/from related companies (79,343) (82,751)
----------- -----------
Net cash used in investing activities (1,439,392) (1,735,788)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from line-of-credit 6,583,150 7,630,325
Repayments on line of credit (6,470,934) (6,656,931)
Proceeds from long-term debt 489,054 1,227,762
Repayments on long-term debt (915,858) (680,925)
Change in other long-term liabilities (160,967) 304,461
Distributions paid to shareholders (17,501) (734,465)
----------- -----------
Net cash (used in) provided by financing activities (493,056) 1,090,227
----------- -----------
</TABLE>
4
See notes to combined financial statements.
<PAGE> 7
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (RESTATED) (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(RESTATED)
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH $ (21,426) $ 14,154
CASH, beginning of year 29,645 15,491
--------- ---------
CASH, end of year $ 8,219 $ 29,645
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the years for interest $ 312,279 $ 253,198
========= =========
</TABLE>
5
See notes to combined financial statements.
<PAGE> 8
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The combined financial statements include the
accounts of Venture Medical, Inc. and Infusystem II, Inc. (the Companies).
The Companies are related through common ownership, officers and basically
identical business activities. The shareholders own controlling interests
in other entities which are not included in this presentation. The
Companies are closely-held Michigan corporations whose principal business
activity consists of the rental of medical infusion pumps. The leases are
on a month-to-month basis and are treated as operating leases.
Principles of Combination - The accompanying financial statements include
the accounts of Venture Medical, Inc. and Infusystem II Inc. (a group of S
corporations under common control). All significant intercompany balances
and transactions have been eliminated in the combined financial
statements.
Revenue Recognition - Rental revenue from medical infusion pumps is
recognized as earned over the term of the rental agreement.
Accounts Receivable - The Companies bill individuals, various insurance
companies and governmental third-party reimbursers for rental of medical
infusion pumps. These third parties reimburse the Companies at contractual
amounts which often differ from the Companies' established rates.
Accordingly, the Companies record the rental invoice at full face value at
the time of billing and record an allowance for the difference between the
billed amount and the estimated collectible amount based upon the
anticipated reimbursement rates. This allowance also encompasses the
allowance for doubtful accounts for the Companies.
Inventories - Inventories are carried at the lower of cost (determined on
a first-in, first-out basis) or market.
Concentrations of Credit Risk - The Companies extend credit in their
normal course of business primarily to Medicare, Medicaid and numerous
health insurance companies of patients located throughout North America.
Aggregate revenue from Medicare amounted to approximately 43% and 45% of
net revenue for the years ended December 31, 1997 and 1996, respectively.
There can be no assurance that reimbursement rates from such payors will
continue to be available at the current levels. Changes in the
reimbursement policies or reductions in reimbursement rates could have a
material adverse impact on the Companies.
Fixed Assets - Fixed assets are stated at cost and are depreciated or
amortized using the double declining balance method over the estimated
useful life of five years.
Income Taxes - The Companies have elected by unanimous consent of the
shareholders to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Companies do not pay
federal corporate income taxes on their taxable income. Instead, the
shareholders are liable for individual income taxes on their respective
shares of the Companies' taxable income. Therefore, no provision or
liability for federal income taxes is reflected in the combined financial
statements.
6
<PAGE> 9
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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 reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Reclassifications - Certain reclassifications have been made to the 1996
combined financial statements to conform to the 1997 presentation.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revolving Credit Lines - Comerica Bank, interest payable monthly at 1/2% over
prime (8.5% at December 31, 1997); due on demand; aggregate maximum facility
of $2,500,000, collateralized by all assets of Venture Medical, Inc. and
Infusystem II, Inc. $ 2,032,798 $ 1,920,582
Installment Note - Comerica Bank; interest payable monthly at 1/2% over prime,
due between February 1998 and November 1999; collateralized by all assets of
Venture Medical, Inc. and Infusystem II, Inc. 1,167,367 1,407,518
Installment Note - Comerica Bank; monthly payment of $15,555 plus interest at
9.25%; matured December 22, 1997; collateralized by all assets of Venture
Medical Inc. and Infusystem II, Inc. 186,653
----------- -----------
3,200,165 3,514,753
Less current portion (2,756,373) (2,776,574)
----------- -----------
Total long-term debt $ 443,792 $ 738,179
=========== ===========
</TABLE>
7
<PAGE> 10
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Future principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1998 $ 2,756,373
1999 338,085
2000 103,151
2001 2,556
-----------
$ 3,200,165
===========
</TABLE>
At December 31, 1997, the Companies had a $332,633 unused term loan
commitment with a bank at 1.0% above the prime rate, to be drawn on for
future purchases of infusion pumps and heart monitors.
3. COMMON STOCK
The following is a summary of the common stock of the Companies for the
years ended December 31, 1997 and 1996:
Venture Medical, Inc. - $.01 par value; 750,000 shares authorized; 250,000
shares issued and outstanding.
Infusystem II, Inc. - $1.00 par value, 60,000 shares authorized; 6,000
shares issued and outstanding.
4. LEASE COMMITMENT - RELATED PARTY
The Companies lease their operating facility from a company owned by five
shareholders. The building lease expires in December 1998. The minimum
future payment required under the related party lease is $76,752.
Total rental expense for the years ended December 31, 1997 and 1996 was
$79,092 and $80,628, respectively.
5. CONTINGENCIES
During 1997, the Companies underwent a Medicare Region B audit. As part of
its findings, Medicare Region B disagreed with the Companies' definition
of intermittent use of infusion pumps and claimed that, as a result,
Medicare Region B had overpaid for certain patient rentals. The Companies
have retained outside counsel and believe that the Companies' definition
of intermittent use and the related billings were appropriate based on
applicable law. The Companies also believe that this position is supported
by the policies and regulations of other Medicare regions. However, in the
event that
8
<PAGE> 11
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Medicare Region B prevails, the Companies could be forced to refund
applicable payments received from October 1, 1995 to the current time,
plus penalties and interest, if assessed. If this occurs, other Medicare
regions could take the same position and request refunds on amounts
previously paid. In addition, a change in the ability to bill intermittent
use of pumps would result in a reduction of the Companies' ongoing revenue
stream, as it would no longer be profitable to serve certain customers.
Although the Companies believe they have meritorious defenses against the
Medicare Region B claim, the ultimate impact of the dispute, which could
have a material adverse impact on the Companies, cannot be determined at
the current time.
The Companies are also involved in litigation in the ordinary course of
business. The Companies believe that the ultimate outcome of such matters
will not have a material impact on the Companies' financial position or
results of operations.
6. EMPLOYEE BENEFIT PLAN
Through the end of 1995, the Companies had sponsored a defined
contribution profit sharing plan which covered substantially all employees
of the Companies. Effective January 1, 1996, the plan was amended to a
401(k) Profit Sharing Plan covering substantially all employees. The
Companies' contributions to the plan are at the discretion of management
and amounted to $25,962 and $27,667 for the years ended December 31, 1997
and 1996, respectively.
7. OTHER RELATED-PARTY TRANSACTIONS
The Companies have uncollateralized advances to related companies, of
$233,821 and $154,726, and advances from related companies, of $72,531 and
$72,779, at December 31, 1997 and 1996, respectively.
The Companies had related-party transactions during the years ended
December 31, 1997 and 1996 with various entities in which the Companies'
shareholders held ownership interest. Such transactions are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Building rent and related facility expenses $112,180 $117,493
Pump repair expense $ 47,031 $ 51,072
Pump supplies purchased $ - $ 13,451
Pump rental expense $ - $ 71,268
</TABLE>
9
<PAGE> 12
VENTURE MEDICAL INC. AND INFUSYSTEM II, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
8. SUBSEQUENT EVENT
On February 9, 1998, the Companies were acquired by I-Flow Corporation in
a transaction accounted for as a purchase.
9. RESTATEMENT
Subsequent to the issuance of the Companies' 1996 combined financial
statements, the Companies' management determined that there were errors in
previously reported amounts principally related to revenue, accounts
receivable and fixed assets. Restatement adjustments relate to errors in
the calculation of contractual revenue adjustments, a failure to write off
known bad debts, and improperly recorded disposals and acquisitions of
fixed assets.
The effects of the restatement on the combined financial statements are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Balance sheet:
Accounts receivable, net $ 2,939,779 $ 2,035,907
Net fixed assets 2,503,389 2,524,508
Retained earnings, beginning of year 1,820,638 1,305,831
Retained earnings, end of year 1,342,127 251,430
Statement of operations:
Net revenue 6,393,394 5,864,210
Total operating expenses 5,921,643 5,968,349
Net income (loss) 260,954 (314,936)
</TABLE>
10
