<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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
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 Identification No.)
incorporation or organization)
20202 Windrow Drive Lake Forest, CA 92630
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(Address of principal executive offices) (Zip Code)
(949) 206-2700
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(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 March 31, 1998 there were 13,417,655 shares outstanding of
Common Stock and 656,250 shares outstanding of Series B Preferred Stock.
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I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three month
periods ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 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 11
</TABLE>
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I-FLOW CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 635,000 $ 715,000
Accounts receivable, net 6,009,000 5,127,000
Inventories 5,037,000 4,058,000
Prepaids and other 391,000 140,000
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Total current assets 12,072,000 10,040,000
------------ ------------
PROPERTY:
Furniture, fixtures and equipment 9,108,000 4,170,000
Less accumulated depreciation (5,088,000) (1,939,000)
------------ ------------
Property, net 4,020,000 2,231,000
------------ ------------
OTHER ASSETS
Goodwill and other intangibles, net 7,535,000 3,983,000
Notes receivable and other 982,000 1,380,000
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TOTAL $ 24,609,000 $ 17,634,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,643,000 $ 1,828,000
Accrued payroll and related expenses 937,000 895,000
Deferred revenue 58,000 58,000
Current portion of long-term debt 4,029,000 1,000,000
Borrowings under line-of-credit -- 1,500,000
Other liabilities 20,000 186,000
------------ ------------
Total current liabilities 6,687,000 5,467,000
------------ ------------
LONG-TERM DEBT 4,345,000 1,579,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares
authorized; 656,250 series B shares issued
and outstanding at March 31, 1998 and
December 31, 1997, respectively (aggregate
preference on liquidation is $1,575,000) 1,494,000 1,494,000
Common stock - no par value; 40,000,000 shares
authorized; 13,417,655 and 12,393,619 shares
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively 36,910,000 33,853,000
Common stock warrants 615,000 615,000
Accumulated deficit (25,442,000) (25,374,000)
------------ ------------
Net shareholders' equity 13,577,000 10,588,000
------------ ------------
TOTAL $ 24,609,000 $ 17,634,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
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<S> <C> <C>
Net revenues $ 4,072,000 $ 4,302,000
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Costs and expenses:
Cost of sales 1,810,000 1,748,000
Selling and marketing 853,000 793,000
General and administrative 1,045,000 885,000
Product development 210,000 326,000
Amortization of intangibles 144,000 117,000
----------- -----------
Total costs and expenses 4,062,000 3,869,000
Operating profit 10,000 433,000
Interest income (expense) (151,000) (79,000)
Income taxes (7,000) (17,000)
----------- -----------
Net income (loss) $ (148,000) $ 337,000
=========== ===========
Net income (loss) per share
Basic $ (0.01) $ 0.03
=========== ===========
Diluted $ (0.01) $ 0.02
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (148,000) $ 337,000
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization 298,000 260,000
Changes in operating assets and liabilities:
Royalty receivable -- 1,000,000
Accounts receivable 1,656,000 (333,000)
Inventories (295,000) (367,000)
Prepaid expenses and other (98,000) (8,000)
Accounts payable, accrued and other liabilities (2,024,000) (813,000)
----------- -----------
Net cash provided (used) by operating activities (611,000) 76,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property (acquisitions) disposals 55,000 (211,000)
Change in other assets (360,000) (120,000)
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Net cash used by investing activities (305,000) (331,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Change in line of credit 2,263,000
Change in notes payable (1,500,000) (250,000)
Proceeds from exercise of stock options and warrants 13,000 56,000
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Net cash provided (used) by financing activities 776,000 (194,000)
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Effect of exchange rates on cash 60,000 (11,000)
NET DECREASE IN CASH AND CASH EQUIVALENTS (80,000) (460,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 715,000 1,651,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 635,000 $ 1,191,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 155,000 84,000
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Income tax payments 7,000 17,000
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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 March 31, 1998 and the results
of its operations and its cash flows for the three-month periods ended
March 31, 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 March 31, 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.
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>
Three Months Ended March 31,
(Amounts in thousands) 1998 1997
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<S> <C> <C>
Basic net income (loss) per share
Weighted average number of shares outstanding 12,951 12,070
Effect of dilutive securities:
Preferred stock 700 700
Stock options -- 1,441
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Diluted net income (loss) per share
Weighted average number of shares outstanding 13,651 14,211
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</TABLE>
6
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3. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, Reporting Comprehensive Income,
for the period ending March 31, 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.
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 approximately $2.9 million (subject to certain
post-effective adjustments). 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.
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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-month period ended March 31, 1998 were
$4,072,000, compared to $4,302,000 for the same period in the prior
year, a decrease of 5%. 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.
Revenue generated by InfuSystem, Inc. of $1,083,000 for the period from
February 11, 1998 (date of acquisition) through March 31, 1998, was
included in net revenues for the three-month period ended March 31,
1998. Without the InfuSystem, Inc. revenues, net revenues during the
three-month period ended March 31, 1998 would have decreased by 31%
compared to the same period in the prior year, primarily due to fewer
sales of the Company's elastomeric products into distributors and a
price decrease of approximately 15% on such products.
Revenues for the three-month period ended March 31, 1998 were adversely
affected by the restructuring of I-Flow's worldwide distribution
network as well as existing distributor inventory levels, which caused
a short-term decline in shipments of infusion products to the Company's
previous distribution partners. This decline is expected to continue
until sometime near the end of 1998.
During this quarter 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 signed a letter of intent to
enter 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.
Cost of sales of $1,810,000 were incurred during the three-month period
ended March 31, 1998, compared to $1,748,000 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.
8
<PAGE> 9
Selling and marketing expenses for the three-month period ended March
31, 1998 increased over the same period in the prior year by $60,000 or
8%, due to the addition of $138,000 in such expenses for InfuSystem,
Inc. Without the InfuSystem, Inc. selling and marketing expenses, the
Company's selling and marketing expenses would have declined by $78,000
which relates to the decrease in product sales noted above.
General and administrative expenses for the three-month period ended
March 31, 1998 increased $160,000 or 18% from the same period in the
prior year, due to the addition of $240,000 of such expenses for
InfuSystem, Inc. Without the InfuSystem, Inc. general and
administrative expenses, the Company's general and administrative
expenses would have declined by $80,000 due to the Company's
consolidating of its facilities in California in July 1997 and
therefore lowering its facilities costs thereafter.
Product development expenses for the three-month period ended March 31,
1998 decreased over the same period in the prior year by $116,000, or
36%. With the acquisition of Block Medical, Inc. in July 1996, the
Company increased its engineering staff but has since decreased the
overall engineering costs by consolidating the engineering efforts of
Block Medical, Inc. with its own. 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 three-month period ended March 31, 1998, funds of $619,000
were used by operating activities consisting of a net loss of $148,000
less non-cash expenses of $208,000 plus net changes in operating assets
and liabilities of $679,000. These changes in operating assets and
liabilities consisted of: (1) an increase in accounts receivable of
$1,656,000 due to the addition of InfuSystem, Inc., less (2) a decrease
in inventory, prepaid expenses and other of $393,000 and (4) a
reduction in accounts payable and other liabilities of $1,942,000 due
to the timing of payments of trade accounts payable.
The Company used funds for investing activities during the three-month
period ended March 31, 1998 by acquiring leasehold improvements,
furniture, fixtures, equipment and other assets aggregating $393,000
for use in its operations.
During the three-month period ended March 31, 1998, funds of $874,000
were provided by financing activities consisting primarily of proceeds
from borrowings on notes payable net of payments on the line of credit.
As of March 31, 1998, the Company had cash funds of $635,000 and net
receivables of $6,009,000. 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 projected needs for operations for
the next twelve months. However, the Company may decide to sell
additional equity or increase its borrowings in order to fund increased
product development or for other purposes.
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 and making such products Year 2000
compliant. The Company does not believe that there will be significant
issues or costs associated to make 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.
9
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.-
Not Applicable
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. 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 - none
(b) During the quarter ended March 31, 1998, the Company
filed a Current Report on Form 8-K dated February 9,
1998 regarding the acquisition of InfuSystem II, Inc.
and Venture Medical, Inc.
10
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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: January 6, 1999 /s/ DONALD M. EARHART
-----------------------------------------
Donald M. Earhart,
Chairman, President and CEO
Date: January 6, 1999 /s/ GAYLE L. ARNOLD
-----------------------------------------
Gayle L. Arnold,
Vice President, Finance, Chief Financial
Officer
11
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INDEX TO EXHIBITS
Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
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<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 (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)
10.1 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. (6)
</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 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.
(6) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated February 9, 1998.
12
