<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
COMMISSION FILE NUMBER 0-18338
I-FLOW CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0121984
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20202 WINDROW DRIVE, LAKE FOREST, CA 92630
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 206-2700
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
[COVER PAGE 1 OF 2 PAGES]
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The aggregate market value of the 11,992,998 shares of voting Common Stock of
the registrant held by non-affiliates of the registrant on February 27, 1998,
based on the last sale price of such stock on the Nasdaq Small Cap Market on
such date was $31,481,620.
Registrant's outstanding stock as of February 27, 1998 was 13,417,655 shares of
Common Stock and 656,250 shares of Series B Preferred Stock. The Series B
Preferred Stock is convertible by the holders thereof at any time into 700,000
shares of the Company's Common Stock and, except as otherwise provided by law or
the Certificate of Determination of Preferences of Series B Preferred Stock,
votes with the Common Stock as a single class on all matters submitted to
holders of Common Stock. All the Preferred Stock is held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to portions of the
registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the registrant's year ended December 31, 1997.
Certain information required by Parts II and IV is incorporated by reference to
portions of the registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
2
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PART I
ITEM 1. BUSINESS
THE COMPANY
I-Flow Corporation (the "Company" or "I-Flow") designs, develops,
manufactures and markets technically advanced, ambulatory infusion systems that
administer antibiotics, analgesics, chemotherapeutic agents, hormones,
nutrients, hydration therapies and other medical treatments to patients. These
compact, portable devices simplify and improve patient care, while reducing
costs through innovative product design. They are used most frequently in the
home, hospitals and physician offices.
The Company was incorporated in the State of California in July 1985.
The Company's corporate offices are located at 20202 Windrow Drive, Lake Forest,
California 92630. The telephone number is (714) 206-2700 and its web site is
located at www.i-flowcorp.com.
ACQUISITION OF BLOCK MEDICAL, INC.
On July 3, 1996, the Company entered into an agreement for the purchase
of substantially all of the assets of Block Medical, Inc. ("Block"), a wholly
owned subsidiary of Hillenbrand Industries, Inc. Block was a San Diego,
California based manufacturer and marketer of ambulatory infusion devices. The
transactions contemplated by this agreement were consummated on July 22, 1996.
ACQUISITION OF INFUSYSTEMS II, INC. AND VENTURE MEDICAL, INC.
On February 9, 1998, the Company entered into an agreement and plan of
merger contemplating the merger of Infusystems II, Inc. and Venture Medical,
Inc. with and into a wholly-owned subsidiary of I-Flow. The transactions
contemplated by this agreement were consummated on February 11, 1998.
Infusystems II and Venture Medical (collectively referred to as
"Infusystem") is a leading ambulatory infusion pump management firm based in
Madison Heights, Michigan. By delivering pumps from a variety of manufacturers
to private medical practices and clinics across the country, Infusystem uses a
unique approach to service the cancer infusion therapy market. InfuSystem
specializes in providing ambulatory infusion pumps and the related disposables
used primarily for cancer treatments. Infusystem believes it has captured
approximately 30% of the total target physician and clinical ambulatory pump
market for outpatient chemotherapy treatment. They currently serve over 1,000
physicians and clinics out of approximately 3,500 physicians and clinics in the
cancer treatment market which are believed to be targets for services relating
to outpatient chemotherapy treatment.
THE PRODUCTS
I-Flow offers the health care professional a complete line of
cost-effective infusion therapy devices designed to meet the needs of today's
managed care environment both in the hospital and alternate site setting. The
I-Flow family of technically advanced infusion products is portable, reliable,
economical and versatile.
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ELASTOMERICS
The patented HOMEPUMP Eclipse(R) and HOMEPUMP Eclipse "C" Series are
durable, portable and compact elastomeric infusion systems designed to deliver
medications such as antibiotics, pain medication, and chemotherapy drugs in a
wide range of volumes and delivery times needed to meet today's sometimes
complex protocols. The HOMEPUMP Eclipse is the market leader in elastomeric
technology and provides the health care professional with a device that is both
safe and extremely easy to teach patients to self-administer.
The ONE-STEP KVO(TM) is a new elastomeric infusion device intended to
be used as an alternative to flushing and as a means to help prevent catheter
occlusions. There are several hundred million flushes performed on catheters in
the U.S. every year and the process is expensive, cumbersome and difficult to
perform correctly. The complication rates for PICC line catheters exceed 20%,
many of which are attributable to improper flushing techniques. The ONE-STEP KVO
not only helps prevent complications associated with flushing, but it is
significantly more cost effective and easy to use. The ONE-STEP KVO is well
suited for hospitals, skilled nursing facilities and home healthcare
environments.
SYRINGE DELIVERY SYSTEMS
The Medi-SIS(TM) 20 and Medi-SIS 60 Syringe Infusion Systems are
designed to provide an accurate intravenous ("IV") push delivery from a syringe.
This cost-effective syringe system delivers IV medications in single doses or in
multi-doses from one syringe over periods from 5 minutes to 12 hours. The
Medi-SIS Syringe Infusion System provides the healthcare professional with a
reusable, mechanical delivery system that can replace gravity based systems
while providing a low cost, accurate delivery with less teaching time required
for patients.
The Band-It(TM) Syringe Delivery System and the Band-It One Dose(TM)
System deliver a variety of medications such as antibiotics, diuretics, and
other low volume drugs. The Band-It utilizes a standard Becton-Dickinson 10 or
20 cc syringe to infuse over 15 to 30 minutes, providing the lowest supply cost
per dose while still providing a safe and accurate alternative to gravity or IV
push methods.
NON-ELECTRONIC IV BAG DELIVERY SYSTEMS
The Liberty(TM) 100, Liberty 250 and Liberty 1000 IV Bag Infusion
Systems deliver medications from standard Abbott Laboratories, Inc. or Baxter
International, Inc. IV bags. The Liberty System provides a safe, easy to use
means of providing a controlled infusion, eliminating the need to teach patients
to count drops, use a roller clamp, etc. The I-Flow Liberty system encourages
improved patient compliance, while providing a low cost means of infusion
delivery.
The PARAGON(TM) ambulatory infusion pump provides accurate and cost
effective delivery of IV medications, including chemotherapy, heparin and
analgesics, which require precise and reliable delivery over extended periods of
time. The companion product, SIDEKICK, utilizes a patented spring technology to
deliver IV antibiotics over a shorter time period. These products are sold
outside of the United States.
The Rely-A-Flow(TM) Gravity Set eliminates roller clamps and reduces
the risk of over infusion using gravity. Flow control tubing precisely controls
the rate of infusion, providing a safe and cost-effective method for delivering
medications from standard IV fluid containers at a controlled rate of flow.
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ELECTRONIC PUMPS
Verifuse(TM), Verifuse Plus(TM) and the I-Flow VIP(TM) are the only
infusion devices available today that can be used with the VOICELINK(R). These
electronic infusion pumps are multi-therapy, ambulatory infusion devices with
features similar to pumps currently on market.
VOICELINK represents the "standard for tele-medicine". With VOICELINK,
the only piece of equipment a caregiver needs is a telephone. There is no
computer to carry and no special software to learn. Remote programming and
monitoring is as simple as dialing a telephone and following the verbal
instructions from a voice mail-like system. VOICELINK and a standard touch tone
telephone or cellular phone is all that is needed. The Company is currently
reviewing possibilities for licensing the VOICELINK technology for other
applications.
Vivus 4000(R) is the only ambulatory, multi-channel, multi-therapy
electronic infusion pump available. It provides accurate and safe remote
programming and delivery of four individual protocols regardless of complexity.
THE MARKET
Alternate site healthcare has grown significantly in the past few
years. Ambulatory infusion devices are one of the fastest growing segments in
the alternate site healthcare marketplace. An ambulatory pump allows patients to
leave the hospital earlier, making it very attractive to cost-conscious
hospitals and to patients who favor home treatment. Alternate site revenues for
infusion devices were estimated at $400 million in 1995 and are expected to
reach approximately $600 million by the year 2000. This field has been
identified by marketing research analysts as one of the fastest growing segments
in the U.S. healthcare market with revenues rising in excess of 20% annually.
Infusystem's market further extends the reach of I-Flow's products into
physician offices and clinics, which specialize in cancer treatment. There are
over 7,000 physicians and clinics in the cancer treatment market, of which the
Company serves over 500. In addition, the Company also serves over 500 hospitals
and hospital outpatient centers. Two of I-Flow's newer products, the ONE-STEP
KVO and the Medi-SIS Syringe Infusion System, are well suited for the hospital
market. There has been tremendous growth in the number of hospital outpatient
centers as hospitals attempt to broaden the geographic reach within their
communities.
COMPETITION
The IV drug and nutrient infusion segment of the alternate site
healthcare industry is highly competitive. The Company competes in this market
based on price, service and product performance. Some of the competitors have
significantly greater resources than the Company for research and development,
manufacturing and marketing, and may be better able to compete for a share of
the market, even in areas in which the Company's products may be superior. The
industry is subject to technological changes and there can be no assurance that
the Company will be able to maintain any existing technological lead long enough
to establish its products and to sustain profitability.
The number of competitors and the Company's competitive position for
each of its product lines is noted in the table below.
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<TABLE>
<CAPTION>
Number of Estimated Competitive
Market Description Competitors Position
------------------ ----------- --------
<S> <C> <C>
Electronic Ambulatory Infusion Pumps 7 4
Syringe Pumps 8 7
Elastomerics 3 1
Gravity Infusion Systems 10 8
Mechanical Infusion Systems 4 2
</TABLE>
The Company has focused its product development efforts on products in
the ambulatory infusion systems market and, with certain of its new products, it
is expanding its market to include hospitals. Amounts spent on Company-sponsored
product development activities are disclosed in the Statements of Operations in
the Financial Statements included elsewhere herein.
SALES AND DISTRIBUTION
Distribution of the Company's products is currently managed directly
through its internal sales force as well as through a number of regional medical
product distributors. As of February 1998, the Company and its newly acquired
subsidiary, InfuSystem, had approximately 20 internal sales representatives
located throughout the United States. The Company is actively pursuing
additional distribution arrangements for its products.
In March 1998, the Company entered into a letter of intent with B. Braun
Medical Inc., a world leader in the manufacture and distribution of
pharmaceuticals and infusion products, to distribute I-Flow's HOMEPUMP Eclipse,
HOMEPUMP Eclipse C-Series and One-Step KVO elastomeric products in the United
States. This relationship will strengthen I-Flow's existing distribution network
in the home care/alternate site market and open yet another new channel of
distribution directly into hospitals through the nationwide reach of B. Braun's
125 direct sales professionals.
The Company sells several of its products into the international market
and has signed agreements with distributors in various countries. Currently, the
Company is selling its products through distributors in the Canada, Brazil, the
Benelux Countries, Germany, England, Ireland, Italy, Mexico, Spain, Korea,
Australia, New Zealand and Israel. Aggregate sales to countries outside of the
United States represented approximately 36%, 30% and 21% of the Company's
revenues for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company does not have any capital investments in any foreign operations except
for its plant in Mexico.
Net revenues attributable to each geographic area into which the
Company has sales are as follows:
<TABLE>
<CAPTION>
Sales to unaffiliated customers: 1997 1996 1995
- -------------------------------- ---- ---- ----
<S> <C> <C> <C>
United States $11,447,000 $9,519,000 $7,925,000
Europe 3,973,000 2,690,000 1,393,000
Asia 1,986,000 1,383,000 678,000
Other 336,000 300,000 51,000
</TABLE>
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MANUFACTURING AND OPERATIONS
Electromechanical assembly, calibration, pre and post-assembly quality
assurance inspection and testing, and final packaging for all products have
historically been performed at I-Flow facilities by I-Flow employees using parts
and materials acquired from a variety of outside vendors. Printed circuit board
manufacture and component integration are performed externally, with I-Flow
obtaining custom circuit boards and then providing the electronic materials and
engineering specifications to an outside assembler. In July 1997, the Company
consolidated its U.S. operations to a new facility in Lake Forest, California.
With the acquisition of substantially all the assets of Block in July
1996, the Company acquired Block's wholly owned subsidiary, a manufacturing
plant in Northern Mexico. This plant has been in operation since 1994 and has
historically performed and is currently performing the manufacture of all of
Block's disposable IV infusion devices and tubing sets. The Company intends to
maintain the plant in Mexico and to manufacture a substantial portion of its
products there. The Company regularly reviews the use of outside vendors for
production versus internal manufacturing, analyzing factors such as the quality
of the products received from vendors, the costs of the products, timely
delivery and employee utilization.
In each of the years ended December 31, 1997, 1996 and 1995, the
Company incurred expenses of $1,035,000, $1,139,000 and $840,000, respectively,
for research and development.
PATENTS AND TRADEMARKS
The Company has filed U.S. patent applications for substantially all of
its products. The Company received a patent for the Medi-SIS Syringe Delivery
System in 1997 bringing the total number of patents now held by the Company to
40. These patents generally expire between 2009 to 2015, with the most
significant patents expiring in 2009. The Company has also filed for
intellectual property right protection in all foreign countries from which it
has significant revenues and, in the opinion of management, there are no related
limitations that would have a material adverse effect on the Company.
Copyrights have been obtained for the Vivus 4000 programming software.
The product names "HOMEPUMP Eclipse", "VoiceLink" and "Vivus 4000" are
registered trademarks and trademark applications are pending for most of the
Company's other products. There can be no assurance that pending patent or
trademark applications will be approved or that any patents will provide
competitive advantages for the Company's products or will not be challenged or
circumvented by competitors.
REGULATIONS GOVERNING THE COMPANY'S MANUFACTURING OPERATIONS
Development and manufacture of I-Flow products are regulated by the
U.S. Food, Drug and Cosmetic Act. The Food and Drug Administration ("FDA"),
which administers this Act, has issued a number of regulations that dictate the
method by which new products are allowed to enter the U.S. market, and the
documentation and control of the manufacturing processes. The Company regularly
receives its biannual inspections from the FDA, and to date, there have been no
reportable conditions found during these inspections.
In addition to the FDA, the State of California has a set of similar
regulations and requires annual production-site inspections to maintain the
relevant manufacturing license. State regulations also address the storage and
handling of certain chemicals and disposal of their wastes.
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The Company is required to comply with federal, state and local
environmental laws, however, there is no significant effect of such on the
capital expenditures, earnings and competitive position of the Company as there
is no significant use of hazardous materials in the manufacture of the Company's
products.
Products intended for export shipment are also subject to additional
regulations, including compliance with ISO 9000. In May 1995, the Company
received ISO 9001 certification, which ensures that I-Flow's products meet
specified uniform standards of quality and testing. The Company was also granted
permission to use the CE mark on its products, which reflects approval of the
Company's products for export into 18 member countries of the European
Community. In December 1996, the operations of Block were also added to the
Company's ISO certification and permission was granted to use the CE mark on the
Block products.
The Company has passed all regulatory inspections and believes that it
is currently in compliance with all relevant federal, state and international
requirements in all material respects.
EMPLOYEES
As of February 27, 1998, the Company and its newly acquired subsidiary,
InfuSystem, had a total of 120 full-time employees in the United States and the
Company had 119 employees in its wholly-owned subsidiary in Mexico. No U.S.
employees are covered by a collective bargaining agreement with a union. The
Company considers its relationship with its employees to be very good. The
Company also uses temporary employees as needed, mainly in manufacturing.
ITEM 2. DESCRIPTION OF PROPERTY
In July 1997, the Company entered into a noncancelable operating lease
for a new 51,000 square foot building in Lake Forest, California, for its
primary facility. The lease agreement contains certain scheduled rent increases
(which are accounted for on a straight-line basis) and expires in June 2007 (see
Note 6 of Notes to Consolidated Financial Statements). The Company also leases a
facility for its manufacturing plant in Northern Mexico and a facility for the
operation of its newly acquired subsidiary in Detroit, Michigan.
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 1998, the Company was involved in legal proceedings
in the normal course of operations. Although the outcome of the litigations
cannot be determined as of February 28, 1998, in the opinion of management any
resulting future liability will not have a material adverse effect on the
Company, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the three months ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of February 28, 1998. There are no family
relationships between any of the executive officers or directors of the Company.
The executive officers are chosen annually at the first meeting of the Board
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of Directors following the annual meeting of shareholders and, subject to the
terms of any employment agreement, serve at the pleasure of the Board of
Directors.
<TABLE>
<CAPTION>
Name (Age) Position
---------- --------
<S> <C>
Donald M. Earhart (53) President, Chief Executive Officer and
Chairman of the Board
Henry Tsutomu Tai, Ph.D., M.D. (54) Secretary and Director
James J. Dal Porto (44) Executive Vice President, Chief Operating
Officer and Director
Gayle L. Arnold (36) Chief Financial Officer and Treasurer
</TABLE>
DONALD M. EARHART, former Corporate Officer and President of the
Optical Division of Allergan, Inc. (from 1986 to 1990), has been Chairman of the
Board since March 1991, and Chief Executive Officer since July 1990. Mr. Earhart
joined the Company as President and Chief Operating Officer in June 1990. Mr.
Earhart, who holds a Bachelor of Engineering from Ohio State University and a
Masters Degree in Business Administration from Roosevelt University, has over 23
years experience in the medical products industry. Prior to his employment at
Allergan, he was a Corporate Officer and Division President of Bausch and Lomb,
and was an operations manager of Abbott Laboratories. He has also served as an
engineering consultant at Peat, Marwick, Mitchell & Co., and as an engineer with
Eastman Kodak Company. Mr. Earhart currently serves on the Board of Directors of
Abacus Investments, Ltd.
HENRY TSUTOMU TAI, PH.D., M.D. is the initial progenitor of the
Company's product and business concept in multiple-drug infusion systems and
founding director. Dr. Tai was Chairman of the Board from 1985 to 1988, and has
been a director and Secretary of the Company since 1990. Dr. Tai has been a
consultant in hematology and oncology since 1977. Dr. Tai holds a Bachelor of
Arts degree in Molecular Biology from Harvard University, a Ph.D. in Molecular
Biology and a M.D. from the University of Southern California. He has done
postdoctoral research in the molecular biology of tumor virus DNA at the Weizman
Institute of Science in Israel and at the California Institute of Technology.
JAMES J. DAL PORTO joined the Company in October 1989 to serve as
Controller. Mr. Dal Porto was promoted to Treasurer in October 1990, to Vice
President of Finance and Administration in March 1991, to Executive Vice
President, Chief Financial Officer in March 1993 and to Chief Operating Officer
in February 1994. Mr. Dal Porto served as Financial Planning Manager and Manager
of Property Accounting and Local Taxation at CalComp, a high technology
manufacturing company, from 1984 to 1989. Mr. Dal Porto holds a Bachelor of
Science degree in Economics from the University of California, Los Angeles, and
a Masters in Business Administration from California State University,
Northridge.
GAYLE L. ARNOLD joined the Company in April 1991 to serve as
Controller, was promoted to Vice President, Finance in February 1994 and given
the additional office of Treasurer in May 1996. Prior to joining the Company,
Ms. Arnold served as a Manager with the accounting firm, Deloitte & Touche LLP
where she was employed from 1984 to 1991. Ms. Arnold is a Certified Public
Accountant and holds a Bachelor of Business Administration degree from the
University of Texas, Austin.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Small-Cap Market under
the symbol "IFLO." The Company's Series B Preferred Stock is not publicly
traded, but is convertible by the holder at any time into shares of Common
Stock. The table below sets forth the high and low sales prices of the Company's
Common Stock as reported by The Nasdaq Small-Cap Market.
<TABLE>
<CAPTION>
High Low
---- ---
1996
----
<S> <C> <C>
1st Quarter $5.50 $3.81
2nd Quarter $5.94 $3.69
3rd Quarter $4.94 $3.81
4th Quarter $5.44 $4.06
1997
----
1st Quarter $5.88 $4.00
2nd Quarter $4.31 $3.88
3rd Quarter $5.00 $3.91
4th Quarter $5.13 $2.56
</TABLE>
American Stock Transfer & Trust Company is the Company's transfer agent
for its Common Stock. As of February 27, 1998, the Company had approximately 500
shareholders of record, and based upon information received from nominee
holders, the Company believes it has in excess of 9,000 total beneficial
holders.
The Company has not paid, and does not currently expect to pay in the
foreseeable future, cash dividends on its Common Stock.
In July 1995, an aggregate of 758,681 shares of the Company's Common
Stock were issued upon exercise of various warrants issued to holders in
previous private placements at an exercise price of $2.25 per share, for net
proceeds of $1,707,000. In January and February 1996, an aggregate of 1,999,255
shares of the Company's Common Stock were issued upon exercise of Series G
warrants, which were issued to holders in a private placement in March 1991, at
an exercise price of $3.00 per share, for net proceeds of $5,998,000. The
Company relied on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended. On February, 28 1997, the Company's
Registration Statement on Form S-3 (Registration No. 333-21493) relating to the
sale by certain selling shareholders of shares of common stock which were
previously issued, shares of common stock issuable upon the exercise of
outstanding warrants and shares of common stock issuable upon exercise of
outstanding options, became effective. The shares of Common Stock issued upon
exercise of such warrants were included in the Registration Statement.
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On July 3, 1996, the Company entered into an Agreement for Purchase and
Sales of Assets (the "Asset Agreement") by and among the Company, Block Medical,
Inc., a Delaware corporation ("Block") and Hillenbrand Industries, Inc., an
Indiana corporation and the parent of Block ("Hillenbrand") which contemplated
the purchase by the Company or its wholly-owned subsidiary of substantially all
of the assets of Block from Block and Hillenbrand. The transactions contemplated
by the Asset Agreement were consummated on July 22, 1996. Consideration for the
purchase included 433,018 shares of the Company's Common Stock (issued to
Hillenbrand) and a warrant to purchase 250,000 shares of the Company's Common
Stock at an exercise price of $4.62, expiring July 22, 2001 (issued to
Hillenbrand), exercisable at anytime. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
The shares of Common Stock issuable upon exercise of Hillenbrand's warrant were
included in the Registration Statement on form S-3 (Registration No. 333-21493)
filed by the Company in February 1997.
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. 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 and VMI, as payment of Amherst's fees and
expenses in connection with the Merger. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to the Merger Agreement, the Company is obligated to use its
commercially reasonable best efforts to register the shares of Common Stock
within six months after the Effective Time.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Consolidated Financial Data" shown on page
5 of the Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which appears on pages 6 to 9 of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
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The financial statements, including the notes thereto, included on
pages 11 through 26 of the Company's 1997 Annual Report to Shareholders together
with the section entitled "Independent Auditors Report" included on page 11 are
incorporated herein by reference.
(b) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO ADDITIONS FOR BALANCE
BEGINNING COSTS AND BUSINESS AT END
CLASSIFICATION OF PERIOD EXPENSES ACQUISITION DEDUCTIONS OF PERIOD
- -------------- --------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995:
Allowance for doubtful
accounts 247,000 262,000 509,000
Reserve for obsolete
inventories 461,000 296,000 165,000
YEAR ENDED DECEMBER 31,
1996:
Allowance for doubtful
accounts 509,000 29,000 413,000 125,000
Reserve for obsolete
inventories 165,000 1,169,000 567,000 767,000
YEAR ENDED DECEMBER 31,
1997:
Allowance for doubtful
accounts 125,000 338,000 463,000
Reserve for obsolete
inventories 767,000 612,000 244,000 1,135,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders under the caption "Election of Directors" which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the fiscal year ended December 31, 1997 and the information from the
section entitled "Executive Officers of the Registrant" following Part I, Item 4
of this Report.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders under the captions "Executive Compensation", "Compensation
Committee Interlock Insider Participation" and "Stock Performance Graph" which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders under the caption "Principal Shareholders and Stock Ownership of
Management" which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by
this Item included in the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders under the caption "Certain Relationships and Related
Transactions" which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 1997.
13
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements
The following financial statements of the Company and independent
auditors' report are included on pages 10 to 26 of the Company's 1997
Annual Report to Shareholders and are incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report
Page(s)
-------
<S> <C>
Independent Auditors' Report 10
Financial Statements
Consolidated Balance Sheets, December 31, 1997 and 1996 11
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 12
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 13
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 14
Notes to Financial Statements 15
The following are included herein: Page in This
Report
------
Independent Auditors' Report 12
</TABLE>
The Financial Statements and Independent Auditor's Report listed in the
above index which are included in the Company's 1997 Annual Report to
Shareholders are hereby incorporated herein by reference. With
exception of the items referred to above and in Items 6, 7, and 8, the
Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997 is not deemed filed as part of this Report.
<TABLE>
<CAPTION>
Page in This
(2) Financial Statement Schedules included herein: Report
------
<S> <C>
Schedule II - "Valuation and Qualifying Accounts" 9
</TABLE>
All other schedules are omitted as the required information is
inapplicable.
(3) Exhibits
The list of exhibits contained in the accompanying Index to Exhibits is
herein incorporated by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1997
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
I-FLOW CORPORATION
Dated: January 6, 1999 By: /s/ Donald M. Earhart
-------------------------------
Donald M. Earhart,
Chairman, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities indicated on March 30, 1998:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Donald M. Earhart Chairman, President and Chief Executive Officer
-----------------------------
Donald M. Earhart
/s/ James J. Dal Porto Executive Vice President, Chief Operating
----------------------------- Officer and Director
James J. Dal Porto
/s/ Gayle L. Arnold Chief Financial Officer (Principal Financial and
----------------------------- Accounting Officer)
Gayle L. Arnold
/s/ John H. Abeles Director
-----------------------------
John H. Abeles, M.D.
/s/ Jack H. Halperin Director
-----------------------------
Jack H. Halperin
/s/ Joel S. Kanter Director
-----------------------------
Joel S. Kanter
/s/ Erik H. Loudon Director
-----------------------------
Erik H. Loudon
/s/ Charles C. McGettigan Director
-----------------------------
Charles C. McGettigan
/s/ Henry Tsutomu Tai Director and Secretary
-----------------------------
Henry Tsutomu Tai, Ph.D., M.D.
</TABLE>
15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of I-Flow Corporation:
We have audited the consolidated financial statements of I-Flow Corporation
as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997, and have issued our report thereon dated
February 19, 1998. Such financial statements and report are included in
I-Flow Corporation's Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the financial statement
schedule of I-Flow Corporation listed in Item 8. The financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 19, 1998
16
<PAGE> 17
INDEX TO EXHIBITS
Set forth below is a list of the exhibits included as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
3.1 Restated Articles of Incorporation of the Company(2)
3.2 Certificate of Amendment to Restated Articles of Incorporation
dated June 14, 1991(3)
3.3 Certificate of Amendment to Restated Articles of Incorporation
dated May 12, 1992(5)
3.4 Certificate of Determination covering Company's Series B
Preferred Stock filed with the Secretary of State on October
5, 1992(5)
3.5 Restated Bylaws as of July 22, 1991 of the Company(3)
4.1 Specimen Common Stock Certificate(5)
4.2 Warrant Agreement between the Company and American Stock
Transfer & Trust Company, as Warrant Agent, dated February 13,
1990(1)
4.3 Form of Warrant dated July 22, 1996, issued in conjunction
with the acquisition of Block Medical, Inc.(8)
10.1 Employment Agreement with Donald M. Earhart dated May 16, 1990
(2)(6)*
10.2 1987-1988 Incentive Stock Option Plan and Non-Statutory Stock
Option Plan Restated as of March 23, 1992(5)(6)*
10.3 1992 Non-Employee Director Stock Option Plan(4)(6)
10.4 License and Transfer Agreement with SoloPak Pharmaceuticals
Inc., dated March 6, 1996(7)
10.5 1996 Stock Incentive Plan(6)(9)*
10.6 Agreement for Purchase and Sale of Assets dated as of July 3,
1996 by and among I-Flow Corporation, Block Medical, Inc. and
Hillenbrand Industries, Inc.(8)
10.7 Employment Agreement with James J. Dal Porto dated September
6, 1996(10)*
10.8 Lease Agreement Between Industrial Developments International,
Inc. as Landlord and I-Flow Corporation as Tenant dated April
14, 1997(11)
10.9 Agreement and Plan of Merger by and among I-Flow Corporation,
I-Flow Subsidiary, Inc., Venture Medical, Inc., and
Infusystems II, Inc. and the Shareholders of Venture Medical,
Inc. and InfuSystems II, Inc.(12)
10.10 Loan and Security Agreement between Silicon Valley Bank and
I-Flow Corporation dated September 28, 1995
10.11 Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation dated March 2, 1998
13 1997 Annual Report to Shareholders (not deemed to be filed
herein except for certain portions which have been
incorporated herein by reference)
21 List of Subsidiaries
23.1 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-32263-LA) declared effective
February 1, 1990.
(2) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended September 30, 1990.
17
<PAGE> 18
(3) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-41207-LA) declared effective
August 8, 1991.
(4) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1991.
(5) Incorporated by reference to exhibit with this title filed with the
Company's Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
(6) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(7) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1995.
(8) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated July 22, 1996.
(9) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#333-16547) declared effective
November 20, 1996.
(10) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1996.
(11) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated April 14, 1997.
(12) Incorporated by reference to exhibit with this title filed with the
Company's Report on Form 8-K dated February 9, 1998.
* Compensation plan, contract or arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and Exchange Commission.
18
<PAGE> 1
EXHIBIT 10.10
____________________________________________________________
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: I-FLOW CORPORATION
ADDRESS: 2532 WHITE ROAD
IRVINE, CALIFORNIA 92714
DATE: AUGUST 11, 1995
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK ("Silicon"), whose address is 3000 Lakeside Drive, Santa
Clara, California 95054-2895 and the borrower named above (the "Borrower"),
whose chief executive office is located at the above address ("Borrower's
Address").
1. LOANS.
1.1 LOANS. Silicon, in its reasonable discretion, will make loans to the
Borrower (the "Loans") in amounts determined by Silicon in its reasonable
discretion up to the amount (the "Credit Limit") shown on the Schedule to this
Agreement (the "Schedule"), provided no Event of Default and no event which,
with notice or passage of time or both, would constitute an Event of Default has
occurred. The Borrower is responsible for monitoring the total amount of Loans
and other Obligations outstanding from time to time, and Borrower shall not
permit the same, at any time, to exceed the Credit Limit. If at any time the
total of all outstanding Loans and all other Obligations exceeds the Credit
Limit, the Borrower shall immediately pay the amount of the excess to Silicon,
without notice or demand.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest
at the rate shown on the Schedule hereto. Interest shall be payable monthly, on
the due date shown on the monthly billing from Silicon to the Borrower. Silicon
may, in its discretion, charge interest to Borrower's deposit accounts
maintained with Silicon.
1.3 FEES. The Borrower shall pay to Silicon a loan origination fee in the
amount shown on the Schedule hereto concurrently herewith. This fee is in
addition to all interest and other sums payable to Silicon and is not
refundable.
2. GRANT OF SECURITY INTEREST.
2.1 OBLIGATIONS. The term "Obligations" as used in this Agreement means the
following: the obligation to pay all Loans and all interest thereon when due,
and to pay and perform when due all other present and future indebtedness,
liabilities, obligations, guarantees, covenants, agreements, warranties and
representations of the Borrower to Silicon, whether joint or several, monetary
or non-monetary, and whether created pursuant to this Agreement or any other
present or future agreement or otherwise. Silicon may, in its discretion,
require that Borrower pay monetary Obligations in cash to Silicon, or charge
them to Borrower's Loan account, in which event they will bear interest at the
same rate applicable to the Loans. Silicon may also, in its discretion, charge
any monetary Obligations to Borrower's deposit accounts maintained with Silicon.
2.2 COLLATERAL. As security for all Obligations, the Borrower hereby grants
Silicon a continuing security interest in all of the Borrower's interest in the
types of property described below, whether now owned or hereafter acquired, and
wherever located (collectively, the "Collateral"): (a) All accounts, contract
rights, chattel paper, letters of credit, documents, securities, money, and
instruments, and all other obligations now or in the future owing to the
Borrower; (b) All inventory, goods, merchandise, materials, raw materials, work
in process, finished goods, farm products, advertising, packaging and shipping
materials, supplies, and all other tangible personal property which is held for
sale or lease or furnished under contracts of service or consumed in the
Borrower's business, and all warehouse receipts and other documents; and (c) All
equipment, including without limitation all machinery, fixtures, trade fixtures,
vehicles, furnishings, furniture, materials, tools, machine tools, office
equipment, computers and peripheral devices, appliances, apparatus, parts, dies,
and jigs; (d) All general intangibles including, but not limited to, deposit
accounts, goodwill, names, trade names, trademarks and the goodwill of the
business symbolized thereby, trade secrets, drawings, blueprints, customer
lists, patents, patent applications, copyrights, security deposits, loan
commitment fees, federal, state and local tax refunds and claims, all rights in
all litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, all rights to purchase or
sell real or personal property, all rights as a licensor or licensee of any
kind, all royalties, licenses, processes, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation credit, liability, property and other insurance), and all
other rights, privileges and franchises of every kind; (e) All books and
records, whether stored on computers or otherwise maintained; and (f) All
substitutions, additions and accessions to any of the foregoing, and all
products, proceeds and insurance
-1-
<PAGE> 2
Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
proceeds of the foregoing, and all guaranties of and security for the foregoing;
and all books and records relating to any of the foregoing. Silicon's security
interest in any present or future technology (including patents, trade secrets,
and other technology) shall be subject to any licenses or rights now or in the
future granted by the Borrower to any third parties in the ordinary course of
Borrower's business; provided that if the Borrower proposes to sell, license or
grant any other rights with respect to any technology in a transaction that, in
substance, conveys a major part of the economic value of that technology,
Silicon shall first be requested to release its security interest in the same,
and Silicon may withhold such release in its discretion.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants to Silicon as follows, and the Borrower
covenants that the following representations will continue to be true, and that
the Borrower will comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower, if a corporation, is and
will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The Borrower is and
will continue to be qualified and licensed to do business in all jurisdictions
in which any failure to do so would have a material adverse effect on the
Borrower. The execution, delivery and performance by the Borrower of this
Agreement, and all other documents contemplated hereby have been duly and
validly authorized, are enforceable against the Borrower in accordance with
their terms, and do not violate any law or any provision of, and are not grounds
for acceleration under, any agreement or instrument which is binding upon the
Borrower.
3.2 NAME; TRADE NAMES AND STYLES. The name of the Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule hereto are
all prior names of the Borrower and all of Borrower's present and prior trade
names. The Borrower shall give Silicon 15 days' prior written notice before
changing its name or doing business under any other name. The Borrower has
complied, and will in the future comply, with all laws relating to the conduct
of business under a fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is the Borrower's chief executive office. In addition,
the Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule to this Agreement. The Borrower will give
Silicon at least 15 days prior written notice before changing its chief
executive office or locating the Collateral at any other location.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. The Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of equipment which are leased by the Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for the following ("Permitted Liens"):
(i) purchase money security interests in specific items of equipment; (ii)
leases of specific items of equipment; (iii) liens for taxes not yet payable;
(iv) additional security interests and liens consented to in writing by Silicon
in its reasonable discretion, which consent shall not be unreasonably withheld;
and (v) security interests being terminated substantially concurrently with this
Agreement. Silicon will have the right to require, as a condition to its consent
under subparagraph (iv) above, that the holder of the additional security
interest or lien sign an intercreditor agreement on Silicon's then standard
form, acknowledge that the security interest is subordinate to the security
interest in favor of Silicon, and agree not to take any action to enforce its
subordinate security interest so long as any Obligations remain outstanding, and
that the Borrower agree that any uncured default in any obligation secured by
the subordinate security interest shall also constitute an Event of Default
under this Agreement. Silicon now has, and will continue to have, a perfected
and enforceable security interest in all of the Collateral, subject only to the
Permitted Liens, and the Borrower will at all times defend Silicon and the
Collateral against all claims of others. None of the Collateral now is or will
be affixed to any real property in such a manner, or with such intent, as to
become a fixture.
3.5 MAINTENANCE OF COLLATERAL. The Borrower will maintain the Collateral in
good working condition, and the Borrower will not use the Collateral for any
unlawful purpose. The Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. The Borrower has maintained and will maintain at the
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the
future delivered to Silicon have been, and will be, prepared in conformity with
generally accepted accounting principles and now and in the future will
completely and accurately reflect the financial condition of the Borrower, at
the times and for the periods therein stated. Since the last date covered by any
such statement, there has been no material adverse change in the financial
condition or business of the Borrower. The Borrower is now and will continue to
be solvent. The Borrower will provide Silicon: (i) within 30 days after the end
of each month, a monthly financial statement prepared by the Borrower, and a
Compliance Certificate in such form as Silicon shall reasonably specify, signed
by the Chief Financial Officer of the Borrower, certifying that as of the end of
such month the Borrower was in full compliance with all of the terms and
conditions of this Agreement, and setting forth calculations showing compliance
with the financial covenants set forth on the Schedule and such other
information as Silicon shall reasonably request; *
*(II) WITHIN THE EARLIER OF 45 DAYS FOLLOWING THE END OF EACH FISCAL
QUARTER'S OR 5 DAYS AFTER THE EARLIER OF THE DATE THE BORROWER'S REPORT 10-Q IS
FILED OR IS REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
SUCH 10-Q REPORT; AND (III) WITHIN THE EARLIER OF 90 DAYS FOLLOWING THE END OF
THE BORROWER'S FISCAL YEAR END OR 5 DAYS AFTER THE EARLIER OF THE DATE THE
BORROWER'S REPORT 10-K IS FILED OR IS REQUIRED TO BE
-2-
<PAGE> 3
Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH 10-K REPORT, AND
COMPLETE ANNUAL FINANCIAL STATEMENTS, CERTIFIED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ACCEPTABLE TO SILICON.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and the Borrower has timely paid, and will timely
pay, all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by the Borrower. The Borrower may,
however, defer payment of any contested taxes, provided that the Borrower (i) in
good faith contests the Borrower's obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted, (ii) notifies
Silicon in writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. The Borrower is
unaware of any claims or adjustments proposed for any of the Borrower's prior
tax years which could result in additional taxes becoming due and payable by the
Borrower. The Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and the Borrower has not and will not
withdraw from participation in, permit partial or complete termination of, or
permit the occurrence of any other event with respect to, any such plan which
could result in any liability of the Borrower, including, without limitation,
any liability to the Pension Benefit Guaranty Corporation or its successors or
any other governmental agency.
3.9 COMPLIANCE WITH LAW. The Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to the Borrower, including, but not limited to,
those relating to the Borrower's ownership of real or personal property, conduct
and licensing of the Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit,
litigation, proceeding or investigation pending or (to best of the Borrower's
knowledge) threatened by or against or affecting the Borrower in any court or
before any governmental agency (or any basis therefor known to the Borrower)
which may result, either separately or in the aggregate, in any material adverse
change in the financial condition or business of the Borrower, or in any
material impairment in the ability of the Borrower to carry on its business in
substantially the same manner as it is now being conducted. The Borrower will
promptly inform Silicon in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against the Borrower
involving amounts in excess of $250,000.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. ADDITIONAL DUTIES OF THE BORROWER.
4.1 FINANCIAL AND OTHER COVENANTS. The Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule to this Agreement.
4.2 OVERADVANCE; PROCEEDS OF ACCOUNTS. If for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit, without
limiting Silicon's other remedies, and whether or not Silicon declares an Event
of Default, Borrower shall remit to Silicon all checks and other proceeds of
Borrower's accounts and general intangibles, in the same form as received by
Borrower, within one day after Borrower's receipt of the same, to be applied to
the Obligations in such order as Silicon shall determine in its discretion.
4.3 INSURANCE. The Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole and absolute discretion, except that,
provided no Event of Default has occurred, Silicon shall release to the Borrower
insurance proceeds with respect to equipment totaling less than $100,000, which
shall be utilized by the Borrower for the replacement of the equipment with
respect to which the insurance proceeds were paid. Silicon may require
reasonable assurance that the insurance proceeds so released will be so used. If
the Borrower fails to provide or pay for any insurance, Silicon may, but is not
obligated to, obtain the same at the Borrower's expense. The Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
4.4 REPORTS. The Borrower shall provide Silicon with such written reports with
respect to the Borrower (including without limitation budgets, sales
projections, operating plans and other financial documentation), as Silicon
shall from time to time reasonably specify.
4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and upon
one business day notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy the Borrower's accounting books
and records and Borrower's books and records relating to the Collateral. Silicon
shall take reasonable steps to keep confidential all information obtained in any
such inspection or audit, but Silicon shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and pursuant to
any subpoena or other legal process. The foregoing audits shall be at Silicon's
expense, except that the Borrower shall reimburse Silicon for its reasonable out
of pocket costs for semi-annual accounts receivable audits by third parties
retained by Silicon, and Silicon may debit Borrower's deposit accounts with
Silicon for the cost of such semi-annual accounts receivable audits (in which
event Silicon shall send notification thereof to the Borrower). Notwithstanding
the foregoing, after the occurrence of an Event of Default all audits shall be
at the Borrower's expense.
4.6 NEGATIVE COVENANTS. Except as may be permitted in the Schedule hereto, the
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation, except that the
Borrower may merge or consolidate with another corporation if the Borrower is
the surviving corporation in the merger and the aggregate value of the assets
acquired in the merger do not exceed 25% of Borrower's Tangible Net Worth (as
defined in the Schedule) as of the end of the
-3-
<PAGE> 4
Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
month prior to the effective date of the merger, and the assets of the
corporation acquired in the merger are not subject to any liens or encumbrances,
except Permitted Liens; (ii) acquire any assets outside the ordinary course of
business for an aggregate purchase price exceeding 25% of Borrower's Tangible
Net Worth (as defined in the Schedule) as of the end of the month prior to the
effective date of the acquisition; (iii) enter into any other transaction
outside the ordinary course of business (except as permitted by the other
provisions of this Section); (iv) sell or transfer any Collateral, except for
the sale of finished inventory in the ordinary course of the Borrower's
business, and except for the sale of obsolete or unneeded equipment in the
ordinary course of business; (v) make any loans of any money or any other
assets; (vi) incur any debts, outside the ordinary course of business, which
would have a material, adverse effect on the Borrower or on the prospect of
repayment of the Obligations; (vii) guarantee or otherwise become liable with
respect to the obligations of another party or entity; (viii) pay or declare any
dividends on the Borrower's stock (except for dividends payable solely in stock
of the Borrower); (ix) redeem, retire, purchase or otherwise acquire, directly
or indirectly, any of the Borrower's stock; (x) make any change in the
Borrower's capital structure which has a material adverse effect on the Borrower
or on the prospect of repayment of the Obligations; or (xi) dissolve or elect to
dissolve. Transactions permitted by the foregoing provisions of this Section are
only permitted if no Event of Default and no event which (with notice or passage
of time or both) would constitute an Event of Default would occur as a result of
such transaction.
4.7 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to the Borrower, the Borrower shall, without expense to Silicon, make
available the Borrower and its officers, employees and agents and the Borrower's
books and records to the extent that Silicon may deem them reasonably necessary
in order to prosecute or defend any such suit or proceeding.
4.8 VERIFICATION. Silicon may, from time to time, following prior notification
to Borrower, verify directly with the respective account debtors the validity,
amount and other matters relating to the Borrower's accounts, by means of mail,
telephone or otherwise, either in the name of the Borrower or Silicon or such
other name as Silicon may reasonably choose, provided that no prior notification
to Borrower shall be required following an Event of Default.
4.9 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its expense, on
request by Silicon, to execute all documents in form satisfactory to Silicon, as
Silicon, may deem reasonably necessary or useful in order to perfect and
maintain Silicon's perfected security interest in the Collateral, and in order
to fully consummate all of the transactions contemplated by this Agreement.
5. TERM.
5.1 MATURITY DATE. This Agreement shall continue in effect until the maturity
date set forth on the Schedule hereto (the "Maturity Date").
5.2 EARLY TERMINATION. This Agreement may be terminated, without penalty,
prior to the Maturity Date as follows: (i) by the Borrower, effective three
business days after written notice of termination is given to Silicon; or (ii)
by Silicon at any time after the occurrence of an Event of Default, without
notice, effective immediately.
5.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, the Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding letters of
credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such letters of credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said letters of credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the reasonable
discretion of Silicon, Silicon may, in its sole discretion, refuse to make any
further Loans after termination. No termination shall in any way affect or
impair any right or remedy of Silicon, nor shall any such termination relieve
the Borrower of any Obligation to Silicon, until all of the Obligations have
been paid and performed in full. Upon payment and performance in full of all the
Obligations, Silicon shall promptly deliver to the Borrower termination
statements, requests for reconveyances and such other documents as may be
required to fully terminate any of Silicon's security interests.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and the Borrower shall
give Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by the Borrower or
any of the Borrower's officers, employees or agents, now or in the future, shall
be untrue or misleading in any material respect; or (b) the Borrower shall fail
to pay when due any Loan or any interest thereon or any other monetary
Obligation; or (c) the total Loans and other Obligations outstanding at any time
exceed the Credit Limit; or (d) the Borrower shall fail to comply with any of
the financial covenants set forth in the Schedule or shall fail to perform any
other non-monetary Obligation which by its nature cannot be cured; or (e) the
Borrower shall fail to pay or perform any other non-monetary Obligation, which
failure is not cured within 5 business days after the date due; or (f) Any levy,
assessment, attachment, seizure, lien or encumbrance is made on all or any part
of the Collateral which is not cured within 10 days after the occurrence of the
same; or (g) Dissolution, termination of existence, insolvency or business
failure of the Borrower; or appointment of a receiver, trustee or custodian, for
all or any part of the property of, assignment for the benefit of creditors by,
or the commencement of any proceeding by the Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in
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Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
the future in effect; or (h) the commencement of any proceeding against the
Borrower or any guarantor of any of the Obligations under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect,
which is not cured by the dismissal thereof within 30 days after the date
commenced; (i) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing; or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or (j) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing; or commencement of proceedings by or against
any such third party under any bankruptcy or insolvency law; or (k) the Borrower
makes any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement or if any person who has subordinated such indebtedness
or obligations terminates or in any way limits his subordination agreement; or
(l) there shall be a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of the Borrower,
in one or more transactions, compared to the ownership of outstanding shares of
stock of the Borrower in effect on the date hereof, without the prior written
consent of Silicon; or (m) the Borrower shall generally not pay its debts as
they become due; or the Borrower shall conceal, remove or transfer any part of
its property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law. Silicon may cease making any
Loans hereunder during any of the above cure periods, and thereafter if an Event
of Default has occurred.
6.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by the Borrower), may do any one or
more of the following: (a) Cease making Loans or otherwise extending credit to
the Borrower under this Agreement or any other document or agreement; (b)
Accelerate and declare all or any part of the Obligations to be immediately due,
payable, and performable, notwithstanding any deferred or installment payments
allowed by any instrument evidencing or relating to any Obligation; (c) Take
possession of any or all of the Collateral wherever it may be found, and for
that purpose the Borrower hereby authorizes Silicon without judicial process to
enter onto any of the Borrower's premises without interference to search for,
take possession of, keep, store, or remove any of the Collateral, and remain on
the premises or cause a custodian to remain on the premises in exclusive control
thereof without charge for so long as Silicon deems it reasonably necessary in
order to complete the enforcement of its rights under this Agreement or any
other agreement; provided, however, that should Silicon seek to take possession
of any or all of the Collateral by Court process, the Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that Silicon
retain possession of and not dispose of any such Collateral until after trial or
final judgment; (d) Require the Borrower to assemble any or all of the
Collateral and make it available to Silicon at places designated by Silicon
which are reasonably convenient to Silicon and the Borrower, and to remove the
Collateral to such locations as Silicon may deem advisable; (e) Require Borrower
to deliver to Silicon, in kind, all checks and other payments received with
respect to all accounts and general intangibles, together with any necessary
indorsements, within one day after the date received by the Borrower; (f)
Complete the processing, manufacturing or repair of any Collateral prior to a
disposition thereof and, for such purpose and for the purpose of removal,
Silicon shall have the right to use the Borrower's premises, vehicles, hoists,
lifts, cranes, equipment and all other property without charge; (g) Sell, lease
or otherwise dispose of any of the Collateral in its condition at the time
Silicon obtains possession of it or after further manufacturing, processing or
repair, at any one or more public and/or private sales, in lots or in bulk, for
cash, exchange or other property, or on credit, and to adjourn any such sale
from time to time without notice other than oral announcement at the time
scheduled for sale. Silicon shall have the right to conduct such disposition on
the Borrower's premises without charge, for such time or times as Silicon deems
reasonable, or on Silicon's premises, or elsewhere and the Collateral need not
be located at the place of disposition. Silicon may directly or through any
affiliated company purchase or lease any Collateral at any such public
disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve the
Borrower of any liability the Borrower may have if any Collateral is defective
as to title or physical condition or otherwise at the time of sale; (h) Demand
payment of, and collect any accounts and general intangibles comprising
Collateral and, in connection therewith, the Borrower irrevocably authorizes
Silicon to endorse or sign the Borrower's name on all collections, receipts,
instruments and other documents, to take possession of and open mail addressed
to the Borrower and remove therefrom payments made with respect to any item of
the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant
extensions of time to pay, compromise claims and settle accounts and the like
for less than face value; (i) Offset against any sums in any of Borrower's
general, special or other deposit accounts with Silicon; and (j) Demand and
receive possession of any of the Borrower's federal and state income tax returns
and the books and records utilized in the preparation thereof or referring
thereto. All reasonable attorneys' fees, expenses, costs, liabilities and
obligations incurred by Silicon with respect to the foregoing shall be added to
and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.
6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. The Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially
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Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
reasonable: (i) Notice of the sale is given to the Borrower at least seven days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by Silicon, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v)
Payment of the purchase price in cash or by cashier's check or wire transfer is
required; (vi) With respect to any sale of any of the Collateral, Silicon may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from the Borrower any and all information concerning the same. Silicon may
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable.
6.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, the Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to the
Borrower, and at the Borrower's expense, to do any or all of the following, in
the Borrower's name or otherwise: (a) Execute on behalf of the Borrower any
documents that Silicon may, in its sole and absolute discretion, deem advisable
in order to perfect and maintain Silicon's security interest in the Collateral,
or in order to exercise a right of the Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of the Borrower any
document exercising, transferring or assigning any option to purchase, sell or
otherwise dispose of or to lease (as lessor or lessee) any real or personal
property which is part of Silicon's Collateral or in which Silicon has an
interest; (c) Execute on behalf of the Borrower, any invoices relating to any
account, any draft against any account debtor and any notice to any account
debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien; (d) Take control in any manner of any
cash or non-cash items of payment or proceeds of Collateral; endorse the name of
the Borrower upon any instruments, or documents, evidence of payment or
Collateral that may come into Silicon's possession; (e) Endorse all checks and
other forms of remittances received by Silicon; (f) Pay, contest or settle any
lien, charge, encumbrance, security interest and adverse claim in or to any of
the Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; (g) Grant extensions of time to pay, compromise
claims and settle accounts and general intangibles for less than face value and
execute all releases and other documents in connection therewith; (h) Pay any
sums required on account of the Borrower's taxes or to secure the release of any
liens therefor, or both; (i) Settle and adjust, and give releases of, any
insurance claim that relates to any of the Collateral and obtain payment
therefor; (j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, the Borrower to give Silicon the same
rights of access and other rights with respect thereto as Silicon has under this
Agreement; and (k) Take any action or pay any sum required of the Borrower
pursuant to this Agreement and any other present or future agreements. Silicon
shall exercise the foregoing powers in a commercially reasonable manner. Any and
all reasonable sums paid and any and all reasonable costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon with respect to
the foregoing shall be added to and become part of the Obligations, shall be
payable on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations. In no event shall Silicon's
rights under the foregoing power of attorney or any of Silicon's other rights
under this Agreement be deemed to indicate that Silicon is in control of the
business, management or properties of the Borrower.
6.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Silicon shall determine in its sole discretion. Any surplus shall be paid to the
Borrower or other persons legally entitled thereto; the Borrower shall remain
liable to Silicon for any deficiency. If, Silicon, in its sole discretion,
directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale or other disposition of Collateral,
Silicon shall have the option, exercisable at any time, in its sole discretion,
of either reducing the Obligations by the principal amount of purchase price or
deferring the reduction of the Obligations until the actual receipt by Silicon
of the cash therefor.
6.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and the Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
7. GENERAL PROVISIONS.
7.1 NOTICES. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by regular first-class mail, or
certified mail return receipt requested, addressed to Silicon or the Borrower at
the addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. All notices shall be
deemed to have been given upon delivery in the case of notices personally
delivered to the Borrower or to Silicon, or at the expiration of two business
days following the deposit thereof in the United States mail, with postage
prepaid.
7.2 SEVERABILITY. Should any provision of this Agreement be held by any court
of competent jurisdiction to be void or unenforceable, such defect shall not
affect the remainder of this Agreement, which shall continue in full force and
effect.
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Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
7.3 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between the Borrower and Silicon and supersede all prior
and contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
7.4 WAIVERS. The failure of Silicon at any time or times to require the
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between the Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent thereto. None of the provisions of
this Agreement or any other agreement now or in the future executed by the
Borrower and delivered to Silicon shall be deemed to have been waived by any act
or knowledge of Silicon or its agents or employees, but only by a specific
written waiver signed by an officer of Silicon and delivered to the Borrower.
The Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general
intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.
7.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by the
Borrower or any other party through the ordinary negligence of Silicon, or any
of its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon.
7.6 AMENDMENT. The terms and provisions of this Agreement may not be waived or
amended, except in a writing executed by the Borrower and a duly authorized
officer of Silicon.
7.7 TIME OF ESSENCE. Time is of the essence in the performance by the Borrower
of each and every obligation under this Agreement.
7.8 ATTORNEYS FEES AND COSTS. The Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, account debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of the Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to the Borrower. In satisfying Borrower's obligation
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
only Silicon and not Borrower in connection with this Agreement. If either
Silicon or the Borrower files any lawsuit against the other predicated on a
breach of this Agreement, the prevailing party in such action shall be entitled
to recover its reasonable costs and attorneys' fees, including (but not limited
to) reasonable attorneys' fees and costs incurred in the enforcement of,
execution upon or defense of any order, decree, award or judgment. All
attorneys' fees and costs to which Silicon may be entitled pursuant to this
Paragraph shall immediately become part of the Borrower's Obligations, shall be
due on demand, and shall bear interest at a rate equal to the highest interest
rate applicable to any of the Obligations.
7.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of the parties hereto; provided, however, that
the Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release the
Borrower from its liability for the Obligations.
7.10 JOINT AND SEVERAL LIABILITY. If the Borrower consists of more than one
person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
7.11 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. The Borrower acknowledges that the headings may
not describe completely the subject matter of the applicable paragraph, and the
headings shall not be used in any manner to construe, limit, define or interpret
any term or provision of this Agreement. This Agreement has been fully reviewed
and negotiated between the parties and no uncertainty or ambiguity in any term
or provision of this Agreement shall be construed strictly against Silicon or
the Borrower under any rule of construction or otherwise.
7.12 MUTUAL WAIVER OF JURY TRIAL. THE BORROWER AND SILICON EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE BORROWER, OR ANY CONDUCT, ACTS
OR OMISSIONS OF SILICON OR THE BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR THE
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
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Silicon Valley Bank Loan and Security Agreement
____________________________________________________________
7.13 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and the
Borrower shall be governed by, and in accordance with, the laws of the State of
California. Any undefined term used in this Agreement that is defined in the
California Uniform Commercial Code shall have the meaning assigned to that term
in the California Uniform Commercial Code. As a material part of the
consideration to Silicon to enter into this Agreement, the Borrower (i) agrees
that all actions and proceedings relating directly or indirectly hereto shall,
at Silicon's option, be litigated in courts located within California, and that
the exclusive venue therefor shall be Orange County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights the Borrower may have to object to
the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
BORROWER:
I-FLOW CORPORATION
BY_______________________________
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE______________________________
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____________________________________________________________
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: I-FLOW CORPORATION
ADDRESS: 2532 WHITE ROAD
IRVINE, CALIFORNIA 92714
DATE: AUGUST 11, 1995
THIS SCHEDULE is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i)
$1,500,000 at any one time outstanding; or (ii)
75% of the Net Amount of Borrower's accounts,
which Silicon in its discretion deems eligible
for borrowing. "Net Amount" of an account means
the gross amount of the account, minus all
applicable sales, use, excise and other similar
taxes and minus all discounts, credits and
allowances of any nature granted or claimed.
Without limiting the fact that the
determination of which accounts are eligible
for borrowing is a matter of Silicon's
discretion, the following will not be deemed
eligible for borrowing: accounts outstanding
for more than 90 days from the invoice date,
accounts subject to any contingencies, accounts
owing from the United States or any department,
agency or instrumentality of the United States
or any state, city or municipality, accounts
owing from an account debtor outside the United
States (unless pre-approved by Silicon in its
discretion, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured
satisfactory to Silicon), accounts owing from
one account debtor to the extent they exceed
25%* of the total eligible accounts
outstanding, accounts owing from an affiliate
of Borrower, and accounts owing from an account
debtor to whom Borrower is or may be liable for
goods purchased from such account debtor or
otherwise. In addition, if more than 50% of the
accounts owing from an account debtor are
outstanding more than 90 days from the invoice
date or are otherwise not eligible accounts,
then all accounts owing from that account
debtor will be deemed ineligible for borrowing.
*PROVIDED THAT SUCH PERCENTAGE FIGURE SHALL BE
50% WITH RESPECT TO THE FOLLOWING ACCOUNT
DEBTOR: SOLOPAK PHARMACEUTICAL
LETTER OF CREDIT SUBLIMIT Silicon, in its reasonable discretion, will
from time to time during the term of this
Agreement issue letters of credit for the
account of the Borrower ("Letters of Credit"),
in an aggregate amount at any one time
outstanding not to exceed $200,000, upon the
request of the Borrower, provided that, on the
date the Letters of Credit are to be issued,
Borrower has available to it Loans in an amount
equal to or greater than the face amount of the
Letters of Credit to be issued. Prior to the
issuance of any Letters of Credit, Borrower
shall execute and deliver to Silicon
Applications for Letters of Credit and such
other
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Silicon Valley Bank Schedule to Loan and Security Agreement
_________________________________________________________________
documentation as Silicon shall specify (the
"Letter of Credit Documentation"). Fees for the
Letters of Credit shall be as provided in the
Letter of Credit Documentation. Letters of
Credit may have a maturity date up to twelve
months beyond the Maturity Date in effect from
time to time, provided that if on the Maturity
Date, or on any earlier effective date of
termination, there are any outstanding letters
of credit issued by Silicon or issued by
another institution based upon an application,
guarantee, indemnity or similar agreement on
the part of Silicon, then on such date Borrower
shall provide to Silicon cash collateral in an
amount equal to the face amount of all such
letters of credit plus all interest, fees and
costs due or to become due in connection
therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to
Silicon's then standard form cash pledge
agreement.
The Credit Limit set forth above and the Loans
available under this Agreement at any time
shall be reduced by the face amount of Letters
of Credit from time to time outstanding.
INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from
time to time, plus 1.0% per annum. Interest
shall be calculated on the basis of a 360-day
year for the actual number of days elapsed.
"Prime Rate" means the rate announced from time
to time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by
Silicon are based, and it is not necessarily
the best rate available at Silicon. The
interest rate applicable to the Obligations
shall change on each date there is a change in
the Prime Rate.
LOAN ORIGINATION FEE
(Section 1.3): $7,500. (Any Commitment Fee previously paid by
the Borrower in connection with this loan shall
be credited against this Fee.)
MATURITY DATE
(Section 5.1): AUGUST 5, 1996
PRIOR NAMES OF BORROWER
(Section 3.2): NONE
TRADE NAMES OF BORROWER
(Section 3.2): NONE
OTHER LOCATIONS AND ADDRESSES
(Section 3.3): 1202 MCGRAW, IRVINE, CALIFORNIA 92714
MATERIAL ADVERSE LITIGATION
(Section 3.10): NONE
NEGATIVE COVENANTS-EXCEPTIONS
(Section 4.6): Without Silicon's prior written consent,
Borrower may do the following, provided that,
after giving effect thereto, no Event of
Default has occurred and no event has occurred
which, with notice or passage of time or both,
would constitute an Event of Default, and
provided that the following are done in
compliance with all applicable laws, rules and
regulations: (i) repurchase shares of
Borrower's stock pursuant to any employee stock
purchase or benefit plan, provided that the
total amount paid by Borrower for such stock
does not exceed $100,000 in any fiscal year.
-2-
<PAGE> 11
Silicon Valley Bank Schedule to Loan and Security Agreement
_________________________________________________________________
FINANCIAL COVENANTS
(Section 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of
the end of each month, except as otherwise
specifically provided below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick
Assets" to current liabilities of not less than
1.25 to 1.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of
not less than $3,750,000.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total
liabilities to tangible net worth of not more
than 1.0 to 1.
PROFITABILITY: Borrower shall not incur a loss (after taxes)
for any fiscal quarter; except that Borrower
may incur a loss (after taxes) for a single
fiscal quarter not to exceed $100,000.
DEFINITIONS: "Current assets," and "current liabilities"
shall have the meanings ascribed to them in
accordance with generally accepted accounting
principles.
"Tangible net worth" means the excess of total
assets over total liabilities, determined in
accordance with generally accepted accounting
principles, excluding however all assets which
would be classified as intangible assets under
generally accepted accounting principles,
including without limitation goodwill,
licenses, patents, trademarks, trade names,
copyrights, capitalized software and
organizational costs, licences and franchises.
"Quick Assets" means cash on hand or on deposit
in banks, readily marketable securities issued
by the United States, readily marketable
commercial paper rated "A-1" by Standard &
Poor's Corporation (or a similar rating by a
similar rating organization), certificates of
deposit and banker's acceptances, and accounts
receivable (net of allowance for doubtful
accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing
covenants do not include indebtedness which is
subordinated to the indebtedness to Silicon
under a subordination agreement in form
specified by Silicon or by language in the
instrument evidencing the indebtedness which is
acceptable to Silicon.
OTHER COVENANTS
(Section 4.1): Borrower shall at all times comply with all of
the following additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
2. MONTHLY BORROWING BASE CERTIFICATE AND
LISTING. Within 20 days after the end of each
month, Borrower shall provide Silicon with a
Borrowing Base Certificate in such form as
Silicon shall specify, and an aged listing of
Borrower's accounts receivable and accounts
payable.
3. INDEBTEDNESS. Without limiting any of the
foregoing terms or provisions of this
Agreement, Borrower shall not in the future
incur indebtedness for borrowed money, except
for (i) indebtedness to Silicon, and (ii)
indebtedness incurred in the future for the
purchase price of or lease of equipment in an
aggregate amount not exceeding $500,000 at any
time outstanding.
-3-
<PAGE> 12
Silicon Valley Bank Schedule to Loan and Security Agreement
_________________________________________________________________
4. INITIAL AUDIT. The first, semi-annual audit
referred to in Section 4.5 of this Agreement
shall be completed, with satisfactory results,
prior to the making of any Loans hereunder.
BORROWER:
I-FLOW CORPORATION
BY_______________________________
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE______________________________
-4-
<PAGE> 1
EXHIBIT 10.11
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: I-FLOW CORPORATION
ADDRESS: 20202 WINDROW DRIVE
LAKE FOREST, CALIFORNIA 92630
DATED: MARCH 2, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower"). The Parties
agree to amend the Loan and Security Agreement between Silicon and I-Flow
Corporation, dated September 28, 1995, as amended by that Amendment to Loan
Agreement dated July __, 1996 (pursuant to which I-Flow Acquisition Subsidiary
was acquired and made a Borrower under the Loan Agreement), as amended by that
Amendment to Loan Agreement dated April 4, 1997 and as amended by that Amendment
to Loan Agreement dated August 19, 1997 (as so amended and as otherwise amended
from time to time, the "Loan Agreement"), as follows, effective as of the date
hereof. (Capitalized terms used but not defined in this Amendment, shall have
the meanings set forth in the Loan Agreement.)
I-Flow Acquisition Subsidiary was previously an additional Borrower
under the Loan Agreement. I-Flow Acquisition Subsidiary changed its name to
Block Medical, Inc. and recently merged with and into I-Flow Corporation, with
I-Flow Corporation as the surviving entity. Therefore I-Flow Corporation is the
sole Borrower under the Loan Agreement.
1. MODIFIED CREDIT LIMIT. Section 1.1 (Credit Limit) of the Schedule to
Loan Agreement is hereby amended to read as follows:
"(I) Revolving Loans. An amount (the "Revolving
Loans") not to exceed the lesser of: (i)
$4,000,000 at any one time outstanding; or (ii)
75% (the "Advance Percentage") of the Net
Amount of Borrower's accounts, which Silicon in
its discretion deems eligible for borrowing,
provided that with respect to Approved Foreign
Accounts the Advance Percentage is "35%". "Net
Amount" of an account means the gross amount of
the account, minus all applicable sales, use,
excise and other similar taxes and minus all
discounts, credits and allowances of any nature
granted or claimed.
Without limiting the fact that the
determination of which accounts are eligible
for borrowing is a matter of Silicon's
discretion, the following will not be deemed
eligible for borrowing: accounts outstanding
for more than 90 days from the invoice date,
accounts subject to any contingencies, accounts
owing from the United States or any department,
agency or instrumentality of the United States
or any state, city or municipality, accounts
owing from an account debtor
<PAGE> 2
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
outside the United States (unless pre-approved
by Silicon in its discretion, or backed by a
letter of credit satisfactory to Silicon, or
FCIA insured satisfactory to Silicon*),
accounts owing from one account debtor to the
extent they exceed 25% of the total eligible
accounts outstanding, accounts owing from an
affiliate of Borrower, and accounts owing from
an account debtor to whom Borrower is or may be
liable for goods purchased from such account
debtor or otherwise. In addition, if more than
50% of the accounts owing from an account
debtor are outstanding more than 90 days from
the invoice date or are otherwise not eligible
accounts, then all accounts owing from that
account debtor will be deemed ineligible for
borrowing.
* , WITH FRESENIUS MEDICAL CARE A.G. AND
INPHARDIAL ZAMBON BIOMEDICA (AND THE ACCOUNTS
RELATING TO SUCH ACCOUNT DEBTORS ARE REFERRED
TO HEREIN AS THE "APPROVED FOREIGN ACCOUNTS")
AS SUCH PREAPPROVED ACCOUNT DEBTORS PROVIDED
THAT THE RELATED ACCOUNTS ARE OTHERWISE DEEMED
ELIGIBLE HEREUNDER
PLUS
II. Term Loan A.
The amount of $4,000,000 (such Loan is "Term
Loan A" and the loan facility relating thereto
is the "Term Loan A Facility") which was
utilized by the Borrower for the purpose of
financing a portion of the purchase of the
assets of Block Medical, Inc. Such acquisition
and related transactions contemplated thereby
are collectively referred to as the
"Acquisition".
Once amounts under the Term Loan A Facility are
repaid, such amounts may not be reborrowed.
Borrower hereby further promises to pay
interest to Silicon on the unpaid principal
balance of Term Loan A at the interest rate as
set forth below. Such interest shall be paid
each month in accordance with the terms of the
Loan Agreement.
Borrower shall repay to Silicon the outstanding
aggregate principal amount of Term Loan A in 48
consecutive equal monthly installments on the
first day of each month, commencing August 1,
1996. The first 47 installments shall be in the
amount of $83,333.34, and the final installment
shall be in remaining principal amount of the
Term Loan.
PLUS
III. Term Loan B.
The amount of $2,500,000 (such Loan is "Term
Loan B" and the loan facility relating thereto
is the "Term Loan B Facility")
2
<PAGE> 3
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
to be utilized by the Borrower in a single
utilization on or about March ___, 1998.
Once amounts under the Term Loan B Facility are
repaid, such amounts may not be reborrowed.
Borrower hereby further promises to pay
interest to Silicon on the unpaid principal
balance of Term Loan B at the interest rate as
set forth below. Such interest shall be paid
each month in accordance with the terms of the
Loan Agreement. Borrower shall repay to Silicon
the outstanding aggregate principal amount of
Term Loan B in 54 consecutive equal monthly
installments on the first day of each month,
commencing October 1, 1998. The first 53
installments shall be in the amount of
$46,296.30, and the final installment shall be
in remaining principal amount of the Term Loan
B.
LETTER OF CREDIT SUBLIMIT Silicon, in its reasonable discretion, will
from time to time during the term of this
Agreement issue letters of credit for the
account of the Borrower ("Letters of Credit"),
in an aggregate amount at any one time
outstanding not to exceed $500,000, upon the
request of the Borrower, provided that, on the
date the Letters of Credit are to be issued,
Borrower has available to it Revolving Loans in
an amount equal to or greater than the face
amount of the Letters of Credit to be issued.
Prior to the issuance of any Letters of Credit,
Borrower shall execute and deliver to Silicon
Applications for Letters of Credit and such
other documentation as Silicon shall specify
(the "Letter of Credit Documentation"). Fees
for the Letters of Credit shall be as provided
in the Letter of Credit Documentation. Letters
of Credit may have a maturity date up to twelve
months beyond the Maturity Date in effect from
time to time, provided that if on the Maturity
Date, or on any earlier effective date of
termination, there are any outstanding letters
of credit issued by Silicon or issued by
another institution based upon an application,
guarantee, indemnity or similar agreement on
the part of Silicon, then on such date Borrower
shall provide to Silicon cash collateral in an
amount equal to the face amount of all such
letters of credit plus all interest, fees and
costs due or to become due in connection
therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to
Silicon's then standard form cash pledge
agreement.
The Credit Limit set forth above regarding
Revolving Loans and the Revolving Loans
available under this Agreement at any time
shall be reduced by the face amount of Letters
of Credit from time to time outstanding.
3
<PAGE> 4
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
2. MODIFIED INTEREST RATE. Section 1.2 of the Schedule to Loan Agreement
regarding the Interest Rate is hereby amended to read as follows:
INTEREST RATE (Section 1.2): Revolving Loans: With respect to Revolving
Loans and all related Obligations the interest
rate shall be a rate equal to the "Prime Rate"
in effect from time to time, plus .75% per
annum. Interest shall be calculated on the
basis of a 360-day year for the actual number
of days elapsed. "Prime Rate" means the rate
announced from time to time by Silicon as its
"prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and
it is not necessarily the best rate available
at Silicon. The interest rate applicable to the
Obligations shall change on each date there is
a change in the Prime Rate.
Term Loan A:
With respect to Term Loan A and all related
Obligations, the interest rate shall be a rate
equal to the "Prime Rate" in effect from time
to time, plus 1.00% per annum. Interest shall
be calculated on the basis of a 360-day year
for the actual number of days elapsed. "Prime
Rate" means the rate announced from time to
time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by
Silicon are based, and it is not necessarily
the best rate available at Silicon. The
interest rate applicable to the Obligations
shall change on each date there is a change in
the Prime Rate.
Term Loan B:
With respect to Term Loan B and all related
Obligations, the interest rate shall be a rate
equal to the "Prime Rate" in effect from time
to time, plus 1.00% per annum. Interest shall
be calculated on the basis of a 360-day year
for the actual number of days elapsed. "Prime
Rate" means the rate announced from time to
time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by
Silicon are based, and it is not necessarily
the best rate available at Silicon. The
interest rate applicable to the Obligations
shall change on each date there is a change in
the Prime Rate."
3. MODIFIED MATURITY DATE. Section 5.1 of the Schedule to Loan Agreement
regarding the Maturity Date is hereby amended to read as follows:
"MATURITY DATE
(Section 5.1): FEBRUARY 15, 1999, provided that the Maturity
Date with respect to each of Term Loan A and
Term Loan B shall be as is set forth in Section
1.1 above."
4. MODIFIED FEE. Section 1.3 of the Schedule to Loan Agreement regarding
the Loan Origination Fee is hereby amended to read as follows:
"LOAN ORIGINATION FEE
(Section 1.3): $12,500 to be paid in full concurrently
herewith; and $20,000 to be paid on an annual
basis in connection herewith, which latter fee
shall be payable by the Borrower in
installments of
4
<PAGE> 5
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
$5,000 on each of March 31, 1998, June 30,
1998, September 30, 1998, and December 31,
1998. Failure to pay such amount on each of
such dates shall constitute an Event of Default
hereunder. Such fees shall be in addition to
interest and to all other amounts payable
hereunder and shall not be refundable."
5. FINANCIAL COVENANTS. Section 4.1 of the Schedule to Loan Agreement
regarding the Financial Covenants is hereby amended to read as follows:
"FINANCIAL COVENANTS
(Section 4.1): Borrower, on a consolidated basis, shall comply
with all of the following covenants. Compliance
shall be determined as of the end of each
quarter, except as otherwise specifically
provided below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick
Assets" to current liabilities of not less than
1.00 to 1.
STATED NET WORTH: Borrower shall maintain a stated net worth of
not less than $9,000,000.
DEBT TO STATED
NET WORTH RATIO: Borrower shall maintain a ratio of total
liabilities to stated net worth of not more
than 1.00 to 1.
PROFITABILITY: Borrower shall not incur a loss (after taxes)
for any fiscal quarter, except that Borrower
may incur a loss (after taxes) for a single
fiscal quarter during the term hereof not to
exceed $100,000. Notwithstanding the foregoing,
Borrower may incur a loss (after taxes) for the
quarter ending December 31, 1997 not to exceed
$1,600,000.
DEBT SERVICE RATIO: Borrower shall maintain a Debt Service Ratio
(as referred to below) of not less than 1.50 to
1 as of the end of each fiscal quarter.
DEFINITIONS: "Current assets," and "current liabilities"
shall have the meanings ascribed to them in
accordance with generally accepted accounting
principles, consistently applied.
"Quick Assets" means cash on hand or on deposit
in banks, readily marketable securities issued
by the United States, readily marketable
commercial paper rated "A-1" by Standard &
Poor's Corporation (or a similar rating by a
similar rating organization), certificates of
deposit and banker's acceptances, and accounts
receivable (net of allowance for doubtful
accounts).
"Stated net worth" means the excess of total
assets over total liabilities (including but
not limited to indebtedness which is
subordinated to the indebtedness to Silicon),
determined in
5
<PAGE> 6
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
accordance with generally accepted accounting
principles, consistently applied..
"Debt Service Ratio" means the year-to-date and
annualized ratio of (a) earnings before
interest, taxes, depreciation and other
non-cash amortization expenses and other
non-cash expenses of the Borrower, determined
in accordance with generally accepted
accounting principles, consistently applied,
(other than for expenses of Borrower associated
solely with the Acquisition) to (b) Borrower's
obligations relating to payment of interest and
current maturities of principal on Borrower's
outstanding indebtedness, determined in
accordance with generally accepted accounting
principles, consistently applied. For purposes
hereof, the annualized Debt Service Ratio for
the quarter ending March 31, 1998 shall be such
quarter's ratio multiplied by four; the
annualized Debt Service Ratio for the quarter
ending June 30, 1998 shall be the sum of such
quarter's ratio plus the ratio for the prior
quarter, which sum is then multiplied by two;
the annualized Debt Service Ratio for the
quarter ending September 30, 1998 shall be the
sum of such quarter's ratio plus the ratio for
each of the two preceding quarters, which sum
is then multiplied by the fraction of 4/3.
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing
covenants do not include indebtedness which is
subordinated to the indebtedness to Silicon
under a subordination agreement in form
specified by Silicon or by language in the
instrument evidencing the indebtedness which is
acceptable to Silicon."
6. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the
6
<PAGE> 7
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
-----------------------------------------------------------------------
parties with respect to the subject hereof. Except as herein expressly amended,
all of the terms and provisions of the Loan Agreement, and all other documents
and agreements between Silicon and the Borrower shall continue in full force and
effect and the same are hereby ratified and confirmed.
BORROWER:
I-FLOW CORPORATION
BY_______________________________
TITLE:
BY_______________________________
TITLE:
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE______________________________
7
<PAGE> 1
EXHIBIT 13
I-FLOW CORPORATION
1997 ANNUAL REPORT
19
<PAGE> 2
FINANCIAL HIGHLIGHTS I-Flow Corporation
OPERATING RESULTS
<TABLE>
<CAPTION>
(Amounts in thousands, except Years Ended December 31,
per share amounts) 1997 1996 1995
==============================================================================================
<S> <C> <C> <C>
Total revenue $17,742 $13,892 $10,047
Operating income (loss) $ 779 $(7,406) $ 973
Net income (loss) per share $ 0.02 $ (0.69) $ 0.11
==============================================================================================
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
(Amounts in thousands) December 31, 1997 December 31, 1996
==============================================================================
<S> <C> <C>
ASSETS
Current assets $10,040 $ 9,658
Property and equipment, net 2,231 1,938
Other assets 5,363 5,638
- ------------------------------------------------------------------------------
Total assets $17,634 $17,234
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 5,467 $ 4,753
Long-term debt 1,579 2,500
Shareholders' equity 10,588 9,597
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $17,634 $17,234
==============================================================================
</TABLE>
20
<PAGE> 3
MESSAGE TO SHAREHOLDERS
To Our Shareholders:
Fiscal 1997 was a year of progress and challenges for I-Flow as we (1)
transitioned from a Company generating mostly licensing revenues to one of
product sales and (2) began developing strong distribution channels to support
this change, both domesticly and internationally. This transition began in the
fourth quarter of 1997 and will continue through the first half of fiscal
1998. We are concentrating our efforts on establishing strong partnerships with
large healthcare companies that can gain us visibility with national healthcare
providers, both in the hospital and in the alternate site market.
During the year, revenue reached a new record. We successfully launched
several important new products. The Company was awarded two new patents, and
entered into two new master purchasing agreements with large hospital networks.
Early in 1998, we completed an acquisition that adds to our base of business and
opens new distribution channels for our products. And in March 1998, we
established an agreement with a major distributor of infusion products in the
United States that we believe will contribute significantly to the Company's
future growth. These accomplishments added real value to our Company and moved
us forward in the implementation of our strategic plan -- to be a leading
supplier of high quality, low cost IV infusion devices to the world, for the
delivery of medicines.
Earnings for the year would have been even better if we had not had a
lower than expected fourth quarter. The fourth quarter was negatively impacted
by lower-than-anticipated shipments to a major European distributor, order
delays due to the economic uncertainty in Asia (and particularly Korea), and the
temporary impact of the reorganization of our domestic distribution channels.
This reorganization is necessary if we are to continue achieving strong revenue
growth in the future.
NEW PRODUCTS
To further strengthen our position as the leading low-cost provider of
reliable, affordable infusion systems, I-Flow introduced two more innovative
infusion systems in 1997:
- The Eclipse(R) C-Series is specifically designed for chemotherapy
infusion, optimized for appropriate flow rates and the higher viscosities of
chemotherapeutic drugs. With our acquisition of InfuSystems II, Inc. and Venture
Medical, Inc. in 1998, we acquired two of the market leaders to distribute this
family of oncology products.
- Late in the year we began marketing the ONE-STEP KVO(TM), which
substantially eliminates the need for IV flushing, is very cost-effective and
reduces the occurrence of occluded catheters and other complications associated
with catheter maintenance. This is both a hospital product and an alternate site
product. With the proposed agreement with B. Braun Medical, Inc., we will be
able to introduce this product to their domestic hospital accounts using their
125 person salesforce.
NATIONAL SALES CONTRACTS
To help us meet our objectives for sustained domestic and international
growth, I-Flow entered into three new national sales contracts in 1997:
21
<PAGE> 4
- A three year national agreement with Shared Services Healthcare, Inc.
(SSH), a non-profit purchasing organization for 1,200 acute care and alternate
site members in the southeastern United States, which gives I-Flow the
opportunity to market its entire line of mechanical and electronic infusion
products to each of SSH's facility members.
- A three year Government Service Agreement (GSA) with the U.S.
Department of Veteran Affairs, which adds all of I-Flow's infusion therapy
devices to the Federal Supply Schedule (FSS). This GSA contract together with
the previously negotiated Distribution and Pricing Agreement (DAPA) with the
Defense Personnel Support Center (DPSC), makes I-Flow's infusion systems
available to all U.S. Government medical treatment facilities around the world.
- A three year agreement to provide Fresenius Medical Care in the
United States with eighty percent of their elastomeric pump requirements.
PATENTS
I-Flow was awarded two U.S. Patents during the year, bringing the total
number of patents now held by the Company to 40:
- A patent for our VOICELINK(TM) remotely programmable infusion therapy
system, a tele-medicine technology for the remote monitoring and programming of
intravenous (IV) infusion pumps via a touch tone telephone. VOICELINK bridges
the gap between the limitations of managed care and the need for monitoring IV
patients who are at home, and we believe that this technology has the potential
to become the industry standard for remote monitoring and programming.
- A patent for the Medi-SIS(TM) syringe infusion system, the lowest
cost method of administering intravenous (IV) fluids available today. With an
average cost per infusion of less than half that of gravity-based IV drip
systems, until now the most cost-effective method of IV fluid delivery, Medi-SIS
sets a new standard for cost savings, ease of use, and reliability.
ACQUISITION
Early in 1998, I-Flow acquired privately-held Venture Medical, Inc. and
InfuSystems II, Inc., two Michigan based national ambulatory infusion pump
management and distribution companies (referred to jointly as InfuSystems),
which service the oncology market. In addition to adding almost $5 million of
incremental revenue to our sales base in 1998, this acquisition is important
because it provides I-Flow with a new channel of distribution - directly into
the offices of oncologists and hematologists. InfuSystem is presently a leading
supplier of infusion devices to physicians and their expertise in distributing
to physicians opens the door to establishing additional channels for our
ambulatory infusion products in the hospital-based pain management and bone
marrow transplant segments of the industry.
DISTRIBUTION AGREEMENT
In March 1998 we signed a letter of intent with B. Braun Medical Inc.,
a world leader in the manufacture and distribution of pharmaceuticals and
infusion products, to distribute I-Flow's HOMEPUMP Eclipse(R), HOMEPUMP Eclipse
C-Series and ONE-STEP KVO elastomeric products in the United States. This
relationship will strengthen I-Flow's existing distribution network in the home
care/alternate site market and open yet another
22
<PAGE> 5
new channel of distribution directly into hospitals through the nationwide reach
of B. Braun's 125 direct sales professionals.
FINANCIAL RESULTS
For the year ended December 31, 1997, revenue rose 27% to a record
$17,742,000 from $13,892,000 for 1996. Revenue for 1996 included licensing fees
of $4,600,000; there were no licensing fees for 1997. Net income for the year
was $365,000, or $0.03 per share. This compares to a net loss of $7,425,000, or
$0.68 per share, for 1996, which included the write-off of purchased in-process
R&D, a goodwill write down, and a restructuring charge related to the
acquisition of Block Medical totaling $9,252,000.
OUTLOOK
The healthcare marketplace is changing, and cost-containment pressures
are causing third-party payers to reassign complex therapies from the
traditional hospital setting to less costly environments, including the home,
nursing home, outpatient clinic, hospice facility and the physician's office. As
described in this report, during 1997 we created a variety of new opportunities
for I-Flow to prosper in this new healthcare environment, including the
acquisition of InfuSystem which gives us an immediate presence in the
oncologist's office today and future inroads to other physician's offices. In
addition, with the recent agreement with B. Braun Medical, Inc., we now have a
vehicle to sell our products to hospitals as well as to national home care
providers.
We recently applied for FDA permission to market a new pain management
kit for use by orthopedic surgeons. Preliminary results from more than 25
patients has shown a significant reduction in pain after surgery, a significant
reduction in the time for rehabilitation of the repaired limb, all with a
reduction in the use of oral pain medications and their unpleasant side effects.
Once permission to market is received, we will begin selling this new pain kit
to orthopedic surgeons through a yet unnamed distribution partner.
We are committed to our strategic road map for expansion through
acquisition and corporate partnering and the expansion into new markets by using
our existing patented technologies; telemedicine applications for pumps,
respirators, monitors, etc. using VOICELINK, mechanical delivery systems for
medicines using springs or our elastomeric technology. We believe this is the
best way to further strengthen our position as a leading provider of affordable
mechanical and electronic infusion systems, and to build long-term value for our
shareholders.
Thank you for your interest and support. We look forward to reporting
our progress to you.
Sincerely,
Donald M. Earhart
Chairman, President and Chief Executive Officer
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA I-Flow Corporation
<TABLE>
<CAPTION>
(Amounts in thousands, except Year Ended December 31,
per share amounts) 1997 1996 1995 1994 1993
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:(1)(3)
Revenue:
Net sales $ 17,678 $ 9,153 $ 9,737 $ 6,321 $ 5,436
Rental income and other 64 139 60 72 212
Other fees -- 4,600 250 500 --
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 17,742 13,892 10,047 6,893 5,648
Cost of sales 8,450 3,954 4,422 4,062 3,623
- --------------------------------------------------------------------------------------------------------------------------
Gross Profit 9,292 9,938 5,625 2,831 2,025
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Selling and marketing 3,197 2,617 1,483 1,948 1,356
General and administrative 4,281 4,336 2,329 2,044 2,119
Product development 1,035 1,139 840 720 1,246
Purchased in-process research
and development costs -- 4,900 -- -- --
Goodwill writedown -- 2,800 -- -- --
Restructuring costs -- 1,552 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 8,513 17,344 4,652 4,712 4,721
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 779 (7,406) 973 (1,881) (2,696)
Interest income (expense) (334) 41 96 208 60
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 445 (7,365) 1,069 (1,673) (2,636)
Income taxes 80 60 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 365 $ (7,425) $ 1,069 $ (1,673) $ (2,636)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share(2) $ 0.02 $ (0.69) $ 0.11 $ (0.21) $ (0.45)
- --------------------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
shares outstanding(2) $ 13,030 $ 10,849 $ 9,247 $ 8,177 $ 5,990
==========================================================================================================================
CONSOLIDATED BALANCE SHEET DATA:(3)
Working capital $ 4,573 $ 4,905 $ 6,958 $ 3,564 $ 5,270
Total assets 17,634 17,234 9,107 6,209 7,737
Long-term obligations 1,579 2,884 -- -- --
Total shareholders' equity 10,588 9,597 7,728 4,181 5,812
==========================================================================================================================
</TABLE>
(1) Certain amounts previously reported have been reclassified to conform
with the presentation at December 31, 1997.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) In July 1996, the Company purchased substantially all of the assets of
Block Medical, Inc. See Note 2 of Notes to Consolidated Financial
Statements.
24
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain disclosures made by the Company in this report and in other reports and
statements released by the Company are and will be forward-looking in nature,
such as comments which express the Company's opinions about trends and factors
which may impact future operating results. Disclosures which use words such as
the Company "believes," "anticipates," or "expects" or use similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
from those expected and readers are cautioned not to place undue reliance on
these forward-looking statements. The Company undertakes no obligation to
republish revised forward-looking statements to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report which seek to advise
interested parties of the risks and other factors that affect the Company's
business, as well as in the Company's period reports on Forms 10-K, 10-Q, and
8-K filed with the Securities and Exchange Commission. The risks affecting the
Company's business include reliance on the success of the Home Health Care
Industry, the reimbursement system currently in place, competition in the
industry, demand in foreign countries, technological changes and product
availability. Any such forward-looking statements, whether made in this report
or elsewhere, should be considered in context with the various disclosures made
by the Company about its business.
Consolidated Results of Operations - For the Year Ended December 31, 1997
Compared to the Year Ended December 31, 1996
Net product sales during the year ended December 31, 1997 were $17,678,000
compared to $9,153,000 for the prior year and increase of 93%. In July 1996, the
Company acquired substantially all of the assets of Block Medical, Inc.
("Block"). Accordingly, net product sales increased, as sales from Block were
reported by the Company for a full year in 1997 versus only a portion of the
year in 1996. The acquisition of Block accounted for 99% of the increase in net
product sales from 1996 to 1997. Additionally, net product sales to
international customers (including sales of Block products) have increased
substantially, as export sales were $6,427,000, or 36% of total revenues, for
the year ended December 31, 1997 compared to $4,186,000, or 30% of total
revenues, for the year ended December 31, 1996.
In addition to revenue growth, the acquisition of Block has brought several
other strategic advantages to the Company, one of which is an expanded product
line with single-dose, one-time use infusion pumps and a new electronic device
with advanced remote programming technology. The acquisition has also increased
the Company's profitability through the use of its manufacturing plant in Mexico
and the corresponding reduction in direct labor costs.
Notwithstanding the year-to-year increase, net sales were less than anticipated
due to lower than forecasted sales from one of the Company's primary
international distributors, Fresenius A. G. in Europe. This distributor is
currently undergoing certain changes within its internal organization and is
seeking to finalize the acquisition of a major European homecare company. These
changes within the distributor have created an estimated shortfall in current
sales of approximately $1,000,000 to the distributor that may continue into the
first quarter of 1998. Management believes, however, that these efforts by the
distributor will ultimately increase the sales of I-Flow products into the
European market. Additionally, international net sales were less than
anticipated due to the economic difficulties in Asia and, most particularly
Korea. In addition, a combination of changes in domestic distribution
arrangements together
25
<PAGE> 8
with current distributors' existing inventory levels may adversely impact the
Company's revenues generated by domestic distributors during the first quarter
of 1998.
In March 1996, the Company sold the exclusive right and license to manufacture
and sell its SideKick(TM), Paragon(TM), and elite(TM) products in the United
States and Puerto Rico to SoloPak Pharmaceuticals, Inc. ("SoloPak"). Pursuant to
the agreement, SoloPak paid the Company $4.3 million in consideration of the
license and guaranteed royalties in 1996. The Company retained the right to sell
the products outside the United States and Puerto Rico.
Cost of sales of $8,450,000 were incurred during the year ended December 31,
1997, compared to $3,954,000 for the prior year, an increase of 114%. As a
percentage of revenues, cost of sales increased by 19 percentage points for the
year ended December 31, 1997 compared to the prior year. The decrease in gross
profit is primarily the result of the lack of licensing fees in 1997 as compared
to 1996. The Company does not anticipate any additional licensing fees in the
near future.
Selling and marketing expenses for the year ended December 31, 1997 increased
over the prior year by $580,000 or 22%. This increase was due primarily to the
Company's additional sales and marketing activity during 1997 relating to its
increased sales. With the acquisition of Block in mid-1996, the Company
significantly expanded its product line and sales efforts.
General and administrative expenses for the year ended December 31, 1997
decreased from the prior year by $55,000 or 1%. These expenses primarily
represent costs for administrative personnel, facilities and other miscellaneous
items. These costs have decreased primarily as a result of the consolidation of
the Company's facilities from 3 locations in 1996 to one in 1997.
Product development expenses for the year ended December 31, 1997 decreased
compared to those for the prior year by $104,000 or 9%, primarily due to the
consolidation of the product development efforts of the Company with those of
Block in 1997.
With the acquisition of Block in 1996, the Company acquired four in-process
product development projects and technologies; a new elastomeric infusion pump
for use with chemotherapy, an IV flushing device, a new electronic infusion pump
and a new version of the VoiceLink product. The new elastomeric pump for use
with chemotherapy was initially completed in early 1997 and initial sales have
met the Company's expectations. The IV flushing device was discontinued as the
Company has since developed a new elastomeric infusion pump, which eliminates
the need for flushing. Product development for a new electronic infusion pump
and a new version of the VoiceLink have been postponed due to the capital
requirements and recent changes in the market.
Consolidated Results of Operations - For the Year Ended December 31, 1996
Compared to the Year Ended December 31, 1995
Net sales during the year ended December 31, 1996 were $9,153,000 compared to
$9,737,000 for the prior year. Sales to a major distributor were $6,508,000 for
the year ended December 31, 1995, whereas there were no sales to this
distributor during 1996. However, during the year ended December 31, 1996, the
Company received licensing fees of $4,300,000 from this distributor, which
brought total revenues for the year to $13,933,000 compared to $10,143,000 for
the prior year. Included in net sales for the year ended December 31, 1996 were
sales from Block of $5,227,000. Substantially all of the assets of Block were
acquired by the Company on July 22, 1996.
26
<PAGE> 9
Export sales were $4,186,000, or 30% of total revenues, for the year ended
December 31, 1996 compared to $2,100,000, or 21% of total revenues, for the year
ended December 31, 1995.
In November 1994, the Company signed an exclusive distribution agreement with
SoloPak for the SideKick(TM), Paragon(TM), and elite(TM) product lines. In March
1996, the SoloPak distribution agreement was superseded with a new agreement in
which SoloPak purchased the exclusive right and license to manufacture and sell
the products in the United States and Puerto Rico. Pursuant to the new
agreement, SoloPak paid the Company $4.3 million in consideration of the license
in 1996. Additionally, SoloPak agreed to pay I-Flow a royalty equal to two
percent of SoloPak's net sales of the products for the 1997 and 1998 calendar
years. Per the terms of the agreement, I-Flow has the right of first refusal to
supply SoloPak with services and assistance in assembling the products until
February 1998. The Company retained the right to sell the products outside the
United States and Puerto Rico.
In July 1996, the Company purchased substantially all of the assets of Block, a
wholly-owned subsidiary of Hillenbrand Industries, Inc. (Note 2 of Notes to
Consolidated Financial Statements). Block, which manufactures and sells portable
infusion devices for the alternate site market, is headquartered in San Diego,
California and has a manufacturing facility in Northern Mexico. Block had
revenues of approximately $13.5 million for its fiscal year ended December 2,
1995.
Cost of sales of $3,954,000, including intangible amortization of $125,000, were
incurred during the year ended December 31, 1996 compared to $4,422,000 for the
prior year. As a percentage of net sales, cost of sales excluding intangible
amortization, decreased by 4% for the year ended December 31, 1996 compared to
the prior year. This increase in gross profit on sales is primarily the result
of a higher percentage of sales to foreign customers, and the move of a
substantial portion of the Company's manufacturing to its newly acquired plant
in Mexico during the second half of the year.
Selling and marketing expenses for the year ended December 31, 1996 increased
over the prior year by $1,134,000, or 76%. These higher expenses primarily
resulted from the increased internal sales force from four people to 15 people
as a result of the acquisition of Block.
General and administrative expenses of $4,336,000, which included amortization
of intangibles of $652,000, were incurred during the year ended December 31,
1996 compared to $2,329,000 for the prior year. This represented an increase
over the prior year of $2,007,000, or 86%. The remaining expenses primarily
represent costs for administrative personnel, facilities and other miscellaneous
items which have increased primarily as a result of the acquisition of Block.
Product development expenses for the year ended December 31, 1996 increased
compared to those for the prior year by $299,000, or 36%. With the acquisition
of Block, the Company increased its engineering staff and the number of new
products under development. The Company will continue to incur product
development expenses as it continues its efforts to introduce new
improved-technology, cost-efficient products into the market.
In conjunction with the acquisition of Block, the Company allocated $4.9 million
of the purchase price to in-process research and development costs at the date
of acquisition. Additionally, during the year ended December 31, 1996, the
Company recorded a write-down of goodwill of $2.8 million due to impairment of
value. The Company recorded a restructuring charge of $1,552,000 to provide for
expenses related to consolidating Block's facilities with its own in 1997. The
$1,552,000 restructuring charge was comprised of approximately $788,000 in
severance and relocation expenses, $380,000 in moving expenses and $384,000 in
lease abandonment.
27
<PAGE> 10
Liquidity and Capital Resources
During the year ended December 31, 1997, funds of $956,000 were used for
operating activities consisting of net income of $365,000 plus non-cash expenses
of $815,000 less net changes in operating assets and liabilities of $2,136,000.
The changes in operating assets and liabilities consisted of an increase in
accounts receivable of $951,000 and an increase in inventories of $1,074,000 as
well as an increase in accounts payable and accrued liabilities of $259,000 and
a decrease in deferred revenues of $371,000.
The Company used funds for investing activities during the year ended December
31, 1997 by acquiring property of $906,000. Additionally, there was an increase
in other assets of $279,000 due to new notes receivable relating to capital
leases.
During the year ended December 31, 1997, funds of $1,317,000 were provided from
financing activities consisting of net borrowings on the line of credit of
$1,500,000 and proceeds from the exercise of stock options and warrants of
$738,000 less payments on notes payable of $921,000. Additionally, foreign
exchange rates relating to the subsidiary in Mexico had a negative effect of
$112,000 on funds during the year.
As of December 31, 1997, the Company had cash and cash equivalents of $715,000
and net receivables of $5,127,000. To date, the Company has financed its
operations and working capital requirements primarily through equity and debt
financings. Management believes the Company's available funds are sufficient to
provide for its short and long-term projected needs for operations and to fund
future capital expenditures, if any. However, the Company may decide to sell
additional equity or increase its borrowings in order to fund increased product
development or for other purposes.
The Company has a working capital line of credit with a bank expiring in
February 1999. Under the line of credit, the Company may borrow up to the lesser
of $4,000,000 or 75% of eligible accounts receivable, as defined, at a bank's
prime rate plus .75% (9.25% at December 31, 1997). There were borrowings
outstanding and available funds for borrowing under the line of $1,500,000 and
$536,000, respectively, as of December 31, 1997.
In conjunction with the acquisition of Block, the Company entered into a
$4,000,000 note payable with a bank ($2,579,000 outstanding at December 31,
1997) due in equal monthly installments of principal of $83,333 plus interest at
the bank's prime rate plus 1.5% (10.0% at December 31, 1997) through July 2000.
In March 1998, the Company entered into an additional note payable with a bank
for $2,500,000 due in equal monthly installments of principal of $46,000 plus
interest at the banks's prime rate plus 1% beginning in October 1998 through
March 2003. Proceeds from the new note were used to pay off the outstanding
balance on the line of credit and for general working capital. The notes are
collateralized by substantially all of the Company's assets and require the
Company to comply with certain covenants principally relating to working capital
and liquidity. As of December 31, 1997, the Company was in compliance with or
had received a waiver for all such covenants.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with InfuSystems II, Inc. ("InfuSystems"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystems and VMI, contemplating the
merger of InfuSystems and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystems were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998. See
Note 8 in Notes to Consolidated Financial Statements.
28
<PAGE> 11
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.
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.
29
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of I-Flow Corporation:
We have audited the accompanying consolidated balance sheets of I-Flow
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of I-Flow Corporation and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
30
<PAGE> 13
CONSOLIDATED BALANCE SHEETS I-Flow Corporation
<TABLE>
<CAPTION>
(Amounts in thousands, except share amounts) December 31, 1997 December 31, 1996
======================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 715 $ 1,651
Royalty receivable -- 1,000
Accounts receivable, less allowance for doubtful accounts of $463
and $125 at December 31, 1997 and 1996, respectively (Note 3) 5,127 3,514
Inventories (Note 1) 4,058 3,352
Prepaid expenses and other 140 141
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 10,040 9,658
- ----------------------------------------------------------------------------------------------------------------------
Property:
Furniture, fixtures and equipment 3,982 3,091
Rental and demonstration equipment 188 173
- ----------------------------------------------------------------------------------------------------------------------
Total property 4,170 3,264
Less accumulated depreciation (1,939) (1,326)
- ----------------------------------------------------------------------------------------------------------------------
Net property 2,231 1,938
- ----------------------------------------------------------------------------------------------------------------------
Other assets:
Goodwill and other intangibles, net (Note 2) 3,983 4,831
Notes receivable and other 1,380 807
- ----------------------------------------------------------------------------------------------------------------------
Total other assets 5,363 5,638
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 17,634 $ 17,234
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,828 $ 1,156
Accrued payroll and related expenses 895 1,271
Deferred revenue 58 429
Current portion of long-term debt (Note 3) 1,000 1,000
Line of credit (Note 3) 1,500 --
Restructuring reserve (Note 2) -- 824
Other liabilities 186 73
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,467 4,753
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 3) 1,579 2,500
Long-term restructuring reserve (Note 3) -- 384
Commitments and contingencies (Note 6)
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Note 4)
Preferred stock, no par value; 5,000,000 shares authorized, 656,250 Series B
shares issued and outstanding at December 31, 1997 and 1996 (aggregate
preference on liquidation of $1,575) 1,494 1,494
Common stock, no par value; 40,000,000 shares authorized, 12,393,619 and
12,050,076 shares issued and outstanding at December 31, 1997 and 1996,
respectively 33,853 33,036
Common stock warrants 615 615
Accumulated deficit (25,374) (25,548)
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,588 9,597
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 17,634 $ 17,234
======================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS I-Flow Corporation
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands, except per share amounts) 1997 1996 1995
===================================================================================================
<S> <C> <C> <C>
Revenues:
Net product sales $ 17,678 $ 9,153 $ 9,737
Rental income and other 64 139 60
Licensing and other fees -- 4,600 250
- ---------------------------------------------------------------------------------------------------
Total revenues 17,742 13,892 10,047
Cost of sales 8,450 3,954 4,422
- ---------------------------------------------------------------------------------------------------
Gross profit 9,292 9,938 5,625
- ---------------------------------------------------------------------------------------------------
Expenses (Notes 2, 3 and 6):
Selling and marketing 3,197 2,617 1,483
General and administrative 4,281 4,336 2,329
Product development 1,035 1,139 840
Purchased in-process research and development costs -- 4,900 --
Goodwill writedown -- 2,800 --
Restructuring costs -- 1,552 --
- ---------------------------------------------------------------------------------------------------
Total expenses 8,513 17,344 4,652
- ---------------------------------------------------------------------------------------------------
Operating income (loss) 779 (7,406) 973
Interest income (expense) (334) 41 96
- ---------------------------------------------------------------------------------------------------
Income (loss) before income taxes 445 (7,365) 1,069
Income taxes (Note 5) 80 60 --
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 365 $ (7,425) $ 1,069
- ---------------------------------------------------------------------------------------------------
Net income (loss) per share, basic and diluted $ 0.02 $ (0.69) $ 0.11
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE> 15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY I-Flow Corporation
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ------------------- Common Stock Accumulated
(Amounts in thousands) Shares Amount Shares Amount Warrants Deficit Total
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 656 $1,494 8,202 $ 21,721 $ -- $ (19,034) $ 4,181
Exercise of common stock warrants
and options (net of costs of $29) 1,026 2,434 2,434
Common stock issued for payment
of preferred stock dividends 31 79 (79)
Stock options granted with exercise
prices below market value 44 44
Net income 1,069 1,069
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 656 1,494 9,259 24,278 -- (18,044) 7,728
Exercise of common stock warrants
and options (net of costs of $78) 2,336 6,635 6,635
Common stock and warrants issued
for acquisition 433 2,000 615 2,615
Common stock issued for payment
of preferred stock dividends 22 79 (79)
Stock options granted with exercise
prices below market value 44 44
Net (loss) (7,425) (7,425)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 656 1,494 12,050 33,036 615 (25,548) 9,597
Exercise of common stock warrants
and options 323 738 738
Common stock issued for payment
of preferred stock dividends 20 79 (79)
Cumulative translation adjustment (112) (112)
Net income 365 365
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 656 $1,494 12,393 $ 33,853 $615 $ (25,374) $ 10,588
===============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS I-Flow Corporation
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands) 1997 1996 1995
==========================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 365 $ (7,425) $ 1,069
Adjustments to reconcile net income (loss) to net cash provided by
(used) in operating activities:
In-process research and development costs -- 4,900 --
Restructuring costs (1,208) 1,552 --
Goodwill writedown -- 2,800 --
Depreciation and amortization 1,167 1,154 188
Compensation expense for stock option grants 150 44 44
Change in inventory obsolescence reserve 368 (567) (296)
Change in allowance for doubtful accounts 338 (413) 262
Changes in operating assets and liabilities, net of effect of business
acquisition:
Receivables (951) (506) 798
Inventories (1,074) 227 269
Prepaid and other expenses 1 (24) 16
Accounts payable and accrued liabilities 146 798 (397)
Deferred revenues (371) (87) (195)
Other liabilities 113 23 (57)
- --------------------------------------------------------------------------------------------------------------------------
Total adjustments (1,321) 9,901 632
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used) in operating activities (956) 2,476 1,701
Cash flows from investing activities:
Property acquisitions (906) (821) (243)
Property disposals -- 162 --
Cash paid for acquisition, net of cash received -- (15,803) --
Change in other assets (279) (126) (98)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,185) (16,588) (341)
Cash flows from financing activities:
Net borrowings on line of credit 1,500 -- --
Proceeds from issuance of note payable -- 4,000 --
Payments on note payable (921) (500) --
Proceeds from exercise of stock options and warrants 738 6,635 2,434
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,317 10,135 2,434
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (112) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (936) (3,977) 3,794
Cash and cash equivalents at beginning of year 1,651 5,628 1,834
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 715 $ 1,651 $ 5,628
==========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 365 $ 175 --
- --------------------------------------------------------------------------------------------------------------------------
Income tax payments $ 80 $ 35 $ 17
- --------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend paid in Common Stock $ 79 $ 79 $ 79
- --------------------------------------------------------------------------------------------------------------------------
Liabilities issued and assumed in connection with acquisition:
Fair value of assets acquired (including intangibles) $ 18,004
Cash outflows for business acquisition (15,803)
Common stock and warrants issued 2,615
- --------------------------------------------------------------------------------------------------------------------------
Liabilities issued and assumed $ 4,816
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - I-Flow Corporation ("the Company") was incorporated on
July 17, 1985 and is engaged in the manufacturing and marketing of ambulatory
infusion systems for use in the intravenous administration of drugs, nutrients
and similar medical treatments. The Company sells its products primarily to
customers in the home health care industry.
Principals of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash in the
bank, money-market funds and U.S. Treasury bills with an original maturity date
of 90 days or less.
Fair Value of Financial Instruments - Pursuant to Statement of Financial
Accounting Standard ("SFAS") No. 107, Disclosures about Fair Value of Financial
Instruments, the Company is required to estimate the fair value of all financial
instruments included on its balance sheet at December 31, 1997. The Company
considers the carrying value of such amounts in the financial statements to
approximate their fair value due to (1) the relatively short period of time
between origination of the instruments and their expected realizations, (2)
interest rates which approximate current market rates, or (3) the overall
immateriality of the amounts.
Inventories - Inventories are stated at the lower of first-in, first-out cost or
market. Inventories consisted of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------------- ------------------------------
<S> <C> <C>
Raw materials $ 3,235,000 $2,822,000
Work in process 359,000 110,000
Finished goods 1,599,000 1,187,000
Reserve for obsolescence (1,135,000) (767,000)
--------------------------------------------------- ------------------------------
Total $ 4,058,000 $3,352,000
=================================================== ==============================
</TABLE>
Other Assets - Goodwill and other intangibles are amortized on a straight-line
basis over five to fifteen years. Patents of $449,000 and $365,000 (net of
accumulated amortization), included in other assets as of December 31, 1997 and
1996, respectively, are amortized over periods ranging from two to seven years.
The Company assesses the recoverability of intangible assets at each balance
sheet date by determining whether the amortization of the balance over its
remaining useful life is recoverable through projected undiscounted operating
cash flows.
Property - Property (including rental and demonstration equipment) is stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the related assets, ranging from two to seven years. Rental and
demonstration equipment consists of products held by customers under
month-to-month rental agreements or on loan to customers for evaluation.
35
<PAGE> 18
Deferred Revenue - The Company has received deposits under the terms of
distribution agreements with certain foreign companies, which entitled them to
exclusive distribution rights for certain of the Company's products in those
countries. Such funds will be applied to future sales to these distributors.
Revenues - Revenue from sales is recognized when products are shipped to
customers. The Company concurrently records estimates for product returns and
warranty obligations, which historically have not been significant.
Rental income is recorded monthly when earned.
In March 1996, SoloPak Pharmaceuticals, Inc. ("SoloPak") purchased the exclusive
rights and license to manufacture and sell the SideKick and Paragon products in
the United States and Puerto Rico. Pursuant to the new agreement, SoloPak paid
the Company $1.3 million in consideration of the license in March 1996 and
guaranteed royalties of $1.0 million during each of the three succeeding
quarters in 1996. Additionally, SoloPak will pay I-Flow a royalty equal to two
percent of their net sales of the products for the 1997 and 1998 calendar years.
Per the terms of the agreement, I-Flow has the right of first refusal to supply
SoloPak with services and assistance in assembling completed products until
February 1998. The Company retained the rights to sell the products outside the
United States and Puerto Rico.
Also in 1996, the Company expanded its international sales agreement with its
German distributor, Fresenius AG. The expanded agreement provided I-Flow with an
initial licensing fee of $300,000.
Accounting for Stock-Based Compensation - The Company accounts for stock-based
compensation awards to employees using the intrinsic value method in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees (Note 13).
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, ("SFAS No.
130"). This statement established standards for the reporting of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosures
prescribed by SFAS No. 130 are effective beginning with the first quarter of
calendar year 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, ("SFAS No. 131"). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosure about products and services, geographical areas and major customers.
The Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997.
Net Income (Loss) Per Share - In December 1997, the Company adopted SFAS No.
128, "Earnings per Share." SFAS No. 128 redefines earnings per share under
generally accepted accounting principles. Under the new standard, primary net
income per share is replaced by basic net income per share, and fully diluted
net income per share is replaced by diluted net income per share. All historical
earnings per share information has been restated as required by SFAS No. 128.
Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods presented.
36
<PAGE> 19
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>
Years Ended December 31,
(Amounts in thousands) 1997 1996 1995
------------------------------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
Net income $365 $(7,425) $1,069
Less preferred stock dividends (79) (79) (79)
------------------------------------------------------- --------------- ---------------- ---------------
Net income available to common shareholders $286 $(7,504) $ 990
------------------------------------------------------- --------------- ---------------- ---------------
Basic net income (loss) per share
Weighted average number of shares outstanding 12,210 10,849 9,247
Effect of dilutive securities:
Stock options 820
------------------------------------------------------- --------------- ---------------- ---------------
Diluted net income (loss) per share
Weighted average number of shares outstanding 13,030 10,849 9,247
------------------------------------------------------- --------------- ---------------- ---------------
</TABLE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Customer Concentrations - The Company sells primarily on credit terms to
customers in the home health care industry. During the years ended December 31,
1996 and 1995, one customer accounted for 31%, and 64% of total revenues from
operations, respectively. There were no such significant customers during the
year ended December 31, 1997. Export sales accounted for 36%, 30% and 21% of
total revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. Export sales were primarily to certain European and Far Eastern
countries. The loss of, or reduction in sales to any such customers or
geographical areas would have a material adverse effect on the Company's
business, operating results and financial condition.
Supplier Concentrations - Certain of the Company's products utilize components
that are available in the short term only from a single or a limited number of
sources. Any inability to obtain components in the amounts needed on a timely
basis or at commercially reasonable prices could result in delays in product
introductions or interruption in product shipments or increases in product
costs, which could have a material adverse effect on the Company's business,
operating results and financial condition until alternative sources could be
developed or designed and manufacturing changes could be completed. Any
37
<PAGE> 20
such design or manufacturing changes or increased costs could result in
significant expenses in a particular quarter and, therefore, could adversely
affect operating results for any quarter or other period.
Foreign Currency - The financial position and results of operations of the
Company's foreign subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
at the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are included in the accumulated foreign currency translation
adjustments account in stockholders' equity. Realized gains or losses from
foreign currency transactions are included in operations as incurred.
2. ACQUISITION OF BLOCK MEDICAL, INC.
On July 22, 1996, the Company purchased substantially all of the assets of Block
Medical, Inc. ("Block"). The assets were acquired for an aggregate purchase
price of approximately $18 million. The purchase price has been allocated to the
net assets acquired, in-process research and development, goodwill and other
intangibles. The amount allocated to in-process research and development of $4.9
million has been expensed as of the acquisition date. In-process research and
development arises from new product development projects, which were in various
stages of development at the date of acquisition. In-process research and
development for products which have not established technological feasibility
and for which no alternative use is identified is written off at the time of
acquisition. New product development projects underway at the acquisition date
included four prospective products: Oasis, an electronic ambulatory infusion
pump, Voicelink II, an accessory device for electronic pumps, Flush, a reusable
device for saline, antibiotic, saline and heparin flushing, and the C-Series
Pump, a disposable elastometric infusion pump for delivery of chemotherapy.
Management initially expected that research and development costs to complete
the in-process projects would be approximately $2 to $3 million , which would be
incurred over a 2 to 3 year period. Uncertainties that could impede progress to
a developed technology include: (i) availability of financial resources to
complete development, (ii) economic feasibility of the developed technology,
(iii) regulatory approvals required to market each product, (iv) customer
acceptance, and (v) general competitive conditions in the industry. As of
December 31, 1997, the Company has incurred additional development costs of
approximately $500,000 related to these projects. As a result of the additional
development efforts, as well as the uncertainties described above, the Company
has abandoned development efforts on the Flush device, has completed development
on the C-Series Pump, and has postponed development on the Oasis and Voicelink
II due to changes in the market and capital requirements. If the Company should
decide to go forward with the Oasis and Voicelink II projects or projects very
similar to those, it anticipates additional costs of approximately $2 million.
Consideration for the purchase consisted of: $15,000,000 in cash, 433,018 shares
of I-Flow Corporation Common Stock with a value of $2,000,000 as of the date of
closing, and a warrant to purchase 250,000 shares of I-Flow Corporation Common
Stock at an exercise price of $4.62, expiring July 22, 2001, valued at $615,000
at the date of closing.
The Company recorded a restructuring charge in 1996 of $1,552,000 to provide for
expenses related to consolidating Block's facilities with its own in 1997. The
$1,552,000 restructuring charge was comprised of approximately $788,000 in
severance and relocation expenses, $380,000 in moving expenses and $384,000 for
lease abandonment. The restructuring was completed during 1997 and there was no
restructuring reserve remaining as of December 31, 1997.
38
<PAGE> 21
The unaudited consolidated pro forma results of operations for the years ended
December 31, 1996 and 1995, as if the Block Medical acquisition had occurred at
the beginning of 1995, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
------------------------ ------------------------ ------------------------
<S> <C> <C>
Total revenues $ 22,071,000 $ 23,571,000
Net loss $(3,068,000) $(8,823,000)
Net loss per share $ (0.26) $ (0.91)
------------------------ ------------------------ ------------------------
</TABLE>
The pro forma information presented above does not purport to be indicative of
the results that actually would have been obtained if the combined operations
had been conducted during the periods presented and is not intended to be a
projection of future results.
3. BANK FINANCING AND LONG-TERM DEBT
During the year ended December 31, 1995, the Company entered into a financing
agreement with a bank which provides for a working line of credit expiring in
February 1999. Under the line of credit, the Company may borrow up to the lesser
of $4,000,000 or 75% of eligible accounts receivable, as defined, at the prime
rate plus .75% (9.25% at December 31, 1997). There were borrowings outstanding
and available funds for borrowing under the line of $1,500,000 and $536,000,
respectively, as of December 31, 1997.
In conjunction with the acquisition described in Note 2, the Company entered
into a $4,000,000 note payable with a bank ($2,579,000 outstanding at December
31, 1997) due in equal monthly installments of principal of $83,333 plus
interest at the bank's prime rate plus 1.5% (10.0% at December 31, 1997) through
July 2000. The notes are collateralized by substantially all of the Company's
assets and require the Company to comply with certain covenants. As of December
31, 1997, the Company was in compliance with or had received a waiver for all
such covenants.
4. SHAREHOLDERS' EQUITY, COMMON STOCK WARRANTS AND OPTIONS
The Company has 656,250 shares outstanding of its Series B Preferred Stock,
which is convertible at any time by the holders into an aggregate of 700,000
shares of the Company's Common Stock (subject to adjustment from time to time as
a result of certain dilutive events). The preferred shareholder is entitled to
receive an annual dividend of 5% payable in cash or in shares of Common Stock
valued at 80% of the market value thereof on the declaration date and entitled
to a liquidation preference of $2.40 per share. The preferred stock is
redeemable by the Company at the discretion of the Board at $2.40 per share,
plus any declared but unpaid dividends, at any time after the average closing
bid price for the Company's Common Stock equals or exceeds $7.20 per share for
over thirty (30) consecutive trading days.
In July 1995, an aggregate of 758,681 shares of the Company's Common Stock was
issued upon exercise of warrants for net proceeds of $1,707,000.
39
<PAGE> 22
In July 1996, the Company issued warrants for the purchase of 250,000 shares of
the Company's Common Stock in conjunction with the acquisition of Block
("Acquisition Warrants") (Note 2), expiring in July 2001. The exercise price for
these warrants, $4.62 per share, was equal to the fair market value of the
Common Stock at the date of grant. Additionally, in conjunction with the
financing obtained for the acquisition (Note 3), the Company issued warrants to
the bank for the purchase of 60,000 shares of the Company's Common Stock at an
exercise price of $5.00 per share, expiring in July 2001.
During the year ended December 31, 1997, Series F Warrants to purchase 336,328
shares of Common Stock at exercise prices of $2.40 and $3.60 were exercised in a
cashless exchange for 56,814 shares of the Company's Common Stock. Series F
Warrants to purchase 270,704 shares of the Company's Common Stock at an exercise
price of $4.80 expired during the year. Also during the year, Series H Warrants
for 150,000 shares of the Company's Common Stock were exercised raising net
proceeds of $450,000.
The Company has an employee stock option plan (the "1987 - 1988 Plan") which
provides for granting options to employees, officers and consultants to purchase
up to 2,000,000 shares of the Company's Common Stock at exercise prices not less
than 100% of the fair market value of the Company's Common Stock at the date of
grant (110% for incentive options granted to holders of greater than 10% of the
Company's outstanding voting stock). Options granted become exercisable at such
times as determined by the Compensation Committee of the Board of Directors and
expire on various dates up to ten years from the date of grant.
In May 1996, the shareholders of the Company approved a new stock incentive plan
(the "1996 Plan") which provides for the grant of stock options (including
incentive stock options or nonqualified stock options), restricted stock, stock
appreciation rights, stock payments, dividend equivalents, stock bonuses, stock
sales, phantom stock and other stock-based benefits to directors, officers,
employees, consultants, and advisors of the Company and its affiliated entities.
Stock options granted under the 1996 Plan may be incentive stock options
intended to qualify under the provisions of Section 422 of the Internal Revenue
Code ("Code") or non-qualified stock options which do not so qualify. The
maximum number of shares of Common Stock which may be the subject of awards
granted under the 1996 Plan may not exceed 2,500,000 shares in the aggregate,
subject to adjustments for stock splits or other adjustments as discussed below.
The shares available under the 1996 Plan may either be authorized and unissued
shares or shares reacquired by the Company through open market purchases or
otherwise. If any award granted under the 1996 Plan expires, terminates or is
forfeited before the exercise thereof or the payment in full thereof, the shares
covered by the unexercised or unpaid portion will become available for new
grants under the 1996 Plan. The 1996 Plan provides for the granting of options
to purchase shares of the Company's Common Stock at a price equal to 85% of the
quoted market price on the date of grant. Options granted become exercisable at
such times as determined by the Compensation Committee of the Board of Directors
and expire on various dates up to ten years from the date of grant. Options to
purchase 1,928,651 shares of the Company's Common Stock were available for grant
under the 1996 Plan as of December 31, 1997.
The Company has issued options outside the option plans to purchase an aggregate
of 541,500 shares of its Common Stock to certain key employees at exercise
prices below fair market value for services rendered (Note 6). Compensation
expense related to these options aggregating $150,000, $44,000 and $44,000 has
been recorded for the years ended December 31, 1997, 1996 and 1995,
respectively. All other terms of the options are the same as those issued under
the 1996 Plan (described above).
The Company also has a stock option plan which provides for the granting of
options to non-employee directors to purchase up to 400,000 shares of the
Company's Common Stock at exercise prices not less than the fair market value of
the Company's Common Stock at the date of grant. Under the terms of the plan,
options to purchase 10,000 shares of the Company's Common Stock are to be
granted to each non-
40
<PAGE> 23
employee director serving in such capacity as of the first business day of
January of each year as long as the plan remains in existence. Options granted
become exercisable in four equal installments, with one installment occurring at
the end of each calendar quarter subsequent to the date of grant. The options
expire at the earlier of five years from the date of grant or two years after
termination of the options holder's status as a director. Options to purchase
215,000 shares of the Company's Common Stock were available for grant under this
plan as of December 31, 1997.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Price
- -------------------------------------------------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance, January 1, 1995 1,802,091 $2.01
Granted (weighted average fair value of $4.54 ) 773,677 3.88
Canceled/Expired (58,602) 2.18
Exercised (38,278) 1.76
- -------------------------------------------------------------- ------------------- ------------------
Balance, December 31, 1995 (1,462,687 exercisable at a
weighted average price of $2.17) 2,478,888 2.59
Granted (weighted average fair value of $7.29) 753,372 4.55
Canceled/Expired (45,547) 3.53
Exercised (337,078) 2.13
- -------------------------------------------------------------- ------------------- ------------------
Balance, December 31, 1996 (1,788,437 exercisable at a
weighted average price of $2.74) 2,849,635 3.06
Granted (weighted average fair value of $4.63) 218,000 4.61
Canceled/Expired (175,660) 3.98
Exercised (116,328) 2.48
- -------------------------------------------------------------- ------------------- ------------------
Balance, December 31, 1997 (1,909,601 exercisable at a
weighted average price of $2.87) 2,775,647 $3.17
- -------------------------------------------------------------- ------------------- ------------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for stock option grants with exercise prices equal to the fair
value of the underlying shares at the grant date. Had compensation cost for the
Company's option plans been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been decreased/increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
(Amounts in thousands, except per share amounts) 1997 1996 1995
------------------------------------------------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 365 $(7,425) $ 1,069
Net income (loss) - pro forma $ (146) $(8,057) $ 618
Earnings (loss) per share - as reported $ 0.03 $ (0.68) $ 0.12
Earnings (loss) per share - pro forma $ (0.01) $ (0.74) $ 0.07
------------------------------------------------------------ ---------------- ---------------- ----------------
</TABLE>
41
<PAGE> 24
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1997, 1996 and 1995: no dividend yield; expected volatility of 52% in
1997, 45% in 1996 and 27% in 1995; risk-free interest rate of 6.0% in 1997 and
6.5% in 1996 and 1995; and expected lives of 5 years.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------- --------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Of Shares Contractual Exercise Of Shares Exercise
Outstanding Life in Years Price Exercisable Price
- ------------------------------- ---------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.25 - $1.00 86,000 5.37 $0.25 49,634 $0.25
$1.01 - $2.00 749,000 4.16 $1.59 648,366 $1.59
$2.01 - $3.00 338,487 3.68 $2.26 330,640 $2.25
$3.01 - $4.00 401,470 3.76 $3.38 256,311 $3.14
$4.01 - $5.00 1,052,690 4.63 $4.44 484,650 $4.39
$5.01 - $6.00 148,000 3.37 $5.36 140,000 $5.37
- ------------------------------- ---------------- ---------------- ----------------- --------------- ----------------
Total 2,775,647 4.22 $3.17 1,909,601 $2.87
- ------------------------------- ---------------- ---------------- ----------------- --------------- ----------------
</TABLE>
5. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109, -
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are established for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at tax
rates expected to be in effect when such assets or liabilities are realized or
settled.
Total federal and state taxes on income for the years ended December 31, 1997,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 79,000 $ 49,000 $ --
State 1,000 11,000 --
Deferred:
Federal 68,000 (2,186,000) 374,000
State 710,000 (1,566,000) 68,000
Change in valuation allowance (778,000) 3,752,000 (442,000)
- ------------------------------------- -------------------- ------------------- --------------------
Total $ 80,000 $ 60,000 $ --
- ------------------------------------- -------------------- ------------------- --------------------
</TABLE>
42
<PAGE> 25
The reconciliation of the effective income tax rate to the statutory federal
rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
U.S. federal statutory tax expense 35.0% 35.0% 35.0%
State taxes, net of federal benefit, net -- (0.1%) --
of state valuation allowance
Research and development credits (6.7%) 0.1% --
Change in valuation allowance (15.3%) (34.9%) (35.0%)
Other 5.0% (0.2%) --
- -------------------------------------------- ------------------- ------------------- -------------------
Total 18.0% (0.1%) --
- -------------------------------------------- ------------------- ------------------- -------------------
</TABLE>
As of December 31, 1997 and 1996, the Company had a net deferred tax asset
comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
Deferred Tax Assets: 1997 1996
- -------------------------------------------------- ----------------------- ---- -------------------
<S> <C> <C>
Net operating loss carryforwards $ 4,922,000 $ 5,474,000
Amortization of goodwill and other intangibles 3,090,000 3,329,000
Reserves not currently deductible 757,000 360,000
Accrued restructuring -- 523,000
State taxes (410,000) (649,000)
Tax credits 493,000 475,000
Deferred revenue 25,000 186,000
Accrued compensation and related costs 214,000 108,000
Depreciation 73,000 94,000
Other 1,000 43,000
- -------------------------------------------------- ----------------------- -------------------
Subtotal 9,165,000 9,943,000
Less valuation allowance (9,165,000) (9,943,000)
- -------------------------------------------------- ----------------------- -------------------
$ -- $ --
- -------------------------------------------------- ----------------------- -------------------
</TABLE>
At December 31, 1997, net operating loss carryforwards amounted to approximately
$14,100,000 and $1,600,000 for federal and state purposes, respectively, and
expire beginning 2000 through 2009. Due to certain tax regulations, future use
of the loss carryforwards is restricted. The impact of the restricted amount has
not been calculated as of December 31, 1997.
6. COMMITMENTS AND CONTINGENCIES
In June 1990, the Company entered into an employment agreement with the
President of the Company that expires on June 4, 2000. Under the terms of the
agreement, the President will receive a minimum base salary of $200,000 per year
for the term of this contract, with salary reviews conducted annually by the
Board of Directors.
In 1996, the Board of Directors approved a deferred compensation plan under
which certain key employees may be granted options under the 1996 Plan (Note 4)
for which the Company will pay 100% of the total exercise price upon exercise of
the options by the employee. These options will vest one-third
43
<PAGE> 26
upon the expiration of each of the three years following the date of grant.
Compensation expense of $150,000, $44,000 and $44,000 relating to the plan was
recorded in 1997, 1996 and 1995, respectively.
In July 1997, the Company entered into a noncancelable operating lease for a new
51,000 square foot building for its primary facility. The lease agreement
contains certain scheduled rent increases (which are accounted for on a
straight-line basis) and expires in June 2007. Future minimum lease payments
under the lease are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------- ----------------------
<S> <C>
1998 $ 386,000
1999 386,000
2000 386,000
2001 386,000
2002 407,000
Thereafter 1,928,000
----------------------------------------- ----------------------
Total $ 3,879,000
----------------------------------------- ----------------------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $401,000,
$291,000 and $201,000, respectively.
The Company is subject to litigation in the normal course of business. As of
December 31, 1997, the Company is not a party to any legal proceedings, the
adverse outcome of which, in management's opinion, individually or in aggregate,
would have a material adverse effect on the Company's financial position or
results of operations.
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan in which any full-time employee may
participate. Employer contributions to the plan are discretionary. No employer
contributions were authorized during the years ended December 31, 1997, 1996 or
1995. The Company does not provide post-retirement benefits to its employees.
8. SUBSEQUENT ACQUISITION OF INFUSYSTEMS II, INC. AND VENTURE MEDICAL, INC.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with, InfuSystems II, Inc. ("InfuSystems"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystems and VMI, contemplating the
merger of InfuSystems and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystems were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998. During
the year ended December 31, 1997, the Company had approximately $684,000 of net
product sales to Infusystem and VMI.
In the Merger, all of the outstanding shares of Common Stock of VMI and
InfuSystems were exchanged for shares of Common Stock of the Company. The
aggregate number of shares of Common Stock of the Company issued in the Merger
to the shareholders of VMI and InfuSystems was 972,372 shares, valued at
approximately $2.9 million (subject to certain post-effective adjustments). As
contemplated by the Agreement, shares of Common Stock of the Registrant issued
in the Merger valued at $1.5 million (the
44
<PAGE> 27
"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. The additional
amounts, if any, will be calculated pursuant to the formula set forth in the
Agreement. At the Company's election, it may pay such additional merger
consideration, if any, by the issuance of additional shares of its Common Stock,
in cash, or any combination thereof.
45
<PAGE> 28
<TABLE>
<S> <C>
CORPORATE OFFICE STOCK REGISTRAR & TRANSFER AGENT
I-Flow Corporation American Stock Transfer & Trust Company
20202 Windrow Drive 40 Wall Street
Lake Forest, California 92630 New York, NY 10005
(800) 448-3569 (800) 937-5449 or (212) 936-5100
(714) 206-2700
LEGAL COUNSEL ANNUAL MEETING OF SHAREHOLDERS
Gibson, Dunn & Crutcher LLP Thursday, May 21, 1998 at 9:30 a.m.
Jamboree Center, 4 Park Plaza at the Corporate Office, 20202 Windrow Drive
Irvine, CA 92614 Lake Forest, California 92630
INDEPENDENT AUDITORS FORM 10-K
Deloitte & Touche LLP A COPY OF I-FLOW'S ANNUAL REPORT ON FORM
695 Town Center Drive 10-K FILED WITH THE SECURITIES AND EXCHANGE
Costa Mesa, California 92626 COMMISSION (INCLUDING THE FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES) WILL BE
FURNISHED WITHOUT CHARGE TO SHAREHOLDERS OF
INVESTOR RELATIONS COUNSEL RECORD UPON WRITTEN REQUEST TO:
Neil Berkman & Associates GAYLE L. ARNOLD
1900 Avenue of the Stars CHIEF FINANCIAL OFFICER
Suite 2850 I-FLOW CORPORATION
Los Angeles, CA 90067 20202 WINDROW DRIVE
(310) 277-5162 LAKE FOREST, CALIFORNIA 92630
</TABLE>
SECURITIES INFORMATION
I-FLOW Corporation's Common Stock is traded on The Nasdaq Small Cap Stock Market
under the symbol IFLO. The high and low transaction prices for the Common Stock
as reported by Nasdaq are set forth in the following table.
<TABLE>
<CAPTION>
1997 High Low 1996 High Low
- --------------------- ----- ----- -------------- ----- ---
<S> <C> <C> <C> <C> <C>
First Quarter $5.88 $4.00 First Quarter $5.50 $3.81
Second Quarter $4.31 $3.88 Second Quarter $5.94 $3.69
Third Quarter $5.00 $3.91 Third Quarter $4.94 $3.81
Fourth Quarter $5.13 $2.56 Fourth Quarter $5.44 $4.06
</TABLE>
There were approximately 500 shareholders of record of I-Flow's Common Stock on
February 27, 1998.
The Company has not paid, and does not expect to pay in the foreseeable future,
cash dividends on its common stock.
46
<PAGE> 1
EXHIBIT 21
I-FLOW CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State of Jurisdiction
Name of Incorporation
- ---- ---------------------
<S> <C>
Block Medical de Mexico, S.A. de C.V. Mexico
I-Flow International, Inc. U.S. Virgin Islands
Infusystem, Inc.* California
</TABLE>
* Not included in the Company's Consolidated Financial Statements.
47
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63500 and 333-16547 on Form S-8 and in Registration Statement Nos. 33-80384
and 333-21493 on Form S-3 of I-Flow Corporation of our reports dated February
19, 1998, appearing, and incorporated by reference, in this Annual Report on
Form 10-K of I-Flow Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Costa Mesa, California
January 6, 1999
48
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 5,590
<ALLOWANCES> 463
<INVENTORY> 4,058
<CURRENT-ASSETS> 10,040
<PP&E> 4,170
<DEPRECIATION> (1,939)
<TOTAL-ASSETS> 17,634
<CURRENT-LIABILITIES> 5,467
<BONDS> 0
0
1,494
<COMMON> 34,468
<OTHER-SE> (25,374)
<TOTAL-LIABILITY-AND-EQUITY> 17,634
<SALES> 17,768
<TOTAL-REVENUES> 17,714
<CGS> 8,450
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (337)
<INCOME-PRETAX> 445
<INCOME-TAX> (80)
<INCOME-CONTINUING> 365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 5,628 1,651
<SECURITIES> 0 0
<RECEIVABLES> 2,076 4,639
<ALLOWANCES> 509 125
<INVENTORY> 1,067 3,352
<CURRENT-ASSETS> 8,337 9,658
<PP&E> 1,650 3,264
<DEPRECIATION> (1,155) (1,326)
<TOTAL-ASSETS> 9,107 17,234
<CURRENT-LIABILITIES> 1,379 4,753
<BONDS> 0 0
0 0
1,494 1,494
<COMMON> 24,278 33,651
<OTHER-SE> (18,044) (25,548)
<TOTAL-LIABILITY-AND-EQUITY> 9,107 17,234
<SALES> 9,737 9,153
<TOTAL-REVENUES> 10,143 13,933
<CGS> 4,422 3,954
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,656 17,344
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 96 41
<INCOME-PRETAX> 1,069 (7,365)
<INCOME-TAX> 0 (60)
<INCOME-CONTINUING> 1,069 (7,425)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,069 (7,425)
<EPS-PRIMARY> .11 (.69)
<EPS-DILUTED> .11 (.69)
</TABLE>
