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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
------------------------------------------------------
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 office (Zip code)
Registrant's telephone number, including area code: (949) 206-2700
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x]
The aggregate market value of the 13,544,374 shares of voting Common Stock of
the registrant held by non-affiliates of the registrant on March 1, 2000, based
on the last sale price of such stock on the NASDAQ Small Cap Market on such date
was $49,166,078.
Registrant's outstanding stock as of March 1, 2000 was 14,920,207 shares of
Common Stock.
Information required by Part III is incorporated by reference to portions of the
registrant's Proxy Statement for the 2000 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, 1999.
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PART I
ITEM 1. BUSINESS
THE COMPANY
I-Flow Corporation (the "Company" or "I-Flow") designs, develops and markets
technically advanced, low-cost ambulatory infusion systems that are redefining
the standard of care by providing life enhancing, cost effective solutions for
pain management and infusion therapy. The Company's products are used both in
hospitals and alternate site settings.
I-Flow is rapidly expanding its reputation in the medical and health care
industry as an innovator in acute and chronic pain management. An important fear
of most patients having surgery is the expectation of pain after the operation.
I-Flow's product lines for pain management help get patients on their feet
faster, allowing for shorter hospital stays and quicker recoveries.
I-Flow manufactures a growing line of compact, portable infusion pumps,
catheters and pain kits that administer medication directly to the wound site as
well as administer local anesthetics, chemotherapies, antibiotics, nutritional
supplements and other medications. The Company has continued to introduce
reliable, lightweight, portable infusion pumps enabling patients to live
ambulatory and, therefore, more productive lifestyles. I-Flow sells and
distributes its products throughout the United States, Canada, Europe, Asia,
Mexico, Brazil, Australia, New Zealand and the Middle East. InfuSystem, Inc. a
wholly-owned subsidiary, is primarily engaged in the rental of infusion pumps on
a month-to-month basis.
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 (949) 206-2700 and its web site is
located at www.i-flowcorp.com.
ACQUISITIONS
On July 22, 1996, the Company purchased 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.
On February 11, 1998, the Company acquired all of the outstanding stock of
InfuSystem II, Inc. and Venture Medical, Inc. (collectively referred to as
"InfuSystem"). InfuSystem is a leading ambulatory infusion pump management
provider based in Madison Heights, Michigan. By delivering ambulatory pumps and
the related disposables 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.
On January 14, 2000, the Company acquired all of the outstanding stock of Spinal
Specialties, Inc., a designer and manufacturer of custom spinal, epidural and
nerve block infusion kits based in San Antonio, Texas. Spinal Specialties
provides a line of custom disposable products for chronic pain management, which
are tailored to the specific needs of the hospital, anesthesiologist and pain
clinic.
THE PRODUCTS
I-Flow offers the health care professional a complete line of cost-effective
infusion therapy devices designed to meet the needs of today's managed care
environment both in the hospital and alternate site setting. The I-Flow family
of technically advanced infusion products is portable, reliable, economical and
versatile.
Elastomerics
I-Flow's complete family of Elastomeric pumps deliver medication from an elastic
"balloon" that does not rely on gravity for proper delivery. These pumps are
small enough to fit into the patient's pocket or be clipped to the
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patient's clothing, allowing for better mobility and a quicker transition to
rehabilitation. This easy-to-use technology provides the health care
professional with a device that is both safe and simple enough for patients to
use for self-administration. The Company's elastomeric line of products can be
used for pain management medications, antibiotics or other medications that
often require complex protocols for volume and delivery rate.
Elastomeric products include the patented Homepump Eclipse(R), Homepump Eclipse
"C"-Series and One-Step KVO(TM).
Chronic Pain Kits
This new product line resulting from I-Flow's January 2000 acquisition of Spinal
Specialties, Inc. includes custom spinal, epidural and nerve block kits. These
disposable products for chronic pain management are tailored to the specific
needs of the hospital, anesthesiologist and pain management clinic. The spinal
tray line can be combined with I-Flow's infusion systems to create new products
for managing acute and chronic pain.
Acute Pain Kits
The acute pain kit product line includes the PainBuster(TM) kit, ON-Q(TM) Pain
Management System and Nerve Block kit. I-Flow's PainBuster(TM) and ON-Q(TM)
offer continuous wound site pain management, considered one of the most ideal
treatments for post-operative pain. This is a great improvement over previous
methods of wound site pain management. Since few or no narcotics are used, there
are fewer side effects.
The Company's new Soaker Catheter was granted FDA permission for use for pain
management of large surgical incisions in November 1999. The Soaker Catheter,
which attaches to I-Flow's diverse line of infusion systems, provides a
continuous, even infusion of a non-narcotic, local anesthetic directly along
incisions for post-operative pain management. It will be available in lengths of
2.5, 5 and 10-inches.
Syringe Delivery Systems
I-Flow's Syringe Delivery Systems are designed to provide accurate intravenous
push delivery from a syringe. The systems are cost-effective for both single and
multiple doses and provide health care professionals with a safe and accurate
alternative to gravity or IV push methods with a relatively easy learning curve
for patients.
Products include Medi-SIS 20(TM) and Medi-SIS 60(TM).
Non-Electric IV Bag Delivery Systems
I-Flow's non-electric products provide a safe and easy-to-use system for
controlled infusion.
Products include the Paragon(R) ambulatory infusion pump, Paragon Epidural Pump
and Rely-A-Flow(R) Gravity Set.
Electronic Pumps
Products include I-Flow VIP(TM), which can be used with VOICELINK(R). VOICELINK
enables caregivers to monitor and program the devices for their patients with
just a touch-tone phone. The Company believes he Vivus 4000(R) is the only
ambulatory, multi-channel, multi-therapy electronic infusion pump currently
available and provides accurate and safe remote programming and delivery of four
individual protocols regardless of complexity.
THE MARKETS
The Company participates in various market segments. Over the last two years,
I-Flow significantly expanded its product line and distribution capabilities to
establish itself as a leading player in the pain management arena. This, coupled
with the Company's continuing innovations in pain management and infusion
technologies, has placed I-Flow in a strong position for future potential
growth.
The hospital market for I-Flow's simple and portable infusion technologies is
currently a virtually untapped market. There are more than 39 million operative
procedures performed in the U.S. every year. I-Flow estimates that more than 10
million per year are excellent candidates for the ON-Q(TM) and PainBuster(TM)
systems. There are also 4 million live births in the U.S., most of which are
targets for Spinal Specialties product lines.
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The alternate site health care industry has grown significantly in the past few
years with ambulatory infusion devices being one of the fastest growing
segments. 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.
The following table sets forth a summary of the Company's revenues by market
segment, expressed as percentages of the total net revenues:
Revenues by Market Segment 1999 1998 1997
- ---------------------------- ---- ---- ----
Hospital and Pain Management 26% 9% --
Home Care 25% 36% 64%
Oncology 29% 27% --
International 20% 28% 36%
COMPETITION
The drug infusion 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 as a result may be better able to
compete for market share, 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 current competitors and the Company's current competitive position
for each of its product lines is noted in the table below.
Number of
Known Estimated
Market Description Competitors Competitive Position
------------------ ----------- --------------------
Elastomerics 3 1
Chronic Pain Kits 11 8
Acute Pain Kits 4 1
Syringe Delivery Systems 8 7
Non-Electric IV Bag Delivery Systems 4 2
Electronic Pumps 7 4
The Company has focused its product development efforts on products in the
ambulatory infusion systems market and, with the majority 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 in the United States is currently managed
directly through its internal sales force as well as through a number of
regional medical product distributors. As of March 1, 2000, the Company and its
subsidiaries had 22 internal sales representatives located throughout the United
States. The Company relies on regional U.S. medical product distributors for
approximately 7% of its revenue. There are no complete integrated contracts with
any of these distributors. The Company is actively pursuing additional
distribution arrangements for its products.
During 1998, the Company entered into an agreement with B. Braun Melsungen AG, a
world leader in the manufacture and distribution of pharmaceuticals and infusion
products, to distribute I-Flow's elastomeric infusion pumps in Western Europe,
Eastern Europe, the Middle East, Asia Pacific, South America and Africa. The
Company also entered into a similar agreement with B. Braun Medical, Inc. to
distribute I-Flow's elastomeric pumps to its full line IV solution customers in
the United States. These two relationships have generated significant sales for
the
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Company. During the year ended December 31, 1999, combined sales to these
companies accounted for approximately 16% of the Company's net revenues.
In May 1999, the Company entered into an agreement with dj Orthopedics LLC
(formerly DonJoy, a division of Smith & Nephew, Inc.), a leading provider of
orthopedic braces, to distribute the Company's PainBuster pain management system
exclusively in the United States and Canada for orthopedic surgery applications.
I-Flow's PainBuster pain management system provides continuous infusion of a
non-narcotic, local anesthetic directly into the intraoperative site for
post-operative pain management. The agreement called for I-Flow to receive a
nonrefundable $2 million licensing fee during 1999. Additionally, dj Orthopedics
is required to make minimum purchases in order to maintain distribution rights.
In June 1999, the Company signed a distribution agreement with Ethicon
Endo-Surgery, Inc., a Johnson & Johnson company, under which Ethicon
Endo-Surgery became the exclusive worldwide distributor of I-Flow's ON-Q Pain
Management System for all surgical applications excluding orthopedics. The ON-Q
Pain Management System infuses non-narcotic local anesthetics directly into the
intraoperative site, the patient's primary source of post-operative pain. This
multi-year agreement requires Ethicon Endo-Surgery to meet minimum purchase
commitments to maintain exclusive distribution rights.
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 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 20%, 28% and 36% of the Company's revenues for
the years ended December 31, 1999, 1998 and 1997, respectively. The Company does
not have any capital investments in any foreign operations except for its plant
in Mexico.
Total revenue attributable to each geographic area into which the Company has
sales is as follows:
Sales to unaffiliated customers: 1999 1998 1997
- -------------------------------- ---- ---- ----
United States $23,962,000 $17,020,000 $11,484,000
Europe 4,181,000 5,032,000 3,953,000
Asia 1,165,000 1,129,000 1,986,000
Other 476,000 411,000 319,000
MANUFACTURING AND OPERATIONS
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, 1999, 1998 and 1997, the Company
incurred expenses of approximately $1,057,000, $940,000 and $1,035,000,
respectively, for product development.
PATENTS AND TRADEMARKS
The Company has filed U.S. patent applications for substantially all of its
products. The total number of patents now held by the Company is approximately
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 revenue. In the opinion of management, there are no related
limitations that would have a material adverse effect on the Company.
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Copyrights have been obtained for the Vivus 4000 programming software. The
product names are either registered trademarks or have trademark applications
pending. 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 is regulated by the Food, Drug
and Cosmetic Act. Under the act, the Company is required to register its
facilities and list its devices with the FDA, to file notice of intent to market
new products under Section 510(K) of the Act, to track the location of certain
of its products and to report any incidents of death or serious injury relating
to its products. To date, there have been no reportable conditions found during
any FDA inspections. Failure to comply with any of these regulations can result
in civil and criminal penalties upon the Company and/or the recall, seizure or
injunction of certain of its products.
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.
The Company is required to comply with federal, state and local environmental
laws. To date, however, there has been no significant effect of environmental
issues on the capital expenditures, earnings and competitive position of the
Company and there is currently no significant use of hazardous materials in the
manufacture of the Company's products.
Products intended for export are subject to additional regulations, including
compliance with ISO 9000. In May 1995, the Company received ISO 9001
certification, which indicates 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 Block operations, including the Mexico facility, were 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 March 1, 2000, the Company and its subsidiaries had a total of 139
full-time employees in the United States and an additional had 143 employees at
the Company's wholly-owned subsidiary in Mexico. None of the Company's employees
in the United States are covered by a collective bargaining agreement with a
union. The Company considers its relationship with its employees to be 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 ten-year noncancelable operating lease
for a new 51,000 square foot building in Lake Forest, California, to be used as
its primary facility. The Company also leases a facility for its manufacturing
plant in Northern Mexico, a facility for the operation of its subsidiary in
Detroit, Michigan and a facility for its recently acquired subsidiary in San
Antonio, Texas. These facilities currently operate at approximately 60% of
capacity.
ITEM 3. LEGAL PROCEEDINGS
As of March 1, 2000, the Company was involved in legal proceedings in the normal
course of operations. Although the outcome of the proceedings cannot be
determined as of March 1, 2000, in the opinion of management any
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resulting future liability will not have a material adverse effect on the
Company and its subsidiaries, 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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive officers of
the Company as of March 1, 2000. There are no family relationships between any
of the executive officers or directors of the Company. The executive officers
are chosen annually at the first meeting of the Board of Directors following the
annual meeting of shareholders and, subject to the terms of any employment
agreement, serve at the will and pleasure of the Board of Directors.
Name(Age) Position
- ---------- --------
Donald M. Earhart(55) President, Chief Executive Officer and
Chairman of the Board
Henry Tsutomu Tai, Ph.D., M.D.(56) Secretary and Director
James J. Dal Porto(46) Executive Vice President, Chief Operating
Officer and Director
Gayle L. Arnold(38) Chief Financial Officer and Treasurer
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 degree from Ohio State University and a
Masters Degree in Business Administration from Roosevelt University, has over 25
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.
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 and 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 Chief Financial Officer 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
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to 1991. Ms. Arnold is a Certified Public Accountant and holds a Bachelor of
Business Administration degree from the University of Texas, Austin.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Small-Cap Market under the
symbol "IFLO." The table below sets forth the high and low sales prices of the
Company's Common Stock as reported by The Nasdaq Small-Cap Market. As of March
1, 2000, the Company's closing stock price was $3.63.
High Low
---- ---
1998
----
1st Quarter $3.69 $2.50
2nd Quarter $2.69 $1.75
3rd Quarter $2.31 $1.38
4th Quarter $2.00 $1.13
1999
----
1st Quarter $2.94 $1.75
2nd Quarter $5.00 $2.72
3rd Quarter $4.34 $3.50
4th Quarter $4.50 $3.69
American Stock Transfer & Trust Company is the Company's transfer agent for its
Common Stock. As of March 1, 2000, 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.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with InfuSystems II, Inc. ("InfuSystem"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystem and VMI, contemplating the
merger of InfuSystem and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystem were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998 (the
"Effective Time"). In the Merger, all of the outstanding shares of Common Stock
of VMI and InfuSystem were exchanged for 987,074 shares of Common Stock of the
Company. 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 InfuSystem and VMI, as payment of Amherst's
fees and expenses in connection with the Merger. In August 1998, the Company
issued an additional 209,675 shares of its Common Stock pursuant to a valuation
floor provision for the six-month anniversary. In February 1999, the Company
paid an additional $286,000 pursuant to a valuation floor provision for the
one-year anniversary. 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 issued pursuant to the Merger Agreement were included in the
Registration Statement on form S-3 (Registration No. 333-62929) filed by the
Company in January 1999.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below has been derived from the audited Consolidated
Financial Statements of I-Flow Corporation and is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
(Amounts in thousands, except 1999 1998 1997 1996 1995
per share amounts) -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:(1)
Revenue:
Net sales $ 19,197 $ 17,006 $ 17,678 $ 9,153 $ 9,737
Rental income and other 8,587 6,586 64 139 60
Licensing fees 2,000 -- -- 4,600 250
-------- -------- -------- -------- -------
Total revenue 29,784 23,592 17,742 13,892 10,047
Cost of sales 11,824 10,219 8,450 3,954 4,422
-------- -------- -------- -------- -------
Gross Profit 17,960 13,373 9,292 9,938 5,625
Expenses:
Selling and marketing 4,193 4,178 3,197 2,617 1,483
General and administrative 8,257 6,401 4,281 4,336 2,329
Product development 1,057 940 1,035 1,139 840
Non-recurring charges -- -- -- 9,252 --
-------- -------- -------- -------- -------
Total expenses 13,507 11,519 8,513 17,344 4,652
-------- -------- -------- -------- -------
Operating income (loss) 4,453 1,854 779 (7,406) 973
Interest and other income (expense), net (404) (684) (334) 41 96
-------- -------- -------- -------- -------
Income (loss) before income taxes 4,049 1,170 445 (7,365) 1,069
Income taxes (benefit) (4,763) 69 80 60 --
-------- -------- -------- -------- -------
Net income (loss) $ 8,812 $ 1,101 $ 365 $ (7,425) $ 1,069
-------- -------- -------- -------- -------
Net income (loss) per share, basic $ 0.61 $ 0.08 $ 0.02 $ (0.69) $ 0.12
-------- -------- -------- -------- -------
Net income (loss) per share, diluted $ 0.58 $ 0.08 $ 0.02 $ (0.69) $ 0.12
-------- -------- -------- -------- -------
Weighted average shares outstanding:
Basic 14,387 13,479 12,210 10,849 9,247
Diluted 15,116 13,711 13,030 10,849 9,247
-------- -------- -------- -------- -------
CONSOLIDATED BALANCE SHEET DATA:(2)(3)
Working capital $ 13,565 $ 6,588 $ 4,573 $ 4,905 $ 6,958
Total assets 31,768 24,336 17,634 17,234 9,107
Long-term obligations 1,548 2,680 1,579 2,884 --
Total shareholders' equity 24,670 14,817 10,588 9,597 7,728
======== ======== ======== ======== =======
</TABLE>
- ----------
(1) Certain amounts previously reported have been reclassified to conform
with the presentation at December 31, 1999.
(2) In July 1996, the Company purchased substantially all of the assets of
Block Medical, Inc. See Note 2 of Notes to Consolidated Financial
Statements.
(3) In February 1998, the Company purchased substantially all of the assets
of InfuSystem II, Inc. and Venture Medical, Inc. See Note 3 of Notes to
Consolidated Financial Statements.
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ITEM 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 PERIODIC REPORTS ON FORMS 10-K, 10-Q, AND
8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE RISKS AFFECTING THE
COMPANY'S BUSINESS INCLUDE RELIANCE ON THE SUCCESS OF THE HOME HEALTH CARE
INDUSTRY, THE REIMBURSEMENT SYSTEM CURRENTLY IN PLACE AND FUTURE CHANGES TO THAT
SYSTEM, COMPETITION IN THE INDUSTRY, ECONOMIC CONDITIONS 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, 1999
Compared to the Year Ended December 31, 1998
Net revenues during the year ended December 31, 1999 were $29,784,000 compared
to $23,592,000 for the prior year, an increase of 26%. In February 1998, the
Company acquired InfuSystems II, Inc. and Venture Medical, Inc., both of which
were national ambulatory infusion pump management and distribution companies
based in Detroit, Michigan. These companies were merged into InfuSystem, Inc.
("InfuSystem"), a wholly-owned subsidiary of the Company. InfuSystem is
primarily engaged in the rental of infusion pumps on a month-to-month basis.
Rental revenues generated by InfuSystem of $6,468,000 for the period from
February 11, 1998 (date of acquisition) through December 31, 1998, were included
in net revenues for the year ended December 31, 1998. Rental revenues of
$8,512,000 were included for the year ended December 31, 1999.
Net product revenues increased from $17,006,000 in 1998 to $19,197,000 in 1999,
an increase of 13%. The 1998 revenues were adversely affected by the
restructuring of the Company's worldwide distribution network as well as
existing distributor inventory levels early in 1998, which caused a short-term
decline in shipments of infusion products to the Company's previous distribution
partners. As described below, several new distribution partners and new products
were added in 1998 and 1999. These new distributors contributed significantly to
the increased product revenues for the year ended December 31, 1999.
In March 1998, the Company entered into an agreement with B. Braun Melsungen AG,
a world leader in the manufacture and distribution of pharmaceuticals and
infusion products, to distribute I-Flow's elastomeric infusion pumps in Western
Europe, Eastern Europe, the Middle East, Asia Pacific, South America and Africa.
The Company also entered into a similar agreement under which B. Braun of
America, Inc. distributes I-Flow's elastomeric pumps to its full line IV
solution customers in the United States. During the year ended December 31,
1999, combined sales to these companies accounted for approximately 16% of the
Company's net revenues.
In May 1999, the Company entered into an agreement with dj Orthopedics LLC
(formerly DonJoy, a division of Smith & Nephew, Inc.), a leading provider of
orthopedic braces, to distribute the Company's PainBuster pain management system
exclusively in the United States and Canada for orthopedic surgery applications.
I-Flow's PainBuster pain management system provides continuous infusion of a
non-narcotic, local anesthetic directly into the intraoperative site for
post-operative pain management. The agreement called for I-Flow to receive a
nonrefundable $2 million licensing fee during 1999. Additionally, dj Orthopedics
is required to make minimum purchases in order to maintain distribution rights.
9
<PAGE> 11
In June 1999, the Company signed a distribution agreement with Ethicon
Endo-Surgery, Inc., a Johnson & Johnson company, under which Ethicon
Endo-Surgery became the exclusive worldwide distributor of I-Flow's ON-Q Pain
Management System for all surgical applications excluding orthopedics. The ON-Q
Pain Management System infuses non-narcotic local anesthetics directly into the
intraoperative site, the patient's primary source of post-operative pain. This
multi-year agreement requires Ethicon Endo-Surgery to meet minimum purchase
commitments to maintain exclusive distribution rights.
Cost of sales of $11,824,000 was incurred during the year ended December 31,
1999, compared to $10,219,000 in the prior year, an increase of 16%. As a
percentage of total revenue, cost of sales decreased by four percentage points
for the year ended December 31, 1999 compared to the prior year, due primarily
to the increased licensing fees in 1999 and a change in the sales mix towards
the new pain management products, which have a higher gross margin.
Selling and marketing expenses for the year ended December 31, 1999 remained
essentially unchanged with an increase of only $15,000. As a percentage of net
product sales, selling and marketing expenses decreased from the prior year by
approximately 3% due to the lower selling costs associated with the new
distribution agreements described above.
General and administrative expenses for the year ended December 31, 1999
increased $1,856,000 or 29% from the prior year. This increase was primarily due
to higher personnel costs, insurance costs and various other costs associated
with the growth in the business as well as the addition of InfuSystem for the
entire year in 1999 compared to only a portion of the year for 1998. As a
percentage of net product sales, general and administrative expenses remained
relatively unchanged.
Product development expenses for the year ended December 31, 1999 increased from
the prior year by $117,000, or 12%, due primarily to increased efforts on the
new pain management products. The Company will continue to incur product
development expenses as it continues its efforts to introduce new technology and
cost-efficient products into the market. Product development has remained
relatively consistent as a percentage of net product sales.
During the year ended December 31, 1999, the Company recorded a $4.8 million tax
benefit related to a reduction in the valuation allowance for deferred tax
assets. The Company's deferred tax assets primarily relate to net operating loss
carryforwards for federal and state tax purposes that can be used to offset
taxes on future earnings. The valuation allowance on the deferred tax assets was
reduced, as it became more likely that the Company will incur future profits and
therefore will be able to realize the tax benefits.
Consolidated Results of Operations - For the Year Ended December 31, 1998
Compared to the Year Ended December 31, 1997
Net revenues during the year ended December 31, 1998 were $23,592,000 compared
to $17,742,000 for the prior year, an increase of 33%. As described above, in
February 1998, the Company acquired InfuSystems II, Inc. and Venture Medical,
Inc., and merged both into InfuSystem, a wholly-owned subsidiary of the Company.
Rental revenues generated by InfuSystem of $6,468,000 for the period from
February 11, 1998 (date of acquisition) through December 31, 1998, were included
in net revenues for the year ended December 31, 1998.
Net product revenues decreased from $17,678,000 in 1997 to $17,006,000 in 1998.
These revenues were adversely affected by the restructuring of the Company's
worldwide distribution network as well as existing distributor inventory levels
early in 1998, which caused a short-term decline in shipments of infusion
products to the Company's previous distribution partners. Additionally, net
sales in 1998 were adversely affected by the economic difficulties in Asia and,
most particularly, Korea.
As described above, during 1998, the Company entered into an agreement with B.
Braun Melsungen AG to distribute I-Flow's elastomeric infusion pumps in Western
Europe, Eastern Europe, the Middle East, Asia Pacific, South America and Africa.
The Company also entered into a similar agreement under which B. Braun of
America, Inc. distributes I-Flow's elastomeric pumps to its full line IV
solution customers in the United States. These two relationships generated
significant sales for the Company in the second half of 1998. During the year
ended
10
<PAGE> 12
December 31, 1998, combined sales to these companies accounted for approximately
20% of the Company's net revenues.
I-Flow received permission in June 1998 from the Food and Drug Administration
("FDA") to market the PainBuster in the United States. I-Flow's PainBuster pain
management system provides for the continuous infusion of a non-narcotic, local
anesthetic directly into the intraoperative site for post-operative pain
management. In September 1998, the Company entered into a letter of
understanding to distribute the PainBuster through Smith & Nephew, Inc., a
leading worldwide healthcare company offering a broad range of products for the
care and repair of bone, joints, skin and other soft tissue. During the year
ended December 31, 1998, sales of the PainBuster to Smith & Nephew were
approximately $2 million.
In 1996, the Company sold the exclusive right and license to manufacture and
sell its SideKick, Paragon, and elite products in the United States and Puerto
Rico. The Company reacquired the rights in 1998 and has begun selling these
products in the United States.
Cost of sales of $10,219,000 was incurred during the year ended December 31,
1998, compared to $8,450,000 in the prior year. As a percentage of total
revenue, cost of sales decreased by four percentage points for the year ended
December 31, 1998 compared to the prior year. The increase in gross profit is
primarily the result of the addition of InfuSystem revenues in 1998. As
primarily a service business, InfuSystem has a considerably higher gross margin
than the Company's traditional manufacturing business. Without InfuSystem the
gross margin would still have improved by approximately 2%, which was primarily
due to the introduction of the PainBuster in 1998.
Selling and marketing expenses for the year ended December 31, 1998 increased
over the prior year by $981,000 or 31%. This increase was primarily due to the
addition of InfuSystem. Without the InfuSystem selling and marketing expenses,
the Company's selling and marketing expenses for the year ended December 31,
1998 would have increased by only $30,000. As a percentage of sales, selling and
marketing expenses remained consistent from the prior year at approximately 18%.
General and administrative expenses for the year ended December 31, 1998
increased $2,120,000 or 50% from the prior year, primarily due to the addition
of InfuSystem. For the year ended December 31, 1998 InfuSystem incurred general
and administrative expenses of $1,974,000. Without the InfuSystem general and
administrative expenses, the Company's general and administrative expenses for
the year ended December 31, 1998 would have increased by only $146,000 or 3%.
Product development expenses for the year ended December 31, 1998 decreased from
the prior year by $95,000, or 9%. The decrease in the expenses was primarily due
to consolidation of the engineering efforts of Block Medical, Inc. with those of
the Company in late 1997. The Company will continue to incur product development
expenses as it continues its efforts to introduce new technology and
cost-efficient products into the market. Product development has remained
relatively consistent as a percentage of product sales but has decreased as a
percentage of total revenues due to the inclusion of InfuSystem's rental
revenue, which has no corresponding product development costs.
Liquidity and Capital Resources
During the year ended December 31, 1999, funds of $7,068,000 were provided by
operating activities consisting of net income of $8,812,000 less non-cash
expenses of $2,115,000, and net changes in operating assets and liabilities of
$371,000.
The Company used funds for investing activities during the year ended December
31, 1999 by acquiring net leasehold improvements, furniture, fixtures, equipment
and other assets of $1,048,000 for use in its operations. In addition, there was
an increase in other assets of $178,000. The Company also paid $286,000 in
connection with the InfuSystem acquisition during the year.
11
<PAGE> 13
During the year ended December 31, 1999, funds of $3,285,000 were used in
financing activities consisting primarily of a net reduction on the line of
credit of $1,891,000 and net payments on notes payable of $1,772,000. The
Company also received proceeds of $378,000 from the exercise of stock options
and warrants.
As of December 31, 1999, the Company had cash funds of $3,192,000 and net
receivables of $8,748,000. Management believes the Company's funds are
sufficient to provide for its short and long-term projected needs for
operations. However, the Company may decide to sell additional equity or
increase its borrowings in order to fund increased product development or for
other purposes.
The Company has a working capital line of credit with a bank expiring in August
2000. Under the line of credit, the Company may borrow up to the lesser of
$4,000,000 or 75% of eligible accounts receivable and 25% of eligible inventory,
as defined, at the bank's prime rate plus .75% (9.25% at December 31, 1999).
Under the line as of December 31, 1999, there were funds available for borrowing
of $3,007,000 and there were no borrowings outstanding.
In conjunction with the acquisition of Block, the Company entered into a
$4,000,000 note payable with a bank ($559,000 outstanding at December 31, 1999)
due in equal monthly installments of principal of $83,333 plus interest at the
bank's prime rate plus 1% (9.5% at December 31, 1999) through July 2000. In
March 1998, the Company entered into an additional note payable with a bank for
$2,500,000 ($1,806,000 outstanding at December 31, 1999) due in equal monthly
installments of principal of $46,296 plus interest at the bank's prime rate plus
1% beginning in October 1998 through March 2003. Proceeds from the new note were
used to pay off the outstanding balance on the line of credit and for general
working capital.
As described above, on February 9, 1998, the Company entered into an Agreement
and Plan of Merger (the "Agreement") with InfuSystems II, Inc., Venture Medical,
Inc. and their shareholders, contemplating the merger of both companies with and
into InfuSystem, Inc., a wholly-owned subsidiary of the Company. Pursuant to the
Agreement, the mergers were effective as of February 11, 1998. See Note 3 in
Notes to Consolidated Financial Statements. The subsidiary has a revolving line
of credit with a bank under which it may borrow up to $2,500,000 or 80% of
eligible accounts receivable, as defined, at the bank's prime rate plus .5%
(9.0% at December 31, 1999). There were borrowings of $88,000 outstanding under
the line as of December 31, 1999.
The lines of credit and 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, 1999,
the Company believes it was in compliance with or had received a waiver for all
such covenants.
Year 2000 Compliance
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue." However, it
is possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues such as leap year-related problems may occur with billing,
payroll, or financial closings at month, quarter or year end. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if the Year 2000 or
similar issues adversely affect its customers or suppliers. The Company
currently is not aware of any significant Year 2000 or similar problems that
have arisen for its customers and suppliers.
The Company expended less then $150,000 on Year 2000 readiness efforts from 1998
to 1999. These efforts included replacing some outdated, noncompliant hardware
and noncompliant software as well as identifying and remediating Year 2000
problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
The Report of Independent Auditors and the Consolidated Financial Statements
listed in the "Index to Consolidated Financial Statements" are filed as part of
this report.
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,
1997:
Allowance for doubtful
accounts $ 125,000 $338,000 $ 463,000
Reserve for obsolete
inventories 767,000 612,000 $ 244,000 1,135,000
YEAR ENDED DECEMBER 31,
1998:
Allowance for doubtful
accounts 463,000 316,000 $1,311,000 266,000 1,824,000
Reserve for obsolete
inventories 1,135,000 323,000 238,000 1,220,000
YEAR ENDED DECEMBER 31,
1999:
Allowance for doubtful
accounts 1,824,000 501,000 2,325,000
Reserve for obsolete
inventories 1,220,000 808,000 360,000 1,668,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 15
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 2000 Annual Meeting of
Shareholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," 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, 1999 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 2000 Annual Meeting of
Shareholders under the captions "Board Compensation," "Executive Compensation,"
"Report of the Compensation Committee," "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, 1999.
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 2000 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, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
14
<PAGE> 16
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 documents described in the "Index to Consolidated Financial
Statements" are included in this report starting at page F-1.
Page in This
(2) Financial Statement Schedules included herein: Report
------------
Schedule II - "Valuation and Qualifying Accounts" 15
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,
1999.
15
<PAGE> 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F2
Consolidated Statements of Operations and Comprehensive Operations
For the Years Ended December 31, 1999, 1998 and 1997 F3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 F4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 F5
Notes to Consolidated Financial Statements F6
<PAGE> 18
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 (the Company) as of December 31, 1999 and 1998, and
the related consolidated statements of operations and comprehensive operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 2000
F-1
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
(Amounts in thousands, except share amounts) 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets: (Note 4)
Cash and cash equivalents $ 3,192 $ 971
Accounts receivable, less allowance for doubtful accounts of $2,325
and $1,824 at December 31, 1999 and 1998, respectively 8,748 7,490
Inventories, net (Note 1) 3,785 4,328
Prepaid expenses and other 553 638
Deferred taxes 2,837 --
--------- --------
Total current assets 19,115 13,427
Property, net (Note 1) 2,985 3,427
Goodwill and other intangibles, net (Notes 1, 2 & 3) 5,846 7,223
Notes receivable and other 782 259
Deferred taxes 3,040 --
--------- --------
Total assets $ 31,768 $ 24,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,800 $ 1,300
Accrued payroll and related expenses 1,526 1,453
Income taxes payable 607 --
Current portion of long-term debt (Note 4) 1,443 2,083
Line of credit (Note 4) 88 1,979
Other liabilities 86 24
--------- --------
Total current liabilities 5,550 6,839
--------- --------
Long-term debt (Note 4) 1,548 2,680
Commitments and contingencies (Note 7)
Shareholders' equity (Note 5)
Preferred stock, no par value; 5,000,000 shares authorized, 301,250
Series B shares issued and outstanding at December 31, 1998 -- 686
Common stock, no par value; 40,000,000 shares authorized, 14,692,125 and
14,044,428 shares issued and outstanding at December 31, 1999 and 1998,
respectively 39,414 37,735
Common stock warrants 615 615
Accumulated other comprehensive income 26 --
Accumulated deficit (15,385) (24,219)
--------- --------
Total shareholders' equity 24,670 14,817
--------- --------
Total liabilities and shareholders' equity $ 31,768 $ 24,336
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
(Amounts in thousands, except per share amounts) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net product sales $ 19,197 $ 17,006 $ 17,678
Rental income and other 8,587 6,586 64
Licensing fees 2,000 -- --
-------- -------- --------
Total revenues 29,784 23,592 17,742
Cost of revenues 11,824 10,219 8,450
-------- -------- --------
Gross profit 17,960 13,373 9,292
-------- -------- --------
Expenses (Notes 2, 7 & 8):
Selling and marketing 4,193 4,178 3,197
General and administrative 8,257 6,401 4,281
Product development 1,057 940 1,035
-------- -------- --------
Total expenses 13,507 11,519 8,513
-------- -------- --------
Operating income 4,453 1,854 779
Interest and other expense, net (Notes 1 & 4) (404) (684) (334)
-------- -------- --------
Income before income taxes 4,049 1,170 445
Income tax (benefit) expense (Note 6) (4,763) 69 80
-------- -------- --------
Net income (Note 1) $ 8,812 $ 1,101 $ 365
======== ======== ========
Net income per share
Basic $ 0.61 $ 0.08 $ 0.02
Diluted 0.58 0.08 0.02
======== ======== ========
Comprehensive Operations:
Net income $ 8,812 $ 1,101 $ 365
Foreign currency translation adjustments 26 117 (112)
-------- -------- --------
Comprehensive income $ 8,838 $ 1,218 $ 253
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Other
Preferred Stock Common Stock Common Comprehensive
---------------- ----------------- Stock Income Accumulated
(Amounts in thousands) Shares Amount Shares Amount Warrants (Loss) Deficit Total
------ ------- ------ ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 656 $ 1,494 12,050 $33,036 $615 $ (5) $(25,543) $ 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 (117) (25,257) 10,588
Exercise of common stock warrants
and options 16 30 30
Common stock issued for acquisition 1,256 3,044 3,044
Conversion of preferred stock (355) (808) 379 808
Preferred stock dividend (63) (63)
Cumulative translation adjustment 117 117
Net income 1,101 1,101
---- ------- ------ ------- ---- ----- -------- -------
Balance, December 31, 1998 301 $ 686 14,044 $37,735 $615 $ -- $(24,219) $14,817
Exercise of common stock options 326 869 869
Tax benefit from exercise of stock options 309 309
Stock based compensation 101 101
Purchase price adjustment (286) (286)
Conversion of preferred stock (301) (686) 322 686
Reversal of preferred stock dividend 22 22
Cumulative translation adjustment 26 26
Net income 8,812 8,812
---- ------- ------ ------- ---- ----- -------- -------
Balance, December 31, 1999 -- $ -- 14,692 $39,414 $615 $ 26 $(15,385) $24,670
==== ======= ====== ======= ==== ===== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
(Amounts in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,812 $ 1,101 $ 365
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Restructuring costs -- -- (1,208)
Deferred taxes (5,569) -- --
Depreciation and amortization 2,490 2,414 1,167
Loss on disposal of property 37 -- --
Compensation expense for stock option grants 101 136 150
Change in inventory obsolescence reserve 448 85 368
Change in allowance for doubtful accounts 378 50 338
Changes in operating assets and liabilities,
net of effect of business acquisitions:
Accounts receivable (1,562) (559) (951)
Inventories 172 329 (1,074)
Prepaid expenses and other 14 (348) 1
Accounts payable and accrued payroll and related expenses 1,058 (956) 146
Deferred revenue -- (58) (371)
Income taxes payable 607 -- --
Other liabilities 82 (162) 113
------- ------- -------
Net cash provided by (used in) operating activities 7,068 2,032 (956)
------- ------- -------
Cash flows from investing activities:
Capital expenditures (1,048) (688) (906)
Cash paid for acquisition, net of cash received (286) (673) --
Change in other assets (178) 488 (279)
------- ------- -------
Net cash used in investing activities (1,512) (873) (1,185)
------- ------- -------
Cash flows from financing activities:
Net (repayments) proceeds from line of credit (1,891) (1,607) 1,500
Proceeds from issuance of note payable 163 2,558 --
Payments on notes payable (1,935) (1,938) (921)
Cash dividend on preferred stock -- (63)
Proceeds from exercise of stock options and warrants 378 30 738
------- ------- -------
Net cash (used in) provided by financing activities (3,285) (1,020) 1,317
------- ------- -------
Effect of exchange rates on cash (50) 117 (112)
Net increase (decrease) in cash and cash equivalents 2,221 256 (936)
Cash and cash equivalents at beginning of year 971 715 1,651
------- ------- -------
Cash and cash equivalents at end of year $ 3,192 $ 971 $ 715
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 476 $ 698 $ 365
------- ------- -------
Income tax payments $ 36 $ 69 $ 80
------- ------- -------
Preferred stock dividend paid in Common Stock $ -- $ -- $ 79
------- ------- -------
Non cash preferred stock conversion $ 686 $ 808 $ --
------- ------- -------
Deferred stock based compensation $ 491 $ -- $ --
------- ------- -------
Tax benefit from exercise of stock options $ 309 $ -- $ --
------- ------- -------
Liabilities issued and assumed in connection with acquisition:
Fair value of assets acquired (including intangibles) $ -- $ 8,783 $ --
Less receivable from acquired entity -- (684) --
Cash outflows for business acquisition (286) (673) --
Common stock and warrants issued 286 (3,044) --
------- ------- -------
Liabilities issued and assumed $ -- $ 4,382 $ --
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - I-Flow Corporation ("the Company") was incorporated on
July 17, 1985. The Company designs, develops and markets technically advanced,
low-cost ambulatory infusion systems that are redefining the standard of care by
providing life enhancing, cost effective solutions for pain management and
infusion therapy. The Company's products are used both in hospitals and
alternate site settings. I-Flow manufactures a growing line of compact, portable
infusion pumps, catheters and pain kits that administer medication directly to
the wound site as well as administer local anesthetic, chemotherapy,
antibiotics, nutritional supplements and other medications. InfuSystem, Inc., a
wholly-owned subsidiary is primarily engaged in the rental of medical infusion
pumps. The rentals are on a month-to-month basis and are treated as operating
leases.
Principles 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.
Inventories - Inventories are stated at the lower of cost (determined on a first
in, first out basis) or market. Inventories consisted of the following as of
December 31, 1999 and 1998:
December 31, 1999 December 31, 1998
----------------- -----------------
Raw Materials $3,581,000 $3,507,000
Work in Process 164,000 172,000
Finished Goods 1,708,000 1,869,000
Reserve for Obsolescence (1,668,000) (1,220,000)
---------- ----------
Total $3,785,000 $4,328,000
========== ==========
Property - Property 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. Leasehold improvements are amortized using the straight-line
method over the life of the asset or the term of the lease, whichever is
shorter. Property consisted of the following as of December 31, 1999 and 1998:
December 31, 1999 December 31, 1998
----------------- -----------------
Furniture, fixtures and equipment $4,710,000 $4,354,000
Rental and demonstration equipment 2,976,000 2,435,000
Accumulated depreciation and
amortization (4,701,000) (3,362,000)
---------- ----------
Total $2,985,000 $3,427,000
========== ==========
Long Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. In accordance with SFAS 121, long-lived
assets to be held are reviewed for events or changes in circumstances, which
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not impairment to such value has occurred and has determined that
there was no impairment at December 31, 1999.
F-6
<PAGE> 24
Goodwill and Other Intangibles - Goodwill represents the excess purchase cost
over the net assets acquired and is amortized over five to fifteen years using
the straight-line method. Other intangible assets include patents, acquired
workforce value and acquired technology which are being amortized using the
straight-line method over two to seven years. Accumulated amortization of
goodwill and other intangible assets amounted to $3,340,000 and $2,314,000 as of
December 31, 1999 and 1998, respectively. The Company periodically evaluates the
recoverability of goodwill based on projected undiscounted operating cash flows
and evaluates the recoverability of other intangibles based on the requirements
of SFAS 121.
Revenue Recognition - Revenue from product sales is recognized at the time of
shipment. Provision is made currently for estimated product returns and warranty
obligations, both of which have historically been insignificant.
Fees for non-cancelable licensing agreements with no minimum quantity or other
performance requirements are recognized as revenue upon execution of the related
agreement, assuming collection is probable. Fees for licensing agreements that
include minimum quantity or other performance requirements are recognized as
revenue ratably over the license period or as such criteria are met.
Rental revenue from medical pumps is recorded as earned over the term of the
related rental agreements, normally on a month-to-month basis. Pump rentals are
billed at the Company's established rates, which often differ from contractually
allowable rates provided by third party payors such as Medicare, Medicaid and
commercial insurance carriers. Provision is made currently to reduce revenue to
the estimated allowable amount per such contractual rates.
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. (See Note 5)
Earnings Per Share - Pursuant to SFAS No. 128, Earnings Per Share, ("SFAS No.
128"), the Company provides dual presentation of "Basic" and "Diluted" earnings
per share ("EPS"). SFAS No. 128 replaced "Primary" and "Fully diluted" EPS under
APB Opinion No. 15.
Basic EPS excludes dilution from common stock equivalents and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from common stock equivalents, such as the Company's convertible
preferred stock and outstanding stock options, calculated using the treasury
stock method. Common stock equivalents have not been included in calculating
diluted EPS where inclusion would be anti-dilutive.
The following is a reconciliation between the components of the basic and
diluted earnings per share calculations:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net income $ 8,812,000 $ 1,101,000 $ 365,000
Less preferred stock dividends -- (63,000) (79,000)
----------- ------------ ------------
Net income available to common
shareholders $ 8,812,000 $ 1,038,000 $ 286,000
----------- ------------ ------------
Basic net income per share
Weighted average number of
shares outstanding 14,387,000 13,479,000 12,210,000
Effect of dilutive securities:
Stock options 729,000 232,000 820,000
----------- ------------ ------------
Diluted net income per share
Weighted average number of
shares outstanding 15,116,000 13,711,000 13,030,000
========== ========== ==========
</TABLE>
F-7
<PAGE> 25
Comprehensive Income - Pursuant to SFAS No. 130, Reporting Comprehensive Income,
the Company has included a calculation of comprehensive income in its
accompanying consolidated statements of operations for the years ended December
31, 1999, 1998 and 1997.
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.
Foreign Currency - The financial position and results of operations of the
Company's foreign subsidiary are generally measured using the local currency as
the functional currency. Assets and liabilities of the subsidiary 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 shareholders' equity. Realized gains or losses from
foreign currency transactions are included in operations as incurred.
Due to the highly inflationary environment in Mexico (as defined by SFAS No. 52,
Foreign Currency Transactions), the U.S. dollar served as the functional
currency for the Company's Mexican subsidiary during 1998. As a result, gains
and losses from foreign currency transactions and from translation of the
Mexican financial statements were recognized currently as a component of other
income (expense). Such amounts were not significant for the years ended December
31, 1998 and 1997. During 1999, the environment in Mexico was not highly
inflationary, therefore, the gains and losses from translation of the Mexican
financial statements were included as a component of equity.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
Accounting for Derivative Instruments and Hedging Activities - In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, ("SFAS No. 133"), which the Company is required to adopt in 2001.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts for hedging activities. As of December 31, 1999, the Company had no
derivative instruments nor had it engaged in hedging activities, but it will
continue to evaluate the effects of adopting SFAS No.
133.
2. ACQUISITION OF BLOCK MEDICAL, INC.
On July 22, 1996, the Company purchased substantially all of the assets of Block
Medical, Inc. ("Block"). The assets were acquired for an aggregate purchase
price of approximately $18 million. The purchase price has been allocated to the
net assets acquired, in-process research and development, goodwill and other
intangibles. The amount allocated to in-process research and development of $4.9
million has been expensed as of the acquisition date. Consideration for the
purchase consisted of: $15,000,000 in cash, 433,018 shares of I-Flow Corporation
Common Stock with a value of $2,000,000 as of the date of closing, and a warrant
to purchase 250,000 shares of I-Flow Corporation Common Stock at an exercise
price of $4.62, expiring July 22, 2001, valued at $615,000 at the date of
closing. In addition, the Company incurred direct acquisition costs of $803,000.
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.
F-8
<PAGE> 26
3. ACQUISITION OF INFUSYSTEMS II, INC. AND VENTURE MEDICAL, INC.
On February 9, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with InfuSystems II, Inc. ("InfuSystem"), Venture Medical,
Inc. ("VMI") and the shareholders of InfuSystem and VMI, contemplating the
merger of InfuSystem and VMI with and into a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, VMI and InfuSystem were merged (the
"Merger") with and into the subsidiary effective as of February 11, 1998.
In the Merger, all of the outstanding shares of Common Stock of VMI and
InfuSystem were exchanged for 987,074 shares of the Company's Common Stock,
valued at approximately $2.9 million, plus 59,395 shares of the Company's Common
Stock valued at $177,000 as payment for related investment banker's fees. In
addition, the Company incurred direct acquisition costs of $673,000. The
transaction was recorded using the purchase method of accounting and resulted in
the recording of approximately $3.5 million in goodwill.
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 was less
than the value of its Common Stock as of the closing ($2.98 per share), then the
Company was obligated to pay additional amounts as merger consideration. Any
additional amounts were to be calculated pursuant to the formula set forth in
the Agreement. At the Company's election, it could pay such additional merger
consideration by the issuance of additional shares of its Common Stock, in cash,
or any combination thereof. In August 1998, the Company issued 209,675 shares of
its Common Stock pursuant to the valuation floor provision for the six-month
anniversary. In February 1999, the Company paid cash of $286,000 pursuant to the
valuation floor provision for the one-year anniversary. There was no adjustment
required for the eighteen-month and two-year anniversaries. Pursuant to APB 16,
Business Combinations, there was no incremental value ascribed to these
additional payments for purchase accounting purposes
Since the acquisition was near the beginning of 1998, consolidated pro forma
results of operations for the year ended December 31, 1998 would not be
materially different from actual reported results, and thus are not included
herein. The unaudited consolidated pro forma results of operations for the year
ended December 31, 1997, as if the VMI and InfuSystem acquisition had occurred
at the beginning of that year, are as follows:
1997
----
Total revenues $23,358,000
Net loss $(4,000)
Net loss per share $(0.00)
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 period presented and is not intended to be a
projection of future results.
4. LINES OF CREDIT AND LONG TERM DEBT
The Company has a line of credit, expiring in August 2000, under which it may
borrow up to the lesser of $4,000,000 or 75% of eligible accounts receivable and
25% of eligible inventory, as defined. There was $3,007,000 available for
borrowing under the line as of December 31, 1999. There were no amounts
outstanding under the line as of December 31, 1999 and 1998. Interest is payable
monthly at the bank's prime rate plus .75%.
Additionally, the Company's wholly-owned Subsidiary, InfuSystem, has a line of
credit, expiring in October 2000, under which it may borrow up to the lesser of
$2,500,000 or 80% of its eligible accounts receivable, as defined. There was
$2,412,000 available for borrowing under the line as of December 31, 1999.
Amounts outstanding under the line as of December 31, 1999 and 1998 were $88,000
and $1,979,000, respectively. Interest is payable monthly at the bank's prime
rate plus .5%. The principle is due on demand and is collateralized by all
assets of InfuSystem.
F-9
<PAGE> 27
The Company's long term debt is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note Payable due in equal monthly principal installments of $83,333 plus
interest at the bank's prime rate plus 1% through July 2000; collateralized by
all assets of the Company.
$ 559,000 $1,560,000
Note Payable due in equal monthly installments of $46,296 plus interest at the
bank's prime rate plus 1%, through March 2003; collateralized by all assets of
the Company.
1,806,000 2,361,000
Installment Notes under which interest is payable monthly at .5% over the bank's
prime rate, due on various dates; collateralized by
all assets of InfuSystem, Inc. 156,000 535,000
Other 470,000 307,000
---------- ----------
Total 2,991,000 4,763,000
Less current portion 1,443,000 2,083,000
---------- ----------
Total long-term debt $1,548,000 $2,680,000
========== ==========
</TABLE>
The prime rate at the Company's banks was 8.50% at December 31, 1999. The notes
contain covenants primarily relating to the maintenance of certain financial
ratios, all of which the Company was in compliance with or had received a waiver
for as of December 31, 1999.
Future principal payments on long-term debt are as follows:
Year ended December 31:
- -----------------------
2000 $1,443,000
2001 730,000
2002 644,000
2003 174,000
----------
Total $2,991,000
==========
At December 31, 1999, the Company was contingently liable for $192,000 under an
irrevocable standby letter of credit, which expires in August 2002.
5. SHAREHOLDERS' EQUITY, COMMON STOCK WARRANTS AND OPTIONS
During the year ended December 31, 1999, 301,250 shares of the Series B
Preferred Stock were converted into 321,333 shares of the Company's Common
Stock. As of December 31, 1999, there was no Preferred Stock outstanding.
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). The exercise price for these warrants 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 4), 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.
F-10
<PAGE> 28
In May 1996, the shareholders of the Company approved a new equity incentive
plan (the "1996 Plan") which provides for the grant of stock options (including
incentive stock options or nonqualified stock options) and other stock-based
benefits to directors, officers, employees, consultants and advisors of the
Company and its affiliated entities. 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 or greater than 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.
The Company has issued options outside of the option plans to purchase an
aggregate of 541,500 shares of its Common Stock to certain key employees at
exercise prices below fair market value for services rendered. Compensation
expense related to these options aggregating $101,000, $136,000 and $150,000 has
been recorded for each of the years ended December 31, 1999, 1998 and 1997,
respectively. All other terms of the options are similar to those issued under
the 1996 Plan.
The Company also has a stock option plan which provides for the granting of
options to non-employee directors to purchase up to 400,000 shares of the
Company's Common Stock at exercise prices not less than the fair market value of
the Company's Common Stock at the date of grant. Under the terms of the plan,
options to purchase 10,000 shares of the Company's Common Stock are to be
granted to each non-employee director serving in such capacity as of the first
business day of January of each year as long as the plan remains in existence.
Options granted become exercisable in four equal installments, with one
installment occurring at the end of each calendar quarter subsequent to the date
of grant. The options expire at the earlier of five years from the date of grant
or two years after termination of the option holder's status as a director.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Balance, January 1, 1997 (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
Granted (weighted average fair value of $2.32) 1,770,918 2.00
Canceled/Expired (1,217,180) 4.36
Exercised (16,000) 1.63
---------- -----
Balance, December 31, 1998 (1,865,735 exercisable at a weighted average
price of $2.21) 3,313,385 2.16
Granted (weighted average fair value of $1.92) 163,500 3.06
Canceled/Expired (244,329) 2.06
Exercised (326,365) 1.81
---------- -----
Balance, December 31, 1999 (1,974,317 exercisable at a weighted average
price of $2.27) 2,906,191 2.27
---------- -----
</TABLE>
F-11
<PAGE> 29
On February 5, 1998, the Board of Directors approved a program for the
cancellation and regrant of certain options, whereby all Directors and employees
could elect to relinquish their existing options with exercise prices ranging
from $3.56 to $5.44 per share, in return for options to purchase 43% fewer
shares at an exercise price of $2.50 per share. Under this program options to
purchase 1,115,000 shares at prices ranging from $3.56 to $5.44 were cancelled
and new options were granted to purchase 635,550 shares at a price of $2.50.
Vesting on the new options began one year from the date of grant and continues
over the next four years.
Options to purchase 1,842,855 and 208,900 shares of the Company's Common Stock
were available for grant under the 1996 Plan and the non-employee director's
plan, respectively, as of December 31, 1999.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------
Weighted
Average Weighted
Number Remaining Number Average
Of Shares Contractual Weighted Average Of Shares Exercise
Range of Exercise Prices Outstanding Life in Years Exercise Price Exercisable Price
- ------------------------ ----------- ------------- ---------------- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.25 - $1.00 82,000 3.43 $0.25 82,000 $0.25
$1.01 - $2.00 867,000 5.01 $1.32 612,270 $1.43
$2.01 - $3.00 1,401,291 3.64 $2.39 870,077 $2.38
$3.01 - $4.00 335,470 2.81 $3.33 249,506 $3.21
$4.01 - $5.00 196,430 2.68 $4.23 136,464 $4.29
$5.01 - $6.00 24,000 2.11 $5.16 24,000 $5.16
--------- ---- ----- --------- -----
Total 2,906,191 3.87 $2.27 1,974,317 $2.27
========= ==== ===== ========= =====
</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
market 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 of the
options at the grant date consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
(Amounts in thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------ -------- ------ ------
<S> <C> <C> <C>
Net income - as reported $8,812 $1,101 $ 365
Net income (loss) - pro forma $8,238 $ 56 $ (146)
Diluted earnings per share - as reported $ 0.58 $ 0.08 $ 0.02
Diluted earnings (loss) per share - pro forma $ 0.55 $ 0.00 $(0.02)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999, 1998 and 1997: no dividend yield; expected volatility 75% in
1999, 76% in 1998, and 52% in 1997; risk-free interest rate of 5.7% in 1999,
5.0% in 1998, and 6.0% in 1997; and expected lives of 5 years.
F-12
<PAGE> 30
6. 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 taxes on income for the years ended December 31, 1999, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 801,000 $ 24,000 $ 79,000
State 5,000 5,000 1,000
Foreign -- 40,000 --
Deferred:
Federal 1,209,000 (8,000) 68,000
State 361,000 (5,000) 710,000
Change in valuation allowance (7,139,000) 13,000 (778,000)
---------- -------- ---------
Total $(4,763,000) $ 69,000 $ 80,000
=========== ======== =========
</TABLE>
A deferred tax asset in the amount of $465,000 was acquired in conjunction with
the acquisition of InfuSystem II, Inc. and Venture Medical, Inc. in 1998. A
valuation allowance of $465,000 was established for the deferred tax asset. If
this deferred tax asset is realized, the benefit will first go to reduce any
unamortized goodwill remaining from the acquisition.
The reconciliations of income tax expense computed at federal statutory rate of
35% to income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
U.S. Federal statutory tax expense 35.0% 35.0% 35.0%
State taxes, net of Federal benefit, net
of state valuation allowance 5.8% 1.1% --
Research and development credits (1.4%) (4.2%) (6.7%)
Foreign income 0.1% 0.6% --
Goodwill amortization 2.0% 5.6% --
Change in valuation allowance (159.0%) (35.7%) (15.3%)
Other (0.2%) 3.5% 5.0%
------ ------ -----
Total (117.7%) 5.9% 18.0%
====== ====== =====
</TABLE>
F-13
<PAGE> 31
As of December 31, 1999 and 1998, the Company had a net deferred tax asset
comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
Deferred Tax Assets: 1999 1998
- -------------------- ----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 2,873,000 $ 4,517,000
Amortization of goodwill and other intangibles 2,851,000 3,010,000
Reserves not currently deductible 2,155,000 2,049,000
Cash to accrual adjustment (412,000) (626,000)
State taxes (377,000) (484,000)
Credits 488,000 782,000
Accrued compensation and related costs 361,000 229,000
Depreciation 134,000 166,000
Subtotal 8,073,000 9,643,000
Less valuation allowance (2,504,000) (9,643,000)
----------- ----------
Total $ 5,569,000 $ --
=========== ==========
</TABLE>
At December 31, 1999, the Company had a federal net operating loss carryforward
of approximately $8,450,000 which begins to expire in the year 2004. Due to
certain tax regulations, future use of a portion of the net operating loss
carryforwards is limited to approximately $600,000 per year. Tax credits for
federal taxes of approximately $488,000 begin to expire in 2007.
The net deferred tax assets of December 31, 1998 were offset by a valuation
allowance of $9,643,000. During the year ended December 31, 1999, the future
realization of a majority of the net deferred tax assets was determined by
management to be more likely than not, based on current and projected taxable
income. Accordingly, the valuation allowance was decreased by $7,139,000.
7. COMMITMENTS AND CONTINGENCIES
In June 1990, the Company entered into an employment agreement with the
President of the Company that expires on June 4, 2001. 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 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:
Year Ended December 31,
- -----------------------
2000 $ 386,000
2001 386,000
2002 407,000
2003 428,000
2004 428,000
Thereafter 1,070,000
----------
Total $3,105,000
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $571,000,
$541,000 and $401,000, respectively.
F-14
<PAGE> 32
The Company is also involved in litigation arising from the normal course of
operations. In the opinion of management, the ultimate impact of such litigation
will not have a material adverse effect on the Company's financial position and
results of operations.
8. 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, 1999, 1998 or
1997. The Company does not provide post-retirement benefits to its employees.
The Company's wholly-owned subsidiary InfuSystem, Inc. has a 401(k) Profit
Sharing Plan, which covers substantially all employees. The Company's
contributions to the plan are at the discretion of management and amounted to
$25,962 for the year ended December 1, 1997. There were no employer
contributions for the years ended December 31, 1999 and 1998.
9. BUSINESS SEGMENTS
During 1999, the Company operated in two business segments: manufacturing and
marketing of medical infusion pumps and rentals of medical infusion pumps. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (Note 1). There were no business
segments in 1997 as the rental segment was acquired in fiscal 1998 (Note 3).
Business segment information is as follows for the years ended December 31, 1999
and 1998:
<TABLE>
<CAPTION>
Manufacturing and
Marketing Rentals Consolidated
----------------- ------- ------------
<S> <C> <C> <C>
1999:
Revenues $21,272,000 $8,512,000 $29,784,000
Operating income 2,507,000 1,946,000 4,453,000
Assets 22,291,000 9,477,000 31,768,000
Depreciation and amortization 1,456,000 1,034,000 2,490,000
Property additions 416,000 632,000 1,048,000
----------- ---------- -----------
1998:
Revenues $17,124,000 $6,468,000 $23,592,000
Operating income 722,000 1,132,000 1,854,000
Assets 15,885,000 8,451,000 24,336,000
Depreciation and amortization 1,324,000 1,090,000 2,414,000
Property additions 388,000 300,000 688,000
----------- ---------- -----------
</TABLE>
Sales to major customers as a percentage of total revenue are shown in the table
below.
1999 1998 1997
---- ---- ----
Customer A - elastomeric infusion products 16% 20% --
Customer B - elastomeric infusion products 11% -- --
A decision by a significant customer to substantially decrease or delay
purchases from the Company or the Company's inability to collect receivables
from these customers could have a material adverse effect on the Company's
financial condition and results of operations.
F-15
<PAGE> 33
All of the Company's rental revenue is domestic. Export sales of medical
products represented 20%, 28% and 36% of total revenue during 1999, 1998 and
1997, respectively. Total revenue by geographical region is summarized as
follows:
<TABLE>
<CAPTION>
Sales to unaffiliated customers: 1999 1998 1997
- -------------------------------- ---- ---- ----
<S> <C> <C> <C>
United States $23,962,000 $17,020,000 $11,484,000
Europe 4,181,000 5,032,000 3,953,000
Asia / Pacific Rim 1,165,000 1,129,000 1,986,000
Other 476,000 411,000 319,000
----------- ----------- -----------
Total $29,784,000 $23,592,000 $17,742,000
=========== =========== ===========
</TABLE>
10. SUBSEQUENT ACQUISITION OF SPINAL SPECIALTIES, INC.
On January 14, 2000, the Company acquired Spinal Specialties, Inc., a designer
and manufacturer of custom spinal, epidural and nerve block infusion kits based
in San Antonio, Texas, for $1.5 million. The purchase price consisted of
$750,000 in cash and 200,000 shares of I-Flow common stock.
In conjunction with the acquisition, the Company entered into employment
agreements with two employees of Spinal Specialties that expire in January 2002.
Under the terms of the agreements, each of the individuals will receive a
minimum base salary of $130,000 per year for the terms of the contracts.
F-16
<PAGE> 34
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: March 30, 2000 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, 2000:
<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/ Henry Tsutomu Tai Director and Secretary
- --------------------------------------
Henry Tsutomu Tai, Ph.D., M.D.
</TABLE>
<PAGE> 35
INDEX TO EXHIBITS
Set forth below is a list of the exhibits included as part of this report:
Exhibit No. Exhibit
- ----------- -------
3.1 Restated Articles of Incorporation of the Company (2)
3.2 Certificate of Amendment to Restated Articles of Incorporation
dated June 14, 1991 (3)
3.3 Certificate of Amendment to Restated Articles of Incorporation
dated May 12, 1992 (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 (13)
10.11 Amendment to Loan Agreement between Silicon Valley Bank and
I-Flow Corporation dated March 2, 1998 (13)
21 List of Subsidiaries
23.1 Independent Auditors' Consent
27 Financial Data Schedule
(1) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-32263-LA) declared effective
February 1, 1990.
30
<PAGE> 36
(2) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended September 30, 1990.
(3) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-41207-LA) declared effective
August 8, 1991.
(4) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1991.
(5) Incorporated by reference to exhibit with this title filed with the
Company's Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
(6) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(7) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1995.
(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.
(13) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended December 31, 1997.
* Compensation plan, contract or arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 21
I-FLOW CORPORATION
LIST OF SUBSIDIARIES
State of Jurisdiction
Name of Incorporation
Block Medical de Mexico, S.A. de C.V. Mexico
I-Flow International, Inc. U.S. Virgin Islands
InfuSystem, Inc. California
<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. 333-80384,
333-21493 and 333-62929 on Form S-3 of I-Flow Corporation of our report dated
March 29, 2000, appearing in this Annual Report on Form 10-K of I-Flow
Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,192,000
<SECURITIES> 0
<RECEIVABLES> 8,748,000
<ALLOWANCES> 2,325,000
<INVENTORY> 3,785,000
<CURRENT-ASSETS> 19,115,000
<PP&E> 10,547,000
<DEPRECIATION> 4,701,000
<TOTAL-ASSETS> 31,768,000
<CURRENT-LIABILITIES> 5,550,000
<BONDS> 0
0
0
<COMMON> 39,414,000
<OTHER-SE> 641,000
<TOTAL-LIABILITY-AND-EQUITY> 24,670,000
<SALES> 19,197,000
<TOTAL-REVENUES> 29,784,000
<CGS> 11,824,000
<TOTAL-COSTS> 25,331,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404,000
<INCOME-PRETAX> 4,049,000
<INCOME-TAX> (4,763,000)
<INCOME-CONTINUING> 8,812,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,812,000
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.58
</TABLE>
