UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended March 31, 2003 | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission file number: 0-18338
I-Flow Corporation
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
33-0121984 (I.R.S. Employer Identification No.) |
|
| 20202 Windrow Drive, Lake Forest, CA (Address of Principal Executive Offices) |
92630 (Zip Code) |
(949) 206-2700
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 whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
Yes [ ] No [X]
As of April 29, 2003 there were 15,622,263 shares of common stock outstanding.
I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
Table of Contents
| Page | ||||||
Part I: Financial Information |
||||||
Item 1. Financial Statements (Unaudited) |
||||||
Condensed Consolidated Balance Sheets as of March 31, 2003 and
and December 31, 2002 |
1 | |||||
Condensed Consolidated Statements of Operations and Comprehensive Operations
for the three-month periods ended March 31, 2003 and 2002 |
2 | |||||
Condensed Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 2003 and 2002 |
3 | |||||
Notes to Condensed Consolidated Financial Statements |
4 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
10 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
14 | |||||
Item 4. Controls and Procedures |
14 | |||||
Part II: Other Information |
||||||
Item 5. Other Information |
15 | |||||
Item 6. Exhibits and Reports on Form 8-K |
15 | |||||
Signatures and Certifications |
18 | |||||
I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
CURRENT ASSETS: |
|||||||||||
Cash and cash equivalents |
$ | 1,280,000 | $ | 1,700,000 | |||||||
Accounts receivable, net |
11,153,000 | 10,483,000 | |||||||||
Inventories, net |
7,352,000 | 7,046,000 | |||||||||
Prepaid expenses and other current assets |
838,000 | 477,000 | |||||||||
Deferred taxes |
2,541,000 | 2,541,000 | |||||||||
Total current assets |
23,164,000 | 22,247,000 | |||||||||
Property, net |
6,196,000 | 5,626,000 | |||||||||
Goodwill |
2,639,000 | 2,639,000 | |||||||||
Other intangible assets, net |
1,102,000 | 1,134,000 | |||||||||
Other long-term assets |
161,000 | 155,000 | |||||||||
Deferred taxes |
1,560,000 | 1,560,000 | |||||||||
TOTAL |
$ | 34,822,000 | $ | 33,361,000 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES: |
|||||||||||
Accounts payable |
$ | 4,330,000 | $ | 3,898,000 | |||||||
Accrued payroll and related expenses |
1,832,000 | 1,349,000 | |||||||||
Income taxes payable |
525,000 | 507,000 | |||||||||
Current portion of long-term debt |
41,000 | 77,000 | |||||||||
Line of credit |
300,000 | — | |||||||||
Other liabilities |
57,000 | 59,000 | |||||||||
Total current liabilities |
7,085,000 | 5,890,000 | |||||||||
LONG-TERM DEBT, less current portion |
— | 1,000 | |||||||||
Commitments
and Contingencies (Note 1) |
|||||||||||
STOCKHOLDERS’ EQUITY: |
|||||||||||
Preferred
stock - $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding |
— | — | |||||||||
Common
stock - $0.001 par value; 40,000,000 shares
authorized; 15,596,191 and 15,473,138 shares
issued and outstanding at March 31, 2003
and December 31, 2002, respectively |
43,428,000 | 43,106,000 | |||||||||
Accumulated other comprehensive loss |
(167,000 | ) | (95,000 | ) | |||||||
Accumulated deficit |
(15,524,000 | ) | (15,541,000 | ) | |||||||
Net stockholders’ equity |
27,737,000 | 27,470,000 | |||||||||
TOTAL |
$ | 34,822,000 | $ | 33,361,000 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE OPERATIONS
(Unaudited)
| Three Months Ended | |||||||||
| March 31, | |||||||||
| 2003 | 2002 (1) | ||||||||
Net revenues |
$ | 11,164,000 | $ | 8,550,000 | |||||
Costs and expenses: |
|||||||||
Cost of sales |
4,149,000 | 3,456,000 | |||||||
Selling and marketing |
3,973,000 | 2,367,000 | |||||||
General and administrative |
2,519,000 | 1,974,000 | |||||||
Product development |
502,000 | 526,000 | |||||||
Total costs and expenses |
11,143,000 | 8,323,000 | |||||||
Operating income |
21,000 | 227,000 | |||||||
Interest income, net |
(8,000 | ) | (1,000 | ) | |||||
Income tax provision |
12,000 | 92,000 | |||||||
Net income before cumulative effect of a change in
accounting principle |
17,000 | 136,000 | |||||||
Cumulative effect of a change in accounting principle: |
|||||||||
Goodwill impairment |
— | (3,474,000 | ) | ||||||
Net income (loss) |
$ | 17,000 | $ | (3,338,000 | ) | ||||
Net income per share, before cumulative effect of
change in accounting principle |
|||||||||
Basic |
$ | — | $ | 0.01 | |||||
Diluted |
$ | — | $ | 0.01 | |||||
Loss per share from cumulative effect of change in
accounting principle |
|||||||||
Basic |
$ | — | $ | (0.23 | ) | ||||
Diluted |
$ | — | $ | (0.22 | ) | ||||
Net income (loss) per share |
|||||||||
Basic |
$ | — | $ | (0.22 | ) | ||||
Diluted |
$ | — | $ | (0.21 | ) | ||||
Comprehensive Operations: |
|||||||||
Net income (loss) |
$ | 17,000 | $ | (3,338,000 | ) | ||||
Foreign currency translation gain (loss) |
(72,000 | ) | 9,000 | ||||||
Comprehensive loss |
$ | (55,000 | ) | $ | (3,329,000 | ) | |||
See accompanying notes to unaudited condensed consolidated financial statements.
| (1) | Effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets as a result of adopting Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.” The Company recognized a transitional goodwill impairment loss of $3,474,000 as a cumulative effect of a change in accounting principle during the six months ended June 30, 2002. The amounts previously reported for the first quarter of 2002 have been revised to include the $3,474,000 cumulative effect of this change in accounting principle. The effect of the change on the first quarter 2002 results was to reduce net income by $3,474,000, or $0.22 per diluted share. |
2
I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income (loss) |
$ | 17,000 | $ | (3,338,000 | ) | |||||
Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |
||||||||||
Depreciation and amortization |
441,000 | 479,000 | ||||||||
Cumulative effect of a change in accounting principle |
— | 3,474,000 | ||||||||
Stock based compensation |
153,000 | 201,000 | ||||||||
Change
in allowance for doubtful accounts |
(175,000 | ) | (23,000 | ) | ||||||
Change
in inventory obsolescence reserve |
59,000 | 54,000 | ||||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
(498,000 | ) | 370,000 | |||||||
Inventories |
(365,000 | ) | (100,000 | ) | ||||||
Prepaid expenses and other current assets |
(361,000 | ) | 133,000 | |||||||
Accounts payable, accrued payroll and related expenses |
924,000 | (475,000 | ) | |||||||
Income taxes payable |
17,000 | 69,000 | ||||||||
Other liabilities |
(2,000 | ) | (33,000 | ) | ||||||
Net cash provided by operating activities |
210,000 | 811,000 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Capital expenditures |
(939,000 | ) | (656,000 | ) | ||||||
Change in other assets |
(46,000 | ) | (96,000 | ) | ||||||
Net cash used in investing activities |
(985,000 | ) | (752,000 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Proceeds from line of credit |
300,000 | — | ||||||||
Principal payments on long-term debt |
(36,000 | ) | (67,000 | ) | ||||||
Proceeds from exercise of stock options and warrants |
169,000 | 22,000 | ||||||||
Net cash provided by (used in) financing activities |
433,000 | (45,000 | ) | |||||||
Effect
of exchange rate changes on cash and cash equivalents |
(78,000 | ) | (23,000 | ) | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(420,000 | ) | (9,000 | ) | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD |
1,700,000 | 2,033,000 | ||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 1,280,000 | $ | 2,024,000 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||
Interest paid |
$ | 2,000 | $ | 2,000 | ||||||
Income tax payments |
$ | — | $ | 22,000 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
I-FLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation – The accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments, and a goodwill impairment charge related to a change in accounting principle discussed in Note 4 below) that, in the opinion of management, are necessary to present fairly the financial position of I-Flow Corporation and its subsidiaries (the “Company”) at March 31, 2003 and the results of its operations and its cash flows for the three-month periods ended March 31, 2003 and 2002. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission although the Company believes that the disclosures in the financial statements are adequate to make the information presented not misleading.
The financial statements included herein should be read in conjunction with the financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.
Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 2003.
New Accounting Pronouncements – In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 addresses the financial accounting and reporting requirements for acquired goodwill and other intangible assets. The Company adopted the provisions of SFAS 142 effective January 1, 2002. Under SFAS 142, the Company is no longer required to amortize goodwill and other intangible assets with indefinite lives. Instead, SFAS 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS 142 and annually thereafter. See Note 4 to condensed consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets (“SFAS 143”). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. The Company adopted the provisions of SFAS 143 on January 1, 2003 and such adoption did not have a material impact on its consolidated results of operations and financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS 146 is effective for exit and disposal activities initiated after December 31, 2002. The Company adopted the provisions of SFAS 146 on January 1, 2003, and such adoption did not have a material impact on its consolidated results of operations and financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or
4
modified after December 31, 2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption did not have a material impact on the consolidated financial statements. The Company adopted the recognition provisions of FIN 45 effective January 1, 2003 and such adoption did not have a material impact on the consolidated results of operations and financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods for voluntary transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financial statements. The Company has adopted the provisions of SFAS 148 effective January 1, 2003, and has included the additional required disclosures below under the heading Accounting for Stock Based Compensation. This adoption did not have a material impact on the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the entity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted the provisions of FIN 46 effective February 1, 2003, and such adoption did not have a material impact on its consolidated results of operations and financial position because the Company currently has no variable interest entities.
Accounting for Stock Based Compensation – The Company accounts for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Stock options issued to consultants and vendors are accounted for at fair value.
The Company has adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for stock option grants to employees and non-employee directors 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 123, the Company’s net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below:
5
| Three Months Ended March 31, | ||||||||
| (Amounts in thousands, except per share amounts) | 2003 | 2002 | ||||||
Net income (loss) – as reported |
$ | 17 | $ | (3,338 | ) | |||
Stock-based employee compensation included in
net income (loss), net of tax |
$ | 56 | $ | 103 | ||||
Total stock based employee compensation expense
determined under fair value based method for
all awards, net of tax |
$ | (182 | ) | $ | (280 | ) | ||
Net income (loss) – pro forma |
$ | (109 | ) | $ | (3,515 | ) | ||
Basic earnings (loss) per share – as reported |
$ | — | $ | (0.22 | ) | |||
Basic earnings (loss) per share – pro forma |
$ | (0.01 | ) | $ | (0.23 | ) | ||
Diluted earnings (loss) per share - as reported |
$ | — | $ | (0.21 | ) | |||
Diluted earnings (loss) per share – pro forma |
$ | (0.01 | ) | $ | (0.22 | ) | ||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the first quarter of 2003 and fiscal year 2002: no dividend yield; expected volatility 94%; risk-free interest rate of 3.04%; and expected lives of 5 years.
| 2. | Inventories |
Inventories consisted of the following:
| March 31, | December 31, | |||||||
| 2003 | 2002 | |||||||
Raw Materials |
$ | 4,617,000 | $ | 4,404,000 | ||||
Work in Process |
544,000 | 411,000 | ||||||
Finished Goods |
2,191,000 | 2,231,000 | ||||||
Total |
$ | 7,352,000 | $ | 7,046,000 | ||||
3. Earnings (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods presented, excluding unvested restricted stock which the Company has a right to repurchase in the event of early termination of employment.
Diluted net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding during the periods utilizing the treasury stock method for stock options and unvested restricted stock.
The following is a reconciliation between the number of shares used in the basic and diluted net income (loss) per share calculations:
6
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| (Amounts in thousands) | 2003 | 2002 | ||||||||
Net income before cumulative effect of a change in accounting principle |
$ | 17 | $ | 136 | ||||||
Net income (loss) |
$ | 17 | $ | (3,338 | ) | |||||
Basic net income (loss) per share |
||||||||||
Weighted average number of common shares outstanding |
15,434 | 15,366 | ||||||||
Effect of dilutive securities: |
||||||||||
Stock options and unvested restricted stock |
510 | 844 | ||||||||
Diluted net income (loss) per share |
||||||||||
Weighted average number of common shares outstanding |
15,944 | 16,210 | ||||||||
Potential common shares of 2,102,000 and 1,004,000 have been excluded from diluted weighted average common shares for the three-month periods ended March 31, 2003 and 2002, respectively, as the effect would be anti-dilutive.
| 4. | Goodwill and Other Intangible Assets |
SFAS 142 addresses the financial accounting and reporting requirements for acquired goodwill and other intangible assets. The Company adopted the provisions of SFAS 142 in January 2002. Under SFAS 142, the Company is no longer required to amortize goodwill and other intangible assets with indefinite lives. Instead, SFAS 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS 142 and annually thereafter.
Under SFAS 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company’s reporting units are generally consistent with the operating segments underlying the reporting segments identified in Note 5. — Business Segments. This methodology differs from the Company’s previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if goodwill is recoverable.
In accordance with SFAS 142, the Company completed a test for impairment in June 2002 and concluded that consolidated goodwill in the amount of $3,474,000 was impaired. The Company recorded a non-cash charge of $3,474,000 to reduce the carrying value of its goodwill retroactively during the quarter ended March 31, 2002. Such charge is not included in operating income and is reflected as a cumulative effect of a change in accounting principle, effective January 1, 2002, in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Operations.
The total impairment amount of $3,474,000 is attributable to the Company’s manufacturing and marketing business segment, and represents the previously unamortized goodwill resulting from the Company’s purchase of substantially all of the assets of Block Medical, Inc. on July 22, 1996, and the Company’s acquisition of all of the outstanding stock of Spinal Specialties, Inc. on January 14, 2000. In calculating the impairment charge, the fair value of the impaired reporting unit was estimated using a market multiple methodology. The impairment of the goodwill associated with the manufacturing and marketing segment resulted from the low profitability of the business segment.
The changes in carrying amount of goodwill by segment for fiscal year 2002 and the three months ended March 31, 2003 are as follows:
| Manufacturing and | ||||||||||||
| Marketing | Rentals | Total | ||||||||||
Balance as of January 1, 2002 |
$ | 3,474,000 | $ | 2,639,000 | $ | 6,113,000 | ||||||
Impairment loss |
(3,474,000 | ) | — | (3,474,000 | ) | |||||||
Balance as of December 31, 2002 |
— | 2,639,000 | $ | 2,639,000 | ||||||||
Goodwill acquired |
— | — | ||||||||||