UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number: 000-18338
I-FLOW CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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33-0121984
(I.R.S. Employer Identification No.)
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20202 Windrow Drive, Lake Forest, CA
(Address of Principal Executive Offices)
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92630
(Zip Code)
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(949) 206-2700
(Registrants Telephone Number, Including Area Code)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer
o
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Accelerated Filer
þ
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Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
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Smaller Reporting Company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
As of October 31, 2009 there were 24,463,356 shares of common stock outstanding.
I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
Table of Contents
PART 1 FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
I-FLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value amounts)
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September 30,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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49,119
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$
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39,276
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Short-term investments
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3,384
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Short-term investments HAPC common stock
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5,217
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5,703
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Accounts receivable, less allowance for
doubtful accounts of $2,126 and $2,063 at
September 30, 2009 and December 31, 2008,
respectively
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20,987
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21,930
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Inventories
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26,394
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15,819
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Prepaid expenses and other current assets
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3,624
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3,356
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Note receivable, HAPC current
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3,270
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3,270
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Deferred taxes
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783
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961
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Total current assets
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109,394
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93,699
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Property, net
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4,676
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4,127
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Goodwill
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12,233
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12,233
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Other intangible assets, net
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4,348
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4,201
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Other long-term assets
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232
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170
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Note receivable, HAPC noncurrent
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19,233
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26,980
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Deferred taxes
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4,178
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7,277
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Total assets
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$
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154,294
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$
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148,687
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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8,507
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$
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4,882
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Accrued payroll and related expenses
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7,657
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6,138
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Accrued litigation costs (Note 10)
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11,956
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10,467
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Other current liabilities
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1,933
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2,140
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Total current liabilities
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30,053
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23,627
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Other liabilities (Note 10)
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5,935
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6,015
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Commitments and contingencies (Note 10)
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Stockholders equity:
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Preferred stock $0.001 par value; 5,000
shares authorized; no shares issued and
outstanding
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Common stock and additional paid-in capital
$0.001 par value; 40,000 shares
authorized; 24,459 and 24,534 shares issued
and outstanding at September 30, 2009 and
December 31, 2008, respectively
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137,746
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136,338
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Accumulated other comprehensive loss
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(736
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)
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(379
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)
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Accumulated deficit
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(18,704
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)
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(16,914
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)
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Net stockholders equity
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118,306
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119,045
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Total liabilities and stockholders equity
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$
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154,294
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$
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148,687
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See accompanying notes to condensed consolidated financial statements.
1
I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Net revenues
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$
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36,747
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$
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32,242
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$
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104,756
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$
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95,973
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Cost of revenues
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9,767
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8,582
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28,483
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25,468
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Gross profit
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26,980
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23,660
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76,273
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70,505
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Operating expenses:
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Selling and marketing
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15,753
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16,965
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48,800
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54,716
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General and administrative
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7,024
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5,551
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19,394
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16,044
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Product development
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2,965
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1,285
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7,792
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3,443
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Certain litigation and insurance charges (Note 10)
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136
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1,500
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12,304
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Purchased in-process research and development
charges (Note 6)
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11,600
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11,600
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Total operating expenses
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25,742
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35,537
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77,486
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98,107
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Operating income (loss)
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1,238
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(11,877
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)
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(1,213
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)
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(27,602
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)
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Impairment loss on investment
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(4,569
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)
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(4,569
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)
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Interest and other income
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671
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1,082
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2,200
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3,977
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|
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Income (loss) before income taxes
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1,909
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(15,364
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)
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987
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(28,194
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)
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Income tax provision (benefit)
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1,239
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(1,237
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)
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2,777
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(2,105
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)
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Net income (loss)
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$
|
670
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|
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$
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(14,127
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)
|
|
$
|
(1,790
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)
|
|
$
|
(26,089
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)
|
|
|
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|
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Net income (loss) per share of common stock:
|
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|
|
|
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|
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Basic
|
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$
|
0.03
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|
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$
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(0.57
|
)
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$
|
(0.07
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)
|
|
$
|
(1.05
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)
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Diluted
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$
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0.03
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|
|
$
|
(0.57
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)
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$
|
(0.07
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)
|
|
$
|
(1.05
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)
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|
|
|
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Weighted-average shares:
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Basic
|
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24,454
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|
|
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24,580
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|
|
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24,482
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|
|
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24,827
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Diluted
|
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25,001
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|
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24,580
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24,482
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24,827
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Comprehensive Operations:
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|
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|
|
|
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Net income (loss)
|
|
$
|
670
|
|
|
$
|
(14,127
|
)
|
|
$
|
(1,790
|
)
|
|
$
|
(26,089
|
)
|
Foreign currency translation gain (loss)
|
|
|
(272
|
)
|
|
|
(106
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)
|
|
|
(41
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)
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|
|
3
|
|
Unrealized gain (loss) on investment securities
|
|
|
(1,325
|
)
|
|
|
2,866
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|
|
|
(316
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)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Comprehensive loss
|
|
$
|
(927
|
)
|
|
$
|
(11,367
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)
|
|
$
|
(2,147
|
)
|
|
$
|
(26,088
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)
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
2
I-FLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
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Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
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|
|
|
|
|
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Net loss
|
|
$
|
(1,790
|
)
|
|
$
|
(26,089
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
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Purchased in-process research and development charges
|
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|
|
|
|
|
11,600
|
|
Impairment loss on investment
|
|
|
|
|
|
|
4,569
|
|
Deferred taxes
|
|
|
3,447
|
|
|
|
230
|
|
Stock-based compensation
|
|
|
3,722
|
|
|
|
5,142
|
|
Depreciation and amortization
|
|
|
1,854
|
|
|
|
1,614
|
|
Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
|
|
|
|
|
|
|
(562
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)
|
Amortization of deferred financing fees from note receivable, HAPC
|
|
|
(533
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)
|
|
|
(533
|
)
|
Provision for doubtful accounts receivable
|
|
|
478
|
|
|
|
272
|
|
Write-off of inventories
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|
244
|
|
|
|
401
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|
Gain on disposal of property
|
|
|
|
|
|
|
(4
|
)
|
Changes in operating assets and liabilities, net of AcryMed acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
465
|
|
|
|
5,587
|
|
Inventories
|
|
|
(10,819
|
)
|
|
|
(4,335
|
)
|
Prepaid expenses and other assets
|
|
|
(299
|
)
|
|
|
(821
|
)
|
Accounts payable, accrued payroll and related expenses
|
|
|
4,903
|
|
|
|
(2,552
|
)
|
Income taxes payable
|
|
|
(1,196
|
)
|
|
|
(15,245
|
)
|
Accrued litigation costs
|
|
|
1,489
|
|
|
|
8,374
|
|
Other liabilities
|
|
|
397
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,362
|
|
|
|
(12,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property acquisitions
|
|
|
(1,606
|
)
|
|
|
(1,264
|
)
|
Proceeds from sale of property
|
|
|
|
|
|
|
11
|
|
Acquisition of AcryMed, net of cash acquired
|
|
|
|
|
|
|
(26,663
|
)
|
Repayments on note receivable, HAPC
|
|
|
7,747
|
|
|
|
1,227
|
|
Purchases of investments
|
|
|
|
|
|
|
(13,275
|
)
|
Maturities of investments
|
|
|
3,384
|
|
|
|
21,301
|
|
Patent and other intangible asset acquisitions
|
|
|
(861
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
8,664
|
|
|
|
(19,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock
|
|
|
(1,150
|
)
|
|
|
(12,621
|
)
|
Excess tax benefit from exercise of stock options and vested restricted
stock and restricted stock units
|
|
|
|
|
|
|
562
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,150
|
)
|
|
|
(11,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(33
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,843
|
|
|
|
(43,215
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
39,276
|
|
|
|
78,571
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
49,119
|
|
|
$
|
35,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
441
|
|
|
$
|
13,427
|
|
Interest received
|
|
|
1,667
|
|
|
|
3,762
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property acquisitions included in accounts payable
|
|
$
|
81
|
|
|
$
|
88
|
|
See accompanying notes to 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 condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring adjustments) that, in the
opinion of management, are necessary to present fairly the financial position of I-Flow Corporation
and its subsidiaries (the Company) at September 30, 2009 and the results of its operations for
the three and nine-month periods ended September 30, 2009 and 2008 and cash flows for the
nine-month periods ended September 30, 2009 and 2008. 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 (the SEC), 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 included in the Companys Annual Report on Form 10-K for the year ended December 31,
2008 as filed with the SEC on March 10, 2009. The Company evaluated all subsequent events through
the time that it filed its condensed consolidated financial statements in this Form 10-Q with the
SEC on November 5, 2009.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States (U.S. GAAP) 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. Examples of such estimates
include allowance for bad debts, valuation of inventories and financial instruments, recoverability
of intangible assets, other long-lived assets and goodwill, assumptions related to stock-based
compensation, income taxes and contingencies and litigation. Actual results could differ
materially from these estimates.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Codification (ASC) 810 (ASC 810) (formerly Statement of
Financial Accounting Standards (SFAS) No. 167,
Amendments to FASB Interpretation No. 46(R)
). ASC
810 amends certain requirements involving variable interest entities to improve financial reporting
by enterprises involved with variable interest entities and to provide more relevant and reliable
information to users of financial statements. This statement is effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company is currently evaluating the effect ASC 810 will have on its
consolidated financial statements.
No other new accounting pronouncements issued or effective during the fiscal year had or is
expected to have a material impact on the Companys condensed consolidated financial statements.
2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
14,556
|
|
|
$
|
7,501
|
|
Work in process
|
|
|
7,362
|
|
|
|
2,612
|
|
Finished goods
|
|
|
4,476
|
|
|
|
5,706
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,394
|
|
|
$
|
15,819
|
|
|
|
|
|
|
|
|
4
3. Earnings (Loss) Per Share
Pursuant to ASC 260-10 (formerly SFAS No. 128,
Earnings per Share
), the Company provides dual
presentation of Basic and Diluted earnings per share.
Effective January 1, 2009, companies were required to treat unvested share-based payment awards
that have non-forfeitable rights to dividends or dividend equivalents as a separate class of
securities in calculating earnings per share. The Company granted and expects to continue to grant
restricted stock awards to its employees, officers and non-employee directors that contain
non-forfeitable rights to dividends. Such awards are considered participating securities under ASC
260-10. As such, the Company is required to include these awards in the calculation of the
Companys basic earnings per share and will need to calculate basic earnings per share using the
two-class method. Restricted stock awards have previously been included in the Companys dilutive
earnings per share calculation using the treasury stock method. The two-class method of computing
earnings per share is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared (or accumulated)
and participation rights in undistributed earnings. The Company has historically not paid and does
not expect to pay dividends in the foreseeable future; however, the Company must still allocate
undistributed earnings between common shares and participating securities based on the contractual
rights of each security, as if all the earnings for the period have been distributed. The
application of this accounting treatment was required on a retrospective basis. As such, the
earnings per share for certain prior periods will be recalculated to conform to the current-year
presentation. The weighted-average number of shares used in the basic earnings per share
calculation for the three and nine months ended September 30, 2008 has been recalculated using the
two-class method to conform to the current-period presentation.
Basic net income (loss) per share is computed utilizing the two-class method and is calculated
based on the weighted-average number of common shares outstanding during the periods presented,
excluding nonvested restricted stock units which do not contain nonforfeitable rights to dividends
and dividend equivalents.
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 two-class method for stock
options, nonvested restricted stock and nonvested restricted stock units. Certain potentially
dilutive securities are not included in the calculation of net income (loss) per share if their
impact would be anti-dilutive.
The following is a reconciliation between the weighted-average number of shares used in the basic
and diluted earnings per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Amounts in thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
670
|
|
|
$
|
(14,127
|
)
|
|
$
|
(1,790
|
)
|
|
$
|
(26,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
24,454
|
|
|
|
24,580
|
|
|
|
24,482
|
|
|
|
24,827
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, nonvested restricted stock and
nonvested restricted stock units
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common
equivalent shares outstanding
|
|
|
25,001
|
|
|
|
24,580
|
|
|
|
24,482
|
|
|
|
24,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.57
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(1.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.57
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(1.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 1,125,000 shares attributable to outstanding stock options and stock-based awards
have been excluded for diluted weighted-average common shares for each of the three and nine months
ended September 30, 2009 because their effect would be anti-dilutive.
5
Approximately 2,229,000 and 1,713,000 shares attributable to outstanding stock options and
stock-based awards have been excluded for diluted weighted-average common shares for the three and
nine months ended September 30, 2008, respectively, because their effect would be anti-dilutive.
4. Goodwill and Other Intangible Assets
The Company recognizes goodwill and other intangible assets in accordance with ASC 350-20. In
connection with the Companys acquisition of AcryMed on February 15, 2008, the Company recorded
approximately $12.2 million of goodwill and $2.0 million of purchased intangible assets, consisting
of $0.8 million in purchased technology, including patents, $0.7 million in customer relationships,
$0.3 million in licensing agreements and $0.2 million in other intangibles.
Under ASC 350-20, goodwill and other intangible assets with indefinite lives are not amortized but
tested at least annually for impairment. The Company reviews the recoverability of the carrying
value of goodwill on an annual basis or more frequently if an event occurs or circumstances change
to indicate that an impairment of goodwill may have occurred. The Company performs its goodwill
impairment test as of June 30 of each year. The Company compares the fair value of its reporting
units to their net carrying value to determine whether or not any potential impairment of goodwill
exists. Goodwill impairment may exist if the net book value of a reporting unit exceeds its
estimated fair value. An impairment loss is recognized to the extent the carrying value of goodwill
exceeds the difference between the fair value of the reporting unit and the fair value of its other
assets and liabilities. The Company performed its annual impairment test on goodwill and other
intangible assets as of June 30, 2009 and identified no goodwill impairment. No goodwill
impairment indicators existed for the three months ended September 30, 2009 and, as a result,
additional impairment testing was not required.
During 2008, general economic and stock market conditions worsened considerably resulting in
material declines in stock prices. Accordingly, the Companys stock price declined significantly
during this period. During the fourth quarter of 2008, the Companys market capitalization fell
below its recorded net book value. The Company believes it is reasonable to consider market
capitalization over a reasonable period of time as an indicator of fair value and, as such,
performed impairment testing during the fourth quarter of 2008. Based on the results of the
impairment testing, the Company recorded an impairment charge of $380,000 on certain intangible
assets related to developed technology that were acquired in the AcryMed transaction. No goodwill
impairment was identified.
Amortizable intangible assets in the accompanying condensed consolidated balance sheets are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Purchased technology and patents
|
|
$
|
4,964
|
|
|
$
|
(1,978
|
)
|
|
$
|
2,986
|
|
Licensing rights and agreements
|
|
|
1,402
|
|
|
|
(644
|
)
|
|
|
758
|
|
Customer relationships
|
|
|
700
|
|
|
|
(209
|
)
|
|
|
491
|
|
Other
|
|
|
150
|
|
|
|
(37
|
)
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,216
|
|
|
$
|
(2,868
|
)
|
|
$
|
4,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Amounts in thousands)
|
|
Purchased technology and patents
|
|
$
|
4,404
|
|
|
$
|
(1,784
|
)
|
|
$
|
2,620
|
|
Licensing rights and agreements
|
|
|
1,402
|
|
|
|
(528
|
)
|
|
|
874
|
|
Customer relationships
|
|
|
700
|
|
|
|
(123
|
)
|
|
|
577
|
|
Other
|
|
|
150
|
|
|
|
(20
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,656
|
|
|
$
|
(2,455
|
)
|
|
$
|
4,201
|
|
|
|
|
|
|
|
|
|
|
|
The Company generally amortizes patents and licensing rights using the straight-line method over
seven and ten years, respectively. Purchased intangibles are amortized as follows: ten years for
customer relationships using an accelerated method; ten years for developed technology using a
straight-line method; five years for licensing
6
agreements using a straight-line method; and a range of four to ten years for all other intangible
assets using a straight-line method.
On July 28, 2005, the Company entered into an agreement with Thomas Winters, M.D. (Dr. Winters)
to acquire the non-exclusive rights to utilize intellectual property, including registered United
States patents, owned by Dr. Winters. Pursuant to the agreement, the Company made a cash payment
of $900,000 to Dr. Winters and issued him options to purchase up to 5,000 shares of common stock of
the Company. The options vested on the one year anniversary of the agreement and have an exercise
price equal to the closing price of the Companys common stock on July 28, 2005, or $15.20 per
share. All of the options will expire on the eight year anniversary of the agreement. The total
intangible asset acquired of approximately $951,000, which was valued based on the cash payment of
$900,000 and issuance of options with a fair value of approximately $51,000, are amortized over the
expected ten-year life of the asset. The fair value of the options was estimated on the date of
the grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield; expected volatility of 62%; risk-free interest rate of 4.25%; and
contractual life of eight years.
Amortization expense of intangible assets for the three and nine months ended September 30, 2009
was approximately $241,000 and $714,000, respectively. Amortization expense for the three and nine
months ended September 30, 2008 was approximately $164,000 and $629,000, respectively. Annual
amortization expense of intangible assets is currently estimated to be approximately $830,000,
$776,000, $721,000, $616,000 and $490,000 in 2009, 2010, 2011, 2012 and 2013, respectively.
5. Stockholders Equity
On February 26, 2008, the Company announced that its board of directors had authorized the
repurchase of up to 1,000,000 shares of the Companys common stock under a new stock repurchase
program, which would be in existence for 12 months unless the program was terminated sooner by the
board of directors. This new stock repurchase program superseded and replaced any other repurchase
program that the Company previously announced. On August 12, 2008, the Companys board of directors
authorized the repurchase of up to an additional 1,000,000 shares of the Companys common stock for
a total of up to 2,000,000 shares authorized for repurchase under the program. On March 17, 2009,
the Companys board of directors authorized the repurchase of up to an additional 2,000,000 shares
of the Companys common stock for a total of up to 4,000,000 shares authorized for repurchase under
the program. The stock repurchase program was also extended to February 28, 2010, unless
terminated sooner by the board of directors. During the nine months ended September 30, 2009, the
Company repurchased approximately 129,000 shares with a weighted-average purchase price of $2.35
per share under this program. During the nine months ended September 30, 2008, the Company
repurchased approximately 832,000 shares with a weighted-average purchase price of $12.42 per share
under this program.
Also, in connection with the I-Flow Corporation 2001 Equity Incentive Plan (the 2001 Plan) the
Company may repurchase shares of common stock from employees for the satisfaction of their
individual payroll tax withholdings upon vesting of restricted stock and restricted stock units.
In addition, the board of directors approved the withholding of shares of common stock for the
satisfaction of payment of the exercise price and individual tax withholdings for the exercise of
certain outstanding stock options during the nine months ended September 30, 2008. A total of
approximately 195,000 shares with a weighted-average price of $4.35 per share were purchased in
connection with the satisfaction of employee payroll tax withholdings during the nine months ended
September 30, 2009. A total of approximately 182,000 shares with a weighted-average price of
$14.09 per share were purchased in connection with the satisfaction of employee payroll tax
withholdings and exercise price during the nine months ended September 30, 2008.
7
6. Stock-Based Compensation
The Company applies ASC 718-10 (formerly SFAS No. 123-revised 2004,
Share-Based Payment
), which
requires the measurement and recognition of compensation expense based on estimated fair values for
all equity-based compensation made to employees and directors. Stock-based compensation expense
recognized for the three and nine months ended September 30, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Selling and marketing
|
|
$
|
178
|
|
|
$
|
246
|
|
|
$
|
456
|
|
|
$
|
738
|
|
General and administrative
|
|
|
999
|
|
|
|
1,568
|
|
|
|
3,266
|
|
|
|
4,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,177
|
|
|
$
|
1,814
|
|
|
$
|
3,722
|
|
|
$
|
5,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 718-10 requires companies to estimate the fair value of equity awards on the date of grant
using an option-pricing model. The determination of the fair value of option-based awards using
the Black-Scholes model incorporates various assumptions including volatility, expected life of
awards, risk-free interest rates and expected dividends. The expected volatility is based on the
historical volatility of the price of the Companys common stock over the most recent period
commensurate with the estimated expected life of the Companys stock options and adjusted for the
impact of unusual fluctuations not reasonably expected to recur. The expected life of an award is
based on historical experience and on the terms and conditions of the stock awards granted to
employees and non-employee directors.
Compensation expense for all equity awards granted subsequent to December 31, 2005 is recognized
using the straight-line single-option method. In accordance with ASC 718-10, the Company has
factored in forfeitures in its recognition of stock-based compensation. ASC 718-10 requires
forfeitures to be estimated at the time of grant and revised in subsequent periods if actual
forfeitures differ from those estimates.
All active equity incentive plans of the Company have been approved by its stockholders. Future
grants of stock options (including incentive stock options or nonqualified stock options),
restricted stock, restricted stock units or other forms of equity-based compensation to officers,
employees, consultants and advisors of the Company and its affiliated entities may be made under
the 2001 Plan, which was approved by the stockholders in May 2001. In 2007, the Companys
stockholders re-approved the material terms of the performance goals of the 2001 Plan. The maximum
number of shares of common stock that may be issued pursuant to awards under the 2001 Plan is
currently 7,750,000, subject to adjustments for stock splits or other adjustments as defined in the
2001 Plan.
Stock Options
Options granted under the 2001 Plan become exercisable at such times as determined by the
compensation committee of the board of directors or the board of directors itself and expire on
various dates up to ten years from the date of grant. No options were granted during the three and
nine months ended September 30, 2009 and 2008. Options previously granted to employees generally
have an exercise price equal to the market price of the Companys stock at the date of the grant,
with vesting and contractual terms of five years. The Company issues new shares upon the exercise
of stock options. The following table provides a summary of all the Companys outstanding options
as of September 30, 2009 and of changes in options outstanding during the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
(Amounts in thousands, except per share and year amounts)
|
|
Number of Shares
|
|
|
per Share
|
|
|
(in years)
|
|
|
Value
|
|
|
Options outstanding at December 31, 2008
|
|
|
2,001
|
|
|
$
|
11.79
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(699
|
)
|
|
|
13.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2009
|
|
|
1,302
|
|
|
|
10.83
|
|
|
|
0.66
|
|
|
$
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at September 30, 2009
|
|
|
1,243
|
|
|
$
|
10.63
|
|
|
|
0.60
|
|
|
$
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options were exercised during the nine months ended September 30, 2009. The total intrinsic
value of options exercised during the nine months ended September 30, 2008 was $1.8 million. As of
September 30, 2009, the
8
Company estimates that a total of approximately 26,000 shares of total unvested options will vest
over their remaining vesting term.
As of September 30, 2009, total unrecognized compensation expense related to unvested stock options
was $0.1 million. This expense is expected to be recognized over the remaining weighted-average
period of 2.11 years.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock units are granted pursuant to the 2001 Plan and as determined
by the compensation committee of the board of directors or the board of directors itself.
Restricted stock awards granted to non-employee directors have a one-year vesting (
i.e.
, lapse of
restrictions) period from the date of grant. Restricted stock and restricted stock units granted
to officers and employees of the Company generally have vesting periods ranging from two to five
years from the date of grant. Restricted stock units granted to sales representatives and sales
management generally have a maximum vesting term of three years from the date of grant. The
Company issues new shares upon the issuance of restricted stock or vesting of restricted stock
units. In accordance with ASC 718-10, the fair value of restricted stock and restricted stock
units is based on the closing stock price on the date of grant and the expense is recognized on a
straight-line basis over the requisite vesting period. The total number of shares of restricted
stock and restricted stock units expected to vest is adjusted by estimated forfeiture rates. The
following table provides a summary of the Companys restricted stock and restricted stock unit
awards as of September 30, 2009 and of changes in restricted stock and restricted stock units
outstanding under the 2001 Plan during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
Average Grant
|
|
|
Number of
|
|
Date Fair Value
|
|
Number of
|
|
Date Fair Value
|
(Amounts in thousands, except per share amounts)
|
|
Shares
|
|
per Share
|
|
Shares
|
|
per Share
|
Nonvested shares outstanding at December 31, 2008
|
|
|
517
|
|
|
$
|
14.35
|
|
|
|
676
|
|
|
$
|
14.12
|
|
Shares issued
|
|
|
85
|
|
|
|
4.58
|
|
|
|
233
|
|
|
|
4.76
|
|
Shares vested
|
|
|
(354
|
)
|
|
|
14.48
|
|
|
|
(163
|
)
|
|
|
14.32
|
|
Shares forfeited
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
14.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding at September 30, 2009
|
|
|
248
|
|
|
$
|
10.80
|
|
|
|
714
|
|
|
$
|
11.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, total unrecognized compensation expense related to nonvested restricted
stock and restricted stock units was $1.5 million and $5.1 million, respectively. The expenses for
the nonvested restricted stock and restricted stock units are expected to be recognized over a
remaining weighted-average vesting period of 0.94 and 1.86 years, respectively. The total fair
value of shares of restricted stock and restricted stock units that vested during the nine months
ended September 30, 2009 was $1.6 million and $0.7 million, respectively. The total fair value of
shares of restricted stock and restricted stock units that vested during the nine months ended
September 30, 2008 was $3.2 million and $2.7 million, respectively.
7. Income Taxes
For the three and nine months ended September 30, 2009, the Company recorded an income tax
provision of $1.2 million and $2.8 million, respectively. For the three and nine months ended
September 30, 2008, the Company recorded an income tax benefit of $1.2 million and $2.1 million,
respectively. The Companys effective tax rate for the three and nine months ended September 30,
2009 was a tax expense rate of 64.9% and 281.4%, respectively. The Companys effective tax rate
for the three and nine months ended September 30, 2008 was a tax benefit rate of 8.1% and 7.5%,
respectively. The increase in the effective income tax expense rate for the three and nine months
ended September 30, 2009 compared to the same periods in the prior year was primarily due to the
impact from an increase in valuation allowance for deferred tax assets with uncertain future
benefit.
The Company adopted ASC 805 effective January 1, 2009. The Company expects ASC 805-740 will have
an impact on the tax treatment of the acquisition of AcryMed to the extent the valuation allowance
recorded for the deferred tax assets related to the AcryMed acquisition is released in future years
or any future purchase accounting adjustments are recorded.
9
In accordance with ASC 740-10-25/30 (formerly FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
), the Company recognizes
the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits
of the position.
The Company is subject to U.S. federal income tax as well as income tax of multiple state
jurisdictions. The Internal Revenue Service has just commenced an examination of the 2007 return
and no adjustments have yet been proposed. Tax years 2006 and 2008 are open to assessment, and
certain earlier years are open to potential adjustment to the extent of the net operating loss and
credit carryovers to 2007 and later years. Tax years 2005 through 2006 are currently under
examination by the State of California. As of September 30, 2009, the field work has been
completed and certain adjustments have been proposed by the California Franchise Tax Board. The
Company believes that these proposed adjustments will not have a material effect on the financial
statements. The tax year 2004 and later years remain open to examination by the major state taxing
jurisdictions to which the Company is subject depending on the state taxing authority. The Company
does not believe it is reasonably possible that the total amounts of unrecognized tax benefits will
materially change in the next 12 months.
8. Note Receivable HAPC
On October 25, 2007 (the Closing Date) the Company completed the sale of its wholly owned
subsidiary, InfuSystem, Inc. (InfuSystem), to Infusystem Holdings, Inc. (formerly known as HAPC,
Inc.) (HAPC) for $100 million. On the Closing Date the Company received the $100 million
purchase price in a combination of (i) cash equal to $67.3 million and (ii) a secured promissory
note with a principal amount equal to $32.7 million. The secured promissory note is recognized on
the balance sheet as Note Receivable HAPC.
The $32.7 million secured promissory note bears interest at either the prime rate plus 4.50% or
LIBOR rate plus 5.50% (8.50% at September 30, 2009), matures four years after the Closing Date and
is currently secured by all the assets of HAPC. Principal payments are due quarterly in equal
installments for each year and are based on the following annual amortization: 5% of the aggregate
note in the first year; 10% of the aggregate note in the second year; 10% of the aggregate note in
the third year; 15% of the aggregate note in the fourth year; and the balance remaining at the
maturity date. In addition to the quarterly installment principal payments, HAPC is required to
make prepayments for any fiscal year, commencing with the fiscal year ending December 31, 2008, in
which HAPC has excess cash flow. Excess cash flow as defined in the secured promissory note is net
cash provided by operating activities less certain fixed charges, including scheduled principal
payments and capital leases, and capital expenditures. The amount of the prepayment is equal to
75% of the excess cash flow for the fiscal year. The Company received a prepayment of
approximately $5.3 million from HAPC in April 2009 in connection with HAPCs excess cash flow for
the fiscal year ending December 31, 2008.
9. Fair Values of Financial Instruments
On January 1, 2008, the Company adopted ASC 820-10 (formerly SFAS No. 157,
Fair Value
Measurements
), which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. As defined in ASC 820-10, fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Valuation techniques used to
measure fair value under ASC 820-10 must maximize the use of observable inputs and minimize the use
of unobservable inputs. ASC 820-10 also establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The statement requires that assets and
liabilities carried at fair value be classified and disclosed in one of the following three
categories:
Level 1 Quoted market prices in active markets (unadjusted) for identical assets or liabilities.
Level 2 Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Level 3 Unobservable inputs that are supported by little or no market activity that are
significant to the fair value of the assets or liabilities and that reflect the reporting entitys
own assumptions.
The following table sets forth the Companys financial assets that were measured at fair value on a
recurring basis during the period, by level within the fair value hierarchy:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Amounts in thousands)
|
|
September 30, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
|
$
|
36,773
|
|
|
$
|
36,773
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments HAPC common stock (2)
|
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,990
|
|
|
$
|
36,773
|
|
|
$
|
|
|
|
$
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Level 1 securities include money market securities that are valued based on quoted market
prices in active markets.
|
|
(2)
|
|
Level 3 securities include available-for-sale investment in HAPC common stock purchased in
October 2007 in connection with the sale of InfuSystem to HAPC. The value is based on quoted
market prices for the exchange-traded equity security, adjusted to reflect the restriction on
the sale of the security due to the Companys potential affiliate status with HAPC for
purposes of federal securities laws resulting from the Companys position as a substantial
stockholder and creditor on a secured promissory note.
|
The following table presents a reconciliation of the financial assets measured at fair value
on a recurring basis using Level 3 inputs for the nine months ended September 30, 2009:
|
|
|
|
|
|
|
Short-term
|
|
(Amounts in thousands)
|
|
Investments
|
|
Balance as of January 1, 2009
|
|
$
|
5,703
|
|
Total gains (losses):
|
|
|
|
|
Included in net income (loss)
|
|
|
|
|
Included in other comprehensive income
|
|
|
(486
|
)
|
Purchases, issuances and settlements
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
$
|
5,217
|
|
|
|
|
|
Amount of total income (losses) for the period included
in earnings attributable to the change in unrealized
losses relating to assets still held at the reporting
date Short-term investments HAPC common stock
|
|
$
|
|
|
|
|
|
|
The Company reviews its investment for impairment in accordance with ASC 320-10-25 and 320-10-35
(formerly SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
, and FASB
Staff Position SFAS No. 115-1,
The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments
) and Staff Accounting Bulletins 5.M,
Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities
. Investments are considered to be impaired when
a decline in fair value is judged to be other-than-temporary. The Company considers available
quantitative and qualitative evidence (both positive and negative) in evaluating potential
impairment of its investment, including factors such as the Companys holding strategy for the
investment, general market conditions, the duration and extent to which the fair value is less than
cost, specific adverse conditions related to the financial health of the investee and the Companys
intent to hold the investment. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis is established in the
investment.
On October 19, 2007, the Company purchased approximately 2.8 million shares of HAPC common stock at
$5.97 per share through private transactions with third parties totaling approximately $17 million
in connection with the sale of InfuSystem to HAPC, which the Company classifies as
available-for-sale securities. With the shares purchased as of that date, the Company owned
approximately 15% of the issued and outstanding HAPC common stock and disclosed its intentions to
vote such shares in favor of the acquisition. As of August 1, 2009, the latest date reported by
HAPC, the 2.8 million shares held by the Company remained at approximately 15% of the issued and
outstanding common stock of HAPC. Since October 2007, the share price of HAPC common stock has
significantly decreased from the Companys purchase price of $5.97 per share. During the years
ended December 31, 2008 and 2007, the Company recognized other-than-temporary impairments of
approximately $4.6 million and $6.1 million, respectively. As of September 30, 2008, the HAPC
common stock had been written down to a cost basis of approximately $2.14 per share through the
income statement. As of December 31, 2008, the Company recorded an
11
unrealized loss of approximately $262,000, based on the December 31, 2008 fair value of the HAPC
common stock, which was included in other comprehensive income. The estimated fair value of the
Companys investment in HAPC common stock decreased from approximately $5.7 million as of December
31, 2008 to approximately $5.2 million as of September 30, 2009.
HAPC receives reimbursement from private insurers and governmental agencies and may be adversely
affected by any change in the overall reimbursement system. For example, certain changes to the
Medicare and Medicaid compliance standards for consignment closets and stock and bill arrangements
are expected to be implemented on or before March 1, 2010. Such or similar changes may potentially
adversely impact the business of HAPC, which in turn could require the Company to record an
impairment in the future to the HAPC common stock held by the Company. The Company believes that
the decline in the fair value of HAPC stock as of September 30, 2009 was temporary in nature, not
specifically related to regulatory risks and considered the decline to be insignificant. The
decline in the fair value of the HAPC common stock was recorded as an unrealized loss and reflected
in other comprehensive loss.
10. Commitments and Contingencies
The Company enters into certain types of contracts from time to time that contingently require the
Company to indemnify parties against third party claims. These contracts primarily relate to: (i)
divestiture and acquisition agreements, under which the Company may provide customary
indemnification to either (a) purchasers of the Companys businesses or assets, (b) entities from
which the Company is acquiring assets or businesses, or (c) investment bankers retained by the
Company in connection with such transactions; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other liabilities,
including claims arising from the Companys use of the applicable premises; (iii) certain
agreements with the Companys officers, directors and employees, under which the Company may be
required to indemnify such persons for liabilities arising out of their relationship with the
Company; and (iv) Company license, consulting, distribution and purchase agreements with its
customers and other parties, under which the Company may be required to indemnify such parties for
intellectual property infringement claims, product liability claims, and other claims arising from
the Companys provision of products or services to such parties.
The terms of the foregoing types of obligations vary. A maximum obligation arising out of these
types of agreements is generally not explicitly stated and, therefore, the overall maximum amount
of these obligations cannot be reasonably estimated. Historically, the Company has not been
obligated to make significant payments for these obligations and, thus, no additional liabilities
have been recorded for these obligations on its balance sheets as of September 30, 2009 and
December 31, 2008, except as noted below regarding HAPC.
In connection with the sale of InfuSystem, the Company has indemnified HAPC as to all taxes imposed
on or relating to InfuSystem that are due with respect to periods ending on or prior to the closing
date, which was October 25, 2007. InfuSystem is subject to income tax in multiple state
jurisdictions. The tax year 2004 and later years remain open to examination by the major state
taxing jurisdictions to which InfuSystem is subject depending on the state taxing authority. In
accordance with ASC 460-10 (formerly FASB Interpretation No. 45,
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
),
the Company recorded a liability of approximately $3.7 million as of December 31, 2007 to reflect
the fair value of the indemnification to HAPC for all tax exposures arising prior to the closing of
the sale of InfuSystem, with an offsetting decrease in the gain on sale of discontinued operations.
The ASC 460-10 liability as of December 31, 2008 was $4.0 million, which includes approximately
$267,000 of additional accrued interest recorded during the year ended December 31, 2008 in
operating expenses. The ASC 460-10 liability as of September 30, 2009 was $4.2 million, which
includes approximately $235,000 of additional accrued interest recorded during the nine months
ended September 30, 2009 in operating expenses.
Chondrolysis Litigation
There has been discussion in the orthopedic community over the possibility that the continuous
infusion of a local anesthetic into the joint space via an infusion pump may contribute to a
condition called chondrolysis. This condition, which to the Companys knowledge has mostly been
present after certain shoulder surgeries, may cause the deterioration of the cartilage in the joint
months after the surgery. The authors of papers in the relevant medical
12
literature have identified a variety of possible causes of chondrolysis including: thermal
capsulorraphy; radiofrequency treatment; prominent hardware; gentian violet; chlorhexidine;
methylmethacrylate; intra-articular (within the joint) administration of bupivacaine with
epinephrine; and intra-articular administration of bupivacaine without epinephrine. There does not
appear, however, to be scientific evidence available yet sufficient to identify the actual cause.
It should be noted that these authors have not cited any evidence suggesting the extra-articular
(outside the joint) administration of bupivacaine as a possible cause of chondrolysis. For shoulder
surgeries, the Company believes most surgeons today are administering bupivacaine extra-articularly
or having an anesthesiologist administer a continuous nerve block (
e.g.
, ON-Q
®
C-bloc).
The Company in its March 31, 2009 Form 10-Q previously reported that it was named as a defendant in
approximately 69 filed lawsuits seeking damages as a result of alleged chondrolysis. The number of
filed lawsuits against the Company significantly increased in the second quarter resulting in the
Company reporting a total of 212 filed lawsuits in its June 30, 2009 Form 10-Q. As of November 5,
2009, the Company was named as a defendant in approximately 191 filed lawsuits, which included a
total of 80 dismissals and 59 new lawsuits since the June 30, 2009 Form 10-Q. The 191 filed
lawsuits represented a total of 412 allegedly injured plaintiffs. A significant majority of these
lawsuits name defendants in addition to the Company such as physicians, drug companies and other
device manufacturers. It is not known to what degree, if any, the potential liability of other
parties may affect the ultimate cost to the Company, and the Company currently has no cost-sharing
arrangements with other defendants.
For the policy periods beginning June 1, 2008 and June 1, 2009, the Company has in place product
liability insurance on a claims-made basis in the aggregate amount of $50 million for liability
losses, including legal defense costs, excluding shoulder chondrolysis claims for pre-June 1, 2008
surgeries, which are covered under the separate policies discussed below. For chondrolysis claims
made in 2008 through 2013 arising out of pre-June 1, 2008 surgeries, the Company increased its
product liability insurance on a claims-made basis from an aggregate amount of $10 million to $35
million, which includes a $5 million self-insured layer above the original $10 million primary
policy and below the additional $20 million in excess policies the Company purchased. As noted,
these policies for pre-June 1, 2008 surgeries will remain in place until 2013. The additional
excess policies for the retroactive period for pre-June 1, 2008 surgeries cost the Company $3.5
million in additional insurance expense during the second quarter of 2008, which was recorded in
operating expenses as part of certain litigation and insurance charges.
On June 26, 2009, a United States District Court in Florida (the Court) dismissed the first
chondrolysis case against any pump manufacturer to be decided on the merits, in a case filed
against Breg Incorporated (Breg), a former competitor of the Company. The case was
Kilpatrick v.
Breg, Inc
(the Kilpatrick case). In the Kilpatrick case, the Court granted Bregs motion for
summary judgment after it granted Bregs motion to exclude plaintiffs causation testimony pursuant
to Federal Rule of Evidence 702. Specifically, the Court granted Bregs Motion for Summary
Judgment on the grounds that plaintiff had not sufficiently demonstrated that Bregs pain pump
could or did cause the type of injury the plaintiff suffered, applying the U.S. Supreme Courts
decision in
Daubert v. Merrell Dow Pharmaceuticals,
509 U.S. 579 (1993) (Daubert). Under
Daubert, federal district courts act as gatekeepers, admitting expert testimony only if it is
both reliable and relevant so as to prevent speculative and unreliable testimony from reaching the
jury. The Daubert precedent applies in all federal courts and in the approximately 30 state courts
that have adopted Daubert or similar principles as law. A majority of the Companys outstanding
lawsuits are in jurisdictions that either follow Daubert or have adopted some form of Daubert
principles. The Kilpatrick case has favorably impacted the Companys assessment of its legal
prospects and potential liability for claims of alleged chondrolysis. Although other courts are
not legally bound to follow the Kilpatrick case decision in similar lawsuits involving the Company,
the Company believes that the decision is highly beneficial to the Companys position and
fundamentally affects its long-term outlook for resolving legal matters involving chondrolysis.
In addition to the favorable legal implications of the Kilpatrick case ruling described above, the
Company believes that information contained in a case series recently published by David S. Bailie,
M.D., et al. is beneficial to its legal position regarding causation, the crux of plaintiffs
claims.
Further, the Company has observed that a significant majority of the current plaintiffs as of
November 5, 2009 are named in lawsuits that were received after June 30, 2009. The Company
believes that plaintiff attorneys are rapidly filing claims because of their evaluation that the
statute of limitations is expiring in many jurisdictions. The new
13
cases are at a very early stage of development and generally provide minimal information. Many of
these lawsuits name two or more pain pump manufacturers in addition to the Company as defendants in
the same lawsuit, presumably because plaintiffs attorneys have not yet determined the manufacturer
of the pump utilized in the surgical procedure. The Company believes that a significant portion of
such cases against the Company will ultimately be dismissed because a Company pump was not
involved.
In accordance with ASC 450-20-25 (formerly SFAS No. 5,
Accounting for Contingencies
), the Company
records an estimated loss from loss contingency such as the legal proceedings described immediately
above when a loss is known or considered probable and the amount can be reasonably estimated. If
the reasonable estimate of a known or probable loss is a range and no amount within the range is a
better estimate, the minimum amount of the range is accrued in accordance with U.S. GAAP. In most
cases, significant judgment is required to estimate the range of probable potential loss and timing
of a loss to be recorded. Events may arise that were not anticipated and the outcome of a
contingency may result in an uninsured loss to the Company that differs from the previously
estimated liability, which could result in a material difference from that recorded in the current
period.
During the first quarter of 2009, the Company estimated the range of probable potential loss to the
Company for the legal proceedings described immediately above as of March 31, 2009 was $12.4
million to $89.0 million. As of March 31, 2009, the Company recorded a cumulative total expense of
$12.4 million in loss contingency, of which $1.5 million and $10.9 million were recognized as part
of certain litigation and insurance charges in operating expenses during the three months ended
March 31, 2009 and year ended December 31, 2008, respectively. The cumulative $12.4 million
expense in loss contingency represented the low end of the estimated range of cumulative loss as of
March 31, 2009. The range of probable potential loss represented the Companys estimated
out-of-pocket cost for claims already asserted, including the estimated cost of legal fees and
potential settlements with claimants, to the extent not covered by insurance, in compliance with
the Companys accounting policy. No accrual was made for unasserted claims as of March 31, 2009,
because the number and cost of such claims could not be reasonably estimated. The range of loss
was determined based on the number of actual cases brought against the Company and included
estimated payments for self-insured retentions that would be made to its product liability
insurance carriers or third parties and any amounts in excess of its insurance coverage amount.
The accrual also assumed that the Company will ultimately incur the Companys $5.0 million
self-insured layer discussed earlier. As of December 31, 2008, the loss contingency recognized on
the balance sheet as Accrued Litigation Costs was $10.5 million, compared to $12.0 million as of
March 31, 2009. The loss contingency recognized on the balance sheet as Accrued Litigation Costs
remained at $12.0 million as June 30, 2009.
Significant developments during the second quarter of 2009 surrounding the ongoing lawsuits include
the highly favorable ruling in the Kilpatrick case, the scientific information recently brought to
light in the published Bailie case series that the Company believes will be beneficial to its legal
position regarding causation and the nature of the latest filed lawsuits, since, among other
matters potentially favorable to the Company, many of the lawsuits have more than one named pain
pump manufacturer as a defendant and information regarding product identification that is lacking.
The Company believes that, due to these significant developments, the probability of significant
unfavorable judicial outcomes from the lawsuits is reasonably possible but not probable in
accordance with ASC 450-20-25. The Company intends to seek dismissals and aggressively defend such
cases. The Company can no longer reasonably estimate its contingent liability for possible
unfavorable legal outcomes from any of the lawsuits or the potential settlements with claimants or
judgments following trial beginning in the second quarter of 2009. However, the Company believes
that the legal costs to defend the current lawsuits are probable and can be reasonably estimated.
As such, the Company recorded a loss contingency for the estimated legal costs as of June 30, 2009
and September 30, 2009 in accordance with ASC 450-20-25 and consistent with the Companys
accounting policy.
The Companys estimate includes its best estimate of the portion of legal costs not covered by
insurance. No accrual was made for unasserted claims as of September 30, 2009, because the number
and cost of such claims could not be reasonably estimated. While the Company has explicitly
accrued for legal costs only, it recognizes that a rational defendant will often settle cases for a
nuisance value in lieu of incurring legal costs of a comparable amount. The Company estimates that
the range of probable potential loss to the Company for the legal costs as of September 30, 2009 is
$12.0 million to $31.4 million. As of September 30, 2009, the loss contingency recognized on the
balance sheet as Accrued Litigation Costs was $12.0 million, which represents the low end of the
estimated range and reflects no additional accrual for the second and third quarters of 2009
despite the sharp increase in the number
14
of lawsuits filed against the Company since June 30, 2009. As previously discussed, the new cases,
which comprise a majority of the number of filed lawsuits currently outstanding against the
Company, are at a very early stage of development. Due to the nature of the newly-filed lawsuits,
the Company believes that a significant portion of these cases will ultimately be dismissed. The
Company also believes that the favorable and unfavorable events since the second quarter of 2009
had an offsetting impact on the Companys legal liability with respect to its chondrolysis legal
exposures. No additional reserves were accrued in the second or third quarters of 2009 in
connection with the ongoing litigation. While the portion of the reserve for estimated legal fees
was significantly increased in light of the increase in the number of cases, the estimated
liability for the cases themselves was reduced to zero during the three months ended June 30, 2009
as the Company does not believe that liability amounts are either probable or estimable at this
time. A significant increase in the number of claims made against the Company or unfavorable legal
outcomes or scientific evidence could have a material adverse effect on the Companys financial
condition and results from operations.
Litigation as to the Offer and Merger
On or about October 20, 2009, David Lash and Dale Hartig, on behalf of themselves and the public
stockholders of the Company, filed a purported class action complaint in the Superior Court of the
State of California, Orange County (the Court), captioned
David Lash and Dale Hartig v. Donald
Earhart, et al.
(Case No. 30-2009 00312968). On October 23, 2009, David Lash and Dale Hartig filed
an amended complaint. On or about October 23, 2009, Stuart Kessler, on behalf of himself and the
public stockholders of the Company, filed a purported class action complaint in the Court,
captioned
Stuart Kessler v. James J. Dal Porto, et al.
(Case No. 30-2009 00312919). Both lawsuits
name the Company, each of the Companys directors, Kimberly-Clark Corporation (Kimberly-Clark)
and Boxer Acquisition, Inc., a wholly owned subsidiary of Kimberly-Clark (Merger Sub), as
defendants. The lawsuits allege, among other things, that the Companys directors breached their
fiduciary duties by failing to maximize shareholder value and through alleged materially inadequate
disclosures and material disclosure omissions. In addition, the lawsuits allege that the Company
and Kimberly-Clark aided and abetted such alleged breaches of fiduciary duties by the Companys
directors. Based on these allegations, the lawsuits seek, among other relief, injunctive relief
enjoining a tender offer by Kimberly-Clark (the Offer) and a merger with Merger Sub (the
Merger). Both lawsuits also purport to seek recovery of the costs of the action, including
reasonable attorneys fees. See Note 12 of the Notes to
Condensed Consolidated Financial Statements for further information regarding the pending merger
with Kimberly-Clark.
Other Litigation and Regulatory Matters
In June 2007, the Company commenced a lawsuit against Apex Medical Technologies, Inc (Apex) and
its president, Mark McGlothlin, in the U.S. District Court for the Southern District of California
for patent infringement and misappropriating the Companys valuable trade secrets. The Company
also sued distributors of Apexs Solace
®
Pump, including Zone Medical, LLC (Zone). In response
to the litigation brought by the Company, the defendants asked the U.S. Patent and Trademark Office
(the Patent Office) to reexamine one of the Companys patents. The Patent Office routinely
grants such requests and often times initially rejects previously issued patent claims. In October
2008, the Patent Office took this action after receiving Apexs position on the patent without
input from the Company. The Company presented its position to the Patent Office and in April 2009
the Patent Office reconfirmed the patent with clarifying amendments to some of the patents claims.
On July 14, 2009, the Patent Office issued the Reexamination Certificate, terminating the
reexamination proceedings. On October 28, 2009 after a four week trial the jury found that 1) Apex
and Zone willfully infringed the Companys patent awarding the Company damages in excess of
$2,950,000, 2) the Companys patent is valid and enforceable, 3) Mr. McGlothlin and Apex willfully
and maliciously misappropriated the Companys trade secrets awarding the Company damages in excess
of $2,950,000, 4) Mr. McGlothlin and Apex willfully and maliciously breached the Companys
confidence awarding the Company damages of $3,000,000, and 5) Mr. McGlothlin and Apex willfully and
maliciously competed unfairly with the Company awarding the Company damages in excess of
$2,950,000. The jury also found in favor of the Company on the Defendants counterclaim.
Moreover, the jury awarded the Company $1,500,000 in punitive damages against Mr. McGlothlin for
willfully and maliciously misappropriating the Companys trade secrets, breaching the Companys
confidence and unfairly competing with the Company. There is no assurance that the Company
will ultimately collect any or all of the damages awarded at the trial. In view of the jury
verdict, the
15
Company expects to move for entry of a permanent injunction against the Defendants. The Company
continues to enforce its patent and trade secret rights against Mr. McGlothlin, Apex, Zone and
other distributors that make, use, sell or offer to sell the Solace Pump. The Company is
vigorously moving forward to protect its patent rights and valuable trade secrets.
On December 22, 2008, the Company received a warning letter from the U.S. Food and Drug
Administration (the FDA) citing various general issues concerning the Companys Quality System.
In January 2009, the Company formally responded to the FDA regarding these issues and is fully
cooperating with the FDA to address their concerns. The Company has not been, and does not expect
to be, assessed any fines, penalties or interest related to the warning letter. The FDA has not
issued a suspension or restriction on the sale of any of the Companys products or devices. The
Company believes that the impact of the warning letter and the corrective actions taken by the
Company have not had a material impact to its financial condition nor on its operational results.
The Company is involved in other litigation arising from the normal course of operations. In the
opinion of management, the ultimate impact of such other litigation will not have a material
adverse effect on the Companys financial position and results of operations.
11. Operating Segments and Revenue Data
ASC 320-10 (formerly SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information
), establishes standards and disclosure requirements for the reporting of operating
segments. Operating segments are defined as components of an enterprise for which separate
financial information is available and that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing performance. Prior to the
acquisition of AcryMed on February 15, 2008, the Company operated in one reportable operating
segment. The Companys products were predominately assembled from common subassembly components in
a single integrated manufacturing facility, and operating results were reviewed by management and
the chief operating decision-maker on a combined basis due to shared infrastructure. Within this
single operating segment, the Company has identified two product lines representing specific
clinical applications Regional Anesthesia and Intravenous (IV) Infusion Therapy. Management
and the chief operating decision-maker currently evaluate AcryMeds performance on a separate
internal reporting basis. As such, the Company currently operates in two reportable operating
segments: Infusion Pumps for its Regional Anesthesia and IV Infusion Therapy products and
Antimicrobial Materials for AcryMeds products. The Companys condensed consolidated financial
statements for the three and nine months ended September 30, 2008 include AcryMeds contributions
subsequent to the February 15, 2008 acquisition date. Revenues from the two operating segments for
the three and nine months ended September 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Infusion Pumps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Anesthesia
|
|
$
|
27,532
|
|
|
$
|
24,817
|
|
|
$
|
78,466
|
|
|
$
|
73,537
|
|
IV Infusion Therapy
|
|
|
8,368
|
|
|
|
5,945
|
|
|
|
23,837
|
|
|
|
18,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
35,900
|
|
|
|
30,762
|
|
|
|
102,303
|
|
|
|
92,129
|
|
Antimicrobial Materials
|
|
|
847
|
|
|
|
1,480
|
|
|
|
2,453
|
|
|
|
3,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,747
|
|
|
$
|
32,242
|
|
|
$
|
104,756
|
|
|
$
|
95,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment information is as follows for the three and nine months ended September 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infusion
|
|
|
Antimicrobial
|
|
|
|
|
|
|
Pumps
|
|
|
Materials
|
|
|
Consolidated
|
|
|
|
(Amounts in thousands)
|
|
Three Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1)
|
|
$
|
35,900
|
|
|
$
|
847
|
|
|
$
|
36,747
|
|
Operating income (loss) (1)(2)
|
|
|
1,748
|
|
|
|
(510
|
)
|
|
|
1,238
|
|
Assets
|
|
|
138,857
|
|
|
|
15,437
|
|
|
|
154,294
|
|
Depreciation and amortization
|
|
|
523
|
|
|
|
110
|
|
|
|
633
|
|
Property additions
|
|
|
774
|
|
|
|
176
|
|
|
|
950
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infusion
|
|
|
Antimicrobial
|
|
|
|
|
|
|
Pumps
|
|
|
Materials
|
|
|
Consolidated
|
|
|
|
(Amounts in thousands)
|
|
Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1)
|
|
$
|
102,303
|
|
|
$
|
2,453
|
|
|
$
|
104,756
|
|
Operating income (loss) (1)(2)
|
|
|
466
|
|
|
|
(1,679
|
)
|
|
|
(1,213
|
)
|
Assets
|
|
|
138,857
|
|
|
|
15,437
|
|
|
|
154,294
|
|
Depreciation and amortization
|
|
|
1,529
|
|
|
|
325
|
|
|
|
1,854
|
|
Property additions
|
|
|
1,491
|
|
|
|
196
|
|
|
|
1,687
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1)
|
|
$
|
30,762
|
|
|
$
|
1,480
|
|
|
$
|
32,242
|
|
Operating loss (1)(2)
|
|
|
(116
|
)
|
|
|
(11,761
|
)
|
|
|
(11,877
|
)
|
Assets
|
|
|
133,418
|
|
|
|
16,033
|
|
|
|
149,451
|
|
Depreciation and amortization
|
|
|
471
|
|
|
|
48
|
|
|
|
519
|
|
Property additions
|
|
|
393
|
|
|
|
99
|
|
|
|
492
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1)
|
|
$
|
92,129
|
|
|
$
|
3,844
|
|
|
$
|
95,973
|
|
Operating loss (1)(2)
|
|
|
(15,437
|
)
|
|
|
(12,165
|
)
|
|
|
(27,602
|
)
|
Assets
|
|
|
133,418
|
|
|
|
16,033
|
|
|
|
149,451
|
|
Depreciation and amortization
|
|
|
1,329
|
|
|
|
285
|
|
|
|
1,614
|
|
Property additions
|
|
|
1,200
|
|
|
|
152
|
|
|
|
1,352
|
|
|
|
|
(1)
|
|
Intercompany sales and operating income between the Infusion Pumps and Antimicrobial
Materials operating segments have been eliminated in the consolidation and have been excluded
from the above numbers.
|
|
(2)
|
|
Certain expenses incurred by the Company at the corporate level have not been allocated to
the Antimicrobial Materials operating segment, such as employee stock administration, human
resources, finance, information technology, investor relations, corporate governance, SEC
compliance, general management, strategy development, taxes, audit fees, cash management,
legal fees, regulatory compliance and budgeting, as such amounts are not used by management in
evaluating segment profitability.
|
12. Pending Merger with Kimberly-Clark
On October 8, 2009, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Kimberly-Clark Corporation and Merger Sub. The Merger Agreement provides that
within seven business days of the date of the Merger Agreement, Merger Sub will commence the Offer
to purchase all of the outstanding shares of the Companys common stock for $12.65 in cash per
share. Upon successful completion of the tender offer, Merger Sub will merge with and into the
Company, with the Company surviving as a wholly owned subsidiary of Kimberly-Clark. Consummation
of the Offer is subject to customary conditions, including, but not limited to, (i) at least a
majority of outstanding shares of the Companys common stock on a fully diluted basis being
tendered into the Offer, (ii) the expiration or termination of waiting periods under applicable
antitrust laws and (iii) the absence of any Material Adverse Effect (as defined in the Merger
Agreement). The Offer is not subject to a financing condition.
The Offer was launched on October 20, 2009 and will initially expire at midnight, New York City
time, on November 17, 2009, which is the 20th business day from the commencement thereof. However,
until such time as the applicable conditions in the Merger Agreement have been satisfied, the Offer
may be extended by either the Company or Merger Sub for up to 120 calendar days after commencement
(the Outside Date), in accordance with applicable SEC rules and regulations. Additionally, the
Outside Date may be extended pursuant to the Merger Agreement for 30 calendar days if the waiting
period under the applicable foreign antitrust laws or Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, has not expired or been terminated, and up to an incremental 120 calendar days
if the waiting periods under applicable foreign antitrust laws have not expired or been terminated.
Consummation of the Merger is expected in the fourth quarter of 2009 and is subject to customary
conditions, including, if required under Delaware law, approval of the Merger Agreement by the
Companys stockholders. The parties have agreed that, if after the purchase of shares pursuant to
the Offer and any subsequent offering period, and
17
after giving effect to any shares purchased pursuant to the Top-Up Option described in the next
paragraph, Merger Sub owns at least 90% of the outstanding shares, then provided that the other
conditions of the Merger have been satisfied or waived, Merger Sub will merge into the Company in a
short-form merger pursuant to the applicable provisions of Delaware law, which will not require
the approval of the Companys stockholders other than Merger Sub.
In the Merger Agreement, the Company has granted to Merger Sub an option (the Top-Up Option) to
purchase, at a price per share equal to the offer price, a number of newly issued shares equal to
the lowest number of shares that, when added to the number of shares owned by Kimberly-Clark or
Merger Sub at the time of exercise of the Top-Up Option, constitutes one Share more than 90% of the
fully diluted shares (after giving effect to the issuance of all shares subject to the Top-Up
Option); provided that the Top-Up Option shall not be exercisable for a number of shares in excess
of the Companys authorized and unissued shares on a fully diluted basis. Merger Sub may exercise
the Top-Up Option during the 20 business day period following the consummation of the Offer.
In addition, pursuant to the terms of the Merger Agreement, effective upon the purchase of shares
pursuant to the Offer, Kimberly-Clark will be entitled to designate a number of directors, rounded
up to the next whole number, on the Companys Board of Directors and committees thereof equal to
the product of (i) the total number of directors on the Companys Board of Directors or a committee
thereof, as applicable, and (ii) the percentage that the number of shares beneficially owned by
Kimberly-Clark and/or Merger Sub bears to the number of shares then outstanding.
The Merger Agreement contains customary representations and warranties by Kimberly-Clark, Merger
Sub and the Company. The Merger Agreement also contains customary covenants and agreements,
including with respect to the Companys operation of the business and its subsidiaries between
signing of the Merger Agreement and closing of the Merger, solicitation of alternative acquisition
proposals by the Company, governmental filings and approvals, and other matters.
The Merger Agreement and the Offer may be terminated under certain customary circumstances by
Kimberly-Clark and/or the Company, including if the Offer is not consummated on or before the
Outside Date (as it may be extended as described above). The Merger Agreement provides for a
termination fee and/or expenses of up to approximately $12.8 million, payable by the Company to
Kimberly-Clark, if the Merger Agreement is terminated under certain circumstances.
The Merger Agreement is included as an exhibit to this Form 10-Q to provide additional information
regarding the terms of the transactions described herein and is not intended to provide any other
factual information or disclosure about the Company, Kimberly-Clark or Merger Sub. The
representations, warranties and covenants contained in the Merger Agreement were made only for
purposes of such agreement and as of a specific date, were solely for the benefit of the parties to
such agreement (except as to certain indemnification obligations), are subject to limitations
agreed upon by the contracting parties, including being qualified by disclosure schedules made for
the purposes of allocating contractual risk between and among the parties thereto instead of
establishing these matters as facts, and may be subject to standards of materiality applicable to
the contracting parties that differ from those applicable to investors. Moreover, information
concerning the subject matter of the representations and warranties may change after the date of
the Merger Agreement, which subsequent information may or may not be fully reflected in the
Companys public disclosures. Investors are not third-party beneficiaries under the Merger
Agreement and, in light of the foregoing reasons, should not rely on the representations,
warranties and covenants or any descriptions thereof as characterizations of the actual state of
facts or condition of the Company, Kimberly-Clark or Merger Sub or any of their respective
subsidiaries or affiliates.
As described above, two purported class action complaints have been filed in California Superior
Court seeking, among other relief, injunctive relief enjoining the Offer and the Merger. See Note
10 of the Notes to Condensed Consolidated Financial Statements.
18
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements by the Company in this report and in other reports and statements released by the
Company are and will be forward-looking in nature and express the Companys current opinions about
trends and factors that may impact future operating results. Statements that use words such as
may, will, should, believes, predicts, estimates, projects, anticipates or
expects or use similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to material risks, assumptions and uncertainties, which
could cause actual results to differ materially from those currently expected, and readers are
cautioned not to place undue reliance on these forward-looking statements. Except as required by
law, the Company undertakes no obligation to publish revised forward-looking statements to reflect
the occurrence of unanticipated or subsequent events. Readers are also urged to carefully review
and consider the various disclosures made by the Company in this report that seek to advise
interested parties of the risks and other factors that affect the Companys business. Interested
parties should also review the Companys reports on Forms 10-K, as amended, for the year ended
December 31, 2008, 10-Q and 8-K and other reports that are periodically filed with the Securities
and Exchange Commission. The risks affecting the Companys business include, among others: the risk
that the Offer or the Merger will not be consummated; the risk that the Companys business will be
adversely impacted during the pendency of the Offer and the Merger, whether as a result of
announcement of the Offer or otherwise; physician acceptance of infusion-based therapeutic
regimens; potential inadequacy of insurance to cover existing and future product liability claims;
implementation of the Companys direct sales strategy; successful integration of the Companys
acquisition of AcryMed Incorporated and further development and commercialization of AcryMeds
technologies; dependence on the Companys suppliers and distributors; the Companys continuing
compliance with applicable laws and regulations, such as the Medicare Supplier Standards and Food,
Drug and Cosmetic Act, and the Medicares and FDAs concurrence with managements subjective
judgment on compliance issues, including those related to the recent FDA warning letter; the
reimbursement system currently in place and future changes to that system; product availability,
acceptance and safety; competition in the industry; technological changes; intellectual property
challenges and claims; economic and political conditions in foreign countries; currency exchange
rates; inadequacy of booked reserves (including those related to the chondrolysis litigation);
future impairment write-downs; and reliance on the success of the home health care industry. All
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.
Overview
The Company is improving surgical outcomes by designing, developing and marketing technically
advanced, low cost drug delivery systems and innovative surgical products for post-surgical pain
relief and surgical site care. The Companys products are used in hospitals, free-standing surgery
centers, homes and other settings. The Company previously focused on three distinct markets:
Regional Anesthesia, IV Infusion Therapy and Oncology Infusion Services. Revenue from the Oncology
Infusion Services market was generated by InfuSystem, Inc. (InfuSystem), which was previously a
wholly owned subsidiary of the Company. InfuSystem primarily engages in the rental of infusion
pumps on a month-to-month basis for the treatment of cancer. On October 25, 2007, the Company
completed the sale of InfuSystem to InfuSystem Holdings, Inc., formerly known as HAPC, Inc.
(HAPC).
The Company sought to expand its strategic focus to include general surgical site management in
addition to its leadership position in Regional Anesthesia for post-surgical pain management. To
that end, the Company acquired AcryMed Incorporated (AcryMed), a privately held Oregon-based
developer of innovative infection control and wound healing products, on February 15, 2008 for
$26.7 million in cash. The Company intends to leverage its dedicated sales and marketing
organization by selling products from the AcryMed pipeline in the market for acute care products.
The results of operations for the year ended December 31, 2008 include AcryMeds contributions
subsequent to the February 15, 2008 acquisition date.
The Company is continuing its strategic focus for future growth on the growing Regional Anesthesia
market, with particular emphasis on the Companys pain relief products marketed under its ON-Q
®
brand. The Company intends to continue its sales and marketing efforts to further penetrate the U.S
post-surgical pain relief market with its ON-Q products.
19
While it is difficult to predict the breadth and duration of the economic and financial market
problems and the many ways in which they may adversely affect the Companys suppliers, customers
and its business in general, the Company is aware that economic conditions in the United States and
in the foreign markets where the Companys products are sold could substantially affect its sales
and profitability. Economic activity in the United States and throughout much of the world has
undergone a sudden, sharp economic downturn following the recent housing downturn and subprime
lending collapse in both the United States and Europe. As a result, the Company has seen a decline
in elective surgeries where the Companys products may be used.
Global credit and capital markets have also experienced unprecedented volatility and disruption,
and business credit and liquidity have tightened in much of the world. This has also adversely
affected the stock market resulting in material declines in stock prices. The Companys stock
price declined significantly during this period. During the fourth quarter of 2008, the Companys
market capitalization fell below its recorded net book value, which triggered impairment testings
of its goodwill, other intangible assets and long-lived assets with finite lives. Based on the
results of the impairment testing, the Company recorded an impairment charge of $380,000 during the
fourth quarter of 2008 on certain intangible assets related to developed technology that were
acquired in the AcryMed transaction. No goodwill impairment was identified. The Companys market
capitalization was above its recorded book value as of September 30, 2009. The Company will
continue to monitor its market capitalization. If the Companys market capitalization drops below
the Companys book value again in the future, it could imply that the carrying amount of the
Companys goodwill and other intangible assets may not be recoverable, thereby requiring future
interim impairment tests that may result in a non-cash write-down of these assets, which could have
a material adverse impact on the Companys condensed consolidated financial statements. See Note 4
of the Notes to Condensed Consolidated Financial Statements for further discussion.
Pending Merger with Kimberly-Clark
On October 8, 2009, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Kimberly-Clark Corporation (Kimberly-Clark) and Boxer Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of Kimberly-Clark (Merger Sub). The Merger
Agreement provides that within seven business days of the date of the Merger Agreement, Merger Sub
will commence a tender offer (the Offer) to purchase all of the outstanding shares of the
Companys common stock for $12.65 in cash per share. The Offer was launched on October 20, 2009.
Upon successful completion of the tender offer, Merger Sub will merge with and into the Company,
with the Company surviving as a wholly owned subsidiary of Kimberly-Clark. Consummation of the
Offer is subject to customary conditions, including, but not limited to, (i) at least a majority of
outstanding shares of the Companys common stock on a fully diluted basis being tendered into the
Offer, (ii) the expiration or termination of waiting periods under applicable antitrust laws and
(iii) the absence of any Material Adverse Effect (as defined in the Merger Agreement). The Offer
is not subject to a financing condition.
Consummation of the Merger is expected in the fourth quarter of 2009 and is subject to customary
conditions, including, if required under Delaware law, approval of the Merger Agreement by the
Companys stockholders. The Merger Agreement and the Offer may be terminated under certain
customary circumstances by Kimberly-Clark and/or the Company. The Merger Agreement provides for a
termination fee and/or expenses of up to approximately $12.8 million, payable by the Company to
Kimberly-Clark, if the Merger Agreement is terminated under certain circumstances. See Note 12 of
the Notes to Condensed Consolidated Financial Statements for further discussion.
Results of Operations
Revenue
Net revenues from continuing operations increased 14%, or $4.5 million, to $36.7 million for the
three months ended September 30, 2009 from $32.2 million for the three months ended September 30,
2008 and increased 9%, or $8.8 million, to $104.8 million for the nine months ended September 30,
2009 from $96.0 million for the nine months ended September 30, 2008.
Prior to the acquisition of AcryMed on February 15, 2008, the Company operated in one reportable
operating segment. The Companys products were predominately assembled from common subassembly
components in a single integrated manufacturing facility, and operating results were reviewed by
management and the chief operating
20
decision-maker on a combined basis due to shared infrastructure.
Within this single operating segment, the
Company has identified two product lines representing specific clinical applications Regional
Anesthesia and Intravenous (IV) Infusion Therapy. Since the AcryMed acquisition, management and
the chief operating decision-maker began to evaluate the Companys performance on a separate
internal reporting basis. As such, the Company currently operates in two reportable operating
segments: Infusion Pumps for its Regional Anesthesia and IV Infusion Therapy products and
Antimicrobial Materials for AcryMeds products. The Companys condensed consolidated financial
statements for the year ended December 31, 2008 and subsequent periods include AcryMeds
contributions subsequent to the February 15, 2008 acquisition date. Further, the Company believes
it is most meaningful for the purposes of revenue analyses to group the product lines in the
Infusion Pumps operating segment into two categories representing specific clinical applications
Regional Anesthesia and IV Infusion Therapy.
The Companys revenues from the Infusion Pumps operating segment increased 17%, or $5.1 million, to
$35.9 million for the three months ended September 30, 2009 from $30.8 million for the three months
ended September 30, 2008 and increased 11%, or $10.2 million, to $102.3 million for the nine months
ended September 30, 2009 from $92.1 million for the nine months ended September 30, 2008.
Regional Anesthesia revenues increased 11%, or $2.7 million, to $27.5 million for the three months
ended September 30, 2009 from $24.8 million for the three months ended September 30, 2008 and 7%,
or $4.9 million, to $78.5 million for the nine months ended September 30, 2009 from $73.5 million
for the nine months ended September 30, 2008. The increase was primarily due to increased clinical
usage of the ON-Q C-bloc
®
Continuous Nerve Block System by surgeons in the United States, offset in
part by reduced revenues from ON-Q third party billings, which the Company discontinued effective
February 2009. U.S. revenue from the C-bloc Continuous Nerve Block System increased 36%, or $2.2
million, to $8.3 million for the three months ended September 30, 2009 from $6.1 million for the
three months ended September 30, 2008 and increased 35%, or $6.0 million, to $23.1 million for the
nine months ended September 30, 2009 from $17.1 million for the nine months ended September 30,
2008. The increases in revenue from the C-bloc Continuous Nerve Block System were primarily due to
improved customer awareness of clinical efficacy and favorable reimbursement from third parties.
Other Regional Anesthesia products include the Soaker Catheter and the SilverSoaker Catheter.
Sales of IV Infusion Therapy products, which include the Companys intravenous elastomeric pumps,
mechanical infusion devices and disposables, increased 41%, or $2.4 million, to $8.4 million for
the three months ended September 30, 2009 from $5.9 million for the three months ended September
30, 2008 and increased 28%, or $5.2 million, to $23.8 million for the nine months ended September
30, 2009 from $18.6 million for the nine months ended September 30, 2008. The increase was due to
increased unit sales of IV Infusion Therapy products to B. Braun Medical Inc., a domestic
distributor, other regional U.S. distributors and international distributors, including B. Braun
Medical S.A. (France). The increase in unit sales was due to the timing of shipments to
distributors and the withdrawal of a competitor from the IV Infusion Therapy market. The Company
has a distribution agreement with B. Braun Medical S.A., a manufacturer and distributor of
pharmaceuticals and infusion products, to distribute the Companys elastomeric infusion pumps in
Western Europe, Eastern Europe, the Middle East, Asia Pacific, South America and Africa. The
distribution agreement was amended as of March 31, 2009 for updates primarily to territories
subject to the agreement. In March 2009, the Company also announced that it entered into a binding
letter of intent (the letter of intent) for an exclusive international distribution agreement
with B. Braun Melsungen AG covering the ON-Q PainBuster Post-Operative Pain Relief System and ON-Q
C-bloc Continuous Nerve Block System (the latter will be private labeled as Easypump C-bloc RA for
B. Braun Melsungen AG). The letter of intent expired in June 2009. The terms of the letter of
intent were renewed and extended to December 2009. The Company is currently negotiating the terms
of the definitive agreement.
Antimicrobial Materials revenues decreased 43%, or $0.6 million, to $0.8 million for the three
months ended September 30, 2009 from $1.5 million for the three months ended September 30, 2008 and
decreased 36%, or $1.4 million, to $2.5 million for the nine months ended September 30, 2009 from
$3.8 million for the nine months ended September 30, 2008. The decreases for the three and nine
months ended September 30, 2009 were primarily due to sales in the three and nine months ended
September 30, 2008 from a temporary pilot production to a customer prior to the planned transfer of
manufacturing responsibility to that customer. No product sales were recognized for the same
customer for the three and nine months ended September 30, 2009.
21
Cost of Revenues
Cost of revenues increased 14%, or $1.2 million, to $9.8 million for the three months ended
September 30, 2009 from $8.6 million for the three months ended September 30, 2008 and increased
12%, or $3.0 million, to $28.5 million for the nine months ended September 30, 2009 from $25.5
million for the nine months ended September 30, 2008. The increase was primarily due to higher
sales volume. As a percentage of net sales, cost of revenues was comparable for both the three
and nine months ended September 30, 2009 compared to the same periods in the prior year.
Selling and Marketing Expenses
Selling and marketing expenses decreased 7%, or $1.2 million, to $15.8 million for the three months
ended September 30, 2009 from $17.0 million for the three months ended September 30, 2008 and
decreased 11%, or $5.9 million, to $48.8 million for the nine months ended September 30, 2009 from
$54.7 million for the nine months ended September 30, 2008.
For the three months ended September 30, 2009, the decrease was primarily attributable to decreases
in compensation and related expenses ($0.8 million), travel and entertainment expenses ($0.7
million), marketing samples ($0.2 million), advertising and promotion expenses ($0.1 million),
employee training ($0.1 million) and non-cash compensation expense related to the amortization of
deferred compensation ($0.1 million), offset in part by increases in commissions ($0.6 million),
rebates ($0.3 million) and consulting ($0.1 million). For the nine months ended September 30,
2009, the decrease was primarily attributable to decreases in compensation and related expenses
($2.5 million), commissions ($0.9 million), national sales meeting ($0.5 million), advertising and
promotion expenses ($0.5 million), travel and entertainment expenses ($1.0 million), marketing
samples ($0.5 million), non-cash compensation expense related to the amortization of deferred
compensation ($0.3 million) and employee training ($0.1 million), offset in part by an increase in
rebates ($0.9 million).
The decreases in compensation and related expenses, national sales meeting, advertising and
promotion expenses, marketing samples, employee training and travel and entertainment expenses were
directly related to a reduction in the sales force and decreased spending on marketing programs.
As of September 30, 2009 and 2008, the Company had approximately 280 and 310 employees,
respectively, in its sales organization. The Companys sales organization is comprised of inside
and outside salespeople, nurses, customer service representatives and sales management. The
decreases in commissions for the nine months ended September 30, 2009 and non-cash compensation
expense related to the amortization of deferred compensation for the three and nine months ended
September 30, 2009 were due to a decrease in the number of sales representatives who achieved quota
compared to the same period in the prior year and reduction of stock awards granted to the sales
force. The increase in rebates was primarily due to the increase in revenue.
As a percentage of net revenues, selling and marketing expenses decreased by approximately ten
percentage points for each of the three and nine months ended September 30, 2009 versus the same
period in the prior year primarily because of the increase in net revenues and decrease in selling
and marketing expenses described above.
General and Administrative Expenses
General and administrative expenses increased 27%, or $1.5 million, to $7.0 million for the three
months ended September 30, 2009 from $5.6 million for the three months ended September 30, 2008 and
increased 21%, or $3.4 million, to $19.4 million for the nine months ended September 30, 2009 from
$16.0 million for the nine months ended September 30, 2008.
For the three months ended September 30, 2009, the increase was primarily attributable to increases
in legal fees ($1.7 million), bonus expense ($0.7 million) and accounting fees ($0.2 million),
offset in part by decreases in non-cash compensation expense related to the amortization of
deferred compensation ($0.6 million), general and administrative expenses incurred by AcryMed ($0.3
million) and management service fees ($0.1 million). For the nine months ended September 30, 2009,
the increase was primarily attributable to increases in legal fees ($3.9 million), bonus expense
($0.7 million), accounting fees ($0.4 million) and bad debt expense ($0.2 million), offset in part
by decreases in non-cash compensation expense related to the amortization of deferred compensation
($1.1
22
million), general and administrative expenses incurred by AcryMed ($0.7 million) and management
services fees ($0.2 million).
The increase in legal fees was primarily due to increased litigation costs including the patent
infringement case discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements
and approximately $0.8 million of services rendered in connection with the pending merger with
Kimberly-Clark. The decrease in non-cash compensation expense related to the amortization of
deferred compensation is due to a reduction in the number of share-based awards granted in the
current year and a lower fair market value of the share-based awards that were granted, which was
the result of a decrease in the Companys stock price. The general and administrative expenses
incurred by AcryMed were consolidated with the Companys operations effective February 15, 2008 in
connection with the Companys acquisition of AcryMed.
As a percentage of net revenues, general and administrative expenses increased by approximately two
percentage points for each of the three and nine months ended September 30, 2009, respectively,
compared to the same period in the prior year because general and administrative expenses increased
at a rate that outpaced the increase in net revenues described above.
Product Development Expenses
Product development expenses include research and development for new products and the cost of
obtaining and maintaining regulatory approvals of products and processes. Product development
expenses increased 131%, or $1.7 million, to $3.0 million for the three months ended September 30,
2009 from $1.3 million for the three months ended September 30, 2008 and increased 126%, or $4.3
million, to $7.8 million for the nine months ended September 30, 2009 from $3.4 million for the
nine months ended September 30, 2008. The increase was primarily due to expenses incurred by
AcryMed and increases in consulting expense and compensation and related expenses that resulted
from an increase in the number of headcount in the Companys product development departments and an
increase in regulatory testing. Expenses incurred by AcryMed were consolidated with the Companys
operations effective February 15, 2008 in connection with the Companys acquisition of AcryMed.
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.
Certain Litigation and Insurance Charges
For the three months ended September 30, 2008, the Company recorded $0.1 million in certain
litigation and insurance charges for loss contingency related to certain legal proceedings. No
accrual for certain litigation and insurance charges was recorded for the three months ended
September 30, 2009. For the nine months ended September 30, 2008, the Company recorded $12.3
million in certain litigation and insurance charges, which consisted of $3.5 million in expense for
additional retroactive product liability coverage and $8.8 million in loss contingency related to
certain legal proceedings. For the nine months ended September 30, 2009, the Company recorded $1.5
million in certain litigation and insurance charges for loss contingency. As of November 5, 2009,
the Company was named as a defendant in approximately 191 filed lawsuits seeking damages as a
result of alleged chondrolysis. The 191 filed lawsuits represented a total of 412 allegedly
injured plaintiffs. Many of these lawsuits name defendants in addition to the Company such as
physicians, drug companies and other device manufacturers. ASC 450-20-25 requires the Company to
record an estimated loss from loss contingency such as the legal proceedings described immediately
above when a loss is known or considered probable and the amount can be reasonably estimated. If
the reasonable estimate of a known or probable loss is a range and no amount within the range is a
better estimate, the minimum amount of the range is accrued. In most cases, significant judgment is
required to estimate the range of probable potential loss and timing of a loss to be recorded.
Events may arise that were not anticipated and the outcome of a contingency may result in an
uninsured loss to the Company that differs from the previously estimated liability, which could
result in a material difference from that recorded in the current period.
During the second quarter of 2009, the Company determined that, due to the significant developments
discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements, the probability
of significant unfavorable judicial outcomes from the lawsuits is reasonably possible but not
probable in accordance with ASC 450-20-25. Accordingly, the Company no longer accrues potential
settlements with claimants or judgments following trial beginning with the second quarter of 2009.
Offsetting this favorable impact, however, is a significant increase in the
23
Companys estimate of legal costs to defend the current lawsuits that are believed to be probable
and can be reasonably estimated. As such, the Company recorded a loss contingency for the
estimated legal costs as of June 30, 2009 and September 30, 2009 in accordance with ASC 450-20-25
and consistent with the Companys accounting policy. As of June 30, 2009 and September 30, 2009,
the loss contingency recognized on the balance sheet was $12.0 million. The Companys estimated
loss contingency includes its best estimate of the portion of legal costs not covered by insurance.
No accrual was made for unasserted claims as of September 30, 2009, because the number and cost of
such claims could not be reasonably estimated. While the Company has explicitly accrued for legal
costs only, it recognizes that a rational defendant will often settle cases for a nuisance value in
lieu of incurring legal costs of a comparable amount. See Note 10 of the Notes to Condensed
Consolidated Financial Statements.
The evaluation of potential legal liability, outcomes and costs are based on managements best
estimates which are subjective in nature and involve significant assumptions. Accordingly, if the
Companys evaluation and assumptions are incorrect, the result could have a material adverse effect
on the Companys financial condition and results of operations. The Company believes its current
funds, together with possible borrowings from its existing line of credit, are sufficient to settle
its current estimated loss contingency. However, the Company may also be required to seek
additional funds, including possibly through financings, in the event of an unfavorable outcome.
Purchased In-Process Research and Development
On February 15, 2008, the Company acquired AcryMed, a privately held Oregon-based corporation, for
$26.7 million in cash. As a result of the AcryMed acquisition, the Company recorded $12.2 million
of goodwill, $2.0 million of acquired intangible assets and $11.6 million of in-process research
and development that was expensed as of the date of acquisition. The Companys methodology for
allocating the purchase price of purchased acquisitions to in-process research and development is
determined through established valuation techniques. In-process research and development is
expensed upon acquisition because technological feasibility has not been established and no future
alternative uses exist.
Interest and Other Income
Interest and other income decreased 38%, or $0.4 million, to $0.7 million for the three months
ended September 30, 2009 from $1.1 million for the three months ended September 30, 2008 and
decreased 45%, or $1.8 million, to $2.2 million for the nine months ended September 30, 2009 from
$4.0 million for the nine months ended September 30, 2008. The decreases during the three and nine
months ended September 30, 2009 compared to the same periods in the prior year were primarily due
to decreased investment income from lower cash balances after the payment of $26.7 million in cash
for the acquisition of AcryMed on February 15, 2008 and lower interest rates earned during the
three and nine months ended September 30, 2009. In addition, during the nine months ended
September 30, 2009, and as part of its risk management process, the Company invested its excess
cash primarily in a highly liquid money market fund that principally holds U.S. Treasury
securities, which earns lower interest rates.
Income Taxes
During the three months ended September 30, 2009, the Company recorded an income tax provision of
$1.2 million compared to an income tax benefit of $1.2 million for the three months ended September
30, 2008. During the nine months ended September 30, 2009, the Company recorded an income tax
provision of $2.8 million compared to an income tax benefit of $2.1 million for the nine months
ended September 30, 2008. The Companys effective tax rate for the three and nine months ended
September 30, 2009 was a tax expense rate of 64.9% and 281.4%, respectively, compared to tax
benefit rates of 8.1% and 7.5% for the three and nine months ended September 30, 2008,
respectively. The increase in the effective income tax expense rate for the three and nine months
ended September 30, 2009 was primarily due to the impact from an increase in valuation allowance
for deferred tax assets with uncertain future benefit.
Liquidity and Capital Resources
During the nine-month period ended September 30, 2009, cash provided by operating activities was
$2.4 million compared to cash used in operating activities of $12.4 million for the same period in
the prior year. The increase in cash provided by operating activities was primarily due to a
federal income tax payment of $12.5 million made
24
during the first quarter of 2008 in connection with the taxable gain from the sale of InfuSystem in
October 2007 and an increase in accounts payable during the current year due to the timing of
payments, partially offset by an increase in inventory during the current year for the anticipated
seasonal revenue increase in the fourth quarter.
During the nine-month period ended September 30, 2009, cash provided by investing activities was
$8.7 million compared to cash used in investing activities of $19.1 million for the same period in
the prior year. The increase in cash provided by investing activities was primarily due to the
$26.7 million cash payment made for the acquisition of AcryMed in February 2008, an increase in the
principal payments received from the HAPC note receivable, which was primarily due to a $5.3
million prepayment received in April 2009, and a decrease in the purchases of investments during
the current year, offset in part by the decrease in net proceeds from the maturities of investments
during the current year.
The Companys investing activities are impacted by sales, maturities and purchases of its
short-term investments. The Company currently invests its excess cash primarily in a highly liquid
money market fund that principally holds U.S. Treasury securities. The Company does not hold any
direct or indirect investments in auction rate securities.
During the nine-month period ended September 30, 2009, cash used in financing activities was $1.2
million compared to cash used in financing activities of $11.7 million for the same period in the
prior year. The decrease in cash used in financing activities was primarily due to a lesser amount
of cash paid for the purchase of shares of stock under the Companys stock repurchase program and
shares purchased by the Company related to employee payroll tax withholdings from the vesting of
certain restricted stock and restricted stock units during the nine months ended September 30, 2009
compared to the same period in the prior year.
As of September 30, 2009, the Company had cash and cash equivalents of $49.1 million, short-term
investments of $5.2 million, net accounts receivable of $21.0 million and net working capital of
$79.3 million. The Company has a $20.0 million working capital line of credit with Silicon Valley
Bank. The line of credit facility initially expired on October 15, 2008 and originally included a
revolving credit facility of $10.0 million. Effective December 18, 2008, the Company renewed and
increased the line of credit facility to $20.0 million and extended the term of the credit facility
to December 17, 2009. To the extent permitted by the Merger Agreement while the Merger is pending,
the Company is able to borrow, repay and reborrow under the line of credit facility at any time.
Amounts outstanding under the line of credit facility bear interest at one percentage point above
Silicon Valley Banks prime rate (3.25% at September 30, 2009), but no less than 4.0% per annum.
The Company did not have any borrowings under the line of credit facility during the three and nine
months ended September 30, 2009 and 2008. As of September 30, 2009 and 2008, the Company did not
have an outstanding balance under the line of credit facility.
The Companys line of credit is collateralized by substantially all of the Companys assets and
requires the Company to comply with covenants principally relating to the achievement of a minimum
profitability level and satisfaction of a quick ratio test of 1.5:1.0. As of September 30, 2009,
the Company believes it was in compliance with all related covenants.
Management believes the current funds, together with possible borrowings on the existing line of
credit and other bank loans, are sufficient to provide for the Companys projected needs to
maintain operations for at least the next 12 months. To the extent permitted by the Merger
Agreement while the Merger is pending, the Company may decide to sell additional equity securities
or increase its borrowings in order to fund or increase its expenditures for selling and marketing,
to fund increased product development, or for other purposes.
On February 26, 2008, the Company announced that its board of directors had authorized the
repurchase of up to 1,000,000 shares of the Companys common stock under a new stock repurchase
program, which would be in existence for 12 months unless the program was terminated sooner by the
board of directors. This new stock repurchase program superseded and replaced any other repurchase
program that the Company previously announced. On August 12, 2008, the Companys board of directors
authorized the repurchase of up to an additional 1,000,000 shares of the Companys common stock for
a total of up to 2,000,000 shares authorized for repurchase under the program. On March 17, 2009,
the Companys board of directors authorized the repurchase of up to an additional 2,000,000 shares
of the Companys common stock for a total of up to 4,000,000 shares authorized for repurchase under
the program. The stock repurchase program was also extended to February 28, 2010, unless
terminated sooner by the board of directors. During the nine months ended September 30, 2009, the
Company
25
repurchased approximately 129,000 shares with a weighted-average purchase price of $2.35 per share
under this program.
Also, in connection with the 2001 Plan the Company may repurchase shares of common stock from
employees for the satisfaction of their individual payroll tax withholdings upon vesting of
restricted stock and restricted stock units. A total of approximately 195,000 shares with a
weighted-average price of $4.35 per share were purchased in connection with the satisfaction of
employee payroll tax withholdings during the nine months ended September 30, 2009.
A summary of the Companys repurchase activity for the nine months ended September 30, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
|
|
|
Shares That May Yet
|
|
|
Total Number of
|
|
|
|
|
|
Under the Stock
|
|
|
|
|
|
Be Purchased Under
|
|
|
Shares Repurchased
|
|
Average
|
|
Repurchase
|
|
Average
|
|
the Stock
|
|
|
for Tax
|
|
Price Paid
|
|
Program
|
|
Price Paid
|
|
Repurchase Program
|
2009
|
|
Withholding (1)
|
|
per Share
|
|
(2)
|
|
per Share
|
|
(2)
|
January 1 January 31
|
|
|
22,434
|
|
|
$
|
4.12
|
|
|
|
|
|
|
$
|
|
|
|
|
3,092,548
|
|
February 1 February 28
|
|
|
167,739
|
|
|
|
4.36
|
|
|
|
|
|
|
|
|
|
|
|
3,092,548
|
|
March 1 March 31
|
|
|
1,968
|
|
|
|
2.96
|
|
|
|
128,863
|
|
|
|
2.35
|
|
|
|
2,963,685
|
|
April 1 April 30
|
|
|
335
|
|
|
|
4.33
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
May 1 May 31
|
|
|
21
|
|
|
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
June 1 June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
July 1 July 31
|
|
|
1,574
|
|
|
|
7.03
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
August 1 August 31
|
|
|
286
|
|
|
|
8.83
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
September 1 September 30
|
|
|
238
|
|
|
|
8.59
|
|
|
|
|
|
|
|
|
|
|
|
2,963,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
194,595
|
|
|
$
|
4.35
|
|
|
|
128,863
|
|
|
$
|
2.35
|
|
|
|
2,963,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The total number of shares purchased represents shares delivered to or withheld by the
Company in connection with employee payroll tax withholding upon vesting of restricted stock
and restricted stock units.
|
|
(2)
|
|
The stock repurchase program authorized the repurchase of up to 4,000,000 shares of the
Companys common stock. The program will be in existence until February 28, 2010, unless the
program is terminated sooner by the board of directors.
|
The Company had no material changes outside the normal course of business in the contractual
obligations and commercial commitments disclosed in Item 7 to the Companys Annual Report on Form
10-K for the year ended December 31, 2008, under the caption Contractual Obligations and
Commercial Commitments. As of September 30, 2009, the Company had no material off-balance sheet
arrangements as defined in Regulation S-K Item 303(a)(4)(ii).
New Accounting Pronouncements
See Note 1 of the Condensed Consolidated Financial Statements for information regarding new
accounting pronouncements.
Critical Accounting Policies
There have been no material changes to the Companys critical accounting policies from the
information provided in Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies and Estimates included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC on March 10,
2009.
26
Contingencies
The Company accounts for contingencies in accordance with ASC 450-20-25, which requires that the
Company record an estimated loss from loss contingency, such as legal proceedings, when a loss is
known or considered probable and the amount can be reasonably estimated. In most cases,
significant judgment is required to estimate the range of probable potential loss and timing of a
loss to be recorded.
As of
November 5, 2009, the Company was named as a defendant in approximately 191 filed lawsuits
seeking damages as a result of alleged chondrolysis. The 191 filed lawsuits represented a total of
412 allegedly injured plaintiffs. The Company believes that due to significant recent
developments, the probability of significant unfavorable judicial outcomes from the lawsuits is
reasonably possible but not probable. The Company can no longer reasonably estimate its contingent
liability for possible unfavorable legal outcomes from any of the lawsuits or the potential
settlements with claimants. However, the Company believes that the legal costs to defend the
current lawsuits are probable and can be reasonably estimated. While the portion of the reserve
for estimated legal fees was significantly increased in light of the increase in the number of
cases, the estimated liability for the cases themselves was reduced to zero during the three months
ended June 30, 2009 as the Company does not believe that liability amounts are either probable or
estimable at this time. A significant increase in the number of claims made against the Company or
unfavorable legal outcomes or scientific evidence could have a material adverse effect on the
Companys financial condition and results from operations. See Note 10 of the Notes to Condensed
Consolidated Financial Statements for further information.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Companys financial instruments include cash and cash equivalents and short-term investments.
The Company does not utilize derivative financial instruments, derivative commodity instruments or
other market risk sensitive instruments, positions or transactions in any material fashion.
The Company currently invests its excess cash primarily in a highly liquid money market fund that
principally holds U.S. Treasury securities. At September 30, 2009, the carrying values of the
Companys financial instruments approximated fair values based on current market prices and rates.
As of September 30, 2009, the Company had $36.8 million in money market securities and $5.2 million
of HAPC common stock and did not hold any direct or indirect investments in auction rate
securities.
Foreign Currency
The Company has a subsidiary in Mexico. As a result, the Company is exposed to potential
transaction gains and losses resulting from fluctuations in foreign currency exchange rates. The
Company has not and currently does not hedge or enter into derivative contracts in an effort to
address foreign exchange risk.
Item 4. CONTROLS AND PROCEDURES
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of September 30, 2009.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company
concluded that the Companys disclosure controls and procedures were effective as of September 30,
2009.
During the three months ended September 30, 2009, there were no changes in the Companys internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
27
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Chondrolysis Litigation
There has been discussion in the orthopedic community over the possibility that the continuous
infusion of a local anesthetic into the joint space via an infusion pump may contribute to a
condition called chondrolysis. This condition, which to the Companys knowledge has mostly been
present after certain shoulder surgeries, may cause the deterioration of the cartilage in the joint
months after the surgery. The authors of papers in the relevant medical literature have identified
a variety of possible causes of chondrolysis including: thermal capsulorraphy; radiofrequency
treatment; prominent hardware; gentian violet; chlorhexidine; methylmethacrylate; intra-articular
(within the joint) administration of bupivacaine with epinephrine; and intra-articular
administration of bupivacaine without epinephrine. There does not appear, however, to be
scientific evidence available yet sufficient to identify the actual cause. It should be noted that
these authors have not cited any evidence suggesting the extra-articular (outside the joint)
administration of bupivacaine as a possible cause of chondrolysis. For shoulder surgeries, the
Company believes most surgeons today are administering bupivacaine extra-articularly or having an
anesthesiologist administer a continuous nerve block (
e.g.
, ON-Q
®
C-bloc).
The Company in its March 31, 2009 Form 10-Q previously reported that it was named as a defendant in
approximately 69 filed lawsuits seeking damages as a result of alleged chondrolysis. The number of
filed lawsuits against the Company significantly increased in the second quarter resulting in the
Company reporting a total of 212 filed lawsuits in its June 30, 2009 Form 10-Q. As of November 5,
2009, the Company was named as a defendant in approximately 191 filed lawsuits, which included a
total of 80 dismissals and 59 new lawsuits since the June 30, 2009 Form 10-Q. The 191 filed
lawsuits represented a total of 412 allegedly injured plaintiffs. A significant majority of these
lawsuits name defendants in addition to the Company such as physicians, drug companies and other
device manufacturers. It is not known to what degree, if any, the potential liability of other
parties may affect the ultimate cost to the Company, and the Company currently has no cost-sharing
arrangements with other defendants.
For the policy periods beginning June 1, 2008 and June 1, 2009, the Company has in place product
liability insurance on a claims-made basis in the aggregate amount of $50 million for liability
losses, including legal defense costs, excluding shoulder chondrolysis claims for pre-June 1, 2008
surgeries, which are covered under the separate policies discussed below. For chondrolysis claims
made in 2008 through 2013 arising out of pre-June 1, 2008 surgeries, the Company increased its
product liability insurance on a claims-made basis from an aggregate amount of $10 million to $35
million, which includes a $5 million self-insured layer above the original $10 million primary
policy and below the additional $20 million in excess policies the Company purchased. As noted,
these policies for pre-June 1, 2008 surgeries will remain in place until 2013. The additional
excess policies for the retroactive period for pre-June 1, 2008 surgeries cost the Company $3.5
million in additional insurance expense during the second quarter of 2008, which was recorded in
operating expenses as part of certain litigation and insurance charges.
On June 26, 2009, a United States District Court in Florida (the Court) dismissed the first
chondrolysis case against any pump manufacturer to be decided on the merits, in a case filed
against Breg Incorporated (Breg), a former competitor of the Company. The case was
Kilpatrick v.
Breg, Inc
(the Kilpatrick case). In the Kilpatrick case, the Court granted Bregs motion for
summary judgment after it granted Bregs motion to exclude plaintiffs causation testimony pursuant
to Federal Rule of Evidence 702. Specifically, the Court granted Bregs Motion for Summary
Judgment on the grounds that plaintiff had not sufficiently demonstrated that Bregs pain pump
could or did cause the type of injury the plaintiff suffered, applying the U.S. Supreme Courts
decision in
Daubert v. Merrell Dow Pharmaceuticals,
509 U.S. 579 (1993) (Daubert). Under
Daubert, federal district courts act as gatekeepers, admitting expert testimony only if it is
both reliable and relevant so as to prevent speculative and unreliable testimony from reaching the
jury. The Daubert precedent applies in all federal courts and in the approximately 30 state courts
that have adopted Daubert or similar principles as law. A majority of the Companys outstanding
lawsuits are in jurisdictions that either follow Daubert or have adopted some form of Daubert
principles. The Kilpatrick case has favorably impacted the Companys assessment of its legal
prospects and potential liability
for claims of alleged chondrolysis. Although other courts are not legally bound to follow the
Kilpatrick case decision in similar lawsuits involving the Company, the Company believes that the
decision is highly beneficial to
28
the Companys position and fundamentally affects its long-term
outlook for resolving legal matters involving chondrolysis.
In addition to the favorable legal implications of the Kilpatrick case ruling described above, the
Company believes that information contained in a case series recently published by David S. Bailie,
M.D., et al. is beneficial to its legal position regarding causation, the crux of plaintiffs
claims.
Further, the Company has observed that a significant majority of the current plaintiffs as of
November 5, 2009 are named in lawsuits that were received after June 30, 2009. The Company
believes that plaintiff attorneys are rapidly filing claims because of their evaluation that the
statute of limitations is expiring in many jurisdictions. The new cases are at a very early stage
of development and generally provide minimal information. Many of these lawsuits name two or more
pain pump manufacturers in addition to the Company as defendants in the same lawsuit, presumably
because plaintiffs attorneys have not yet determined the manufacturer of the pump utilized in the
surgical procedure. The Company believes that a significant portion of such cases against the
Company will ultimately be dismissed because a Company pump was not involved.
In accordance with ASC 450-20-25 (formerly SFAS No. 5,
Accounting for Contingencies
), the Company
records an estimated loss from loss contingency such as the legal proceedings described immediately
above when a loss is known or considered probable and the amount can be reasonably estimated. If
the reasonable estimate of a known or probable loss is a range and no amount within the range is a
better estimate, the minimum amount of the range is accrued in accordance with U.S. GAAP. In most
cases, significant judgment is required to estimate the range of probable potential loss and timing
of a loss to be recorded. Events may arise that were not anticipated and the outcome of a
contingency may result in an uninsured loss to the Company that differs from the previously
estimated liability, which could result in a material difference from that recorded in the current
period.
During the first quarter of 2009, the Company estimated the range of probable potential loss to the
Company for the legal proceedings described immediately above as of March 31, 2009 was $12.4
million to $89.0 million. As of March 31, 2009, the Company recorded a cumulative total expense of
$12.4 million in loss contingency, of which $1.5 million and $10.9 million were recognized as part
of certain litigation and insurance charges in operating expenses during the three months ended
March 31, 2009 and year ended December 31, 2008, respectively. The cumulative $12.4 million
expense in loss contingency represented the low end of the estimated range of cumulative loss as of
March 31, 2009. The range of probable potential loss represented the Companys estimated
out-of-pocket cost for claims already asserted, including the estimated cost of legal fees and
potential settlements with claimants, to the extent not covered by insurance, in compliance with
the Companys accounting policy. No accrual was made for unasserted claims as of March 31, 2009,
because the number and cost of such claims could not be reasonably estimated. The range of loss
was determined based on the number of actual cases brought against the Company and included
estimated payments for self-insured retentions that would be made to its product liability
insurance carriers or third parties and any amounts in excess of its insurance coverage amount.
The accrual also assumed that the Company will ultimately incur the Companys $5.0 million
self-insured layer discussed earlier. As of December 31, 2008, the loss contingency recognized on
the balance sheet as Accrued Litigation Costs was $10.5 million, compared to $12.0 million as of
March 31, 2009. The loss contingency recognized on the balance sheet as Accrued Litigation Costs
remained at $12.0 million as June 30, 2009.
Significant developments during the second quarter of 2009 surrounding the ongoing lawsuits include
the highly favorable ruling in the Kilpatrick case, the scientific information recently brought to
light in the published Bailie case series that the Company believes will be beneficial to its legal
position regarding causation and the nature of the latest filed lawsuits, since, among other
matters potentially favorable to the Company, many of the lawsuits have more than one named pain
pump manufacturer as a defendant and information regarding product identification that is lacking.
The Company believes that, due to these significant developments, the probability of significant
unfavorable judicial outcomes from the lawsuits is reasonably possible but not probable in
accordance with ASC 450-20-25. The Company intends to seek dismissals and aggressively defend such
cases. The Company can no longer reasonably estimate its contingent liability for possible
unfavorable legal outcomes from any of the lawsuits or the potential settlements with claimants or
judgments following trial beginning in the second quarter of 2009. However, the Company believes
that the legal costs to defend the current lawsuits are probable and can be
reasonably estimated. As such, the Company recorded a loss contingency for the estimated legal
costs as of June 30,
29
2009 and September 30, 2009 in accordance with ASC 450-20-25 and consistent
with the Companys accounting policy.
The Companys estimate includes its best estimate of the portion of legal costs not covered by
insurance. No accrual was made for unasserted claims as of September 30, 2009, because the number
and cost of such claims could not be reasonably estimated. While the Company has explicitly
accrued for legal costs only, it recognizes that a rational defendant will often settle cases for a
nuisance value in lieu of incurring legal costs of a comparable amount. The Company estimates that
the range of probable potential loss to the Company for the legal costs as of September 30, 2009 is
$12.0 million to $31.4 million. As of September 30, 2009, the loss contingency recognized on the
balance sheet as Accrued Litigation Costs was $12.0 million, which represents the low end of the
estimated range and reflects no additional accrual for the second and third quarters of 2009
despite the sharp increase in the number of lawsuits filed against the Company since June 30, 2009.
As previously discussed, the new cases, which comprise a majority of the number of filed lawsuits
currently outstanding against the Company, are at a very early stage of development. Due to the
nature of the newly-filed lawsuits, the Company believes that a significant portion of these cases
will ultimately be dismissed. The Company also believes that the favorable and unfavorable events
since the second quarter of 2009 had an offsetting impact on the Companys legal liability with
respect to its chondrolysis legal exposures. No additional reserves were accrued in the second or
third quarters of 2009 in connection with the ongoing litigation. While the portion of the reserve
for estimated legal fees was significantly increased in light of the increase in the number of
cases, the estimated liability for the cases themselves was reduced to zero during the three months
ended June 30, 3009 as the Company does not believe that liability amounts are either probable or
estimable at this time. A significant increase in the number of claims made against the Company or
unfavorable legal outcomes or scientific evidence could have a material adverse effect on the
Companys financial condition and results from operations.
Litigation as to the Offer and Merger
On or about October 20, 2009, David Lash and Dale Hartig, on behalf of themselves and the public
stockholders of the Company, filed a purported class action complaint in the Superior Court of the
State of California, Orange County (the Court), captioned
David Lash and Dale Hartig v. Donald
Earhart, et al.
(Case No. 30-2009 00312968). On October 23, 2009, David Lash and Dale Hartig filed
an amended complaint. On or about October 23, 2009, Stuart Kessler, on behalf of himself and the
public stockholders of the Company, filed a purported class action complaint in the Court,
captioned
Stuart Kessler v. James J. Dal Porto, et al.
(Case No. 30-2009 00312919). Both lawsuits
name the Company, each of the Companys directors, Kimberly-Clark Corporation (Kimberly-Clark)
and Boxer Acquisition, Inc., a wholly owned subsidiary of Kimberly-Clark (Merger Sub), as
defendants. The lawsuits allege, among other things, that the Companys directors breached their
fiduciary duties by failing to maximize shareholder value and through alleged materially inadequate
disclosures and material disclosure omissions. In addition, the lawsuits allege that the Company
and Kimberly-Clark aided and abetted such alleged breaches of fiduciary duties by the Companys
directors. Based on these allegations, the lawsuits seek, among other relief, injunctive relief
enjoining a tender Offer by Kimberly-Clark (the Offer) and a merger with Merger Sub (the
Merger). Both lawsuits also purport to seek recovery of the costs of the action, including
reasonable attorneys fees. See Note 12 of the Notes to
Condensed Consolidated Financial Statements for further information regarding the pending merger
with Kimberly-Clark.
Other Litigation and Regulatory Matters
In June 2007, the Company commenced a lawsuit against Apex Medical Technologies, Inc (Apex) and
its president, Mark McGlothlin, in the U.S. District Court for the Southern District of California
for patent infringement and misappropriating the Companys valuable trade secrets. The Company
also sued distributors of Apexs Solace
®
Pump, including Zone Medical, LLC (Zone). In response
to the litigation brought by the Company, the defendants asked the U.S. Patent and Trademark Office
(the Patent Office) to reexamine one of the Companys patents. The Patent Office routinely
grants such requests and often times initially rejects previously issued patent claims. In October
2008, the Patent Office took this action after receiving Apexs position on the patent without
input from the Company. The Company presented its position to the Patent Office and in April 2009
the Patent
Office reconfirmed the patent with clarifying amendments to some of the patents claims. On July
14, 2009,
the
30
Patent Office issued the Reexamination Certificate, terminating the reexamination
proceedings. On October 28, 2009 after a four week trial the jury found that 1) Apex and Zone
willfully infringed the Companys patent awarding the Company damages in excess of $2,950,000, 2)
the Companys patent is valid and enforceable, 3) Mr. McGlothlin and Apex willfully and maliciously
misappropriated the Companys trade secrets awarding the Company damages in excess of $2,950,000,
4) Mr. McGlothlin and Apex willfully and maliciously breached the Companys confidence awarding the
Company damages of $3,000,000, and 5) Mr. McGlothlin and Apex willfully and maliciously competed
unfairly with the Company awarding the Company damages in excess of $2,950,000. The jury also
found in favor of the Company on the Defendants counterclaim. Moreover, the jury awarded the
Company $1,500,000 in punitive damages against Mr. McGlothlin for willfully and maliciously
misappropriating the Companys trade secrets, breaching the Companys confidence and unfairly
competing with the Company. There is no assurance that the Company
will ultimately collect any or
all of the damages awarded at the trial. In view of the jury verdict, the Company expects to move
for entry of a permanent injunction against the Defendants. The Company continues to enforce its
patent and trade secret rights against Mr. McGlothlin, Apex, Zone and other distributors that make,
use, sell or offer to sell the Solace Pump. The Company is vigorously moving forward to protect
its patent rights and valuable trade secrets.
On December 22, 2008, the Company received a warning letter from the U.S. Food and Drug
Administration (the FDA) citing various general issues concerning the Companys Quality System.
In January 2009, the Company formally responded to the FDA regarding these issues and is fully
cooperating with the FDA to address their concerns. The Company has not been, and does not expect
to be, assessed any fines, penalties or interest related to the warning letter. The FDA has not
issued a suspension or restriction on the sale of any of the Companys products or devices. The
Company believes that the impact of the warning letter and the corrective actions taken by the
Company have not had a material impact to its financial condition nor on its operational results.
The Company is involved in other 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 Companys financial position and results of operations.
Item 1A. RISK FACTORS
The Annual Report on Form 10-K for the year ended December 31, 2008, as amended, includes a
detailed discussion of the Companys risk factors. Pursuant to the instructions to Form 10-Q, the
Company has provided below only those risk factors that are new or that have been materially
amended since the time that the Company filed its most recent Form 10-K. Accordingly, the
information presented below should be read in conjunction with the risk factors and information
disclosed in the Companys most recent Form 10-K, as amended, as well as the information under
Legal Proceedings in this Form 10-Q.
RISKS RELATING TO THE PROPOSED MERGER
The pending Merger and/or the delay or failure to complete the Merger with Kimberly-Clark could
materially and adversely affect our results of operations and our stock price.
On October 8, 2009, we entered into the Merger Agreement with Kimberly-Clark and Merger Sub. The
Merger Agreement provides that within seven business days of the date of the Merger Agreement,
Merger Sub will commence the Offer to purchase all of the outstanding shares of the Companys
common stock for $12.65 in cash per share. The Offer was launched on October 20, 2009.
Consummation of the Offer is subject to customary conditions, including, but not limited to, (i) at
least a majority of outstanding shares of the Companys common stock on a fully diluted basis being
tendered into the Offer, (ii) the expiration or termination of waiting periods under applicable
antitrust laws and (iii) the absence of any Material Adverse Effect (as defined in the Merger
Agreement). Consummation of the Merger is subject to customary conditions, including, if required
under Delaware law, approval of the Merger Agreement by the Companys stockholders. We cannot
assure you that these conditions will be met or waived, that the necessary approvals will be
obtained, or that we will be able to successfully consummate the Offer and the Merger as currently
contemplated under the Merger Agreement or at all. As a result of the pending Merger:
31
|
|
the attention of our management and our employees may be diverted from day-to-day
operations as they focus on consummating the Merger;
|
|
|
the Merger Agreement places a variety of restrictions and constraints on the conduct of our
business prior to the closing of the Merger or the termination of the Merger Agreement;
|
|
|
our customers may seek to modify or terminate existing agreements, or prospective customers
may delay entering into new agreements or purchasing our products as a result of the
announcement of the Merger, which could cause our revenues to decline or any anticipated
increases in revenue to be lower than expected; and
|
|
|
our ability to attract new employees and retain our existing employees may be harmed by
uncertainties associated with the Merger, and we may be required to incur substantial costs to
recruit replacements for lost personnel.
|
A delay in the consummation of the Merger may exacerbate the occurrence of these events.
Furthermore, in the event that the Offer or Merger is not completed:
|
|
our stockholders will not receive $12.65 in cash per share of our common stock which
Kimberly-Clark has agreed to pay pursuant to the Merger Agreement, and our stock price would
likely experience a significant decline;
|
|
|
we have incurred and will incur significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the Merger; and
|
|
|
under some circumstances, we may have to pay a termination fee to Kimberly-Clark.
|
The occurrence of any of these events individually or in combination could have a material adverse
effect on our results of operations and our stock price.
RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
If one or more of our products proves to be defective or is misused by a health care practitioner,
we may be subject to claims of liability that could adversely affect our financial condition and
the results of our operations.
A defect in the design or manufacture of our products, or a failure of our products to perform for
the use that we specify, could have a material adverse effect on our reputation in the industry and
subject us to claims of liability for injuries and otherwise. Misuse of our product by a
practitioner or patient that results in injury could similarly subject us to claims of liability,
including claims concerning chondrolysis as described in greater detail below. As we have grown,
the number of product liability claims made against us has increased. Although we currently have in
place product liability insurance, any substantial underinsured loss would have a material adverse
effect on our financial condition and results of operations. Furthermore, any impairment of our
reputation could have a material adverse effect on our sales, revenue and prospects for future
business.
In this regard, for example, there has been discussion in the orthopedic community over the
possibility that the continuous infusion of a local anesthetic into the joint space via an infusion
pump may contribute to a condition called chondrolysis. This condition, which to our knowledge has
mostly been present after certain shoulder surgeries, may cause the deterioration of the cartilage
in the joint months after the surgery. The authors of papers in the relevant medical literature
have identified a variety of possible causes of chondrolysis including: thermal capsulorraphy;
radiofrequency treatment; prominent hardware; gentian violet; chlorhexidine; methylmethacrylate;
intra-articular (within the joint) administration of bupivacaine with epinephrine; and
intra-articular administration of bupivacaine without epinephrine. There does not appear, however,
to be scientific evidence available yet sufficient to identify the actual cause. It should be noted
that these authors have not cited any evidence suggesting the extra-articular (outside the joint)
administration of bupivacaine as a possible cause of chondrolysis. For shoulder surgeries,
32
we believe most surgeons today are administering bupivacaine extra-articularly or having an
anesthesiologist administer a continuous nerve block (
e.g.
, ON-Q C-bloc).
We are
currently named as a defendant in approximately 191 filed lawsuits seeking damages as a
result of alleged chondrolysis. The 191 filed lawsuits represented a total of 412 allegedly injured
plaintiffs. Many of these lawsuits name defendants in addition to us such as physicians, drug
companies and other device manufacturers.
For the policy periods beginning June 1, 2008 and June 1, 2009, we have in place product liability
insurance in the aggregate amount of $50 million for liability losses, including legal defense
costs, excluding shoulder chondrolysis claims for pre-June 1, 2008 surgeries, which are covered
under the separate policies described below. For chondrolysis claims made in 2008 through 2013
arising out of pre-June 1, 2008 surgeries, we increased our product liability insurance on a
claims-made basis from an aggregate amount of $10 million to $35 million, which includes a $5
million self-insured layer above the original $10 million primary policy and below the additional
$20 million in excess policies we purchased. As noted, these policies for pre-June 1, 2008
surgeries will remain in place until 2013. During the nine months ended September 30, 2009 and
year ended December 31, 2008, we recorded a total of $1.5 million and $14.4 million as certain
litigation and insurance charges in operating expenses. The $14.4 million recorded during the year
ended December 31, 2008 includes a $3.5 million expense to purchase retroactive insurance policies
for pre-June 1, 2008 surgeries to significantly increase our product liability insurance coverage
and $10.9 million in estimated loss contingency that we accrued in connection with the ongoing
litigation. Events may arise that were not anticipated and the outcome of a contingency may result
in an uninsured loss to us that differs from the previously estimated liability, which could result
in a material difference from the amount recorded in the current period and may have a material
adverse effect on our financial condition and results of operations. The Company believes its
current funds, together with possible borrowings from its existing line of credit, is sufficient to
settle its current estimated loss contingency. However, if the Companys assumptions are wrong and
the outcome of the legal proceedings results in a significant unfavorable difference from the
previously recorded estimated liability, this will have a material adverse effect on the Companys
financial condition and results of operations. The Company may be required to seek additional
funds, including possibly through financings, due to the unfavorable outcome. See Note 10 of the
Notes to Condensed Consolidated Financial Statements for further information.
We have experienced net losses in prior periods. Future losses are possible.
We incurred net losses of $1.8 million and $30.5 million during the nine months ended September 30,
2009 and year ended December 31, 2008, respectively. We may not achieve profitability from
operations in the future, and further losses may arise.
We may need to raise additional capital in the future to fund our operations. We may be unable to
raise funds when needed or on acceptable terms.
During the nine months ended September 30, 2009, our operating activities provided cash of $2.4
million and our investing activities provided cash of $8.7 million. As of September 30, 2009, we
had cash and equivalents of $49.1 million, short-term investments of $5.2 million and net accounts
receivable of $21.0 million. We believe our current funds, together with possible borrowings on our
existing line of credit and other bank loans, are sufficient to provide for our projected needs to
maintain operations for at least the next 12 months. This estimate, however, is based on
assumptions that may prove to be wrong. If our assumptions are wrong or if we experience further
losses, we may be required to reduce our operations or seek additional financing. Furthermore,
financing may not be available when needed and may not be on terms acceptable to us.
A significant portion of our sales is to customers in foreign countries. We may lose revenues,
market share, and profits due to exchange rate fluctuations and other factors related to our
foreign business.
For the three and nine months ended September 30, 2009, sales to customers in foreign countries
comprised approximately 14% and 11% of our revenues, respectively. Our foreign business is subject
to economic, political and regulatory uncertainties and risks that are unique to each area of the
world. Fluctuations in exchange rates may also affect the prices that our foreign customers are
willing to pay and may put us at a price disadvantage compared to other competitors. Potentially
volatile shifts in exchange rates may negatively affect our financial condition and operations.
33
Our stockholders equity may also be adversely affected by unfavorable translation adjustments
arising from differences in exchange rates from period to period. In addition, we have not and
currently do not hedge or enter into derivative contracts in an effort to address foreign exchange
risk.
We currently rely on two distributors for a significant percentage of our sales. If our
relationship with these distributors were to deteriorate, our sales may materially decline.
For the three months ended September 30, 2009, sales to B. Braun Medical S.A. and B. Braun Medical
Inc. accounted for 7% and 10% of the Companys total revenues, respectively. For the nine months
ended September 30, 2009, sales to B. Braun Medical S.A. and B. Braun Medical Inc. accounted for 6%
and 10% of the Companys total revenues, respectively. Any deterioration in our relationship with
B. Braun Medical S.A. or B. Braun Medical Inc. could cause a material decline in our overall sales
and a material adverse effect on our business.
Our financial results could be adversely impacted by recording impairment losses or incurring
capital losses on stock sales in connection with our ownership of HAPC common stock.
In October 2007, we purchased approximately 2.8 million shares of common stock of InfuSystem
Holdings, Inc. (formerly known as HAPC, Inc.) (HAPC common stock), at $5.97 per share through
private transactions with third parties totaling approximately $17 million in connection with the
then-pending sale of InfuSystem. In accordance with ASC 320-10-25 and 320-10-35, we must
periodically determine whether a decline in fair value of HAPC common stock below our cost basis is
other-than-temporary. If the decline in fair value is judged to be other-than-temporary, the cost
basis of the individual security is to be written down to fair value and the amount of the
write-down is to be included in earnings. For the years ended December 31, 2008 and 2007, we
recognized other-than-temporary impairments of $4.6 million and $6.1 million on our HAPC common
stock, respectively. The estimated fair value of the investment in HAPC common stock decreased
from approximately $5.7 million as of December 31, 2008 to approximately $5.2 million as of
September 30, 2009. The decrease in fair value of the HAPC common stock was recorded as unrealized
losses, which was included in other comprehensive income. We are also currently evaluating the
possibility of selling the HAPC common stock during the current year to utilize certain federal tax
benefits that will expire as of December 31, 2010. If the fair value of HAPC common stock declines
before the HAPC common stock is sold and the decline is determined to be other-than-temporary, or
if we sell shares of HAPC common stock at lower than our current cost basis, any resulting
impairment charges under ASC 320-10-25 and 320-10-35 or capital loss on sale of the shares would
have an adverse effect on our net income or increase our net losses.
Recent regulatory developments could adversely affect HAPCs business and, as a result, its ability
to perform under the Note Receivable.
On October 25, 2007, the Company completed the sale of InfuSystem, Inc. to HAPC for $100 million.
Part of the consideration included a secured promissory note with an original principal amount
equal to $32.7 million. The promissory note is recognized on the balance sheet as Note Receivable
HAPC and, as of September 30, 2009, the current portion of the note was approximately $3.3
million with an additional remaining balance of approximately $19.2 million. See Note 8 of the
Notes to Condensed Consolidated Financial Statements for further discussion.
Certain changes to the Medicare and Medicaid compliance standards for consignment closets and stock
and bill arrangements are expected to be implemented on or before March 1, 2010, as described in
Change Request 6528 to the CMS Manual System released by the Department of Health and Human
Services Centers for Medicare and Medicaid Services. Such or similar changes may adversely impact
the business of HAPC which in turn could (i) require the Company to record an impairment in the
future to (A) the Note Receivable HAPC or (B) the HAPC common stock held by the Company or (ii)
result in the inability of HAPC to timely pay amounts owed to the Company under such Note
Receivable.
34
RISK FACTORS RELATED SPECIFICALLY TO OUR COMMON STOCK
The average trading volume for our common stock is relatively low when compared to most larger
companies. As a result, there may be less liquidity and more volatility associated with our common
stock, even if our business is doing well.
Our common stock has been traded publicly since February 13, 1990, and since then has had only a
few market makers. The average daily trading volume for our shares during the three months ended
September 30, 2009 was approximately 97,000 shares. There can be no assurance that a more active or
established trading market for our common stock will develop or, if developed, will be maintained.
The market price of our common stock has been and is likely to continue to be highly volatile.
Market prices for securities of biotechnology and medical device companies, including ours, have
historically been highly volatile, and the market has from time to time experienced significant
price and volume fluctuations that appear unrelated to the operating performance of particular
companies. The following factors, among others, can have a significant effect on the market price
of our securities:
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announcements of technological innovations, new products, or clinical studies by us or
others;
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changes in the coverage or reimbursement rates of private insurers and governmental agencies;
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developments in patent or other proprietary rights;
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developments in the chondrolysis lawsuits filed against us;
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future sales of substantial amounts of our common stock by existing stockholders or by us;
and
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comments by securities analysts and general market conditions.
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The realization of any of the risks described in these Risk Factors could also have a negative
effect on the market price of our common stock.
Future sales of our common stock by existing stockholders could negatively affect the market price
of our stock and make it more difficult for us to sell stock in the future.
Sales of our common stock in the public market, or the perception that such sales could occur,
could result in a decline in the market price of our common stock and make it more difficult for us
to complete future equity financings. A substantial number of shares of our common stock and shares
of common stock subject to outstanding options and warrants may be resold pursuant to currently
effective registration statements. As of September 30, 2009, there were:
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24,211,404 shares of common stock that are freely tradable in the public markets;
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248,052 shares of restricted stock that are subject to outstanding awards under our 2001
Equity Incentive Plan; and
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an aggregate of 2,015,047 shares of common stock that are subject to outstanding awards under
our various equity incentive plans, including shares of restricted stock units and stock
options.
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We cannot estimate the number of shares of common stock that may actually be resold in the public
market because this will depend on the market price for our common stock, the individual
circumstances of the sellers, and other factors. If stockholders sell large portions of their
holdings in a relatively short time, for liquidity or other reasons, the market price of our common
stock could decline significantly.
35
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A description of the Companys stock repurchase program and tabular disclosure of the information
required under this Item 2 is contained under the caption Liquidity and Capital Resources in
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
Part I of this Quarterly Report on Form 10-Q.
Item 6. EXHIBITS
The Exhibit Index included herewith is incorporated herein.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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I-FLOW CORPORATION
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Date: November 5, 2009
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/s/ Donald M. Earhart
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Donald M. Earhart
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Chairman, President and Chief Executive Officer
(On behalf of the registrant)
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Date: November 5, 2009
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/s/ James R. Talevich
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James R. Talevich
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Chief Financial Officer
(As principal financial officer)
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37
INDEX TO EXHIBITS
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Exhibit No.
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Exhibit
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2.1
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Stock Purchase Agreement, dated October 28, 2003, by and between Integra
LifeSciences Corporation and I-Flow Corporation (1)
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2.2
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Merger Agreement, dated July 27, 2001, by and between I-Flow Corporation, a
Delaware corporation, and I-Flow Corporation, a California corporation (2)
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2.3
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Agreement and Plan of Merger, dated January 13, 2000, by and among I-Flow
Corporation, Spinal Acquisition Corp., Spinal Specialties, Inc. and the
Shareholders of Spinal Specialties, Inc. (3)
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2.4
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Agreement and Plan of Merger, dated February 9, 1998, by and among I-Flow
Corporation, I-Flow Subsidiary, Inc., Venture Medical, Inc., InfuSystems II,
Inc. and the Shareholders of Venture Medical, Inc. and InfuSystems II, Inc.
(4)
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2.5
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Agreement for Purchase and Sale of Assets, dated July 3, 1996, by and among
I-Flow Corporation, Block Medical, Inc. and Hillenbrand Industries, Inc. (5)
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2.6
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Stock Purchase Agreement, dated as of September 29, 2006, by and among
I-Flow Corporation, InfuSystem, Inc., HAPC, Inc. and Iceland Acquisition
Subsidiary, Inc. (including the Form of Services Agreement, attached thereto
as Exhibit A, the Form of License Agreement attached thereto as Exhibit B
and the Term Sheet attached thereto as Exhibit C) (9)
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2.7
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Amendment No. 1 dated as of April 30, 2007
to the Stock Purchase Agreement dated as of
September 29, 2006 by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc.
and Iceland Acquisition Subsidiary, Inc.
(10)
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2.8
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Amendment No. 2 dated as of June 29, 2007
to the Stock Purchase Agreement dated as of
September 29, 2006, as amended by an
Amendment No. 1 dated as of April 30, 2007,
by and among I-Flow Corporation,
InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (11)
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2.9
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Amendment No. 3 dated as of July 31, 2007
to the Stock Purchase Agreement dated as of
September 29, 2006, as amended by Amendment
No. 1 dated as of April 30, 2007 and an
Amendment No. 2 dated as of June 29, 2007,
by and among I-Flow Corporation,
InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (12)
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2.10
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Memorandum of Intent dated as of September
12, 2007 by and among I-Flow Corporation,
InfuSystem, Inc., HAPC, Inc. and Iceland
Acquisition Subsidiary, Inc. (13)
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2.11
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Amendment No. 4 dated as of September 18,
2007 to the Stock Purchase Agreement dated
as of September 29, 2006, as amended by
Amendment No. 1 dated as of April 30, 2007,
an Amendment No. 2 dated as of June 29,
2007 and an Amendment No. 3 dated as of
July 31, 2007, by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc.
and Iceland Acquisition Subsidiary, Inc.
(14)
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2.12
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Further Agreement Regarding Project Iceland
dated as of October 17, 2007 by and among
I-Flow Corporation, InfuSystem, Inc., HAPC,
Inc. and Iceland Acquisition Subsidiary,
Inc. (15)
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2.13
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Acknowledgement and Agreement dated as of
October 8, 2007 by and among I-Flow
Corporation, InfuSystem, Inc., HAPC, Inc.,
Iceland Acquisition Subsidiary, Inc., Sean
D. McDevitt and Philip B. Harris (15)
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2.14
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Form of Share Purchase Agreement (15)
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2.15
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Second Form of Share Purchase Agreement (15)
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2.16
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Form of Irrevocable Proxy (15)
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2.17
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Binding Letter of Intent dated as of
December 13, 2007 by and among I-Flow
Corporation, AcryMed, Inc., Bruce L.
Gibbins, Jack D. McMaken, John A. Calhoun
and James P. Fee, Jr. (16)
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2.18
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Agreement and Plan of Merger dated as of
February 2, 2008 by and among I-Flow
Corporation, Alaska Acquisition Subsidiary,
Inc., AcryMed Incorporated, Bruce L.
Gibbins, Jack D. McMaken, John A. Calhoun
and James P. Fee, Jr., in their capacities
as stockholders, and John A. Calhoun, in
his capacity as the stockholder
representative (17)
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Exhibit No.
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Exhibit
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2.19
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Agreement and Plan of Merger, dated as of October 8, 2009, by and among
Kimberly-Clark Corporation, Boxer Acquisition, Inc. and I-Flow Corporation
(20)
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3.1
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Amended and Restated Certificate of Incorporation of I-Flow Corporation, a
Delaware Corporation (6)
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3.2
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Amended and Restated Bylaws of I-Flow Corporation (18)
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3.3
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Certificate of Designation Regarding Series A Junior Participating
Cumulative Preferred Stock (7)
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4.1
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Specimen Common Stock Certificate (8)
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4.2
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Rights Agreement, dated as of March 8, 2002, by and between I-Flow
Corporation and American Stock Transfer & Trust Company, as rights agent,
which includes, as Exhibit A, the Form of Rights Certificate, the Form of
Assignment and the Form of Election to Purchase (7)
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4.3
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Amendment No. 1 to Rights Agreement, dated as of October 15, 2009, by and
between I-Flow Corporation and American Stock Transfer & Trust Company, LLC,
(as successor-in-interest to American Stock Transfer & Trust Company), as
Rights Agent (21)
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10.1
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Summary of the 2009 Executive Performance Incentive Plan (as amended on
August 11, 2009) (19)*
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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*
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Management contract or compensatory plan or arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and Exchange Commission.
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(1)
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Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended September 30, 2003.
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(2)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 3, 2001.
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(3)
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Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2000.
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(4)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K/A filed on March 6, 1998.
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(5)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated July 22, 1996.
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(6)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K dated May 29, 2002.
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(7)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on March 13, 2002.
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(8)
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Incorporated by reference to exhibit with this title filed with the Companys Quarterly
Report on Form
10-Q for the quarter ended March 31, 2002.
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(9)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 4, 2006.
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(10)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on May 1, 2007.
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(11)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 2, 2007.
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(12)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on July 31, 2007.
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(13)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 13, 2007.
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(14)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on September 19, 2007.
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(15)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 19, 2007.
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(16)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on December 17, 2007.
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(17)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on February 6, 2008.
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(18)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on April 3, 2009.
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(19)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on August 17, 2009.
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(20)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 9, 2009.
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(21)
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Incorporated by reference to exhibit with this title filed with the Companys Current Report
on Form 8-K filed on October 16, 2009.
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