##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
    FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  ___________________ to  ___________________
 Commission file number: 0-18338 I-FLOW CORPORATION  Delaware
    
    33-0121984(State or Other Jurisdiction of Incorporation or
Organization)
    
    (I.R.S. Employer Identification No.)
 20202 Windrow Drive, Lake Forest, CA
    
    92630(Address of Principal Executive Offices)
    
    (Zip Code)
 (949) 206-2700
(Registrants 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 x  No o Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes x  No o As of May 1, 2004 there were 21,429,168 shares of common stock
outstanding.




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##### Table of Contents



I-FLOW CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004 Table of Contents PagePart I: Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations and Comprehensive Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15Part II: Other InformationItem 1.
    
    Legal Proceedings
    
    
    16Item 5.
    
    Other Information
    
    
    16Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIHBIT 32.1




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I-FLOW CORPORATION 
 
 March 31,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    12,761,000
    
    
    $
    15,185,000Accounts receivable, less allowance for doubtful accounts of
$1,897,000
and $1,698,000 at March 31, 2004 and December 31, 2003, respectively
    
    
    11,953,000
    
    
    
    12,392,000Inventories, net
    
    
    6,361,000
    
    
    
    6,815,000Prepaid expenses and other current assets
    
    
    627,000
    
    
    
    652,000Deferred taxes
    
    
    4,926,000
    
    
    
    3,546,000Total current assets
    
    
    36,628,000
    
    
    
    38,590,000Property, net
    
    
    7,691,000
    
    
    
    6,744,000Goodwill
    
    
    2,639,000
    
    
    
    2,639,000Other intangible assets, net
    
    
    1,239,000
    
    
    
    1,214,000Other long-term assets
    
    
    147,000
    
    
    
    147,000Deferred taxes
    
    
    2,562,000
    
    
    
    2,562,000TOTAL
    
    $
    50,906,000
    
    
    $
    51,896,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,456,000
    
    
    $
    3,134,000Accrued payroll and related expenses
    
    
    3,008,000
    
    
    
    2,961,000Income taxes payable
    
    
    257,000
    
    
    
    236,000Other liabilities
    
    
    741,000
    
    
    
    792,000Total current liabilities
    
    
    6,462,000
    
    
    
    7,123,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock  $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock  $0.001 par value; 40,000,000 shares
authorized; 18,417,894 and 18,305,787 shares
issued and outstanding at March 31, 2004
and December 31, 2003, respectively
    
    
    61,243,000
    
    
    
    60,049,000Accumulated other comprehensive loss
    
    
    (215,000
    )
    
    
    (192,000
    )Accumulated deficit
    
    
    (16,584,000
    )
    
    
    (15,084,000
    )Net stockholders equity
    
    
    44,444,000
    
    
    
    44,773,000TOTAL
    
    $
    50,906,000
    
    
    $
    51,896,000
 See accompanying notes to condensed consolidated financial statements. 1




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I-FLOW CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Revenues:Net product sales
    
    $
    9,906,000
    
    
    $
    7,105,000Net rental income and other
    
    
    4,263,000
    
    
    
    3,030,000Total revenues
    
    
    14,169,000
    
    
    
    10,135,000Cost of revenues:Product cost of revenues
    
    
    3,522,000
    
    
    
    2,579,000Rental cost of revenues
    
    
    1,160,000
    
    
    
    876,000Total cost of revenues
    
    
    4,682,000
    
    
    
    3,455,000Gross Profit
    
    
    9,487,000
    
    
    
    6,680,000Operating expenses:Selling and marketing
    
    
    7,683,000
    
    
    
    3,803,000General and administrative
    
    
    3,617,000
    
    
    
    2,459,000Product development
    
    
    579,000
    
    
    
    502,000Total operating expenses
    
    
    11,879,000
    
    
    
    6,764,000Operating loss
    
    
    (2,392,000
    )
    
    
    (84,000
    )Interest income, net
    
    
    36,000
    
    
    
    8,000Loss from continuing operations before
income taxes
    
    
    (2,356,000
    )
    
    
    (76,000
    )Income tax benefit
    
    
    (856,000
    )
    
    
    (32,000
    )Loss from continuing operations
    
    
    (1,500,000
    )
    
    
    (44,000
    )Income from discontinued operations,
net of tax
    
    
    
    
    
    
    61,000Net income (loss)
    
    $
    (1,500,000
    )
    
    $
    17,000Loss per share from continuing operations:Basic and diluted
    
    $
    (0.08
    )
    
    $
    Net income (loss) per share:Basic and diluted
    
    $
    (0.08
    )
    
    $
    Comprehensive Operations:Net income (loss)
    
    $
    (1,500,000
    )
    
    $
    17,000Foreign currency translation loss
    
    
    (23,000
    )
    
    
    (72,000
    )Comprehensive loss
    
    $
    (1,523,000
    )
    
    $
    (55,000
    )
 See accompanying notes to condensed consolidated financial statements. 2
    Table of Contents  I-FLOW CORPORATION 
 
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (1,500,000
    )
    
    $
    17,000Income from discontinued operations
    
    
    
    
    
    
    (61,000
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Deferred taxes
    
    
    (877,000
    )
    
    
    Depreciation and amortization
    
    
    737,000
    
    
    
    422,000Stock based compensation
    
    
    269,000
    
    
    
    153,000Provision for doubtful accounts receivable
    
    
    621,000
    
    
    
    (29,000
    )Provision for inventory obsolescence
    
    
    373,000
    
    
    
    68,000Changes in operating assets and liabilities:Accounts receivable
    
    
    (183,000
    )
    
    
    (502,000
    )Inventories
    
    
    82,000
    
    
    
    (429,000
    )Prepaid expenses and other current assets
    
    
    10,000
    
    
    
    (374,000
    )Accounts payable, accrued payroll and related expenses
    
    
    (630,000
    )
    
    
    985,000Income taxes payable
    
    
    21,000
    
    
    
    17,000Other liabilities
    
    
    (50,000
    )
    
    
    (2,000
    )Net cash provided by (used in) operating activities from
continuing operations
    
    
    (1,127,000
    )
    
    
    265,000Net cash used in operating activities from discontinued operations
    
    
    
    
    
    
    (56,000
    )Net cash provided by (used in) operating activities
    
    
    (1,127,000
    )
    
    
    210,000CASH FLOWS FROM INVESTING ACTIVITIES:Property acquisitions
    
    
    (1,620,000
    )
    
    
    (913,000
    )Patent acquisitions
    
    
    (100,000
    )
    
    
    (46,000
    )Net cash used in investing activities from continuing operations
    
    
    (1,720,000
    )
    
    
    (959,000
    )Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (26,000
    )Net cash used in investing activities
    
    
    (1,720,000
    )
    
    
    (985,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Revolving line of credit borrowings
    
    
    
    
    
    
    300,000Principal payments on notes payable
    
    
    (1,000
    )
    
    
    (36,000
    )Proceeds from exercise of stock options and warrants
    
    
    421,000
    
    
    
    169,000Net cash provided by financing activities
    
    
    420,000
    
    
    
    433,000Effect of exchange rates on cash
    
    
    3,000
    
    
    
    (78,000
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,424,000
    )
    
    
    (420,000
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD
    
    
    15,185,000
    
    
    
    1,700,000CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    12,761,000
    
    
    $
    1,280,000SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    2,000Income taxes paid
    
    $
    
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. 3
    Table of Contents  I-FLOW CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 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 March 31, 2004, the results of its operations
and cash flows for the three-month periods ended March 31, 2004 and 2003.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission although the Company believes that the
disclosures in the financial statements are adequate to make the information
presented not misleading. The financial statements included herein should be read in conjunction with the
financial statements of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission on
March 15, 2004. The Company sold Spinal Specialties, Inc., a wholly owned subsidiary (Spinal
Specialties), on November 1, 2003 to Integra LifeSciences Holdings Corporation
for approximately $6,000,000 in cash and net proceeds of approximately
$5,000,000. The Company has restated its
financial statements for the three-month period ended March 31, 2003
to present the operations of Spinal Specialties as discontinued
operations. Reported in income from discontinued operations, net of tax, for the three
months ended March 31, 2003 are net product sales from Spinal Specialties of
$1,029,000, income before taxes of $105,000, and income tax expense of $44,000. Use of EstimatesThe preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates. New Accounting Pronouncements In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust or any other legal structure used
for business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46 requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns
or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. With respect to
variable interest entities created before January 31, 2003, in December 2003
the FASB issued FIN 46R which, among other things, revised the implementation
date to first fiscal years or interim periods ending after March 15, 2004, with
the exception of Special Purpose Entities (SPE). The consolidated
requirements apply to all SPEs in the first fiscal year or interim period
ending after December 15, 2003. As the Company has determined that it does not
have any SPEs to which these interpretations apply, the Company adopted FIN46R
in the first quarter of 2004 and such adoption did not have a material impact
on its financial statements. 4
    Table of Contents  In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both debt and equity and
requires an issuer to classify the following instruments as liabilities in its
balance sheet:  
    
    a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;  
    
    a financial instrument, other than an outstanding share, that
embodies an obligation to repurchase the issuers equity shares, or is
indexed to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and  
    
    a financial instrument that embodies an unconditional obligation
that the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuers equity shares, or
(3) variations inversely related to changes in the fair value of the
issuers equity shares. In November 2003, the FASB issued FASB Staff Position (FSP) No. 150-3 which
deferred the effective dates for applying certain provisions of SFAS 150
related to mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests for public
and nonpublic entities. For public entities, SFAS 150 is effective for mandatorily redeemable financial
instruments entered into or modified after May 31, 2003 and is effective for
all other financial instruments as of the first interim period beginning after
June 15, 2003. For mandatorily redeemable noncontrolling interests that would not have to be
classified as liabilities by a subsidiary under the exception in paragraph 9 of
SFAS 150, but would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are deferred
indefinitely. For other mandatorily redeemable noncontrolling interests that
were issued before November 5, 2003, the measurement provisions of SFAS 150 are
deferred indefinitely. For those instruments, the measurement guidance for
redeemable shares and noncontrolling interests in other literature shall apply
during the deferral period. The adoption of the
other provisions of SFAS 150 did not have a material impact on the
Companys consolidated
financial statements. Accounting for Stock-Based Compensation The Company accounts for employee
stock options using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,and
FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans,and has adopted the disclosure-only
alternative of SFAS 123, Accounting for Stock-Based Compensation.Stock
options issued to consultants and vendors are accounted for at fair value. 5
    Table of Contents  Because the Company has adopted the disclosure-only provisions of SFAS 123, no
compensation cost has been recognized for stock option grants to employees and
non-employee directors with exercise prices equal to the fair market value of
the underlying shares at the grant date. Had compensation cost for the
Companys option plans been determined based on the fair value of the options
at the grant date consistent with the provisions of SFAS 123, the Companys net
income (loss) and net income (loss) per share would have been the pro forma
amounts indicated below: Three Months Ended March 31,(Amounts in thousands, except per share amounts)
    
    2004
    
    2003Net income (loss)  as reported
    
    $
    (1,500
    )
    
    $
    17Stock-based employee compensation included in net
income (loss), net of tax
    
    $
    133
    
    
    $
    56Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax
    
    $
    (876
    )
    
    $
    (182
    )Net loss  pro forma
    
    $
    (2,243
    )
    
    $
    (109
    )Basic earnings (loss) per share  as reported
    
    $
    (0.08
    )
    
    $
    Basic earnings (loss) per share  pro forma
    
    $
    (0.12
    )
    
    $
    (0.01
    )Diluted earnings (loss) per share  as reported
    
    $
    (0.08
    )
    
    $
    Diluted earnings (loss) per share  pro forma
    
    $
    (0.12
    )
    
    $
    (0.01
    )
 The amounts in the above table related to stock-based employee compensation
included in net income (loss), net of tax relate to employee stock options only
and exclude compensation expense related to consultant stock options and
restricted stock. The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the three months ended March 31, 2004 and
2003: no dividend yield; expected volatility 94% in 2003 and 90% in 2004;
risk-free interest rate of 3.04% in 2003 and 3.64% in 2004; and expected lives
of 5 years. Reclassifications Certain prior year amounts have been reclassified to
conform to the presentation at March 31, 2004. 2. Inventories Inventories consisted of the following: March 31,
    
    December 31,2004
    
    2003Raw Materials
    
    $
    5,046,000
    
    
    $
    5,368,000Work in Process
    
    
    1,345,000
    
    
    
    765,000Finished Goods
    
    
    2,493,000
    
    
    
    2,838,000Reserve for Obsolescence
    
    
    (2,523,000
    )
    
    
    (2,156,000
    )Total
    
    $
    6,361,000
    
    
    $
    6,815,000
 3. Earnings (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods presented, excluding unvested
restricted stock which the Company has a right to repurchase in the event of
early termination of employment of 65,000 shares and 84,500 shares as of March
31, 2004 and 2003, respectively. 6
    Table of Contents  Diluted net income (loss) per share is computed using the weighted average
number of common and potential common shares outstanding during the periods
utilizing the treasury stock method for stock options, warrants and unvested
restricted stock, if dilutive. The following is a reconciliation between the number of shares used in the
basic and diluted net income (loss) per share calculations: Three Months Ended March 31,(Amounts in thousands)
    
    2004
    
    2003Net income (loss)
    
    $
    (1,500
    )
    
    $
    17Basic net income (loss) per shareWeighted average number of common shares outstanding
    
    
    18,282
    
    
    
    15,434Effect of dilutive securities:Stock options and unvested restricted stock
    
    
    
    
    
    
    Diluted net income (loss) per shareWeighted average number of common and common
equivalent shares outstanding
    
    
    18,282
    
    
    
    15,434
 Options to purchase 1,000 and 1,860,533 shares of common stock have been
excluded from the treasury stock method of calculation for diluted weighted
average common shares for the three-month periods ended March 31, 2004 and
2003, respectively, as their exercise prices exceeded the average market price
of the Companys common stock for these periods and their effect would be
anti-dilutive. 4. Other Intangible Assets Amortizable intangible assets included in the accompanying condensed
consolidated balance sheets are as follows: As of March 31, 2004Carrying
    
    AccumulatedAmount
    
    Amortization
    
    NetPatents
    
    $
    2,027,000
    
    
    $
    788,000
    
    
    $
    1,239,000
 As of December 31, 2003Carrying
    
    AccumulatedAmount
    
    Amortization
    
    NetPatents
    
    $
    1,960,000
    
    
    $
    746,000
    
    
    $
    1,214,000
 The Company amortizes patents over a period of seven years. Amortization
expense for the three months ended March 31, 2004 was $74,000 compared to
$72,000 for the same period in the prior year. Amortization expense of
intangible assets recorded as of March 31, 2004 is expected to be approximately
$245,000 in each of the next five fiscal years. 5. Stockholders Equity During September 2003, the Company sold 1,666,740 shares of common stock at
$7.50 per share with net proceeds to the Company of $11,563,000. In connection
with the sale of the common stock, the Company granted the investors warrants
to purchase 250,011 shares of common stock with an exercise price of $10.00 per
share. The estimated fair value of these warrants on the grant date was
$1,272,000 as calculated by the Black-Scholes pricing model. These warrants
are fully exercisable and expire five years from the date of grant. As of
March 31, 2004, warrants to purchase 225,111 shares of common stock were
outstanding. The following weighted average assumptions were used to calculate
the fair value of these warrants using the Black-Scholes pricing model:
contractual life of five years; stock volatility of 87%; risk-free interest
rate of 2.730%; and no dividends during the term. 7
    Table of Contents  6. Operating Segments and
Revenue Data The Company operates in two reportable operating segments: the manufacturing
and marketing of medical infusion pumps (the Manufacturing and Marketing
operating segment) and the rental and third party billing of electronic medical
infusion pumps that are manufactured by companies other than I-Flow Corporation
(the Rentals operating segment.) The Manufacturing and Marketing operating
segment consists of two major market segments, the IV Infusion Therapy market
segment and Regional Anesthesia market segment. The Rentals operating segment
consists of the activities of InfuSystem, Inc., which provides infusion pumps
for chemotherapy to the Oncology Infusion Services market segment. Operating segment information is as follows for the three-month periods ended
March 31, 2004 and 2003. Manufacturing and(Amounts in thousands)
    
    Marketing
    
    Rentals
    
    ConsolidatedThree months ended March 31, 2004Revenues
    
    $
    9,906
    
    
    $
    4,263
    
    
    $
    14,169Operating income (loss)
    
    
    (3,292
    )
    
    
    900
    
    
    
    (2,392
    )Assets
    
    
    38,827
    
    
    
    12,079
    
    
    
    50,906Depreciation and amortization
    
    
    369
    
    
    
    368
    
    
    
    737Property additions
    
    
    524
    
    
    
    1,096
    
    
    
    1,620Three months ended March 31, 2003Revenues
    
    $
    7,105
    
    
    $
    3,030
    
    
    $
    10,135Operating income (loss)
    
    
    (747
    )
    
    
    663
    
    
    
    (84
    )Assets
    
    
    23,374
    
    
    
    11,448
    
    
    
    34,822Depreciation and amortization
    
    
    331
    
    
    
    91
    
    
    
    422Property additions
    
    
    373
    
    
    
    540
    
    
    
    913
 The Company had a major customer which accounted for 9% and 13% of the total
revenues for the three month periods ended March 31, 2004 and 2003,
respectively. 7. Guarantees and Indemnifications From time to time, the Company enters into certain types of contracts 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 indemnifications to
either (a) purchasers of the Companys businesses or assets or (b) entities
from which the Company is acquiring assets or businesses; (ii) certain real
estate leases, under which the Company may be required to indemnify property
owners for environmental and other liabilities and other claims arising from
the Companys use of the leased premises; (iii) certain agreements with the
Companys 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) license, consulting, distribution and
purchase agreements with the Companys 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
Companys provision of products or services to such parties. The terms of such obligations vary. Generally, a maximum obligation arising
out of these types of agreements is 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. The Company had not issued any significant indemnities,
commitments or guarantees during the three-month
periods ended March 31, 2004 and 2003 requiring recognition, thus, no
liabilities have been recorded. 8. Subsequent Event On April 19, 2004, the Company completed a public offering of 2,990,000 shares
of common stock, of which 390,000 shares were issued pursuant to the exercise
of the underwriters over-allotment option. The shares were sold at a price to
the public of $15.50 per share resulting in net proceeds to the Company of
approximately $43,000,000. 8
    Table of Contents  Item 2. MANAGEMENTS 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 Companys current opinions about trends and factors that may impact future
operating results. Statements that use words such as believes,
anticipates, or expects or use similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to risks
and uncertainties, which could cause actual results to differ materially from
those expected, and readers are cautioned not to place undue reliance on these
forward-looking statements. The Company undertakes no obligation to republish
revised forward-looking statements to reflect the occurrence of unanticipated
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 Companys
business. Interested parties should also review the Companys reports on Forms
10-K, 10-Q and 8-K and other reports that are periodically filed with the
Securities and Exchange Commission. The risks affecting the Companys business
include, among others: implementation of our direct sales strategy; dependence
on our suppliers and distributors; reliance on the success of the home health
care industry; our continuing compliance with applicable laws and regulations,
such as the Food, Drug and Cosmetic Act, and the FDAs concurrence with our
managements subjective judgment on compliance issues; the reimbursement system
currently in place and future changes to that system; competition in the
industry; economic and political conditions in foreign countries; currency
exchange rates; inadequacy of booked reserves; technological changes; and
product availability and acceptance. All forward-looking statements, whether
made in this release or elsewhere, should be considered in context with the
various disclosures made by the Company about its business. Critical Accounting Policies I-Flow prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States. Accordingly,
the Company is required to make estimates, judgments and assumptions that the
Company believes are reasonable based on the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the periods presented. The critical accounting policies
which the Company believes are the most important to aid in fully understanding
and evaluating its reported financial results are: Revenue Recognition The Company recognizes revenue from product sales at the time of shipment and
passage of title. The Company offers the right of return for defective
products and continuously monitors and tracks product returns. The Company
records a provision for the estimated amount of future returns based on
historical experience and any notification received of pending returns.
Although such returns have historically been insignificant, the Company cannot
guarantee that it will continue to experience the same return rates as it has
in the past. Any significant increase in product returns could have a material
adverse impact on the Companys operating results for the period or periods in
which the returns materialize. The Company recognizes rental revenues from medical pumps over the term of the
related agreement, generally on a month-to-month basis. Pump rentals are
billed at the Companys established rates, which often differ from
contractually allowable rates provided by third party payors such as Medicare,
Medicaid and commercial insurance carriers. The Company records net rental
revenues at the estimated realizable amounts from patients and third party
payors. The Company experiences significant extended payment terms with
certain of these third party payors, but it continuously monitors reimbursement
rates of the third party payors and the timing of such payments. Any change in
reimbursement or collection rates could have a material negative impact on the
Companys operating results for the period or periods in which the change is
identified. Accounts Receivable The Company performs various analyses to evaluate accounts receivable balances.
It records an allowance for bad debts based on the estimated collectibility of
the accounts such that the recorded amounts reflect estimated net 9
    Table of Contents  realizable value. The Company applies specified percentages to the accounts
receivable agings to estimate the amount that will ultimately be uncollectible
and therefore should be reserved. The percentages are increased as the
accounts age. If the actual uncollected amounts are less than the previously
estimated allowance, a favorable adjustment would result. If the actual
uncollected amounts significantly exceed the estimated allowance, the Companys
operating results would be significantly and adversely affected. Inventories The Company values inventory at the lower of the actual cost to purchase or
manufacture the inventory and the current estimated market value of the
inventory. The Company regularly reviews inventory quantities on hand and
records a provision for excess and obsolete inventory on specifically
identified items based primarily upon the estimated forecast of product demand
and production requirements for the next two years. A significant increase in
the demand for the Companys products could result in a short-term increase in
the cost of inventory purchases while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand.
Additionally, the Companys estimates of future product demand may prove to be
inaccurate and thus the Company may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if
inventory is determined to be overvalued, the Company would be required to
recognize such costs in cost of goods sold at the time of such determination.
Likewise, if inventory is determined to be undervalued, the Company may have
over-reported cost of goods sold in previous periods and would be required to
recognize additional operating income at the time of sale. Therefore, although
the Company seeks to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of its inventory and
reported operating results. Deferred Taxes The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance based on
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. If the Company
operates at a profit in the future and generates sufficient future taxable
income, it could be required to reverse the current valuation allowance against
the deferred tax assets which would result in a substantial decrease in the
Companys effective tax rate. Likewise, if the Company is unable to operate at
a profit and unable to generate sufficient future taxable income, it could be
required to establish an additional valuation allowance against all or a
significant portion of its deferred tax assets, resulting in a substantial
increase in the Companys effective tax rate and a material adverse impact on
operating results. Intangible Assets Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets(SFAS 142), required the Company to cease amortizing
goodwill and indefinite life intangibles effective January 1, 2002. The
Companys business combinations have at various times resulted in the
acquisition of goodwill and other intangible assets, which may affect the
amount of future period amortization expense and impairment expense that the
Company may incur. The determination of the value of such intangible assets
requires management to make estimates and assumptions that affect its
consolidated financial statements. 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
has possibly occurred. The Company compares fair value of its reporting units
to their carrying value, as well as other factors, to determine whether or not
any potential impairment of goodwill exists. If a potential impairment
exists, 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 cannot
guarantee that there will be no impairment in the future. See Note 4 to
Condensed Consolidated Financial Statements. Divestiture of Spinal Specialties The Company sold Spinal Specialties, Inc., a wholly owned subsidiary (Spinal
Specialties), on November 1, 2003 to Integra LifeSciences Holdings Corporation
for approximately $6,000,000 in cash and net proceeds of approximately
$5,000,000. 10
    Table of Contents  The net income of Spinal Specialties prior to divestiture is presented in the
Companys operations as income from discontinued operations, net of tax.
Reported in income from discontinued operations, net of tax, for the three
months ended March 31, 2003 are net product sales from Spinal Specialties of
$1,029,000, income before taxes of $105,000 and income tax expense of $44,000. Overview We design, develop and market technically advanced, low-cost drug delivery
systems and services that provide life-enhancing, cost-effective solutions for
pain relief and intravenous infusion therapy. We focus on three distinct
markets: Regional Anesthesia, IV Infusion Therapy and Oncology Infusion
Services. Our products are used in hospitals, ambulatory surgery centers,
physicians offices and patients homes. Our strategic focus for future growth is on the Regional Anesthesia market and,
more specifically, on our pain relief products marketed under our ON-Q brand.
We intend to continue to expand our sales and marketing efforts to further
penetrate the United States post-surgical pain relief market for our ON-Q
products. Results of Operations Revenue Net revenues during the three-month period ended March 31, 2004 were
$14,169,000 compared to $10,135,000 for the same period in the prior year,
representing an increase of 40%. Net product revenues increased 39% to
$9,906,000 during the three months ended March 31, 2004 compared to the same
period in the prior year. Rental income, comprised of the revenues of the
Companys InfuSystem subsidiary, increased by 41% to $4,263,000 for the three
months ended March 31, 2004 from $3,030,000 for the same period in the prior
year. The Companys product
revenues from the Manufacturing and Marketing operating segment during the three months ended March 31, 2004 and
2003 were generated in two primary market segments: Regional Anesthesia and IV
Infusion Therapy. Regional Anesthesia product revenues increased by 90% to
$5,721,000 during the three months ended March 31, 2004 compared to $3,015,000
for the same period in the prior year. This increase resulted from increased
market penetration by the Companys ON-Q® PainBuster® Post-Operative Pain
Relief System. Regional anesthesia products include the ON-Q® PainBuster®
Post-Operative Pain Relief System, the ON-Q® C-bloc® Continuous Nerve Block
System and the SoakerTM Catheter. IV Infusion Therapy product sales, which included the Companys intraveneous
elastomeric pumps, mechanical infusion devices and electronic infusion pumps
and disposables, increased 2% to $4,185,000 for the three months ended March
31, 2004 from $4,090,000 for the same period in the prior year. Revenues from the Rental
operating segment provided by the Companys InfuSystem subsidiary within the
Oncology Infusion Services market increased 41% to $4,263,000 for the three
months ended March 31, 2004 from $3,030,000 for the same period in the prior
year. This increase resulted primarily from the increased clinical usage of
new chemotherapy drugs and protocols requiring the use of continuous
intravenous pump services. Cost of Revenue The Company incurred cost of sales of $4,682,000 during the three-month period
ended March 31, 2004 compared to $3,455,000 for the comparable period in the
prior year. This represents an increase of 36%. This increase is primarily
due to higher sales volume. As a percentage of net product sales, product cost
of revenues decreased by approximately one percentage point compared to the
same period in the prior year. This decrease was due to increased sales of
higher-margin products, including the Companys ON-Q® PainBuster®
Post-Operative Pain Relief System, during the three-month period ended March
31, 2004. As a percentage of rental revenues, rental cost of revenue decreased
by approximately two percentage points compared to the same period in the prior
year due to reduced direct operating costs. Selling and Marketing Expenses Selling and marketing expenses for the three-month period ended March 31, 2004
increased over the same period in the prior year by $3,880,000, or 102%. As a
percentage of net revenues, selling and marketing expenses increased 11
    Table of Contents  by 17 percentage points for the three-month period ended March 31, 2004 over
the comparable period in the prior year. This increase was primarily
attributable to increases in salaries and commissions ($2,184,000), increases
in travel and entertainment expenses ($483,000), increases in training costs
($292,000) and other costs related to the expansion of the Companys direct
sales force. The increase also consisted of increased marketing expenses
($186,000) related to the Companys ON-Q® PainBuster® Post-Operative Pain
Relief System. General and Administrative Expenses General and administrative expenses for the three-month period ended March 31,
2004 increased by $1,158,000, or 47%, compared to the comparable period in the
prior year. This increase included increased bad debt provision primarily for
the Companys Infusystem subsidiary ($506,000), increased compensation
expenses ($163,000), general insurance expenses ($55,000), consulting fees ($24,000) and
investor relations expenses ($19,000), as well as overall increases due to growth of the
Company. As a percentage of net revenues, general and administrative expenses
increased by approximately one percentage point for the three-month period
ended March 31, 2004 compared to the same period in the prior year. Product Development Expenses Product development expenses for the three-month period ended March 31, 2004
increased by $77,000, or 15%, compared to the same period in the prior year,
primarily due to increased salaries and wages and consulting fees. The Company
will continue to incur product development expenses as it continues its efforts
to introduce new and improved technology and cost-efficient products into the
market. Product development expenses as a percentage of net revenues for the
three-month period ended March 31, 2004 decreased by approximately one
percentage point compared to the same period in the prior year, primarily due
to higher sales levels. Income Taxes During the three-month period ended March 31, 2004, the Company recorded an
income tax benefit of $856,000 compared to an income tax benefit of $32,000 for
the same period in the prior year. The Companys effective tax rate for the
three-month period ended March 31, 2004 was 36.3% compared to 42.1% for the
same period in the prior year, due to changes in deductible amortization of
intangible assets and changes in consolidated state tax rates. Liquidity and Capital Resources During the three-month period ended March 31, 2004, cash of $1,127,000 was used
in operating activities consisting of a net loss of $1,500,000 partially offset
by net non-cash expenses of $1,123,000, less net changes in operating assets
and liabilities of $750,000, primarily related to a decrease in accounts
payable and accrued liabilities due to timing of payments to vendors. During the three-month period ended March 31, 2004, cash of $1,720,000 was used
in investing activities, compared to $985,000 for the same period in the prior
year. The expenditures in the three-month period ended March 31, 2004
consisted of $1,620,000 used to acquire capital equipment, including electronic
infusion pumps for the Companys rental business segment, computer equipment,
purchased software, leasehold improvements, furniture, fixtures, tooling and
equipment for use in the Companys operations and a net outflow related to the
acquisition of other assets, primarily patents, of $100,000. During the three-month period
ended March 31, 2004, net cash of $420,000 was
provided by financing activities consisting primarily of $421,000 in proceeds
from the exercise of stock options and warrants to purchase common stock. As of March 31, 2004, the Company had cash and cash equivalents of $12,761,000,
net accounts receivable of $11,953,000 and net working capital of $30,167,000.
Management believes the Companys funds, together with possible borrowings on
its existing lines of credit and other bank loans, are sufficient to provide
for its short and long-term needs for operations as currently projected. 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
April 19, 2004, the Company completed a public offering of 2,990,000 shares of
common stock which resulted in net proceeds to the Company of approximately
$43,000,000. See Note 8 to the Condensed Consolidated Financial Statements. 12
    Table of Contents  The Company has a working capital line of credit with Silicon Valley Bank which
expires on April 30, 2005. Under the line of credit, the Company may borrow up
to the lesser of $4,000,000 or the sum of 80% of eligible accounts receivable
plus 25% of eligible inventory, as defined, at the banks prime rate (4.0% at
March 31, 2004). As of March 31, 2004, there were funds available for
borrowing of $3,700,000 and no outstanding borrowings. The Companys InfuSystem subsidiary has a revolving line of credit with a bank
under which it may borrow up to the lesser of $3,500,000 or 80% of eligible
accounts receivable, as defined, at the banks prime rate less 0.25% (3.75% at
March 31, 2004). There were no outstanding borrowings under the line of credit
as of March 31, 2004 and there were funds available for borrowing of
$3,500,000. The credit line expires on June 30, 2004. In addition, InfuSystem
has a loan facility under which it may borrow up to $2,500,000 for the purchase
of equipment. As of March 31, 2004, there were no outstanding borrowings under
the loan facility. The lines of credit and the notes are collateralized by substantially all of
the Companys assets and require the Company to comply with covenants
principally relating to working capital and liquidity. As of March 31, 2004,
the Company was in compliance with all such covenants. Contractual Obligations and Commercial Commitments As of March 31, 2004, future payments related to contractual obligations and
commercial commitments are as follows: Payment Due by PeriodLess than 1 year
    
    1 to 3 years
    
    3 to 5 years
    
    More than 5 years
    
    TotalOperating Lease
Obligations for
Facilities
    
    
    667,000
    
    
    
    1,145,000
    
    
    
    894,000
    
    
    
    1,392,000
    
    
    
    4,098,000Purchase
Commitments with
Suppliers
    
    
    2,381,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,381,000Total Contractual
Obligations and
Commercial
Commitments
    
    $
    3,048,000
    
    
    $
    1,145,000
    
    
    $
    894,000
    
    
    $
    1,392,000
    
    
    $
    6,479,000
 New Accounting Pronouncements In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. In general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. With respect to variable interest entities created
before January 31, 2003, in December 2003 the FASB issued FIN 46R which, among
other things, revised the implementation date to first fiscal years or interim
periods ending after March 15, 2004, with the exception of Special Purpose
Entities (SPE). The consolidated requirements apply to all SPEs in the
first fiscal year or interim period ending after December 15, 2003. As the
Company has determined that it does not have any SPEs to which these
interpretations apply, the Company adopted FIN46R in the first quarter of 2004
and such adoption did not have a material impact on its financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both debt and equity and
requires an issuer to classify the following instruments as liabilities in its
balance sheet:  
    
    a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur; 13
    Table of Contents  
    
    a financial instrument, other than an outstanding share, that
embodies an obligation to repurchase the issuers equity shares, or is
indexed to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and  
    
    a financial instrument that embodies an unconditional obligation
that the issuer must settle by issuing a variable number of its equity
            shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuers equity shares, or
(3) variations inversely related to changes in the fair value of the
issuers equity shares. In November 2003, the FASB issued FASB Staff Position (FSP) No. 150-3 which
deferred the effective dates for applying certain provisions of SFAS 150
related to mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests for public
and nonpublic entities. For public entities, SFAS 150 is effective for mandatorily redeemable financial
instruments entered into or modified after May 31, 2003 and is effective for
all other financial instruments as of the first interim period beginning after
June 15, 2003. For mandatorily redeemable noncontrolling interests that would not have to be
classified as liabilities by a subsidiary under the exception in paragraph 9 of
SFAS 150, but would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 150 are deferred
indefinitely. For other mandatorily redeemable noncontrolling interests that
were issued before November 5, 2003, the measurement provisions of SFAS 150 are
deferred indefinitely. For those instruments, the measurement guidance for
redeemable shares and noncontrolling interests in other literature shall apply
during the deferral period. The adoption of the
other provisions of SFAS 150 did not have a material impact on the
Companys consolidated
financial statements. 14
    Table of Contents  Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Currency The Company has a subsidiary operating 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. As of the end of the period covered by this quarterly report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings. There have been no significant changes in the
Companys internal control over financial reporting during the period covered
by this quarterly report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. 15
    Table of Contents  PART II   OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS As of May 10, 2004, the Company was involved in legal proceedings in the normal
course of operations. Although the ultimate outcome of the proceedings cannot
be currently determined, in the opinion of management any resulting future
liability will not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. 
 Item 5. OTHER INFORMATION Risk Factors. We are updating and restating our risk factors as follows: RISKS RELATING TO OUR BUSINESS AND INDUSTRY We have experienced net losses in prior years and have an accumulated deficit.
We may not achieve profitability in the future. As of March 31, 2004, our accumulated deficit was approximately $16,584,000.
We had a net loss of $1,500,000 for the three-month period ended March 31,
2004. We had net income (loss) of $1,267,000, ($3,035,000) and $457,000 for
the years ended December 31, 2001, 2002 and 2003, respectively. We may not
achieve or maintain profitability in the future, and further losses may arise. For example, during the year ended December 31, 2003, our total costs and
expenses increased by an amount greater than the increase in revenues, compared
to the year ended December 31, 2002. There can be no assurance that our future
revenue growth, if any, will be greater than the growth of our costs and
expenses. If the increase in our total costs and expenses continues to be
greater than any increase in our revenues, we will not be profitable. We have invested substantial resources into the sales and marketing of our ON-Q
products. If these products do not achieve significant clinical acceptance or
if our direct sales strategy is not successful, our financial condition and
operating results will be adversely affected. Our current strategy assumes that our ON-Q products will be used in a
significant number of surgical procedures, ultimately becoming the standard of
care for many common procedures. We have invested, and continue to invest, a
substantial portion of our resources into the establishment of a direct sales
force for the sales and marketing of our ON-Q products. During the year ended
December 31, 2003, we invested approximately $16,800,000 in the sales and
marketing of our ON-Q products. A failure of our ON-Q products to achieve and
maintain a significant market presence, or the failure to successfully
implement our direct sales strategy, will have a material adverse effect on our
financial condition and results of operations. 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 three-month period ended March 31, 2004, our operating activities
used cash of $1,127,000 and our investing activities used cash of $1,720,000.
As of March 31, 2004, we had cash on hand of $12,761,000 and net accounts
receivable of $11,953,000. We believe our current funds, together with possible
additional borrowings on our existing lines 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 curtail our operations and/or seek additional
financing. Any additional equity financings may be dilutive to our existing stockholders
and may involve the issuance of securities that have rights, preferences or
privileges senior to those of our current stockholders. A debt financing, if
available, may involve restrictive covenants on our business that could limit
our operational and financial flexibility, and the amount of debt incurred
could make us more vulnerable to economic downturns or operational difficulties
and limit our ability to compete. Furthermore, financing may not be available
when needed and, if available, may not be on terms acceptable to us. 16
    Table of Contents  Our products are highly regulated by a number of governmental agencies. Any
changes to the existing rules and regulations of these agencies may adversely
impact our ability to manufacture and market our products. Our activities are regulated by the Food, Drug and Cosmetic Act. Under the
Food, Drug and Cosmetic Act, we are required, among other matters, to register
our facilities and to list our devices with the FDA, to file notice of our
intent to market certain new products under Section 510(k) of the Food, Drug
and Cosmetic Act, to track the location of certain of our products, and to
report any incidents of death or serious injury relating to our products. If we
fail to comply with any of these regulations, or if the FDA subsequently
disagrees with the manner in which we sought to comply with these regulations,
we could be subjected to substantial civil and criminal penalties and a recall,
seizure or injunction with respect to the manufacture or sale of our products. Each state also has similar regulations. For example, in California, we are
subject to annual production-site inspections in order to maintain our
manufacturing license. State regulations also specify standards for the storage
and handling of certain chemicals and disposal of their wastes. We are also
required to comply with federal, state and local environmental laws. Our
failure to comply with any of these laws could expose us to material
liabilities. Products intended for foreign export are subject to additional regulations,
including compliance with ISO 9000. In May 1995, we received ISO 9001
certification, which indicates that our products meet specified uniform
standards of quality and testing. We also were granted permission to use the CE
mark on certain of our products, which reflects approval of our products for
export into the 15 member countries of the European Union (the EU) and three
non-EU countries. In December 1996, the operations of Block Medical de Mexico,
S.A. de C.V., a wholly-owned subsidiary (Block Medical), including its
manufacturing facility, were added to our ISO certification and we received
permission to use the CE mark on all disposable elastomeric products we
manufacture. If we fail to comply with foreign regulations or to maintain ISO
certification or CE approval, the sale of our products could be suspended in
one or more of our foreign markets. Furthermore, federal, state, local or foreign governments may enact new laws,
rules and regulations that may adversely impact our ability to manufacture and
market infusion devices by, for example, increasing our costs. Any impairment
of our ability to market our infusion devices or other products could have a
material adverse effect on our financial condition and results of operations. Our compliance with laws frequently involves our subjective judgment. If we are
wrong in any of our interpretations of the laws, we could be subjected to
substantial penalties for noncompliance. In the ordinary course of business, management frequently makes subjective
judgments with respect to complying with the Food, Drug and Cosmetic Act, as
well as other applicable state, local and foreign laws. If any of these
regulatory agencies disagrees with our interpretation of, or objects to the
manner in which we have attempted to comply with, the applicable law, we could
be subjected to substantial civil and criminal penalties and a recall, seizure
or injunction with respect to the manufacture or sale of our products. These
types of actions against us or our products could have a material adverse
effect on our financial condition and results of operations. Our intangible assets are subject to potential impairment charges that could
adversely affect our results of operations. As of March 31, 2004, $2,639,000 of our assets consisted of goodwill, an
intangible asset acquired through the acquisition of InfuSystem. The
determination of the value of such intangible assets requires management to
make estimates and assumptions that affect our financial statements. For
example, we review 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 has possibly occurred. We compare
market value of our reporting units to book value, as well as consider other
factors, to determine whether or not any potential impairment of goodwill
exists. In fiscal year 2002, and as a result of the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, we wrote-off $3,474,000 of goodwill related to past
acquisitions other than InfuSystem. We cannot guarantee that there will be no
additional impairment in the future related to InfuSystem or other acquisitions
we may make in the future. Any impairment charge will adversely affect our
results of operations. 17
    Table of Contents  Our customers frequently receive reimbursement from private insurers and
governmental agencies. Any change in the overall reimbursement system may
adversely impact our business. The health care reimbursement system is in a constant state of change. Changes
often create financial incentives and disincentives that encourage or
discourage the use of a particular type of product, therapy or clinical
procedure. Market acceptance and sales of our products may be adversely
affected by changes or trends within the reimbursement system. Changes to the
health care system that favor technologies other than ours or that reduce
reimbursements to providers or treatment facilities that use our products may
adversely affect our ability to sell our products profitably. Hospitals, alternate care site providers and physicians are heavily dependent
on payment for their services by private insurers and governmental agencies.
Changes in the reimbursement system could adversely affect our participation in
the industry. Our products fall into the general category of infusion devices
and related disposable products with regard to reimbursement issues. Except for
payments made to our InfuSystem subsidiary, the majority of reimbursements are
currently not paid directly to us. Rather, health care providers will often
request that their patients health insurance providers provide them with some
form of reimbursement for the disposables that are consumed in the patients
therapy. We believe that the current trend in the insurance industry (both private and
governmental) has been to eliminate cost-based reimbursement and to move
towards fixed or limited fees for service, thereby encouraging health care
providers to use the lowest cost method of delivering medications. This trend
may discourage the use of our products, create downward pressure on our average
prices and, ultimately, negatively affect our revenues. Changes in reimbursement rates may adversely impact InfuSystems revenues. InfuSystem depends primarily on third-party reimbursement for the collection of
its revenues. InfuSystem is paid directly by private insurers and governmental
agencies, often on a fixed fee basis, for infusion services provided by
InfuSystem to patients. InfuSystems revenues comprised 30% of our consolidated
revenues for the three-month period ended March 31, 2004. If the average fees
allowable by private insurers or governmental agencies were reduced, the
negative impact on revenues of InfuSystem could have a material adverse effect
on our financial condition and results of operations. Changes in reimbursement rates may adversely impact the revenue that we earn
from our developing billing strategy for our ON-Q products. Historically, we have charged health care providers for each ON-Q unit that
they purchase from us. Recently, we, through our InfuSystem subsidiary, have
begun to bill private insurers for the use of our ON-Q products in ambulatory
surgery centers, rather than charging these centers for the purchase price of
each ON-Q unit. If this sales strategy is successful, we expect to increase our
use of this sales strategy for ambulatory surgery centers. Any reduction in the
average fees allowable by private insurers for the use of our ON-Q products in
ambulatory surgery centers could negatively affect our ability to generate
revenue from the centers and this could have a material adverse effect on our
financial condition and results of operations. Our industry is intensely competitive and changes rapidly. If we are unable to
maintain a technological lead over our competitors, our business operations
will suffer. The drug infusion industry is highly competitive. We compete in this industry
based primarily on product performance, service and price. Some of our
competitors have significantly greater resources than we do for research and
development, manufacturing, marketing and sales. As a result, they may be
better able to compete for market share, even in areas in which our products
may be superior. We continue our efforts to introduce clinically effective,
cost-efficient products into the market, but the industry is subject to
technological changes and we may not be able to maintain any existing
technological advantage long enough to establish our products and to sustain
profitability. We may also see significant pricing pressure if new competitors
enter into our target markets. If we are unable to effectively compete in our
market, our financial condition and results of operations will materially
suffer. 18
    Table of Contents  We rely on independent suppliers for parts and materials necessary to assemble
our products. Any delay or disruption in the supply of parts may prevent us
from manufacturing our products and negatively impact our operations. Although we perform the final assembly and testing of our infusion systems,
certain component parts, as well as molded products, are obtained from outside
vendors based on our specifications. The loss or breakdown of our relationships
with these outside vendors could subject us to substantial delays in the
delivery of our products to customers. Significant delays in the delivery of
our products could result in possible cancellation of orders and the loss of
customers. Furthermore, we have numerous suppliers of components and materials
that are sole-source suppliers. Because these suppliers are the only vendors
with which we have a relationship for a particular component or material, we
may be unable to produce and sell products if one of these suppliers becomes
unwilling or unable to deliver components or materials meeting our
specifications. Our inability to manufacture and sell products to meet delivery
schedules could have a material adverse effect on our reputation in the
industry, as well as our financial condition and results of operations. If one of our products proves to be defective or is misused by a health care
practitioner or patient, 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. We
currently have in place product liability insurance in the amount of $5,000,000
for liability losses, including legal defense costs. 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, revenues and
prospects for future business. We are dependent on our proprietary technology and the patents, copyrights and
trademarks that protect our products. If competitors are able to independently
develop products of equivalent or superior capabilities, the results of our
operations could be adversely impacted. We rely substantially on proprietary technology and capabilities. We have filed
patent applications in the United States for substantially all of our products.
We currently hold approximately 40 patents, including patents that relate to
both the ON-Q® Post-Operative Pain Relief System (now known as the ON-Q®
PainBuster® Post-Operative Pain Relief System) and the SoakerTM Catheter. We
have also filed for intellectual property right protection in all foreign
countries in which we currently derive significant revenue. Our patents
generally expire between 2009 and 2015, with significant patents expiring in
2009. Without sufficient intellectual property right protection, our
competitors may be able to sell products identical to ours and cause a downward
pressure on the selling price of our products. There can be no assurance that pending patent or trademark applications will be
approved or that any patents will provide competitive advantages for our
products or will not be challenged or circumvented by competitors or others.
Our competitors may also independently develop products with equivalent or
superior capabilities or otherwise obtain access to our capabilities. We manufacture the majority of our products in Mexico. Any difficulties or
disruptions in the operation of our plant may adversely impact our operations. The majority of our products are manufactured by Block Medical, a wholly-owned
subsidiary. We may encounter difficulties with the uncertainties inherent in
doing business in a foreign country, including economic, political and
regulatory uncertainties. 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. If there are difficulties or problems in our Mexico facility, or
other disruptions in our production and delivery process affecting product
availability, these difficulties could have a material adverse effect on our
business, financial condition and results of operations. 19
    Table of Contents  A significant portion of our sales is to customers in foreign countries. We may
lose sales, market share and profits due to exchange rate fluctuations and
other factors related to our foreign business. For the three-month period ended March 31, 2004, sales to customers in foreign
countries comprised approximately 17% of our revenues. 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. We currently rely on two distributors for a significant percentage of our
sales. If our relationship with one or both of these distributors were to
deteriorate, our sales may materially decline. During the three-month period ended March 31, 2004, sales to B. Braun Medical
S.A. (France), a distributor in Europe, and B. Braun Medical, Inc., a national
distributor in the United States, accounted for approximately 9% and 3%,
respectively, of our net revenues. 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 have a material adverse effect on our business. The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates, judgments and assumptions that may ultimately prove to be incorrect. The accounting estimates and judgments that management must make in the
ordinary course of business affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the periods presented. If the underlying estimates
are ultimately proven to be incorrect, subsequent adjustments could have a
material adverse effect on our operating results for the period or periods in
which the change is identified. Additionally, subsequent adjustments could
require us to restate our financial statements. Restating financial statements
could result in a material decline in the price of our stock. RISKS RELATED 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 month of April 2004 was approximately 354,000 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:  
    
    Announcements of technological innovations, new products, or clinical studies by us or others;  
    
    government regulation;  
    
    developments in patent or other proprietary rights;  
    
    future sales of substantial amounts of our common stock by existing stockholders or by us; and  
    
    comments by securities analysts and general market conditions. 20
    Table of Contents  The realization of any of the risks described in these Risk Factors could
have a negative effect on the market price of our common stock. In the future, our common stock may be removed from listing on the Nasdaq
quotation system and may not qualify for listing on any stock exchange, in
which case it may be difficult to find a market in our stock. If our common stock is no longer traded on a national trading market, it may be
more difficult for you to sell shares that you own, and the price of our common
stock would likely be negatively affected. Currently, our common stock is
traded on the Nasdaq National Market. Nasdaq has a number of continued listing
requirements, including a minimum trading price requirement. Failure to comply
with any Nasdaq continued listing requirement could cause our common stock to
be removed from listing on Nasdaq. Should this occur, we may not be able to
secure listing on other exchanges or quotation systems, and this would have a
material adverse effect on the price and liquidity 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 warrants may be resold pursuant to currently effective
registration statements. As of May 1, 2004, there were:  
    
    21,282,168 shares of common stock that have been issued in registered
offerings and are freely tradable in the public markets;  
    
    225,111 shares of common stock underlying warrants which have been
registered for resale under a Registration Statement on Form S-3
(Registration No. 333-109096);  
    
    147,000 shares of vested and unvested restricted common stock that have
been issued under our restricted stock plans; and  
    
    an aggregate of 4,128,103 shares of common stock that may be issued upon
the exercise of stock options and stock rights outstanding under our
equity incentive plans. 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. Anti-takeover devices may prevent a sale, or changes in the management, of
I-Flow. We have in place several anti-takeover devices, including a stockholder rights
plan, that may have the effect of delaying or preventing a sale, or changes in
the management, of I-Flow. For example, one anti-takeover device provides for a
board of directors that is separated into three classes, with their terms in
office staggered over three year periods. This has the effect of delaying a
change in control of the board of directors without the cooperation of the
incumbent board. In addition, our bylaws do not allow stockholders to call a
special meeting of stockholders or act by written consent, and also require
stockholders to give written notice of any proposal or director nomination to
us within a specified period of time prior to any stockholder meeting. We may also issue shares of preferred stock without stockholder approval and
upon terms that our board of directors may determine in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third-party to acquire a majority of our outstanding stock, and the
holders of such preferred stock could have voting, dividend, liquidation and
other rights superior to those of holders of our common stock. 21
    Table of Contents  We do not pay dividends and this may negatively affect the price of our stock. We have not paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. The future price of
our common stock may be depressed because we do not pay dividends. 
 Item 6.Exhibits and Reports on Form 8-K (a)
    
    ExhibitsIncorporated by reference to the Exhibit Index included herewith.(b)
    
    Reports on Form 8-KOn February 24, 2004, the Company filed a current report on Form
8-K pursuant to which it furnished a release regarding its fourth
quarter and year end financial results. On March 22, 2004, the
Company filed a current report on Form 8-K to report certain
expectations regarding its first quarter financial results. On
April 12, 2004, the Company filed a current report on Form-8-K that
contained revised expectations regarding its first quarter
financial results. On April 14, 2004, the Company filed a current
report on Form 8-K to report that it had entered into an
underwriting agreement pursuant to which it had agreed to sell up
to 2,990,000 shares of its common stock in an underwritten public
offering. On April 27, 2004, the Company filed a current report on
Form 8-K pursuant to which it furnished a release regarding its
first quarter financial results.
 22
    Table of Contents  SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. I-FLOW CORPORATIONDate: May 10, 2004
    /s/ Donald M. EarhartDonald M. EarhartPresident, Chairman and Chief Executive Officer
(As Principal Executive Officer) Date: May 10, 2004
    /s/ James R. TalevichJames R. TalevichChief Financial Officer
(As Principal Financial Officer) 23
    Table of Contents  INDEX TO EXHIBITS Exhibit No.
    
    Exhibit2.1
    
    Stock Purchase Agreement, dated October 28, 2003, by and between Integra
LifeSciences Corporation and I-Flow Corporation (1)2.2
    
    Merger Agreement, dated July 27, 2001, by and between I-Flow Corporation, a
Delaware corporation, and I-Flow Corporation, a California corporation (2)2.3
    
    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)2.4
    
    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)2.5
    
    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)3.1
    
    Amended and Restated Certificate of Incorporation of I-Flow Corporation, a
Delaware Corporation (6)3.2
    
    Bylaws of I-Flow Corporation, a Delaware Corporation (2)3.3
    
    Certificate of Designation Regarding Series A Junior Participating Cumulative
Preferred Stock (7)4.1
    
    Specimen Common Stock Certificate (20)4.2
    
    Warrant Agreement, dated February 13, 1990, between the Company and American
Stock Transfer & Trust Company, as warrant agent (9)4.3
    
    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)4.4
    
    Warrant to Purchase Stock, dated May 8, 2003, between I-Flow Corporation and
Silicon Valley Bank (10)4.5
    
    Registration Rights Agreement, dated May 8, 2003, between I-Flow Corporation
and Silicon Valley Bank (10)4.6
    
    Form of Warrant, dated September 4, 2003 (1)4.7
    
    Form of Registration Rights Agreement, dated September 4, 2003 (1)10.1
    
    Form of Securities Purchase Agreement, dated September 2, 2003 (1)10.2
    
    I-Flow Corporation Amended and Restated 2001 Equity Incentive Plan (11)*10.3
    
    2003 Restricted Stock Plan of I-Flow Corporation (10)*10.4
    
    2001 Restricted Stock Plan of I-Flow Corporation (12)*10.5
    
    1996 Stock Incentive Plan (13)*10.6
    
    1992 Non-Employee Director Stock Option Plan (14)*10.7
    
    1987-1988 Incentive Stock Option Plan and Non-Statutory Stock Option Plan,
restated as of March 23, 1992 (15)*10.8
    
    License and Transfer Agreement with SoloPak Pharmaceuticals Inc., dated March
6, 1996 (16)10.9
    
    Underwriting Agreement, dated April 13, 2004 (21)10.10
    
    Reserved.
 24
    Table of Contents  Exhibit No.
    
    Exhibit10.11
    
    Lease Agreement between Industrial Developments International, Inc. as Landlord and
I-Flow Corporation as Tenant dated April 14, 1997 (17)10.12
    
    Block Medical de Mexico lease agreement dated December 7, 1999 (22)10.13
    
    Amendment to Loan Agreement between Silicon Valley Bank and I-Flow Corporation dated
January 30, 2004 (22)10.14
    
    Amended and Restated Loan and Security Agreement between Silicon Valley Bank and
I-Flow Corporation dated May 8, 2003 (10)10.15
    
    Loan Agreement, dated March 31, 2000, by and among InfuSystem, Inc., I-Flow
Corporation and Old Kent Bank (10)10.16
    
    First Amendment to Loan Agreement, dated April 1, 2002, by and among InfuSystem,
Inc., I-Flow Corporation and Fifth Third Bank (formerly Old Kent Bank) (10)10.17
    
    Second Amendment to Loan Agreement, dated April 1, 2003, by and among InfuSystem,
Inc., I-Flow Corporation and Fifth Third Bank (formerly Old Kent Bank) (10)10.18
    
    Second Amended and Restated Promissory Note, dated April 1, 2003, between InfuSystem,
Inc. and Fifth Third Bank (formerly Old Kent Bank) (10)10.19
    
    Promissory Note with Donald M. Earhart dated June 15, 2001 (8)*10.20
    
    Reserved.10.21
    
    Employment Agreement with Donald M. Earhart, dated May 16, 1990 (18)*10.22
    
    Amendment No. 1 to Employment Agreement with Donald M. Earhart, dated June 21, 2001
(8)*10.23
    
    Amended and Restated Employment Agreement with James J. Dal Porto, dated June 21,
2001 (8)*10.24
    
    Employment Agreement with James R. Talevich, dated June 30, 2000 (19) *10.25
    
    Agreement Re: Change in Control with Donald M. Earhart dated June 21, 2001 (8)*10.26
    
    Agreement Re: Change in Control with James J. Dal Porto dated June 21, 2001 (8)*10.27
    
    Agreement Re: Change in Control with James R. Talevich, dated June 21, 2001 (8)*31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act on 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act on 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit
pursuant to applicable rules of the Securities and Exchange Commission.(1)
    
    Incorporated by reference to exhibit with this title filed with the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003.(2)
    
    Incorporated by reference to exhibit with this title filed with the Companys Current Report on
Form 8-K filed on August 3, 2001. 25
    Table of Contents  (3)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.(4)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K/A filed on March 6, 1998.(5)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K dated July 22, 1996.(6)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K dated May 29, 2002.(7)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K filed on March 13, 2002.(8)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.(9)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 1990.(10)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003.(11)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.(12)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.(13)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Definitive Proxy Statement filed on March 27, 1996.(14)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.(15)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Post-Effective Amendment to its Registration
Statement (No. 33-41207) filed on October 27, 1992.(16)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.(17)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K dated April 14, 1997.(18)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 1990.(19)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.(20)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002.(21)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Current Report on Form 8-K filed on April 14, 2004.(22)
    
    Incorporated by reference to exhibit with this title filed with
the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2003. 26