<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _______ TO _______
COMMISSION FILE NO.: 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as provided in charter)
-----------------------------------------------
Delaware 33-0022692
--------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
951 Calle Amanecer, San Clemente, California 92673
- --------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(949) 366-2183
--------------
(Registrant's Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports 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 XXX No____
---
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 31, 1998
----- -------------------------------
Common 8,051,065
<PAGE>
ICU MEDICAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Consolidated Balance Sheets, September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the three months
ended September 30, 1998 and 1997 4
Consolidated Statements of Income for the nine months
ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2.
- -------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3.
- -------
Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II OTHER INFORMATION 15
- --------------------------
SIGNATURES 16
</TABLE>
2
<PAGE>
ICU MEDICAL, INC.
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(All dollar amounts in thousands except share data)
ASSETS
<TABLE>
<CAPTION>
09/30/98 12/31/97
--------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,166 $ 2,962
Liquid investments 36,041 32,150
Accounts receivable, net of allowance for doubtful accounts of $342
and $324 as of September 30, 1998 and December 31, 1997, respectively 4,107 3,357
Inventories 2,369 1,763
Prepaid expenses and other 786 201
Deferred income taxes 690 717
------ ------
Total current assets 47,159 41,150
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 7,977 7,078
Furniture and fixtures 1,947 1,522
Molds 3,305 2,873
Land, building and building improvements 5,474 5,001
Construction in process 2,625 183
------ ------
21,328 16,657
Less - Accumulated depreciation (8,817) (7,060)
------- ------
12,511 9,597
Other assets 531 439
------- -------
$60,201 $51,186
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,081 $ 1,403
Accrued liabilities 2,984 1,754
------ ------
Total current liabilities 4,065 3,157
Deferred income taxes 104 82
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1.00 par value,
Authorized 500,000 shares, issued and outstanding - none - -
Common stock, $0.10 par value, authorized, 20,000,000 shares;
issued, 8,867,162 shares 887 887
Additional capital 40,198 39,455
Treasury stock - 823,847 and 1,100,776 shares at
September 30, 1998 and December 31, 1997, respectively (7,237) (9,320)
Retained earnings 22,184 16,925
------- -------
Total stockholders' equity 56,032 47,947
------- -------
$60,201 $51,186
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Three Months Ended
September 30, 1998 and September 30, 1997
(All dollar amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
9/30/98 9/30/97
--------------------------
<S> <C> <C>
Net sales $ 9,618 $ 7,700
Cost of goods sold 4,020 3,306
--------------------------
Gross profit 5,598 4,394
Selling, general and administrative expense 2,887 2,126
Research and development expenses 205 280
--------------------------
Income from operations 2,506 1,988
Investment income 367 342
--------------------------
Income before income taxes 2,873 2,330
Provision for income taxes 1,050 885
--------------------------
Net income $ 1,823 $ 1,445
==========================
Net income per share:
Basic $ 0.23 $ 0.18
Diluted $ 0.22 $ 0.18
==========================
Weighted average number of shares:
Basic 8,001,942 7,810,891
Diluted 8,350,717 7,853,002
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Nine Months Ended
September 30, 1998 and September 30, 1997
(all dollar amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
9/30/98 9/30/97
--------------------------
<S> <C> <C>
Net sales $ 30,030 $ 21,714
Cost of sales 12,555 9,276
--------------------------
Gross profit 17,475 12,438
Selling, general and administrative expense 9,415 5,976
Research and development expenses 756 931
--------------------------
Income from operations 7,304 5,531
Interest and other income 1,038 950
--------------------------
Income before tax 8,342 6,481
Provision for income taxes 3,140 2,445
--------------------------
Net income $ 5,202 $ 4,036
==========================
Net income per share:
Basic $ 0.65 $ 0.50
Diluted $ 0.62 $ 0.50
==========================
Weighted average number of shares:
Basic 7,967,903 8,006,842
Diluted 8,367,083 8,038,076
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ICU MEDICAL, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1998 and September 30, 1997
(All dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
9/30/98 9/30/97
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,202 $ 4,036
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,876 1,679
Net change in current asset and current liabilities, and other (952) (542)
--------------------------
Net cash provided by operating activities 6,126 5,173
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other (4,914) (534)
Net change in liquid investments (3,891) 2,050
--------------------------
Net cash provided by (used in) investing activities (8,805) 1,516
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised and related tax benefits 3,283 76
Purchase of treasury stock (400) (4,606)
--------------------------
Net cash provided by (used in) financing activities 2,883 (4,530)
--------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 204 2,159
Cash and cash equivalents, beginning of the period 2,962 2,060
--------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,166 $ 4,219
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(All dollar amounts in thousands)
(unaudited)
NOTE 1: The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which are, in the opinion of
Management, necessary to a fair statement of the consolidated results for the
interim periods presented, which adjustments consist of only normal recurring
adjustments. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The consolidated statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report to Stockholders. Certain reclassifications have been made to
the 1997 consolidated financial statements to conform with the current
presentation.
NOTE 2: Inventories consisted of the following:
9/30/98 12/31/97
------- --------
Raw material $1,440 $1,060
Work in process 647 460
Finished goods 282 243
------ ------
Total $2,369 $1,763
====== ======
NOTE 3: Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive securities. The Company's dilutive
securities are outstanding common stock options (excluding stock options with an
exercise price in excess of market value), less the number of shares that could
have been purchased with the proceeds from the exercise of the options, using
the treasury stock method, and were 348,775 and 42,111 for the three months
ended September 30, 1998 and 1997, respectively, and 399,180 and 31,234 for the
nine months ended September 30, 1998 and 1997, respectively.
NOTE 4: The effective tax rate differs from that computed at the federal
statutory rate of 34% principally because of the effect of tax-exempt
investment income partially offset by the effect of state income taxes.
NOTE 5: In the second quarter of 1998, the Company settled its patent
litigation against Tri-State Hospital Supply Corporation. The Company also
accrued a provision for a judgement against it in a suit for commissions
allegedly owed by the Company. See Part II, Item 1. Legal Proceedings.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following table sets forth the net sales by product as a percentage of total
net sales for the periods indicated:
<TABLE>
<CAPTION>
========================================================================================================
PRODUCT LINE 1994 1995 1996 1997 Q3-97 Q3-98 YTD YTD
Q3-97 Q3-98
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLAVE(R) 45% 61% 68% 65% 69% 67% 67% 69%
- --------------------------------------------------------------------------------------------------------
Click Lock and Piggy Lock 41% 20% 12% 7% 8% 4% 8% 4%
- --------------------------------------------------------------------------------------------------------
McGaw Protected Needle 9% 13% 8% 5% 5% 4% 6% 5%
- --------------------------------------------------------------------------------------------------------
Lopez Valve and other 5% 4% 4% 4% 4% 4% 4% 4%
- --------------------------------------------------------------------------------------------------------
RF100-RF150 ("Rhino") - 2% 3% 7% 7% 7% 6% 6%
- --------------------------------------------------------------------------------------------------------
Budget Medical Products ("BMP") - - 2% 6% 5% 9% 5% 7%
- --------------------------------------------------------------------------------------------------------
B.Braun/McGaw SafeLine
Revenue Sharing - - 3% 6% 2% 5% 4% 5%
- --------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100% 100%
========================================================================================================
</TABLE>
The Company sells its products to independent distributors and through
strategic supply and distribution agreements extending into 2002 with B.Braun
Medical, Inc. ("B.Braun/McGaw") and Abbott Laboratories ("Abbott") (the
"B.Braun/McGaw Agreement" and the "Abbott Agreement," respectively). Most
independent distributors handle the full line of the Company's products.
B.Braun/McGaw and Abbott purchase CLAVE products, principally bulk, non-sterile
connectors. B.Braun/McGaw also purchases the McGaw Protected Needle and pays
the Company revenue sharing payments on its sales of its SafeLine products.
Abbott also purchases the Rhino, a low-priced connector specifically designed
for Abbott. Through 1997, both agreements established minimum transfer prices
that were lower than historical average selling prices, and a revenue sharing
formula under which the Company could receive more than the minimum transfer
prices based on selling prices of products incorporating the Company's products.
The B.Braun/McGaw Agreement provided for such revenue sharing based on
B.Braun/McGaw's selling prices of CLAVE products and the Abbott Agreement
provided for such revenue sharing based on Abbott's selling prices of both CLAVE
products and Rhinos. Effective August 1, 1997, the Abbott Agreement was amended
to establish fixed selling prices for Rhinos and eliminate revenue sharing, and
effective January 1, 1998, both the Abbott and B.Braun/McGaw Agreements were
amended to establish fixed selling prices on CLAVE Products and eliminate
revenue sharing on CLAVE products.
Management believes that as the healthcare provider market continues to
consolidate, the Company's success in marketing and distributing CLAVE products
will depend, in part, on the Company's ability, either independently or through
strategic supply and distribution arrangements, to secure long-term CLAVE
contracts with major buying organizations. There is no assurance that the
Company will obtain such long-term contracts in the future. Further, the
Company's marketing and distribution strategy may result in a significant share
of the Company's revenues being concentrated among a small number of customers.
The loss of a strategic supply and distribution agreement with a
8
<PAGE>
customer or the loss of a large contract by such a customer, could have a
material adverse effect on operating results.
Management believes the success of the CLAVE has, and will continue to
motivate others to develop one piece needleless connectors, which may
incorporate many of the same functional and physical characteristics as the
CLAVE. The Company is aware of a number of such products. In response to
competitive pressure the Company has been reducing prices to its independent
distributors, as well as to original equipment manufacturers, to protect and
expand its market. The price reductions to date have more than been offset by
increased volume, although this has not occurred to date for independent
distributors in the aggregate. There is no assurance that such increased volume
will be achieved by the independent distributors, and there is no assurance that
the Company's current or future products will be able to successfully compete
with products developed by others.
Quarter Ended September 30, 1998 Compared to the Same Quarter Last Year
- -----------------------------------------------------------------------
Net sales increased $1,918,000, or approximately 25%, to $9,618,000 in the
third quarter compared to $7,700,000 during the same period last year. The
increase was primarily attributable to a 21% increase in sales of CLAVE
products.
Net sales to B.Braun/McGaw, including revenue sharing, amounted to
$3,154,000 in the third quarter of 1998, as compared with $2,391,000 in the
third quarter of 1997. CLAVE net sales increased $503,000 and estimated revenue
sharing payments due on B.Braun/McGaw sales of its SafeLine products increased
$279,000. Sales of McGaw Protected Needle were down slightly from last year.
Assuming the continuation of historical trends, Management expects increases in
unit shipments of CLAVE Products to B.Braun/McGaw to continue during the
remainder of 1998, although there is no assurance that those expectations will
be realized.
Net sales to Abbott in the third quarter of 1998 were $2,922,000, as
compared with net sales of $1,555,000 in the third quarter of 1997. Commencing
in the second quarter of 1997, there has been a substantial increase in
marketing of CLAVE products to Abbott and to Abbott customers, and Assuming the
continuation of historical trends, Management expects continued increases in
sales volume with Abbott through the remainder of 1998, although there is no
assurance that such increases will be realized.
Total net sales of CLAVE Products increased from $5,299,000 in the third
quarter of 1997 to $6,415,000 in the third quarter of 1998, or 21%. The
increase in unit shipments over the third quarter of 1997 was approximately 73%,
substantially all of which was accounted for by sales to Abbott and
B.Braun/McGaw. Unit shipments to independent distributors were virtually
unchanged. Average net selling prices decreased in response to market pressures
and because a greater proportion of sales were the lower priced bulk non-sterile
CLAVEs sold to Abbott and B.Braun/McGaw.
Management expects unit shipments of CLAVE Products to independent
distributors in 1998 to be the same or somewhat below those for 1997. Net sales
of CLAVE products to independent distributors are expected to continue to
decrease as average selling prices continue to decline.
9
<PAGE>
Net sales of Click Lock and Piggy Lock decreased approximately 40% in the
third quarter of 1998 compared to the same period last year. The decline is
because of the safe-connector market's continued shift to needleless technology.
Management expects the trend to continue.
Net sales of the Lopez Valve increased from $225,000 in the third quarter
of 1997 to $351,000 in the third quarter of 1998, or 56%. The net increase year-
to-date is 26%. Management expects that net sales of the Lopez Valve will
continue to increase for the rest of 1998.
Net sales of Budget Medical Products increased to $878,000 in the third
quarter of 1998, as compared with $413,000 in the third quarter of 1997,
principally because of increased unit shipments of custom I.V. sets
incorporating the CLAVE. The Company is currently taking steps aimed at
expanding BMP by increasing systems capabilities, improving manufacturing
efficiencies, lowering inventory carrying costs, reducing labor costs and
enhancing distribution. As part of these steps, the Company will transfer BMP's
labor intensive manufacturing, and a portion of the Company's non-BMP labor
intensive manufacturing to a low-labor-cost area in Mexico, and is evaluating a
significant broadening of its market. The Company started construction of a
manufacturing facility in Ensenada, Baja California, Mexico in the third quarter
of 1998. Because significant innovation is required to achieve these goals,
there can be no assurance that these steps will achieve the desired results.
However, even if they are successful, Management expects that gross profit
margins in BMP will continue to be lower than the average historical gross
profit margins recorded by the Company because production of its products is
relatively labor intensive.
Total net sales to foreign distributors were $190,000 in the third quarter
of 1998, as compared with $201,000 in the third quarter of 1997. Year-to-date
total net sales to foreign distributors increased to $953,000 from $583,000 in
1997. (Those amounts do not include distribution in Canada.) Management expects
that the Company's sales to foreign distributors will increase over the balance
of the year. In April 1998, BOC OHMEDA AB ("Ohmeda"), the Company's principal
distributor in Europe sold its European distribution operations to a competitor
of the Company, and the Company has terminated substantially all distribution by
Ohmeda since August 1998. The Company is currently arranging alternative
distribution in Europe. There is no assurance that satisfactory alternative
distribution arrangements will be made or whether the termination of the
distribution agreement with Ohmeda will have an adverse effect on the Company's
sales in Europe.
In November 1997, the Company commenced marketing the CLC 2000, a one
piece, swabable connector, engineered to prevent the back-flow of blood into the
catheter. Shipments were delayed until late in the second quarter in order to
complete production validation. Shipments have commenced, but have not been
significant to date.
10
<PAGE>
Historically, the Company has experienced lower usage of its products in
the summer months due to lower censuses in healthcare facilities. The table
below illustrates the effect this phenomenon has on the Company's net sales:
<TABLE>
<CAPTION>
=======================================================================================================
NET SALES (000'S) Q1 Q2 Q3 Q4 TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 $2,914 $ 2,335 $2,495 $3,637 $11,381
- -------------------------------------------------------------------------------------------------------
1994 $4,180 $ 3,842 $3,484 $5,036 $16,542
- -------------------------------------------------------------------------------------------------------
1995 $5,427 $ 5,966 $4,617 $5,272 $21,282
- -------------------------------------------------------------------------------------------------------
1996 $6,008 $ 6,147 $5,972 $6,472 $24,599
- -------------------------------------------------------------------------------------------------------
1997 $6,824 $ 7,190 $7,700 $8,690 $30,404
- -------------------------------------------------------------------------------------------------------
1998 $9,982 $10,430 $9,618
=======================================================================================================
</TABLE>
The second and third quarters have tended to be weaker than the first and
fourth, although the rate of growth in net sales has caused exceptions to that
tendency in recent years. In the second quarter of 1995, B.Braun/McGaw was
building significant inventory of CLAVE products. In the second quarter of
1996, B.Braun/McGaw commenced payment of SafeLine Revenue Sharing. In the
second quarter of 1997, sales increases occurred in most of the Company's
product lines; and the third quarter of 1997, sales increases occurred
principally because of increased net sales of CLAVE products to Abbott and
independent distributors, offset by lower net sales of CLAVE products to
B.Braun/McGaw. In the second quarter of 1998, net sales increased over the
first quarter of 1998 principally because of increased net sales of CLAVE
products to B.Braun/McGaw. Management believes that the large percentage of its
sales to Abbott and B.Braun/McGaw could lead to non-seasonal fluctuations in net
sales in the future because their ordering patterns may not directly reflect
their current sales volumes.
Gross margin was 58% during the third quarter of 1998 compared to 57%
during the same period last year. Although average selling prices have continued
to decrease, increases in production volume resulted in greater absorption of
overhead and a decrease in unit manufacturing costs. Management believes that
the gross margin percentage for the remainder of 1998 will stay at or slightly
lower than that achieved in the third quarter of 1998 as average unit sales
prices decrease.
Selling, general and administrative expenses ("SG&A"), excluding research
and development expenses, increased $761,000 to $2,887,000, an increase as a
percentage of net sales to 30% during the third quarter of 1998 compared to 28%
during the same period last year. The principal components of the increase were
increased sales and marketing expenses related to the introduction of new
products and expansion of the business, and, to a lesser extent, costs related
to BMP, offset by a decrease in litigation expenses with the settlement of the
patent litigation in which the Company was the plaintiff. See Part II, Item 1.
Legal Proceedings.
Management expects the cost of litigation in the fourth quarter to be
approximately the same or somewhat higher than costs in the third quarter.
However, the amount of costs related to litigation will depend on the amount and
type of litigation and the progress of the legal proceedings, and no assurances
can be given in this regard. There can be no assurance that the costs will not
vary materially from Management's estimates. Costs related to BMP and sales and
marketing expenses are expected to continue through the balance of the year a
somewhat higher level than in the third quarter
11
<PAGE>
of 1998, but SG&A expenses are not expected to increase as a percentage of net
sales in the fourth 1uarter of 1998.
Research and development expenses ("R&D") were lower in the third quarter
of 1998 than in the same quarter of 1997, and decreased as a percentage of net
sales from 4% to 2%. The level of R&D activity is down from last year as two
major products are near completion, and resources are being devoted to
sustaining engineering. Management expects R&D expenses to increase later in the
year and in 1999 for clinical evaluations of the new CLC 2000. However, no
assurance can be given that such costs will not differ materially from those
estimates or that the R&D will be completed as expected.
Income from operations increased 26%, because of the increase in net sales.
Net income increased 26% to $1,823,000 in the third quarter of 1998 as
compared with $1,445,000 in the comparable period last year. Net income per
share - diluted increased $0.04 or 22% in the third quarter of 1998 over the
third quarter of 1997.
Nine Months Ended September 30, 1998 Compared to the Same Nine Months Last Year
- -------------------------------------------------------------------------------
Net sales increased $8,316,000, or approximately 38%, to $30,030,000 in the
first nine months of 1998 compared to $21,714,000 during the same period last
year. The increase was primarily attributable to a 44% increase in sales of
CLAVE products. All other product categories, except protected needles, also
had increased net sales.
Gross margin was 58% during the first nine months of 1998 compared to 57%
during the same period last year. Although average selling prices have
continued to decrease, increases in production volume resulted in greater
absorption of overhead and a decrease in unit manufacturing costs.
Selling, general and administrative expenses ("SG&A"), excluding research
and development expenses, increased $3,439,000 to $9,415,000, an increase as a
percentage of net sales to 31% during the nine months of 1998 compared to 28%
during the first nine months of 1997. The principal components of the increase
were the cost of patent litigation in which the Company was the plaintiff
(settled in the second quarter of 1998 -- see above), other litigation,
increased sales and marketing expenses related to introduction of new products
and expansion of the business, and investment in the BMP custom I.V. set
business.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1998, the Company's cash and
cash equivalents and investment securities position increased $4,095,000 to
$39,207,000. Cash provided by operating activities and the exercise of stock
options was partially offset by the cost of additions to property and equipment.
Management expects that sales of the Company's products will continue to
grow in 1998. If sales continue to increase, net working capital requirements
(other than cash and investments), principally accounts receivable and
inventories are expected to increase as well. As a result of these and other
12
<PAGE>
factors, including increased capital expenditures, the Company's working capital
requirements may increase in the foreseeable future.
Capital expenditures have increased significantly in 1998 from levels in
the past three years to meet increased sales volumes and automate production of
new products, and to acquire land and build a facility in Ensenada, Baja
California, Mexico.
The Company believes that its existing working capital, supplemented by
income from operations, will be sufficient for the foreseeable future.
In August 1998, the Company spent $400,000 to purchase treasury stock, its
first such purchase since August 1997. It may purchase additional shares in the
future. However, future acquisitions, if any, will depend on market conditions
and other factors.
Year 2000 Compliance
- --------------------
Many older computer programs use only the last two digits to refer to a
year. Therefore, they do not properly recognize a year that begins with "20"
rather than "19." This is referred to as the Year 2000, or Y2K Problem. The Y2K
problem has been eliminated in many new programs and systems, which are said to
be "Y2K compliant." The Company has completed its initial assessment of Y2K and
believes, based on manufacturers' specifications and subject to completion of
testing later in 1998, that all its information technology ("IT") systems and
applications and related hardware are Y2K compliant. The Company has not
completed assessing Y2K compliance of its non-IT systems, principally
manufacturing systems, but it believes that any non-compliance will not affect
the ability to use the related manufacturing equipment. The Company will attempt
to assess later in 1998 and in 1999 whether third parties with whom it deals,
such as customers, vendors and governments have any Y2K problems that could
affect the Company; such problems could result in interruptions in delivery of
services and materials and payments, among other things. The Company has not
developed Y2K non-compliance contingency plans, but will consider the need for
such plans upon completion of the Y2K compliance assessments. Costs to assure
Y2K compliance have so far been and are expected to remain nominal.
While the Company is not currently aware of any Y2K compliance problems in
its own systems, Y2K compliance of those systems cannot be assured until
completion of testing. Further, the Company cannot assure that the information
it receives from third parties about their Y2K compliance will be meaningful or
accurate. Failure to achieve compliance for the Company's systems, or failure
of significant third parties, with which the Company deals to achieve Y2K
compliance, could have a material adverse effect on the Company's operations.
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis describes trends in the Company's
business and finances that Management perceives and states some of its
expectations and beliefs about the Company's future. These statements about the
future are "forward looking statements," and the Company identifies them by
using words such as "believes," "expects," "anticipates," "estimates,"
"intends," "plans," "will," "continuing," "may" and similar expressions and by
statements about aims, goals and plans. The forward looking statements are based
on the best information currently available to Management and assumptions
13
<PAGE>
that Management believes are reasonable, but Management does not intend the
statements to be representations as to future results. They include among other
things statements about:
. future operating results and various elements of operating results, including
sales and unit volumes of products, production costs, gross margins, sales
and marketing costs, research and development expense and clinical evaluation
costs;
. factors affecting operating results, such as shipments to specific customers,
product mix, selling prices, the market shift to needleless products,
achievement of business expansion goals, manufacturing efficiencies,
production volumes, overhead absorption, expansion of markets and
distribution and litigation costs;
. new contracts with buying organizations and dependence on a small number of
customers;
. competitive factors, including continuing development of competing products
by other manufacturers and downward pressure on selling prices;
. working capital requirements, capital expenditures and common stock
repurchases; and
. Y2K issues.
The kinds of statements described above and similar forward looking
statements about the Company's future performance are subject to a number of
risks and uncertainties which you should consider in evaluating the statements.
First, you should consider the factors and risks described in the statements
themselves. These factors are uncertain, and if one or more of them turn out
differently than Management currently expects, the Company's operating results
may differ materially from Management's current expectations.
Second, you should read the forward looking statements in conjunction with
the Risk Factors in the Company's Current Report on Form 8-K to the Securities
and Exchange Commission dated November 5, 1998, which is incorporated by
reference.
Third, the Company's actual future operating results are subject to other
important factors that the Company cannot predict or control, including among
others the following:
. general economic and business conditions;
. the effect of price and safety considerations on the healthcare industry;
. competitive factors, such as product innovation, new technologies, marketing
and distribution strength and price erosion;
. unanticipated market shifts and trends;
. the impact of legislation effecting government reimbursement of healthcare
costs;
. changes by the Company's major customers and independent distributors in
their strategies that might effect their efforts that to market the Company's
products;
. unanticipated production problems; and
. the availability of patent protection and the cost of enforcing and of
defending patent claims.
The Company disclaims any obligation to update the statements or to
announce publicly the result of any revision to any of the statements contained
herein to reflect future events or developments.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
In an action entitled ICU Medical, Inc. v. Tri-State Hospital Supply
----------------------------------------------
Corporation, brought in the United States District Court for the Northern
- -----------
District of California, the Company alleged infringement of two of the Company's
patents by defendant's protected needle connector and Y-style extension sets.
The parties agreed to settle this matter in June 1998. Under the settlement
agreement, Tri-State Hospital Supply Corporation ("Tri-State") stipulates that
the patents are valid, enforceable and have been infringed by virtue of Tri-
State's manufacture and sale of certain products. The parties agreed to treat
the other terms of the settlement as confidential.
On April 7, 1998, in an action entitled Allen Petty, dba Carmel Development
-----------------------------------
International v. ICU Medical, Inc., an Orange County, California, Superior Court
- ----------------------------------
jury rendered a verdict in favor of the Plaintiff and against the Company in the
sum of $795,448 in an action brought by the Plaintiff for commissions allegedly
owed him. On June 23, 1998, the Court reduced the judgement to $727,522
($673,142 plus certain expenses), but denied the balance of the Company's motion
to set aside the jury verdict. The Company believes the verdict is against the
facts in the case and is contrary to well established law, and intends to appeal
to have the balance of the judgement overturned. In view of the Court decision
in June 1998 and the uncertainties of the appeal process, the Company accrued a
provision for this matter in its June 1998 financial statements.
The Company is from time to time involved in various other legal
proceedings, either as a defendant or plaintiff, most of which are routine
litigation in the normal course of business. The Company believes that the
resolution of the legal proceedings in which it is involved will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
Inapplicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- --------------------------
Any stockholder who intends to propose any business at a meeting shall, not
less than 50 days nor more than 75 days prior to the date of the meeting,
deliver a notice to the Secretary of the Company setting forth as to each matter
the stockholder proposes to bring before the meeting (i) a brief description of
the business to be brought before the meeting and the reasons for conducting the
business at the meeting (ii) the name and record address of the stockholder
giving the notice, (iii) the class and number of shares of capital stock of the
Company which are beneficially owned by the stockholder, and by any other
stockholders known by the stockholder giving the notice to be supporting the
proposal and (iv) any material or financial interest of the stockholder in such
business.
15
<PAGE>
Notwithstanding the foregoing, if less than 60 days or prior public disclosure
of the meeting is given or made to stockholders, the notice by the stockholder
must be received by the Secretary on or before the tenth day after notice of the
date of the meeting was mailed or publicly disclosed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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.
ICU Medical, Inc.
(Registrant)
/s/ Francis J. O'Brien Date: November 6, 1998
- ----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
16
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