<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: JUNE 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 X 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 July 24, 1998
----- ----------------------------
Common 8,074,415
<PAGE>
ICU MEDICAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
<S> <C>
Consolidated Balance Sheets, June 30, 1998 and December
31, 1997 3
Consolidated Statements of Income for the three months
ended June 30, 1998 and 1997 4
Consolidated Statements of Income for the six months
ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six
months ended June 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 Not Applicable
Risk
PART II - OTHER INFORMATION 14
- --------------------------
SIGNATURES 16
</TABLE>
2
<PAGE>
ICU MEDICAL, INC.
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(All dollar amounts in thousands except share data)
<TABLE>
<CAPTION>
6/30/98 12/31/97
----------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,610 $ 2,962
Liquid investments 34,950 32,150
Accounts receivable, net of allowance for doubtful
accounts of $357 and $324 as of June 30, 1998 and
December 31, 1997, respectively 4,822 3,357
Inventories 2,223 1,763
Prepaid expenses and other 371 201
Deferred income taxes 717 717
----------------------
Total current assets 46,693 41,150
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 7,654 7,078
Furniture and fixtures 1,632 1,522
Molds 3,272 2,873
Land, building and building improvements 5,459 5,001
Construction in process 1,767 183
----------------------
19,784 16,657
Less - Accumulated depreciation (8,192) (7,060)
----------------------
11,592 9,597
Other assets 444 439
======================
$58,729 $51,186
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,522 $ 1,403
Accrued liabilities 2,547 1,754
----------------------
Total current liabilities 4,069 3,157
Deferred income taxes 82 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 40,192 39,455
Treasury stock - 794,747 and 1,100,776 shares at
June 30, 1998 and December 31, 1997, respectively (6,860) (9,320)
Retained earnings 20,359 16,925
======================
Total stockholders' equity 54,578 47,947
----------------------
$58,729 $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
June 30, 1998 and June 30, 1997
(All dollar amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
6/30/98 6/30/97
----------------------------
<S> <C> <C>
Net sales $ 10,430 $ 7,190
Cost of goods sold 4,368 3,057
----------------------------
Gross profit 6,062 4,133
Selling, general and administrative expenses 3,357 2,121
Research and development expenses 253 335
----------------------------
Income from operations 2,452 1,677
Investment income 337 336
----------------------------
Income before income taxes 2,789 2,013
Provision for income taxes 1,070 760
----------------------------
Net income $ 1,719 1,253
============================
Net income per share:
Basic $ 0.21 $ 0.16
Diluted $ 0.20 $ 0.16
============================
Weighted average number of shares:
Basic 8,078,362 7,965,446
Diluted 8,469,353 7,972,629
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ICU Medical, Inc.
Consolidated Statements of Income
For the Six Months Ended
June 30, 1998 and June 30, 1997
(All dollar amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
6/30/98 6/30/97
----------------------------
<S> <C> <C>
Net sales $ 20,412 $ 14,014
Cost of goods sold 8,535 5,970
----------------------------
Gross profit 11,877 8,044
Selling, general and administrative expenses 6,528 3,850
Research and development expenses 551 651
----------------------------
Income from operations 4,798 3,543
Investment income 671 608
----------------------------
Income before income taxes 5,469 4,151
Provision from income taxes 2,090 1,560
----------------------------
Net income $ 3,379 $ 2,591
============================
Net income per share:
Basic $ 0.42 $ 0.32
Diluted $ 0.40 $ 0.32
============================
Weighted average number of shares:
Basic 7,950,696 8,105,982
Diluted 8,375,356 8,131,629
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ICU Medical, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended
June 30, 1998 and June 30, 1997
(All dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
6/30/98 6/30/97
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,379 $ 2,591
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,206 1,126
Net change in current asset and current liabilities, and other (1,152) 639
--------------------------
Net cash provided by operating activities 3,433 4,356
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other (3,237) (378)
Net change in liquid investments (2,800) -
--------------------------
Net cash used in investing activities (6,037) (378)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised and related tax benefits 3,252 58
Purchase of treasury stock - (4,152)
--------------------------
Net cash provided by (used in) financing activities 3,252 (4,094)
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 648 (116)
Cash and cash equivalents, beginning of the period 2,962 2,060
--------------------------
CASH AND CASH EQUIVALENTS, end of period $ 3,610 $ 1,944
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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:
<TABLE>
<CAPTION>
6/30/98 12/31/97
-------- ---------
<S> <C> <C>
Raw material $ 1,379 $ 1,060
Work in process 502 460
Finished goods 342 243
-------- ---------
Total $ 2,223 $ 1,763
======== =========
</TABLE>
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 390,990 and 7,183 for the three months ended
June 30, 1998 and 1997, respectively, and 424,660 and 25,647 for the six months
ended June 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 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 Q2-97 Q2-98 YTD YTD
Q2-97 Q2-98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLAVE(R) 45% 61% 68% 65% 65% 73% 65% 71%
- ---------------------------------------------------------------------------------------------------------
Click Lock and Piggy Lock 41% 20% 12% 7% 7% 3% 8% 4%
- ---------------------------------------------------------------------------------------------------------
McGaw Protected Needle 9% 13% 8% 5% 7% 6% 7% 5%
- ---------------------------------------------------------------------------------------------------------
Lopez Valve and other 5% 4% 4% 4% 4% 2% 4% 4%
- ---------------------------------------------------------------------------------------------------------
RF100-RF150 ("Rhino") - 2% 3% 7% 6% 4% 5% 5%
- ---------------------------------------------------------------------------------------------------------
Budget Medical Products ("BMP") - - 2% 6% 5% 7% 5% 6%
- ---------------------------------------------------------------------------------------------------------
McGaw SafeLine Revenue Sharing - - 3% 6% 6% 5% 6% 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 with B.Braun Medical, Inc.
("B.Braun/McGaw" or "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 both 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
which were lower than historical average selling prices, which the Company
negotiated in anticipation of significant sales, 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
provides 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 June 25, 1997, B.Braun Melsungen AG (B.Braun) acquired McGaw from IVAX
Corporation. On June 10, 1998, the Company and B.Braun/McGaw signed a
definitive Manufacture and Supply Agreement following a letter of intent that
had been signed in January. The Agreement extends the prior agreement for CLAVE
products from June 2000 to December 2002, has extension provisions beyond then,
and generally reduces prices.
8
<PAGE>
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. 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 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
distribution, 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 June 30, 1998 Compared to the Same Quarter Last Year
- ------------------------------------------------------------------
Net sales increased $3,240,000, or approximately 45%, to $10,430,000 in the
second quarter compared to $7,190,000 during the same period last year. The
increase was primarily attributable to a 63% increase in sales of CLAVE
products.
Net sales to McGaw, including revenue sharing, amounted to $4,617,000 in the
second quarter of 1998, as compared with $3,146,000 in the second quarter of
1997. CLAVE net sales increased $1,255,000 and estimated revenue sharing
payments due on B.Braun/McGaw sales of its SafeLine products increased $112,000.
Sales of McGaw Protected Needle were up slightly from last year. 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. Management expects that SafeLine revenue sharing
payments will continue, although it is unable to accurately forecast such
amounts.
Net sales to Abbott in the second quarter of 1998 were $2,535,000, as
compared with net sales of $756,000 in the second 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 Management expects
continued increases in sales volume with Abbott throughout 1998, although there
is no assurance that such increases will be realized.
Total net sales of CLAVE Products increased from $4,683,000 in the second
quarter of 1997 to $7,627,000 in the second quarter of 1998, or 63%. The
increase in unit shipments was approximately 94%, substantially all of which was
accounted for by Abbott and B.Braun/McGaw. Unit shipments to independent
distributors were virtually unchanged. Average net selling prices decreased in
response to
9
<PAGE>
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 at or somewhat below those for 1997. Net sales to
independent distributors are expected to decrease as average selling prices
continue to decline.
Net sales of Click Lock and Piggy Lock decreased approximately 38% in the
second 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 decreased 22% in the second quarter compared to
the same period last year due to a decrease in unit shipments. This partially
offset a 56% increase in the first quarter of 1998. The net increase year-to-
date is 13%. 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 $681,000 in the second
quarter of 1998, as compared with $341,000 in the second 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
efficiency, reducing labor cost and enhancing distribution. As part of these
steps, the Company will transfer BMP's 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 for BMP's labor intensive
operations in the third quarter of 1998. 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 sales to foreign distributors were $332,000 in the second quarter of
1998, as compared with $142,000 in the second quarter of 1997. The increase was
due to higher unit shipments. 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
and Ohmeda have agreed to terminate substantially all distribution by Ohmeda in
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. Net sales to date have not been significant, as the Company
experienced delays in production validation. That process is complete, and
shipments commenced late in the second quarter.
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
========================================================================================================
</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, McGaw was building
significant inventory of CLAVE products. In the second quarter of 1996, 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.
Gross margin was 58% during the second 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 second quarter of 1998 as average unit sales
prices decrease.
Selling, general and administrative expenses ("SG&A"), excluding research and
development expenses, increased $1,236,000 to $3,357,000, an increase as a
percentage of net sales to 32% during the second quarter of 1998 compared to 29%
during the same period last year. The principal components of the increase were
the cost of patent litigation in which the Company was the plaintiff, other
litigation, and increased sales and marketing expenses related to the
introduction of new products and expansion of the business.
The cost of patent litigation in which the Company was the plaintiff increased
from 1% of net sales in the second quarter of 1997 to 5% of net sales in the
second quarter of 1998. That litigation was settled in the second quarter of
1998, and there are no remaining costs related to it. The cost of other
litigation for the balance of 1998 is expected to be at or below levels incurred
during the first half of 1998, when the action entitled Allen Petty, dba Carmel
Development International v. ICU Medical, Inc. was tried. See Part II, Item 1.
Legal Proceedings.
11
<PAGE>
Research and development expenses ("R&D") were lower in the second quarter of
1998 than in the same quarter of 1997, and decreased as a percentage of net
sales from 5% 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 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 46%, because of the increase in net sales.
Net income increased 37% to $1,719,000 in the second quarter of 1998 as
compared with $1,253,000 in the comparable period last year. Net income per
share - diluted increased $0.04 or 25%, in the second quarter of 1998 over the
second quarter of 1997.
Six Months Ended June 30, 1998 Compared to the Same Six Months Last Year
- ------------------------------------------------------------------------
Net sales increased $6,398,000, or approximately 46%, to $20,412,000 in the
first six months of 1998 compared to $14,014,000 during the same period last
year. The increase was primarily attributable to a 58% 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 six 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 $2,678,000 to $6,528,000, an increase as a
percentage of net sales to 32% during the first half of 1998 compared to 27%
during the first half of 1997. The principal components of the increase were
the cost of patent litigation in which the Company was the plaintiff, other
litigation, investment in the BMP custom I.V. set business, and increased sales
and marketing expenses related to introduction of new products and expansion of
the business.
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 custom I.V. set
business and sales and marketing are expected to continue through the balance of
the year at approximately the same level as in the first half of 1998.
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1998, the Company's cash and cash
equivalents and investment securities position increased $3,448,000 to
$38,560,000. Cash provided by operating activities and the exercise of stock
options was partially offset by the cost of additions to property and equipment
and increases in accounts receivable and inventories.
12
<PAGE>
Management expects that sales of the Company's products will continue to grow
in 1998. If sales continue to increase, accounts receivable and inventories are
expected to increase as well. As a result of these and other factors, including
increased capital expenditures, the Company's working capital requirements may
increase in the foreseeable future.
Management expects to increase capital expenditures significantly in 1998 from
levels in the past three years to meet increased sales volumes and automate
production of new products, and to acquire and build a facility for BMP in a
low-labor-cost area of Mexico.
The Company believes that its existing working capital, supplemented by income
from operations, will be sufficient for the foreseeable future.
The Company has not purchased treasury stock since August 1997, but may
purchase additional shares in the future. However, future acquisitions, if any,
will depend on market conditions and other factors.
Forward Looking Statements
- --------------------------
In this Management's Discussion and Analysis, Management has made numerous
statements about perceived trends and its expectations and beliefs about various
matters, which reflect the best information currently available to Management
and assumptions which Management believes to be reasonable. They include
without limitation statements about: sales and unit volumes of product generally
and of individual product categories; sales and unit volumes of sales to
B.Braun/McGaw and Abbott and revenue sharing from B.Braun/McGaw; contracts with
buying organizations; concentration of revenues among a small number of
customers; the development by others of competing products; reduction in average
selling prices and the possibility of increased unit volumes offsetting such
decline; SafeLine revenue sharing; sales and unit volumes of sales to
independent distributors; decreases in sales of Click Lock and Piggy Lock; the
market shift to needleless technology; Lopez Valve sales; BMP systems
capabilities, manufacturing efficiency, labor costs, distribution, transfer of
manufacturing, broadening of market, costs of increasing systems capabilities
and future gross profit margins; foreign sales; European distribution; unit
production costs, production volumes and their effect on gross margin; SG&A
costs; sales, marketing and promotional costs; new product introduction; costs
related to the custom I.V. set business; litigation costs, R&D costs and
clinical evaluation costs; capital expenditures; repurchases of the Company's
common stock; and, working capital requirements. These statements and similar
statements are forward looking statements that involve a number of risks and
uncertainties, including the possible failure of the factors described in such
statements to materialize, the materialization of other factors and the caveats
which accompany the statements. The Company further cautions that, in addition
to the factors described in such statements, actual future results of operations
are subject to other important factors, including among others the following:
general economic and business conditions; the effect of price and safety
considerations on the healthcare industry, 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; any changes in corporate
strategies and practices of B.Braun/McGaw, Abbott and the Company's independent
distributors that might effect the resources and efforts that they devote to
marketing the Company's products; the possible impact of the acquisition of the
Company's customers; production
13
<PAGE>
problems; changes in product mix; changes in marketing strategy; the
availability of patent protection and the cost of enforcing and of defending
patent claims; and other risks described from time to time in the Company's
registration statements and reports filed with the Securities and Exchange
Commission, including those described under "Risk Factors" in the Company's
Current Report on Form 8-K dated November 14, 1996. Results of operations
actually achieved in the future may thus differ materially from Management's
current expectations. 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.
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 $673,142, 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
14
<PAGE>
ITEM 3. DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The following is a description of matters submitted to a vote or Registrant's
stockholders at its annual Meeting of Stockholders held on April 24, 1998:
A. George A. Lopez, M.D. was elected as director to hold office until the 2001
Annual Meeting. Votes cast for and withheld with respect to the nominee were as
follows:
Votes For Votes Withheld
--------- --------------
George A. Lopez, M.D. 7,482,005 246,380
The terms of the following directors continued after the Annual Meeting:
Jack W. Brown John J. Connors
Michael T. Kovalchik, III, M.D. Richard H. Sherman, M.D.
B. A brief description of each other matter voted upon at the meeting and
votes cast for, against and abstentions and broker non-votes as to each such
matter are as follows:
<TABLE>
<CAPTION>
Abstain and
For Against Broker non-votes
--- ------- ----------------
<S> <C> <C> <C>
Proposal to ratify the selection of Arthur 7,712,808 9,830 5,747
Andersen LLP as auditors for Registrant
</TABLE>
ITEM 5. OTHER INFORMATION
- --------------------------
On June 9, 1998, the Board of Directors elected Robert S. Swinney, M.D. to
fill a vacancy on the Board of Directors to hold office until the 2001 Annual
Meeting. Dr. Swinney is a physician and member of the faculty of the Los
Angeles County University of Southern California Medical Center and had
previously served as a director from 1989 to 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
Registrant filed the following report on Form 8-K during the quarter for which
this Report is filed.
Item 5 - June 10, 1998
15
<PAGE>
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: July 28, 1998
- ----------------------
Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,610
<SECURITIES> 34,950
<RECEIVABLES> 5,179
<ALLOWANCES> (357)
<INVENTORY> 2,223
<CURRENT-ASSETS> 46,693
<PP&E> 19,784
<DEPRECIATION> (8,192)
<TOTAL-ASSETS> 58,729
<CURRENT-LIABILITIES> 4,069
<BONDS> 0
0
0
<COMMON> 887
<OTHER-SE> 53,691
<TOTAL-LIABILITY-AND-EQUITY> 58,729
<SALES> 20,412
<TOTAL-REVENUES> 20,412
<CGS> 8,535
<TOTAL-COSTS> 15,614
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,469
<INCOME-TAX> 2,090
<INCOME-CONTINUING> 3,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
