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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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 specified in its 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)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (714) 366-2183
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
Indicate by check mark whether 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
Registrant as of February 28, 1998 was $95,562,306. *
The number of shares outstanding of Registrant's Common Stock, $.10 par value,
as of February 28, 1998 was 7,908,386.
Portions of the Proxy Statement for Registrant's 1998 Annual
Meeting of Stockholders, filed or to be filed pursuant to Regulation 14A within
120 days following Registrant's fiscal year ended December 31, 1997, are
incorporated by reference into Part III of this Report.
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* Without acknowledging that any persons other than Dr. George A. Lopez and
Jesus Mejia are affiliates, all directors and executive officers have been
included as affiliates solely for purposes of this computation.
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PART I
ITEM 1. BUSINESS
ICU Medical, Inc., together with its wholly-owned subsidiary Budget Medical
Products, Inc. ("BMP") (collectively, the "Company") is a leader in the
development, manufacture and sale of proprietary, disposable medical connection
systems for use in intravenous ("IV") therapy applications. The Company's IV
connectors are designed to prevent accidental disconnection's of IV lines and to
protect healthcare workers and their patients from the spread of infectious
diseases such as Hepatitis B and Human Immunodeficiency Virus ("HIV") by
significantly reducing the risk of accidental needlesticks. In 1993, the
Company launched the CLAVE(R), an innovative one-piece, needleless IV connection
device that has become the Company's largest selling product. The Company
believes that the CLAVE offers healthcare providers a combination of safety,
ease of use, reliability and cost effectiveness that is superior to any other
protective IV connection system on the market.
Heightened awareness of the risk of infection from needlesticks and the
substantial expense to healthcare providers of complying with regulatory
protocols when needlesticks occur have led to growing demand for safe medical
devices such as the Company's protective IV connectors. In addition, healthcare
regulations promulgated by OSHA mandate that "universal precautions" be observed
to minimize exposure to blood and other body fluids.
BACKGROUND
The Company's first products, the Click Lock and Piggy Lock, feature
protected needles to prevent accidental contact with needles and include locking
mechanisms to prevent accidental disconnections. These products were designed
to replace conventional products and methods, such as IV connectors with exposed
needles that are secured by tape or open luer lock connections. Such
conventional products typically do not provide the protection from needlesticks,
accidental disconnection and contamination that are provided by the Company's
products. Although protected needle products manufactured by the Company and by
others significantly reduce the risk of needlesticks, they nevertheless employ
steel needles, which require special disposal procedures.
Recognizing the inherent risks associated with needle handling and
disposal, even with protected needle systems, the Company developed the CLAVE, a
needleless IV connection system that was introduced in 1993. The CLAVE IV
connection system allows protected, secure and sterile IV connections without
needles and without failure prone mechanical valves used in the IV connection
systems of some competitors. The CLAVE was designed to eliminate needles from
certain applications by acute care hospitals, home healthcare providers,
ambulatory surgical centers, nursing homes, convalescent facilities, physicians'
offices, medical clinics, and emergency services. Reduction in the use of
needles will not only decrease needlesticks but will also reduce the number of
needles to be disposed of and certain safety risks inherent in needle handling
and disposal. While the Company continues to manufacture and sell protected
needle products, sales of those products are declining as the market penetration
of needleless systems such as the CLAVE and other competitive needleless
products increases.
IV USAGE AND INFECTION CONTROL
Primary IV therapy lines, used in hospitals, nursing homes, emergency units
and in home healthcare, consist of a tube running from a bottle or plastic bag
containing an IV solution to a catheter inserted in a patient's vein. The tube
typically has several injection ports or Y sites (conventionally, entry tubes
covered by latex caps) to which a secondary IV line can be connected to permit
constant intravenous administration of medications, fluids and nutrients, and to
allow instantaneous intravenous administration of emergency medication.
In conventional practice, primary IV system connections are made by
inserting an exposed steel needle attached to the primary IV line into an
injection port connected to the catheter. Conventional secondary IV connections,
so called piggyback connections, are made by inserting an exposed steel needle
attached to a secondary IV line into an injection port or other IV connector.
In a conventional IV connection the needle, which typically is secured only with
tape, can detach from the catheter or injection port resulting in disconnection
and a serious and sometimes fatal interruption of the flow of the IV solution to
the patient. The exposed needles can easily be contaminated by contact with
unsterile objects or through contact with fluid in the IV lines. A contaminated
needle can result in infection to healthcare workers and, less frequently,
patients, as a result of accidental needlesticks. Increasing awareness of the
risk of infection from needlesticks and the substantial and increasing expense
to healthcare providers
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of complying with regulatory protocols when needlesticks occur have led to a
growing demand for safe medical devices such as the Company's protective IV
connectors.
Hepatitis B and HIV are transmitted through blood and other body fluids,
and workers who come in contact with such infectious materials are at risk of
contracting these diseases. Transmissions may occur from needlesticks by
contaminated needles or exposure of mucous membranes to infectious body fluids
containing blood traces. Following each needlestick, the healthcare provider is
required to perform a series of tests on the healthcare worker for both
Hepatitis B and HIV, as well as track and record each needlestick incident.
Thus, needlesticks result in time lost from work and substantial expense
regardless of whether an infectious disease is transmitted. The Company's
protective IV connectors are designed to prevent accidental needlesticks from
needles originating from primary and secondary IV connections.
PRODUCTS
CLAVE Products
A conventional IV line terminates with a male luer connector to which a
needle would be attached to penetrate a latex-covered injection port to make a
primary or secondary IV connection. With the CLAVE system, instead of attaching
a needle to the male luer, a CLAVE is used in place of the injection port and
the male luer, without a needle, is simply threaded into the CLAVE with a half
turn. The CLAVE consists of a cylindrical housing, which contains a silicone
compression seal and a recessed plastic piercing element. As the luer tip enters
the CLAVE housing, it depresses the silicone seal back into the housing and
slides over the piercing element, which penetrates through the compressed
silicone. Fluid channels in the piercing element create a continuous fluid
pathway from the IV line, through the CLAVE into the primary IV line and into
the catheter. The luer tip creates a tight seal against the top of the silicone
thereby preventing contaminants from entering the fluid pathway. When the IV
line is disconnected from the CLAVE, the silicone compression seal expands to
again fill the housing and reseal the opening. When the CLAVE is not in use,
the silicone compression seal fills the opening in the housing and covers the
plastic piercing element, thus completely sealing the connector and presenting a
flush surface which can be cleansed with an alcohol swab. The CLAVE contains no
natural rubber latex.
Emergency medications can be administered through the CLAVE by using a
standard syringe without a hypodermic needle attached. The CLAVE can be used
with any conventional primary IV system, acute and chronic central venous IV
system, acute care catheter, multi-lumen catheter, peripheral catheter and a
variety of other standard devices. The resilience of the silicone compression
seal permits repeated connections and disconnections without replacing the
CLAVE.
The CLAVE Integrated Y site is designed to be integrated directly into
primary and secondary IV sets, thus eliminating the need for special adapters,
pre-slit injection ports, or metal needles when making piggyback IV connections.
Currently, virtually all popular IV connection systems that compete with the
Company's systems require either a metal needle, a pre-slit injection port or a
special adapter to make piggyback connections. The original CLAVE can be used to
make a piggyback connection, but it also requires a special adapter when used in
piggyback applications. The Company believes the CLAVE Integrated Y site offers
a lower cost alternative to existing systems by eliminating the need for
multiple parts. The healthcare professional simply inserts the male luer of any
secondary IV set, without a needle, into the CLAVE Integrated Y site and twists
to make the connection. The CLAVE Integrated Y site will not replace CLAVE
products used in non-piggyback connections. Unlike the original CLAVE site, the
CLAVE Integrated Y site is marketed exclusively to IV set manufacturers, such as
B.Braun/McGaw division of B.Braun Medical, Inc. ("B.Braun/McGaw") and Abbott
Laboratories ("Abbott") to build directly into their IV sets. Sales of the CLAVE
Integrated Y site to date have only been to Abbott and accounted for
approximately 4% of the Company's net sales in 1997.
The CLAVE is the Company's largest selling product line, and accounted for
65% of the Company's net sales in 1997.
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Click Lock and Piggy Lock Products
The Company's first products, the Click Lock and Piggy Lock, were designed
to overcome the limitations of conventional IV connections which use exposed
needles. The needles in the Click Lock and Piggy Lock systems are completely
recessed into a clear plastic cylindrical housing to reduce the risk of
needlesticks and contamination by preventing contact between the needle and
other objects. Locking devices which snap closed with an audible click are
designed to prevent accidental disconnection but permit immediate and easy
disconnection when desired. The cylindrical housing also acts as a guide to
direct the needle accurately into the matching port, thus allowing an easy,
quick connection while preventing the needle point from scratching the insides
of the injection port on insertion and scraping off particles of plastic which
could enter the patient's vascular system. The clear plastic housing and the
audible click permit visual and aural confirmation that the connection has been
made.
The Click Lock housing locks onto the Company's matching injection port
located on either piggyback IV sets or extension IV sets manufactured by the
Company. Matching injection ports are also sold separately for use on other
manufacturers' extension sets and catheters. Using the appropriate IV set or
separate matching injection port, the Click Lock can be used with any
conventional primary IV system, acute or chronic central venous IV system, acute
care catheter, multi-lumen catheter, implantable medication port, peripheral
catheter and a variety of other standard devices. The Piggy Lock was developed
as a less expensive, more convenient alternative to using a Click Lock and
related IV set combination to make a secondary or piggyback IV connection. The
Piggy Lock does not however replace Click Lock components used in non-piggyback
or conventional catheter connections.
With the availability of the CLAVE and other needleless products sold by
competitors, the market is shifting rapidly away from protected needle products
to needleless connection systems. Sales of Click Lock and Piggy Lock products
are declining both absolutely and as a percentage of net sales.
McGaw Protected Needle and SafeLine Products
The Company has a Manufacture and Supply Agreement with McGaw, Inc.,
predecessor to B.Braun/McGaw ("McGaw"), (the "McGaw MPN Agreement"), which
grants the Company exclusive rights to perform certain assembly of the McGaw
Protected Needle which is marketed and distributed by B.Braun/McGaw. The McGaw
Protected Needle is similar to the Click Lock, and competes with the Company's
IV connection systems. The McGaw MPN Agreement provides that the Company
release McGaw from any claims for patent infringement resulting from the sale of
McGaw Protected Needles prior to the effective date of the McGaw MPN Agreement,
and for as long as the McGaw MPN Agreement is in effect. The Company began
assembly of the McGaw Protected Needle during 1994. Sales of the McGaw
Protected Needle under the McGaw MPN Agreement accounted for approximately 8%,
and 5% of the Company's net sales in 1996 and 1997, respectively. With the
continuing shift in demand from protected needle to needleless products, the
Company expects sales of McGaw Protected Needles will continue to decline.
Pursuant to a May 1995 amendment to the another agreement with McGaw, McGaw also
agreed to pay the Company a share of McGaw's revenues on SafeLine, a then-new
needleless IV connector designed and manufactured by McGaw for use with pre-slit
injection ports. Such payments commenced in 1996 and accounted for
approximately 3% of the Company's net sales in 1996 and 6% in 1997.
Lopez Valve
The Company's Lopez Valve is a small "T" valve designed to be connected
into nasogastric tube systems. The valve permits intermittent injection of
medications or fluids through nasal passages without having to disconnect the
nasogastric tube. By eliminating the need to disconnect the nasogastric tube,
the Lopez Valve helps prevent the splashing of and risk of contact with
potentially infectious stomach fluids and also saves valuable time.
RF100 and RF150
The Company has developed a family of inexpensive single-use needleless
connectors for use in both piggyback and non-piggyback applications. The RF100,
designed for use in piggyback applications, is a one-piece, needleless IV
connector comprised of a small plastic piercing element that is recessed into a
plastic housing. The RF100 locks onto any standard Y site reducing the
potential for accidental disconnection. The RF150 is similar to the RF100 in
that it is comprised of a small plastic piercing element that is recessed into a
plastic housing. The RF150
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was developed specifically for Abbott for use with pre-slit injection ports in
piggyback and non-piggyback applications. Once the injection port is pierced,
the protective housing opens much like a clothes pin, and locks over the pre-
slit injection port thus reducing the potential for accidental disconnections.
Although the Company believes that the CLAVE has significant functional
advantages over the RF100 and RF150, these products could compete with the CLAVE
as less expensive needleless IV connectors.
Budget Medical Products, Inc.
During late 1995, the Company created BMP as a wholly owned subsidiary.
BMP was established to service the low end of the safe medical connector market
by distributing custom IV sets manufactured by the Company which incorporate
lower priced safe medical connectors, and custom IV sets incorporating the
CLAVE. During 1996 and 1997, BMP's net sales were approximately $400,000 and
$1,800,000, respectively. Most of the increase in 1997 net sales was because of
increased unit shipments of custom IV sets incorporating the CLAVE.
The Company is currently taking steps aimed at expanding BMP by increasing
systems capabilities, improving manufacturing efficiency, reducing labor costs
and enhancing distribution. As part of these steps, the Company is evaluating
transferring its manufacturing to a low-labor-cost area outside of the United
States, as well as a significant broadening of its market. There can be no
assurance that these steps will achieve the desired results.
CLC 2000
The Company commenced marketing the CLC 2000 in November 1997 upon receipt
of the Section 510(k) clearance from the Food and Drug Administration. The CLC
2000 is a one piece, swabable connector, engineered with the only technology
currently in the marketplace to prevent the back-flow of blood into the
catheter. The CLC 2000 does not permit the use of needles, thereby ensuring
compliance with current needle-free policies. The CLC 2000 also contains no
natural rubber latex.
Generally, when an IV line is disconnected, there is a back-flow of blood
into the catheter that is in the patient. That blood in time occludes
("clots"). Occlusion ("clotting off") of catheters requires expensive
procedures to "flush" the catheter, or if those procedures are not effective,
replacement of the catheter. The CLC 2000 was developed to eliminate clotting
of catheters because of "back-flow" after the catheter is disconnected by
expelling a portion of the fluid remaining in the catheter on disconnection out
through the tip of the catheter while maintaining a constant positive pressure
to prevent any back-flow into the catheter.
The Company is currently conducting trials with the objective of receiving
FDA approval of its claim that the CLC 2000 does prevent the occlusion of
catheters, and while the Company believes it can achieve such approval, there is
no assurance that it will ultimately receive it, and pending receipt of such
approval, makes no claim as to the actual ability of the CLC 2000 to prevent
occlusion of catheters.
New Products
The Company is developing several of new products that it intends to
introduce in 1998. The Company believes innovative products continue to be
important to maintaining and increasing its sales levels.
MARKETING AND DISTRIBUTION
The influence of managed care and the growing trend toward consolidation
among healthcare providers are the driving forces behind the Company's sales and
marketing strategies. Many healthcare providers are consolidating to create
economies of scale and to increase negotiating power with suppliers. In an
effort to further control costs, many of these consolidated groups are entering
into long-term contracts with medical suppliers at fixed pricing. In this
changing market place, the Company believes it is becoming increasingly
important to secure contracts with major buying organizations in addition to
targeting specific hospital and homecare providers.
The Company has entered into strategic supply and distribution
relationships with B.Braun/McGaw ("the McGaw Agreement") and Abbott, two major
IV product suppliers, each of whom has a significant share of the IV set market
under contract. The McGaw Agreement, which extends to July 2000, confers
exclusive and nonexclusive
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rights to distribute certain CLAVE products to certain categories of customers.
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations for the current status of the McGaw Agreement. Under the
Abbott Agreement which extends to April 2002, Abbott also has rights to market
certain CLAVE products together with its own products. The Abbott Agreement
adopted fixed prices as of January 1, 1998 for sales by the Company to Abbott,
which prices are expected to decrease in the future based on sales volumes.
B.Braun/McGaw and Abbott purchase CLAVE products packaged separately and in
bulk for distribution in the hospital market and to certain homecare providers.
CLAVE products purchased in bulk are assembled into B.Braun/McGaw and Abbott's
primary and secondary IV sets. Both B.Braun/McGaw and Abbott purchase other
CLAVE products, which are sold as accessories.
The Company currently has approximately 19 independent distributors in the
United States who employ approximately 150 salespeople in the aggregate. In
addition, the Company employs 31 product specialists who support the Company's
distributors' salespeople, calling on prospective customers, demonstrating
products and supporting programs to train distributors' and customers' staffs in
the use of the Company's products. Distributors purchase and stock the
Company's products for resale to hospitals and home healthcare providers.
Sales to B.Braun/McGaw of McGaw Protected Needles and CLAVE products
accounted for approximately 30%, 28% and 36% of the Company's net sales in 1995,
1996 and 1997, respectively. Sales to Abbott accounted for approximately 7% and
16% of net sales in 1996 and 1997, respectively. Several independent
distributors accounted for more between 5% and 10% of 1997 net sales. All other
customers account for smaller percentages of net sales. Although the loss of one
or more of the several larger distributors could have an adverse affect on the
Company's business, the Company believes it could readily locate other
distributors in the same territories who could continue to distribute the
Company's products to the same customers. The loss of B.Braun/McGaw or Abbott
as a customer would be more significant because these customers have full-line
contracts with numerous hospitals and homecare providers to supply all IV
products and solutions to those customers.
The Company's products are distributed in several European countries,
Canada, the Middle East, Australia, Japan and other parts of Asia. During 1995,
1996, and 1997, foreign sales accounted for approximately 2%, 3% and 3%,
respectively, of the Company's net sales. During the second quarter of 1996, the
Company entered into a distribution agreement with BOC OHMEDA AB ("Ohmeda"), a
major distributor of medical products, for distribution of CLAVE in Europe.
Since then, a number of other distribution agreements have been established in
Europe, and the Company has placed two product specialists in Italy. The Company
has distribution throughout most of Europe, and expects to add a number of
additional product specialists in 1998. In January 1998, Ohmeda announced an
agreement to sell its European distribution operations to a competitor of the
Company; the Company is currently evaluating the impact of that. There is no
assurance that the sale will be completed and there is no assurance as to the
impact of that sale on future distribution through Ohmeda or whether it will
have an adverse effect on the Company's ability to increase sales in Europe.
MANUFACTURING
Manufacturing of the Company's products involves injection molding of
plastic parts, manual and automated assembly of the molded plastic parts,
needles and other components, quality control inspection, packaging and
sterilization. The Company molds the majority of its requirements for
components, performs all assembly, quality control, inspection, packaging,
labeling and shipping of its products. Sterilization and sterility testing are
performed under contract by independent companies.
The Company has a fully integrated medical device manufacturing facility in
two adjacent buildings totaling 78,000 square feet in San Clemente, California.
A mold maintenance shop supports the repair and maintenance needs of the
Company's molding operation. In addition, the mold maintenance shop serves as a
research and development prototype shop, and utilizes advanced computer assisted
design systems and automated machining equipment. The state-of-the-art medical
device molding facility includes an 8,000 square foot class 100,000 clean room
in which all molding of the Company's proprietary medical components is
performed. The clean room is equipped with 22 injection molding machines and
ancillary equipment including robots designed to minimize human intervention.
The Company uses sophisticated, highly automated assembly systems to assemble
the CLAVE, CLAVE Integrated Y site,
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Click Lock, RF150 and the McGaw Protected Needle products. The assembly systems
are custom designed and manufactured for the Company. The Piggy Lock, Lopez
Valve and IV sets are assembled manually.
The Company's state-of-the-art injection molding technology and highly
automated assembly systems are designed to maintain a high level of product
quality and achieve high volume production at low unit manufacturing costs. To
achieve these advantages and to gain greater control over raw material and
finished product delivery times, the Company now molds its entire requirements
of proprietary molded components. Generic, "off-the-shelf" items are purchased
from outside vendors unless significant cost savings can be achieved by molding
in-house. The Company is not dependent on any individual vendor for purchased
parts and has no contracts with its suppliers beyond the terms of purchase
orders issued.
The Company's products are currently sterilized in processes, which use either
gamma radiation or ethylene oxide gas ("ETO"). Most of the Company's
sterilization is by gamma radiation. Sterilization is performed by independent
companies who have extensive equipment and procedures to prevent the release of
ETO and radiation into the environment. Use of ETO in California is subject to
hazardous material labeling requirements. The Company believes that it can
continue to have its products sterilized by firms in California. The Company is
also investigating other methods of sterilization that would be more cost
effective and less time-consuming, and has commenced qualification of certain
products for sterilization by electronic beam radiation ("e-beam"). E-beam
sterilization is less expensive and quicker than either of the other two methods
currently used by the Company.
GOVERNMENT REGULATION
Government regulation is a significant factor in the development, marketing
and manufacturing of the Company's products. The Company and its products are
regulated by the FDA under a number of statutes including the Federal Food, Drug
and Cosmetics Act ("FDC Act"). The FDC Act provides two basic review procedures
for medical devices. Certain products may qualify for a submission authorized
by Section 510(k) of the FDC Act, under which the manufacturer gives the FDA a
pre-market notification of the manufacturer's intention to commence marketing
the product. The manufacturer must, among other things, establish that the
product to be marketed is substantially equivalent to another legally marketed
product. Marketing may commence when the FDA issues a letter finding
substantial equivalence. If a medical device does not qualify for the Section
510(k) procedure, the manufacturer must file a pre-market approval ("PMA")
application. This requires substantially more extensive pre-filing testing than
the Section 510(k) procedure and involves a significantly longer FDA review
process. FDA approval of a PMA application occurs only after the applicant has
established safety and efficacy to the satisfaction of the FDA. Each of the
Company's current products has qualified, and the Company anticipates that any
new products that it is likely to market will qualify, for the expedited Section
510(k) clearance procedure. There is no assurance, however, that new products
developed by the Company or any manufacturers that the Company might acquire, or
claims that the Company may make concerning those products, will qualify for
expedited clearance rather than the more time consuming PMA procedure or that,
in any case, they will receive clearance from the FDA. As described under Item
1, Business, Products, CLC 2000, certain product performance claims for the CLC
2000 require FDA approval. That approval may be required pursuant to the PMA
procedure. FDA regulatory processes are time consuming and expensive.
Uncertainties as to time required to obtain FDA clearances or approvals could
adversely affect the timing and expense of new product introductions. All of
the regulated products currently manufactured by the Company are classified as
Class II medical devices by the FDA. Class II medical devices are subject to
performance standards relating to one or more aspects of the design,
manufacturing, testing and performance or other characteristics of the product
in addition to general controls involving compliance with labeling and record
keeping requirements.
The Company must comply with FDA regulations governing medical device
manufacturing practices. The FDA and the California Department of Health
Services ("DHS") require manufacturers to register and subject them to periodic
FDA and DHS inspections of their manufacturing facilities. The Company is an
FDA registered medical device manufacturer, and must demonstrate that the
Company and its contract manufacturers comply with the FDA's current Quality
System Regulations ("QSR") regulations. Under these regulations, the
manufacturing process must be regulated and controlled by the use of written
procedures and the ability to produce devices which meet the manufacturer's
specifications must be validated by extensive and detailed testing of every
critical aspect of the process. They also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Further, the FDA's interpretation and enforcement of
these requirements has been
7
increasingly strict in recent years and seems likely to be even more stringent
in the future. Failure to adhere to QSRs would cause the products produced to be
considered in violation of the applicable law and subject to enforcement action.
The FDA monitors compliance with these requirements by requiring manufacturers
to register with the FDA, and by subjecting them to periodic FDA inspections of
manufacturing facilities. If the inspector observes conditions that might be
violative, the manufacturer must correct those conditions or explain them
satisfactorily, or face potential regulatory action that might include physical
removal of the product from the marketplace.
The Company believes that its products and procedures are in compliance with
all applicable FDA and DHS regulations. There can be no assurance, however,
that other products under development by the Company or products developed by
the Company in the future will be cleared by the FDA and classified as Class II
products, or that additional regulations restricting the sale of its present or
proposed products will not be promulgated by the FDA or DHS. In addition,
changes in FDA, DHS or other federal or state health, environmental or safety
regulations or their applications could adversely affect the Company's business.
To market its products in the European Community ("EC"), the Company must
conform to additional requirements of the EC and demonstrate conformance to
established quality standards and applicable directives. As a manufacturer that
designs, manufactures and markets its own devices, the Company must comply with
the quality management standards of EN ISO 9001(08/94)/EN 46001 (10/93). Those
quality standards are similar to the GMP regulations but incorporate the quality
requirements for product design and development.
Manufacturers of medical devices must also be in conformance with EC
Directives such as Council Directive 93/42/EEC ("Medical Device Directive") and
their applicable annexes. Those are regulations that assure that medical
devices are both safe and effective and meet all applicable established
standards prior to being marketed in the EC. Once a manufacturer and its
devices are in conformance with the Medical Device Directive, the "CE" Mark may
be affixed to its devices. The CE Mark gives devices an unobstructed entry to
all the member countries of the EC.
The Company has demonstrated conformity to the regulations of both EN ISO
9001 (08/94)/EN 46001 (10/93) and the Medical Device Directive and affixes the
CE Mark to its device labeling for product sold in member countries of the EC.
The Company believes its products and systems are in compliance with all EC
requirements. There can be no assurance, however, that other products under
development by the Company or products developed by the Company in the future
will be in conformance or that additional regulations restricting the sale of
its present or proposed products will not be promulgated by the EC.
COMPETITION
The market for IV products is intensely competitive. The Company believes
that its ability to compete depends upon its continued product innovation, the
quality, convenience and reliability of its products, access to distribution
channels, patent protection, and pricing. The Company encounters significant
competition in this market both from large established medical device
manufacturers and from smaller companies. The Company's ability to compete
effectively depends on its ability to differentiate the products based on safety
features, product quality, cost effectiveness, ease of use and convenience, as
well as the Company's ability to perceive and respond to changing customer
needs. In the long term, the Company's ability to compete may be affected by
its ability to reduce unit manufacturing costs of the CLAVE through higher
volume production.
In addition to competing with conventional IV connection systems and protected
needle locking IV connection systems marketed by companies such as Baxter
Healthcare Corporation ("Baxter") and Abbott, the Company's present and future
products will compete with needleless IV connection systems like those marketed
by Baxter, B. Braun Medical, Inc., IVAC Corporation and others. Although the
Company believes that its needleless CLAVE has distinct advantages over
competing systems, there is no assurance that it will be able to compete
successfully with these products.
Manufacturers of products with which the Company currently competes, or might
compete in the future, include large companies with an established presence in
the healthcare products market and substantially greater financial, marketing
and distribution, managerial and other resources. In particular, Baxter, Abbott
and
8
B.Braun/McGaw are leading distributors of IV therapy systems, while Becton-
Dickinson and Company and Sherwood Medical Company dominate the hypodermic
needle market. Several of these competitors have broad product lines and have
been successful in obtaining full-line contracts with a significant number of
hospitals to supply all of their IV product requirements. In order to penetrate
more of these hospitals, the Company has established strategic supply and
distribution relationships with B.Braun/McGaw and Abbott.
The Company believes the success of 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. The Company believes these products were
developed primarily by companies who currently do not have the distribution or
financial capabilities of the Company. The Company believes these products have
had a modest impact on its CLAVE business to date, and there is no assurance
that the Company's current or future products will be able to successfully
compete with these or future products developed by others.
PATENTS
The Company has United States and certain foreign patents on the CLAVE, Click
Lock and Piggy Lock IV connectors and has United States patents on the Lopez
Valve connector. The Company has applications pending for additional United
States and foreign patents on the CLC 2000, CLAVE, Click Lock and Piggy Lock IV
connectors. The expiration dates of the Company's patents range from 2005 to
2015.
The Company's success may depend in part on its ability to obtain patent
protection for its products and to operate without infringing the proprietary
rights of third parties. While the Company has obtained certain patents and
applied for additional United States and foreign patents covering certain of its
products, there is no assurance that any additional patents will be issued, that
the scope of any patent protection will prevent competitors from introducing
similar devices or that any of the Company's patents will be held valid if
subsequently challenged. The Company also believes that patents on the Click
Lock and the Lopez Valve products may have been, and that patent protection on
the CLAVE may be, important in preventing others from introducing competing
products which are as effective as the Company's products. The loss of patent
protection on Click Lock, Lopez Valve or CLAVE products could adversely affect
the Company's ability to exclude other manufacturers from producing effective
competitive products and could have an adverse impact on the Company's financial
results.
The fact that a patent is issued to the Company does not eliminate the
possibility that patents owned by others may contain claims which are infringed
by the Company's products.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which would result
in substantial cost to and diversion of resources by the Company, may be
necessary to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. In addition, enforcement of the Company's intellectual property rights
through litigation could result in substantial cost and diversion of resources.
Adverse determinations in litigation could subject the Company to significant
liabilities to third parties or could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
its products, any of which could have a material adverse effect on the Company's
business.
In 1995, the Company initiated legal proceedings against Tri-State Hospital
Supply Corporation alleging patent infringement; the cost of the litigation has
been significant. See: Item 3, Legal Proceedings; Item 7, Management's
Discussion and Analysis of Financial Conduction and Results of Operations; and
Item 8, Financial Statements.
EMPLOYEES
At February 28, 1998, the Company had 130 full-time employees, consisting of
58 engaged in sales, marketing and administration, and 72 in manufacturing,
molding, product development and quality control. The Company contracts an
independent temporary agency to provide its production personnel; none of the
personnel provided through the agency are employed by the Company. At February
28, 1998, the number of temporary production personnel was approximately 192.
9
ITEM 2. PROPERTIES.
The Company owns two adjacent 39,000 square foot buildings in San Clemente,
California. The Company is currently in the process of acquiring facilities for
BMP. The Company is currently evaluating the adequacy of its existing
facilities but does not believe that significant additions will be required in
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
In an action entitled ICU Medical, Inc. v. Tri-State Hospital Supply
----------------------------------------------
Corporation, pending in the United States District Court for the Northern
- -----------
District of California, the Company alleges infringement of two of the Company's
patents by defendant's protected needle connector and Y-style extension sets.
The Company is seeking a permanent injunction, and monetary damages in an amount
to be determined. On February 28, 1997, the Court ruled on a number of motions
filed by the parties. It denied a number of motions for summary judgment
brought by the defendant, including the motion for partial summary judgment of
non-infringement of one of the patents, and issued rulings on matters of
enforceability that were generally favorable to the Company. On February 20,
1998, a hearing was held on additional motions filed by the parties including a
motion contesting the validity of the patents. A ruling is expected shortly.
Trial date is presently set for June 1, 1998.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
EXECUTIVE OFFICERS OF REGISTRANT.
The following table lists the names, ages, certain positions and offices
with the Company held by the executive officers and key employees of the
Company. Officers are elected annually by and serve at the pleasure of the Board
of Directors.
EXECUTIVE OFFICERS: Age Office Held
--- -----------
George A. Lopez, M.D. 50 Chairman of the Board, President and Chief
Executive Officer
Richard A. Costello 34 Vice President of Sales
Evelyn L. Foss 42 Vice President of Marketing
Francis J. O'Brien 55 Chief Financial Officer, Secretary
and Treasurer
KEY EMPLOYEE:
Robert J. Brown 40 President, Budget Medical Products, Inc.
10
Dr. Lopez is the founder of the Company and has served as Chairman of the
Board, President and Chief Executive Officer since August 1989. He also served
as Secretary, Treasurer and Chief Financial Officer from January 1994 to October
1994.
Mr. Costello became Vice President of Sales in December 1997, after having
been National Sales Manager since August, 1996 and a product specialist since
1992.
Ms. Foss became Vice President of Marketing in 1992.
Mr. O'Brien became Chief Financial Officer in November, 1996 and was
elected as Secretary in December, 1996. From October 1994 to November 1996, he
was an independent consultant and prior to 1994 he was a partner with Ernst &
Young LLP.
Mr. Brown became President of Budget Medical Products, Inc. in 1997, after
having been a product specialist since 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol "ICUI" since its initial public
offering on March 31, 1992. The following table sets forth, for the quarters
indicated, the high and low closing prices for the Company's Common Stock quoted
by the Nasdaq:
1997 High Low
- ---- ---- ---
First Quarter $9 31/64 $ 8 1/4
Second Quarter 8 7/8 7 1/4
Third Quarter 11 1/4 7 3/4
Fourth Quarter 14 1/2 10 1/2
1996
- ----
First Quarter $ 17 5/8 $ 14
Second Quarter 23 1/2 13
Third Quarter 13 5/8 8 1/4
Fourth Quarter 9 6 5/8
The Company has never paid dividends and does not anticipate paying
dividends in the foreseeable future as the Board of Directors intends to retain
future earnings for use in the Company's business. Any future determination as
to payment of dividends will depend upon the Company's financial condition,
results of operations and such other factors as the Board of Directors deems
relevant.
As of February 28, 1998 the Company had 160 stockholders of record and
believes it has approximately 4,000 beneficial stockholders.
11
ITEM 6. SELECTED FINANCIAL DATA
ICU MEDICAL, INC.
-----------------
SELECTED FINANCIAL DATA
-----------------------
Year ended December 31,
------------------------------------------------
(in thousands, except per share data)
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
INCOME DATA:
Net sales................................ $30,404 $24,599 $21,282 $16,542 $11,381
Cost of goods sold....................... 12,817 10,438 10,276 8,818 4,407
------- ------- ------- ------- -------
Gross profit............................. 17,587 14,161 11,006 7,724 6,974
Operating expenses....................... 9,725 8,236 5,600 3,877 2,784
------- ------- ------- ------- -------
Income from operations................... 7,862 5,925 5,406 3,847 4,190
Investment income and other.............. 1,269 1,289 713 516 (12)
Provision for income taxes............... 3,450 2,475 1,958 1,456 1,146
------- ------- ------- ------- -------
Income from continuing operations............. $ 5,681 $ 4,739 $ 4,161 $ 2,907 $ 3,032
======= ======= ======= ======= =======
Income from continuing operations.............
Per Share
Basic $0.71 $0.54 $0.53 $0.41 $0.44
Diluted 0.71 0.54 0.52 0.40 0.42
====== ====== ====== ====== ======
Weighted average number of shares
Basic 7,946 8,722 7,906 7,048 6,945
Diluted 8,029 8,842 8,040 7,296 7,244
====== ====== ====== ====== ======
CASH FLOW DATA:
Cash flows from operations............... $ 8,666 $ 6,513 $ 6,997 $ 938 $ 3,263
BALANCE SHEET DATA:
Cash and liquid investments.............. $35,112 $31,760 $29,665 $ 3,569 $12,968
Working capital.......................... 37,993 35,587 33,762 12,712 17,892
Total assets............................. 51,186 49,639 47,850 26,321 23,594
Long-term debt........................... - - - - -
Stockholders' equity..................... 47,947 46,749 45,658 24,659 21,494
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's principal product is its CLAVE needleless IV connection
system. The following table sets forth, for the periods indicated, net sales by
product as a percentage of total net sales:
Product Line 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
CLAVE 65% 68% 61%
Click Lock 7% 12% 20%
McGaw Protected Needle 5% 8% 13%
Lopez Valve 4% 4% 4%
RF100-RF150 ("Rhino") 7% 3% 2%
Budget Medical Products 6% 2% -
McGaw SafeLine Revenue
Sharing 6% 3% -
- -------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100%
=========================================================================================================================
The Company sells its products to independent distributors and through
strategic supply and distribution agreements with B.Braun/McGaw, Inc.
("B.Braun/McGaw" in 1997 and "McGaw" in prior periods) and Abbott Laboratories
("Abbott") (the "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
Abbott also purchases the Rhino, a low-priced connector specifically designed
for Abbott. Through 1997, both agreements established minimum transfer 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 McGaw Agreement provided for revenue sharing based
on McGaw's selling prices of CLAVE products and the Abbott Agreement provided
for revenue sharing based on Abbott's selling prices of both CLAVE products and
Rhinos. Effective August 1, 1997, and January 1, 1998, respectively, the Abbott
Agreement was amended to establish fixed selling prices for Rhinos and CLAVE
products and eliminate revenue sharing for all sales after the respective
effective dates. The Company expects to establish fixed selling prices and
eliminate revenue sharing under the McGaw Agreement effective January 1, 1998.
On June 25, 1997, B.Braun Melsungen AG ("B.Braun") acquired McGaw from IVAX
Corporation. B.Braun's U.S. operation markets an IV connection system that
competes with IV connection systems of the Company and others. The current McGaw
Agreement extends to July 2000. The Company and B.Braun have signed a letter of
intent to modify the McGaw Agreement to extend it to 2002 and modify product
pricing. Average monthly sales to B.Braun/McGaw since June 1997 have decreased
somewhat from the levels in the first half of 1997, although they are still
significantly above those for comparable periods of the prior year. There is no
assurance as to future patterns of sales with B.Braun/McGaw, and, while the
Company expects to conclude a definitive agreement with B.Braun/McGaw, there is
no assurance that it will. If it does not, the current agreement will remain in
effect.
The Company 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 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 felt in
the third quarter of
13
1996, the Company in mid-October 1996 announced to its independent distributors
a new aggressive pricing strategy to protect and expand its market. Under this
strategy, prices to independent distributors will eventually be reduced by up to
approximately 40%, depending on the type of customer to which the distributor is
reselling the CLAVE product. The average price reduction through the fourth
quarter of 1997 has been less than the maximum 40%, although Management expects
that the average price of its CLAVE products will continue to decline. There is
no assurance that the Company's current or future products will be able to
successfully compete with products developed by others.
COMPARISON OF 1997 TO 1996
In 1997, the Company reported net sales of $30,404,000, which was
$5,805,000, or 24%, higher than the net sales of $24,599,000 reported in 1996.
The most significant factor in the increase was a $2,816,000, or 17%, increase
in CLAVE net sales, including revenue sharing from B.Braun/McGaw on sales of
CLAVE products. Net sales in all of the Company's other product lines increased
over 1997, except for a 23% decrease in Click Lock, Piggy Lock and McGaw
Protected Needle net sales. The Company's independent distributors accounted for
48% of the Company's net sales in 1997, with McGaw accounting for 36% and Abbott
the remaining 16%. In 1996, the comparable percentages were 65%, 28% and 7%,
respectively.
Total CLAVE net sales increased approximately 17% from $16,723,000 in 1996
to $19,539,000 in 1997. Unit shipments of CLAVE products in 1997 increased
approximately 61% over 1996, with McGaw and Abbott accounting for the entire
unit growth. Unit sales to independent distributors were down slightly. The
aggregate average net selling price of CLAVE products in 1997 decreased
approximately 27% as compared with 1996. That decrease reflects lower prices
from independent distributors and lower prices on bulk, non-sterile CLAVE
products sold to McGaw and Abbott, as well as a higher percentage of the sales
mix being accounted by bulk, non-sterile CLAVEs.
Net sales to B.Braun/McGaw, including revenue sharing, amounted to
$10,971,000 in 1997, as compared to $6,875,000 in 1996. CLAVE net sales to
B.Braun/McGaw increased approximately 89%, principally because of an increase in
unit shipments. Net sales of the McGaw Protected Needle declined 23% and
management expects those to continue to decline as the market for safe
connectors continues its shift to needleless technology. Based on
B.Braun/McGaw's forecasts, Management expects increases in unit shipments to
B.Braun/McGaw in 1998, although there is no assurance that this expectation will
be realized. Under the McGaw Agreement, the Company receives revenue sharing
payments on B.Braun/McGaw's sales of its SafeLine products; such payments
commenced in 1996, and the Company recorded estimated revenue sharing of
approximately $1,767,000 in 1997, as compared with $834,000 in 1996. Although
Management anticipates that such revenue sharing will continue, the actual
amount will depend on the volume and selling prices of B.Braun/McGaw's SafeLine
products, which Management has no means of forecasting accurately.
Net sales to Abbott amounted to $4,993,000 in 1997, as compared to
$1,755,000 in 1996. CLAVE sales were $2,906,000, an increase of 151% from the
$1,156,000 in 1996. The balance of the sales were in the low-priced Rhino, which
were $2,087,000 as compared with $599,000 in 1996. Management expects an
increase in sales volume with Abbott in 1998, although there is no assurance
that such increases will be realized.
Management expects that unit sales of CLAVE to its independent distributors
in 1998 will be approximately the same as in 1997 or slightly lower. Although
Management had expected that the price reduction commenced in October 1996 would
eventually be more that offset by increased volume, this has not occurred to
date for independent distributors in the aggregate. There is no assurance that
independent distributors will achieve increased unit volume in the future.
Further, the ability of the independent distributors to sustain their unit sales
may be impacted by competition from existing and new competitive products or
acquisition of CLAVE market share by Abbott and B.Braun/McGaw. Management
expects to encounter continued pricing pressure from individual end users, and
expects continued declines in net prices to the independent distributors.
Net sales of Click Lock and Piggy Lock decreased 22% in 1997 as compared to
1996, because of the safe connector market's continued shift to needleless
technology, and Management expects that decline to continue.
14
The Lopez Valve showed a 9% growth in 1997 net sales as compared to 1996
because of increased unit shipments. Management expects continued modest
increases in Lopez Valve net sales in 1998.
The Company's Budget Medical Products subsidiary ("BMP"), which markets
custom IV sets, recorded approximately $1,828,000 net sales in 1997 as compared
to $400,000 in 1996, its first year of operations. Most of the increase in 1997
net sales was because of increased unit shipments of custom IV sets
incorporating the CLAVE. BMP's production is relatively labor-intensive,
resulting in a generally lower gross profit margin than for the Company's other
products. BMP had a small gross profit in 1997. 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 is evaluating transferring its manufacturing to
a low-labor-cost area outside of the United States, as well as a significant
broadening of its market. 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 be lower than those historically
recorded by the Company because production of its products is relatively labor
intensive.
During the second quarter of 1996, the Company entered into a distribution
agreement with BOC OHMEDA AB ("Ohmeda"), a major distributor of medical
products, for distribution of CLAVE in Europe. Since then, a number of other
distribution agreements have been established in Europe, and the Company has
located two product specialists in Italy. The Company has distribution
throughout most of Europe, and expects to add a number of additional product
specialists in 1998. Total sales to foreign distributors were $908,000 in 1997
as compared to $693,000 in 1996. Management expects that its sales to foreign
distributors will continue to increase in the future. In January 1998, Ohmeda
announced an agreement to sell its European distribution operations to a
competitor of the Company; the Company is currently evaluating the impact of
that. There is no assurance that the sale will be completed and there is no
assurance as to the impact of that sale on future distribution through Ohmeda or
whether it will have an adverse effect on the Company's ability to increase
sales in Europe.
Gross margin for 1997 was unchanged from the 58% registered in 1996. The
shift in sales mix toward a higher percentage of the relatively higher-margin
CLAVE products, continued increases in the benefits of the Company's extensive
production automation, and the McGaw SafeLine revenue sharing first recorded in
1996 more than offset the effect of lower average unit selling prices.
The Company expects that its unit production costs will continue to decrease
in 1998 as unit volumes increase, but that the gross margin percentage will stay
at or slightly lower than that achieved in 1997 as average unit sales prices
decrease.
Selling, general and administrative costs ("SG&A") increased by
approximately $1,017,000 to $8,463,000 in 1997, as compared to $7,446,000 in
1996. As a percentage of sales, SG&A costs were 28% in 1997 and 30% in 1996. The
increase in SG&A costs was primarily due to increased sales and marketing costs
related to the Company's domestic expansion of the CLAVE product line, growth of
BMP and expansion of the international sales efforts. An increase in corporate
expenses also contributed to the increase in SG&A. Partially offsetting those
increases was a decrease in the costs of patent litigation in which the Company
is the plaintiff from $1,615,000 in 1996 to $512,000 in 1997. Management also
expects SG&A costs, exclusive of the patent litigation costs, to increase in
1998, both in absolute terms and also slightly as a percentage of sales, because
of growth in the Company, increased domestic and international sales and
marketing costs, promotional costs of new products expected to be introduced
1998 and expansion of BMP. Management expects the patent litigation costs to
increase somewhat from the level experienced in 1997, but the amount and timing
of the costs will depend on the progress of the litigation, and no assurances
can be given in this regard.
Research and development ("R&D") costs increased in 1997 by approximately
$471,000 to $1,261,000, or 4% of net sales, as compared with approximately
$790,000, or 3% of sales, in 1996. The increase related to efforts to complete
development on a number of new products. Management estimates that R&D costs in
1998 will continue at a higher level than in 1997 because of continuing efforts
to complete new products and because of clinical evaluations of the new CLC
2000, including trials necessary for FDA clearance of certain performance claims
for the CLC 2000. However, no assurance can be given that such costs will not
differ from those estimates or that the R&D will be completed as expected.
15
The operating margin increased to 26% in 1997, compared with 24% in 1996,
principally because SG&A decreased as a percentage of net sales.
Investment income was essentially unchanged from 1996 to 1997.
The Company's effective income tax rate in 1997 was 37% as compared with 34%
in 1996, principally because tax-exempt investment income decreased as a
percentage of total taxable income. Management expects its effective tax rate in
1998 to be equal to or slightly higher than the 1997 rate.
Income from operations increased 33%, as the increase in operating expenses
of 18% trailed the 24% increase in net sales and gross profit. On a percentage
basis, that increase in income from operations was partially offset by the
essentially unchanged income from investments and a higher effective tax rate,
resulting in a 20% overall increase in net income. Net income per share
increased $0.17, or 32% due to the increase in net income, and the reduction in
shares outstanding because of the purchase of shares for treasury. The
acquisition of treasury stock after considering the investment income that would
have been earned if the shares had not been purchased, increased earnings per
share by approximately $0.04 for the year 1997.
Comparison of 1996 to 1995
In 1996, the Company reported net sales of $24,599,000, which was
$3,317,000, or 16%, higher than the net sales of $21,282,000 reported in 1995.
The increase was primarily attributable to a $3,648,000, or 28%, increase in
CLAVE sales, including revenue sharing from McGaw on sales of CLAVE products,
and $829,000 of revenue sharing on McGaw's sales of its SafeLine products, which
payments were initiated 1996. Also contributing to the increase were sales by
the Company's Budget Medical Products subsidiary formed in late 1995, sales of
the low-priced Rhino and a modest increase in Lopez Valve sales. Those increases
were partially offset by a 32% decrease in Click Lock and Piggy Lock sales and a
25% decrease in McGaw Protected Needle sales. The Company's independent
distributors accounted for 65% of the Company's net sales in 1996, with McGaw
accounting for 28% and Abbott the remaining 7%. In 1995, the comparable
percentages were 68%, 30% and 2%, respectively.
Total CLAVE net sales increased approximately 28% from $13,075,000 in 1995
to $16,723,000 in 1996. Unit shipments of CLAVE products in 1996 increased
approximately 43% over 1995, with independent distributors, McGaw and Abbott
accounting for approximately 47%, 8% and 45%, respectively, of this unit growth.
The aggregate average net selling price of CLAVE products in 1996 decreased
approximately 10% as compared with 1995. That decrease reflects equally lower
prices from independent distributors and lower prices on bulk, non-sterile CLAVE
products sold to McGaw and Abbott.
Net sales to McGaw, including revenue sharing, amounted to $6,875,000 in
1996, as compared to $6,301,000 in 1995. CLAVE sales to McGaw increased
approximately 14%, principally because of an increase in unit shipments. Net
sales of the McGaw Protected Needle declined 25%.
Net sales to Abbott amounted to $1,755,000 in 1996, as compared to $406,000
in 1995. CLAVE sales were $1,156,000, as compared with none in 1995, with the
balance of the sales in the low-priced Rhino.
Net sales of Click Lock and Piggy Lock decreased 32% in 1996 as compared to
1995. The Lopez Valve and Swiss System showed a 23% growth in 1996 revenue as
compared to 1995 because of increased unit shipments.
Gross margin for 1996 improved to 58% from the 52% registered in 1995. The
shift in sales mix toward a higher percentage of the relatively higher-margin
CLAVE products, continued increases in the benefits of the Company's extensive
production automation, and the McGaw SafeLine revenue sharing first recorded in
1996 more than offset the effect of lower average unit selling prices.
Selling, general and administrative costs ("SG&A") increased by
approximately $2,009,000 to $7,446,000 in 1996, as compared to $5,437,000 in
1995. As a percentage of sales, SG&A costs were 30% in 1996 and 26% in 1995. The
increase was primarily due to the continuing costs of patent litigation in which
the Company is the plaintiff; such costs were $1,615,000 in 1996 and $168,000 in
1995 (see Item 3, "Legal Proceedings"). Other SG&A expenses
16
increased at a somewhat lower rate than the increases in sales except for those
related to BMP, which were not incurred in 1995.
Research and development ("R&D") costs increased in 1996 by approximately
$626,000 to $790,000, or 3% of net sales, as compared with approximately
$164,000, or less than 1% of sales, in 1995. The increase accelerated during the
year as the Company increased efforts to complete development on a number of new
products.
The operating margin decreased slightly in 1996 compared with 1995, from 25%
to 24%. The effects of the improved gross profit was more than offset by the
patent litigation costs and higher R&D costs.
Investment income increased in 1996 to $1,289,000 from $713,000 in 1995
because of increased funds invested. Funds increased because of the net proceeds
of approximately $16,000,000 from the Company's July 1995 public offering of
Common Stock and cash provided by operations.
The Company's effective income tax rate in 1996 was 34% as compared with 32%
in 1995. A state manufacturing tax credit, recorded in the fourth quarter of
both years, was lower in 1996 than in 1995, and that effect was partially offset
by a higher portion of income being tax-exempt investment income in 1996.
Net income increased 14% because of higher sales and gross profit margins
offset by higher rates of SG&A and R&D in relation to sales. Net income per
share increased 8% due to the increase in net income, offset by the effect of
additional shares issued in the public offering in July 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, working capital increased approximately $2,406,000 to
$37,993,000 from $35,587,000. The Company's cash and cash equivalents and
investment securities, including liquid investments, increased to $35,112,000
from $31,759,000. Those increases were due primarily to $8,666,000 of cash flows
from operating activities offset by $4,606,000 used to acquire treasury stock.
During 1996, working capital increased approximately $1,825,000 to
$35,587,000 from $33,762,000. The Company's cash and cash equivalents and
investment securities, including liquid investments, increased to $31,759,000
from $30,172,000. Those increases were due primarily to $6,513,000 of cash flows
from operating activities and $1,460,000 from stock options exercised
(principally tax benefits), offset by $5,108,000 used to acquire treasury stock.
Capital expenditures were reduced significantly in 1997, 1996 and 1995 as
compared with the $9,414,000 in 1994 when the Company purchased its San Clemente
facilities and much of its automated production equipment. Management expects to
increase capital expenditures significantly in 1998 to meet increased sales
volumes and to automate production of new products, and to incur capital
expenditures to acquire and build a facility for BMP in a low-labor-cost area
outside the United States.
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, the
Company expects the use of working capital to fund its operations to continue to
increase.
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.
The Company believes, that its existing working capital, supplemented by
income from operations, will be sufficient for the foreseeable future.
FORWARD LOOKING STATEMENTS
In this Management's Discussion and Analysis and elsewhere in this Report,
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:
demand for safe medical devices; sales and unit volumes of product generally and
of
17
individual product categories; sales and unit volumes of sales to B.Braun/McGaw
and Abbott and revenue sharing from B.Braun/McGaw; the relationship with and
future contractual arrangements with B.Braun/McGaw; the pattern of sales to
B.Braun/McGaw; contracts with buying organizations; concentration of revenues
among a small number of customers; the development by others of competing
products; decline in average selling prices and the possibility of increased
unit volumes offsetting such decline; decreases in sales of McGaw Protected
Needle, Click Lock and Piggy Lock; SafeLine revenue sharing; sales and unit
volumes of sales to independent distributors; the effect of competition and
competitive products on sales by independent distributors; pricing pressure from
end users; 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; European product specialists; foreign sales; status of agreements with
Ohmeda; unit production costs, production volumes and their effect on gross
margin; SG&A costs; sales, marketing and promotional costs; new product
introduction; regulatory approval of clearance of new products and new product
claims; patent litigation costs, R&D costs and completion of new products;
clinical evaluation costs; effective tax rate; 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 problems; changes in product mix; changes in
marketing strategy; the availability of patent protection and the cost of
enforcing 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The remainder of this page intentionally left blank. Item 8 continued on
following page.
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders
of ICU Medical, Inc.:
We have audited the accompanying consolidated balance sheets of ICU MEDICAL,
INC. (a Delaware corporation) as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ICU
Medical, Inc. as of December 31, 1997 and 1996, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)2 of this Form 10-K is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
January 30, 1998
19
ICU MEDICAL, INC.
-----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31,
--------------------------------------
1997 1996
----------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,962,276 $ 2,059,663
Liquid investments 32,150,000 29,700,000
----------- -----------
Cash and liquid investments 35,112,276 31,759,663
Accounts receivable, net of
allowance for doubtful accounts
of $323,620 in 1997 and $293,032 in 1996 3,356,936 3,043,149
Inventories 1,762,628 2,233,619
Prepaid expenses and other 200,964 763,146
Deferred income taxes 717,000 450,000
----------- -----------
Total current assets 41,149,804 38,249,577
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 7,078,157 6,761,568
Furniture and fixtures 1,521,580 1,319,920
Molds 2,873,321 2,679,014
Construction in process 183,029 417,327
Land, building and building improvements 5,001,297 4,993,228
----------- -----------
16,657,384 16,171,057
Less--Accumulated depreciation (7,060,431) (5,242,487)
----------- -----------
9,596,953 10,928,570
----------- -----------
OTHER ASSETS 439,340 460,490
----------- -----------
$51,186,097 $49,638,637
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
20
ICU MEDICAL, INC.
-----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
-----------------------------------------
1997 1996
------------------- -------------------
CURRENT LIABILITIES:
Accounts payable $ 1,403,312 $ 1,902,217
Accrued liabilities 1,753,915 760,516
----------- -----------
Total current liabilities 3,157,227 2,662,733
----------- -----------
DEFERRED INCOME TAXES 82,000 227,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
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 in 1997 and 1996 886,716 886,716
Additional paid-in capital 39,455,511 39,447,125
Treasury stock -- 1,100,776 shares in 1997 and 566,711 shares in 1996 (9,320,352) (4,848,465)
Retained earnings 16,924,995 11,263,528
----------- -----------
Total stockholders' equity 47,946,870 46,748,904
----------- -----------
$51,186,097 $49,638,637
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
21
ICU MEDICAL, INC.
-----------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
NET SALES $30,404,128 $24,599,005 $21,281,995
COST OF GOODS SOLD 12,817,048 10,438,066 10,275,614
--------------- --------------- ---------------
Gross profit 17,587,080 14,160,939 11,006,381
OPERATING EXPENSES:
Selling, general and administrative 8,463,480 7,445,694 5,436,628
Research and development 1,261,274 790,353 163,844
--------------- --------------- --------------
Income from operations 7,862,326 5,924,892 5,405,909
INVESTMENT INCOME 1,269,236 1,289,298 712,651
--------------- --------------- ---------------
Income before income taxes 9,131,562 7,214,190 6,118,560
PROVISION FOR INCOME TAXES 3,450,000 2,475,000 1,958,000
--------------- --------------- ---------------
NET INCOME $ 5,681,562 $ 4,739,190 $ 4,160,560
=============== =============== ===============
NET INCOME PER SHARE
Basic $0.71 $0.54 $0.53
Diluted $0.71 $0.54 $0.52
=============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 7,946,328 8,722,081 7,906,604
Diluted 8,028,991 8,841,562 8,040,139
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
22
ICU MEDICAL, INC.
-----------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Number Common Additional
of Shares Stock Paid-In Treasury Retained
Outstanding Amount Capital Stock Earnings Total
----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 7,065,737 $706,574 $21,338,190 $ - $ 2,614,732 $24,659,496
Issuance of common stock 1,460,000 146,000 15,861,697 - - 16,007,697
Exercise of stock options and
related income tax benefits 137,100 13,710 816,578 - - 830,288
Net Income - - - 4,160,560 4,160,560
---------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1995 8,662,837 866,284 38,016,465 - 6,775,292 45,658,041
Acquire shares for treasury (596,711) - - (5,108,168) - (5,108,168)
Exercise of stock options and
related income tax benefits 234,325 20,432 1,430,660 259,703 (250,954) 1,459,841
Net Income - - - 4,739,190 4,739,190
---------- -------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1996 8,300,451 886,716 39,447,125 (4,848,465) 11,263,528 46,748,904
Acquire shares for treasury (549,565) - - (4,606,068) - (4,606,068)
Exercise of stock options
and related income tax
benefits, and other 15,500 8,386 134,181 (20,095)
Net Income - - - 5,681,562 5,681,562
---------- -------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 7,766,386 $888,716 $39,455,511 $(9,320,352) $16,924,995 $47,946,870
========== ======== =========== =========== =========== ===========
The accompanying notes are in integral part of these consolidated financial
statements.
23
ICU MEDICAL, INC.
-----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years ended December 31,
---------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,681,562 $ 4,739,190 $ 4,160,560
Adjustments to reconcile net income to net cash
Provided by operating activities --
Depreciation and amortization 2,148,826 1,969,310 1,798,700
Deferred income taxes, non-current (145,000) 21,000 288,300
(Increase) decrease in:
Accounts receivable (280,540) (289,821) (578,972)
Inventories 470,991 (729,797) 1,366,342
Prepaid expenses and other assets 562,182 125,279 (568,426)
Increase (decrease) in:
Accounts payable (498,905) 853,805 290,878
Accrued liabilities 993,399 (177,404) 134,920
Deferred income taxes, current (267,000) 1,000 105,000
----------- ----------- ------------
Net cash provided by operating activities 8,665,515 6,512,562 6,997,302
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (829,306) (1,276,766) (1,739,877)
Proceeds from sales of investment securities - 507,580 4,000,000
Net change in liquid investments (2,450,000) (2,049,156) (24,775,844)
----------- ----------- ------------
Net cash (used in) investing activities (3,279,306) (2,818,342) (22,515,721)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and related income tax benefits, and other 122,472 1,459,841 830,288
Proceeds from sale of common stock - - 16,007,697
Purchase of treasury stock (4,606,068) (5,108,168) -
----------- ----------- ------------
Net cash provided by (used in) financing activities (4,483,596) (3,648,327) 16,837,985
----------- ----------- ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 902,613 45,893 1,319,566
CASH AND CASH EQUIVALENTS, beginning of year 2,059,663 2,013,770 694,204
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,962,276 $ 2,059,663 $ 2,013,770
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for income taxes $ 2,861,991 $ 1,406,620 $ 1,304,677
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
24
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
-------
ICU Medical, Inc. (the Company - a Delaware Corporation) operates in one
business segment engaged in the development and marketing of proprietary
disposable medical devices designed to protect healthcare workers and patients
from the spread of infectious diseases. The Company's devices are sold
principally to distributors and medical product manufacturers throughout the
United States. A wholly owned subsidiary, Budget Medical Products, Inc., formed
late in 1995 is included in the Consolidated Financial Statements.
b. Inventories
-----------
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. Inventory costs include material, labor
and overhead related to the manufacturing of medical devices.
Inventories at December 31, consist of the following:
1997 1996
---------- ----------
Raw materials $1,060,325 $1,179,126
Work in process 459,618 457,885
Finished goods 242,685 596,608
---------- ----------
$1,762,628 $2,233,619
========== ==========
c. Property and Equipment
----------------------
The Company uses the straight-line method for depreciating property and
equipment over their estimated useful lives. Estimated useful lives are:
Buildings 30 years
Building improvements 15 years
Machinery and equipment 5 - 10 years
Furniture, fixtures and molds 3 - 5 years
The Company follows the policy of capitalizing expenditures that materially
increase the life of the related assets; maintenance and repairs are charged
directly to expense as incurred. The costs and related accumulated depreciation
applicable to property and equipment sold or retired are removed from the
accounts and any gain or loss is reflected in the statements of income.
25
d. Patents and Licenses
--------------------
Patents and licenses, which are shown in other assets in the accompanying
consolidated balance sheets, are stated at cost and are amortized using the
straight-line method over 10 years which is the estimated useful life of the
patent or license. At December 31, 1997 and 1996, the net book value of patents
and licenses was $383,228 and $371,131, respectively, net of accumulated
amortization of $243,139 and $166,214, respectively.
e. Research and Development
------------------------
The Company expenses research and development costs as incurred.
f. Cash Equivalents
-----------------
Cash equivalents include certificates of deposit and money market funds
with initial maturities of three months or less.
g. Net Income Per Share
--------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." This statement provides for the presentation of (i)
"basic" earnings per share, which is computed by dividing net income by the
weighted average number of common shares outstanding and (ii) "diluted" earnings
per share which 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.
h. Investment Securities
---------------------
The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. It requires that securities classified as available for sale
be carried at their market values and changes in the securities market values be
recorded, net of income tax effect, as a separate component of stockholders'
equity. Debt securities that the Company intends to hold to maturity can be
carried at amortized cost with no accounting for market value fluctuations.
i. Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach in
accounting for income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the financial
statements as measured by enacted tax laws. Additionally, SFAS No. 109 requires
that deferred tax assets be evaluated and a valuation allowance be established
if it is "more likely than not" that all or a portion of the deferred tax asset
will not be realized.
j. Revenue Recognition
-------------------
Sales and related costs are recorded by the Company upon shipment of
products to non-related distributors and end-users. Distributors and end-users
do not retain any right of return or price protection with respect to unsold
product. The Company warrants products against defects and has a policy
permitting the return of products under such circumstances. The Company
provides a reserve for future returns and price adjustments (including rebates)
based on historical experience. Revenue sharing payments are estimated and
recorded in the period earned, and adjusted to actual amounts when reports are
received from payers; if there is insufficient data to make such estimates, the
revenue sharing is not recorded until reported by the payers.
k. Post-retirement and Post-employment Benefits
--------------------------------------------
The Company does not provide post-retirement or post-employment benefits to
employees.
26
l. Stock Options
-------------
The Company accounts for its stock options under Accounting Principles
Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations as permitted by SFAS No. 123 "Accounting for Stock-Based
Compensation".
m. Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles 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 those estimates.
n. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements
in order to conform with the 1997 presentation.
2. INVESTMENTS
The Company's liquid investments, which are considered "available for
sale," consist principally of corporate preferred stocks and federal-tax-exempt
state and municipal government debt securities that reset dividend or interest
rates at auction from between seven and forty-nine day intervals. They are
carried at cost, which closely approximates both fair value and par value
throughout the period they are held. Balances consist of :
1997 1996
----------- -----------
Corporate preferred stocks $26,450,000 $17,500,000
Federal tax-exempt debt securities 5,700,000 12,200,000
----------- -----------
$32,150,000 $29,700,000
=========== ===========
Investment income, including interest on certificates of deposit and money
market funds, consisted of:
1997 1996 1995
---------- ---------- --------
Corporate dividends $ 612,066 $ 71,176 $ 58,465
Tax-exempt interest 574,603 1,072,711 524,431
Other interest 82,567 145,411 129,755
---------- ---------- --------
$1,269,236 $1,289,298 $712,651
========== ========== ========
27
3. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
1997 1996
---------- --------
Accrued incentive compensation $ 577,129 $210,849
Accrued vacation 117,375 152,407
Taxes payable 737,840 229,776
Other accruals 321,571 167,484
---------- --------
Total accrued liabilities $1,753,915 $760,516
========== ========
4. COMMON STOCK AND COMMON STOCK OPTIONS GRANTED
In July 1995, the Company completed a public offering of 1,460,000 new
common shares, raising proceeds of $16,007,697, net of expenses of
approximately $505,000.
In 1993, the Company adopted the 1993 Stock Incentive Plan and Directors'
Stock Option Plan (the Plans). In 1996, the Plans were amended to increase from
1,500,000 to 3,500,000 the number of shares reserved for issuance to employees
and directors. Options granted under the 1993 Stock Incentive Plan expire eleven
years from issuance and are time-accelerated options which vest upon the earlier
of the Company attaining specific operating performance levels or ten years from
the date of grant. The 1993 Directors' Stock Option Plan called for options to
be granted to non-employee Directors every three years; fifty percent of each
Director's options vest on the date of the first annual shareholders meeting
following the grant and the other fifty percent on the date of the second such
meeting. The Plans include a condition whereby options not vested are canceled
if employment or directorship is terminated. All options have been granted at
the fair market value of the Company's stock on the date of grant. Upon exercise
of options, the Company is generally entitled to a tax deduction for an amount
equal to the excess over the exercise price of the fair market value of the
shares at the date of exercise.
In 1997, the Directors' Stock Award Plan, under which each non-employee
Director is awarded 1,000 shares of Common Stock annually, was adopted. The
Directors' Stock Option Plan was terminated, reducing the number of shares
reserved for issuance to 3,335,000.
A summary of the Company's stock option activity is in the following table.
Options canceled in 1996 were replaced with options granted at exercise prices
ranging from $7.69 to $8.19 per share (weighted average $7.76 per share), and
options canceled in 1997 were replaced with options granted at exercise prices
ranging from $8.19 to $8.31 (weighted average $8.24 per share).
Of the options outstanding at December 31, 1997, 2,102,452 are time-
accelerated options, which were issued under the 1993 Stock Incentive Plan. Of
those options, 46,150 issued in 1993 at an average exercise price of $9.56
expire in 2004; 141,000 issued in 1994 at an average exercise price of $10.56
expire in 2005; 25,000 issued in 1995 at an average exercise price of $11.50
expire in 2006; 617,824 issued in 1996 at an average exercise price of $12.48
expire in 2007; and, 1,272,478 issued in 1997 at an average exercise price of
$9.02 expire in 2008. Of the remaining 45,000 options that are not time-
accelerated, 15,000 at an exercise price of $14.00 expire in 1998 and 30,000 at
an exercise price of $16.13 expire in 2001. In January 1998, 750,000 options
with an exercise price of $12.25 were issued. Also in January 1998, options
granted from 1993 to 1996 to purchase 155,150 shares of common stock at prices
ranging from $8.00 to $13.62 (weighted average $9.26 per share) became vested.
Dilutive stock options account for the difference in the number of shares
used to calculate basic and diluted net income per share. Options which are
anti-dilutive because their exercise price exceeded the average market price of
the Company's common stock approximated 870,000, 940,000 and 25,000 in 1997,
1996 and 1995, respectively. At December 31, 1997, 450,000 options had exercise
prices in excess of the market price of the Company's common stock.
28
A summary of the Company's stock option activity is as follows:
Exercise Price Weighted
Shares Range Average
--------- ------------------------------ --------
Outstanding at December 31, 1994 1,295,775 $ 0.29 - $16.25 $10.49
Granted 36,000 11.44 - 16.63 13.74
Exercised 137,100 0.29 - 6.96 0.37
Forfeited 19,450 9.50 - 15.13 11.12
--------- ------ ------ ------
Outstanding at December 31, 1995 1,175,225 0.29 - 16.63 11.76
Granted 958,300 7.19 - 23.00 13.73
Canceled 105,000 15.35 - 16.25 16.13
Exercised 234,325 0.29 - 14.63 2.00
Forfeited 55,050 9.50 - 18.81 14.01
--------- ------ ------ ------
Outstanding at December 31, 1996 1,739,150 5.75 - 23.00 13.82
Granted 1,371,002 7.50 - 12.94 8.97
Canceled 830,000 9.19 - 23.00 14.39
Exercised 11,500 5.75 - 7.33 7.05
Forfeited 121,200 8.19 - 15.63 9.54
--------- ------ ------ ------
Outstanding at December 31, 1997 2,147,452 $ 7.19 - $16.25 $10.29
========= ====== ====== ======
Exercisable at December 31:
1995 255,825 $ 0.29 - $14.00 $ 2.75
1996 26,500 5.75 - 14.00 10.98
1997 31,000 9.50 - 16.13 14.88
Available for grant at December 31, 1997 1,167,548
=========
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options, and does not recognize compensation expense
because the exercise price of the options equals the fair market value of the
underlying shares at the date of grant. Directors' stock options are treated in
the same manner as employee stock options for accounting purposes.
Under SFAS No. 123, the Company is required to present certain pro forma
earnings information determined as if employee stock options were accounted for
under the fair value method of that Statement. The fair value for options
granted in 1997, 1996 and 1995 was estimated as of the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions in the respective years: risk-free interest rate of 5.9, 6.4 and
6.0 percent, respectively; expected option life of 4.3, 3.4 and 2.5 years,
respectively; expected volatility of 54, 49 and 44 percent, respectively; and,
no dividends. The Black-Scholes option valuation model was developed for use in
estimating fair value of fully transferable traded options with no vesting
restrictions, and, similar to other option valuation models, requires use of
highly subjective assumptions, including expected stock price volatility. The
characteristics of the Company's stock options differ substantially from those
of traded stock options, and changes in the subjective assumptions can
materially affect estimated fair values; therefore, in Management's opinion,
existing option valuation models do not necessarily provide a reliable single
measure of the fair value of the Company's stock options.
29
For purposes of the following required pro forma information, the weighted
average fair value of stock options granted in 1997, 1996 and 1995 was $3.33,
$5.84 and $4.50, respectively. The total estimated fair value is amortized to
expense over the vesting period.
1997 1996 1995
----------------- ----------------- -----------------
Proforma:
Net Income............................................ $3,682,000 $3,968,000 $4,147,000
Net Income per share - basic......................... $ 0.52 $ 0.48 $ 0.53
- diluted....................... $ 0.51 $ 0.47 $ 0.52
Weighted average number of
commmon shares - basic......................... 7,120,000 8,260,000 7,891,000
- diluted....................... 7,209,000 8,379,000 8,025,000
5. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995, is as follows:
1997 1996 1995
-------------------- ----------------------- ----------------------
Current:
Federal $2,826,000 $1,992,000 $1,110,700
State 1,036,000 461,000 454,000
---------- ---------- ----------
3,862,000 2,453,000 1,564,700
---------- ---------- ----------
Deferred:
Federal (311,000) (3,000) 279,300
State (101,000) 25,000 114,000
---------- ---------- ----------
(412,000) 22,000 393,300
---------- ---------- ----------
$3,450,000 $2,475,000 $1,958,000
========== ========== ==========
The current tax provision includes the tax expense that results from
allocating to stockholders' equity the tax benefit that the Company receives
upon exercise of stock options by employees and directors. Because of that
benefit, current income taxes payable were reduced from the amounts in the above
table by $8,000, $1,032,000, and $780,000 in 1997, 1996 and 1995, respectively.
A reconciliation of the provision for income taxes at the statutory rate to
the Company's effective rate is as follows:
1997 1996 1995
--------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
----------- -------- ----------- -------- ----------- --------
Federal tax at the expected
statutory rate $3,105,000 34.0% $2,453,000 34.0% $2,080,000 34.0%
State income tax 661,000 7.2 443,000 6.1 373,000 6.1
Tax-exempt interest and
dividends (316,000) (3.4) (382,000) (5.3) (145,000) (2.4)
Tax credits - - (39,000) (0.5) (350,000) (5.7)
---------- ------ ---------- ------ ---------- ------
Provision $3,450,000 37.8% $2,475,000 34.3% $1,958,000 32.0%
========== ====== ========== ====== ========== ======
30
The components of the Company's deferred income tax provision for the years
ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
------------ ------------ ------------
Allowance for doubtful accounts $ (13,000) $(25,000) $(24,000)
Inventory reserves (105,000) (23,000) 37,800
Accruals (45,000) 122,000 159,500
State income taxes (104,000) (73,000) 115,000
Depreciation (145,000) 21,000 105,000
--------- -------- --------
$(412,000) $ 22,000 $393,300
========= ======== ========
The components of the Company's deferred income tax benefit (liability) are
as follows:
1997 1996
---------------- ----------------
Current deferred tax benefit:
Allowance for doubtful accounts $140,000 $ 127,000
Inventory reserves 300,000 195,000
Accruals 115,000 70,000
State income taxes 162,000 58,000
-------------- --------------
$717,000 $ 450,000
============== ==============
Long-term deferred tax liability:
Depreciation $(82,000) $(227,000)
============== ==============
6. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISKS
The Company manufactures disposable medical devices which are sold on
credit terms principally throughout the United States to wholesale medical
supply distributors, and in selected cases to hospitals and homecare providers.
The distributors, in turn, sell the Company's products to hospitals and homecare
providers. The Company has also entered into a sales and supply agreement with
two medical supply manufacturers. For the years ended December 31, 1997, 1996
and 1995, the Company had sales of 10 percent or greater to two distributors and
the two manufacturers as follows:
1997 1996 1995
---- ---- ----
Distributor A * * 12
Distributor B * 13 12
Manufacturer A 36 28 30
Manufacturer B 16 * *
* less than 10 percent
7. EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key employees which
include an incentive compensation agreement. Under contracts that expired on
December 20, 1996, a cash bonus pool was provided equal to 10 percent of after-
tax profits through 1995. Fifty percent of each period's incentive compensation
was payable on December 20 of
31
that period and the remaining 50 percent was paid on December 20 of the
subsequent period. Incentive compensation expense for the years ended December
31, 1995 and 1994, was approximately $465,000 and $324,000, respectively. Under
new contracts effective January 1, 1997, incentive compensation expense based on
meeting certain operating performance goals was $274,000.
8. COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in various legal proceedings,
most of which are routine litigation, in the normal course of business. In the
opinion of management, after consultation with legal counsel, the resolution of
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
9. RELATED PARTY TRANSACTION
In 1996, the Company purchased 167,850 shares of its common stock from the
Company's President for $1,458,197, equal to its fair market value on the date
of purchase.
10. QUARTERLY FINANCIAL DATA -- UNAUDITED -- (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
Quarter Ended
------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1997
- ----
Net Sales $6,824 $7,190 $7,700 $8,690
Gross Profit 3,911 4,133 4,394 5,149
Net Income 1,338 1,253 1,445 1,645
Net Income Per Share $ 0.16 $ 0.16 $ 0.18 $ 0.21
1996
- ----
Net Sales $6,008 $6,147 $5,972 $6,472
Gross Profit 3,704 3,472 3,200 3,785
Net Income 1,591 1,267 964 917
Net Income Per Share $ 0.18 $ 0.14 $ 0.11 $ 0.11
Basic and diluted net income per share was the same in all periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information about Registrant's directors and disclosure of Form 3, 4 or
5 delinquent filers called for by Item 10, Part III of Form 10-K is set forth in
Registrant's definitive Proxy Statement filed or to be filed pursuant to
Regulation 14A within 120 days of Registrant's fiscal year ended December 31,
1997, and such information is incorporated herein by this reference. Pursuant to
Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-
K, information about Registrant's executive officers called for by Item 10, Part
III of Form 10-K is set forth in Part I of this Report in a separate item
captioned "Executive Officers of Registrant."
32
ITEMS 11 THROUGH 13.
The information called for by Part III of Form 10-K (Item 11 - Executive
Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Item 13 - Certain Relationships and Related Transactions) is set
forth in Registrant's definitive Proxy Statement filed or to be filed pursuant
to Regulation 14A within 120 days of Registrant's fiscal year ended December 31,
1997, and such information is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
The financial statements listed below are set forth in Item 8 of this
Annual Report.
FORM 10-K
PAGE NO.
----------
Report of Independent Public Accountants.......................................... 19
Consolidated Balance Sheets at December 31, 1997 and 1996......................... 20-21
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995.................................................................... 22
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995..................................... 23
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.................................................................... 24
Notes to Consolidated Financial Statements........................................ 25-32
2. Financial Statement Schedules
The Financial Statement Schedules required to be filed as a part of this
Report are:
FORM 10-K
PAGE NO.
----------
Schedule II - Valuation and Qualifying Accounts.................................. 37
Schedules other than those listed above are omitted since they are not
applicable, not required or the information required to be set forth therein is
included in Consolidated Financial Statements or Notes thereto included in this
Report.
33
3. Exhibits
Exhibits required to be filed as part of this report are:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Registrant's Certificate of Incorporation, as amended.(1)
3.2 Registrant's Bylaws, as amended.(1)
10.1 Form of Indemnity Agreement with Executive Officers.(1)
10.2 Form of Stock Option Agreement.(1)
10.3 Registrant's Amended and Restated 1993 Incentive Stock Plan.
10.4 Registrant's Directors' Stock Option Plan.(2)
10.5 Manufacture and Supply Agreement dated September 13, 1993 between
Registrant and McGaw, Inc. relating to the CLAVE product.(3)
10.6 Manufacture and Supply Agreement dated September 13, 1993 between
Registrant and McGaw, Inc. relating to the Protected Needle
product.(3)
10.7 Supply and Distribution Agreement dated April 3, 1995 between
Registrant and Abbott Laboratories, Inc. relating to the CLAVE
product.(4)
10.8 Second Amendment to Manufacture and Supply Agreement dated May
31, 1995 between Registrant and McGaw, Inc.(5)
10.9 Distribution Agreement dated June 1, 1996 between Registrant and BOC
OHMEDA AB.(6)
10.10 Registrant's Director's Stock Award Plan.(7)
10.11 Amendment to Abbott and ICU Medical Agreement, dated September 9,
1998 between Registrant and Abbott Laboratories (8)
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
(1) Filed as an exhibit to Registrant's Registration Statement Form S-1
(Registration No. 33-45734) filed on February 14, 1992, and incorporated
herein by reference.
(2) Filed as an exhibit to Registrant's definitive Proxy Statement filed
pursuant to Regulation 14A on March 22, 1993 and incorporated herein by
reference.
(3) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1993, and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1995, and incorporated herein by reference.
34
(5) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1995, and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(7) Filed as exhibit and Registrant's definitive Proxy Statement filed pursuant
to Regulation 14A on April 11, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K.
Registrant filed the following Report on Form 8-K during the last
quarter of the period covered by this Report:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ICU MEDICAL, INC.
By: /s/ George A. Lopez, M.D.
---------------------------
George A. Lopez, M.D.
Chairman of the Board
Dated: March 10, 1998
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George A. Lopez, M.D. Chairman of the Board, President, March 10, 1998
- -------------------------- and Chief Executive Officer,
George A. Lopez, M.D. (Principal Executive Officer)
/s/ Francis J. O'Brien Chief Financial Officer March 10, 1998
- ----------------------- and Principal Accounting Officer
Francis J. O'Brien
/s/ Jack W. Brown Director March 10, 1998
- -----------------
Jack W. Brown
/s/ John J. Connors Director March 10, 1998
- --------------------
John J. Connors
/s/ Michael T. Kovalchik, III Director March 10, 1998
- -----------------------------
Michael T. Kovalchik, III
/s/ Richard H. Sherman Director March 10, 1998
- ----------------------
Richard H. Sherman
36
SCHEDULE II
ICU MEDICAL, INC.
-----------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Additions
--------------------------------
Balance at Charged to Balance
Beginning Costs and Charged to Write-offs/ at End
Description of Period Expenses Other Accounts Disposals of Period
- ----------- --------- -------- -------------- --------- ---------
For the year ended
December 31, 1995:
Allowance for
doubtful accounts $195,048 $ 82,000 $ - $ 22,061 $254,987
======== ======== ======= ======== ========
Inventory reserves $320,411 $254,700 $83,901 $357,574 $301,438
======== ======== ======= ======== ========
For the year ended
December 31, 1996:
Allowance for
doubtful accounts $254,987 $ 40,000 $ - $ 1,955 $293,032
======== ======== ======= ======== ========
Inventory reserves $301,438 $ 50,000 $ - $ 77,371 $274,067
======== ======== ======= ======== ========
For the year ended
December 31, 1997:
Allowance for
doubtful accounts $293,032 $ 35,000 $ - $ 4,412 $323,620
======== ======== ======= ======== ========
Inventory reserves $274,067 $243,951 $ - $ 18,403 $499,615
======== ======== ======= ======== ========
37
EXHIBIT INDEX
Exhibit Number Description Sequentially Numbered Page
- -----------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
38