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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, 1998 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as 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): (949) 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, 1999 was $145,320,294.*
The number of shares outstanding of Registrant's Common Stock, $.10 par
value, as of February 28, 1999 was 8,184,993.
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting
of Stockholders, filed or to be filed pursuant to Regulation 14A within 120 days
following Registrant's fiscal year ended December 31, 1998, 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
Dr. Diana K. Lopez 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. In September 1998, the
State of California enacted the bloodborne pathogen standard under the state's
occupational safety and health statute. The standard mandates use of
needlestick prevention controls, including needleless systems. Final regulations
are due August 1, 1999.
The Company currently sells its products through IV product manufacturers
and independent distributors.
Background
The Company's first products, the Click Lock(R) and Piggy Lock(R), 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
needleless 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 not only decreases needlesticks but also reduces
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
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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 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 employer 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 or non-latex rubber 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 11% of the Company's net sales in 1998.
The CLAVE is the Company's largest selling product line, and accounted for
69% of the Company's net sales in 1998.
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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 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. 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.
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.
("McGaw"), predecessor to B.Braun Medical, Inc. doing business as B.Braun/McGaw
("B.Braun/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%, 5% and 4% of the
Company's net sales in 1996, 1997 and 1998, 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 another agreement with B.Braun/McGaw, B.Braun/McGaw also
agreed to pay the Company a share of B.Braun/McGaw's revenues on SafeLine, a
then-new needleless IV connector designed and manufactured by B.Braun/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, 6% in 1997
and 5% in 1998.
Lopez Valve(R)
The Company's Lopez Valve is a small "T" valve designed to be connected
into nasogastric, gastric or jejunostomy tube systems. The valve permits
intermittent injection of medications, irrigation or suction without having to
disconnect the line, thereby opening the system. By eliminating the need to open
the system, 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, called the "Rhino," 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 are alternative and less expensive needleless IV
connectors.
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CLC 2000(TM)
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 needle-free policies of some hospitals and homecare providers.
The CLC 2000 also contains no natural rubber latex.
The CLC 2000 is used on the IV line in the same manner as the CLAVE.
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. Flushing often requires use of expensive drugs and carries the risk
of infection from bacteria in the occluded blood. Because of this risk of
infection, the United States Food and Drug Administration has recently suggested
use of procedures other than drugs to prevent occlusion of catheters.
The CLC 2000 was developed to reduce clotting of catheters because of
"back-flow" after the catheter is disconnected. The CLC 2000 consists of a "T"
shaped cylindrical housing, which contains a poppet that is depressed as the
luer tip enters the CLC 2000. Fluid flows around the poppet and through the
housing into the primary IV line and into the catheter. When the luer is removed
from the CLC 2000, a portion of the fluid remaining in the housing is expelled
out through the tip of the catheter while a constant positive pressure is
maintained to prevent any back-flow into the catheter.
The Company is currently conducting trials with the objective of receiving
FDA approval for certain performance claims for the CLC 2000. While the Company
believes it can achieve such approval, there is no assurance that it will
ultimately receive it.
The Company began marketing the CLC 2000 in November 1997. The Company is
concentrating the marketing of the CLC 2000 where its "no back-flow" features
are of maximum benefit in patient care. These are generally therapies which use
small diameter, long-dwelling catheters such as oncology, dialysis and long-term
infusion of medication. Sales to date have not been significant.
1o2 Valve(TM)
The 1o2 is the first one-way or two-way drug delivery system. It functions
as a single unit, or in multiple "ganged" units as a manifold, for use
throughout a hospital. It provides the safety features of an automatic one-way
valve, yet allows aspiration, or two-way function by simply pushing a button.
The 1o2 Valve can be used in place of products such as stopcocks and check valve
manifolds. The Company commenced marketing the 1o2 in November 1998. The
Company expects to commence shipments of the 1o2 Valve in the spring of 1999.
Initially, the Company intends to focus marketing efforts on anesthesia and
critical care usage.
Budget Medical Products, Inc.
During late 1995, the Company created Budget Medical Products, Inc. ("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, 1997 and 1998, BMP's net sales were
approximately $400,000, $1,800,000 and $3,200,000, respectively. Most of the
increase in 1997 and 1998 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 one of those steps, in December 1998, BMP
commenced assembly at its new 20,000 square foot facility in Ensenada, Baja
California, Mexico, and intends to transfer most of its manual assembly to the
new facility by mid-1999.
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Set finder(TM)
The Company is currently taking steps to build expertise and capabilities
for direct distribution of commodity-type, standard IV sets directly to
healthcare providers at competitive prices. Distribution will be through Set
finder, Inc., a wholly-owned subsidiary of the Company, in a way that will
minimize working capital requirements. Set finder products will be assembled at
BMP's facility in Mexico. The Company is planning to launch the Set finder
business later in 1999. (Independent distributors will continue to distribute
custom/proprietary IV sets manufactured by the Company.)
New Products
The Company is developing several new products that it intends to introduce
in 2000 and later. 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 and Abbott, two major IV product suppliers,
each of whom has a significant share of the IV set market under contract. The
Agreement with B.Braun/McGaw, which extends to December 2002, confers exclusive
and nonexclusive rights to distribute certain CLAVE products to certain
categories of customers. Under the Agreement with Abbott, which extends to
December 2009, Abbott has rights to distribute certain CLAVE products and the
Rhino.
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's 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 15 independent distributors in the
United States who employ approximately 100 salespeople in the aggregate. In
addition, the Company employs 36 product specialists in the United States 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 CLAVE products and McGaw Protected Needles and
SafeLine revenue share accounted for approximately 28%, 36% and 35% of the
Company's net sales in 1996, 1997 and 1998, respectively. Sales to Abbott
accounted for approximately 7%, 16% and 29% of net sales in 1996, 1997 and 1998,
respectively. Several independent distributors accounted for between 5% and 10%
of 1998 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 could have a more significant adverse
effect on the Company's business and operating results 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. Foreign sales
(excluding Canada) accounted for approximately 3% of the Company's net sales in
each of the years 1996, 1997, and 1998. The Company has six product specialists
in Europe and three in Canada.
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Manufacturing
Manufacturing of the Company's products involves injection molding of
plastic and silicone 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 24 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, 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, 1o2 Valve and IV sets are assembled
manually. The CLC 2000 is currently assembled manually pending installation of
automated assembly in 1999.
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 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 opened a 20,000 square foot facility in Ensenada, Baja
California, Mexico in December 1998. The Company performs manual assembly
operations for BMP at the facility and the Company intends to move certain other
manual assembly operations there over the next year.
The Company's products are currently sterilized in processes which use
either gamma or electronic beam ("e-beam") radiation. Most of the Company's
sterilization is by gamma radiation. Sterilization is performed by independent
companies. The Company has qualified many of its products and components for
sterilization by e-beam. E-beam sterilization is less expensive and quicker than
gamma radiation sterilization.
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. Certain product
performance claims for the CLC 2000 require FDA approval after extensive testing
that is not yet completed. 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
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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 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 QSR 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
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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., Alaris 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 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 the CLAVE has, and will continue to
motivate others to develop one piece needleless connectors, which may
incorporate many of the same functional and physical characteristics as the
CLAVE. The Company is aware of a number of such products. The Company believes
those products were developed primarily by companies who currently do not have
the distribution or financial capabilities of the Company, although some of
those products may be distributed in the future by larger companies that do have
such capabilities. The Company believes these products have had a modest impact
on its CLAVE business to date, but 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 1o2, 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.
9
In 1998, the Company settled legal proceedings that it brought against Tri-
State Hospital Supply Corporation in 1995 alleging patent infringement. The
cost of the litigation was significant. See: Item 3, "Legal Proceedings" and
Item 7, "Management's Discussion and Analysis of Financial Conduction and
Results of Operations."
Employees
At February 28, 1999, the Company had 222 full-time employees, consisting
of 75 engaged in sales, marketing and administration, and 147 in manufacturing,
molding, product development and quality control, including 52 in Mexico. The
Company contracts with 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, 1999, the number of temporary production personnel was
approximately 136.
Item 2. Properties.
The Company owns two adjacent 39,000 square foot buildings in San Clemente,
California and a 20,000 square foot building on approximately 94 acres of land
in Ensenada, Baja California, Mexico. The Company is currently evaluating the
adequacy of its existing facilities in San Clemente and expects to add to those
facilities during the next twenty-four months.
Item 3. Legal Proceedings.
In an action entitled ICU Medical, Inc. v. Tri-State Hospital Supply
----------------------------------------------
Corporation, brought in the United States District Court for the Northern
- -----------
District of California, the Company alleged infringement of two of the Company's
patents by defendant's protected needle connector and Y-style extension sets.
The parties agreed to settle this matter in June 1998. Under the settlement
agreement, Tri-State Hospital Supply Corporation ("Tri-State") stipulates that
the patents are valid, enforceable and have been infringed by virtue of Tri-
State's manufacture and sale of certain products. The parties agreed to treat
the other terms of the settlement as confidential.
On April 7, 1998, in an action entitled Allen Petty, dba Carmel Development
-----------------------------------
International v. ICU Medical, Inc., an Orange County, California, Superior Court
- ----------------------------------
jury rendered a verdict in favor of the Plaintiff and against the Company in the
sum of $795,448 in an action brought by the Plaintiff for commissions allegedly
owed him. On June 23, 1998, the Court reduced the judgement to $727,522
($673,142 plus certain expenses), but denied the balance of the Company's motion
to set aside the jury verdict. The Company believes the verdict is against the
facts in the case and is contrary to well established law, and has appealed to
have the balance of the judgement overturned. In view of the Court decision in
June 1998 and the uncertainties of the appeal process, the Company accrued a
provision for this matter in its June 1998 financial statements.
The Company is from time to time involved in various other legal
proceedings, either as a defendant or plaintiff, most of which are routine
litigation in the normal course of business. The Company believes that the
resolution of the legal proceedings in which it is involved will not have a
material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
10
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. 51 Chairman of the Board, President and Chief Executive Officer
Richard A. Costello 35 Vice President of Sales
Evelyn L. Foss 43 Vice President of Marketing
Francis J. O'Brien 56 Chief Financial Officer, Secretary and Treasurer
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.
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 Stock Market
National Market Tier 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
1998 High Low
---- ---- ---
First Quarter $16 1/4 $12 1/2
Second Quarter 16 3/16 13 5/8
Third Quarter 15 1/4 11 7/8
Fourth Quarter 22 12 3/4
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, 1999 the Company had 143 stockholders of record and
believes it has approximately 2,500 beneficial stockholders.
11
Item 6 Selected Financial Data
ICU MEDICAL, INC.
-----------------
SELECTED FINANCIAL DATA
-----------------------
Year ended December 31
----------------------
(in thousands, except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
INCOME DATA:
Net sales $39,842 $30,404 $24,599 $21,282 $16,542
Cost of goods sold 16,687 12,817 10,438 10,276 8,818
------- ------- ------- ------- -------
Gross profit 23,155 17,587 14,161 11,006 7,724
Operating expenses 13,141 9,725 8,236 5,600 3,877
------- ------- ------- ------- -------
Income from operations 10,014 7,862 5,925 5,406 3,847
Investment income and other 1,408 1,269 1,289 713 516
Provision for income taxes 4,200 3,450 2,475 1,958 1,456
------- ------- ------- ------- -------
Income from continuing operations $ 7,222 $ 5,681 $ 4,739 $ 4,161 $ 2,907
======= ======= ======= ======= =======
Income from continuing operations
Per Share
Basic $ 0.90 $ 0.71 $ 0.54 $ 0.53 $ 0.41
Diluted 0.86 0.71 0.54 0.52 0.40
======= ======= ======= ======= =======
Weighted average number of
shares
Basic 7,990 7,946 8,722 7,906 7,048
Diluted 8,423 8,029 8,842 8,040 7,292
======= ======= ======= ======= =======
CASH FLOW DATA:
Cash flows from operations $ 6,574 $ 8,666 $ 6,513 $ 6,997 $ 938
BALANCE SHEET DATA:
Cash and liquid investments $38,090 $35,112 $31,760 $29,665 $ 3,569
Working capital 43,817 37,993 35,587 33,762 12,712
Total assets 62,360 51,186 49,639 47,850 26,321
Long-term debt - - - - -
Stockholders' equity 58,228 47,947 46,749 45,658 24,659
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 1998 1997 1996
- --------------------------------------------------------------------------------
CLAVE 69% 65% 68%
Click Lock 4% 7% 12%
McGaw Protected Needle 4% 5% 8%
Lopez Valve and other 5% 4% 4%
RF100-RF150 ("Rhino") 5% 7% 3%
Budget Medical Products 8% 6% 2%
McGaw SafeLine Revenue Sharing 5% 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 and Abbott (the
"B.Braun/McGaw Agreement" and the "Abbott Agreement," respectively). Most
independent distributors handle the full line of the Company's products.
B.Braun/McGaw and Abbott both purchase CLAVE products, principally bulk, non-
sterile connectors. B.Braun/McGaw also purchases the McGaw Protected Needle and
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 B.Braun/McGaw Agreement provided for revenue sharing
based on B.Braun/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, the Abbott Agreement was
amended to establish fixed selling prices for Rhinos and eliminate revenue
sharing, and effective January 1, 1998, both the Abbott and B.Braun/McGaw
Agreements were amended to establish fixed selling prices on CLAVE products and
eliminate revenue sharing on CLAVE products.
In June 1997, B.Braun Melsungen AG ("B.Braun") acquired McGaw from IVAX
Corporation. In June 1998, the Company and B.Braun/McGaw concluded a new
definitive agreement effective as of January 1, 1998. The new agreement extends
the prior agreement for CLAVE products from June 2000 to December 2002, has
extension provisions beyond then, and generally reduces prices.
In January 1999, the Company and Abbott agreed to a significant expansion
of their agreement for CLAVE products. The new agreement has assurances of
substantial increases in sales volume, accompanied by price reductions. The
agreement is extended from April 2002 to December 2009 and designates the
Company as Abbott's preferred supplier for all Abbott's needlefree technology.
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 an IV product manufacturer such
as B.Braun/McGaw or Abbott or the loss of a large contract by such a customer
could have a material adverse effect on the Company's business and 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 1996, the Company since October 1996 has been reducing
prices. 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.
13
Comparison of 1998 to 1997
In 1998, the Company reported net sales of $39,842,000 which was
$9,438,000, or 31%, higher than the net sales of $30,404,000 reported in 1997.
The most significant factor in the increase was a $7,969,000, or 41%, increase
in CLAVE net sales. Net sales in all of the Company's other product lines were
equal to or more than those for 1997, except for a decrease in Click Lock and
Piggy Lock net sales. The Company's independent distributors accounted for 36%
of the Company's net sales in 1998, with McGaw accounting for 35% and Abbott the
remaining 29%. In 1997, the comparable percentages were 48%, 36% and 16%,
respectively.
Total CLAVE net sales increased approximately 41% from $19,539,000 in 1997 to
$27,508,000 in 1998. Unit shipments of CLAVE products in 1998 increased
approximately 88% over 1997, with B.Braun/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 1998 decreased
approximately 25% as compared with 1997. That decrease reflects lower prices
from independent distributors and lower prices on bulk, non-sterile CLAVE
products sold to B.Braun/McGaw and Abbott, as well as a higher percentage of the
sales mix being accounted for by bulk, non-sterile CLAVEs.
Net sales to B.Braun/McGaw, including revenue sharing, amounted to $13,961,000
in 1998, as compared to $10,971,000 in 1997. CLAVE net sales to B.Braun/McGaw
increased approximately 36%, principally because of an increase in unit
shipments. Net sales of the McGaw Protected Needle were virtually unchanged,
but management expects those sales to decline in the future as the market for
safe connectors continues its shift to needleless technology. Management
expects increases in unit shipments to B.Braun/McGaw in 1999, although there is
no assurance that this expectation will be realized. Under an Agreement with
B.Braun/McGaw, 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 $1,995,000 in 1998, as
compared with $1,767,000 in 1997. 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 $11,601,000 in 1998, as compared to $4,993,000
in 1997. CLAVE sales were 3.24 times the amount in 1997. Most of the balance
of the sales were in the low-priced Rhino, which were $1,987,000 as compared
with $2,087,000 in 1997. Based upon the terms of the Abbott agreement as
amended in January 1999, Management expects a substantial increase in CLAVE unit
and dollar sales volume with Abbott in 1999, although there is no assurance as
to the amount of such increase.
Management expects that unit sales of CLAVE to its independent distributors in
1999 will be approximately the same as in 1998 or slightly lower. Although
Management had expected that the price reductions commenced in October 1996,
which have aggregated 40% by the end of 1998, 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 29% in 1998 as compared to
1997, because of the safe connector market's continued shift to needleless
technology. Management expects that decline to continue.
The Lopez Valve showed a 24% growth in 1998 net sales as compared to 1997
principally because of increased unit shipments. Management expects continued
increases in Lopez Valve net sales in 1999.
The Company's subsidiary BMP, which markets custom IV sets, recorded
$3,218,000 net sales in 1998 as compared to $1,828,000 in 1997, its second year
of operations. Most of the increase in 1998 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 and
1998. The Company is currently taking steps aimed at expanding BMP by
increasing systems capabilities, improving manufacturing efficiency, reducing
labor cost and enhancing distribution. Because significant innovation is
required to achieve these goals, there is no assurance that these steps will
achieve the desired results. However, even if
14
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.
Total sales to foreign distributors were $1,364,000 in 1998 as compared to
$908,000 in 1997. (Those amounts do not include distribution in Canada.). In
April 1998, BOC OHMEDA AB ("Ohmeda"), the Company's principal distributor in
Europe, sold its European distribution to a competitor of the Company, and the
Company has terminated substantially all distribution by Ohmeda since August
1998. The Company is currently arranging alternative distribution in Europe,
although there is no assurance that satisfactory alternative distribution
arrangements will be made. The Company believes that the loss of distribution
through Ohmeda did have an adverse effect on the growth of European sales. To
enhance growth of the European distribution, the Company has hired four
additional product specialists in Europe bringing to six the total in Europe.
Management expects that its sales to European and other foreign distributors
will continue to increase in the future.
Gross margin for 1998 was unchanged from the 58% registered in 1997. 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 increased absorption of overhead by higher
production volumes offset the effect of lower average unit selling prices.
The Company expects that its unit production costs will continue to decrease
in 1999 as unit volumes increase, but that the gross margin percentage will be
equal to or slightly lower than that achieved in 1998 as average unit sales
prices continue to decrease.
Selling, general and administrative costs ("SG&A") increased by approximately
$3,631,000 to $12,094,000 in 1998, as compared to $8,463,000 in 1997. SG&A costs
were 30% of net sales in 1998 as compared with 28% in 1997. 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, expansion
of the international sales efforts, and legal fees. Management expects SG&A
costs to increase in 1999, because of growth in the Company, increased domestic
and international sales and marketing costs, promotional costs of new products
and expansion of BMP.
Research and development ("R&D") costs decreased in 1998 by approximately
$213,000 to $1,048,000, or 3% of net sales, as compared with approximately
$1,261,000, or 4% of sales, in 1997. Management estimates that R&D costs in
1999 will continue at approximately the same percentage of net sales as in 1998.
However, R&D costs could differ from those estimates and the R&D may not be
completed as expected.
The operating margin decreased to 25% in 1998, compared with 26% in 1997,
principally because SG&A increased as a percentage of net sales.
Investment income increased 11% from 1997 to 1998, principally because of an
increase in invested funds..
The Company's effective income tax rate in 1998 was 37%, approximately the
same as in 1997. Management expects its effective tax rate in 1999 to be equal
to or slightly higher than the 1998 rate.
Income from operations increased 27%, as the increase in operating expenses of
35% exceeded the 32% increase in gross profit. Net income increased 27%. Net
income per share (diluted) increased $0.15, or 21%. The percentage increase in
earnings per share was less than that for net income, principally because the
increase in the price of the Company's stock increased the dilutive effect of
stock options.
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 B.Braun/McGaw accounting for 36% and
Abbott the remaining 16%. In 1996, the comparable percentages were 65%, 28% and
7%, respectively.
15
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 B.Braun/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%.
Estimated SafeLine revenue share was approximately $1,767,000 in 1997, as
compared with $834,000 in 1996.
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.
Net sales of Click Lock and Piggy Lock decreased 22% in 1997 as compared to
1996. The Lopez Valve showed a 9% growth in 1997 net sales as compared to 1996
because of increased unit shipments.
BMP net sales recorded were $1,828,000 in 1997 as compared to $400,000 in
1996, its first year of operations. Total sales to foreign distributors were
$908,000 in 1997 as compared to $693,000 in 1996.
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 and continued increases in the benefits of the Company's
extensive production automation more than offset the effect of lower average
unit selling prices.
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.
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.
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.
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.
Liquidity and Capital Resources
During 1998, working capital increased approximately $5,824,000 to $43,817,000
from $37,993,000. The Company's cash and cash equivalents and investment
securities, including liquid investments, increased by $2,978,000 to
16
$38,090,000 from $35,112,000; that increase was due primarily to $6,574,000 of
cash flows from operating activities and $3,460,000 from exercise of stock
options, partially offset by $6,656,000 of purchases of property and equipment.
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, due primarily to $8,666,000 of cash flows from operating
activities, offset by $4,606,000 used to acquire treasury stock.
Capital expenditures increased substantially in 1998 from the relatively
low levels in 1995 through 1997. The increase related to the acquisition of
land and construction of the facility in Ensenada, Baja California, Mexico of
approximately $2.3 million, acquisition of production tooling and machinery of
approximately $3.5 million, and purchase of computer and other office equipment
of approximately $0.9 million. Management currently expects that capital
expenditures for production tooling and machinery in 1999 will substantially
exceed 1998 levels to meet expected increased sales volumes and to automate
production of new products and that capital expenditures, of an amount yet to be
determined, will be incurred to add to facilities n San Clemente.
Management expects that sales of the Company's products will continue to grow
in 1999. 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, except for
$400,000 of shares purchased in August 1998. It 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 to fund capital expenditures and increased
working capital requirements for the foreseeable future.
Year 2000 Compliance
Many older computer programs use only the last two digits to refer to a year.
Therefore, they do not properly recognize a year that begins with "20" rather
than "19." This is referred to as the Year 2000, or Y2K problem. The Y2K
problem has been eliminated in many new programs and systems, which are said to
be "Y2K compliant." The Company has completed its initial assessment of Y2K and
believes, based on manufacturers' specifications and subject to completion of
testing in 1999, that all its information technology ("IT") systems and
applications and related hardware are Y2K compliant. The Company has not
completed assessing Y2K compliance of its non-IT systems, principally
manufacturing systems, but it believes that any non-compliance will not affect
the ability to use the related manufacturing equipment. The Company will attempt
to assess in 1999 whether third parties with whom it deals, such as customers,
vendors and governments have any Y2K problems that could affect the Company;
such problems could result in interruptions in delivery of services and
materials and payments, among other things. The Company has not developed Y2K
non-compliance contingency plans, but will consider the need for such plans upon
completion of the Y2K compliance assessments. Costs to assure Y2K compliance
have so far been and are expected to remain nominal.
While the Company is not currently aware of any Y2K compliance problems in
its own systems, Y2K compliance of those systems cannot be assured until
completion of testing. Further, the Company cannot assure that the information
it receives from third parties about their Y2K compliance will be meaningful or
accurate. Failure to achieve compliance for the Company's systems, or failure
of significant third parties, with which the Company deals to achieve Y2K
compliance, could have a material adverse effect on the Company's operations.
Forward Looking Statements
Various portions of this Report, including Management's Discussion and
Analysis describe trends in the Company's business and finances that Management
perceives and states some of its expectations and beliefs about the Company's
future. These statements about the future are "forward looking statements," and
the Company identifies them by using words such as "believes," "expects,"
"anticipates," "estimates," "intends," "plans," "will," "continuing," "could,"
and similar expressions and by statements about aims, goals and plans. The
forward looking statements are based on the best information currently available
to Management and assumptions that Management
17
believes are reasonable, but Management does not intend the statements to be
representations as to future results. They include, among other things,
statements about:
. future operating results and various elements of operating results, including
sales and unit volumes of products, production costs, gross margins, selling,
general and administrative costs, sales and marketing costs, promotional
costs, and research and development expense and income taxes;
. factors affecting operating results, such as shipments to specific customers,
product mix, selling prices, the market shift to needleless products,
achievement of business expansion goals, manufacturing efficiencies,
production volumes, overhead absorption, expansion of markets and
distribution costs;
. new contracts with buying organizations and dependence on a small number of
customers;
. competitive and market factors, including continuing development of competing
products by other manufacturers, consolidation of the healthcare provider
market and downward pressure on selling prices;
. working capital requirements, capital expenditures and common stock
repurchases; and
. Y2K issues.
The kinds of statements described above and similar forward looking statements
about the Company's future performance are subject to a number of risks and
uncertainties which one should consider in evaluating the statements. First, one
should consider the factors and risks described in the statements themselves.
These factors are uncertain, and if one or more of them turn out differently
than Management currently expects, the Company's operating results may differ
materially from Management's current expectations.
Second, one should read the forward looking statements in conjunction with the
Risk Factors in the Company's Current Report on Form 8-K to the Securities and
Exchange Commission dated November 5, 1998, which is incorporated by reference.
Third, the Company's actual future operating results are subject to other
important factors that the Company cannot predict or control, including among
others the following:
. general economic and business conditions;
. the effect of price and safety considerations on the healthcare industry;
. competitive factors, such as product innovation, new technologies, marketing
and distribution strength and price erosion;
. unanticipated market shifts and trends;
. the impact of legislation effecting government reimbursement of healthcare
costs;
. changes by the Company's major customers and independent distributors in
their strategies that might affect their efforts that to market the Company's
products;
. unanticipated production problems; and
. the availability of patent protection and the cost of enforcing and of
defending patent claims.
The Company disclaims any obligation to update the statements or to announce
publicly the result of any revision to any of the statements contained herein to
reflect future events or developments.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended December 31, 1998, 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 27, 1999
19
ICU MEDICAL INC.
----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31,
--------------------------------------------
1998 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,048,315 $ 2,962,276
Liquid investments 36,041,283 32,150,000
----------- -----------
Cash and liquid investments 38,089,598 35,112,276
Accounts receivable, net of
allowance for doubtful accounts
of $341,553 in 1998 and $323,620 in 1997 6,492,197 3,356,936
Inventories 1,990,647 1,762,628
Prepaid expenses and other 384,842 200,964
Deferred income taxes - current portion 991,000 717,000
----------- -----------
Total current assets 47,948,284 41,149,804
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 8,224,753 7,078,157
Furniture and fixtures 2,044,472 1,521,580
Molds 3,709,882 2,873,321
Construction in process 1,703,407 183,029
Land, building and building improvements 7,190,733 5,001,297
----------- -----------
22,873,247 16,657,384
Less--Accumulated depreciation (9,108,980) (7,060,431)
----------- -----------
13,764,267 9,596,953
----------- -----------
DEFERRED INCOME TAXES 92,000 -
OTHER ASSETS 554,992 439,340
----------- -----------
$62,359,543 $51,186,097
=========== ===========
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,
------------------------------------------------
1998 1997
--------------- ----------------
CURRENT LIABILITIES:
Accounts payable $ 683,063 $ 1,403,312
Accrued liabilities 3,447,993 1,753,915
----------- -----------
Total current liabilities 4,131,056 3,157,227
----------- -----------
DEFERRED INCOME TAXES - 82,000
----------- -----------
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 1998 and 1997 886,716 886,716
Additional paid-in capital 40,241,288 39,455,511
Treasury stock -- 807,847 shares in 1998
and 1,100,776 shares in 1997 (7,117,001) (9,320,352)
Retained earnings 24,217,484 16,924,995
----------- -----------
Total stockholders' equity 58,228,487 47,946,870
----------- -----------
$62,359,543 $51,186,097
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
21
ICU MEDICAL INC.
----------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
December 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
NET SALES $39,842,165 $30,404,128 $24,599,005
COST OF GOODS SOLD 16,687,212 12,817,048 10,438,066
----------- ----------- -----------
Gross profit 23,154,953 17,587,080 14,160,939
OPERATING EXPENSES:
Selling, general and administrative 12,093,890 8,463,480 7,445,694
Research and development 1,047,579 1,261,274 790,353
----------- ----------- -----------
Total operating expenses 13,141,469 9,724,754 8,236,047
----------- ----------- -----------
Income from operations 10,013,484 7,862,326 5,924,892
INVESTMENT INCOME 1,408,416 1,269,236 1,289,298
----------- ----------- -----------
Income before income taxes 11,421,900 9,131,562 7,214,190
PROVISION FOR INCOME TAXES 4,200,000 3,450,000 2,475,000
----------- ----------- -----------
NET INCOME $ 7,221,900 $ 5,681,562 $ 4,739,190
=========== =========== ===========
NET INCOME PER SHARE
Basic $0.90 $0.71 $0.54
Diluted $0.86 $0.71 $0.54
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 7,989,534 7,946,328 8,722,081
Diluted 8,422,613 8,028,991 8,841,562
=========== =========== ===========
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, 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) 122,472
Net Income - - - 5,681,562 5,681,562
---------- ---------- ------------ ----------- ----------- -----------
BALANCE, December 31, 1997 7,766,386 886,716 39,455,511 (9,320,352) 16,924,995 47,946,870
Acquire shares for treasury (32,100) - - (400,409) - (400,409)
Exercise of stock options and
related income tax benefits,
and other 325,029 - 785,777 2,603,760 70,589 3,460,126
Net Income - - - - 7,221,900 7,221,900
---------- ---------- ------------ ----------- ----------- -----------
BALANCE, December 31, 1998 8,059,315 $886,716 $40,241,288 $(7,117,001) $24,217,484 $58,228,487
========== ========== ============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
23
ICU MEDICAL, INC.
-----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
December 31,
------------------------------------------------------------------------------
1998 1997 1996
---------------- ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $7,221,900 $5,681,562 $4,739,190
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 2,364,136 2,148,826 1,969,310
Deferred income taxes, non-current (174,000) (145,000) 21,000
(Increase) decrease in:
Accounts receivable (3,126,193) (280,540) (289,821)
Inventories (228,019) 470,991 (729,797)
Prepaid expenses and other assets (183,878) 562,182 125,279
Increase (decrease) in:
Accounts payable (720,249) (498,905) 853,805
Accrued liabilities 1,694,078 993,399 (177,404)
Deferred income taxes, current (274,000) (267,000) 1,000
---------- ----------- -----------
Net cash provided by operating activities 6,573,775 8,665,515 6,512,562
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,656,170) (829,306) (1,276,766)
Proceeds from sales of investment securities - - 507,580
Net change in liquid investments (3,891,283) (2,450,000) (2,049,156)
---------- ----------- -----------
Net cash (used in) investing activities (10,547,453) (3,279,306) (2,818,342)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and related income tax benefits, and other 3,460,126 122,472 1,459,841
Purchase of treasury stock (400,409) (4,606,068) (5,108,168)
---------- ----------- -----------
Net cash provided by (used in) financing activities 3,059,717 (4,483,596) (3,648,327)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (913,961) 902,613 45,893
CASH AND CASH EQUIVALENTS, beginning of year 2,962,276 2,059,663 2,013,770
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $2,048,315 $2,962,276 $2,059,663
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for income taxes $3,726,700 $2,861,991 $1,406,620
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
24
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. Summary of Significant Accounting Policies
a. General
-------
ICU Medical, Inc. (the Company - a Delaware Corporation) operates
principally 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. All wholly owned subsidiaries are 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:
1998 1997
---------- ----------
Raw materials $1,121,212 $1,060,325
Work in process 509,180 459,618
Finished goods 360,255 242,685
--------- ---------
$1,990,647 $1,762,628
========== ==========
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, 1998 and 1997, the net book value of patents
and licenses was $507,948 and $383,228, respectively, net of accumulated
amortization of $323,239 and $243,139, 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
--------------------
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" in calculating net income 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.
26
k. Post-retirement and Post-employment Benefits
--------------------------------------------
The Company does not provide post-retirement or post-employment benefits to
employees.
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.
2. Liquid 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:
1998 1997 1996
----------- ----------- -----------
Corporate preferred stocks $14,600,000 $26,450,000 $17,500,000
Federal tax-exempt debt securities 20,350,000 5,700,000 12,200,000
Certificate of deposit 1,091,283 - -
----------- ----------- -----------
$36,041,283 $32,150,000 $29,700,000
=========== =========== ===========
The certificate of deposit is pledged to secure a letter of credit.
Investment income, including interest on certificates of deposit and money
market funds, consisted of:
1998 1997 1996
---------- ---------- ----------
Corporate dividends $ 516,264 $ 612,066 $ 71,176
Tax-exempt interest 757,822 574,603 1,072,711
Other interest 134,300 82,567 145,411
---------- ---------- ----------
$1,408,416 $1,269,236 $1,289,298
========== ========== ==========
27
3. Accrued Liabilities
Accrued liabilities consists of the following:
1998 1997
---------- ----------
Accrued incentive compensation $ 702,617 $ 577,129
Taxes payable 802,415 737,840
Other accruals 1,942,961 438,946
---------- ----------
Total accrued liabilities $3,447,993 $1,753,915
========== ==========
4. Common Stock and Common Stock Options Granted
In 1993, the Company adopted the 1993 Stock Incentive Plan and Directors'
Stock Option Plan (the Plans). In 1996, the 1993 Stock Incentive Plan was
amended to increase the number of shares reserved for issuance to employees from
1,275,000 to 3,275,000. 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,
under which 225,000 shares had been reserved for issuance, called for options to
be granted to non-employee Directors every three years; fifty percent of each
Director's options vested 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 conditions 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.
Further, grants under the Directors' Stock Option Plan were discontinued,
reducing the number of shares reserved for issuance under the Plans 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, 1998, 2,689,152 are time-
accelerated options, which were issued under the 1993 Stock Incentive Plan. Of
those options, 42,700 issued in 1993 at an average exercise price of $9.56
expire in 2004; 126,000 issued in 1994 at an average exercise price of $10.83
expire in 2005; 21,000 issued in 1995 at an average exercise price of $12.10
expire in 2006; 562,324 issued in 1996 at an average exercise price of $12.96
expire in 2007; 1,086,899 issued in 1997 at an average exercise price of $9.17
expire in 2008; and, 850,229 issued in 1998 at an average exercise price of
$12.42 expire in 2009. The remaining 30,000 options that are not time-
accelerated are at an exercise price of $16.13 expire in 2001. In January 1999,
options granted from 1993 to January 1998 to purchase 1,085,990 shares of common
stock at prices ranging from $7.19 to $15.38 (weighted average $11.28 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 360,000, 870,000 and 940,000 in 1998,
1997 and 1996, respectively. At December 31, 1998, all options had exercise
prices less than 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, 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
Granted 910,229 12.06 - 16.38 12.16
Exercised 321,029 7.69 - 14.00 8.24
Forfeited 17,500 7.38 - 15.13 12.51
----------- -------- --------- ----------
Outstanding at December 31, 1998 2,719,152 $ 11.15 - $ 16.38 $ 11.15
============ ======== ========= ==========
Exercisable at December 31:
1996 26,500 $ 5.75 - $14.00 $10.98
1997 31,000 9.50 - 16.13 14.88
1998 430,621 8.00 - 16.13 9.08
Available for grant at December 31, 1998 267,319
============
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options granted to employees, 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 1998, 1997 and 1996 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 5.7, 5.9 and
6.4 percent, respectively; expected option life of 4.7, 4.3 and 3.4 years,
respectively; expected volatility of 52, 54 and 49 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 1998, 1997 and 1996 was $6.05,
$3.33 and $5.84, respectively. The total estimated fair value is amortized to
expense over the vesting period.
1998 1997 1996
---------- ---------- ----------
Proforma:
Net Income............................................ $3,328,000 $3,682,000 $3,968,000
Net Income per share - basic......................... $ .044 $ 0.52 $ 0.48
- diluted....................... $ 0.42 $ 0.51 $ 0.47
Weighted average number of
common shares - basic......................... 7,558,000 7,120,000 8,260,000
- diluted....................... 7,991,000 7,209,000 8,379,000
5. Stockholder Rights Plan
In July 1997, the Board of Directors adopted a Stockholder Rights Plan.
The Company distributed a Preferred Share Purchase Right ("a Right") for each
share of the Company's Common Stock outstanding. The rights generally will not
be exercisable until a person or group has acquired 15% or more of the Company's
Common Stock in a transaction that is not approved in advance by the Board of
Directors or ten days after the commencement of a tender offer which could
result in a person or group owning 15 percent or more of the Common Stock.
On exercise, each Right entitles the holder to buy one share of Common
Stock at an exercise price of $50.00. In the event a third party or group were
to acquire 15 percent or more of the Company's outstanding Common Stock without
the prior approval of the Board of Directors, each Right will entitle the
holder, other that the acquirer, to buy Common Stock with a market value of
twice the exercise price, for the Right's then current exercise price. In
addition, if the Company were to be acquired in a merger, shareholders with
unexercised Rights could purchase common stock of the acquirer with a value of
twice the exercise price of the Rights.
The Company's Board of Directors may redeem the Rights for a nominal amount
at any time prior to the tenth business day following an event that causes the
Rights to become exercisable. The Rights will expire unless previously redeemed
or exercised on August 7, 2007.
6. Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996, is as follows:
1998 1997 1996
---------- ---------- ----------
Current:
Federal $3,694,000 $2,826,000 $1,992,000
State 954,000 1,036,000 461,000
---------- ---------- ----------
4,648,000 3,862,000 2,453,000
---------- ---------- ----------
Deferred:
Federal (379,000) (311,000) (3,000)
State (69,000) (101,000) 25,000
---------- ---------- ----------
(448,000) (412,000) 22,000
---------- ---------- ----------
$4,200,000 $3,450,000 $2,475,000
========== ========== ==========
30
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 $843,000, $8,000, and $1,032,000 in 1998, 1997 and 1996, respectively.
A reconciliation of the provision for income taxes at the statutory rate to
the Company's effective rate is as follows:
1998 1997 1996
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Federal tax at the $3,884,000 34.0% $3,105,000 34.0% $2,453,000 34.0%
expected statutory rate
State income tax 754,000 6.6 661,000 7.2 443,000 6.1
Tax-exempt interest and (380,000) (3.3)
dividends (316,000) (3.4) (382,000) (5.3)
Tax credits (58,000) (0.5) - - (39,000) (0.5)
---------- ------ ---------- ------ ---------- ------
Provision $4,200,000 36.8% $3,450,000 37.8% $2,475,000 34.3%
========== ====== ========== ====== ========= ======
The components of the Company's deferred income tax provision for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---------- --------- ----------
Allowance for doubtful accounts $ (6,000) $ (13,000) $(25,000)
Inventory reserves 30,000 (105,000) (23,000)
Accruals (367,000) (45,000) 122,000
State income taxes 69,000 (104,000) (73,000)
Depreciation (174,000) (145,000) 21,000
--------- --------- --------
$(448,000) $(412,000) $ 22,000
========= ========= ========
The components of the Company's deferred income tax benefit (liability) are
as follows:
1998 1997
-------- --------
Current deferred tax benefit:
Allowance for doubtful accounts $146,000 $140,000
Inventory reserves 270,000 300,000
Accruals 482,000 115,000
State income taxes 93,000 162,000
-------- --------
$991,000 $717,000
======== ========
Long-term deferred tax benefit (liability):
Depreciation $ 92,000 $(82,000)
======== ========
31
7. 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, 1998, 1997
and 1996, the Company had sales of 10 percent or greater to one distributor and
the two manufacturers as follows:
1998 1997 1996
---- ---- ----
Distributor * * 13
Manufacturer A 35 36 *
Manufacturer B 29 16 *
* less than 10 percent
8. Employment Contracts
The Company has employment contracts with certain key employees which
include an incentive compensation agreement. Incentive compensation expense
accrued based on meeting certain operating performance goals was $326,000 in
1998 and $274,000 in 1997.
9. 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.
In June 1998, the Company suffered a judgment against it in the amount of
$728,000 after a jury verdict in favor of a plaintiff for commissions alleged
owed him. The Company is appealing the judgment, but in view of the
uncertainties of the appeal process, accrued a provision for this matter in its
1998 financial statements.
10. 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.
32
11. Quarterly Financial Data -- Unaudited -- (dollars in thousands, except per
share data)
Quarter Ended
--------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1998
- ----
Net Sales $9,982 $10,430 $9,618 $9,812
Gross Profit 5,815 6,062 5,598 5,680
Net Income 1,660 1,719 1,823 2,020
Net Income Per Share:
Basic $ 0.21 $ 0.21 $ 0.23 $ 0.25
Diluted $ 0.20 $ 0.20 $ 0.22 $ 0.24
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:
Basic $ 0.16 $ 0.16 $ 0.18 $ 0.21
Diluted $ 0.16 $ 0.16 $ 0.18 $ 0.21
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,
1998, 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."
Items 11 though 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,
1998, and such information is incorporated herein by this reference.
33
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, 1998 and 1997.......................................... 20-21
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996............. 22
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996................................................................. 23
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996......... 24
Notes to Consolidated Financial Statements........................................................ 25-33
2. Financial Statement Schedules
The Financial Statement Schedules required to be filed as a part of this Report are:
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.
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.(2)
10.4 Registrant's Directors' Stock Option Plan.(3)
10.5 Manufacture and Supply Agreement dated September 13, 1993 between
Registrant and McGaw, Inc. relating to the Protected Needle
product.(4)
10.6 Supply and Distribution Agreement dated April 3, 1995 between
Registrant and Abbott Laboratories, Inc. relating to the CLAVE
product.(5)
10.7 Registrant's Director's Stock Award Plan.(6)
34
10.8 Rights Agreement dated July 15, 1997 between Registrant and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent.(7)
10.9 Manufacture and Supply Agreement dated January 1, 1998 by and
between Registrant and B.Braun Medical, Inc. relating to the CLAVE
product.(8)
10.10 SafeLine Agreement effective October 1, 1998 by and between
Registrant and B.Braun Medical, Inc.(8)
10.11 Amendment to Abbott and ICU Medical Agreement, dated January 1,
1999 between Registrant and Abbott Laboratories.(9)
10.12 Amendment No. 1 to Rights Agreement, dated January 30, 1999,
between Registrant and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent.(10)
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 May 4, 1996 and incorporated herein by
reference.
(3) Filed as an exhibit to Registrant's definitive Proxy Statement filed
pursuant to Regulation 14A on March 22, 1993 and incorporated herein by
reference.
(4) 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.
(5) 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.
(6) Filed as exhibit to Registrant's definitive Proxy Statement filed pursuant
to Regulation 14A on April 11, 1997 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Registration Statement on Form 8-A
dated July 23, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 8-K dated June
18, 1998, and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Quarterly Report on Form 8-K dated
February 23, 1999, and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Registration Statement on Form 8-A/A
dated February 9, 1999 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:
Item 5 - November 5, 1998
35
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 1, 1999
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 1, 1999
- -------------------------- and Chief Executive Officer,
George A. Lopez, M.D. (Principal Executive Officer)
/s/ Francis J. O'Brien Chief Financial Officer March 1, 1999
- -------------------------- and Principal Accounting Officer
Francis J. O'Brien
/s/ Jack W. Brown Director March 1, 1999
- --------------------------
Jack W. Brown
/s/ John J. Connors Director March 1, 1999
- --------------------------
John J. Connors
/s/ Michael T. Kovalchik, III, M.D. Director March 1, 1999
- -----------------------------------
Michael T. Kovalchik, III, M.D.
/s/ Richard H. Sherman, M.D. Director March 1, 1999
- ----------------------------
Richard H. Sherman, M.D.
/s/ Robert S. Swinney, M.D. Director March 1, 1999
- ---------------------------
Robert S. Swinney, M.D.
36
SCHEDULE II
ICU MEDICAL, INC.
-----------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Additions
------------------------------------
Balance at Charged to Balance
Beginning Costs Charged to Other Write-offs/ at End
Description of Period and Expenses Accounts Disposals of Period
----------- ---------- ------------ ---------------- ----------- ---------
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
======== ======== ===== ======= ========
For the year ended
December 31, 1998:
Allowance for
doubtful accounts $323,620 $ 40,000 $ - $22,067 $341,553
======== ======== ===== ======= ========
Inventory reserves $499,615 $ 62,000 $ - $96,150 $465,465
======== ======== ===== ======= ========
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