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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, 2002 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
Preferred Stock Purchase Rights
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 checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of Registrant as of January 31, 2003 was $457,188,464. *
The number of shares outstanding of Registrant's Common Stock, $.10 par
value, as of January 31, 2002 was 14,087,026.
Portions of the Proxy Statement for Registrant's 2003 Annual Meeting of
Stockholders, filed or to be filed pursuant to Regulation 14A within 120 days
following Registrant's fiscal year ended December 31, 2002, are incorporated by
reference into Part III of this Report.
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.
- -----------------
* 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.
PART I
ITEM 1. BUSINESS.
We are a leader in the development, manufacture and sale of
proprietary, disposable medical connection systems for use in intravenous
("I.V.") therapy applications. Our devices are designed to protect healthcare
workers and their patients from exposure to infectious diseases such as
Hepatitis B and C and Human Immunodeficiency Virus ("HIV") through accidental
needlesticks. We also produce custom I.V. systems that incorporate our
proprietary products and low-cost generic I.V. systems and in October 2002
acquired the Punctur-Guard(R) line of blood collection needles.
The CLAVE(R), a one-piece, needleless I.V. connection device, accounts
for approximately 67% of our revenue (that percentage excludes custom I.V.
systems). Although CLAVE sales have increased steadily since we introduced it in
1993, we have undertaken a strategic initiative to reduce our dependence on the
CLAVE. The initiative involves a planned transition from being primarily a
manufacturer of I.V. system components to producing and distributing complete
I.V. systems, both custom and low-cost, generic systems, blood collection
devices and other products. Many of the I.V. systems include our I.V. connection
products.
A key element of our strategy to expand our custom I.V. system business
has been the development and implementation of our proprietary software for
customer orders and order tracking, combined with an innovative system to
coordinate manufacture of components in the U.S., assembly of components into
sets in Mexico and distribution of finished products. We believe that we offer
customers substantially shorter delivery times and lower costs than other
manufacturers of I.V. systems can currently offer.
We currently sell our products to I.V. product manufacturers and
independent distributors. Our largest customer is Abbott Laboratories
("Abbott"), who accounted for 57% of our revenues in 2002.
First person pronouns used in this Report, such as "we," "us," and
"our," refer to ICU Medical, Inc. and its subsidiaries unless context requires
otherwise.
Our website address is http://www.icumed.com. We make available our
Annual Reports on Form 10-K, Quarterly Reports on 10-Q and Current Reports on
Form 8-K free of charge on our website as soon as reasonably practicable after
filing them with the Securities and Exchange Commission.
BACKGROUND
In 1993, we launched the CLAVE(R), an innovative one-piece, needleless
I.V. connection device that has become our largest selling product. We believe
that the CLAVE offers healthcare providers a combination of safety, ease of use,
reliability and cost effectiveness that is superior to any other protective I.V.
connection system on the market. It allows protected, secure and sterile I.V.
connections without needles and without failure-prone mechanical valves used in
the I.V. connection systems of some competitors. The CLAVE is a successor to our
protected needle products first introduced in 1984. We designed the CLAVE to
eliminate needles from certain applications in acute care hospitals, home
healthcare, ambulatory surgical centers, nursing homes, convalescent facilities,
physicians' offices, medical clinics, and emergency centers. 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.
We have been manufacturing and distributing custom and generic I.V.
systems since late 1995. In 1999, we decided to substantially increase our
emphasis on marketing and selling custom I.V. systems. A key element of our
strategy to expand our custom I.V. system business has been the development and
implementation of our proprietary software for our custom product design,
customer orders and order tracking, combined with an innovative system to
coordinate manufacture of components in the U.S., assembly of components into
sets in Mexico and distribution of finished products. We believe that we offer
customers substantially shorter delivery times and lower costs than other
manufacturers of I.V. systems can currently offer.
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The principal products that we have introduced in recent years are the
CLC2000(R), the 1o2 Valve(R), and, with the acquisition of Bio-Plexus, Inc.
("Bio-Plexus) in late 2002, the Punctur-Guard line of blood collection needles.
I.V. USAGE AND INFECTION CONTROL
Primary I.V. 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 I.V. 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 I.V. 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 I.V. system connections are made by
inserting an exposed steel hollow-bore needle attached to the primary I.V. line
into an injection port connected to the catheter. Conventional secondary I.V.
connections, so called piggyback connections, are made by inserting an exposed
steel hollow-bore needle attached to a secondary I.V. line into an injection
port or other I.V. connector. In a conventional I.V. connection the needle,
which typically is secured only with tape, can detach from the catheter or
injection port resulting in disconnection and a serious and sometimes fatal
interruption of the flow of the I.V. solution to the patient. The exposed
needles can easily be contaminated by contact with unsterile objects or through
contact with fluid in the I.V. 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 our protective I.V. connectors.
Hepatitis B and C 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 C 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 transmission of an infectious disease is detected.
Our protective I.V. connectors are designed to prevent accidental needlesticks
from needles originating from primary and secondary I.V. connections.
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 our needleless I.V. connectors. This awareness has also lead to
significant federal and state legislation. In addition, the federal Needlestick
Safety and Prevention Act, enacted in 2000, modified standards promulgated by
the Occupational Safety and Health Administration, to require employers to use
needle-safe systems where appropriate to reduce risk of injury to employees from
needlesticks. This is a significant expansion of the previous 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. California was the first state to enact such legislation, and since
then at least 21 other states have enacted similar legislation. Our devices will
allow a healthcare provider to be compliant with any of these standards.
PRODUCTS
CLAVE PRODUCTS
A conventional I.V. line terminates with a male luer connector to which
a hollow-bore needle would be attached to penetrate a latex or non-latex rubber
covered injection port to make a primary or secondary I.V. connection. With the
CLAVE system, instead of attaching a hollow-bore needle to the male luer, a
CLAVE is used in place of the injection port and the male luer, without a
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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 I.V. line, through
the CLAVE into the primary I.V. 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 I.V. 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 that 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 I.V. system, acute and chronic central venous I.V.
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 I.V. sets, thus eliminating the need for special adapters,
pre-slit injection ports, or metal needles when making piggyback I.V.
connections. Currently, most popular I.V. connection systems that compete with
our 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. We believe 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 I.V.
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 I.V. set manufacturers, such as Abbott, to
build directly into their I.V. sets or used by us in our custom I.V. sets.
The CLAVE is our largest selling product line, and accounted for 67% of
our net revenue in 2002.
In October 2001, we commenced production of the "MicroCLAVE(R)." It is
smaller than the existing CLAVE but is functionally similar. We are marketing it
as an extension of the CLAVE product line for use where its smaller size is
advantageous, such as pediatric care.
CUSTOM I.V. SYSTEMS
During late 1995, we entered the low end of the safe medical connector
market by manufacturing and distributing I.V. sets which incorporated lower
priced safe medical connectors, and also commenced manufacturing and
distributing custom I.V. sets incorporating the CLAVE. In 1999, we substantially
increased our emphasis on marketing and selling these systems. To promote the
growth of the business, we have developed innovative software systems and
manufacturing processes that permit us to design to a hospital's or clinician's
exact specifications, commence production within less than a day after we
receive the customer order and ship the custom I.V. sets to the customer
generally within three days of receipt for smaller orders to approximately two
weeks for larger orders. This is a fraction of the time required by other custom
set manufacturers and we can generally produce the custom sets at a lower cost.
The use of sophisticated design, ordering and order tracking systems and
streamlined assembly and distribution processes allows us to sell custom I.V.
sets at prices substantially lower than those charged by other producers of
custom I.V. sets.
We have also developed proprietary Internet-based electronic ordering,
order tracking, invoicing and payment systems. Hospitals and other healthcare
providers have been slow to change from traditional methods of ordering products
and supplies to ordering over the internet, and to date we receive most of our
orders by facsimile or telephone. We believe, however, that customers will
gradually make the transition from traditional ordering methods to internet
ordering.
4
On February 27, 2001, we signed an agreement with Abbott under which we
will manufacture all new custom I.V. sets for sale by Abbott, and the two
companies will jointly promote the products under the name SetSource(TM). Sales
of custom I.V. systems increased as a result of the agreement and we expect
further significant increases in sales of custom I.V. systems, although there is
no assurance that such increase will be achieved.
We have committed significant resources to the strategic initiative to
expand our custom I.V. system businesses and expect to incur additional expenses
for continuing software development and enhancements in the manufacturing
process. To date, most of the I.V. set sales volume is in custom I.V. systems,
and we expect this to continue.
During 2000, 2001 and 2002, net sales of custom I.V. systems were
approximately $6,700,000, $9,300,000 and $15,200,000, respectively. Most of the
growth in 2002 net sales was because of the SetSource program and increased unit
shipments of non-propriety custom I.V. systems.
PUNCTUR-GUARD
We acquired the Punctur-Guard product line and technology with the
purchase of Bio-Plexus on October 31, 2002. The Punctur-Guard products are based
on a patented technology that internally blunts a needle prior to its removal
from a patient, and are the only products on the market that render a needle
safe prior to its removal from a patient. The technology is currently used to
make blood collection needles ("BCN"), primarily for use by phlebotomists in the
lab, and Winged Sets, used by phlebotomists and other medical personnel in
hospitals and doctors offices.
Hollow bore needles are broadly used for subcutaneous access to a
patient, and expose healthcare workers to accidental needlesticks. There are
essentially three safety technology platforms for use with hollow-bore needles:
"outer-sheath" which uses an outer sheath stored behind the needle during use
and is advanced over the needle after use; "retractable" which uses a chamber
behind the needle and a spring that retracts the needle into the chamber after
use; and, internal needle blunting. The first two technologies require that the
needle be withdrawn from the patient prior to activation of the safety feature,
exposing the healthcare worker to a sharp, contaminated needle during the
procedure and/ or following removal of the needle from the patient. However,
with the internal blunting that we use in the Punctur-Guard products, the safety
feature can be activated in the patient immediately upon achieving clear access,
thereby significantly reducing any risk of accidental needlestick during or
after the procedure.
The internal blunting is achieved by positioning a blunt hollow-bore
needle within the conventional sharp needle. The healthcare worker is able to
activate the safety device that causes the blunt needle to advance just beyond
the sharp tip of the outer needle. It can be activated immediately after
achieving venous access, either at the beginning of the procedure or at the end
immediately before withdrawing the needle from the patient. We believe that
products using our internal blunting technology provide safety that is superior
to that of the products using other safety technologies.
Our internal needle blunting technology is licensed to Johnson &
Johnson Medical and to TFX Medical, a division of Teleflex Incorporated, for use
in various types of catheters. None of the applications of the patented
technology under those licenses compete with our Punctur-Guard line of blood
collection products.
We completed our acquisition of Bio-Plexus on October 31, 2002. Sales
of Punctur-Guard products and royalties from licenses of the related technology
for November and December 2002 totaled $1,219,000.
CLC2000
The CLC2000 is a one piece, swabable connector used to connect I.V.
lines to catheters, which is engineered to prevent the back-flow of blood into
the catheter. The CLC2000 does not permit the use of needles, thereby ensuring
compliance with needle-free policies of healthcare providers. The CLC2000 also
contains no natural rubber latex.
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The CLC2000 is used on those I.V. catheters where catheter occlusion is
most prevalent. Generally, when an I.V. line is disconnected, there is a
back-flow of blood into the catheter that is in the patient's vein. That blood
in time coagulates and occludes the catheter. Occlusion ("clotting off") of
catheters requires expensive drugs and procedures to "flush" the catheter, or if
those procedures are not effective, replacement of the catheter.
The CLC2000 was developed to reduce clotting of catheters because of
"back-flow" when the I.V. line is disconnected. The CLC2000 consists of a "T"
shaped cylindrical housing, which contains a poppet that is depressed as the
luer tip enters the CLC2000. Fluid flows around the poppet and through the
housing and into the catheter. When the luer is removed from the CLC2000, 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.
We began marketing the CLC2000 in November 1997. We are concentrating
the marketing of the CLC2000 where its "no back-flow" features are of maximum
benefit in patient care. These are generally therapies that use long-term
indwelling catheters such as oncology, dialysis and long-term infusion of
medication. We commenced production on automated assembly equipment in the
fourth quarter of 2002. CLC2000 accounted for 4% of our net revenue in 2002.
1O2 VALVE
The 1o2 Valve 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. We actively commenced sales in April 2000. Initially, we are focusing
marketing efforts on anesthesia and critical care usage and we are selling the
1o2 Valve only as part of I.V. sets that we manufacture. In the third quarter of
2002, we commenced production on automated assembly equipment. Sales of I.V.
sets containing 1o2 Valves were approximately $2,560,000 in 2002.
LOPEZ VALVE(R)
The 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 and 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
We have developed a family of inexpensive single-use needleless
connectors for use in piggyback and non-piggyback applications. The RF100,
designed for use in piggyback applications, is a one-piece, needleless I.V.
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. We developed the RF150, called the "Rhino," 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
clothespin, and locks over the pre-slit injection port thus reducing the
potential for accidental disconnections. Although we believe that the CLAVE has
significant functional advantages over the RF100 and RF150, these products are
alternative and less expensive needleless I.V. connectors.
OTHER PRODUCTS AND REVENUES
We manufactured and sold Click Lock and Piggy Lock products, which were
our first products, introduced in 1984. They use needles recessed in a clear
plastic shroud. We discontinued these products in early 2003. We also
manufacture the McGaw Protected Needle, which is similar to the Click Lock, for
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B.Braun Medical Inc. ("B.Braun"). B.Braun also pays us a share of its revenues
on its SafeLine products. The market for all of these products has been
declining as the market shifts to swabable needleless products, and in the
aggregate they accounted for approximately 3% of our net sales in 2002.
We have a significant number of patents on the technology in our
products and methods used to manufacture them. We have continuing royalty and
license fee income from the Punctur-Guard technology and from time to time may
receive license fees or royalties from other entities for the use of our
technology.
NEW PRODUCTS
We are developing several new products that we intend to introduce in
2003 and later. We believe innovative products continue to be important to
maintaining and increasing our sales levels.
We expect to launch an infusion device using Punctur-Guard technology
in the second quarter of 2003. These devices will be used for short-term drug
administration therapy.
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply in the second half of 2003 to the Food &
Drug Administration ("FDA") under Section 510(k) of the Federal Food, Drug and
Cosmetics Act ("FDC Act") for approval to market this new connector. There is no
assurance that the FDA will grant marketing clearance, that we will launch this
new product, or that it will achieve sales if and when we commence marketing it.
MARKETING AND DISTRIBUTION
The influence of managed care and the growing trend toward
consolidation among healthcare providers are the driving forces behind our 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, we believe it is becoming increasingly important to
secure contracts with major buying organizations in addition to targeting
specific healthcare providers.
In 2002, our distribution operations were organized into three groups:
medical product manufacturers under the ICU Medical(R) name, independent
domestic distributors under the BMP Setfinder name, and international
manufacturers and distributors under the ICU Medical name. Early in 2002, we had
combined Budget Medical Products and SetFinder, which were separate distribution
groups, into BMP Setfinder. In early 2003, we determined that we would combine
the separate groups serving the medical product manufacturers and the
independent domestic distributors and that we would no longer use the BMP
Setfinder name, but would market all products under the ICU Medical name.
As of January 31, 2003, we employ 36 product specialists in the United
States and Canada to support the salespeople employed by the medical product
manufacturers and independent domestic distributors. Our product specialists
call on prospective customers, demonstrate products and support programs to
train the salespeople and customers' staffs in the use of our products.
MEDICAL PRODUCTS MANUFACTURERS
We have a strategic supply and distribution relationship with Abbott, a
major I.V. product supplier, that has a significant share of the I.V. set market
under contract. The agreement with Abbott extends to December 2009. The
agreement confers to Abbott conditional exclusive and nonexclusive rights to
distribute certain CLAVE and CLC2000 products to certain categories of
customers.
Abbott purchases CLAVE products packaged separately and in bulk for
distribution to healthcare providers. CLAVE products purchased in bulk are
assembled into Abbott's full range of I.V. products. Abbott purchases other
CLAVE products, which are sold as accessories. CLC2000 products are purchased
packaged separately.
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Under an agreement signed with Abbott on February 27, 2001, and running
to December 2009, we have the exclusive right to manufacture all new custom I.V.
sets for sale by Abbott, and Abbott and ourselves will jointly promote the
products under the name SetSource. Abbott is the exclusive and non-exclusive
distributor and co-promoter of SetSource products to certain categories of
customers, including SetSource products containing both companies' proprietary
products.
Sales to Abbott accounted for approximately 57%, 53%, and 48% of net
sales in 2002, 2001, and 2000, respectively. The loss of Abbott as a customer
could have a significant adverse effect on our business and operating results
because they have full-line contracts with numerous healthcare providers to
supply substantially all I.V. products and solutions to those customers.
Through December 31, 2002, we had a supply and distribution agreement
with B. Braun under which B. Braun had conditional exclusive and nonexclusive
rights to distribute certain CLAVE products to certain categories of customers.
Revenue from B. Braun was approximately $9.9 million, $12.9 million and $14.6
million in 2002, 2001, and 2000, respectively, of which CLAVE products accounted
for $8.6 million, $10.8 million and $12.5 million, or 10%, 16% and 22% of our
total revenue, respectively, in each year.
In 2001, we commenced litigation against B.Braun over contractual and
patent matters. See Item 3. Legal Proceedings. As of November 13, 2002, we
reached a settlement with B.Braun on the contract litigation. In the settlement,
we agreed with B.Braun to dismiss the litigation over contractual matters with
prejudice and terminate the agreement for B.Braun's purchase of CLAVE products
from us. We do not expect to sell CLAVE products to B.Braun after December 31,
2002. B.Braun has a product, called UltraSite(TM), that is designed to be
competitive with the CLAVE, and which we have alleged is being marketed and sold
in violation of our patent. We filed a patent infringement suit against B.Braun
in August 2001 and are vigorously pursuing the matter. B.Braun also sells a
number of other I.V. connectors. While the termination of the B.Braun CLAVE
agreement could have an adverse effect on us, we do not believe that it will. We
do expect to lose some sales unit volume, but we believe many of B.Braun's
customers prefer the CLAVE to B.Braun's products, including the UltraSite, and
that many of them will continue to buy CLAVE products through other Abbott or
independent distributors when they are no longer available from B.Braun. To the
extent that customers' needs are filled through independent distributors, we
generate higher revenue and profit per CLAVE connector, because independent
distributors purchase packaged sterilized products, often complete I.V. sets,
from us and these have a higher price than the bulk nonsterile CLAVE sites which
accounted for most of the CLAVEs that we sold to B. Braun.
INDEPENDENT DOMESTIC DISTRIBUTORS
We currently have approximately 20 independent distributors in the
United States and Canada who employ approximately 125 salespeople in the
aggregate and accounted for approximately 19% of our net revenues in 2002. We
include Canada as "domestic" for administrative purposes. Distributors purchase
and stock our products for resale to healthcare providers.
No single independent distributor accounts for as much as 4% of net
sales. Although the loss of one or more of our larger distributors could have an
adverse affect on our business, we believe we could readily locate other
distributors in the same territories who could continue to distribute our
products to the same customers.
For several years before 2001, our sales to independent distributors
had been declining. In 2001, they showed a modest 6% increase after we
established a separate sales group at the beginning of 2000 to deal only with
the independent distributors and attempt to increase our net sales to them. In
2002, sales to our independent distributors grew 24% in total, and 16% without
the inclusion of sales originating with Bio-Plexus. While we believe that the
declining trend in sales to the independent distributors has been reversed, and
that sales to them will grow in 2003, there is no assurance that continuing
growth will be achieved, or that sales to them will not decline in the future.
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INTERNATIONAL
We distribute products in the principal countries in Western Europe,
the Pacific Rim and South America and in South Africa. Foreign sales (excluding
Canada) accounted for approximately 8%, 8% and 5% of our net sales in each of
the years 2002, 2001 and 2000, respectively. The International division
currently has approximately 60 distributors. We have two business development
managers in Europe, one each in New Zealand and Australia who together serve the
entire Pacific Rim, Southeast Asia and the Middle East, and one in South
America. We expect to add several more business development managers in 2003.
Administrative operations are in Rome and San Clemente.
Currently, we export from the United States substantially all the
products sold internationally. All sales are denominated in U.S. dollars. We
believe it will be necessary for us to establish production facilities in a
number of locations outside North America to meet local demands and avoid high
transportation costs.
MANUFACTURING
Manufacturing of our 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. We mold all of our proprietary components, and perform all
assembly, quality control, inspection, packaging, labeling and shipping of our
products. Our manufacturing operations function as a separate group, producing
products for the marketing and sales groups.
We have 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 our molding
operation and manufactures some of our production molds. 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 a
24,425 square foot class 100,000 clean room in which all molding and automated
assembly of our proprietary medical components is performed. The clean room is
equipped with 41 injection molding machines and ancillary equipment including
robots designed to minimize human intervention, and sophisticated, highly
automated assembly systems to assemble the CLAVE, CLAVE Integrated Y site,
CLC2000 and 1o2 Valve, RF150 and the McGaw Protected Needle products. The
assembly systems are custom designed and manufactured for us.
We also own a 37,500 square foot manufacturing facility in Vernon,
Connecticut (near Hartford) where our Connecticut Division (formerly Bio-Plexus)
manufactures the Punctur-Guard products. There are two clean rooms, one for
assembly of the BCN and one for the Winged Set; both assembly processes use
custom made automated assembly systems. Molding is currently done by outside
custom molding companies.
Our 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, we mold our entire requirements of proprietary molded
components, either directly or through outside contractors who run our molds.
The raw materials for our molding operation are principally resins and
silicones, and these materials are available from several sources. Generic,
"off-the-shelf" items are purchased from outside vendors unless significant cost
savings can be achieved by molding in-house. We are not dependent on any
individual vendor for purchased parts and have no contracts with our suppliers
beyond the terms of purchase orders issued.
Virtually all manual assembly is done at our facility in Ensenada, Baja
California, Mexico. Products assembled manually are I.V. sets, the Lopez Valve,
and CLAVE ancillary products and accessories.
Over the past several years, we have been conducting a program to
increase systems capabilities, improve manufacturing efficiency, reduce labor
costs and enhance distribution. These steps were initially focused on production
of custom I.V. systems and, in part, led to the transfer of most manual assembly
to a 20,000 square foot facility in Ensenada, Baja California, Mexico built in
1998. Future establishment of production facilities outside North America could
be a continuing part of this process, and will exploit the manufacturing,
9
systems and software expertise that we have developed in recent years. The
program also includes molding and automated assembly operations, where the focus
is on improving manufacturing efficiency, aggressive control of material and
labor costs, and control of inventory costs.
We believe we are continuing to build on our expertise to reduce labor
costs and minimize investment in inventory, while at the same time reducing to a
bare minimum the time from when an order is received to when it is shipped.
Because significant innovation is required to achieve these goals, there is no
assurance that the programs will achieve the desired results beyond those
already achieved.
Our products are currently sterilized in processes which use either
gamma or electron beam ("e-beam") radiation. Most of the sterilization is by
e-beam, which is less expensive and quicker than gamma radiation sterilization.
While sterilization is currently performed by independent companies, we are
constructing a sterilization facility at our plant in Mexico that we expect will
sterilize all of our products that are assembled in Mexico when the facility
becomes operational in mid 2003.
GOVERNMENT REGULATION
Government regulation is a significant factor in the development,
marketing and manufacturing our products. The FDA regulates medical product
manufacturers and their products under a number of statutes including the FDC
Act, and we and our products are subject to the regulations of the FDA. 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 our current products has
qualified, and we anticipate 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 that we develop or any manufacturers that
we might acquire, or claims that we 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 CLC2000 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 products that we currently
manufacture 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.
We 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. We are an FDA
registered medical device manufacturer, and must demonstrate that we and our
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 that 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 an FDA 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.
10
We believe that our products and procedures are in compliance with all
applicable FDA and DHS regulations. There can be no assurance, however, that
other products we are developing or products that we may develop in the future
will be cleared by the FDA and classified as Class II products, or that
additional regulations restricting the sale of our 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 our business.
To market our products in the European Community ("EC"), we 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, we must comply with the
quality management standards of EN ISO 9001(1994) / EN 46001 (1996). 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 conform to EC Directives
such as Council Directive 93/42/EEC ("Medical Device Directive") and their
applicable annexes. Those regulations 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.
We have demonstrated conformity to the regulations of both ISO 9001
(1994) / EN 46001 (1996), ISO 13485 (1996) and the Medical Device Directive and
we affix the CE Mark to our device labeling for product sold in member countries
of the EC.
We believe our products and systems are in compliance with all EC
requirements. There can be no assurance, however, that other products we are
developing or products that we may develop in the future will conform or that
additional regulations restricting the sale of our present or proposed products
will not be promulgated by the EC.
COMPETITION
The market for I.V. products is intensely competitive. We believe that
our ability to compete depends upon our continued product innovation, the
quality, convenience and reliability of our products, access to distribution
channels, patent protection, and pricing. We encounter significant competition
in this market both from large established medical device manufacturers and from
smaller companies. Our ability to compete effectively depends on our ability to
differentiate our products based on safety features, product quality, cost
effectiveness, ease of use and convenience, as well as our ability to perceive
and respond to changing customer needs. In the long term, we expect that our
ability to compete will continue to be affected by our ability to reduce unit
manufacturing costs through higher volume production.
In addition to competing with conventional needle I.V. connection
systems and protected needle connection systems marketed by companies such as
Baxter Healthcare Corporation ("Baxter") and Abbott, our present and future
products will compete with needleless I.V. connection systems like those
marketed by Baxter, Becton-Dickinson and Company ("BD"), B.Braun, Alaris
Corporation and others. Although we believe that our needleless CLAVE has
distinct advantages over competing systems, there is no assurance that it will
be able to compete successfully with these products.
The blood collection needle market is highly competitive, and a large
segment of the market continues to use non-safety devices that are generally
less expensive than safety devices such as the Punctur-Guard products. The
largest share of the blood collection needle market is held by BD.
11
Manufacturers of products with which we currently compete, 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 are leading distributors of I.V. therapy systems, while BD 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
substantially all of their I.V. product requirements. In order to penetrate more
of these hospitals, we have established a strategic supply and distribution
relationship with Abbott.
We believe 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. We are aware of a
number of such products. We believe most of those products were developed
primarily by companies who currently do not have the distribution or financial
capabilities that we have, although some of those products may be distributed in
the future by larger companies that do have such capabilities. We believe these
products have had a modest impact on our CLAVE business to date, but there is no
assurance that our current or future products will be able to successfully
compete with these or future products developed by others.
We believe that our ability to compete in the custom I.V. systems
market depends upon the same factors affecting our existing products, but will
be particularly affected by cost to the customer and delivery times. While we
believe we have advantages in these two areas, there is no assurance that other
companies will not be able to compete successfully with our custom I.V. systems.
PATENTS
We have United States and certain foreign patents on the CLAVE,
CLC2000, Punctur-Guard technology, Click Lock, and Piggy Lock I.V. connectors
and have United States patents on the Lopez Valve connector. We have
applications pending for additional United States and foreign patents on the 1o2
Valve, CLC2000, Posi-Link, CLAVE, Click Lock and Piggy Lock I.V. connectors. The
expiration dates of our patents range from 2006 to 2018. (While we no longer
manufacture and sell the Click Lock and Piggy Lock, the patents have
considerable value for potential use in other devices.)
Our success may depend in part on our ability to obtain patent
protection for our products and to operate without infringing the proprietary
rights of third parties. While we have obtained certain patents and applied for
additional United States and foreign patents covering certain of our 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 our patents will be held valid if subsequently
challenged. We also believe 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 that are as
effective as our products. The loss of patent protection on CLAVE, CLC2000,
Punctur-Guard, Click Lock or Lopez Valve products could adversely affect our
ability to exclude other manufacturers from producing effective competitive
products and could have an adverse impact on our financial results.
The fact that a patent is issued to us does not eliminate the
possibility that patents owned by others may contain claims that are infringed
by our 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 us and in diversion of our resources, may be
necessary to defend us against claimed infringement of the rights of others and
to determine the scope and validity of the proprietary rights of others. In
addition, our enforcement of our intellectual property rights through litigation
could result in substantial cost and diversion of resources. Adverse
determinations in litigation could subject us to significant liabilities to
third parties or could require us to seek licenses from third parties and could
prevent us from manufacturing, selling or using our products, any of which could
have a material adverse effect on our business.
12
We have asserted our rights against parties we believe to be violating
our patents in the past and will continue to do so in the future.
ICU FINANCE
ICU Finance Inc. is a wholly owned subsidiary that we established in
2002 to provide financing to companies involved in distribution of healthcare
products and provision of healthcare services. Loans will be made only to
credit-worthy companies on a fully secured basis. Loans outstanding at December
31, 2002 were approximately $150,000.
EMPLOYEES
At January 31, 2003, we had 719 full-time employees, consisting of 94
engaged in sales, marketing and administration, and 625 in manufacturing,
molding, product development and quality control, including 446 in Mexico. We
contract with an independent temporary agency to provide some of the production
personnel at our manufacturing facility in San Clemente, California; we employ
none of the personnel provided through the agency. At January 31, 2003, the
number of temporary production personnel was approximately 54.
ITEM 2. PROPERTIES.
We own two adjacent 39,000 square foot buildings in San Clemente,
California, another 28,000 square foot building in the same business park, a
37,500 square foot building in Vernon, Connecticut and a 20,000 square foot
building on approximately 94 acres of land in Ensenada, Baja California, Mexico.
ITEM 3. LEGAL PROCEEDINGS.
In an action filed August 21, 2001 entitled ICU MEDICAL, INC. V. B
BRAUN MEDICAL, INC. pending in the United States District Court for the Northern
District of California, we allege that B.Braun Medical, Inc. infringes ICU's
patent by the manufacture and sale of its UltraSite medical connector. We seek
monetary damages and injunctive relief and intend to vigorously pursue this
matter. The outcome of this matter cannot be determined at this time.
In an action filed October 2, 2002 entitled ICU MEDICAL, INC V.
MEDTRONIC MINIMED, INC., et al. pending in the United States District Court for
the Central District of California, we allege that the defendants infringes
several of our patents by the manufacture or sales of certain medical devices.
We seek monetary damages and injunctive relief and intend to vigorously pursue
this matter. The outcome of this matter cannot be determined at this time.
We are 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. We believe that the resolution of the legal
proceedings in which we are involved will not have a material adverse effect on
our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
13
EXECUTIVE OFFICERS OF REGISTRANT.
The following table lists the names, ages, certain positions and
offices held by our executive officers and key employees. Officers serve at the
pleasure of the Board of Directors.
Age Office Held
--- -----------
George A. Lopez, M.D. 55 Chairman of the Board, President
and Chief Executive Officer
Alison D. Burcar 30 Vice President of Marketing
Richard A. Costello 39 Vice President of Sales
Francis J. O'Brien 60 Chief Financial Officer, Secretary
and Treasurer
Steven C. Riggs 44 Vice President of Operations
Dr. Lopez and Mssrs. Costello and O'Brien have been employed by us in
their current positions for more than five years.
Ms. Burcar became Vice President of Marketing in August 2002, after
having been Marketing Operations Manager since March 1998. Ms. Burcar has been
with us since 1995.
Mr. Riggs became Vice President of Operations in August 2002, after
having been Director of Operations since 1998. Mr. Riggs has been with us since
1992.
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14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock has been traded on the Nasdaq Stock Market National
Market Tier under the symbol "ICUI" since our initial public offering on March
31, 1992. The following table sets forth, for the quarters indicated, the high
and low closing prices for our Common Stock quoted by the Nasdaq:
2001 High Low
---- ---- ---
First Quarter $23.58 $17.29
Second Quarter 28.07 21.71
Third Quarter 27.61 23.57
Fourth Quarter 31.33 25.13
2002 High Low
---- ---- ---
First Quarter $37.30 $29.29
Second Quarter 41.97 29.55
Third Quarter 38.61 25.75
Fourth Quarter 43.89 32.60
We have never paid dividends and do not anticipate paying dividends in
the foreseeable future as the Board of Directors intends to retain future
earnings for use in our business. Any future determination as to payment of
dividends will depend upon our financial condition, results of operations and
such other factors as the Board of Directors deems relevant.
As of December 31, 2002 we had 108 stockholders of record and believe
we have approximately 5,000 beneficial stockholders.
The above data for 2001, and all share and per share data elsewhere in
this Annual Report, have been adjusted for a three-for-two stock split effected
March 15, 2002 in the form of a stock dividend.
We have a 1993 Stock Incentive Plan under which we grant options to
purchase our Common Stock to our employees and have a 2001 Directors' Stock
Option Plan under which we grant options to purchase our Common stock to our
Directors. We also have an Employee Stock Purchase Plan. All plans were approved
by our stockholders. Further information about the plans is in Note 5 to the
consolidated financial statements. Certain information about the plans is as
follows:
Number of shares
remaining available for
Number of shares to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding shares reflected
warrants and rights warrants and rights in column (a))
(a) (b) (c)
4,120,501 $10.98 1,192,981
15
ITEM 6. SELECTED FINANCIAL DATA
ICU MEDICAL, INC.
-----------------
SELECTED FINANCIAL DATA
-----------------------
Year ended December 31,
-----------------------------------------------------------------
(in thousands, except per share data)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
INCOME DATA:
Revenues $ 87,807 $ 69,055 $ 56,191 $ 47,014 $ 39,842
Cost of goods sold 36,464 28,932 23,787 19,883 16,687
--------- --------- --------- --------- ---------
Gross profit 51,343 40,123 32,404 27,131 23,155
Operating expenses 21,343 18,004 15,782 13,743 13,141
--------- --------- --------- --------- ---------
Income from operations 30,000 22,119 16,622 13,388 10,014
Investment income 1,432 1,988 2,096 1,431 1,408
Provision for income taxes 11,750 8,720 6,930 5,400 4,200
--------- --------- --------- --------- ---------
Net income $ 19,682 $ 15,387 $ 11,788 $ 9,419 $ 7,222
========= ========= ========= ========= =========
Net income per common share
Basic $ 1.43 $ 1.20 $ 0.94 $ 0.77 $ 0.60
Diluted $ 1.28 $ 1.06 $ 0.87 $ 0.72 $ 0.57
========= ========= ========= ========= =========
Weighted average number of shares
Basic 13,793 12,841 12,495 12,232 11,984
Diluted 15,352 14,454 13,588 13,036 12,634
========= ========= ========= ========= =========
CASH FLOW DATA:
Cash flows from operations,
excluding tax benefits from
exercise of stock options $ 17,905 $ 20,565 $ 12,760 $ 14,767 $ 6,574
Total cash flows from operations $ 28,097 $ 24,329 $ 13,462 $ 15,518 $ 7,417
BALANCE SHEET DATA:
Cash and liquid investments $ 88,465 $ 73,027 $ 50,786 $ 38,442 $ 38,090
Working capital 102,564 79,736 57,718 42,024 43,817
Total assets 157,032 117,342 92,860 75,364 62,360
Long-term debt -- -- -- -- --
Stockholders' equity 145,387 106,677 83,380 68,014 58,229
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We develop, manufacture, sell and distribute disposable medical
connection products. Our principal products are proprietary safe medical
connection devices for use in I.V. therapy applications. We also produce custom
I.V. systems that incorporate our proprietary products, and since October 31,
2002, blood collection needles.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements. In preparing our financial statements, we
make estimates and assumptions that affect the expected amounts of assets and
liabilities and disclosure of contingent assets and liabilities. We apply our
accounting policies on a consistent basis. As circumstances change, they are
considered in our estimates and judgments, and future changes in circumstances
could result in changes in amounts at which assets and liabilities are recorded.
Investment securities are all marketable and considered "available for
sale". See Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Under our current investment policies, the securities in which we invest have no
significant difference between cost and fair value. If our investment policies
were to change, and there were differences between cost and fair value, that
difference, net of tax effect, would be reflected as a separate component of
stockholders' equity.
Most of our product sales are FOB shipping point and ownership of the
product transfers to the customer when we ship it. Certain other product sales
are FOB destination and ownership of the product transfers to the customer at
destination. We record sales and related costs when ownership of the product
transfers to the customer. Most of our customers are distributors or medical
product manufacturers, although there are some sales to end-users. Our only
post-sale obligations are warranty and certain rebates. Customers, with certain
rare exceptions, do not retain any right of return and there is no price
protection with respect to unsold products. We warrant products against defects
and have a policy permitting the return of defective products. We provide a
reserve for warranty returns as an expense; amounts have been insignificant. We
accrue rebates as a reduction in revenue based on contractual commitments and
historical experience; amounts have not been significant. Adjustments of
estimates of warranty claims, rebates or returns, which have not been, and are
not expected to be material, affect current operating results when they are
made.
Accounts receivable are stated at net realizable value. An allowance is
provided for estimated collection losses based on specific past due accounts for
which we consider collection to be doubtful. Loss exposure is principally with
international distributors for whom normal payment terms are long in comparison
to those of our other customers and, to a lesser extent, domestic distributors.
Many of these distributors are relatively small and we are vulnerable to adverse
developments in their businesses that can hinder our collection of amounts due.
If there are significant doubts as to the collectibility of receivables at the
time of shipment, we defer recognition of the sale in income until the
receivable is collected. If actual collection losses exceed expectations, we
could be required to accrue additional bad debt expense, which could have an
adverse effect on our operating results in the period in which the accrual
occurs.
Inventories are stated at the lower of cost or market. We need to carry
many components to accommodate our rapid product delivery, and if we misestimate
demand or if customer requirements change, we may have components in inventory
that we may not be able to use. Most finished products are made only after we
receive orders, but for those that are not, we need to estimate what may not be
saleable. We regularly review inventory for slow moving items and write off all
items we do not expect to use in manufacturing, or finished products we do not
expect to sell. If actual usage of components or sales of finished goods
inventory is less than our estimates, we would be required to write off
additional inventory, which could have an adverse effect on our operating
results in the period in which the write-off occurs.
17
Property and equipment is carried at cost and depreciated on the
straight-line method over their estimated useful lives. The estimates of useful
lives are significant judgments in accounting for property and equipment,
particularly for molds and automated assembly machines that are custom made for
us. We may retire them on an accelerated basis if we replace them with larger or
more technologically advanced tooling. The remaining useful lives of all
property and equipment are reviewed regularly and lives are adjusted or assets
written off based on current estimates of future use. As part of that review,
property and equipment is reviewed for other indicators of impairment, but to
date we have not encountered circumstances indicating the carrying amount of an
asset, or group of assets, may not be recoverable. An unexpected shortening of
useful lives of property and equipment that significantly increases depreciation
provisions, or other circumstances causing us to record an impairment loss on
such assets, could have an adverse effect on our operating results in the period
in which the related charges are recorded.
NEW ACCOUNTING PRONOUNCEMENTS
We have implemented all new accounting pronouncements that are in
effect and that may impact our consolidated financial statements and do not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on our consolidated financial
statements.
OVERVIEW
Our principal products through 2002 are our CLAVE needleless I.V.
connection system and our custom I.V. systems. The following table sets forth,
for the periods indicated, net revenues by product as a percentage of total net
revenues:
- ---------------------------------------- ------------------------ ----------------------- -----------------------
Product Line 2002 2001 2000
- ---------------------------------------- ------------------------ ----------------------- -----------------------
CLAVE 67% 74% 71%
Custom I.V. Systems 17% 13% 12%
CLC2000 4% 3% 4%
Punctur-Guard 1% - -
Lopez Valve 2% 2% 3%
RF100-RF150 ("Rhino") 2% 3% 5%
Protected Needle and Other Products 3% 5% 5%
License, royalty and revenue share 4% - -
- ---------------------------------------- ------------------------ ----------------------- -----------------------
Total 100% 100% 100%
- ---------------------------------------- ------------------------ ----------------------- -----------------------
We sell our products to independent distributors and through agreements
with Abbott (the "Abbott Agreements") and certain other medical product
manufacturers. Most independent distributors handle the full line of our
products. Abbott purchases CLAVE products, principally bulk, non-sterile
connectors. Abbott also purchases the Rhino, a low-priced connector specifically
designed for Abbott, the CLC2000, and custom I.V. sets. We also sell certain
other products to a number of other medical product manufacturers.
The Abbott Agreements extend to December 2009 and have extension
provisions beyond that date. The B.Braun Agreement for CLAVE terminated on
December 31, 2002.
We believe that as the healthcare provider market continues to
consolidate, our success in marketing and distributing CLAVE products will
depend, in part, on our ability, either independently or through strategic
supply and distribution arrangements, to secure long-term CLAVE contracts with
major buying organizations. Further, our marketing and distribution strategy may
result in a significant share of our revenues being concentrated among a small
number of distributors and manufacturers. The loss of a strategic supply and
distribution agreement with a customer or the loss of a large contract by such a
customer could have a material adverse effect on our operating results.
18
We believe the success of the CLAVE has, and will continue to, motivate
others to develop one-piece needleless connectors that may incorporate many of
the same functional and physical characteristics as the CLAVE. We are aware of a
number of such products. In response to competitive pressure, we have been
reducing prices to protect and expand our market. The price reductions to date
have been more than offset by increased volume. We expect that the average price
of our CLAVE products may continue to decline. There is no assurance that our
current or future products will be able to successfully compete with products
developed by others.
The federal Needlestick Safety and Prevention Act, enacted in November
2001, modified standards promulgated by the Occupational Safety and Health
Administration to require employers to use needleless systems where appropriate
to reduce risk of injury to employees from needlesticks. We believe the effect
of this law will be to accelerate sales of our needleless systems, although we
are unable to estimate the amount or timing of such sales.
We are taking steps to reduce our dependence on our current proprietary
products. We are seeking to substantially expand our custom I.V. systems
business with products sold to medical product manufacturers and independent
distributors. Under our February 27, 2001 agreement with Abbott we manufacture
all new custom I.V. sets for sale by Abbott and jointly promote the products
under the name SetSource. We expect continuing significant increases in sales of
custom I.V. systems under this agreement. We also launched efforts to contract
with group purchasing organizations and independent dealer networks for
inclusion of our products among those available to members of those entities.
There is no assurance that either one of these initiatives will continue to
succeed.
We have an ongoing program to increase systems capabilities, improve
manufacturing efficiency, reduce labor costs, reduce time needed to produce an
order, and minimize investment in inventory. The original focus was on
production of custom I.V. systems, which is relatively labor intensive; it now
includes all automated manufacturing operations as well. Manual assembly is now
performed at the facility opened in December 1998 in Ensenada, Baja California,
Mexico. In 1999, we made significant investment in automated molding and
assembly equipment. In the third quarter of 2002, we commenced use of automated
assembly equipment for the 1o2 Valve and commenced use of automated assembly
equipment for the CLC2000 in the fourth quarter of 2002. Throughout 2002 we
added molding and automated assembly capacity for CLAVE production and in the
third quarter of 2002 commenced a significant expansion of our manual assembly
capacity in Mexico that we expect to complete in early 2003. All these steps
have reduced and will continue to reduce unit production costs. Ongoing steps
also include automation of the production of new products and other products for
which volume is growing, and consideration of establishment of production
facilities outside North America. Because significant innovation is required to
achieve these goals, there is no assurance that these steps will achieve the
desired results.
We distribute products through three distribution channels. Net
revenues for each distribution channel, including license, royalty and revenue
share were as follows:
- ---------------------------------------- ------------------------ ----------------------- -----------------------
Channel 2002 2001 2000
- ---------------------------------------- ------------------------ ----------------------- -----------------------
Medical product manufacturers 73% 72% 74%
Independent domestic distributors 19% 20% 21%
International 8% 8% 5%
- ---------------------------------------- ------------------------ ----------------------- -----------------------
Total 100% 100% 100%
- ---------------------------------------- ------------------------ ----------------------- -----------------------
The healthcare business in the United States is subject to seasonal
fluctuations, and activity tends to diminish somewhat in the summer months of
June, July and August, when illness is less frequent than in winter months and
patients tend to postpone elective procedures. This typically causes seasonal
fluctuations in our business. In addition, we can experience fluctuations as a
result of variations in the ordering patterns of our largest customers, which
may be driven more by production scheduling and their inventory levels, and less
by seasonality.
19
At December 31, 2002, we had orders for current delivery of
approximately $5.5 million. Of that amount, approximately $4.0 million could
have been shipped to Abbott in the fourth quarter of 2002, but shipment was
deferred until early 2003 by agreement with Abbott.
COMPARISON OF 2002 TO 2001
In 2002, we had net revenues of $87,807,000, which was $18,752,000, or
27%, higher than the net revenues of $69,055,000 reported in 2001. The increase
was primarily attributable to the increase in sales of CLAVE products, which
increased by $7,341,000 and custom I.V. systems, which increased $6,241,000.
Net sales to Abbott were $49,990,000 in 2002, compared to $36,793,000
in 2001. CLAVE sales to Abbott increased to $40,494,000 from $32,282,000
principally because of an increase in unit volume. Sales of custom I.V. systems
to Abbott under the SetSource program approximated $5,666,000 for the year, up
from $1,171,000 in 2001, the year the program was initiated. We expect a
substantial increase in CLAVE unit and dollar sales volume with Abbott in 2003,
as well as a significant increase in SetSource unit and dollar sales volume. Net
sales of the CLC2000 to Abbott almost tripled to approximately $1.6 million from
the low levels of 2001 and we expect sales of the CLC2000 to Abbott will
increase in the future. Net sales of Rhino were virtually unchanged, at just
below $2.0 million for 2002. Sales of Rhino started to decline in early 2001,
and while they leveled off in 2002, they are expected to decline in the future
as the market shifts to swabable technology. There is no assurance as to the
amount of any of the future sales increases to Abbott.
Net revenue from B.Braun, including revenue sharing, amounted to
$9,861,000 in 2002, compared to $12,872,000 in 2001. The decrease was
principally because of a decrease in sales of CLAVE products from $10,544,000 to
$8,183,000, on lower unit volume, as we expected. CLAVE product sales to B.Braun
in the fourth quarter of 2002 accounted for approximately 40% of B.Braun's
annual CLAVE volume, as B.Braun made its final purchases under the agreement to
purchase CLAVE products. Most of the balance of the decrease in net revenue from
B.Braun was in sales of the McGaw Protected Needle and we expect sales to
decline in the future, as they have in most recent periods, as the market for
safe connectors continues to shift to needleless swabable technology. SafeLine
revenue sharing payments decreased slightly from last year; such payments depend
on the volume and selling prices of B.Braun's SafeLine products, and we expect
payments to trend downward in the future.
We do not expect to sell CLAVE products to B.Braun after December 31,
2002. In 2001, we commenced litigation against B.Braun over contractual and
patent matters. See Item 3. Legal Proceedings. As of November 13, 2002, we
reached a settlement with B.Braun on the contract litigation. In the settlement,
we agreed with B.Braun to dismiss the litigation over contractual matters with
prejudice and terminate the agreement for B.Braun's purchase of CLAVE products
from us. B.Braun has a product, called UltraSite, that is designed to be
competitive with the CLAVE, and which we have alleged is being marketed and sold
in violation of our patent. We filed a patent infringement suit against B.Braun
in August 2001 and are vigorously pursuing the matter. B.Braun also sells a
number of other I.V. connectors. While the termination of the B.Braun CLAVE
agreement could have an adverse effect on us, we do not believe that it will. We
do expect to lose some sales unit volume, but we believe many of B.Braun's
customers prefer the CLAVE to B.Braun's products, including the UltraSite, and
that many of them will continue to buy CLAVE products through other Abbott or
independent distributors when they are no longer available from B.Braun. To the
extent that customers' needs are filled through independent distributors, we
generate higher revenue and profit per CLAVE connector, because independent
distributors purchase packaged sterilized products, often complete I.V. sets,
from us and these have a higher price than the bulk nonsterile CLAVE sites which
accounted for most of the CLAVEs that we sold to B. Braun.
Net sales to independent domestic distributors increased approximately
24% to $16,966,000 in 2002 from $13,669,000 in 2001. (These sales include
$1,063,000 of Punctur-Guard sales after we acquired Bio-Plexus on October 31,
2002, and include all sales of SetFinder, Inc., a subsidiary formerly reported
as a separate sales channel). The increase was due principally to an 18%
increase in custom I.V. systems, the inclusion of Punctur-Guard sales for two
months, and a 4% increase in CLAVE product sales. The increase in sales of
20
custom I.V. systems was attributable to an increase in unit volume; and we
expect increased volume of custom I.V. systems in the future. The increase in
CLAVE product sales was also because of higher unit volume. We believe the
increase in sales of CLAVE products to independent distributors is principally
because of acquisition of market share from B.Braun and we expect a continued
increase in the net sales of standard CLAVE products to the independent domestic
distributors. There is no assurance that we will achieve increased net sales to
independent domestic distributors in the future. Further, the ability of the
independent distributors to sustain or increase their sales may be impacted by
competition from existing and new competitive products or acquisition of market
share by Abbott.
Total sales to international distributors (excluding Canada) were
$7,085,000 in 2002, as compared with $5,384,000 in 2001. We now have
distribution arrangements in the principal countries in Western Europe, the
Pacific Rim and Latin America and in South Africa. Approximately 44% of
international sales in 2002 were to distributors selling in Western Europe,
approximately 8% in South Africa, approximately 37% in the Pacific Rim and
approximately 11% in Latin America. Comparable amounts in 2001 were 30%, 30%,
25% and 15%. Net sales to distributors in Western Europe and in the Pacific Rim
both approximately doubled over 2001 levels, as we achieved broader distribution
and better acceptance of CLAVE products in both areas. We expect continued
increases in both areas. Sales to South Africa declined in 2002 from 2001, but
we expect them to increase in the future. Latin America has been a difficult
market because of economic and political issues, but we are optimistic for the
future. We expect significant increases in sales to international distributors
will continue in the future, although there is no assurance that those
expectations will be realized.
Total net sales of CLAVE products (excluding custom CLAVE I.V. systems)
increased approximately 14% to $58,471,000 in 2002 from $51,130,000 in 2001.
Unit shipments of CLAVE products in 2002 increased approximately 15% over 2001.
Abbott accounted for 112% of the growth in dollar sales of CLAVE, International
approximately 18%, partially offset by the decline in sales to B.Braun. The
aggregate average net selling price of CLAVE products in 2002 was virtually the
same as in 2001, and while we expect some decrease in the future, we expect it
to be less than the 10% to 20% annual decreases experienced over the past few
years. We expect continued significant growth in CLAVE unit and dollar sales
volume in 2003, notwithstanding the termination of distribution through B.Braun,
because of the growth that we expect in our other distribution channels.
However, there is no assurance that the expectations will be realized.
Net sales of custom I.V. systems were $15,205,000 in 2002 compared to
$9,263,000 in 2001, an increase of $5,942,000, or 64%. The SetSource program
with Abbott accounted for about 75% of the increase, with most of the balance in
sales to independent domestic distributors.
Net sales of the CLC2000 grew from $2,043,000 in 2001 to $3,744,000, an
increase of 83%. Abbott accounted for approximately 60% of the increase, with
the balance among domestic and international distributors. We expect sales of
the CLC2000 to increase in 2003 and later years, but there is no assurance as to
the amount or timing of future CLC2000 sales.
Net sales of the Lopez Valve increased 8% in 2002 to $1,563,000, on
higher unit volume to domestic and international distributors. We believe that
the focus of the sales and marketing efforts of our personnel and those of our
distributors on other products continues to dilute sales of the Lopez Valve. We
expect only modest sales increases for the Lopez Valve in 2003.
Net sales of protected needle products decreased 37%, principally
because of a decrease in sales of the McGaw Protected Needle. Sales of Click
Lock and Piggy Lock products were the same in both years at approximately
$730,000. We discontinued sales of Click Lock and Piggy Lock Products in the
first quarter of 2003, and we expect sales of the other protected needle
products will decrease in the future as the safe connector market continues its
shift to needleless technology.
License, royalty and revenue share income is being presented separately
in our financial statements for the first time in the fourth quarter of 2002.
The principal component was a payment for a fully paid up license to use certain
of our patents of $3.2 million received in December 2002, royalties received for
other companies' use of Punctur-Guard technology of $156,000 and SafeLine
revenue share (fourth quarter only) of approximately $0.2 million. The royalties
21
for use of Punctur-Guard technology and Safeline revenue share are expected to
continue, although the amounts may vary form period to period. We do expect to
receive other license fees or royalties for the use of our technology such as
the one received in December 2002, but we can give no assurance as to the
amounts or timing of such payments, or whether any such payment will be
received. We received a payment of $1.7 million in February 2003 that will be
included in revenue in the first quarter of 2003.
Gross margin for 2002, calculated on Net sales and excluding Other
revenue, declined from 58% in 2001 to 57% in 2002 because of significant
unabsorbed overhead in the fourth quarter of 2002. This occurred because of
three weeks of substantially reduced production in Mexico as a result of
difficulty in processing orders and preparing production orders at the time we
implemented our new enterprise software, and because of a planned two-week
shutdown of the automated production facility in San Clemente for preventive
maintenance in December. Until the fourth quarter, gross margins had been at
58%. We expect that our gross margins could decline somewhat from those in 2002
because of costs related to the plant expansion in Mexico in 2003, and because
gross margin on the Punctur-Guard line has historically been lower than that of
the rest of the Company.
Selling, general and administrative ("SG&A") costs increased by
$3,055,000, or 18%, to $19,871,000 in 2002, compared to $16,816,000 in 2001.
SG&A costs were 23% of net revenue in 2002 compared to 24% in 2001. We expect
SG&A costs to increase in 2003 because of growth in the Company, international
expansion, and expansion of the custom I.V. system business. Sales and marketing
costs increased approximately $1.7 million, but decreased as a percentage of
sales from 14% to 13%. Increases were principally in salaries and related costs
and travel. General and administrative costs increased approximately $1.3
million, and were approximately 10% of net revenue in both years. Increases were
principally in salary and benefits.
Research and development ("R&D") costs increased in 2002 by $284,000 to
$1,472,000, and were approximately 2% of net revenue in both 2002 and 2001. The
principal increase in spending was on product development for the Punctur-Guard
product line to make product improvements that we felt were necessary to
successfully market and sell the products. Spending on new product development
also increased from 2001. We estimate that R&D costs will continue in 2003 at
approximately the same percentage of net sales as in 2002. However R&D costs
could differ from those estimates and the R&D may not be completed as expected.
We expect to launch an infusion device using Punctur-Guard technology
in the second quarter of 2003. These devices will be used for short-term drug
administration therapy.
We plan to launch, in limited markets, a new I.V. connector currently
under development. We expect to apply in the second half of 2003 to the FDA
under Section 510(k) of the FDC Act for approval to market this new connector.
There is no assurance that the FDA will grant marketing clearance, that we will
launch this new product, or that it will achieve sales if and when we commence
marketing it.
The operating margin increased to 34% in 2002, compared to 32% in 2001,
principally because operating expenses decreased as a percentage of net sales.
Investment income decreased by $556,000 in 2002, notwithstanding an
increase in the investment portfolio, because of the effect of continuing
declines in interest rates since the beginning of 2001.
Our effective income tax rate in 2002 was 37%, up from 36% in 2001
principally because state tax credits were lower in 2002 than in 2001 and tax
exempt investment income declined as a percentage of taxable income. We expect
our effective tax rate in 2003 to be approximately the same as the 2002 rate.
Net income in 2002 increased 28% from 2001 principally because the
gross profit increased 28%, but operating expenses increased only 19%. This
resulted in a 36% increase in operating margin that was partially offset by the
decline in investment income and the increase in the effective income tax rate.
Net income per share (diluted) increased $0.22, or 21%. The percentage increase
in earnings per share was less than that for net income because there were more
shares outstanding.
22
COMPARISON OF 2001 TO 2000
In 2001, we had net revenue of $69,055,000 that was $12,864,000, or
23%, higher than the net revenue of $56,191,000 reported in 2000. The increase
was primarily attributable to the increase in sales of CLAVE products, including
custom CLAVE I.V. systems.
Net sales to Abbott were $36,793,000 in 2001, compared to $26,956,000
in 2000. CLAVE sales increased to $32,282,000 from $21,337,000 because of an
increase in unit volume somewhat offset by lower average selling prices. Sales
under the SetSource program approximated $1,200,000 for the year; they increased
monthly and exceeded $250,000 for the month of December 2001. Net sales of the
CLC2000 and Rhino declined as Abbott balanced its inventory position. Sales of
custom CLAVE I.V. sets declined as production of several high-volume sets was
transferred to Abbott.
Net revenue from B.Braun, including revenue sharing, amounted to
$12,872,000 in 2001, compared to $14,610,000 in 2000. The decrease was
principally because of a decrease in CLAVE sales. Unit sales of CLAVE products
to B.Braun increased, but a decrease in average selling prices, in part because
of a decrease in prices and in part because of a change in the product mix to
lower priced products, more than offset the effect of higher unit volume. Sales
of the McGaw Protected Needle increased in 2001 from 2000 and SafeLine revenue
sharing payments in 2001 decreased from 2000.
Net sales to independent domestic distributors increased approximately
6% to $12,748,000 in 2001 from $11,980,000 in 2000. The increase was due
principally to a 35% increase in custom I.V. systems partially offset by a 16%
decrease in CLAVE product sales because of lower unit volume. The increase in
sales of custom I.V. systems was attributable to an increase in unit volume;
approximately one-third of the increase was from increased sales of custom I.V.
systems incorporating the 1o2 Valve. The decrease in CLAVE product sales was
because of lower unit volume. We believe the decline in sales of CLAVE products
is principally because of acquisition of market share by Abbott and B.Braun.
Total sales to international distributors (excluding Canada) were
$5,384,000 in 2001, as compared with $2,437,000 in 2000. Approximately 30% of
international sales in 2001 were to distributors selling in Western Europe,
approximately 30% in South Africa, approximately 25% in the Pacific Rim and
approximately 15% in Latin America.
Total net sales of CLAVE products (excluding custom CLAVE I.V. systems)
increased approximately 29% to $51,130,000 in 2001 from $39,665,000 in 2000.
Unit shipments of CLAVE products in 2001 increased approximately 63% over 2000.
Abbott accounted for 95% of the growth in dollar sales of CLAVE, International
approximately 24%, partially offset by the decline in B.Braun and independent
domestic distributors. The aggregate average net selling price of CLAVE products
in 2001 decreased approximately 15% as compared with 2000. That decrease
reflects lower prices on bulk, non-sterile CLAVE products sold to Abbott and
B.Braun, as well as a higher percentage of the sales mix being accounted for by
bulk, non-sterile CLAVEs.
Net sales of custom I.V. systems were $9,263,000 in 2001 compared to
$6,737,000 in 2000. Sales of non-proprietary and generic I.V. sets accounted for
substantially all of the net increase.
Net sales of the CLC2000 were approximately the same in 2001 as they
were in 2000. The decline in sales to Abbott was offset by increased sales to
domestic and foreign distributors.
Net sales of the Lopez Valve decreased 14% in 2001 to $1,444,000, on
lower unit volume to domestic and international distributors. We had expected
sales to increase in 2001, but we believe that the focus of the sales and
marketing efforts of our personnel and those of our distributors on other
products diluted the sales of the Lopez Valve.
Net sales of protected needle products increased slightly, as increased
sales of the McGaw Protected Needle offset decreased sales of Click Lock and
Piggy Lock products.
23
Gross margin for 2001 was unchanged from the 58% registered in 2000.
The results of our continuing extensive efforts to improve manufacturing
efficiency and the increased absorption of overhead by higher production volumes
offset the effect of lower average unit selling prices.
Electrical energy costs at our manufacturing facilities in the second
half of 2001 continued to moderate somewhat from the first and second quarters
of 2001, but were still approximately double what they were in the first quarter
of 2000, the last quarter before the sharp rate increase experienced since May
2000. Most of the increase was because of rate increases. Electrical energy
costs were approximately 1% of sales in the second half of 2001, down from 2% of
sales in the third and fourth quarters of 2000 and the first quarter of 2001.
SG&A costs increased by $2,514,000, or 18%, to $16,816,000 in 2000,
compared to $14,302,000 in 2000. SG&A costs were 24% of net sales in 2001
compared to 25% in 2000. Spending increased for litigation and administrative
costs. Sales and marketing costs increased, but decreased as a percentage of
sales.
R&D costs decreased in 2001 by $292,000 to $1,188,000, or 2% of net
sales, as compared to $1,480,000, or 3% of net sales in 2000. Spending on new
product development including development of automated production machinery in
2001 was lower than in 2000, as was spending on clinical evaluations of the
CLC2000. Costs of software development to support manufacturing and distribution
of custom I.V. systems increased in 2001.
The operating margin increased to 32% in 2001, compared to 30% in 2000,
principally because operating expenses decreased as a percentage of net sales.
Investment income decreased by $108,000 in 2001, notwithstanding an
increase in the investment portfolio, because of the effect of declines in
interest rates since the beginning of 2001.
Our effective income tax rate in 2001 was 36%, down from 37% in 2000
principally because of state tax credits.
Net income in 2001 increased 31% from 2000 principally because the
gross profit increased 24%, but operating expenses increased only 14%. Net
income per share (diluted) increased $0.19, or 22%. The percentage increase in
earnings per share was less than that for net income, because there were more
shares outstanding and there were more dilutive shares as a result of the higher
market price of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
During 2002, working capital increased approximately $22,828,000 to
$102,564,000 from $79,736,000. Our cash and cash equivalents and liquid
investment securities increased by $15,438,000 to $88,465,000 from $73,027,000.
That increase was due primarily to $17,905,000 of cash flows from operating
activities (excluding tax benefits from exercise of stock options) and
$18,911,000 from exercise of stock options (including tax benefits), partially
offset by $11,894,000 used to purchase property and equipment and $9,484,000
used to acquire Bio-Plexus (net of cash acquired).
During 2001, working capital increased approximately $22,018,000 to
$79,736,000 from $57,718,000. Our cash and cash equivalents and liquid
investment securities increased by $22,241,000 to $73,027,000 from $50,786,000.
That increase was due primarily to $20,565,000 of cash flows from operating
activities (excluding tax benefits from exercise of stock options) and
$7,910,000 from exercise of stock options (including tax benefits), partially
offset by $6,234,000 used to purchase property and equipment.
Capital expenditures increased in 2002 principally for investment in
molding machines, molds and automated assembly machines, as well as recurring
facilities improvements and acquisition of computer equipment and software. We
are also acquiring sterilization equipment to support our assembly facility in
Mexico, and expanding that facility. We also replaced our enterprise software
with Oracle Corporation's R11i business suite at a cost of over $1.5 million
(excluding amounts charged to expense); we expect that it will substantially
enhance our business and information processes.
24
Capital expenditures increased in 2001 principally for investment in
molding machines, molds and automated assembly machines, as well as recurring
facilities improvements and acquisition of computer equipment and software.
We currently estimate that capital expenditures for 2003 will be
approximately $12 million. We expect that $4 million will be spent on completion
of the $7.2 million expansion in Mexico, including an electron-beam sterilizer,
$6.8 million on molds, molding equipment and automated assembly equipment, and
$1.2 million on computers and software. Of those amounts, approximately $6
million was committed under contracts at December 31, 2002, and we expect to
commit the balance in 2003. Amounts of spending are estimates and actual
spending may substantially differ from those amounts.
We are currently evaluating the design and capacity of our
manufacturing facilities. We estimate that our current facilities and additions
in progress will be adequate through 2003, but that production after 2003 will
require additional clean room facilities for molding and automated assembly. We
expect to decide later in the year how to meet the need for additional
facilities and the location of additional clean room facilities for molding and
automated assembly.
In 2002 we acquired Bio-Plexus and paid for it from our existing
working capital. We may acquire other businesses or product lines in the future.
We expect that sales of our products will continue to grow in 2003. If
sales continue to increase, accounts receivable and inventories are expected to
increase as well. As a result of these and other factors, we expect the use of
working capital to fund our operations to continue to increase.
Accounts receivable increased from $13,062,000 at December 31, 2001 to
$16,633,000 at December 31, 2002, or 27%, approximately the same percentage as
the increase in net revenue. Inventories increased from $1,594,000 at December
31, 2001 to $5,749,000 at December 31, 2002, an increase of $4,155,000, and far
greater than our increase in net sales. Inventory at Bio-Plexus acquired in
2002, was $1,107,000 at December 31, 2002. Of the remaining $3,048,000 increase,
approximately half was in finished goods, mostly because of the shipments that
were deferred from December 2002 to early 2003. The other half was in raw
materials as we increased the amount of components in stock to avoid lack of
components needed to meet production schedules, mostly because a number of
suppliers showed an inability to reliably meet the demands of our increased
volume.
In February 2003, we purchased 56,000 shares of our common stock for
$1.7 million, and in March 2003, we purchased an additional 262,300 shares for
$6.9 million. Until those purchases, we had not purchased treasury stock since
October 1999, except for a small amount in March 2000. We may purchase
additional shares in the future. However, future acquisitions, if any, will
depend on market conditions and other factors.
We have a large cash and liquid investment position generated from
profitable operations and stock sales, principally from the exercise of employee
stock options. We maintain this position to fund our growth, meet increasing
working capital requirements, fund capital expenditures, and potentially to take
advantage of acquisition opportunities that may arise. Our primary investment
goal is capital preservation, so, as further described in Item 7A. Quantitative
and Qualitative Disclosures about Market Risk, our liquid investments have very
little credit risk or market risk.
We believe that our existing working capital, supplemented by income
from operations, will be sufficient to fund our capital expenditures and
increased working capital requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS
Various portions of this Annual Report, including Management's
Discussion and Analysis, describe trends in our business and finances that we
perceive and state some of our expectations and beliefs about our future. These
statements about the future are "forward looking statements," and we identify
them by using words such as "believes," "expects," "anticipates," "estimates,"
25
"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 us and assumptions that we
believe are reasonable, but we do not intend the statements to be
representations as to future results. They include, among other things,
statements about:
o future operating results and various elements of operating
results, including sales and unit volumes of products, future
increases in sales of custom I.V. systems, future license,
royalty and revenue share income, production costs, gross
margins, SG&A, and R&D expense and income taxes;
o factors affecting operating results, such as shipments to
specific customers, product mix, selling prices, warranty
claims, rebates, returns, the market shift to needleless
products, declines in sales of certain products, impact of
safety legislation, achievement of business expansion goals,
development of innovative systems capabilities, introduction
and sales of new products, manufacturing efficiencies, labor
costs, unit production costs, acquisition and use of
production equipment and expansion of facilities and assembly
capacity, expansion of markets and establishment of production
facilities outside North America, business seasonality and
customer ordering patterns;
o new or extended contracts with manufacturers and buying
organizations, and dependence on a small number of customers,
effect of termination of B.Braun CLAVE agreement;
o regulatory approvals, assertion of patent rights, and outcome
of litigation;
o 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; and
o working capital requirements, changes in accounts receivable
and inventories, capital expenditures, acquisitions of other
businesses or product lines and common stock repurchases.
The kinds of statements described above and similar forward looking
statements about our 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 we currently expect, our operating results may differ materially from our
current expectations.
Second, one should read the forward looking statements in conjunction
with the Risk Factors in our Current Report on Form 8-K to the Securities and
Exchange Commission dated February 15, 2002, which is incorporated by reference.
Third, our actual future operating results are subject to other
important factors that we cannot predict or control, including among others the
following:
o general economic and business conditions;
o the effect of price and safety considerations on the
healthcare industry;
o competitive factors, such as product innovation, new
technologies, marketing and distribution strength and price
erosion;
o unanticipated market shifts and trends;
o the impact of legislation affecting government reimbursement
of healthcare costs;
o changes by our major customers and independent distributors in
their strategies that might affect their efforts to market our
products;
o unanticipated production problems; and
o the availability of patent protection and the cost of
enforcing and of defending patent claims.
We disclaim 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.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have a portfolio of corporate preferred stocks and
federal-tax-exempt state and municipal government debt securities. The
securities are all "investment grade" and we believe that we have virtually no
exposure to credit risk. Dividend and interest rates reset at auction for most
of the securities from between seven and forty-nine day intervals, with some
longer but none beyond twelve months, so we have very little market risk, that
is, risk that the fair value of the security will change because of changes in
market interest rates; they are readily saleable at par at auction dates, and
can normally be sold at par between auction dates.
Our future earnings are subject to potential increase or decrease
because of changes in short-term interest rates. Generally, each one-percentage
point change in the discount rate will cause our overall yield to change by
two-thirds to three-quarters of a percentage point, depending upon the relative
mix of federal-tax-exempt securities and corporate preferred stocks in the
portfolio and market conditions specific to the securities in which we invest.
We do not have any significant foreign currency risk. Sales to foreign
distributors are all denominated in U.S. dollars. Cash and receivables in
entities outside the United States, principally in Mexico, which are denominated
in foreign currency are insignificant and are generally offset by accounts
payable in the same foreign currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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27
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Board of Directors and Stockholders
ICU Medical, Inc.
We have audited the accompanying consolidated balance sheet of ICU Medical, Inc.
(the "Company"), Delaware corporation, and subsidiaries as of December 31, 2002,
and the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedule for 2002 listed in Item 15. These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audit.
The consolidated financial statements and financial statement schedule of ICU
Medical, Inc. and subsidiaries as of December 31, 2001, and for each of the two
years in the period then ended, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements (prior to adjustment for a three-for-two stock split described in
Note 1) and stated that such 2001 and 2000 financial statement schedule, when
considered in relation to the 2001 and 2000 basic financial statements taken as
a whole present fairly, in all material respects, the information set forth
therein in their reports dated January 29, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ICU Medical, Inc. and subsidiaries
as of December 31, 2002, and the results of their operations and their cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule for 2002, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed above, the consolidated financial statements of ICU Medical, Inc.
as of December 31, 2001, and for each of the two years in the period then ended,
were audited by other auditors who have ceased operations. As described in Note
1, these consolidated financial statements have been adjusted to reflect a
three-for-two stock split that was effected on March 15, 2002, and have been
revised to include certain disclosures required by Statement of Financial
Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION
AND DISCLOSURE, which disclosure provisions were adopted by the Company on
December 31, 2002. We audited the adjustments described in Note 1 that were
applied to revise the 2001 and 2000 consolidated financial statements. Our audit
procedures with respect to the pro forma disclosures in Note 1 pertaining to
2001 and 2000 included agreeing the previously reported net income and pro forma
net income amounts to previously issued financial statements and the adjustment
to reported net income representing total stock-based employee compensation
expense determined under the fair value based method for all awards, net of
related tax effects, to the Company's underlying records obtained from
management. In our opinion, such adjustments and disclosures are appropriate and
such adjustments have been properly applied. However, we were not engaged to
audit, review or apply any procedures to the 2001 or 2000 consolidated financial
statements of the Company other than with respect to such adjustments and
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 consolidated financial statements taken as a
whole.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 3, 2003
28
The following report of Arthur Andersen LLP ("Andersen") is a copy of the
original report dated January 29, 2002, rendered on the 2001 and 2000
consolidated financial statements. The SEC has provided regulatory relief
designed to allow public companies to dispense with the requirements to file a
reissued report and consent of Andersen in certain circumstances. After
reasonable efforts, we have not been able to obtain a reissued report or consent
from Andersen.
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) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
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 29, 2002
29
ICU MEDICAL, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
December 31,
----------------------------------
2002 2001
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,165,000 $ 3,901,000
Liquid investments 84,300,000 69,126,000
-------------- --------------
Cash and liquid investments 88,465,000 73,027,000
Accounts receivable, net of
allowance for doubtful accounts
of $665,000 in 2002 and $581,000 in 2001 16,633,000 13,062,000
Inventories 5,749,000 1,594,000
Prepaid expenses and other current assets 1,652,000 605,000
Deferred income taxes - current portion 1,710,000 2,113,000
-------------- --------------
Total current assets 114,209,000 90,401,000
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Land, building and building improvements 15,197,000 13,584,000
Machinery and equipment 19,142,000 15,663,000
Furniture and fixtures 5,343,000 3,568,000
Molds 9,534,000 8,566,000
Construction in process 9,742,000 3,566,000
-------------- --------------
58,958,000 44,947,000
Less--Accumulated depreciation (24,350,000) (19,825,000)
-------------- --------------
34,608,000 25,122,000
-------------- --------------
DEFERRED INCOME TAXES - non current portion 4,313,000 963,000
OTHER ASSETS, principally intangibles - net 3,902,000 856,000
-------------- --------------
$ 157,032,000 $ 117,342,000
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
30
ICU MEDICAL, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
---------------------------------
2002 2001
-------------- --------------
CURRENT LIABILITIES:
Accounts payable $ 5,046,000 $ 2,401,000
Accrued liabilities 6,599,000 8,264,000
-------------- --------------
Total current liabilities 11,645,000 10,665,000
-------------- --------------
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--80,000,000 shares;
Issued -- 14,087,026 and 13,300,743 shares in 2002 1,409,000 887,000
and 2001, respectively
Additional paid-in capital 63,284,000 45,765,000
Treasury stock, at cost -- 174,688 shares in 2001 -- (987,000)
Retained earnings 80,694,000 61,012,000
-------------- --------------
Total stockholders' equity 145,387,000 106,677,000
-------------- --------------
$ 157,032,000 $ 117,342,000
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
31
ICU MEDICAL, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the years ended December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUES:
Net sales $84,218,000 $69,055,000 $56,191,000
Other 3,589,000 -- --
------------ ------------ ------------
TOTAL REVENUE $87,807,000 $69,055,000 $56,191,000
COST OF GOODS SOLD 36,464,000 28,932,000 23,787,000
------------ ------------ ------------
Gross profit 51,343,000 40,123,000 32,404,000
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 19,871,000 16,816,000 14,302,000
Research and development 1,472,000 1,188,000 1,480,000
------------ ------------ ------------
Total operating expenses 21,343,000 18,004,000 15,782,000
------------ ------------ ------------
Income from operations 30,000,000 22,119,000 16,622,000
INVESTMENT INCOME 1,432,000 1,988,000 2,096,000
------------ ------------ ------------
Income before income taxes 31,432,000 24,107,000 18,718,000
PROVISION FOR INCOME TAXES 11,750,000 8,720,000 6,930,000
------------ ------------ ------------
NET INCOME $19,682,000 $15,387,000 $11,788,000
============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 1.43 $ 1.20 $ 0.94
Diluted $ 1.28 $ 1.06 $ 0.87
============ ============ ============
Weighted average number of shares
Basic 13,792,760 12,840,556 12,495,103
Diluted 15,352,419 14,454,087 13,588,279
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
32
ICU MEDICAL, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Common Stock
------------------------------
Number Additional
of Shares Paid-In Treasury Retained
Outstanding Amount Capital Stock Earnings Total
-------------- -------------- -------------- -------------- -------------- -------------
BALANCE, December 31, 1999 12,153,059 $ 887,000 $ 40,843,000 ($ 7,153,000) $ 33,437,000 $ 68,014,000
Acquire shares for treasury (9,000) -- -- (119,000) -- (119,000)
Exercise of stock options and
related income tax benefits,
and other 447,285 -- 859,000 2,453,000 385,000 3,697,000
Net income -- -- -- -- 11,788,000 11,788,000
-------------- -------------- -------------- -------------- -------------- -------------
BALANCE, December 31, 2000 12,591,344 887,000 41,702,000 (4,819,000) 45,610,000 83,380,000
Exercise of stock options and
related income tax benefits,
and other 534,711 -- 4,063,000 3,832,000 15,000 7,910,000
Net income -- -- -- -- 15,387,000 15,387,000
-------------- -------------- -------------- -------------- -------------- -------------
BALANCE, December 31, 2001 13,126,055 887,000 45,765,000 (987,000) 61,012,000 106,677,000
Exercise of stock options and
related income tax benefits,
and other 962,193 79,000 18,023,000 987,000 -- 19,089,000
Stock split (1,221) 443,000 (504,000) -- -- (61,000)
Net income -- -- -- -- 19,682,000 19,682,000
-------------- -------------- -------------- -------------- -------------- -------------
BALANCE, December 31, 2002 14,087,026 $ 1,409,000 $ 63,284,000 $ -- $ 80,694,000 $ 145,387,000
============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
33
ICU MEDICAL, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the years ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,682,000 $ 15,387,000 $ 11,788,000
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 5,288,000 5,034,000 4,612,000
Deferred income taxes, non-current 528,000 (74,000) (83,000)
(Increase) decrease, net of acquisition, in:
Accounts receivable (3,188,000) (637,000) (5,409,000)
Inventories (2,869,000) (159,000) 621,000
Prepaid expenses and other assets (831,000) (208,000) (94,000)
Increase (decrease), net of acquisition, in:
Accounts payable 2,283,000 714,000 722,000
Accrued liabilities (3,176,000) 471,000 1,408,000
Deferred income taxes, current 188,000 37,000 (805,000)
------------- ------------- -------------
17,905,000 20,565,000 12,760,000
Tax benefits from exercise of stock options 10,192,000 3,764,000 702,000
------------- ------------- -------------
Net cash provided by operating activities 28,097,000 24,329,000 13,462,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,894,000) (6,234,000) (3,994,000)
Purchase of Bio-Plexus, Inc. net of cash acquired (9,484,000) -- --
Net change in liquid investments (15,174,000) (20,285,000) (12,300,000)
------------- ------------- -------------
Net cash (used in) investing activities (36,552,000) (26,519,000) (16,294,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and other 8,719,000 4,146,000 2,995,000
Purchase of treasury stock -- -- (119,000)
------------- ------------- -------------
Net cash provided by financing activities 8,719,000 4,146,000 2,876,000
------------- ------------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 264,000 1,956,000 44,000
CASH AND CASH EQUIVALENTS, beginning of year 3,901,000 1,945,000 1,901,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 4,165,000 $ 3,901,000 $ 1,945,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for income taxes $ 1,145,000 $ 5,685,000 $ 6,706,000
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
34
ICU MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
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
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 subsidiaries are wholly owned and are included in the
consolidated financial statements. All intercompany balances and transactions
have been eliminated.
All share and per share data for periods prior to 2002 have been
adjusted for a three-for-two stock split effected March 15, 2002 in the form of
a stock dividend.
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:
2002 2001
------------ ------------
Raw materials $ 3,302,000 $ 1,290,000
Work in process 534,000 179,000
Finished goods 1,913,000 125,000
------------ ------------
$ 5,749,000 $ 1,594,000
============ ============
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 15 - 30 years
Building improvements 15 years
Machinery and equipment 2 - 10 years
Furniture, fixtures and molds 2 - 5 years
35
The Company follows the policy of capitalizing expenditures that
materially increase the life of the related assets; maintenance and repairs are
expensed 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.
d. Intangible Assets
-----------------
Intangible assets are included in other assets in the accompanying
consolidated balance sheets. At December 31, 2001, they consisted of patents and
licenses, which had a net book value of $348,000, net of accumulated
amortization of $671,000, and they were being amortized using the straight-line
method over 10 years, which was the estimated useful life of the patent or
license.
Additions to intangible assets in 2002 were $3,293,000, principally
from the acquisition of Bio-Plexus; see Note 2.
At December 31, 2002, intangible assets had a net book value of
$3,352,000, net of amortization of $803,000 and consisted of the following:
Amortization Accumulated
Life in Years Cost Amortization Net
------------- ----------- ----------- -----------
Patents and licenses 10 $2,452,000 $ 755,000 $1,697,000
Royalty agreements 6 1,497,000 42,000 1,455,000
Other 5 to 10 206,000 6,000 200,000
----------- ----------- -----------
Total $4,155,000 $ 803,000 $3,352,000
=========== =========== ===========
Amortization expense in 2002 was $188,000. Estimated annual
amortization for each of the next five years is $530,000.
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
--------------------
"Basic" earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. "Diluted" earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive securities. Dilutive securities are
outstanding common stock options (excluding stock options with an exercise price
in excess of average 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 Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." That statement requires that
securities classified as available for sale be carried at their fair values and
changes in the securities fair values be recorded, net of income tax effect, as
36
a separate component of stockholders' equity. Debt securities that the Company
would intend to hold to maturity would be carried at amortized cost reduced only
for other than temporary impairment in values; the Company has no debt
securities that it intends to hold to maturity.
i. Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS 109
"Accounting for Income Taxes" using the asset and liability approach. Under this
approach, deferred taxes are determined based on the differences between the
financial statements and the tax bases using rates as enacted in tax laws. A
valuation allowance is established if it is "more likely than not" that all or a
portion of the deferred tax assets will not be realized.
j. Revenue Recognition
-------------------
Most of the Company's product sales are FOB shipping point and
ownership of the product transfers to the customer on shipment by the Company.
Certain other product sales are FOB destination and ownership of the product
transfers to the customer at destination. The Company records sales and related
costs when ownership of the product transfers to the customer. Most of the
Company's customers are distributors or medical product manufacturers, although
there are some sales to end-users. The Company's only post-sale obligations are
warranty and certain rebates. Customers, with certain rare exceptions, do not
retain any right of return and there is no price protection with respect to
unsold product.
The Company warrants products against defects and has a policy
permitting the return of defective products. The Company provides a reserve for
warranty returns as an expense; total warranty expense for 2002 was
insignificant. The Company accrues rebates based on contractual commitments and
on historical experience as a reduction in revenue at the time of sale; amounts
have not been significant.
Shipping charges billed to customers are included in product sales
since the fourth quarter of 2002. They are insignificant.
Other revenue consists of license, royalty and revenue sharing
payments. Payments expected to be received 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, payments are not
recorded until reported by the payers.
k. Post-retirement and Post-employment Benefits
--------------------------------------------
The Company does not provide post-retirement or post-employment
benefits to employees. The Company maintains a Section 401(k) retirement plan
for employees. Company contributions to that plan in 2002 were approximately
$104,000.
l. Stock Options
-------------
The Company accounts for its stock options granted to employees and
directors 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," 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. 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 2002, 2001, and
2000 was estimated as of the date of grant using a Black-Scholes option pricing
model. 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. The following
information is provided pursuant to SFAS No. 123, as amended. The pro forma
adjustment reflects stock-based compensation cost calculated under the fair
value method, net of related tax effects, calculated pursuant to SFAS No. 123.
37
2002 2001 2000
------------ ------------ ------------
Net Income, as reported.......... $19,682,000 $15,387,000 $11,788,000
Pro forma adjustment............. $ 6,271,000 $ 3,970,000 $ 2,307,000
------------ ------------ ------------
Net Income, pro forma............ $13,411,000 $11,417,000 $ 9,481,000
============ ============ ============
Net Income per share.............
Basic, as reported $1.43 $1.20 $0.94
Diluted, as reported $1.28 $1.06 $0.87
Basic, pro forma $1.00 $0.92 $0.80
Diluted, pro forma $0.89 $0.81 $0.74
m. Impairment or Disposal of Long-Lived Assets
-------------------------------------------
The Company would account for any impairment or disposal of long-lived
assets in accordance with SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets." This SFAS, which requires a periodic review of long-lived
assets for indicators of impairment, was first effective for the year ended
December 31, 2002, and had no effect on the Company's consolidated financial
statements.
n. 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. ACQUISITION
On October 31, 2002, the Company acquired for cash 84% of the common
stock of Bio-Plexus, Inc. ("Bio-Plexus") and notes payable by Bio-Plexus of
$2,500,000, and in a series of transactions through November 13, 2002 acquired
the remaining minority interest for cash and brought its ownership to 100%.
Bio-Plexus is engaged in the design, development, manufacture, sale and
licensing of medical products designed to prevent infection of healthcare
workers through accidental needlesticks. Bio-Plexus's principal products are
blood collection needles, under the Punctur-Guard name, that are designed to
eliminate exposure to sharp, contaminated needles. These products are an
extension of the needlesafe products the Company already sells.
The acquisition was accounted for as a purchase, and Bio-Plexus is
included in the Company's consolidated financial statements since October 31,
2002. The acquisition cost, net of cash acquired, was $9,484,000, consisting of
the following:
Cash paid for stock and notes $10,144,000
Transaction fees and expenses 708,000
Less: Cash acquired (2,109,000)
------------
Total acquisition cost $ 8,743,000
============
38
The acquisition cost was allocated to the net tangible and intangible
assets acquired, based on estimated fair values at date of purchase, as follows:
Accounts receivable $ 383,000
Inventory 1,286,000
Other current assets 382,000
Property and equipment 2,711,000
Patents and royalty rights, and other 3,057,000
Deferred taxes 3,538,000
Severance payments and other costs (741,000)
Current liabilities (1,873,000)
-----------
Total $8,743,000
===========
Property and equipment valuation is based on the estimated value of the
land, building and improvements if sold ($1,605,000), and the depreciated
replacement cost of automated assembly machines, molds and other equipment that
the Company expects to use in the future ($1,106,000). Depreciable lives are
thirty years for the building and improvements and two to three years for
equipment. Patents and royalty rights valuations are based on the present value
of the incremental cash flows which the Company estimates it will realize over
the estimated duration of the patents ($1,354,000) and royalty agreements
($1,497,000). Other intangibles are customer contracts and trademarks.
Amortization lives are ten years for patents and six years for royalty
agreements; the overall weighted average amortization period is 7.2 years. All
depreciation and amortization is provided on the straight-line method. The
allocations reflect a reduction for a "bargain purchase" credit for the excess
of the estimated values over the acquisition cost.
Deferred taxes arise principally from certain expenses of Bio-Plexus
incurred before the acquisition which are capitalized for tax purposes but
expensed for financial reporting purposes, the future benefit of a portion of
Bio-Plexus's net operating loss carryforwards, and the tax basis in excess of
the allocated acquisition cost of tangible assets acquired, partially offset by
the excess of the acquisition cost of intangible assets over their tax basis.
The Company is still formulating certain aspects of its plan to
integrate the operations of Bio-Plexus with its own. Costs accrued to date
reflect a significant reduction in sales and administrative staff, but a
continuation of manufacturing activities at the Bio-Plexus facility in
Connecticut. To date, all but approximately $200,000 of severance payments and
other costs have been incurred, and if these amounts are not incurred, the
acquisition cost will be adjusted. If additional costs are identified in a final
formulation of the integration plan within one year of the acquisition, such
costs will be accounted for as an adjustment of the acquisition cost; any
identified after one year will be recorded in the income statement.
Unaudited pro forma combined results of operations of the Company and
Bio-Plexus for the past two years, assuming the acquisition occurred on January
1, 2001, are:
2002 2001
------------ ------------
Net revenues $94,534,000 $75,426,000
Net income 20,002,000 14,387,000
Net income per share - diluted $ 1.30 $ 1.00
Pro forma adjustments have been made to eliminate operating and
financing costs not being incurred by Bio-Plexus since the acquisition, to
adjust for differences in depreciation and amortization, and to account for the
Company's cost of capital used for the acquisition, all net of income tax
effects. This information does not reflect the actual results that would have
occurred nor is it necessarily indicative of the future operations of the
combined enterprise.
39
3. LIQUID INVESTMENTS
The Company's liquid investments, all of which are marketable
securities and 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, principally
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. They are readily saleable at par at auction dates, and can normally be
sold at par between auction dates. All securities are "investment grade' and
there have been no gains or losses on their disposal. Balances consist of:
2002 2001
------------ ------------
Corporate preferred stocks $31,500,000 $12,400,000
Federal tax-exempt debt securities 52,800,000 55,635,000
Certificate of deposit - 1,091,000
------------ ------------
$84,300,000 $69,126,000
============ ============
The scheduled maturities of the debt securities are: 2003 $2,600,000;
2004-2007 $4,000,000; 2008-2012 $100,000; and after 2012 $46,100,000.
Investment income, including interest on certificates of deposit and
money market funds, consisted of:
2002 2001 2000
----------- ----------- -----------
Corporate dividends $ 432,000 $ 527,000 $ 835,000
Tax-exempt interest 874,000 1,330,000 993,000
Other interest 126,000 131,000 268,000
----------- ----------- -----------
$1,432,000 $1,988,000 $2,096,000
=========== =========== ===========
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
2002 2001
----------- -----------
Accrued incentive compensation $1,978,000 $2,353,000
Taxes payable 1,513,000 1,939,000
Other accruals 3,108,000 3,972,000
----------- -----------
$6,599,000 $8,264,000
========== ==========
5. COMMON STOCK AND COMMON STOCK OPTIONS GRANTED
In 1993, the Company adopted the 1993 Stock Incentive Plan (the "1993
Plan"). In 1996, the 1993 Plan was amended to increase the number of shares
reserved for issuance to employees from 1,912,500 to 4,912,500, and in 1999 it
was again amended to increase the number of shares reserved for issuance to
employees to 7,162,500. Options granted under the 1993 Plan expire eleven years
from issuance and all options issued through early 2000 are time-accelerated
options which vest upon the earlier of the Company attaining specific operating
40
performance levels or ten years from the date of grant. Almost all options
issued after early 2000 vest in equal amounts on the first, second and third
anniversary of their issuance ("time vested"). The 1993 Plan includes conditions
whereby options not vested are canceled if employment 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 May 2002, stockholders approved the 2001 Directors' Stock Option
Plan (the "Directors' Plan"), which had been adopted in November 2001. There are
750,000 shares reserved for issuance under the Directors' Plan. Options to
purchase 1,875 shares of Common Stock are granted quarterly to non-employee
Directors (of which there are currently six) at fair market value of the Common
Stock at the date of grant. The options become exercisable six months after the
grant date and expire eleven years after the grant date. Options not vested
terminate if directorship is terminated. Options to purchase 101,250 shares of
Common Stock were issued upon stockholder approval of the Directors' Plan; they
included 11,250 granted subject to stockholder approval in November 2001 for
which a compensation charge of $117,000 was recorded for the increase in the
fair market value of the Common Stock from the grant date to the date of
stockholder approval. An additional 22,500 options were granted later in 2002.
Upon approval of the Directors' Plan by the stockholders, the existing
Directors' Stock Award Plan, under which each non-employee Director was awarded
1,500 shares of Common Stock annually, was terminated and the award payable on
the date of the 2002 annual meeting was not made.
In 2002, the Company adopted the 2002 Employee Stock Purchase Plan (the
"ESPP") under which certain employees may purchase up to $25,000 annually of
Common Stock at 85% of its fair market value at the beginning or the end of a
six-month offering period, whichever is lower. There are 750,000 shares of
Common Stock reserved for issuance under the ESPP, which number is subject to
annual increase; the Board of Directors determined that the annual increase due
January 1, 2003 would not take place. The ESPP is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423 of the Internal
Revenue Code. Employees enrolled to purchase approximately 6,700 shares of
Common Stock in the initial offering period, which ended on February 14, 2003.
There are 4,113,801 options outstanding at December 31, 2002 of which
3,990,051 were issued under the 1993 Plan and 123,750 were issued under the
Directors' Plan. 2,869,651 of the outstanding options are vested. Of the
1,244,150 unvested options, 204,486 options are time accelerated options issued
from 1997 to 2002 and the remaining 1,039,664 are time vested options granted
from 2000 to 2002 with vesting dates from 2003 to 2005. All options expire
eleven years after issuance. Options outstanding at December 31, 2002 were
issued as follows:
Exercise Price
---------------------------------
Year of
Grant Shares Weighted Range Average
------- ---------- -------------- ---------
1993 300 $7.75 - $7.75 $7.75
1994 6,250 5.54 - 5.54 5.54
1996 391,762 5.33 - 10.25 9.76
1997 590,115 5.67 - 7.29 6.33
1998 1,156,177 8.04 - 10.63 8.18
1999 287,495 10.10 - 14.29 10.84
2000 489,691 9.58 - 18.97 15.14
2001 498,361 17.00 - 29.16 23.38
2002 693,650 26.51 - 40.62 33.84
All options granted before 1997, and in 1998 and 1999 are vested. Of
the options granted in 1997, 423,129 options with a weighted average exercise
price of $5.94 are vested. Of the options granted in 2000, 2001 and 2002, the
number vested and average exercise prices are 308,081 at $15.41; 162,386 at
$23.35; and 106,500 at $37.81, respectively.
41
Dilutive stock options account for the difference in the number of
shares used to calculate basic and diluted net income per share and were
1,559,659 in 2002, 1,613,531 in 2001, and 1,093,176 in 2000. The average number
of options that are anti-dilutive because their average exercise price exceeded
the average market price of the Company's common stock approximated 130,000,
30,000, and 150,000 in 2002, 2001, and 2000, respectively. At December 31, 2002,
3,973,551 outstanding options had exercise prices less than the market price of
the Company's common stock and 140,250 had exercise prices greater than the
market price of the Company's common stock.
A summary of the Company's stock option activity is as follows:
Exercise Price
--------------------------------------------
Weighted
Shares Range Average
---------- ---------------------------- ----------
Outstanding at December 31, 1999 4,295,052 $ 5.08 - $ 14.29 $ 7.94
Granted 658,314 9.59 - 18.97 14.65
Exercised 439,785 5.08 - 12.21 6.48
Forfeited 27,000 9.00 - 17.56 13.23
---------- ---------- --------- ----------
Outstanding at December 31, 2000 4,486,581 5.08 - 18.97 9.03
Granted 548,565 17.00 - 29.17 23.23
Exercised 526,960 5.08 - 18.00 7.51
Forfeited 119,588 7.29 - 25.42 9.09
---------- ---------- --------- ----------
Outstanding at December 31, 2001 4,388,598 5.08 - 10.95
Granted 707,150 26.51 - 40.62 33.83
Exercised 962,193 5.33 - 32.48 9.13
Forfeited 19,754 12.17 - 29.89 19.72
---------- ---------- --------- ----------
Outstanding at December 31, 2002 4,113,801 $ 5.08 - $ 40.62 $ 10.95
========== ========== ========= ==========
Exercisable at December 31:
2000 2,284,610 $ 5.08 - $ 12.21 $ 7.83
2001 3,200,997 5.08 - 18.98 8.81
2002 2,869,651 5.08 - 39.25 11.09
Available for grant at December 31, 2002 448,881
=========
In 2000, two of the Company's wholly owned subsidiaries, Budget Medical
Products, Inc. and SetFinder, Inc., adopted stock option plans. In 2002,
non-Director employees of the subsidiaries exchanged the options to acquire
stock of the subsidiaries, which options were estimated to have an exercise
price no less than the fair value of the subsidiaries' stock, for options to buy
the Company's Common Stock at fair market value on the exchange date. In January
2003, the remaining option holders, consisting solely of the Company's
Directors, agreed to surrender their options for no consideration, and the stock
option plans of the subsidiaries were terminated.
42
The following information relates to the pro forma earnings information
presented pursuant to SFAS No. 123, as amended. For options under the Company's
1993 Plan and the Directors' Plan (in 2002), the following weighted-average
assumptions in the respective years were used: risk-free interest rate of 4.1,
4.9, and 6.1 percent, respectively; expected option life of 4.9, 6.2, and 7.4
years, respectively; expected volatility of 52, 50, and 54 percent,
respectively; and no dividends. The weighted average fair value of stock options
granted under the 1993 Plan and Directors' Plan in 2002, 2001, and 2000 was
$16.80 per share, $12.49 per share, and $8.91 per share, respectively. The total
estimated fair value is amortized to expense over the vesting period. The
weighted average number of common shares used in calculating pro forma net
income per share is as follows: 2002 basic 13,452,000, diluted 15,012,000; 2001
basic 12,430,000, diluted 14,043,000; and, 2000 basic 11,794,000, diluted
12,888,000.
The fair value of the options of the subsidiaries was estimated using
the same methodology as for grants by the Company; substantially all options
were granted in 2000, when assumptions were a 6.8 percent risk free interest
rate, option life of 6.9 years, and expected volatility of 53 percent.
Volatility was estimated using the Company's volatility since there is no market
for the subsidiaries' shares. The effect of the pro forma amortization of the
value of the subsidiaries' options on pro forma income was a net reduction of
approximately $75,000 in 2002, $400,000 in 2001, and $758,000 in 2000.
6. 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 $115, as amended in April 2002. 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 than 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.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002,
2001 and 2000 is as follows:
43
2002 2001 2000
------------- ------------- -------------
Current:
Federal $ 8,591,000 $ 7,165,000 $ 6,070,000
State 2,443,000 1,592,000 1,748,000
------------- ------------- -------------
11,034,000 8,757,000 7,818,000
------------- ------------- -------------
Deferred:
Federal 759,000 (85,000) (706,000)
State (43,000) 48,000 (182,000)
------------- ------------- -------------
716,000 (37,000) (888,000)
------------- ------------- -------------
$ 11,750,000 $ 8,720,000 $ 6,930,000
============= ============= =============
Current income taxes payable were reduced from the amounts in the above
table by $10,192,000, $3,764,000, and $702,000 in 2002, 2001, and 2000,
respectively, equal to the tax benefit that the Company receives upon exercise
of stock options by employees and directors. That benefit is allocated to
stockholders' equity.
A reconciliation of the provision for income taxes at the statutory
rate to the Company's effective rate is as follows:
2002 2001 2000
------------------------ ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Federal tax at the expected
statutory rate 10,687,000 34.0% $8,196,000 34.0% $6,364,000 34.0%
State income tax, net of
federal benefit 1,562,000 5.0 1,347,000 5.7 1,169,000 6.2
Tax-exempt interest and
dividends (400,000) (1.3) (553,000) (2.4) (537,000) (2.9)
Tax credits (99,000) (0.3) (270,000) (1.1) (66,000) (0.3)
------------ ------- ----------- ------- ----------- -------
Provision $11,750,000 37.4% $8,720,000 36.2% $6,930,000 37.0%
============ ======= =========== ======= =========== =======
The components of the Company's deferred income tax provision for the
years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000
---------- ---------- ----------
Allowance for doubtful accounts $ (31,000) $ (24,000) $ (68,000)
Inventory reserves (114,000) (32,000) 86,000
Accruals 167,000 363,000 (810,000)
State income taxes 507,000 (270,000) (13,000)
Acquired future tax deductions 585,000 -- --
Depreciation (398,000) (74,000) (83,000)
---------- ---------- ----------
$ 716,000 $ (37,000) $(888,000)
========== ========== ==========
44
The components of the Company's deferred income tax benefit are as
follows:
2002 2001
------------ ------------
Current deferred tax benefit:
Allowance for doubtful accounts $ 284,000 $ 249,000
Inventory reserves 377,000 216,000
Accruals 1,215,000 1,246,000
State income taxes (166,000) 402,000
------------ ------------
$ 1,710,000 $ 2,113,000
============ ============
Non-current deferred tax benefit:
Depreciation $ 1,231,000 $ 963,000
Acquired future tax deductions 3,082,000 --
------------ ------------
$ 4,313,000 $ 963,000
============ ============
Acquired future tax deductions are the benefits of future tax
deductions in the Company's consolidated income tax returns originating in
Bio-Plexus before its acquisition by the Company. They consist of: (a) the net
benefit of items expensed for financial statement purposes but capitalized for
tax purposes of $1,877,000 at acquisition date, less $585,000 realized since
acquisition; most of the balance of $1,292,000 will be realized in approximately
equal amounts over the next ten years; and (b) the benefit of a portion of
Bio-Plexus's net operating loss ("NOL") carryforward of $1,790,000 which will be
realized in approximately equal amounts over the next twenty years.
At October 31, 2002, Bio-Plexus had federal NOL carryforwards of
approximately $86 million. Under Section 382 of the Internal Revenue Code,
certain ownership changes limit utilization of the NOL carryforwards, and the
amount recorded is the net federal benefit. Bio-Plexus also has approximately
$33 million of Connecticut State NOL carryforwards expiring through 2007.
Realization of any of these is uncertain, and the Company has not ascribed any
value to them.
The accounting for the benefits of the acquired future tax deductions
as described above will not have any direct impact on net income in the future.
However, if any benefits are realized in excess of those recorded, they will be
allocated to reduce non-current intangible assets related to the acquisition
(patent and royalty rights, and other) until those amounts are reduced to zero,
with any excess then recognized as a reduction in tax expense.
8. PRODUCTS, MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISKS
All of the Company's products are disposable medical devices. Its
principal product is its CLAVE needleless I.V. connection system which accounted
for $58,471,000 of consolidated net sales in 2002, $51,130,000 in 2001 and
$39,665,000 in 2000. Custom I.V. systems, many of which incorporate the CLAVE
connector, accounted for $15,205,000 of consolidated net revenues in 2002,
$9,263,000 in 2001 and $6,737,000 in 2000. Each of the Company's other products
account for less than 4% of net revenues.
The Company sells products, which are sold on credit terms principally
throughout the United States to medical product manufacturers, independent
medical supply distributors, and in selected cases to hospitals and homecare
providers. The manufacturers and distributors, in turn, sell the Company's
products to healthcare providers. For the years ended December 31, 2002, 2001,
and 2000, the Company had sales of 10 percent or greater to two manufacturers as
follows:
45
2002 2001 2000
---- ---- ----
Manufacturer A 57% 53% 48%
Manufacturer B 11 19 26
Export sales accounted for 8%, 8%, and 4% of consolidated net revenue
in 2002, 2001, and 2000, respectively.
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, the resolution of the legal proceedings in which the
Company is involved will not have a material adverse impact on the Company's
financial position or results of operations.
In the normal course of business, the Company has made certain
indemnities, including indemnities to officers and directors of the Company to
the maximum extent permitted under Delaware law and intellectual property
indemnities to customers in connection with sales of its products. These
indemnities do not provide a maximum amount. The Company has not recorded any
liability for these and does not expect to incur any.
10. QUARTERLY FINANCIAL DATA -- UNAUDITED -- (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Quarter Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
2002
- ----
Net Sales $20,905 $22,668 $20,105 $24,129
Gross Profit 12,349 13,336 11,564 14,094
Net Income 4,523 4,998 4,276 5,885
Net Income Per Share:
Basic $ 0.34 $ 0.36 $ 0.31 $ 0.42
Diluted $ 0.30 $ 0.32 $ 0.28 $ 0.38
2001
- ----
Net Sales $15,006 $16,952 $16,214 $20,883
Gross Profit 8,549 10,061 9,347 12,166
Net Income 3,533 3,764 3,319 4,771
Net Income Per Share:
Basic $ 0.28 $ 0.29 $ 0.26 $ 0.37
Diluted $ 0.25 $ 0.26 $ 0.23 $ 0.32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
46
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,
2002, 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, 2002, and such information is incorporated herein by
this reference.
ITEM 14. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer have
concluded, based on their evaluation of our disclosure controls and procedures
(as defined in Regulations 13a-14(c) and 15a-14(c) under the Securities Exchange
Act of 1934) within 90 days of filing this Report, that our disclosure controls
and procedures are effective to ensure that the information we are required to
disclose in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure and that such information is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities Exchange Commission. There were no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of the
principal executive officer's and principal financial officer's evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
FORM 10-K
The financial statements listed below are set forth in Item 8 PAGE NO.
of this Annual Report. ---------
Independent Auditor's Report................................................28
Report of Independent Public Accountants....................................29
Consolidated Balance Sheets at December 31, 2002 and 2001................30-31
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001, and 2000 .......................................32
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001, and 2000........................................33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000........................................34
Notes to Consolidated Financial Statements...............................35-46
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............................54
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 Registrant's Amended and Restated 1993 Incentive Stock Plan.(2)
10.3 Manufacture and Supply Agreement dated September 13, 1993 between
Registrant and B.Braun, Inc. relating to the Protected Needle
product.(3)
10.4 Supply and Distribution Agreement dated April 3, 1995 between
Registrant and Abbott Laboratories, Inc. relating to the CLAVE
product.(4)
48
10.5 Rights Agreement dated July 15, 1998 between Registrant and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent.(5)
10.6 SafeLine Agreement effective October 1, 1999 by and between Registrant
and B.Braun Medical, Inc.(6)
10.7 Amendment to Abbott and ICU Medical Agreement, dated January 1, 1999
between Registrant and Abbott Laboratories.(7)
10.8 Amendment No. 1 to Rights Agreement, dated January 30, 1999, between
Registrant and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent.(8)
10.9 Co-Promotion and Distribution Agreement, dated February 27, 2001
between Registrant and Abbott Laboratories.(9)
10.10 Amended and Restated Rights Agreement, dated as of May 10, 2002,
between Registrant and Mellon Investor services, L.L.C., as Rights
Agent.(10)
10.11 Registrant' 2001 Directors' Stock Option Plan.(11)
10.12 Registrants 2002 Employee Stock Purchase Plan.(11)
10.13 Securities Purchase Agreement (between Registrant and Sellers of Common
Stock of Bio-Plexus, Inc.(12)
10.14 Note Purchase Agreement (between Registrant and Sellers of Notes
Payable of Bio-Plexus, Inc.(12)
21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
(1) Filed as an exhibit to Registrant's Registration Statement Form S-1
(Registration No. 33-45734) filed on February 14, 1992, and
incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's definitive Proxy Statement filed
pursuant to Regulation 14A on March 4, 1999 and incorporated herein by
reference.
(3) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the Quarter ended September 30, 1993, and incorporated herein by
reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1995, and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Registration Statement on Form 8-A
dated July 23, 1998 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
June 18, 1999, and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
February 23, 1999, and incorporated herein by reference.
49
(8) Filed as an exhibit to Registrant's Registration Statement on Form
8-A/A dated February 9, 1999 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
March 7, 2001 and incorporated herein by reference.
(10) Agreement (between Registrant and Sellers of Common Stock of
Bio-Plexus, Inc.)Filed as an Exhibit to Registrant's Registration
Statement on Form 8A/A dated May 14, 2002, and incorporated herein by
reference.
(11) Filed as an exhibit to Registrant's definitive Proxy Statement filed
pursuant to Regulation 14A on April 2, 2002 and incorporated herein by
reference
(12) Files as an exhibit to Registrant's Schedule 13D dated November 12,
2002 and incorporated herein by reference.
(b) Reports on Form 8-K.
Item 2 - October 31, 2002
Item 2 - November 14, 2002
The following financial statements were filed as part of the Report on
Form 8-K of November 14, 2002:
(a) Financial Statements of Business Acquired
The financial statements of Bio-Plexus, Inc. at December 31,
2001 and for the three years then ended and the report of
independent auditors: incorporated by reference to Bio-Plexus,
Inc.'s Form 10-K filed with the Securities and Exchange
Commission (Commission file number 0-24218) for the year ended
December 31, 2001.
The unaudited condensed financial statements of Bio-Plexus,
Inc. at June 30, 2002 and for the six months then ended:
incorporated by reference to Bio-Plexus, Inc.'s Form 10-Q
filed with the Securities and Exchange Commission for the
quarter ended June 30, 2002.
(b) Pro Forma Financial Information
ICU Medical, Inc. and Bio-Plexus, Inc.:
Unaudited Pro Forma Condensed Combined Balance Sheets at June
30, 2002
Unaudited Pro Forma Condensed Combined Consolidated Statements
of Operations for the Year Ended December 31, 2001
Unaudited Pro Forma Condensed Combined Consolidated Statements
of Operations for the Six Months Ended June 30, 2002.
50
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 26, 2003
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 26, 2003
- -------------------------- and Chief Executive Officer, (Principal
George A. Lopez, M.D. Executive Officer)
/s/ Francis J. O'Brien Chief Financial Officer March 26, 2003
- ----------------------- and Principal Accounting Officer
Francis J. O'Brien
/s/ Jack W. Brown Director March 26, 2003
- -----------------
Jack W. Brown
/s/ John J. Connors Director March 26, 2003
- --------------------
John J. Connors
/s/ Michael T. Kovalchik, III, M.D. Director March 26, 2003
- -----------------------------------
Michael T. Kovalchik, III, M.D.
/s/ Joseph R. Saucedo Director March 26, 2003
- ---------------------
Joseph R. Saucedo
/s/ Richard H. Sherman, M.D. Director March 26, 2003
- ----------------------------
Richard H. Sherman, M.D.
/s/ Robert S. Swinney, M.D. Director March 26, 2003
- ---------------------------
Robert S. Swinney, M.D.
51
I, the Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of ICU Medical,
Inc.:
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's auditors and the audit committee of registrant's board
of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involved
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2002
/s/ George A. Lopez, M.D.
-------------------------
President and Chief Executive Officer
(Principal Executive Officer)
52
I, the Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of ICU Medical,
Inc.:
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's auditors and the audit committee of registrant's board
of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involved
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2002
/s/ Francis J. O'Brien
----------------------
Chief Financial Officer
(Principal Accounting Officer)
53
SCHEDULE II
ICU MEDICAL, INC.
-----------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Additions
--------------------------
Balance at Charged to Balance
Beginning Costs and Charged to Write-offs/ at End
Description of Period Expenses Other Accounts Disposals of Period
----------- --------- -------- -------------- --------- ---------
For the year ended December 31, 2000:
Allowance for
doubtful accounts $368,000 $195,000 $ -- $ 58,000 $505,000
========= ========= ========= ========= =========
For the year ended December 31, 2001:
Allowance for
doubtful accounts $505,000 $100,000 $ -- $ 24,000 $581,000
========= ========= ========= ========= =========
For the year ended December 31, 2002:
Allowance for
doubtful accounts $581,000 $100,000 $ 11,000 $ 27,000 $665,000
========= ========= ========= ========= =========
54
EXHIBIT INDEX
Exhibit Number Description Sequentially Numbered Page
- --------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Registrant 56
23.1 Consent of Deloitte & Touche LLP 57
23.2 Consent of Arthur Andersen LLP 58
99.1 Certificate of Chief Executive Officer and Chief Financial Officer 59
55