FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- ---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1997
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _______ TO _________
COMMISSION FILE NO.: 0-19974
ICU MEDICAL, INC.
(Exact name of Registrant as provided in charter)
- -------------------------------------------------
Delaware 33-0022692
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
951 Calle Amanecer, San Clemente, California 92673
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(Address of Principal Executive Offices) (Zip Code)
(714) 366-2183
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(Registrant's Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes XXX No
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Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 6, 1997
----- -------------------------------
Common 7,766,386
ICU MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
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ITEM 1. FINANCIAL STATEMENTS
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Consolidated Balance Sheets, September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income for the three
months ended September 30, 1997 and 1996 4
Consolidated Statements of Income for the nine
months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2.
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Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION 14
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SIGNATURES 16
2
ICU MEDICAL, INC.
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(all dollar amounts in thousands except share data)
ASSETS
9/30/97 12/31/96
-----------------------
CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 4,219 $ 2,060
Liquid investments 27,650 29,700
Accounts receivable, net of allowance for doubtful accounts of $324
and $293 as of September 30, 1997 and December 31, 1996, respectively. 3,249 3,043
Inventories 1,742 2,234
Prepaid expenses and other and other 898 763
Deferred income taxes 335 450
-----------------------
Total current assets 38,093 38,250
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 6,646 6,762
Furniture and fixtures 1,467 1,320
Molds 2,725 2,679
Land, building and building improvements 5,001 4,993
Construction in process 597 417
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16,436 16,171
Less - Accumulated depreciation (6,715) (5,242)
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9,721 10,929
Other assets 509 460
-----------------------
$48,323 $49,639
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,000 $ 1,902
Accrued liabilities 766 761
-----------------------
Total current liabilities 1,766 2,663
Deferred income taxes 270 227
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1.00 par value,
Authorized 500,000 shares, issued and
outstanding - none
Common stock, $0.10 par value, authorized, 20,000,000 shares;
issued, 8,867,162 shares. 887 887
Additional capital 39,452 39,447
Treasury stock - 1,102,276 and 566,711 shares at
September 30, 1997 and December 31, 1996, respectively. (9,335) (4,848)
Retained earnings 15,283 11,263
-----------------------
Total stockholders' equity 46,287 46,749
-----------------------
$48,323 $49,639
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
3
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Three Months Ended
September 30, 1997 and September 30, 1996
(all dollar amounts in thousands except per share data)
(unaudited)
For the Three Months Ended
--------------------------
9/30/97 9/30/96
--------------------------
Net sales $ 7,700 $ 5,972
Cost of goods sold 3,306 2,772
-----------------------
Gross profit 4,394 3,200
Selling, general and administrative expenses 2,126 1,809
Research and development expenses 280 191
-----------------------
Income from operations 1,988 1,200
Investment income 342 330
-----------------------
Income before income taxes 2,330 1,530
Provision for income taxes 885 566
-----------------------
Net income $ 1,445 $ 964
=======================
Net income per share $ 0.18 $ 0.11
=======================
Weighted average number of common
and common equivalent shares outstanding 7,853,002 8,907,056
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
4
ICU MEDICAL, INC.
Consolidated Statements of Income
For the Nine Months Ended
September 30, 1997 and September 30, 1996
(all dollar amounts in thousands except per share data)
(unaudited)
For the Nine Months Ended
-------------------------
9/30/97 9/30/96
-------------------------
Net sales $ 21,714 $ 18,127
Cost of sales 9,276 7,751
-----------------------
Gross profit 12,438 10,376
Selling, general and administrative expenses 5,976 4,778
Research and development expenses 931 535
-----------------------
Income from operations 5,531 5,063
Interest and other income 950 1,003
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Income before tax 6,481 6,066
Provision for income taxes 2,445 2,244
-----------------------
Net income $ 4,036 $ 3,822
=======================
Net income per share $ 0.50 $ 0.43
=======================
Weighted average number of common
and common equivalent shares outstanding 8,038,076 8,992,433
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
5
ICU MEDICAL, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1997 and September 30, 1996
(all dollar amounts in thousands)
(unaudited)
For the Nine Months Ended
9/30/97 9/30/96
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,036 $ 3,822
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,679 1,524
Net change in current asset and current liabilities, and other (542) (950)
-------------------------
Net cash provided by operating activities 5,173 4,396
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other (534) (818)
Proceeds from sales of investment securities - 508
Net change in liquid investments 2,050 (4,125)
-------------------------
Net cash provided by (used in) investing activities 1,516 (4,435)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised and related tax benefits 76 1,399
Purchase of treasury stock (4,606) -
-------------------------
Net cash provided by (used in) financing activities (4,530) 1,399
-------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,159 1,360
Cash and cash equivalents, beginning of the period 2,060 2,014
-------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,219 $ 3,374
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
6
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(All dollar amounts in thousands)
(unaudited)
NOTE 1: The accompanying unaudited interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments which are, in the opinion of Management,
necessary to a fair statement of the results for the interim periods presented,
which adjustments consist of only normal recurring adjustments. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1996 Annual Report to
Stockholders. Certain reclassifications have been made to the 1996 consolidated
financial statements to conform with the current presentation.
NOTE 2: Inventories consisted of the following:
Description 9/30/97 12/31/96
------------------ -------- --------
Raw material $ 798 $ 1,179
Work in process 353 458
Finished goods 591 597
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Total $ 1,742 $ 2,234
======== ========
NOTE 3: Net income per share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the periods. Common stock equivalents consist of the shares
issuable on exercise of the outstanding dilutive common stock options, less the
shares that could have been purchased with the proceeds from the exercise of the
options, using the treasury stock method.
NOTE 4: The effective tax rate differs from that computed at the federal
statutory rate of 34% principally because of the effect of tax-exempt investment
income offset by the effect of state income taxes.
NOTE 5: In October 1996, the Company announced a new CLAVE/(R)/ pricing
strategy under which prices to independent distributors are adjusted through
rebates of up to approximately 40%, depending on the type of customer to which
the distributor is reselling the CLAVE product. Through June 30, 1997,
management had estimated the accrued rebate by approximating the maximum rebate
that might be available to the distributors. In the third quarter, the Company
has reduced this estimate based upon additional historical data. The Company
will continue to accumulate historical data and may adjust this estimate in
future periods.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following table sets forth the net sales by product as a percentage of
total net sales for the periods indicated:
============================================================================================
PRODUCT LINE 1994 1995 1996 Q3-96 YTD Q3-97 YTD
Q3-96 Q3-97
- --------------------------------------------------------------------------------------------
CLAVE 45% 61% 68% 67% 67% 69% 67%
- --------------------------------------------------------------------------------------------
Click Lock and Piggy Lock 41% 20% 12% 11% 13% 8% 8%
- --------------------------------------------------------------------------------------------
McGaw Protected Needle 9% 13% 8% 9% 10% 5% 6%
- --------------------------------------------------------------------------------------------
Lopez Valve and other 5% 4% 4% 4% 4% 4% 4%
- --------------------------------------------------------------------------------------------
RF100-RF150 ("Rhino") - 2% 3% 4% 2% 7% 6%
- --------------------------------------------------------------------------------------------
Budget Medical Products - - 2% - 1% 5% 5%
- --------------------------------------------------------------------------------------------
McGaw SafeLine Revenue Sharing - - 3% 5% 3% 2% 4%
- --------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100%
============================================================================================
The Company sells its products to independent distributors and through
strategic supply and distribution agreements with McGaw, Inc. ("McGaw") and
Abbott Laboratories ("Abbott") (the "McGaw Agreement" and the "Abbott
Agreement," respectively). Most independent distributors handle the full line
of the Company's products. McGaw and Abbott both purchase CLAVE/(R)/ products,
principally bulk, non-sterile connectors; McGaw also purchases the McGaw
Protected Needle and Abbott also purchases the Rhino, a low-priced connector
specifically designed for Abbott. Through the third quarter of 1997, both
agreements establish minimum transfer prices which are lower than historical
average selling prices, which the Company negotiated in anticipation of
significant sales, and a revenue sharing formula under which the Company could
receive more than the minimum transfer prices based on selling prices of
products incorporating the Company's products. The McGaw Agreement provides for
revenue sharing based on McGaw's selling prices of CLAVE products and the Abbott
Agreement provides for revenue sharing based on Abbott's selling prices of both
CLAVE products and Rhinos. Effective August 1, 1997, the Abbott Agreement was
amended to establish fixed selling prices for Rhinos and eliminate revenue
sharing for all orders of Rhinos after August 1, 1997.
On June 25, 1997, B.Braun Melsungen AG (B.Braun) acquired McGaw from IVAX
Corporation. B.Braun's U.S. operation markets an I.V. connection system that
competes with I.V. connection systems of the Company and others. The McGaw
Agreement extends to July 2000, and the Company expects B.Braun-McGaw to abide
by the Agreement. The Company cannot predict the ultimate impact of the
acquisition, although it does expect the relationship with B.Braun-McGaw to
change over time. The Company is currently discussing significant modifications
of the McGaw Agreement, including pricing changes and extension of the term of
the Agreement. The Company does not expect any significant change in the
pattern of sales to McGaw, at least through the balance of 1997. However, there
is no assurance that there will not be a significant change in the pattern of
sales and there is no assurance as to the outcome of current discussions of the
McGaw Agreement.
8
Management believes the success of CLAVE has, and will continue to motivate
others to develop one piece needleless connectors which may incorporate many of
the same functional and physical characteristics as the CLAVE. The Company is
aware of a number of such products. In response to competitive pressure felt in
the third quarter of 1996, the Company in mid-October 1996 announced to its
independent distributors a new aggressive pricing strategy to protect and expand
its market. Under this strategy, prices to independent distributors will
eventually be reduced by up to approximately 40%, depending on the type of
customer to which the distributor is reselling the CLAVE product (See Note 5 to
the Consolidated Financial Statements). The average price reduction through the
third quarter of 1997 was less than the maximum 40%, although Management expects
that the average price of its CLAVE products will continue to decline over the
next several quarters. Management expects that the price decline eventually
will be more than offset by increased volume, although this has not occurred to
date for independent distributors in the aggregate. There is no assurance that
such increased volume will be achieved by the independent distributors, and
there is no assurance that the Company's current or future products will be able
to successfully compete with products developed by others.
Quarter Ended September 30, 1997 Compared to the Same Quarter Last Year
- -----------------------------------------------------------------------
Net sales increased $1,728,000, or approximately 29%, to $7,700,000 in the
third quarter compared to $5,972,000 during the same period last year. The
increase was primarily attributable to a 34% increase in sales of CLAVE
products, increased sales by the Budget Medical Products subsidiary ("BMP"), and
increased sales of the low-priced Rhino. Those increases were partially offset
by continuing decreases in Click Lock, Piggy Lock and McGaw Protected Needle
sales, and decreased revenue sharing due from McGaw, Inc. ("McGaw") based on
sales of its SafeLine products.
Net sales to McGaw, including revenue sharing, amounted to $2,391,000 in
the third quarter of 1997, as compared with $1,992,000 in the third quarter of
1996. The increase was accounted for principally by increased unit shipments of
CLAVE products. That increase was partially offset by a 25% decrease in McGaw
Protected Needle sales because of lower unit shipments, as expected, and a
decrease in estimated revenue sharing payments due under the McGaw Agreement on
McGaw's sales of its SafeLine products. Management expects that overall CLAVE
selling prices to McGaw will decrease through the balance of 1997, and also
expects that those decreases will cause it to receive declining amounts of
revenue sharing on CLAVE products sold to McGaw; further, there is no assurance
that McGaw's pricing in the future will result in any revenue sharing under the
formula in the McGaw Agreement. The Company has had sufficient data to estimate
and record CLAVE revenue sharing payments from McGaw in the period earned
through the first quarter of 1997. Commencing in the second quarter of 1997,
and until pricing stabilizes sufficiently, the Company began recording revenue
sharing due from McGaw on CLAVE products only when reported by McGaw and will no
longer estimate and accrue revenue sharing payments before they are reported.
Based on McGaw's forecasts, Management expects increases in unit shipments to
McGaw to continue during the remainder of 1997, although there is no assurance
that McGaw's forecasts will be realized. Management expects that SafeLine
revenue sharing payments will continue, although it is unable to accurately
forecast such amounts. Management expects McGaw Protected Needle sales to
decline for the remainder for 1997 compared to the third quarter this year, as
the market continues to shift to needleless technology.
9
The Company began production-quantity shipments of the Rhino to Abbott in
late 1995 and the CLAVE in the third quarter of 1996. Net sales to Abbott in
the third quarter of 1997 were $1,555,000, as compared with net sales of
$584,000 in the third quarter of 1996. The increase in net sales of CLAVE
products was 187% and the increase in net sales of the Rhino was 134% including
revenue sharing. Commencing in the second quarter of 1997, there has been a
substantial increase in marketing of CLAVE products to Abbott and to Abbott
customers, and the Company expects the order volume from Abbott to increase in
the fourth quarter of 1997. There is no assurance that Abbott will be
successful in promoting and selling CLAVE against its other safe connector
offerings, or against other competitors' current or future products. Further,
there is no assurance that Abbott's selling prices will result in any
significant revenue sharing with the Company under the Abbott Agreement.
Total CLAVE net sales increased approximately 34% from $3,950,000 in the
third quarter of 1996 to $5,299,000 in the third quarter of 1997. Unit
shipments of CLAVE products increased approximately 67%, substantially all of
which was accounted for by McGaw and Abbott, offset by a decrease with
independent distributors. Average selling prices continued to decrease.
Net sales of CLAVE products to independent distributors in the third
quarter of 1997 decreased approximately 19% from the third quarter of 1996,
principally because of lower unit volumes, and to a lesser degree, lower average
selling prices. Management expects that unit sales of CLAVE products to its
independent distributors will have little, if any, increase for the remainder of
1997, and may continue to decrease, causing net sales of CLAVE products to the
independent distributors to continue to decrease, and resulting in unit sales
and net sales below 1996 levels. Sales to the independent distributors have been
adversely impacted by acquisition of CLAVE market share by Abbott and McGaw and
have been temporarily adversely impacted by the termination of several
distributor arrangements and in the future may be impacted by competition from
existing and new competitive products. Management expects to encounter continued
pricing pressure from individual end users, but believes that its new pricing
strategy is and will continue to improve its competitive position.
Net sales of Click Lock and Piggy Lock decreased approximately 8% in the
third quarter of 1997 compared to the same period last year. The decline is
because of the safe-connector market's continued shift to needleless technology.
Management expects the trend to continue.
Net sales of Lopez Valve and Swiss System increased 10% in the third
quarter compared to the same period last year due to an increase in unit
shipments. Management expects sales of the Lopez Valve to be at the same or
slightly higher levels as in the third quarter of 1997 for the remainder of the
year.
Net sales of Budget Medical Products increased to $413,000 in the third
quarter of 1997 principally because of increased unit shipments of custom I.V.
sets incorporating the CLAVE.
Total sales to foreign distributors were $201,000 in the third quarter of
1997, as compared with $278,000 in the third quarter of 1996. The decrease was
due to lower unit shipments. Foreign distributors have not yet achieved
consistent ordering patterns, but Management expects that the Company's sales to
foreign distributors will increase over the balance of the year.
10
Historically, the Company has experienced lower usage of its products in
the summer months due to lower censuses in healthcare facilities. The table
below illustrates the effect this phenomenon has on the Company's net sales:
=========================================================================================
NET SALES (000'S) Q1 Q2 Q3 Q4 TOTAL
- -----------------------------------------------------------------------------------------
1993 $2,914 $2,335 $2,495 $3,637 $11,381
- -----------------------------------------------------------------------------------------
1994 $4,180 $3,842 $3,484 $5,036 $16,542
- -----------------------------------------------------------------------------------------
1995 $5,427 $5,966 $4,617 $5,272 $21,282
- -----------------------------------------------------------------------------------------
1996 $6,008 $6,147* $5,972* $6,472* $24,599
- -----------------------------------------------------------------------------------------
1997 $6,824* $7,190* $7,700*
================================================================================
* Includes McGaw SafeLine Revenue Sharing In Q2, Q3, Q4 1996 and Q1, Q2, Q3
1997 of $229,000, $300,000, $300,000 and $359,000, $418,000, $182,000
respectively.
================================================================================
As illustrated above, the second and third quarters tend to be weaker than
the first and fourth. The exceptions are the second quarter of 1995, in which
McGaw was building significant inventory of CLAVE; the second quarter of 1997,
in which sales increases occurred in most of the Company's product lines; and
the third quarter of 1997, in which sales increases occurred principally because
of increased net sales of CLAVE products to Abbott and independent distributors,
offset by lower net sales of CLAVE products to McGaw.
Gross margin was 57% during the third quarter of 1997 compared to 54%
during the same period last year. Although average selling prices have
continued to decrease, increases in production volume resulted in greater
absorption of overhead and a decrease in unit manufacturing costs.
Management believes that the continuing decrease in average selling prices
for CLAVE products, including the effect of its new pricing strategy to
independent distributors, could adversely effect the gross margin percentage for
the next several quarters, but that as volume increases, including increasing
production of CLAVE products for McGaw and Abbott, gross margin percentages
should not deteriorate significantly. This is because a large portion of the
Company's manufacturing costs are fixed and the Company has adequate existing
fixed-asset capacity to handle increased volumes. Any such improvement could be
offset, however, by a continuation of the shift in sales mix from independent
distributors to McGaw and Abbott at lower average selling prices. Also,
management is currently evaluating further upgrading the efficiency of its
manufacturing operations by replacing certain fixed assets and adding others;
the effect of this would be to expand its capacity and lower per unit production
costs as production volume increases.
Selling, general and administrative expenses ("SG&A"), excluding research
and development expenses, increased $317,000 to $2,126,000, but decreased as a
percentage of sales to 28% of sales during the third quarter of 1997 compared to
30% during the same period last year. The principal component of the increase in
SG&A expenses was sales and marketing costs, including those related to BMP and
international markets. Management expects continuing increases in sales and
marketing costs in the fourth quarter of 1997 and in 1998 as it works to expand
sales of current products and launch new products.
Costs of patent litigation in which the Company is the plaintiff were
approximately 2% of net sales in the third quarter of 1997, as compared with 7%
in the third quarter of 1996. Management
11
expects the amount of those costs to increase in the fourth quarter of 1997, but
to be at a level lower than those incurred in the fourth quarter of 1996. The
amount of such costs will depend on the progress of the litigation, and that is
difficult to predict.
Research and development expenses ("R&D") increased from 3% of net sales in
the third quarter of 1996 to 4% of net sales in the third quarter of 1997,
reflecting increased efforts to complete R&D on a number of new products.
Management currently expects those efforts to continue through the end of 1997
and into 1998, with R&D expense at approximately the same level as in the third
quarter of 1997. However, no assurance can be given that such costs will not
differ materially from those estimates or that the R&D will be completed as
expected.
Net income increased 50% to $1,444,000 in the third quarter of 1997 as
compared with $964,000 in the comparable period last year. Net sales and gross
profit increased 29% and 37%, respectively. SG&A and R&D combined, increased 20%
from the third quarter of 1996, and income from operations increased 65%.
Net income per share increased $0.07, or 64%, in the third quarter of 1997
over the third quarter of 1996. This increase was more than the percentage
increase in net income because of a 12% decrease in the weighted average number
of common and common equivalent shares outstanding. Had the decrease in shares
not occurred, the increase in net income per share would have been approximately
55%.
Nine Months Ended September 30, 1997 Compared to the Same Nine Months Last Year
- -------------------------------------------------------------------------------
Net sales increased approximately 20% for the nine months ended September
30, 1997 compared to the same nine month period last year. The growth in net
sales was due to increased net sales to McGaw and Abbott, partially offset by a
decline in net sales to independent distributors. The increase resulted
primarily from increased CLAVE sales, Rhino sales, and BMP sales. Those were
offset in part by declining Click Lock, Piggy Lock and McGaw Protected Needle
sales. During the period, net sales of CLAVE increased approximately 19% due
primarily to higher unit sales offset in part by lower average selling prices.
Net sales of Click Lock and Piggy Lock decreased 28% and McGaw Protected
Needles decreased approximately 27%, due to lower unit sales compared to the
same period last year. For the nine months ended September 30, 1997 net sales
of Rhino increased to approximately $1,309,000 compared with $429,000 for the
same period last year. BMP net sales increased to $1,109,000 compared with
$156,000 for the same period last year.
Net sales to McGaw for the first nine months of 1997 were $8,325,000, as
compared to $6,797,000 for the first nine months of 1996. Comparable amounts
for Abbott were $2,933,000 and $810,000, respectively.
Gross margin for the nine months ended September 30, 1997 and 1996 was 57%.
Increased unit volumes and lower per unit manufacturing costs offset the effect
of lower average selling prices.
SG&A expenses excluding R&D, for the nine months ended September 30, 1997
were 28% of sales compared to 26% during the same period of 1996. The increase
is principally because of increased sales and marketing costs, and general
corporate expenses partially offset by a decrease in the continuing costs of
patent litigation in which the Company is the plaintiff.
12
R&D expenses increased for the nine months ended September 30, 1997 as
compared to the same period in 1996 for the same reason as they increased in the
third quarter as described above.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1997, the Company's cash and
cash equivalents and investment securities position increased $109,000 to
$31,869,000. Cash provided by operating activities was offset by the cost of
treasury stock purchases and additions to working capital and property and
equipment.
If sales of the Company's products increase, accounts receivable and
inventories are expected to increase as well. As a result of these and other
factors, the Company's working capital requirements may increase in the
foreseeable future.
The Company believes that its existing working capital, supplemented by
income from operations, will be sufficient for the foreseeable future.
Since October 1996, the Company has purchased 1,146,000 shares of its
common stock at a cost of $9.7 million, of which 52,500 shares were purchased in
the quarter ended September 30, 1997, at a cost of $446,000. The Company is not
currently repurchasing its Common Stock, but may again repurchase its Common
Stock from time to time in the future depending on market prices and other
factors.
Forward Looking Statements
- --------------------------
In this Management's Discussion and Analysis, Management has made numerous
statements about perceived trends and its expectations and beliefs about various
matters, which reflect the best information currently available to Management
and assumptions which Management believes to be reasonable. They include
without limitation statements about: sales to and revenue sharing from McGaw
and Abbott; McGaw's compliance with the McGaw Agreement; the relationship with
McGaw; the pattern of sales to McGaw; the development by others of competing
products; decline in average selling prices and the possibility of increased
volume offsetting such declines; decreases in Click Lock, Piggy Lock and McGaw
protected needle sales; decreases in selling prices to and revenue sharing from
McGaw; the volume of unit shipments to McGaw; SafeLine revenue sharing; order
volume from Abbott; unit sales volume to independent distributors; decreases in
net sales to independent distributors and the possible temporary nature of such
decreases; the effect on sales to independent distributors of competitive
products; pricing pressure from end users; Lopez Valve sales; foreign sales; the
effect of decreases in average selling prices on gross margins and the possible
offsetting effects of volume increases; shift in the balance between sales to
independent dealers and sales to McGaw and Abbott and the effects of any such
shift; sales, marketing and patent litigation costs; research and development
expenses and results; working capital requirements; and, repurchases of the
Company's common stock. These statements and similar statements are forward
looking statements that involve a number of risks and uncertainties including
the possible failure of the factors described in such statements to materialize
and the caveats which accompany the statements. The Company
13
further cautions that actual future results of operations are subject to other
important factors including, among others, the following: general economic and
business conditions; the effect of price and safety considerations on the
healthcare industry; competitive factors such as product innovation, new
technologies, marketing and distribution strength and price erosion;
unanticipated market shifts and trends; the impact of legislation effecting
government reimbursement of healthcare costs; any changes in corporate
strategies and practices of McGaw, Abbott and the Company's independent
distributors that might effect the resources and efforts that they devote to
marketing the Company's products; the possible impact of the acquisition of the
Company's customers (including McGaw) by other entities; production problems;
changes in product mix; changes in marketing strategy; the availability of
patent protection and the cost of enforcing or defending patent claims; and
other risks described from time to time in the Company's registration statements
and reports filed with the Securities and Exchange Commission, including the
Company's Current Report on Form 8-K dated November 14, 1996. Results of
operations actually achieved in the future may thus differ materially from
Management's current expectations. The Company disclaims any obligation to
update the statements or to announce publicly the result of any revision to any
of the statements contained herein to reflect future events or developments.
New Accounting Pronouncement
- ----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." As it effects
the Company under its current capital structure, it provides for the
presentation of "basic" earnings per share, which excludes the dilutive effect
of outstanding common stock options, and "diluted" earnings per share, which
includes the dilutive effect of such common stock options and is the same as
"net income per share" as currently presented by the Company. Both basic and
diluted earnings per share, as calculated under SFAS No. 128, for the quarters
ended September 30, 1997 and 1996 are $0.18 and $0.11, respectively, and for the
nine months ended September 30, 1997 and 1996 are $0.50 and $0.43, respectively.
Those are the same amounts as presented as net income per share in the
consolidated financial statements.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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In an action entitled ICU Medical, Inc. v. Tri-State Hospital Supply
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Corporation, pending in the United States District Court for the Northern
- -----------
District of California, the Company alleges infringement of two patents by
defendant's protected needle connector and Y-style extension sets. The Company
is seeking an injunction, and monetary damages in an amount to be determined.
On February 28, 1996, the Court ruled on a number of motions filed by the
parties. It denied a number of motions for summary judgment brought by the
defendant, including the motion for partial summary judgment of non-infringement
of one of the patents, and issued rulings on matters of
14
enforceability that were generally favorable to the Company. The case remains
pending and a number of motions remain to be brought by the Company. Trial date
is presently scheduled for February 1998.
In an action entitled Allen Petty, dba Carmel Development International v.
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ICU Medical, Inc., pending in the Superior Court for Orange County, State of
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California, Plaintiff alleges breach of contract and seeks at least $500,000 in
commissions allegedly related to sales of the CLAVE/(R)/ to various O.E.M.
manufacturers. The Company believes the claim is without merit and intends to
defend the action vigorously. The Company has asserted counter claims against
the Plaintiff alleging breach of contract and misappropriation and conversion of
trade secrets and fraud. Trial date is scheduled for March 1998.
In an action entitled Hinck Medical, Inc. v. ICU Medical, Inc., pending in
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the United States District Court for the District of Oregon, the plaintiff
alleges that the Company breached a distribution agreement by imposing different
payment terms on the plaintiff, Hinck Medical, Inc. ("Hinck") than were required
of other distributors, and makes several other allegations. The Company has
denied the allegations of the complaint and has asserted counterclaims against
Hinck for breach of the distribution agreement and is seeking damages. The
parties have agreed to submit the matter to binding arbitration. Accordingly,
the action pending in the federal court has been stayed pending resolution of
the matter through arbitration. The Company believes the claim against it is
without merit and intends to defend the action vigorously.
ITEM 2. CHANGES IN SECURITIES
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Inapplicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
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Inapplicable
ITEM 4. OTHER INFORMATION
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None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
10.1 Amendment to Abbott and ICU Medical Agreement, dated September 9, 1997
between Registrant and Abbott Laboratories *
27 Financial Data Schedule
* Portions of the Agreement have been redacted. Registrant has requested that
the Securities and Exchange Commission grant confidential treatment to the
redacted portions of the Agreement.
(b) Reports on Form 8-K:
Registrant filed the following Report on Form 8K during the quarter for which
this Report is filed.
Item 5 - July 23, 1997
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICU Medical, Inc.
(Registrant)
/s/ Francis J. O'Brien Date: November 14, 1997
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Francis J. O'Brien
Chief Financial Officer
(Principal Financial Officer and)
Chief Accounting Officer)
16
Exhibit 10.1
Item 601 of Regulation
CONFIDENTIAL TREATMENT
Portions of the attached Amendment 1 to Abbott and ICU Medical Agreement have
been redacted. The Company has applied to the Securities and Exchange
Commission for confidential treatment of the redacted portions.
AMENDMENT 1
TO
ABBOTT AND ICU MEDICAL AGREEMENT
This Amendment is made to the Agreement dated April 3, 1995 by and between ICU
Medical and Abbott Laboratories for the purchase and sale of certain products
(the "Agreement").
Premises
The parties desire to modify prices and make other changes to the Agreement.
Therefore, in consideration of the premises and mutual promises and agreements
contained herein, ICU Medical and Abbott agree to amend the Agreement as
follows:
1. The correct interpretation of paragraph 6.4 for the calculation of Price of
Product is documented in Exhibit E of the Agreement.
2. The High Pressure Clave/TM/ will be covered by the Revenue Sharing formula
in the Agreement, same as the Clave/TM/. The ICU Billing Price for the High
Pressure Clave/TM will be the same as for the Clave/TM/.
3. The R-F 150 Connector will be given a fixed price and will not be on a
Revenue Share basis. The packaged and sterile product will be ---- and the bulk
non-sterile product will be ---- effective for orders placed after 8/1/97. No
change in price will be made for product already in inventory.
4. Abbott agrees to reimburse ICU Medical ---- for implementation of the bulk
non-sterile R-F 150 within 30 days of the date of this Amendment.
5. The minimum price on the Clave/TM/ and Integral Clave/TM/ paid to ICU
Medical on a quarterly revenue sharing basis will be $ ---- for 1997 and then
negotiated for any changes from this level if the average selling price to the
customer is below ---- . This calculation is based on average selling price to
all accounts and is net of certain adjustments such as hospital dividends.
6. Except as expressly modified by this Amendment, all terms and conditions in
the Agreement shall continue in full force and effect.
7. The provisions of paragraph 6.4 of the Agreement regarding pump
administration sets is amended as follows; the price of the Clave/TM/ is ----per
pump administration set, based on the agreed mix of ---- percent single
Clave/TM/ sets, and ---- percent dual Clave/TM/ sets, and ---- percent triple
Clave/TM/ sets. Both parties agree to negotiate changes from this level, as
appropriate, based on market conditions.
The parties intending to be bound by the terms and conditions hereof, have
caused this Amendment to be signed by their duly authorized representatives the
9 day of September 1997.
- ----- ---------
Abbott Laboratories ICU Medical
By /s/ By /s/ Francis J. O'Brien
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Title /s/ By Francis J. O'Brien
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Title Title Chief Financial Officer
-------------- ------------------------
5
1,000
9-MOS
DEC-31-1997
JUL-01-1997
SEP-30-1997
4,219
27,650
3,573
(329)
1,742
38,093
16,436
(6,715)
48,323
1,766
0
0
0
887
45,400
48,323
7,700
7,700
3,306
5,712
0
0
0
2,330
885
1,445
0
0
0
1,445
0.18
0
