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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM: _______ TO _________
COMMISSION FILE NO.: 0-19974
ICU MEDICAL, INC.

(Exact name of Registrant as provided in charter)

-------------------------------------------------
Delaware 33-0022692

-------- ----------

(State or Other Jurisdiction of (I.R.S. Employer

Incorporation or Organization) Identification No.)
951 Calle Amanecer, San Clemente, California 92673

-------------------------------------------- -----

(Address of Principal Executive Offices) (Zip Code)
(949) 366-2183

--------------

(Registrant's Telephone No. Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports to be

filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the

preceding 12 months (or for such shorter period that the registrant was required

to file such reports), and (2) has been subject to such filing requirements for

the past 90 days:
Yes XXX No____

---
Indicate the number of shares outstanding in each of the issuer's classes of

common stock, as of the latest practicable date:
Class Outstanding at October 20, 2001

----- -------------------------------

Common 8,662,072

ICU MEDICAL, INC.
INDEX

PART I - FINANCIAL INFORMATION PAGE NUMBER

------------------------------ -----------
ITEM 1. FINANCIAL STATEMENTS

-----------------------------
Consolidated Balance Sheets, September 30, 2001 and

December 31, 2000 3
Consolidated Statements of Income for the three months

ended September 30, 2001 and 2000 4
Consolidated Statements of Income for the nine months

ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the nine months

ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
ITEM 2.

-------
Management's Discussion and Analysis of Financial

Condition and Results of Operations 8
ITEM 3.

-------
Quantitative and Qualitative Disclosures About Market Risk Not Applicable

PART II - OTHER INFORMATION 15

---------------------------
SIGNATURES 16

2

ICU MEDICAL, INC.

Consolidated Balance Sheets

September 30, 2001 and December 31, 2000

(all dollar amounts in thousands except share data)

ASSETS
9/30/01 12/31/00

---------- ----------

CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 2,261 $ 1,945

Liquid investments 65,371 48,841

---------- ----------

Cash and liquid investments 67,632 50,786

Accounts receivable, net of allowance for doubtful accounts of $534 and

$505 as of September 30, 2001 and December 31, 2000, respectively 10,394 12,425

Inventories 2,411 1,435

Prepaid expenses and other 481 402

Deferred income taxes - current portion 2,356 2,150

---------- ----------

Total current assets 83,274 67,198

---------- ----------
PROPERTY AND EQUIPMENT, at cost:

Land, building and building improvements 13,584 13,505

Machinery and equipment 15,528 15,601

Furniture and fixtures 3,144 2,763

Molds 7,182 6,804

Construction in process 4,357 1,458

---------- ----------

43,795 40,131

Less--Accumulated depreciation (19,385) (16,210)

---------- ----------

24,410 23,921

---------- ----------

DEFERRED INCOME TAXES 378 889

OTHER ASSETS 895 852

---------- ----------

$ 108,957 $ 92,860

========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

Accounts payable $ 2,248 $ 1,687

Accrued liabilities 8,239 7,793

---------- ----------

Total current liabilities 10,487 9,480

---------- ----------
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 paid-in capital 43,341 41,702

Treasury stock -- 230,090 and 765,123 shares at

September 30, 2001 and December 31, 2000, respectively (1,999) (4,819)

Retained earnings 56,241 45,610

---------- ----------

Total stockholders' equity 98,470 83,380

---------- ----------

$ 108,957 $ 92,860

========== ==========
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, 2001 and September 30, 2000

(all dollar amounts in thousands except per share data)

(unaudited)

For the Three Months Ended

--------------------------
9/30/01 9/30/00

----------- -----------

NET SALES $ 16,214 $ 11,698

COST OF GOODS SOLD 6,867 5,517
----------- -----------

Gross profit 9,347 6,181

----------- -----------
OPERATING EXPENSES:

Selling, general and administrative 4,287 3,091

Research and development 241 249
----------- -----------

Total operating expenses 4,528 3,340

----------- -----------
Income from operations 4,819 2,841
INVESTMENT INCOME 450 532

----------- -----------
Income before income taxes 5,269 3,373
PROVISION FOR INCOME TAXES 1,950 1,250

----------- -----------
NET INCOME $ 3,319 $ 2,123

=========== ===========

NET INCOME PER SHARE

Basic $ 0.39 $ 0.25

Diluted $ 0.34 $ 0.23

=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES

Basic 8,602,417 8,382,922

Diluted 9,687,805 9,221,757

=========== ===========
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, 2001 and September 30, 2000

(all dollar amounts in thousands except per share data)

(unaudited)

For the Nine Months Ended

-------------------------
9/30/01 9/30/00

----------- -----------
NET SALES $ 48,172 $ 39,570

COST OF GOODS SOLD 20,215 17,316
----------- -----------

Gross profit 27,957 22,254

----------- -----------
OPERATING EXPENSES:

Selling, general and administrative 11,890 10,387

Research and development 872 747
----------- -----------

Total operating expenses 12,762 11,134

----------- -----------
Income from operations 15,195 11,120
INVESTMENT INCOME 1,626 1,525

----------- -----------
Income before income taxes 16,821 12,645
PROVISION FOR INCOME TAXES 6,205 4,680

----------- -----------
NET INCOME $ 10,616 $ 7,965

=========== ===========

NET INCOME PER SHARE

Basic $ 1.25 $ 0.96

Diluted $ 1.11 $ 0.89

=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES

Basic 8,509,422 8,309,507

Diluted 9,573,719 8,984,629

=========== ===========
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, 2001 and September 30, 2000

(all dollar amounts in thousands)

(unaudited)

For the Nine Months Ended

-------------------------
9/30/01 9/30/00

--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income $ 10,616 $ 7,965

Adjustments to reconcile net income to net cash

provided by operating activities --

Depreciation and amortization 3,475 3,690

Net change in current assets and current liabilities, and other 2,292 (15)
--------- ---------

Net cash provided by operating activities 16,383 11,640

--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment (4,011) (3,694)

Net change in liquid investments (16,530) (11,150)
--------- ---------

Net cash (used in) investing activities (20,541) (14,844)

--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of stock

options and related income tax benefits, and other 4,474 3,556

Purchase of treasury stock - (119)
--------- ---------

Net cash provided by financing activities 4,474 3,437

--------- ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS 316 233

CASH AND CASH EQUIVALENTS, beginning of the period 1,945 1,901

--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 2,261 $ 2,134

========= =========
The accompanying notes are an integral part of these consolidated financial statements.
6
ICU MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(All dollar amounts in thousands)

(unaudited)
NOTE 1: The accompanying unaudited interim consolidated financial statements

have been prepared pursuant to the rules and regulations of the Securities and

Exchange Commission and reflect all adjustments which are, in the opinion of

Management, necessary to a fair statement of the consolidated results for the

interim periods presented, which adjustments consist of only normal recurring

adjustments. Certain information and footnote disclosures normally included in

consolidated financial statements prepared in accordance with generally accepted

accounting principles have been condensed or omitted pursuant to such rules and

regulations. The consolidated financial statements should be read in conjunction

with the consolidated financial statements and notes thereto included in the

Company's 2000 Annual Report to Stockholders.
NOTE 2: Inventories consisted of the following:
9/30/01 12/31/00

------- --------

Raw material $ 1,569 $ 1,050

Work in process 359 140

Finished goods 483 245

------------ ------------

Total $ 2,411 $ 1,435

============ ============

NOTE 3: Basic net income per share is computed by dividing net income by the

weighted average number of common shares outstanding. Diluted net income per

share is computed by dividing net income by the weighted average number of

common shares outstanding plus dilutive securities. The Company's dilutive

securities are outstanding common stock options (excluding stock options with an

exercise price in excess of market value), less the number of shares that could

have been purchased with the proceeds from the exercise of the options, using

the treasury stock method, and were 1,085,388 and 838,835 for the three months

ended September 30, 2001 and 2000, respectively and 1,064,297 and 675,122 for

the nine months ended September 30, 2001 and 2000, respectively. Stock options

of subsidiaries did not have a dilutive effect.
NOTE 4: The effective tax rate differs from that computed at the federal

statutory rate of 34% principally because of the effect of state income taxes

partially offset by the effect of tax-exempt investment income and state tax

credits.
NOTE 5: The Company is involved in litigation with Medex, Inc. and Porex Medical

Products, Inc. over patent matters and B. Braun Medical Inc. over contractual

and patent matters. See Part II, Item 1, "Legal Proceedings."
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:

====================================== ========== ========== ========= ========== ========== ========== ==========

YTD YTD

PRODUCT LINE 1998 1999 2000 Q3-00 Q3-01 Q3-00 Q3-01

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
CLAVE(R) 69% 68% 71% 69% 79% 70% 75%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

CLC2000(TM) -- 1% 4% 2% 2% 3% 3%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Protected Needle Products 8% 6% 3% 2% 3% 4% 2%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Lopez Valve(R)and other 5% 4% 3% 3% 3% 3% 3%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

RF100-RF150 ("Rhino") 5% 6% 5% 5% 1% 5% 3%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Custom I.V. Systems 8% 11% 12% 16% 11% 13% 13%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

B.Braun SafeLine Revenue Sharing 5% 4% 2% 3% 1% 2% 1%

-------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Total 100% 100% 100% 100% 100% 100% 100%

====================================== ========== ========== ========= ========== ========== ========== ==========
The Company sells its products to independent distributors and through

supply and distribution agreements with Abbott Laboratories ("Abbott"), B.Braun

Medical Inc. ("B.Braun"), (the "Abbott Agreements" and the "B.Braun Agreements,"

respectively) and certain other medical product manufacturers. Most independent

distributors handle the full line of the Company's products. Abbott and B.Braun

both purchase CLAVE Products, principally bulk, non-sterile connectors. Abbott

also purchases the Rhino, a low-priced connector specifically designed for

Abbott, and since July 1999, the CLC2000, and under an agreement signed February

27, 2001, custom I.V. sets. B.Braun also purchases the McGaw Protected Needle

and pays the Company revenue sharing payments on its sales of its SafeLine

products. The Company also sells certain of its products to a number of other

medical product manufacturers.
The Abbott Agreements extend to December 2009. The B.Braun Agreement

for CLAVE products extends to December 2002. All have extension provisions

beyond those dates.
Management believes that as the healthcare provider market continues to

consolidate, the Company's success in marketing and distributing CLAVE Products

will depend, in part, on the Company's ability, either independently or through

strategic supply and distribution arrangements, to secure long-term contracts

with major buying organizations. Further, the Company's marketing and

distribution strategy may result in a significant share of the Company's

revenues being concentrated among a small number of customers. The loss of a

strategic supply and distribution agreement with a customer or the loss of a

large contract by such a customer could have a material adverse effect on

operating results.
Management believes the success of the CLAVE has, and will continue to

motivate others to develop one piece needleless connectors, which may

incorporate many of the same functional and physical characteristics as the

CLAVE. The Company is aware of a number of such products. In response to

competitive pressure, the Company has been reducing prices to protect and expand

its market. The price reductions to date have more than been offset by increased

volume. Management expects that the average price of its CLAVE Products will

continue to decline. There is no assurance that the Company's current or future

products will be able to successfully compete with products developed by others.
The federal Needlestick Safety and Prevention Act enacted in November

2000, and which became effective in April, 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. The Company believes the effect of this law will be to accelerate

sales of the Company's needleless systems, although it is unable to estimate the

amount or timing of such sales.
8
The Company has commenced two initiatives that, if successful, will

reduce its dependence on its current proprietary products. It is seeking to

substantially expand its custom I.V. systems business with products sold to

medical product manufacturers and independent distributors. On February 27,

2001, the Company signed an agreement with Abbott under which the Company 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. The Company expects

a significant increase in sales of custom I.V. systems under this agreement. The

Company has also launched SetFinder, a separate subsidiary, which will contract

with and distribute commodity-type standard I.V. sets directly to healthcare

providers and to group purchasing organizations and independent dealer networks.

There is no assurance that either one of these initiatives will succeed, or that

the expected increases in sales under the February 2001 contract with Abbott

will occur.
The Company has been taking steps to improve manufacturing efficiency

principally by reducing labor costs, reducing time needed to produce an order,

and minimizing investment in inventory. The original focus was on production of

custom I.V. systems, which is relatively labor intensive; it has now been

expanded to include all of the Company's automated and manual manufacturing

operations. Substantially all manual assembly is now performed at the facility

that the Company opened in December 1998 in Ensenada, Baja California, Mexico.

In 1999, the Company made significant investment in automated molding and

assembly equipment. Both of these steps have reduced unit production costs.

Ongoing steps are aimed at increasing systems capabilities, improving

manufacturing efficiency and enhancing distribution, as well as automation of

the production of new products, such as the CLC2000 and the 1o2 Valve, and other

products for which volume is growing. Because significant innovation is required

to achieve these goals, there is no assurance that these steps will achieve the

desired results.
The Company distributes products through four distribution channels.

Net sales for each distribution channel as a percentage of total net sales were

as follows:

======================================== ========== ========== ========= ========== ========== ========== ==========

YTD YTD

CHANNEL 1998 1999 2000 Q3-00 Q3-01 Q3-00 Q3-01

---------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Medical product manufacturers 64% 71% 74% 72% 78% 74% 72%

---------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Independent domestic distributors 33% 25% 21% 23% 13% 22% 19%

---------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

International 3% 4% 5% 5% 8% 4% 8%

---------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

SetFinder ---- ---- ---- ---- 1% 1% 1%

---------------------------------------- ---------- ---------- --------- ---------- ---------- ---------- ----------

Total 100% 100% 100% 100% 100% 100% 100%

======================================== ========== ========== ========= ========== ========== ========== ==========
QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THE SAME QUARTER LAST YEAR

-----------------------------------------------------------------------
NET SALES increased $4,516,000, or approximately 39%, to $16,214,000 in

the third quarter of 2001, compared to $11,698,000 during the same period last

year. The increase was primarily attributable to a 44% increase in sales of

CLAVE Products, including custom CLAVE I.V. systems.
Net sales to Abbott in the third quarter of 2001 were $9,229,000, as

compared with net sales of $6,153,000 in the third quarter of 2000. Net sales of

CLAVE Products to Abbott increased to $8,550,000 in the third quarter of 2001

from $4,921,000 in the third quarter of 2000 on a significant increase in unit

volume. Sales of the CLC2000, Rhino and custom CLAVE I.V. sets declined, as

Abbott balanced its inventory position for those product lines. The Company

expects sales of the CLC2000 to Abbott will increase in the future. Sales of the

Rhino are expected to continue the decline which started earlier in 2001 as the

market shifts to needleless technology. Sales under the new custom I.V. set

program, called SetSource, partially offset declines in the other product lines

in the third quarter. Based on terms of the Abbott Agreement, Management expects

a substantial increase in CLAVE unit and dollar sales volume with Abbott through

the remainder of 2001, although there is no assurance as to the amount of such

an increase.
9
Net sales to B.Braun, including revenue sharing, amounted to $3,319,000

in the third quarter of 2001, as compared with $2,252,000 in the third quarter

of 2000. Net sales of CLAVE Products to B. Braun increased from $1,757,000 in

the third quarter of 2000 to $2,649,000 in the third quarter of 2001. Unit

volume of CLAVE sales to B. Braun year-to-date is higher than in 2000, but this

has been offset by a decline in average sales price, so the dollar amount of net

sales of CLAVE Products to B. Braun year-to-date in 2001 is virtually the same

as in 2000. Sales of the McGaw Protected Needle increased from last year, but

Management expects future sales to decline, as they have in most recent periods,

as the market for safe connectors continues to shift to needleless technology.

Estimated revenue sharing payments due on B.Braun sales of its SafeLine products

decreased from last year. Management expects that SafeLine revenue sharing

payments will continue, although it is unable to accurately forecast such

amounts; the SafeLine Agreement was recently extended to December 2001.
Net sales to independent domestic distributors decreased approximately

20% from $2,705,000 in 2000 to $2,156,000 in 2001. This is attributed

principally to a 48% decrease in CLAVE net sales caused principally by a

decrease in unit volume and average selling prices of CLAVE Products. Management

expects an increase in the fourth quarter of 2001 over the third quarter in the

net sales of standard CLAVE Products to the independent domestic distributors as

well as an increase in sales of custom I.V. systems and new products such as the

CLC2000 and the 1o2 Valve(TM), and increases in net sales of the Lopez Valve.

However, there is no assurance that the Company 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 and B.Braun. Management expects to encounter continued pricing

pressure from individual end users, and expects continued declines in net prices

to the independent distributors.
Total sales to foreign distributors were $1,207,000 in the third

quarter of 2001, as compared with $551,000 in the third quarter of 2000 (Those

amounts do not include distribution in Canada.) The Company now has distribution

arrangements in all of the principal countries in Western Europe, the Pacific

Rim and South America, and in South Africa. Management expects that its sales to

foreign customers will continue to increase in the future, although there is no

assurance that those expectations will be realized.
In the fourth quarter of 1999, the Company launched SetFinder, doing

business as SETFINDER.COM. Net sales of SetFinder to date have not been

significant. The Company believes that, in time, a major portion of the sales of

disposable medical products will be initiated on the internet, although the

transition to the internet has been slow so far. The Company has spent a

significant effort on the launch and development of SetFinder, although it has

temporarily curtailed internet related marketing activities until market

opportunities expand. There is no assurance that SetFinder will achieve

significant sales and the amount of future operating profits or losses of

SetFinder is dependent upon the future development of the SetFinder business,

the outcome of which is not known at this time.
Total net sales of CLAVE Products (excluding custom CLAVE I.V. systems)

increased from $8,126,000 in the third quarter of 2000 to $12,765,000 in the

third quarter of 2001, or 57%. The increase in unit shipments was approximately

83%, almost all of which was accounted for by medical product manufacturers.

Aggregate average net selling prices decreased approximately 14% on a

year-to-year basis in response to market pressures and because a greater

proportion of sales were the lower priced bulk non-sterile CLAVEs sold to

medical products manufacturers.
In October 2001, the Company commenced production of the

"MicroCLAVE(TM)." It is smaller than the existing CLAVE but is functionally

identical. It will initially be marketed as an extension of the CLAVE Product

line for use where its smaller size is advantageous, such as pediatric care.
In November 1997, the Company commenced marketing the CLC2000, a one

piece, swabable connector, engineered to prevent the back-flow of blood into the

catheter. Net sales during the introductory period, which extended through most

of 1999, were not significant, but sales to Abbott and the independent domestic
10
distributors started to accelerate in late 1999. In the third quarter of 2001,

sales to domestic and international distributors accounted for a 62% growth in

sales of the CLC2000 over the third quarter of 2000. Abbott accounted for

approximately half of the net sales of the CLC2000 in the first quarter of 2001,

but has purchased only a small amount since then as it balanced its inventory

position, and sales to Abbott were not significant in the third quarters of 2001

or 2000. Management expects continued increases in CLC2000 sales, but there is

no assurance as to the amount or timing of future CLC2000 sales.
Net sales of Click Lock and Piggy Lock decreased approximately 44% in

the third quarter of 2001 compared to the same period last year. Management

expects continued decline in these sales as the safe connector market continues

its shift to needleless technology.
Net sales of the Lopez Valve in the third quarter of 2001 decreased 14%

from those in 2000. Management expects that net sales of the Lopez Valve will

increase for the remainder of 2001 on increased shipments to independent

distributors.
Net sales of custom I.V. systems were $1,848,000 in the third quarter

of 2001, as compared with $1,851,000 in the third quarter of 2000. Unit sales

decreased slightly, offset by a small increase in average selling prices.

Management believes that the lack of growth in sales in the third quarter was

because of normal seasonality as well as inventory balancing in the distribution

system, and expects net sales to increase in the fourth quarter of 2001.
In November 1998, the Company introduced the 1o2 Valve, the first

one-way or two-way drug delivery system. After overcoming initial delays in

production, the Company re-launched the product in January 2000. Sales to date

have not been significant, and there is no assurance as to the amount or timing

of future 1o2 Valve sales.
Historically, the Company has experienced lower usage of its products

in the summer months due to lower censuses in healthcare facilities. That would

generally cause the Company's sales in the second and third quarters of the year

to be lower than sales in the first and fourth quarters. Since 1995, there have

been significant departures from that pattern because significant increases in

sales volumes with B.Braun and Abbott have often offset the expected seasonal

sales decline. Further, those medical product manufacturers order bulk

non-sterile product many months before sale to the healthcare facility to allow

for normal manufacturing lead-times. Thus, Management believes that the large

percentage of sales to medical product manufacturers could lead to non-seasonal

quarterly fluctuations in net sales because their ordering patterns may not

directly reflect their current sales volumes.
GROSS MARGIN was 58% during the third quarter of 2001 compared to 53%

during the same period last year. Fluctuation in production during the third

quarter of 2000 and the relatively low level of sales in that quarter resulted

in less absorption of overhead in the third quarter of 2000. In the third

quarter of 2001, increases in production volume resulted in greater absorption

of overhead, and that offset the effect of lower average selling prices. The

Company expects that gross margins for custom I.V. systems, SetFinder products

and certain other manually assembled products will be lower than those

historically recorded by the Company because their production is relatively

labor intensive. The Company expects that its unit production costs will

continue to decrease in 2001, but that the gross margin percentage for the

fourth quarter will be equal to or slightly lower than in the third quarter, as

average unit sales prices continue to decrease, and manually assembled products

become a greater percentage of the Company's sales.
Electrical energy costs at the Company's manufacturing facilities in

the third quarter 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 third quarter of

2001, down from 2% of sales in the first quarter of 2001 and 2% in the third

quarter of 2000. Management is unable to predict what those costs will be for

the balance of 2001, but does not expect them to increase to the levels of the
11
first half of 2001. There has been no interruption in service. The significant

uncertainty as to the availability of electrical energy in California has

abated, although there is still uncertainty as to future costs. Any further

significant increase in electrical costs or a significant interruption in

service could have an adverse effect on the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"), excluding

research and development expenses, increased 39% to $4,287,000, and were 26% of

net sales in the third quarter of 2001 compared to 26% during the same period

last year. Spending increased for litigation costs and administrative costs.

Sales and marketing costs increased, but decreased as a percentage of sales.

Management expects SG&A in the fourth quarter of 2001 to increase somewhat from

the level in the third quarter, but to decrease as a percentage of sales.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D") were approximately the same

in the third quarters of 2001 and 2000. Spending on software development and on

clinical evaluations of the new CLC2000 was higher, offset by decreased new

product development costs. Management expects that continuing work on the

clinical evaluations of the CLC 2000, as well as software development for the

custom I.V. systems business, and work on new products will cause R&D expenses

to increase in the fourth quarter of 2001. 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.
The Company plans to launch, in limited markets, a new I.V. connector

currently under development. The Company expects to apply in early 2002 to the

Food & Drug Administration ("FDA") under Section 510(k) of the Federal Food,

Drug and Cosmetics Act for approval to market this new connector. There is no

assurance that the FDA will grant marketing clearance, that the Company will

launch this new product, or that it will achieve sales if and when the Company

commences marketing it.
INCOME FROM OPERATIONS increased $1,978,000 or 70% and was 30% of net

sales in the third quarter of 2001, as compared with 24% in the third quarter of

2000. Gross profit increased $3,166,000 while operating expenses increased only

$1,188,000.
INVESTMENT INCOME declined in the third quarter of 2001 as compared

with the third quarter of 2000, notwithstanding the increase in the investment

portfolio, because of declines in interest rates since the beginning of 2001.
NET INCOME increased 56% to $3,319,000 in the third quarter of 2001 as

compared with $2,123,000 in the comparable period last year. NET INCOME PER

SHARE - DILUTED was $0.34, in the third quarter of 2001, a 48% increase over the

third quarter of 2000. The percentage increase 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 the Company's common stock.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE SAME NINE MONTHS LAST YEAR

-------------------------------------------------------------------------------
NET SALES increased $8,602,000, or approximately 22%, to $48,172,000 in

the first nine months of 2001 compared to $39,570,000 during the same period

last year. The increase was primarily attributable to increased sales of CLAVE

Products including custom CLAVE I.V. sets.
GROSS MARGIN was 58% during the first nine months of 2001 as compared

to 56% in the first nine months of 2000. The decrease in average selling prices

over the first nine months of 2001 was more than offset by a decrease in unit

manufacturing costs.
SG&A excluding R&D increased by $1,503,000 to $11,890,000, and

decreased as a percentage of net sales to 25% during the first nine months of

2001 compared to 26% during the first nine months of 2000. The spending increase

was principally for administrative and litigation costs. Sales and marketing

costs increased, but decreased as a percentage of net sales.
12
INCOME FROM OPERATIONS increased $4,075,000, or 37%, principally

because of the increase in net sales and the reduction, as a percentage of net

sales, in operating expenses.
INVESTMENT INCOME increased $101,000, or 7%, over the first nine months

of 2000. The increase in investment income was less than the increase in the

investment portfolio because of the effect of declines in interest rates since

the beginning of 2001.
NET INCOME increased $2,651,000, or 33%, NET INCOME PER SHARE - DILUTED

increased 25%, a somewhat lower percentage than the increase in net income

because of an increase in the weighted average number of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES

-------------------------------
During the nine months ended September 30, 2001, the Company's cash and

cash equivalents and investment securities position increased $16,846,000 to

$67,632,000. Cash provided by operating activities and the exercise of stock

options was partially offset by the cost of additions to property and equipment.
Management expects that sales of the Company's products will continue

to grow in 2001 and 2002. If sales continue to increase, accounts receivable and

inventories are expected to increase as well. As a result of these and other

factors, including increased capital expenditures, the Company's working capital

requirements may increase in the foreseeable future.
Management currently expects that capital expenditures for property and

equipment will be between approximately $6 million and $7 million in 2001

principally for production tooling for capacity expansion and new products.
The Company has not purchased treasury stock since October 1999, except

for a small amount in March 2000. It may purchase additional shares in the

future. However, future acquisitions, if any, will depend on market conditions

and other factors.
The Company believes that its existing working capital, supplemented by

income from operations, will be sufficient to fund capital expenditures and

increased working capital requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS

--------------------------
Various portions of this Report, including this Management's Discussion

and Analysis, describe trends in the Company's business and finances that

Management perceives and state some of its expectations and beliefs about the

Company's future. These statements about the future are "forward looking

statements," and the Company identifies them by using words such as "believes,"

"expects," "estimates," "plans," "will," "continue," "could," and by similar

expressions and statements about aims, goals and plans. The forward looking

statements are based on the best information currently available to Management

and assumptions that Management believes are reasonable, but Management does 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, SafeLine revenue share, production costs, gross

margins, SG&A, and RD
13
o factors affecting operating results, such as shipments to specific

customers, product mix, seasonality of sales, selling prices, the

market shift to needleless products, impact of safety legislation on

buying patterns, achievement of business expansion goals, development

of innovative systems capabilities, sales of new products, sales

initiated on the internet, direct sales of standard I.V. sets,

manufacturing efficiencies, labor costs, unit production costs,

electrical energy costs and availability, production automation, and

expansion of markets;

o new or extended contracts with manufacturers and buying organizations

and dependence on a small number of customers;

o 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 and common stock repurchases.
The kinds of statements described above and similar forward looking

statements about the Company's future performance are subject to a number of

risks and uncertainties which one should consider in evaluating the statements.

First, one should consider the factors and risks described in the statements

themselves. Those factors are uncertain, and if one or more of them turn out

differently than Management currently expects, the Company's operating results

may differ materially from Management's current expectations.
Second, one should read the forward looking statements in conjunction

with the Risk Factors in the Company's Current Report on Form 8-K to the

Securities and Exchange Commission dated November 5, 1998, which is incorporated

by reference.
Third, the Company's actual future operating results are subject to

other important factors that the Company cannot predict or control, including

among others the following:
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 the Company's major customers and independent distributors

in their strategies that might affect their efforts to market the

Company's products or products incorporating the Company's products;

o unanticipated production problems; and

o the availability of patent protection and the cost of enforcing and of

defending patent claims.
The Company disclaims any obligation to update the statements or to

announce publicly the result of any revision to any of the statements contained

herein to reflect future events or developments.
  1   2

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