ICU Medical Inc (ICUI) 2003 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the ICU Medical Inc. second quarter earnings release conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the Company we will open the conference up for questions and answers following the presentation. I will now turn the conference over to Mr. Franc O'Brien -- please go ahead, Sir.

Good morning and welcome to the quarterly conference call to discuss (inaudible) I am Franc O'Brien, Chief Financial Officer and Dr. George Lopez, our Chairman and President, is at sea in the South Pacific and will be able to join us. On the phone are also a number of the Corporation's directors and with me here as well is Greg Pratt, VP of our Sales (indiscernible).

In the event we touch on forward looking statements on this call, be aware (indiscernible) based on this information currently available to us. And assumptions that we, the management, believe are reasonable. But such statements are not intended for representation of future results and are subject to risks and uncertainties. Future results may differ materially from our current expectations. Before we focus on the quarter let me put it in perspective.

As we have often stated, our quarterly results are subject to fluctuations. Our second quarter of 03 have (indiscernible) from what might be considered a normal quarter. By comparison our second-quarter 2002 was unusually strong for a second quarter. This combination a low quarter this year and a high quarter last year exacerbates the comparisons.

Management of ICU Medical believe it is on track for another year of 20 percent growth on top and bottom lines. We said on our last call we were targeting from 22 to 23 percent the net income by 20 percent. We are still quite comfortable that we will achieve those targets and perhaps exceed them.

For the second quarter, revenue was $21.3 million versus $22.7 million last year. Net income was $3.9 million versus $5.0 million in 2002. For the six months (indiscernible) the comparisons are somewhat more normal, revenue was $52.1 million versus $43.6 million last year, or 19% increase and net income was $11 million versus $9.5 million (indiscernible) or a 15% increase and EPS was up 10 cents to 72 cents.

Sales rate of $2 million a week or actually slightly higher, the differences between where we came in at and what might have been expected is two to four weeks of sales -- something we expect to readily make up in the third and fourth quarter.

As for our products, most of the timing issues affected the Clave product line which for the quarter was $11.6 million versus $16.1 million in 2002. Customers (indiscernible) was up from $3.9 million to $4.6 million. Punctur-Guard was $1.7 million this year, excluding royalties which is (indiscernible). As for the distribution channels, (indiscernible) was fairly flat 1339 this year versus 146 last year.

Distributors were up from 4.2 in the second-quarter last year to 5.1 this year. Our international was off quite substantially -- 1.4 down to 0.7 and the other -- what is in the other categories at this point is mainly license fees and that was 1.4 vs. nothing last year.

Let me turn the meeting over to you for questions now.

(CALLER INSTRUCTIONS)

Please stand by while we poll for questions. Our first question comes from Mike Marinachi from Rangerock (ph) Capital.

Hi Frank -- do you have some balance sheet numbers for us for the AR, where the cash is?

: Yes these are a little rough -- finishing touches on these but the cash is just a tad above 69 that's the (indiscernible) cash and the marketable securities. They are at 39 inventory is out -- I'm sorry AR is at 17 7, inventory is at 7 3 and that, by the way, includes Connecticut as well as the company we just bought in Italy. So it's up a bit from what you might consider the Base level. Fixed assets net are about $40.7 million and total assets are 154.6.

Okay. Regarding the Italy, were there any revenues in the quarter from there or is it just the manufacturing operation?

We picked it up late in the quarter, start picking up operations next year, but let me -- can look at that as buying a factory -- it's a real small operation but what it does do is it gets us into Europe. They make customized (indiscernible) systems. They're located near Verona in Northern Italy -- as you know we've been looking for European manufacturing for several years. We see this company as a base for an aggressive expansion of our customized (indiscernible) businesses throughout Europe. But it's -- consider it a factory but we put this with some solid management and established workforce so we are ready to go immediately.

What did you pay for it and what sort of revenue (indiscernible) business.

Those numbers are all pretty small -- actually the9ir sales number are probably irrelevant because we are going to build an entirely different business based upon what we do here.

Don't want to hog the call, but you backed out the Punctur-Guard product revenues -- looked like they were down about 20 percent year-over-year. Why would you be confident in up 20% year?

A lot of it's timing, the second and third quarters for us are typically potentially down -- that's exactly what happened this year. We got reasonably good visibility as to what to expect from our large OEM customer Abbott and the second half should be pretty good.

All right -- thanks.

Bruce Cranor of (indiscernible).

Good morning, Franc. Again, just to I guess push it a little bit on the back half of the year so I understand you're targeting the 20% top and bottom, so back half on the sales line we're looking at between the two quarters something like $53 to $55 million in your opinion?

Yes.

And net income -- let's call it $23 million to $24 million? That would be 20%...

That would be 20 %, yes, yes -- that's the range we're looking at, Bruce.

So, again, you just have a feeling, you know -- you have enough visibility on order flow going into the back half of the year that those kinds of numbers are realistic?

Yes, no, yes we think they are quite realistic. We've always had the problem of what sort of things are going to fall in but by the end of the year they usually follow out okay. One other thing we have coming on in the second half of the year and we are seeing some very positive signs of it right now is the pickup on the business that had me going through Braun. One of the phenomenon that affected us -- it is real tough to measure this thing is that the pipeline that Braun has been emptying is not being refilled. And the distributors are not going to stock up in advance with the Braun business but when the Braun business starts coming in, they're going to start buying and we expect to see that in the third or fourth quarter.

When the Braun business starts coming in.

Braun's been emptying the pipeline -- they still have Clave -- they're selling it to the customers. When they run out we expect a lot of those customers to come over to our specialty distributors as well as Abbott.

Why not just use Braun's product?

Strong preference for Clave is out there among the Braun customers -- we have seen this for years.

You have any visibility on the legalities there? At one point you were thinking maybe there would be summary judgment or something.

I'm sorry. You're referring to the patent suit. The patent suit is continuing. We're in Discovery right now and I'm not sure what the trial date -- but it's not this year, probably sometime next year -- if it goes to trial. We are going for an injunction on that, which would obviously impact (indiscernible) (indiscernible). But where the (indiscernible) is going to come out, is real hard to tell. We think we're in a good position and I expect to (indiscernible) telling you the same thing. Only we think ours are right.

So you're saying the pieces in the quarter, Clave was 11.6 -- is that right?

Let me get that here. Clave was 11.6.

Again, 16.1 last year.

Yeah.

And the custom -- was that the 4.6?

Custom was 4.6 -- yes. That's up from 3.8 last year.

And what else? Are you going to break the (indiscernible) on CLC (ph)

I can give you the numbers. CLC was 723 -- that is actually down from (indiscernible) but last year but that's not a very significant change. It tends to go up and down. The Punctur-Guard was about 1.7 million (indiscernible) up the royalties. And that's pretty much it, the rest all fall into (indiscernible) of other.

So when I look at the Clave number, what was the part to Abbott?

The Abbott piece of Clave was 10.5.

So, looks like 4 and 1 took the (indiscernible) was the .7 U.S. (ph) all Clave or...

I think most of it was, not quite all, but most of it.

What about the independents?

I don't have the Clave number separately here for them but a major portion of 3 6 there was Clave (indiscernible). (inaudible)

So the Clave was 11.6 and Abbott was 10.5 of that, right? So that leaves me 1,1 you said 700 was foreign, so like 400 was independent -- is that right?

Sounds a tad low, but it actually could be that. I don't have the independent distributors here (indiscernible)

Just a couple more and I'll get back in queue. Just in terms of making that back half net income number, can you comment on the margins -- actually, first of all let us know what happened SG&A and whether or not -- I assume that's going to reverse -- or doesn't look like you can make the net income number and...

Help me with what your question is on the SG&A -- was down sequentially.

I mean as a percent of sales ...

Yes, this is one of the kind of funny phenomenons -- trying to work with the numbers here. Our SG&A in the first quarter was 20 percent of sales because the sales were so high. So we have lower SG&A this quarter. But it is 26 percent of sales because sales were so low. So I think it is probably easier to take a look at the thing in absolute dollars. We've got some increase in operating expenses later in the year but we're looking at SG&A in the 22, 23 percent range for the entire year.

And the R&D line, there seems to be a delta there as well --

(indiscernible) in Connecticut trying to deal with our product developing and some of the work on production equipment, but that will be -- we are looking for that to run in the 2 percent range for the year. The gross margin is the thing that is probably the biggest challenge we face in trying to get these numbers in line. It was 54 percent for the quarter, which was a little less than it was last year, in the last quarter. And the couple of variables that hit it -- one of which is Bio-Plexus. The other (indiscernible) product mix, the greater proportion of both (indiscernible) Clave hit a margin of it. And the other thing was ---

So you said 54 in the quarter for gross margin? Based on product sales -- so I don't have that.

The other thing 54 (indiscernible) sales. The other thing we ran into is international did some price trimming (indiscernible) competitive (indiscernible) a double percent of the margin. I don't think we are going to do as well on the margin as I might have said earlier in the year. I'm kind of thinking the 55, 56 percent range for the year. Realistically, from where we are right now, we'd have to do awfully well to get (indiscernible) 56 percent.

So you are thinking 54, 55.

More 55, 56. Max.

Our next question comes from Mischa Rangapol of Sidoti -- please pose your question.

Franc, could you comment in terms of one: any pricing pressures you're seeing and also in terms from a competitive standpoint with regards to Abbott? Maybe losing market share on infusion pump business, and also, potential slowdown in (indiscernible) spending and I think Abbott mentioned in their release that they are also seeing lower hospital admissions -- could you sort of give us a sense of that impact for the second half of this year?

It's hard to comment specifically on Abbott's press release. They didn't check with me first, but I think what they said in the release that they were down about (indiscernible) 2 percent year-over-year in the hospital products division (indiscernible). I think they also stated they expect to return to double digit growth in the second half of '03. It's hard to measure the effect of this, we haven't seen any direct effect from this in the second quarter but it's possible it may have affected our second quarter -- it's really hard to tell for sure but for the balance of the year as long as they meet their expectations, we think we're in pretty good shape. And I think, from talking to them now, we obviously feel we are going to meet the expectations.

Question on the pump business goes back to some of the conversations we had in the first quarter. Our understanding continues to be that they're going to be at parity with everybody else in market on pumps and some of the rumors about the decline in the pump business we just don't (indiscernible) no reason to change my view on that one. And I think I may have missed one of the other things.

Hospitals. Spending. (indiscernible) being down.

It was basically what happened. Looking at with the drop in the (indiscernible) in the second-quarter. I think what they may have been talking about is people postponing elective procedures. Those things, after a while, don't become elective anymore and people don't stop getting sick. So I mean I think while we're susceptible to some (indiscernible) up and down, longer term, the trends are going to be there.

Third-quarter is typically seasonally your weakest and then you go for a big fourth -- do you see that changing this year?

I think we will have -- the fourth quarter is bigger than the third quarter. I -- we could have a decent third-quarter and look great compared to our third quarter last year. So I would think the third quarter is going to be up a bit from the second quarter for sure, but I think we're going to be back in (technical difficulty) this year, substantially.

And in terms of DSOs I know it declined a little sequentially off the first quarter but what is your sense of it, for the rest of the year?

We are going to continue to work that down. It was off a little bit went from -- just look at the receivables at the end of the quarter, not the average for the quarter and relate that to our quarterly sales. The DSOs dropped from 85 in March, 81 in June and but the ARs themselves were down almost $10 million. Well, $9 million. That is a 34 percent drop and actually the (indiscernible) got a little bit better. We still had more sales in the last month of the quarter than I would like. And we're not (indiscernible) (inaudible) more headway on the DSOs but we're getting there and we'll continue to work on it.

Adina Dhoti of B. Riley and Company.

Good morning, Franc. Your acquisition, Italy -- do you expect a lower effective tax rate going forward? And is there a sterilizer at that facility? Or should we expect some type of CAPEX for them?

There is -- we have access to a sterilizer right nearby the facility. And we would use that until we get a lot bigger so (indiscernible) sterilizer makes no sense -- sterilizers are awful expensive -- we're not going to build one just for the sake of having one if there is something that's workable nearby and there's something workable nearby. What was your (indiscernible) question?

Effective tax rate -- do you expect a decrease in that going forward?

We're looking at that right now. The tax rate in Italy as you probably know, the basic tax rate is the same as it is here -- about 34 percent. To the extent we can run business through Europe. We can litigate our state taxes, (indiscernible) entirely because of California (indiscernible). We're looking at some tax planning alternatives in Europe now that we are on the ground there. I don't want to promise anything at this early date because I am not sure what's available and what we will be able to do. But I'm not cranked in any decrease in the tax rate for the balance of the year. If we benefit from that, so much the better.

Okay. Are you looking at making a share buy back given that your stock suffered recently?

Yes. As you know we got an open authorization. I don't want to comment on the specifics, but we are always looking at it. And the lower the price goes, the better the buy is, and we know that too.

Could you give us CAPEX and depreciation and amortization levels, please?

For the quarter, I don't have the CAPEX number -- the depreciation and amortization was year-to-date just about $4 million.

Thank you.

Our next question comes from Van Brady of (indiscernible) Management.

Good morning, Jim. I was scribbling down the sales mix figures you gave us and I didn't get any for set source, I don't know if you gave it or not.

I may not have. Set source for the quarter was 2.3 million vs. 1.2 million for the quarter last year. And that was up -- 81 percent (indiscernible) rounded actually 1.249 last year 2 million 257 this year but it's up 81 percent year-over-year.

One thing I would appreciate your commenting on is the following: just to understand the question, if you look at Clave through Abbott. You go back to first quarter year and you have year-over-year jumps of -- very big jumps in the first and second-quarter, up to 12 million, which I think probably included a lot of inventory stocking by Abbott as a result of legislative move towards needle sticking. And then, actually, since that time you've had kind of flattish quarters, including this one, that is, if you average the first and the fourth quarter so one can conclude from that, that just about all of Abbott's dedicated (indiscernible) users are surely using Clave by this time so future growth would be nondedicated sets. And the question is: you know from your discussions with Abbott what percentage of their customer base who are buying their regular sets -- undedicated sets, that is -- for drip bags and other things are at this point using needle free connectors and what kind of potential growth there could be as more than an opt to use needle free connectors?

Van, a couple of things. The portion of Clave's that are used on pump sets is about 50 percent. And I don't have an exact number and the range there is 40 to 60 we said 50 because it's about in the middle and talk to different people at Abbott and you get different numbers. But it all comes (indiscernible) in that range. So that means half our Claves are going on pump sets and half of them, roughly, are going on nondedicated gravity sets extension sets, things like that.

In terms of the other way to slice this thing, we are roughly 58 percent penetrated in Abbott. But only two-thirds of that is in hospitals where we've got complete penetration so you work that math and it comes out to about half of the needle free connectors now that maybe a tad more Claves (indiscernible) balance with their own product.

The other piece of the equation is what percentage of Abbott's connects I.V. connections are needle safe devices vs. needles. I don't have a good number on that. We believe it is more than half, but we also believe it is less than three-quarters. And that is an opportunity for us because they've announced their intention to move that over to needle safe and that will eventually become Clave.

If that's true, why is the current quarter of Clave to Abbott less than it was six quarters ago? I can understand some inventory building, that'd take care of the big move towards needleless connectors but one wouldn't think it would go on for a year and a half and you've had no net growth in Clave or Abbott for six quarters now, so...

We're expecting to see that change in the second half. They did wind up coming out of the first half last year with a bit of inventory. And even for the second half of last year, that inventory went down, but not all that much as we understand it. We think they're poised at this point for better growth in the second half of this year.

So you think the 10.5 you get in Clave with Abbott in this quarter is going to significantly improve in the (indiscernible)

Yes -- yes.

Vivian Wall of Federated Kaufmann.

Good morning, Franc. If I could just follow on Van's question for a minute, I -- for some reason -- have been under the impression that a lot of the Abbott business was being shipped directly to hospitals. Maybe, can you clarify for us, how much of that business does go direct to hospitals and how much goes to Abbott?

We don't sell anything directly to hospitals with very minor exceptions. The Clave business -- all that we do with Abbott is we ship to Abbott and they distribute it. The set source business which is a custom set business, we dropped -- we shipped that to the end-user hospital directly. It's an Abbott sale, they invoice the customer but we do just to save time and get it to the customer quickly 'cause it's a JIT (ph) business model. We do ship that to the customer directly on Abbott's behalf, but...

Very distinct -- set source goes to the hospital and Clave goes to Abbott.

Exactly and the sales (indiscernible) Abbott.

What kind of visibility do you have into Abbott's inventory position today on the Clave and how much of that is accounting for your optimism for a Q3 rebound?

I can't get too specific on that one. We do talk to them. We know -- we have a good idea what they're going to buy for the year. We compare that to what they've bought so far and we think we know what the second half is going to be. They have some up-and-down in the inventory and that's up to them in some respects. Their inventory typically runs about three months in the distribution cycles, finished goods stuff, and then the plant could be anywhere from four to eight weeks and the plant piece of it is one that causes us the most ups and downs.

Planned?

Plant -- what they have in the manufacturing plant.

So they have three months of finished goods in inventory plus two months?

Anywhere from four to eight weeks on the factory floor so to speak.

On your factory floor

On their factory floor.

On their factory floor.

It is the variation (indiscernible) and what's in the factory that causes us the fluctuations. Not that they have very much fluctuation in the finished goods side.

If I could just switch to two separate questions. One is, if you could give us some color on how the Bio-Plexus valuations are going you've had underway now a couple of months? And then the second question is, do you have any sense yet of what percentage of the Braun accounts have started -- maybe even in July -- to reorder from you because I thought the expectation was that there was enough inventory in the channel through maybe the end of June but not beyond that.

Okay, let me deal with the Bio-Plexus part first. What we're finding there, it is taking a little more time than we would have liked. But we are focusing first on getting the products fixed and then as we get that completed, we're going to focus on getting their manufacturing up to -- comparable to what we do. We're very good at manufacturing that business as I think you realize. On the product we launched (ph) the Wing Set on March 1 and we have started to see some real activity on that now -- it is a relatively long sales cycle so we're looking for some increased pick up there in the third quarter. On the standard PCN, which is the (indiscernible) device but has the safety feature on it, we're still working on fixing that product, we identified about ten different alternatives to fix 1 problem. And we're starting on which one is the most manufacturable and that is the one we're going to go with. It's going to be a bit longer until we can re-launch that one. But we're starting -- we have already started, but it's getting more intense actually this week.

The guy who runs our molding (ph) and automated assembly operation here is in Connecticut taking a look at what they do.

And that's the beginning of the process of bringing our expertise to Connecticut. The people there are good people, they do good work. We think we can -- we think we can help them a lot and that's what we're doing.

Bio-Plexus was up slightly this year over what they sold last year. I think we will see better results in the third quarter on that one. It's taken us a little longer than they would like to get this thing turned around and on track but it is getting there.

On Braun, don't have a lot of numbers on that. We're getting a lot of good feedback from our guys in the field, we are seeing a lot of very positive signs. But it's just too soon to put a lot of numbers on that, Vivian.

If you had a guess, how much inventory does Braun still have?

That would be a real guess. They still are shipping Clave. Which either means that we've taken more business from them already than we had expected or that they love our Clave than we expected or some combination of the two. We never had good visibility on what they had in inventory so we probably won't have very good visibility on it, either, until it's down to zero.

So you are not hearing from the hospitals yet that this is their last order?

Braun might be hearing that -- I guess if that's what they tell Braun (indiscernible) next.

Okay so on Bio-Plexus, is it too early to say whether Wing Set is the homerun that you thought it might be or ...?

We're all very optimistic on it. We're getting good feedback from the marketplace. As you know, we can use it for infusion as well as blood collection and we just started to tap that market. It's acknowledged as the superior product in the marketplace -- it does have a premium price, but that's (indiscernible) modest premium for a better product.

I'll come back in the queue.

Brian Gonnick of Gorser (ph) Capital.

Couple of questions, just to fill in some numbers on the balance sheet. Can you tell me what accounts payable and accrued liabilities were?

Yes. Combined, they were -- looks like just $10 million.

Can you tell me what CAPEX was for the quarter?

You know, I don't have that number here. It's in line with the annual numbers we would have in the first quarter (indiscernible). We've not added very much of the new stuff. It's a matter of timing.

Can you tell me how much stock you bought back in the quarter?

Yes. That I can. Give me a second here to find a number. It's been about 1.7 million on buying stock back and that was 58,500 shares.

Just trying, then, to reconcile the uses of cash in the quarter. Cash went down from $79 to $69 million. Is there something I am missing?

We had the acquisition in Italy and we also had a very large tax payment to make. We'd gotten out of the habit of paying taxes last year with the unqualified stock option reduction but we're back at it again this year.

The way it works is we are able to make a very low first quarter payment just because of the way the rules were but we had to make it in the second quarter.

How much was the tax payment and how much was the acquisition?

The tax payment -- I think about $6.5 million -- the acquisition relatively small.

That would explain a lot of it.

That's basically where it is. We pulled a whole ton out of receivables.

Yes. In receivables you collected about 10 million plus the net income depreciation was probably what? Another 6?

We had net of kind of round numbers 4, another 4, another 2 for yes -- 6. With post depreciation.

That's about $16 million from cash, from receivables and then it gained depreciation. Okay. We can try to figure it out.

I think payables may be down a little bit as well -- I don't have the cash-flow statement here in front of me.

My next question relates to the recall of Avet (ph) and a bunch of Avet (ph) pumps and I.V. sets that went with those pumps, something on the order of like 70 million units were recalled in this second quarter. Can you talk about how that affected you?

Not very much so far. There's two aspects of the recall to focus on. One is, we buy -- well, let me go back up. What they had was a voluntary recall of certain sight chambers used on their I.V. sets. They stated in their announcement that a supplier erroneously them supplied PVC medical grade plastic resin that was not radiation grade. What happens when it is not radiation grade is when you sterilize it which is usually (indiscernible) you get a slight discoloration of the chamber, but they state no health events associated with the issue. They supplied us with sight chambers which we've been using in the set source customization systems we make and we sell them back to Abbott. As the manufacturers of the IV system we are obligated to initiate a recall of the product that we manufactured and we are in the process of doing that right now.

Abbott will indemnify us for all costs related to the recall, so we don't expect any direct financial effects from the recall. We're now receiving new parts from Abbott and from another source. So, in terms of our manufacturing (indiscernible), the recall is kind of a nonevent.

There is one opportunity here and that is to the extent this recall -- the Abbott recall sets have Clave on them, they are going to have to buy more Claves to replace them. And we don't know what the effect of that's going to be but it can't be all bad for us.

So are you saying none of the sales in the second quarter were related to replacement sales for the recalled I.V. sets?

None. In fact we had about four days of (indiscernible) that didn't go out (indiscernible) warehouse because we got the notice from Abbott and we just stopped shipping.

So you would expect I mean, something like 70 million units, how many Clave would that represent potentially everyday?

I don't know. I don't know.

So would you expect in what you're looking at for this third-quarter and fourth-quarter how much of your sales will relate to replacement sales for the recall?

A lot of it depends on how many sets actually come back and I'm not that familiar with the Abbott numbers. I can tell you that we do not expect very many of the set source sets that we sell through Abbott with this chamber on it to come back. Most of these have already been used. And I would expect -- my recollection is the Abbott number is something over several years and if it's something over several years my guess is most of these things have been used as well. So I don't -- it's hard to say but I'd be surprised if it's used but then again that's Abbott's issue.

But out of 70 million units that are being recalled that they are going to replace you must have a sense for what share of that represents your I.V. sets, right?

I think the more relevant number is how many of the things are actually going to come back? I mean it's not unusual in situations like this to get virtually nothing back or almost nothing.

How would that work?

The customers don't have to send it back. The things work fine --

So it's a voluntary recall, if customer doesn't send it back -- I mean if no customers send anything back it could be zero.

Exactly. And again, there's been no adverse health events associated with the issue and so I mean this does not -- it's not a smoking gun of any type that is going to get people upset -- it's very voluntary.

Just last couple of fill-in questions? Can you tell me what sales and marketing and G&A were individually for the quarter?

Don't have that (indiscernible) 10-Q.

Thank a lot.

Jerry Heffernan of Lord Abbott.

You had gone over the breakdown of products in revenue and, honestly, I think a couple of things double up here by names and I was trying to keep up with it. I was wondering if you could, if we could just go over a summary of that, again? Trying to total back to our 21.2 number here showing in the statement.

Okay. Let me take this in piece. The Clave was 11 6, the Customs were 4 6, Punctur-Guard was 1 5 -- I'm sorry, 1 7. And that's going to be most of the product sales. The rest is just a potpourri of things like Lopez Valve, COC (ph)700 and then you got that the other category which was the whatever was 1 4, I (MULTIPLE SPEAKERS) (indiscernible) pretty close 99 product sales and 1 4 on the other side.

Is that other the license sales?

Yes that's the -- let me just go over what's in there and (indiscernible) this is exactly what you asked but I get a lot of questions on it so just might as well answer the question that hasn't been asked yet.

We got $1 million dollars from a Diabetes Infusion Pump Company in the second quarter. As you recall, from different companies but same issue we got 1 7 in the first quarter and 3 2 in the fourth-quarter last year. The other income that we've had in the quarter on top of that million was roughly 200,000 on B-Braun revenue share and a couple hundred thousand on (indiscernible) royalties so that's 1.4 million for the second quarter. The Punctur-Guard royalties will continue through the balance of the year and that's going to be (indiscernible) a quarter. Safe (indiscernible) revenue share likewise will continue and that's going to be a couple hundred thousand dollars a quarter and starting next year we're getting an additional royalty from one of the diabetes infusion companies that will be about a quarter of a million dollars a quarter for four years. So the quarterly run rate into next year will be about $700,000 and that's going to be pretty steady or about 2.8 million for the year. This year, we will have about -- something (indiscernible) 4.2 million for the year.

This is what had so far -- 3.5 plus about 4 or $500,000 a quarter. From (indiscernible) Bio-Plexus so does that help on the royalties and license fees and (indiscernible) category?

Yes. It does -- appreciate that. Now in regard to the falloff in the Clave sales here the amount to Abbott was 10.5 vs. what was it in the year ago?

It was 12 just 11, 12 in change. Second quarter last year.

And then the remaining big difference there is the international business. Is that correct?

International is down and a lot of that's Clave and without a drop in distributors and looks like some of that may be Claves. Distributor sales last year in second quarter were the best quarter for the year for distributors. So (indiscernible) tough (indiscernible).

I'd like to take this into the conversation on Braun then if I could, because it seems the discussion on Braun is like, they have some and when it's out, it's out, no big deal. I'm somewhat concerned that may be a bigger deal than the tone of the conversation has let on. And I'd like you to walk through that in a little more detail if you would, please?

Okay, take it back to how this thing got started. We have long detected a preference among Braun's customers for the Clave over the Ultrasight. When Braun violated the contract a couple of years ago, we knew that that preference was there and were not the least bit concerned about ultimately terminating the contract with Braun if that is the way it worked out and that's the way it worked out.

What happens to the Clave's business in the Braun accounts is to the extent it goes to our specialty distributors we take what was a Clave going (indiscernible) sold to Braun for (indiscernible) 50 cents each. And we convert that to a sale of a package sterile Clave for 75 cents or more or an I.V. set for several dollars or more.

So we're getting a lot more sales dollars per Clave that would go to the customer if they get their Clave through the specialty distributors rather than Braun. To the extent it goes to Abbott we are just trading dollars Abbott's price was somewhat better than Braun's (indiscernible) sterile although on the ancillary products Abbott does buy a lot of those from us whereas Braun hardly ever did. So when you put that altogether we know we're going to lose some volume to the Ultrasight or other Braun connectors but we expect that switched to other distribution and away from Braun will make up or more than make up for the dollar volume we lose but more than a (indiscernible) will probably get a better margin on the stuff so all in we should be better off when the dust settles. (indiscernible) The uncertainty in this whole process as we see right now is where half a year into it and Braun still has Clave. The question is what is the customer going to do when Braun runs out of Clave.

They're going to get the Clave someplace else or they will take Ultrasight, we believe that a lot of them are going to get the Clave somewhere else.

And do you have any tangible evidence from your distributors business (indiscernible) set now where you see a sequential pickup in their business indicating that customers are coming to an end of the Braun offering and switching over?

We're seen some signs of that and seeing some very notable successes in the marketplace Braun accounts which are now getting Clave through distributors. The other thing we got we got ourselves on some of the GPO contracts Braun is on so customers can continue to buy Clave on contract and continue to get their contract discounts.

Are you seeing this in specific regions of Europe or is it just hot shot (indiscernible)

Braun's strength is on the West Coast and East Coast -- (indiscernible) heavy concentration there and yes we are seeing progress on both coasts.

Very good.

And that just occurred from the beginning of the second quarter on. So we haven't realized the sales the pure sales at this point where they would be reflected in the numbers. We have converted to IDNs on both coasts that we should start seeing an increase in Clave sales through distributors from here on in. But they certainly wouldn't have been realized at this point.

Okay. So you're getting tangible evidence from acouple of customers indicating that they now that now have to switch the ordering methods for the Clave product?

Actually that situation I was describing, theyv'e just switched to Clave. And then a lot of other -- in a lot of other cases if we -- when we get to them at the right time we are usually successful being able to keep that business and convert them over to a distributor. In a lot of places, Braun is simply if they need to they will just ship the Ultrasight in as a surprise to the customer and that benefits us as well, but we have tangible evidence in several large facilities that were buying Braun are now in the process of switching or have switched.

If Braun just sends in their product as a surprise how does that benefit you? I mean it seems to me they're taking a shot at converting forcing conversion to their own product. Why do you think this is good for you?

It's not good, it is not good business when to switch syringes which are pretty generic. Has to go through committee. So from that standpoint they definitely upset a lot of the clinicians in hospitals that already know that there are some clinical differences between the Clave and the Ultrasight.

And I am pretty sure I know the answer to this. There is still no debt on the balance sheet. Is that correct?

No debt.

Thank you.

Doug DeMuth from Whitney.

Would you mind giving me the break down on custom set sales between Abbott and tje distributors? I guess the total's 4.6?

Yes the average custom fees which is the sensor (ph) program is 2.2 -- actually 2.257. I don't have the distributors separated between international and domestic in front of me here but it -- (indiscernible) (MULTIPLE SPEAKERS) international customer it's nothing inconsequential but with the international number this quarter it can't be that big either.

Shy Garrison (ph) of Corsair Capital.

My questions have been asked and answered.

Our next question comes from Gary Brody. Of Brahmin Capital.

Hi, wanted to find out what cash flow flow operations was, either for the quarter or the six months?

(indiscernible) number I don't have the cash flow statement here in front of me, I believe it was about $10 million operating cash flow.

Was that for the quarter.

For the six months.

Thank you.

We're going to put it up on our website within a couple of days. A lot of the financial statements and some of the others (indiscernible).

Simon Castle of Stefanos Capital.

Most of my questions have been asked and answered. I really am after qualitative rather than quantitative answers. You were asked earlier about pricing and I didn't quite catch the answer. I heard a little bit about changing product mix gross margins you expect to decline a little bit I guess 55, 56 percent. FIrst question is, can you help me understand pricing, whether you are seeing stable pricing or if you're seeing real softening in any pricing particularly with respect to Abbott but if you could address any other customers?

The pricing with Abbott this year is pretty steady compared to last year. The difference that we're seeing there is all based upon mix. Given buying more bulk non-sterile as a percentage of the mix which has a lower price than some of the packaged sterile product. That we may see some turnaround in that later in the year which might help us a little bit there, although I haven't used that in any of our numbers. Domestic distributors. We've been reasonably aggressive pricing there. We're dealing with Braun - that was always pretty aggressive on pricing so we had to do some things there. Nothing that I would say dramatic but it's there. International the pricing there middle has been a little bit soft as we've been trying to increase our market share.

The next question you definitely flagged at the last quarter the second quarter was going to be weak. Though I am probably not alone in saying I was surprised at how weak. You've always been a straight shooter. You're quite optimistic about the rest of the year and pretty much making up the guidance that you've been given. I think everyone is struggling to see the basis for that. Is there anything you want to add to what you've seen before?

We've got recently good visibility on where we're going to be with Abbott. And the only question there is where it's going to fall. Set Source is growing very nicely and Abbott is promoting that very aggressively. So I think we have pretty good reason to be optimistic there. The distributor business should look good in the second half of the year. It' normal growth plus picking up some of the business from Braun. Ultraguard we should have some pick up there from the wing set and possibly from the VCM second half of the year -- that's looking okay. And international while it's not going to have a great year should be better in the second half then it was in the first half. Take a look at the Paces cases and the year looks fine. The problem that's always bedeviled us is what quarter income the revenue is going to fall in.

OK and then, finally, the stock is currently trading in mostly a 24 plus range. If it stays that way for the next couple of weeks do you have the comments about additional stock buybacks or management's view about earning more stock?

We talked about that a little earlier on the call -- we got an open authorization and the lower the price the more likely it is we're going to buy and we're buying at a higher price than what iot is right now a little while ago. I can't give you a black and white answer on that but just tell you some things that are going through our mind.

Alan Forrier from (indiscernible) Capital Management.

Couple of housekeeping items Franc. On the -- did I hear you say cash flow from operations for the six months is positive 10 million?

I think that's what guess I -- that's what -- yes that's what is.

And was there any cash generated from option exercised in the quarter?

Yes it was very small. That number I might even have. It was about $1 million.

Okay and you said you spent about 1.7 share purchase?

Yes.

Could you help -- could you help understand where the cash balance where the negative cash was in the quarter? Your cash balances are down about $10 million.

OK. The piece you may be missing on the cash is ICU Finance which is our finance subsidiary which we have given brief mention of in the past and we had a note potentially brief mention of it in 10-K last year. That is basically a commercial finance operation that's been loaning on a fully secured basis to a number of health care institutions. And the loans there probably became noticeable at the end of the quarter. They've got 7 million outstanding right now. What we're trying to do there is increase the yield on our cash because what we have in right now the investment securities is bad. Just like the rest of the market and what we figure is we can give prime plus on basically no risk commercial loans. And that's what we are doing.

Okay so there's a negative number in the (indiscernible) (MULTIPLE SPEAKERS)

-- about $7 million and that is probably the missing number on what you're trying to do there.

OK and the royalty that you had in the quarter, I guess, is around $1.4 million. Is there any receivable associated with that?

No. The only continued receivable on these is a fairly short-term amount and Connecticut has this (indiscernible) has it as well as the (indiscernible) accrued it over the quarter they (indiscernible) in the following quarter either 45 days or 60 days into the quarter. But that just rolls over and over and over. It's not a big deal.

OK. And moving on to sort of I hate to beat a dead horse in terms of revenue outlook but the seasonality of the business historically has been June is very strong and September is weak. Is there -- I guess what you're telling us is that you know what Abbott's going to buy and it just hasn't happened yet so that's why you're comfortable with your forecast?

Let me go back on the seasonality. You are probably seeing what I call the spaghetti chart on our slide presentation. The inherent seasonality is decent first quarter, second quarter down, third quarter down even farther and then fourth-quarter (indiscernible) best quarter of the year. Reason for that Juney, July, and August is relatively slow months in health care in this country. People don't get as sick and postpone elective procedures. The -- so -- while our second quarter over the last several years has -- tends to be a decent quarter it's the underlying economics of the business (indiscernible) should be down quarter. That's what we've seen this year. The second and third quarter as you know (indiscernible) most difficult ones for us to try to predict. And of we're going to (indiscernible).

OK. On the inventory if you adjust your revenue for the royalty payment (indiscernible) assume had no inventory associated with it your DSOs now in the low 70s, which historically your inventory levels have been in the teens. So, was it that you weren't expecting this quarter to be this weak which almost have a full quarter worth of inventory now?

Yes. What's happening -- couple of things happening here. One is the Company (indiscernible) inventory and that all comes in in Juen with sales attached to it so that was historic fee, metrics a little bit. We -- throughout the summer months -- normally produce on a fairly level basis. This is on the (indiscernible) not necessarily related to what the sales plan is and the reason for that is we want to avoid the (indiscernible) spikes in production that can occur in the fourth quarter that cost us a lot of money in overtime and things like that. So we're producing a level basis and build inventory in the second quarter and third-quarter (indiscernible) business last year as well you might recall.

The other thing (indiscernible) us we are still having to build with raw materials and that's just to ensure supplies in the manufacturing to make sure we don't want run out of material and again the difficulty there is getting our supply chain to deliver all the products we need on a JIT basis. We're working on that but (indiscernible) (MULTIPLE SPEAKERS)

Okay so the growth margin pressure you have already experienced clearly must be price because you've been producing at a fairly high level. Is the gross margin pressure you're referring to in the second half going to come from producing at lower levels to work down this inventory?

No no. It's just going to be continuation of what we have in the first half. It's going to be continuing, trying to work on the Bio-Plexus margin, which is a struggle. We have had some weakness in international pricing which caught us a percent on the margin in this quarter. And I don't know if that's going to go away.

And then the rest of it was a mix issue on the Abbott business and that may change as the year goes on where we have more steril products as opposed to (indiscernible) (indiscernible) but I will wait till I see that before I make any changes.

Last question. When would you think we would trend back to your historic inventory level on a Day Sales basis?

I would expect that we'd start -- (indiscernible) the fourth-quarter, quite frankly.

OK. Thank you.

Our next question comes from David (indiscernible) from UBS.

Good morning, Franc. Couple questions that are a little different than everybody else's. I noticed in the voting -- shareholder holding you just reported that the 2003 option plan was almost defeated. And I was just wondering if as I look over historically the GAAP between basis and diluted earnings is growing so it seems that options issued to employees and management are -- is becoming a larger and larger portion of the outstanding each year. And I was wondering whether the Company feels they've gotten to a point where they're going to hold the line a little bit or even decrease the number of options each year issued to employees of the Company? Percentage of outstanding.

We cut a lot of options --I haven't looked at what I have (indiscernible) handy, but the number of options gross number of options (indiscernible) outstanding shares has been -- the thing that has caused the dilution to go up so much is more related to the stock price going up so as you go through the mechanics (indiscernible) calculation you wind up with more diluted shares. More of that actually than any increase in the absolute number of options.

The other thing, so we know we have a lot of options outstanding and if you look at the ISS metrics the fact that we barely tweaked by shouldn't be surprising.

The other thing in terms of what we're going to be doing in the future, we are looking at that very closely. The demise of free stock options may be far off and our pro forma option expense percentage of income is, quite frankly, a lot higher than I like it.

Quite high, actually, I figured it out but go ahead.

About 30 percent. We're looking very closely at that and I don't want to say what we're going to do because that is up to the board to decide. But I suspect that we're going to have fewer options in the future.

OK. And then have you decided whether you're going to formally start expensing them? But I noticed we don't at this time, but are you actually going to?

I'm not a fan of expensing options. I don't like Black-Scholes for (indiscernible) options, I think it gives us a wrong answer. I hope the (indiscernible) something better than Black Scholes but when the (indiscernible) says they're going to expense them (indiscernible) probably not (indiscernible)

OK. Thank you.

Our next question is from Mike Marinachi from (indiscernible) Capital.

Hey Frank, just one more quick one. Regarding the international impact on gross margins, I'm trying to work through the math on how $700,000 worth of revenues hurt gross margins by a full percent. What were the international gross margins versus... (multiple speakers)

Take a look at the thing on a six month basis. What I've done on the gross margin on a six months (indiscernible) about three months -- the international is the only one that kind of popped out there wasn't there in the first quarter. The margins, I don't have the exact number but they were relatively low compared to the rest of the Company.

Allright (multiple speakers) can you ballpark them for me? Are we talking in the '30s, or...

Closer to the low 40s.

And how about the Bio-Plexus? Where are those running?

35 (ph) steady with the first quarter. (indiscernible) improvement there but did not make it.

Got you. Thanks a lot.

Bruce Cranor with Leering Swan.

I guess cleanup items. I'm still trying to reconcile, I guess a lot of us are, the independent channel and the effect of Braun. You mentioned 5.1 in the quarter is the sales level. I think.

Yes.

And that was over 4.2 last year. Do you happen to have the number for Q1, by chance?

For the independent?

Right.

Not on the table here in front of me.... (multiple speakers )

What I'm trying to get at is too, I guess a little little over two of that is custom, so I'm just going to figure out. .. (multiple speakers)

I think the independents, in the first quarter, were about 4.7 or so -- was, I think we had about 1.5 million of Punctur-Guard on top of that. That is pretty close. I mean, I can give you the exact number later but I think that is pretty close to what it is.

For the sake of argument, then, the 5.1 in the quarter -- what is your sense -- what part of that is going into Braun hospitals today?

(indiscernible)

You always said some of that is Baxter so on and so forth. But...

First, Bruce, I don't know, specifically. We've got some numbers on it; I just don't have them. Greg, do you have any idea?

(inaudible) 20 percent. And that is kind of a guestimate (ph) because (inaudible)

I don't know if you heard that, Bruce. He said maybe as much as 20 (indiscernible) a little lower on that. Just difficult to track. What happens on this, Bruce, just in terms of sequencing, is we sell it to a distributor, and then, several months later, sometimes they get sold through to the hospital, we get the sales tracings the following month. So, trying to get the stuff in a real-time basis is a little tough. Right now we still don't have all the June sales tracings in so what happened to June we don't have a lot of visibility and we will not for a few days.

Okay. You mentioned, I think, some design changes with Punctur-Guard. Was your comment -- I think you said something about more changes on the way? Was that specific to the infusion product or the blood collection product or both -- or was it both?

The wings set which is what we use for the -- it's got a blood collection application as well as infusion. That is pretty well done. It is the more standard blood collection needle that we are still working on. The product works fine, it just it makes an audible click when the safety device is activated. It's just the wrong pitch and people do not like it. That is the problem. There are any number of ways to fix it. But it's not a product performance problem it is more a perception issue. But it is important.

Okay. I guess, lastly, if you don't mind, push you a little bit on the Italian acquisition. Did you say closed in June -- is that right?

(indiscernible)

And you don't want to talk about the terms in terms of cash out the door. But I can kind of intuit that. But, sales trends there -- you don't want to comment all, not necessarily size but just the business that's kind of in growth mode. Can you add anything there?

The sales -- I mean, they do have sales -- it is pretty small. But, the important thing there is it gives us a footprint there that we can expand off of. The guys s running the thing -- they're young guys and are very bright, very aggressive and really pumped up about this whole thing. (indiscernible) ICU Medical. We have known these guys for a while because the company was actually a distributor of hours -- a small distributor. What we are doing, working on it right now, is putting our manufacturing techniques, you know, the stuff you see now here, the call center and the manufacturing (indiscernible) that we do in Mexico, in place there, basically, taking what we've done so well with here and putting it in place in Italy and these guys are really excited about it.

We are very optimistic that this is going to be what we need to really expand in Europe and make some decent money there as well.

Okay. Actually I had one more. I lied. You mentioned penetration at Abbott hospitals. I think your number was 50 percent?

Roughly, in terms of, you know, opportunities. I think it is at 58 percent or so. (indiscernible) about two-thirds of those -- we've got pretty complete penetration.

So, if I do that math, I get actually sort of 38 percent as a, you know, total penetration rate, I guess. Do you disagree with that?

(indiscernible) 38 (indiscernible)

I thought you came up with a higher math ... (multiple speakers) .

I said you've taken the ones where we don't have complete penetration you may get the 50 percent.

Okay. (multiple speakers)

The other one third.

Just for clarification, so there is a story and we have all heard it ad nauseum about Abbott losing accounts and maybe it's (indiscernible) maybe it's not. You know -- I assume you know, you have a spreadsheet or something -- kind of detail the hospitals you're actually shipping product to that Abbott is in -- and I just wanted a little clarification. You are not aware of any current account that has basically stopped ordering because they have swapped out to a different infusion pump?

We have not seen that.

Okay. (multiple speakers)

There is always some noise level turnover on these things so there may be one or two in there. But nothing has risen to the point of the notice.

But, you would agree with Abbott characterization of their share being stable and not really giving that up?

Everything we see, yeah.

Adina Dhoti with D.B. Riley and Company.

More follow-up, Frank. You mentioned you're going to see no more revenues from your manufacturing in Italy for the rest of the year.

I did not say that.

Okay. So this is going to -- so can you quantify (multiple speakers)

Adina, it is going to be relatively small. Quite frankly, it is too small to talk about. The way to look at this thing as we are manufacturing plants, with management and people in place. The importance to us is that. It's not the fact that they have some sales. We're looking at, right now, how many of the sales we actually want to keep. I mean, we make -- we're looking at, basically, from the ground up rebuilding this thing our way (indiscernible).

Okay. What do you think the market penetration of needle-free connectors is in Europe?

Relatively small.

We see what we sell, see what other companies sell -- it is relatively small.

You think the driver for transition to needle free would be (multiple speakers) there is no legislation?

It's the same thing we have had, you know, have had here five or ten years ago. There are two aspects of it in Europe. One is that they tend to use open systems -- open (indiscernible) more than we do here. And so, they are moving to close systems. When you get to close systems, then it is a lot easier to sell the needle-free devices such as ours. But, so we've got two (indiscernible) close systems and then selling them to Clave connector as the best connector to use when you have a closed system. So, it's kind of a two-step sale.

It's just as much infection control as it is safety.

The (indiscernible) systems are prone to infection.

Vivian Wall of Federated Kauffman.

Thank you. Good morning. Since we have Craig on the line, I am wondering, Craig, if you are seeing the penetration out there from the competitive connector from Alaris (ph)? Because if you look at the financials they're reporting, they are reporting pretty good gross in the undedicated connector market. And I am just wondering if maybe they are making some inroads into the Braun accounts?

Their undedicated business follows their pump business. So, the better they do with their pump, and potentially the better they do with their undedicated products because of the pricing is so low, their pricing, starting several years ago, deteriorated -- the pricing market for all swabables. It started there, and it continues. But, they do not, from a sales standpoint, to employ, actively go out like we do and go after, aside from Abbott business, go after business that is non-dedicated with their pump business. If it piggybacks onto their pump, fine, we coexist in many accounts of the country, and internationally, relative to the size of international. Where Clave has chosen, even though they are using Alaris pumps. So, I do not believe that they would be gaining much in the dedicated market, unless it is piggybacked onto their pump business.

Vivian, one thing to understand is that there are very significant differences in how the Clave works versus the Alaris (indiscernible) works. Our pump has been very important (indiscernible) going to a non-pump application. That is the advantage we have over them.

Okay. So, in the U.S., you don't see that having a competitive impact?

Well, they have a competitive impact because they have a good pump. Then, you know, because of pricing and the fact that they have a good pump, they are always going to be a competitor. As they are with Abbott. But, in the whole market, including Alternate Sight (ph) you know, we can go head-to-head at any point.

And, as you look to the overseas market, who is the toughest competitors there that is putting price pressure on you?

You know, it varies. I have been involved more with that lately, and it varies. And what I find is, internationally, the safety needle aspect is not an issue. Infection control is a big issue. And, in a lot of places they are still going hub to hub, like Frank mentioned in Europe and also in China. Otherwise, Baxter is a formidable foe. They have a lot of the business because a lot of the offshore manufacturing in Singapore and the like. Cost-wise, we're looking at ways to improve ourselves there to be more competitive. But Baxter, I would guess, has the -- I know -- has probably the bulk of the non-dedicated market.

Okay. Thank you.

Mischa Rangapol (ph) of Sidoti.

Frank I wanted to clarify your revenue guidance for the year. I believe it was about $103 to $105 million, you said.

We said the topline would be up 22, 23 percent -- right.

And that includes the license and royalty fees?

(indiscernible) I have given up trying to keep track of what people put in and out (laughter)... I think when we said 22.2 percent for the first time we were not anticipating any of these onetime payments. Just a normal routine (indiscernible) in Connecticut.

Brian Gonnick with Capital.

Could you just go into a little more detail on the $7 million use of cash to invest in, I guess, financing for some hospital customers? Is that related to your product sales, at all? How does that work? What is this business line?

No, the loans there -- no more than half a dozen of them out right now -- are to -- hospitals or people in the medical -- provide medical supply business -- they are not connected directly, at all, to our product sales. There may be users of our products, in the end. But, that's not going to be a very determining factor, because a portion of our products, you know, as a percentage of the annual hospital budget is very, very small. These are just, I mean, generally, very, you know, profitable hospitals, or other companies. Then, they are fully-secured loans.

So, what kind of terms are you getting in terms of interest rate? And what is the maturity of the loans?

The maturities vary -- I would guess some five-year term loans some shorter term revolvers. But, I think five years is as far as we have gone.

In terms of interest rates, they are all variable over time. So, we're not going to get stuck with any market risk here.

Right. And you think this is a better use of cash than buying back your stock?

It is one of the uses. We're not going to spend all of our cash on the stock. In terms of keeping the cash safe (indiscernible) a lot better way to spend -- a lot better way to put it (indiscernible) rather than putting it into the kind of tax exemptions (multiple speakers) (indiscernible).

But, so -- but these are customers of yours -- is that right?

No (multiple speakers) they are not direct customers of ours. With one exception.

When you say they are not direct -- they are indirect customers?

Some of these hospitals use Clave products so that would make them indirect.

Okay. Okay.

But, no, we are not targeting our distributors for these loans.

Okay. So they're all hospitals -- you said there's a medical device supply company in there or...

I think there are two device suppliers and the rest of them are hospitals.

And (indiscernible) distributors?

One is a distributor and one is an affiliate of a distributor. And those loans are both in connection with changes in the business ownership; has nothing do with the product sales cycle.

Are you taking any reserves against your income?

So far, we have not seen the need to. Obviously, we will continue to look at that.

Okay. Good. I just want to make sure the earnings have not been... (multiple speakers)

These are situations where we should not have any credit exposure at all (indiscernible).

Shawn Daily with Daily Holdings.

What percentage -- your new shareholders -- what percentage of the business is Abbott at this point?

For the six months, they were -- have to go it alone (indiscernible) (indiscernible) 52.1. (indiscernible)

So 34.6 out of 52.1?

66 percent.

66 percent... okay. Secondly, there was a report out a month or so ago -- a short report. Talking about your -- excuse me -- the Accounts Receivable and the clients and allowance for doubtful accounts and other operational matters. Can you comment on that?

Yeah, that was basically addressed to our March balance sheet when the receivables went up but the reserve kind of stayed steady. IF you take a look at our receivables now, they are down $9 million. The reserve is still about the same as where it was. We take a look at the receivables pretty carefully every month, actually. And make a determination as to what we think might not be fully collected. The ups and downs in the receivables that we have experienced lately have been, basically, current billings. And those things get collected like clockwork. You know, we've got some older receivables obviously that are collection issues and those are the ones that don't change up or down very much (indiscernible).

(multiple speakers)

The reserve (indiscernible) receivables I realize (indiscernible) statistic (indiscernible) but it has no relevance here.

And, thirdly, there are very few analysts following the Company. Is that something that you are focusing on to get your story better told? Because, you know, quite candidly, that is probably why you got so much of you know (indiscernible) the shorts can run the show on this thing.

Yeah, getting analyst coverage has been tough. Although people will disclaim any linkage between banking business and analyst coverage. But the rule there is there may have been something there at one time. We have not had banking business in a long time. We continued to try to work with potential companies -- (indiscernible) want to give us analyst coverage don't want to cover us. And it is just tough for a relatively small company.

Bruce Cranor with Leering Swan.

Again, I cannot believe I am doing this three times. But, I have yet another just quick follow-up, Frank. The 1.4 other number in the quarter -- I think you mentioned it was basically 1 million from the infusion company, shall we say -- or, I'm sorry -- we all know what it is. There's a million there and there is a couple hundred say (indiscernible) couple hundred is Punctur-Guard?

Yes.

My question is, in the prior year comp why didn't you break out Safe Line (ph) because that had to be there?

We started breaking this out in the fourth quarter last year. The (indiscernible) was so small it was (indiscernible) didn't bother going back and changing it.

So, you are Safe Line at 630 was diminish?

It was, basically, it looks like the same as it was this year.

Right. My sense was that was kind of trending levelish (ph).

It was level for a number of years.

So it's fair to say there really should be a couple hundred thousand in the other line for the prior year period.

You can look at it that way.

It is important going forward to make sure we are talking apples-to-apples....

This will sort itself out pretty soon anyhow. We've broken out the fourth quarter, numbers in the fourth quarter, as you recall, were pretty big, but they were never big in the past so we just (indiscernible).

Richard Marshall of Fendish. (ph).

(indiscernible) seems to be so many inconsistencies between what Abbott is saying and what you guys are saying. First off, they talk about their intravenous products being down in the last quarter. And they are not certainly sounding bullish about second half in that area. Also, they came over the press release sometime in the first quarter something like that a couple of months ago talking about how by June they would be 100 percent averted to needle-free technology. That is something you guys have been promoting, that there is this whole transition to needle-free and what they are saying is that transition is done -- it's complete. So I'm trying to reconcile that and what you are saying.

Also, I remember being at a presentation that you guys made at one of the investment banking conferences sometime around September of last year, and the question was asked how much of Abbott (indiscernible) was penetrated? And the answer back then was 50 percent and today you are saying it's 50 percent. Do you have any data to back up your 50 percent number? And how -- what has it been quarter-to-quarter? Can you address these issues?

Let me try to work through them backwards. The data on penetration we get in discussions with Abbott, and it has been increasing, steadily, since 1997. So, if I said 50 percent a while back, and said 58 percent, and then two-thirds of that is fully penetrated, that reflects the growth (indiscernible) you heard me at the conference (indiscernible) so it has been growing pretty steadily.

(indiscernible) review that again. Fifty percent but you are saying it is not -- it's 58 percent today -- is that the number you are saying?

I forget what it was (indiscernible) you would have heard a presentation from me. Some time ago we were saying we were 50 percent penetrated in Abbott accounts. And two-thirds of those were fully penetrated; the other one-third was not fully penetrated. Okay? That now (indiscernible) to about 50 percent (indiscernible) two-thirds/one-third ratio still holding (multiple speakers) that will continue to ratchet up until we get pretty close to 100.

Okay.

So, it just changes over time. They announced they were going to go needle-safe by June. Two things there. One is I would be amazed (indiscernible) make it by the end of June. The other is that does not mean instantaneously mean Clave business. They are committed to one connector (indiscernible) Clave. But Clave is still perceived as somewhat more expensive for some therapies. So the price resistance -- and we have talked to them about this -- believe them to go to one of Abbott's lower-priced connectors before they go to Clave and switch to Clave at a later date. So, I think the needle-free thing -- we have not seen a big effect of that on us, although we expect, over time, that it will be helpful.

Now, the first part of your question -- (indiscernible) what was your first question?

Just on that thing. We talked to the Abbott person and they said it was not like there was going to be some acceleration to needle-free in the last few months to June. Their answer was it is pretty much done already we are already in 95 percent plus, so we just put out this press release to basically say it is done. So, they are saying, I mean, their officials, you know, the official statement they're making is they are converting to needle-free. That doesn't mean it's all Clave. There are some other things there. But surely, the impetus to move from needle, needle-based technology to needle-free technology is a lot greater than to move from one needle-free technology to another needle-free technology. (multiple speakers) you don't have legislative imperatives.

(indiscernible) I do know that they still have a lot of standard ports out there and those are the kinds of things you use needles on.

They have a large percentage of business out there that is considered light shield pre-pierced which is similar to the Baxter interlink system. Manufacturers consider that to be a needle-safe system. However, it is far from being a swabbable one-piece system similar to Clave, and similar to -- Baxter is now trying to push in the market, the Clear Link, to take place of the interlink and compete in the swabbable market with the Smart Side and the Clave. So, when Abbott says they are nearly 100 percent into needless safety devices out there, they are combining the Clave business that we have, plus a decent percentage of their Life Shielf pre-pierce system which is a blunt (indiscernible) system. It is a needle-safe system however, it is not the swabbable one-piece Clave-like system.

Got it. Okay. Thanks, guys.

Sir, there are no further questions. Sir, at this time there are no further questions.

Okay, well, let me thank all the participation, Jennifer, and turn it over to you.

Thank you, sir. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089, with an ID number of 298 396. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

(CONFERENCE CALL CONCLUDED)