UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997.
Commission File No. 1-12575
UTAH MEDICAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Utah 87-0342734
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7043 South 300 West
Midvale, UT 84047
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(Address of principal executive offices)
Registrant's telephone number: (801) 566-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which Registered
Common Stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and; (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 6, 1998, based on NYSE closing price: $58,135,252.
The number of shares outstanding of the registrant's common stock as of
March 6, 1998: 8,305,036.
DOCUMENTS INCORPORATED BY REFERENCE
List herein the documents incorporated by reference: The Company's
definitive proxy statement for the Annual Meeting of Shareholders is
incorporated by reference into Part III, Items 10, 11, 12, and 13 of this Form
10-K.
<PAGE>
PART I.
ITEM I - BUSINESS.
Utah Medical Products, Inc. ("UM" or "the Company") is in the business of
producing cost-effective devices for the health care industry which are
predominantly proprietary, disposable and for hospital use. Success depends on
1) recognizing needs of clinicians and patients, 2) rapidly designing economical
solutions which gain regulatory approval, 3) reliably producing products that
meet those clinical needs, and then 4) selling through:
a) UM's own direct channels into markets where the Company enjoys an
established reputation and has a critical mass of sales and support
resources, or
b) establishing relationships with other medical companies that have the
proper resources to effectively introduce and support the Company's
products.
UM's success in rapidly producing solutions comes from its proven ability
to integrate a number of engineering and technical disciplines in electronics,
software, mechanical packaging, instrumentation, optics and materials. The
resulting proprietary products represent incremental, but significant
improvements over existing clinical techniques. UM's experience is that, in the
case of labor-saving devices, the improvement in cost-effectiveness of clinical
procedures also leads to an improvement in overall health care. Historically,
UM has marketed a broad range of medical devices used in the critical care areas
and the labor and delivery department in the hospital, as well as products sold
to outpatient clinics and physician's offices.
The skill of applying solutions to recognized needs results from an
excellent core of practicing clinicians who feed ideas to the Company and key
employees who are both clinical applications savvy and development engineering
adept.
UM's products are sold in the U.S. domestic market primarily through the
Company's own direct sales representatives but also through independent
manufacturers' representatives, specialty distributors and other medical device
companies. Internationally, products are sold through other medical device
companies and through independent medical products distributors. UM now has
representation in all major global markets with approximately 60 international
distributors.
Negative factors that may adversely impact future performance include
managed care reforms or hospital group buying decisions that may limit
physicians' ability to direct spending on certain products or procedures,
innovative new products introduced by other companies that displace UM's
products, regulatory approval delays, changes in the Company's relationships
with its distribution partners, and loss of key personnel.
UM was formed as a Utah corporation in 1978. In 1995, Utah Medical
Products Ltd., a wholly-owned subsidiary located in Ireland, was formed to
establish an international manufacturing capability. In July, 1997, UM
purchased Columbia Medical, Inc. (CMI), a Redmond, Oregon company specializing
in manufacturing and marketing vacuum-assisted obstetrical delivery systems. UM
publicly raised equity capital only one time in 1982. After trading on the
NASDAQ for 14 years, UM's stock was listed on the NYSE on December 26, 1996 in
conjunction with start of operations in Ireland. The Company's corporate
offices are located at 7043 South 300 West, Midvale, Utah 84047 USA. The
corporate telephone number is (801) 566-1200. European operations are located
at Garrycastle Industrial Estate, Athlone, County Westmeath, Ireland. The
telephone number in Ireland is (902) 73932. CMI's mailing address is P.O. Box
1530, Redmond, Oregon 97756. The phone number in Oregon is (541) 548-7738.
PRODUCTS
Obstetrics Market:
Fetal Monitoring.
About 60% of births are considered "higher risk" due to lack of prenatal
care, among other factors. In many of these births, labor may become
complicated and does not progress normally. The obstetrician must assess
progression of labor to be able to intervene with drug therapy, infuse a
solution to augment amniotic fluid, or ultimately if necessary, perform a
Caesarean section procedure, and be prepared for complications following
childbirth. In addition to products already offered, the Company intends to
continue to develop and introduce tools that enhance fetal monitoring
techniques, a core area of focus.
To assist the physician in assessing fetal well-being, changes in fetal
heart rate (FHR) in conjunction with trends in intrauterine pressure are often
electronically monitored. UM's intrauterine pressure catheter product line
provides for clinician choices from a traditional fluid-filled system to INTRANR
PLUS, the state-of-the-art transducer-tipped system. In addition, adjunct FHR
electrodes, leg plates, belly bands and chart paper are offered by UM to
complete a package of fetal monitoring supplies. UM's intrauterine catheters
include:
IUP-075 and UM's other custom catheter kits utilize a saline-filled
catheter that is placed within the uterine cavity, connected to a separate
external reusable or disposable transducer. This product package,
utilizing double lumen catheters, was the traditional mode of intrauterine
monitoring prior to the introduction of INTRAN. An intrauterine pressure
waveform is generated through transmission of a signal to the external
pressure transducer.
Introduced in 1987, INTRAN was the first intrauterine pressure catheter
that placed the pressure sensor at the source within the uterine cavity.
This design eliminated the complicated setup of fluid-filled systems and
provided more accurate pressure waveforms. INTRAN I was discontinued in
1995 in favor of the preferred INTRAN PLUS, which is also covered under
UM's original INTRAN patent.
INTRAN PLUS was introduced in 1991. The INTRAN PLUS catheter combines the
transducer tip concept of INTRAN I with a refined tip design, a re-zero
feature that allows the clinician to verify the reference of the monitor,
and a dedicated amnio lumen which provides immediate access to the amniotic
fluid environment which may be essential in the diagnosis and intervention
of certain fetal conditions. In 1996, an enhancement which allows
physicians to observe amniotic fluid in a closed system was added to INTRAN
PLUS. In 1997, UM introduced several new versions designed to address user
preferences in tip size and zero switch location.
Other Obstetrical Tools.
UM's purchase of CMI brought the Soft Touch , Tender TouchR and Velvet
TouchR lines of disposable and reusable vacuum-assisted operative delivery
systems into UM's family of obstetric products. Operative vaginal deliveries
provide knowledgeable physicians with an alternative to C-section intervention.
Although there are risks associated with vaginal operative deliveries which
represent about 15% of all U.S. hospital births, the procedures are generally
regarded as safer for the mother, and at least as safe for the fetus, as
abdominal (cesarean) delivery in comparable clinical situations. In operative
vaginal deliveries, either forceps or a vacuum-assisted extraction system are
used to deliver a baby. UM estimates that vacuum-assisted extraction, now the
preferred approach, is presently used for about 8-10% of all U.S. births, and
has the potential to continue to improve on its share versus forceps. Vacuum
extraction may also be used to assist in C-section deliveries.
CORDGUARD is a unique product which unifies the multiple steps of clamping
the neonate's cord close to the umbilicus, severing the cord without splattering
blood, drawing a clean blood sample for diagnostic or therapeutic purposes, and
assisting in the removal of the placenta. CORDGUARD's sharpless, closed system
reduces the risk of exposure, and consequently reduces the high cost of hospital
exposure treatment practices when both OSHA and CDC guidelines are properly
implemented. In addition, neonatal blood is generally hard to obtain safely and
cleanly, while at the same time it is gaining in perceived diagnostic value to
clinicians.
Gynecology /Urology /ES Market:
LETZR System: FINESSE Generator; Disposable Loop, Ball, and Needle
Electrodes; FILTRESSE Evacuator; Other Specialty Electrodes and Other Supplies.
The LETZ System is a complete line of products and supplies used to treat
cervical intraepithelial neoplasia (CIN) and other lower genital tract lesions
related to human papilloma virus (HPV) infections. This procedure of using
electrosurgical excision with hemostasis has widely replaced cold knife scalpel,
laser and cryotherapy procedures because it is economical, safe, effective,
quick and easy to perform, has fewer potential side effects, and requires little
physician training. In contrast to laser and cryotherapy (freezing of tissue),
LETZ provides an important tissue specimen for a pathological assessment. In
addition, the procedure may be performed by using only local anesthesia in the
physician's office, eliminating the time and expense of hospital or surgical
center admittance. The Company's full line of products necessary to perform the
LETZ electrosurgical procedure include the Prendiville disposable loop, the
FINESSE electrosurgical generator, and other miscellaneous components. The
FINESSE electrosurgical generator is the only generator on the market that
contains an integral smoke evacuator. The smoke evacuator is required to filter
smoke and vapors which contain potentially hazardous particulate material
produced during electrosurgery. The disposable loop, the electrode used to
excise the tissue specimen, is a pencil-like tube with a thin tungsten wire loop
attached. The loop is available in varying sizes and includes a Safe-T-Gauge
that can be positioned so the physician can colposcopically monitor the amount
of tissue being excised more accurately.
UM has FDA clearance to market its electrosurgical system in general
surgery applications, including dermatology. FILTRESSE, a stand-alone surgical
smoke filtration system which combines high filtration efficiency, low cost and
convenient use was introduced in 1997. The Company will continue to develop and
introduce specialty tools for specific electrosurgical procedures.
EPITOME, introduced in 1996, is a unique electrosurgical scalpel which
delivers precise performance in incision and excision, where minimization of
thermal tissue injury is necessary to ensure accurate histological analysis,
limited morbidity and post-surgical pain, and cosmetically superior results. A
bendable version of EPITOME with a smaller active electrode is being introduced
in early 1998. Designed to significantly reduce the chance of tissue burns due
to inadvertent electrode contact and where a smaller, bent scalpel is
preferable, this new bendable EPITOME should be of particular value to thoracic
surgeons in harvesting the internal mammary artery during coronary artery bypass
surgery, as well as in tonsillectomies, among other possible uses.
LIBERTY System.
LIBERTY, a device for the conservative treatment and effective control of
urinary incontinence in women, was released for marketing by the FDA in 1995.
LIBERTY consists of a battery operated stimulator unit and an intravaginal
electrode probe. This physiotherapy technique, which can be done in the privacy
of the home, involves passive strengthening of the periurethral muscles.
Pulsed, low voltage, high frequency current is applied primarily to the pudendal
nerve causing the pelvic area muscles to contract, leading to better muscle
tone. Because electrical stimulation has no known adverse side effects, Liberty
provides women suffering from mild to moderate incontinence an effective, lower
cost and lower risk alternative to more traumatic treatments such as surgery and
drug therapy. In 1997, UM's simplified and lower cost version of Liberty,
intended for home use by patients, replaced UM's prior version, renamed Liberty
Ultra, as the device of choice for most patients. LIBERTY Ultra is still of
interest to physicians who wish to have a full range of waveform options for
office use. In addition to its electrostimulation product line, UM intends to
add other products that address various aspects of the very prevalent and
diverse incontinence conditions including a rectal probe, and a model of LIBERTY
that combines its current features with biofeedback therapy that helps the
patient measure muscle tone. Beginning in 1998, UM has agreed to market the U-
Control Home Trainer, a biofeedback device developed by Thought Technology, Ltd,
which the Company believes will be a complementary product to Liberty. In 1998,
UM intends to significantly expand its LIBERTY marketing efforts to help
establish the belief in patients and doctors that LIBERTY is the easiest-to-use,
most cost effective incontinence treatment available. The Company also has
begun to market LIBERTY to urologists and physical therapists in the U.S.
through specialty distributors.
PATHFINDER , is an endoscopic irrigation device that allows a surgeon to
precisely irrigate with the same hand that controls the endoscope, eliminating
the need for a separate assistant to irrigate without visualization. PATHFINDER
was acquired in the purchase of CMI.
Tools for Gynecologic Laparoscopy.
LUMINR is a proprietary tool developed by UM for reliably and safely
manipulating the uterus in gynecological laparoscopic procedures. The product
was released for marketing by the FDA in 1995. LUMIN combines the strength,
range of motion and versatility of the higher end reusable instruments with the
lower cost and cleanliness of the cheaper disposable instruments presently on
the market, while at the same time reducing the number of tools needed to move
and secure the uterus. The EPITOME scalpel is another UM proprietary tool that
can be useful in laparoscopic procedures.
Neonatal Critical Care Market:
DISPOSA-HOOD .
The DISPOSA-HOOD is an infant oxygen hood that is used in infant intensive
care to administer oxygen to neonates in a neutral thermal environment critical
to maintaining proper physiologic responses. The Disposa-Hood, which is placed
over the infant's head, incorporates a round diffusor connection specifically
designed to disperse the incoming gases along the inner surfaces of the hood,
rather than allowing them to blow directly on the infant's head. The design
allows more precise FIO2 (fractional inspired oxygen) control, minimizes
convective heat loss from the head and provides optimum flows for elimination of
CO2 (carbon dioxide) by ventilation. The Disposa-Hood is also designed to
prevent cross-contamination, to allow axial rotation of the infant's head
without contact with the Disposa-Hood and to aid in the maintenance of
temperature and humidity conditions that are necessary in the proper respiratory
care of premature infants.
Critical Care Market:
Blood Pressure Monitoring Products.
DeltranR Disposable Transducer.
A transducer converts one form of energy to another. In pressure
monitoring, it is used to convert physiological (mechanical) pressure into an
electrical signal that is displayed on electronic monitoring equipment. In
medical applications, transducers had previously been reusable, fragile, subject
to declining accuracy with repeated use and had a cost of about $1,000. The
development of integrated circuit technology and guided laser technology led to
the introduction of disposable transducers in the medical market approximately
fourteen years ago.
UM has developed and is now distributing its disposable transducer as a
stand-alone product, and as a component in pressure monitoring kits through its
direct representatives and independent distributors, as well as to other medical
companies in the U.S. and internationally.
Although several other medical companies manufacture disposable pressure
transducers ("DPTs"), the Company believes that the Deltran DPT which it
developed sets the standard in terms of reliability and ease of use. UM has
qualified an automated assembly line which allows UM to effectively compete
with the largest suppliers on the basis of low manufacturing costs. In early
1998, UM will begin marketing a new version called DELTRAN PLUS which UM
believes provides the easiest and least risky blood sampling capability
currently available.
Other Products and Components.
The Company sells products specifically designed for other medical
companies which incorporate UM's proprietary technologies. In addition, UM
sells plastic molded parts to a number of medical and non-medical companies,
including competitors. UM believes that this practice has not affected its
competitive position, and extends the benefit that shareholders realize from
UM's manufacturing capabilities and technologies.
MARKETING.
UM competes in the marketplace on the basis of its proprietary value-added
technologies and cost effective solutions. Its future success will depend upon
its ability to innovate and introduce new products into specialized market
niches consistent with cost control pressures under a changing health care
environment. Speed is a critical success factor in that future performance
depends on UM's ability to innovate, develop, test and commercialize new
products faster than other medical device companies who possess significantly
more resources than UM. With new products that are unique, the Company must be
prepared for extensive user training and support.
The Company currently competes within three distinct product/market
arenas, each with differing competitive circumstances from the other:
1) Obstetrics.
a) Fetal monitoring. UM markets its intrauterine pressure catheters
("IUPCs"), fetal heart rate electrodes and other monitoring supplies including
electrical cables, external pressure sensing TOCO belts, leg plates and chart
paper, to hospital labor and delivery departments. Almost exclusively limited
to the United States where electronic monitoring is accepted practice, the
available annual market for UM's full line of fetal monitoring supplies exceeds
$35 million.
The Company's IUPC sales control over 45% of total IUPC unit sales with a
mixture of traditional "fluid-filled" catheters together with sensor-tipped
catheters, where five other suppliers compete. The proven reliability of UM's
INTRAN PLUS IUPC system, educational programs, and breadth of line, have helped
UM secure more than a 75% share of the sensor tipped segment, which represents
about 60% of total IUPC units used. Because UM's IUPC customers are part of
U.S. hospitals which are experiencing consolidation and group purchasing
pressures, a negative factor which may adversely affect future IUPC sales would
be the acceptance of a new IUPC supplier that could bundle a viable but inferior
and cheaper IUPC with broad product lines as part of a group supplies contract.
UM believes its patents are an important barrier to competition, and is
currently involved with infringement litigation against two competitors.
b) Vacuum-assisted operative delivery systems. UM's vacuum-assisted
operative delivery systems, including both disposable and reusable extraction
cups and a proprietary hand pump, are marketed through the same channels as
fetal monitoring supplies. UM's vacuum-assisted operative delivery systems,
formerly manufactured and marketed under the Columbia Medical, Inc. name,
control about 50% of the market for these devices. Although vacuum extraction
historically has enjoyed even greater acceptance internationally than in the
U.S., CMI did not have significant sales of these products outside the U.S. UM
believes its established international distribution channels can spur additional
growth.
c) Other Ob products. Umbilical cord management is a clinical need that
has not been successfully addressed to date with UM's proprietary concept called
CordguardR, or with any other product. Blood samples are routinely collected in
about 50% of births in the U.S. now, and collections are expected to increase
with the greater emphasis being placed on using neonatal blood for both
diagnostic and therapeutic purposes. Cordguard is a totally closed system,
designed to conveniently and safely clamp next to the umbilicus, sever the cord,
and draw a clean cord blood sample in a single unified procedure. In 1998, UM
will continue to work on improving its Cordguard product design and marketing
programs. Also in 1998, UM has agreed to sell the Umbilicup product designed
and manufactured by MKMI as an alternative cord blood collection device. The
Umbilicup II device is designed to harvest larger quantities of cord blood. As
part of the CMI purchase in 1997, UM acquired two other devices used routinely
by obstericians, Amnicot, a device used to assist in the rupture of maternal
membranes, and MUC-X, a neonatal meconium suction device.
The hospital labor and delivery department will continue to offer an
excellent opportunity where UM's established position in fetal monitoring allows
receptiveness for evaluating new obstetrical product concepts. An excellent
example is UM's fetal pH device, designed to provide a continuous measure of
fetal scalp tissue pH, which is in the final stages of product development.
2) Gynecology/Urology/Electrosurgery.
a) LETZ. Since 1991, the office and outpatient market for the
electrosurgical cervical loop excision treatment has attracted over ten
competitors offering either electrosurgery generators or disposable loop
electrodes, or both. UM continues to have a leading market position through
utilizing a direct sales organization to promote educational and clinician
support programs. The Company believes that its products demonstrate superior
cutting and hemostasis capabilities by its FINESSE generators, and an improved
safety and "quality tissue specimen" by its patented disposable loop line. The
current worldwide annual market exceeds $20 million. In 1998, UM will introduce
other proprietary electrodes which provide significant advantages for excision
of certain types of CIN.
b) Other electrosurgery products. In addition to other applications for
UM's LETZ electrosurgery system, UM has exploited its understanding of
electrosurgery to develop the EPITOME scalpel. The major uses of EPITOME are
most likely to be in non-gynecologic specialities such as otolaryngology,
plastic and thoracic surgery where precise incisions and closely controlled
excisions in highly vascular regions, with minimal thermal side effects, are
important, along with the desire to minimize time in the surgical theatre. In
areas such as these where UM does not have an established market presence,
development of new product sales may be slow.
c) Other surgical uses of LETZ equipment and supplies. The Company
believes that similar surgical procedures will gain in acceptance in a number
of other specialized areas, including dermatology and family practice, and plans
to develop and introduce products for these areas based on its electrosurgery
expertise. The ultimate adoption of new specialized products is uncertain
because the products require a high level of user education and require
purchasers to work against the trend of standardized general-purpose tool
acquisitions. Sales may be limited by UM's lack of access to important
distribution channels.
d) Endoscopic procedures. Several of UM's products have utility in rapidly
evolving endoscopic operative techniques. Examples are Pathfinder, a bulb
irrigation device used to improve visualization at the surgical site; LUMIN, a
disposable instrument to precisely position and retain the uterus during
endoscopic procedures; and Epitome, a unique electrosurgical scalpel that allows
very rapid and precise incisions with minimal thermal side effects. Because of
the fragmentation of the markets and channels for distribution of these
products, as well as UM's limited resources, methods of reaching users will
continue to be primarily opportunistically driven.
e) Incontinence therapy. Urinary incontinence is an under diagnosed and
under reported but prevalent condition in women, especially physically active
women over the age of forty. In the United States, at least ten million women
suffer from time to time from some form of urinary incontinence: stress, urge or
mixed. Clinical studies have shown that chances are good that the problem can
be improved or cured by strengthening and toning the pelvic floor muscles,
especially in women with mild to moderate stress incontinence. The use of
electrical stimulation to help strengthen muscles is an approach that is
scientifically well understood and is an area of engineering expertise at UM.
Adjunct therapy devices and diagnostic tools will become important to developing
a system of tools for cost-effective urinary incontinence treatment. The aging
of the population and increased interest in more conservative and non-surgical
therapeutic approaches to solving health problems are two important U.S. trends
which will help drive patient adoption of Liberty and other conservative
accessory products. Market acceptance may be limited by a number of negative
factors including the fact that the electrostimulation therapy approach is not a
"quick fix" and requires patient discipline to continue a treatment regimen over
an extended time span, as well as the fact that the treatment may require a
greater time commitment with less revenue dollars than alternative surgical
approaches for gynecologists prescribing it.
f) Urology. In addition to UM's female urinary incontinence products and
Pathfinder, of which the most prevalent use to date has been in removal of
calculi in biliary and urinary tracts, UM manufactures the pumps used by several
other medical companies selling vacuum erection devices for male erectile
dysfunction. In this last area, UM depends on the marketing strengths of its
OEM customers.
3) Critical Care/Blood Pressure Monitoring.
This is a large, commodity-oriented intensive care/anesthesia monitoring
market dominated by two major U.S. suppliers which bundle disposable transducers
and accessories with venous and arterial catheters. The products used in
monitoring human vital signs have features that are practically undifferentiated
among the major competitors. Consequently, hospital purchasing decisions tend
to be based on price and delivery. The loss of Baxter as a dominant
distribution partner at the end of 1996 represented a negative factor that
adversely impacted 1997 performance. UM's strongest market position now is
outside the U.S. where markets are more fragmented. UM's sales through
distribution partners excluding Baxter, independent U.S. and international
distributors and its limited U.S. direct sales team represented about 4% of the
total annual worldwide end-user market in 1997. The worldwide market at end-
user price for DPT and accessories exceeds $150 million.
DISTRIBUTION.
Another important success factor in a changing health care industry is
"access" to customers. In particular, the U.S. hospital supplier environment
has been consolidating as a result of group purchasing decisions and product
bundling by large suppliers with diverse product lines. The number of channels
and length of time required in evaluating new products for use in hospitals has
grown dramatically in recent years. As a potential negative factor to future
performance, as UM introduces new products, it may find itself limited with its
current distribution channels, or unable to establish viable relationships with
other medical companies who have adequate access to users.
Historically, UM has sold its products, especially those relating to
critical care, through independent distributors and other medical companies in
both domestic and international markets. However, since 1991, the Company has
developed a more focused direct sales organization in the United States with
specialized distributors and its own directly employed sales force. The network
of direct representatives and specialty distributors is employed to concentrate
on select market applications for UM products and to provide proper customer
training and support. In March 1998, the U.S. direct sales force consisted of
25 territory representatives and sales managers. Through the use of
closely-controlled clinical education programs, the direct sales force positions
UM to gain market leadership with its value-added products. UM's products serve
niche market applications in obstetrics and gynecological procedures which are
trending toward outpatient clinics and physician offices. Just three years ago,
independent distributors in the U.S. represented more than half of UM's domestic
Ob/Gyn business. In 1998, UM expects that U.S. distributors will represent less
than 10% of its domestic business.
The Company also sells products into commodity markets, or for
applications which do not generate enough business to justify a direct selling
effort, directly to other medical companies. Additionally, the Company sells
component parts to medical companies for use in their product lines. This
effort is simply an optimal utilization of manufacturing resources that are
needed for UM's main businesses and does not affect the Company's marketing
programs.
Internationally, the Company sells its products through distributors or
through OEM (other medical manufacturers) relationships.
RESEARCH AND NEW PRODUCT DEVELOPMENT.
New product development is a key to UM's growth plans. UM's current new
product development projects are in three areas of focus: 1) obstetrics/ fetal
monitoring, 2) female incontinence management, and 3) specialized procedures for
the assessment and treatment of cervical/uterine disease. In terms of R&D
output, UM has acquired or filed 18 new patent applications in the last five
years. In the medical device industry, FDA premarketing approval submissions
are an indicator of new product development activities for a given company. In
that regard, in the last five years, 21 FDA premarketing approval submissions
have been completed.
Because of UM's reputation as a successful innovator, its financial
strength and its established clinician user base, it enjoys a substantial flow
of new product ideas. Internal development, joint development, product
acquisitions, and licensing arrangements are all included as viable options in
the investigation of opportunities. Only a small percentage of ideas survive
feasibility screening. For internal development purposes, projects are assigned
to a project manager who assembles an interdisciplinary, cross-functional
development team. The team's objective is to have a clinically proven,
manufacturable, and FDA released product ready for marketing by a specific
date. Approximately twelve projects on the average, depending on the level of
resources required, are underway at UM at any given time. More than 50% of
assigned projects do not succeed in attaining a product which meets all of the
Company's criteria. In particular, this includes a product that is highly
reliable, easy to use, cost-effective, safe, useful and differentiated from the
competition.
Once a product is developed, tooled, fully tested and cleared for marketing
by the FDA, there remains a reasonable probability it cannot be successfully
marketed for any number of reasons, not the least of which is being beaten to
the market by a competitor with a better solution, or not having access to users
because of limitations in marketing and distribution resources.
During 1997, the Company spent $958,166 on new product development, which
was 4.0% of sales. Included in these expenses were amounts paid to outside
entities for activities required for the conduct of clinical evaluations.
During 1996 and 1995, new product development expenses were $1,387,088 (3.6% of
sales) and $1,789,167 (4.3% of sales), respectively. Expenditures for R&D
projects are expected to continue at approximately 4% of sales, limited more by
the Company's ability to process new ideas, as well as organize and integrate
the speciality skills necessary to develop innovative products, than by the
availability of funds or new product ideas.
EMPLOYEES.
At December 31, 1997, the Company had 290 employees, 42 of which are
located in Oregon, and 32 in Ireland. The Company's continued success will
depend to a large extent upon its ability to retain its skilled employees. No
assurances can be given that the Company will be able to retain or attract such
employees in the future, although management is committed to providing an
attractive environment in which creative and high achieving people want to work.
To the best of the Company's knowledge, none of the Company's officers or
directors is bound by restrictive covenants from prior employers that limit
their ability to contribute to UM's programs. All professional employees sign a
confidentiality and non-compete agreement as a condition of employment. None of
the Company's employees is represented by labor unions or other collective
bargaining groups. All employees participate in performance-based bonus
programs.
PATENTS AND TECHNOLOGY LICENSES.
The Company owns forty-five unexpired patents and patents pending, and is
the licensee of certain other technology. There can be no assurance, however,
that patents will be issued with respect to the pending applications or that the
issued patents can be successfully defended.
The ability of the Company to achieve critical mass in the marketplace
depends in large part on the protection afforded by its patents. In cases where
competitors introduce products that may infringe on UM's technology, the Company
has an obligation to its shareholders to defend its intangible property.
Although the cost of patent litigation reduces the Company's current
performance, a successful defense of a core market franchise as represented by
INTRAN, for example, represents many orders of magnitude of return in
shareholder value. In addition, UM's practice of aggressively pursuing those
who infringe its patents tends to discourage others from unfairly using UM's
innovation. Patent infringement lawsuits are currently pending against two
companies whom UM believes have infringed its INTRAN patents.
Because of the Company's reliance on certain proprietary information, it
obtains a confidentiality and non-compete agreement from its technical and sales
employees, key management and consultants.
As a matter of policy, UM has acquired and will continue to acquire the use
of technology from third parties that can be synergistically combined with UM
proprietary product ideas. During 1997, royalty expenses were $64,970.
Royalties are included in cost of goods sold.
Also as a matter of policy, UM licenses its proprietary technology to
others in circumstances where that licensing does not directly compete with UM's
own marketing direction. During 1997, the Company received $732,267 in royalty
income, compared to $703,352 in 1996, and $652,894 in 1995. This income remains
a material portion of UM's earnings and therefore UM's future performance also
depends on the performance of other companies who license its technology.
GOVERNMENT REGULATION.
The Company's products are subject to regulation by the U.S. Food & Drug
Administration ("FDA"), as well as other regulatory bodies globally. The FDA
has authority to regulate the marketing, manufacturing, labeling, packaging and
distribution of medical products in the U.S. In addition, requirements exist
under other federal laws and under state, local and foreign statutes that may
apply to the manufacturing and marketing of the Company's products. The Medical
Device Amendments of 1976 (the "Amendments") significantly extended the
jurisdiction of the FDA to regulate medical devices. Until the adoption of the
Amendments, medical devices were subject only to general labeling and purity
requirements. The Amendments established three classifications of medical
devices, Class I, Class II, and Class III.
All manufacturers of medical devices must register with the FDA and, with
their initial registration, list all medical devices produced by them. This
listing must be updated annually. In addition, prior to commercial distribution
of devices for human use, the manufacturer must file a notice with the FDA,
setting forth certain information about the device, including the classification
into which the manufacturer believes it falls.
Devices which are classified in Class I are subject only to the general
controls concerning adulteration, misbranding, good manufacturing practices,
record keeping and reporting requirements. Devices classified in Class II must,
in addition, comply with performance standards promulgated by the FDA. The
Company believes all of its present products are Class I or Class II products
and that the Company is in full compliance with all applicable performance
standards as well as good manufacturing practices, record keeping and reporting.
In 1994, UM received certification of its quality system under the ISO
9001/EN 46001 standards ("ISO" stands for "International Organization of
Standardization"). EN 46001 is the European Community's effort to harmonize
different national regulatory requirements for the development, sale, and
manufacture of medical products. Because the ISO standards are in perpetual
modification, UM remains on a continuous periodic audit schedule by its
independent notified body in order to stay abreast of international regulatory
standards. In early 1997, UM received ISO 9001/EN 46001 certification for its
Ireland facility. UM has now received formal product certification allowing the
use of the CE Mark (demonstrates proof of compliance with the European
Community's product standards) for its blood pressure monitoring kits,
electrosurgical generators, disposable loop and blade electrodes, and
intrauterine catheters, representing most of its current product sales
internationally. As of early 1998, UM is seeking additional CE Mark
authorization on products with about $250,000 in international sales in 1997.
SOURCES AND AVAILABILITY OF RAW MATERIALS.
Most of the component parts which the Company purchases from various
vendors are readily available from a number of sources. Alternate sourcing of
various components is continually underway. Vendors are qualified by Corporate
Quality Assurance. The Company has a vendor quality monitoring program that
routinely checks all incoming material.
EXPORTS.
Revenues from foreign customers in 1997 were about $5,218,000 (21% of total
sales), as compared to $9,739,000 (25% of total sales) in 1996, and $10,343,000
(25% of total sales) in 1995. Critical care products represented 85% of
international sales in 1997, compared to 91% in 1996 and 96% in 1995. Non-
Baxter international sales were about $5,010,000 in 1997 compared to $4,805,000
in 1996 and $4,315,000 in 1995.
UM sees the international marketplace as one of the cornerstones of its
growth strategy. UM is keenly aware that not only are international markets
different from the U.S. market, but also that each country has its own set of
driving influences that affects the dynamics of the nature of care given and
medical devices used. In 1996, UM completed a new manufacturing facility in
Athlone, Ireland. The facility offers a number of advantages: 1) from a
marketing point of view, faster response to European Union customers, including
a better understanding of customized needs, less costly distribution and duty-
free access to over 350 million patients; 2) from a regulatory point of view,
faster new product introductions; and 3) from a manufacturing point of view,
reduced dependence on one manufacturing site and increased capacity at existing
U.S. facilities.
BACKLOG.
As a marketer of primarily disposable products, the nature of UM's business
necessitates being very responsive to customer orders and delivering products
quickly. Thus an objective of UM is to minimize its shippable backlog. Backlog
shippable in less than 60 days as of January 1, 1998, was approximately $0.6
million compared to $0.5 million as of January 1, 1997.
SEASONAL ASPECTS.
The Company's business is generally not affected by seasonal factors.
PRODUCT LIABILITY RISK MANAGEMENT.
No product liability lawsuits involving a significant injury have been
filed against the Company for any of its products in the past six years, despite
the substantially higher product usage rates over that time. The risk of
product liability lawsuits is a negative factor in UM's business because UM's
products are frequently used in inherently life threatening procedures to help
physicians manage higher risk patients. Although UM's products are proven to be
safe and efficacious over millions of uses, positive outcomes cannot always
occur in the procedures where UM's products are used. In litigious cultures
(such as the U.S.) frequently driven by attorneys looking for windfalls,
patients may look for scapegoats. In any lawsuit against a company where an
individual plaintiff has a permanent physical injury, a small probability of a
large award always exists whether or not a causal relationship exists. UM is
self-insured for product liability risk and reserves funds against its current
performance on an ongoing basis to provide for its future defense should any
lawsuits be filed.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by, and information currently available to, management. When
used in this document, the words "anticipate," "believe," "project," "estimate,"
"expect," "intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events and
are subject to certain risks, uncertainties, and assumptions, including the
risks and uncertainties noted throughout the document. Although the Company has
attempted to identify important factors that could cause the actual results to
differ materially, there may be other factors that cause the forward statement
not to come true as anticipated, believed, projected, expected, or intended.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those described herein as anticipated, believed, projected, estimated,
expected, or intended.
General risk factors that may impact the Company's revenues include the
market acceptance of competitive products, obsolescence caused by new
technologies, the possible introduction by competitors of new products that
claim to have many of the advantages of UM's products at lower prices, the
timing and market acceptance of UM's own new product introductions, UM's ability
to efficiently manufacture its products, including the reliability of suppliers,
success in gaining access to important global distribution channels, budgetary
constraints, the timing of regulatory approvals for newly introduced products,
and third party reimbursement.
Risk factors, in addition to the risks outlined in the previous paragraph
and elsewhere in this report that may impact the Company's assets and
liabilities, as well as cash flows, include risks inherent to companies
manufacturing products used in health care including claims resulting from the
improper use of devices and other product liability claims, defense of the
Company's intellectual property, productive use of assets in generating
revenues, management of working capital including inventory levels required to
meet delivery commitments at a minimum cost, and timely collection of accounts
receivable.
Additional risk factors that may affect non-operating income include the
continuing viability of the Company's technology license agreements, actual cash
and investment balances, asset dispositions, and acquisition activities that may
require external funding.
ITEM 2 - PROPERTIES.
Office and Manufacturing Facilities.
The Company's current operations are located in one 100,000 square foot
facility in Midvale, Utah, a suburb of Salt Lake City, a 20,000 square foot
facility in Redmond, Oregon, and a 77,000 square foot facility in Athlone,
Ireland. UM owns its property and facilities in Utah and Ireland, with the
exception of a long-term lease on one section of its Midvale parking lot. The
Oregon facilities are leased. The Ireland facility operates as a wholly-owned
subsidiary under the name Utah Medical Products Ltd. The Company recently sold
a building it previously owned in Lehi, Utah to an unrelated party.
UM is a vertically-integrated manufacturing company. Capabilities include
a machine shop for mold-making and building assembly tools and fixtures;
plastics-forming including thermoplastic forming, injection molding and
extrusion; sensor production; assembly of mechanical, electrical and electronic
components; testing; and advanced packaging in clean room conditions.
Facilities also include a well-equipped R&D lab, communications and information
systems networked internationally, and administrative offices.
ITEM 3 - LEGAL PROCEEDINGS.
The Company may be a party from time to time in ordinary routine litigation
incidental to its business. The outcomes of lawsuits which are currently
pending are not projected to have a materially adverse effect on UM's financial
condition or results of operations.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information.
UM's common stock began trading on the New York Stock Exchange (symbol:
UM) on December 26, 1996. It previously traded on the National Market System of
the National Association of Securities Dealers Automated Quotation System
(symbol UTMD). The following table sets forth the high and low sales price
information as reported by NASDAQ and NYSE for the periods indicated:
1997 1996
------------------ --------------------
High Low High Low
1st Quarter $ 13 $ 10 $ 23-1/2 $ 13
2nd Quarter 11-1/2 6 18 11-1/2
3rd Quarter 10-1/2 7 13 11
4th Quarter 9 6 1/2 14-1/2 11-1/2
Stockholders.
The approximate number of beneficial stockholders of UM's common stock as
of March 6, 1998 was 7,000.
Dividends.
The Company does not currently intend to pay cash dividends on its common
stock in the foreseeable future. It is the present intention of the Company to
use earnings to finance future growth, for selective infusions of technological,
marketing or product manufacturing rights to broaden the Company's product
offerings, and for continued share repurchases when the price of the stock
remains extremely undervalued.
ITEM 6 - SELECTED FINANCIAL DATA.
Year Ended December 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net Sales $24,271,640 $38,672,632 $42,038,082 $39,644,684 $36,999,059
Net Income 4,321,704 8,753,891 8,353,738 7,109,360 7,012,285
Diluted Earnings
Per Share .51 .93 .83 .68 .60
Total Assets 31,459,236 28,915,685 33,330,379 27,365,183 28,344,113
Long-term Debt 5,562,933 None None None None
Cash Dividends
Per Common Share None None None None $.06
Quarterly Data for 1997
------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Net Sales $5,173,394 $5,100,577 $7,018,810 $6,978,859
Gross Profit 2,707,600 2,671,207 3,678,705 3,548,921
Net Income 1,039,985 895,385 1,152,849 1,233,485
Earnings Per Share
- Diluted .12 .10 .14 .15
Quarterly Data for 1996
------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Net Sales $9,967,590 $10,089,176 $9,993,639 $8,622,227
Gross Profit 4,595,059 5,005,227 4,989,655 4,533,439
Net Income 2,483,535 2,170,856 2,190,399 1,909,101
Earnings Per Share
- Diluted .25 .23 .24 .21
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following comments should be read in conjunction with accompanying financial
statements.
Productivity of Assets and Working Capital.
a) Assets. UM's 1997 year ending total assets increased by $2.5 million
relative to the end of 1996 as a result of the mid-year acquisition of Columbia
Medical, Inc (CMI). Year ending assets attributable to CMI were about $7.1
million including working capital, net (after accumulated depreciation) property
and equipment, and net (after accumulated amortization) intangible assets of
about $1.0 million, $1.0 million and $5.1 million, respectively. UM's total
asset turns (ratio of sales to total assets) declined in 1997 because average
total assets declined only 3%, while sales decreased 37%, both relative to 1996.
Total asset productivity is important as a factor to help maintain return on
shareholders' equity (ROE) at levels which will finance significant future
growth. 1997 total asset turns of 0.8 were below management's targeted long
term turn rate of 1.4.
Although total 1997 year ending net property, plant and equipment assets
(PP&E) remained about the same as at year-end 1996, PP&E in Utah and Ireland
decreased $0.4 million and $0.6 million, respectively, to offset the $1.0
million increase by the CMI acquisition. The decreases resulted from the fact
that in Utah depreciation of assets already in service exceeded purchases of new
or replacement PP&E assets, and in Ireland from currency translation adjustments
decreasing the U.S. dollar value of those assets. Since UM has in place the
physical plant to support significant growth without major capital investment,
the trend of depreciation exceeding new PP&E purchases should continue in 1998
for the businesses in which UM currently participates.
Working capital declined by $1.6 million because of the changes in UM's
business, including the CMI acquisition, but UM's current ratio improved to 4.4.
Cash and investments declined $3.5 million as a result of tying UM's daily cash
receipts and disbursements directly into its line of credit, in order to
minimize the credit line balance. Inventories increased by $1.0 million, about
two-thirds of which came from the CMI acquisition. The remaining inventory
increase was significant in light of the substantial decrease in business
activity. After the termination of the Baxter agreement, UM honored longer term
purchase commitments with its vendors and sought to smooth the decline in its
workforce. As a result, 1997 year ending average inventory turns declined to
2.2 times. In 1998, the Company plans to reduce its inventories substantially
while increasing sales activity. 1997 year-ending accounts receivable (A/R)
balances increased $0.3 million relative to the end of 1996, and, at an average
aging of 54 days based on 4Q 1997 shipment activity, remained within
management's aging target. A/R over 90 days from invoice date were less than 1%
of total A/R. As UM continues to increase the share of its business invoiced
directly to end users, particularly hospitals, in contrast to distributors or
OEM's, maintaining A/R at current aging levels will become increasingly
difficult. In 1998, the planned reduction in inventory by itself should be
sufficient to finance the increase in A/R resulting from increased sales
activity.
b) Liabilities. Current liabilities (C/L) at year end 1997 were down 41%
from the prior year end, excluding the reserve for litigation expenses. This
reflects 19% lower sales activity in 4Q 1997 relative to 4Q 1996, and also lower
raw material purchasing activity at the end of 1997 as a result of inventory
reduction programs. The litigation reserve is an accumulated accrual against
the Company's income performance, anticipating the costs of future product
liability lawsuits, patent infringement litigation and other litigation that is
an inherent consequence of doing business in our society. The reserve increased
$0.1 million in 1997 because UM accrued that much more against its 1997
performance than it experienced in actual litigation expenses. Management
believes that the current accrual rate plus the $762,000 reserve balance will be
sufficient to fund known pending or planned litigation.
UM established a credit line in the form of a long-term revolving
promissory note with its bank on April 4, 1997. Under the note, the Company may
borrow up to $10 million at a floating interest rate tied to LIBOR or the Prime
Rate at UM's election. Amounts borrowed under the note are unsecured. The note
terminates on March 25, 1999. At March 6, 1998, the balance on the note is
about $4.6 million at a current interest rate of approximately 7.13% per annum.
Other than the credit line, UM has no long term debt obligations. UM's total
debt ratio (including both current and long-term liabilities as a percentage of
total assets) at the end of 1997 was 28%.
Results of Operations.
a) Revenues. In 1997 as a whole, revenues were down 37% from 1996. The
decline in business with Baxter represented 68% of the decline. In the first
half (1H) of 1997, sales were down 49% relative to the 1H 1996. For the 2H
1997, sales were down 25% from the 2H 1996. The decline in Baxter revenues
represented 85% of the 2H decline.
UM divides revenues into three categories: 1) obstetrics, comprised of a
full line of equipment and supplies used in hospitals' labor & delivery
departments for fetal monitoring, operative vacuum delivery, umbilical cord
management, and meconium aspiration, as well as other needs; 2) gynecology
/urology /electrosurgery (ES) equipment and tools used especially for a
gynecologic electrosurgical procedure called LETZR, but also other
electrosurgical procedures including endoscopic procedures, and other non-
gynecological procedures such as tonsillectomies by otolaryngologists, abdominal
reconstructions and breast reductions by plastic surgeons, mammary artery grafts
by thoracic surgeons, nevus excision by dermatologists, and tumor excisions by
all surgeons; other tools used in other minimally invasive surgical procedures
including diagnostic laparoscopies; urinary incontinence management devices; and
urology pumps; and 3) disposable components used in critical care applications,
especially invasive blood pressure and ICP monitoring, but also disposable
respiratory products. Revenues from contract molding are also included in this
"critical care" revenue category.
UM achieves critical marketing mass through innovation in developing and
commercializing proprietary products that become the most recognized cost-
effective solution for certain clinical needs. UM's primary revenue
contributors generally enjoy a dominant market share and have important product
features protected by patents. In obstetrics, the Company owns eight fetal
monitoring patents with two others pending, five vacuum extraction patents and
four umbilical cord management patents. In gynecology /urology /ES, the Company
owns four patents with four others pending. In critical care applications, the
Company owns 14 patents, several of which are licensed to other medical
companies.
Sales of obstetrics products in 1997 were $11,823,000 compared to
$15,802,000 in 1996, and $16,228,000 in 1995. In 1997, obstetrics product
revenues declined $4.0 million relative to 1996 due to two competitors taking a
lower pricing strategy against INTRAN, with new products UM believes are
infringing the Company's patents. In 1H 1997, the INTRAN sales decline was
amplified by depletion of inventory by terminated distributors and UM
repurchases of distributor inventory. In 1997, sales of INTRAN represented 85%
of obstetrics sales, compared to 98% in 1996. In the 2H 1997, due to the
acquisition of CMI, sales of INTRAN represented 77% of obstetrics sales. Also,
beginning in 3Q 1997, UM introduced several versions of INTRAN PLUS designed to
address user preferences in tip size, zero switch location and amniotic fluid
visualization. Obstetrics product sales in 2H 1997 were $7.4 million, compared
to $4.4 million in 1H 1997. As a percentage of total UM sales, obstetrics
product revenues represented 49% in 1997 compared to 41% in 1996.
Gynecology /urology /ES product sales were $3,859,000 in 1997 compared to
$3,534,000 in 1996 and $2,982,000 in 1995. Several new products aided the
growth in 1997 including Epitome, a unique ES scalpel, Liberty, a conservative
therapy for female urinary incontinence, Pathfinder Plus , an irrigation device
for endoscopic procedures, and CMI's urology pumps. In 1997, this category of
revenues represented 16% of total UM sales compared to 9% in 1996. In contrast
to UM's other two product categories, a number of the products in this category
are designed for use in physicians' offices or outpatient clinics, and therefore
represent important diversification for UM's business.
Critical care revenues were $8,589,000 in 1997 compared to $19,337,000 in
1996 and $22,828,000 in 1995. Included in this category are transducers and
other components used in blood pressure monitoring sold to Baxter, which sales
in 1997 were $1,286,000 compared to $11,132,000 in 1996 and $14,996,000 in 1995.
The decline in sales to Baxter represented 92% of the decline from 1996 critical
care sales, and 96% of the decline from 1995 critical care sales. The silver
lining in this cloud is the fact that UM no longer has one customer that
represents more than 37% of its total sales. Sales to Baxter, still the largest
UM customer, represented 5% of UM's total sales in 1997. Because of UM's
automated assembly capabilities, and established overseas customer base,
management expects to be able to sustain a reasonable base of business for its
critical care products that will continue to contribute to UM's profitability.
UM divides its distribution channels into "direct" and "OEM" channels.
"Direct sales" are sales of UM's products by its own employed sales
representatives, by independent commissioned representatives, or by stocking
distributors in a particular geographic region. Increasing direct sales are an
indication of the Company's ability to build its own marketing franchise. "OEM
sales" are sales of UM products by other medical device manufacturers either as
a component of a kit, or as a repackaged stand-alone product into markets not
served by UM's own direct sales resources. In 1997, global direct sales
represented about 80% of total sales compared to about 63% in 1996, and 58% in
1995. In the U.S., direct sales represented 86% of sales in 1997 compared to
73% in 1996 and 68% in 1995. By product line category, dividing global sales
into the two distribution channels of direct and OEM, yields the following: 1)
obstetrics; 98% direct and 2% OEM in 1997, and 100% direct in both 1996 and
1995; 2) gynecology /urology /ES; 90% direct and 10% OEM in 1997, 95% direct and
5% OEM in 1996; and 96% direct and 4% OEM in 1995; and 3) critical care; 52%
direct and 48% OEM in 1997, 27% direct and 73% OEM in 1996; and 23% direct and
77% OEM in 1995. Sales to Baxter are part of critical care OEM sales.
Previous years' foreign sales included a substantial portion to Baxter
divisions overseas. Including Baxter sales, foreign sales were $5,218,000 in
1997, compared to $9,739,000 in 1996 and $10,343,000 in 1995. Excluding Baxter
sales, foreign sales were $5,009,000 in 1997, compared to $4,804,000 in 1996 and
$4,315,000 in 1995. Foreign sales comprised 22% of total non-Baxter sales in
1997, compared to 17% in 1996 and 15% in 1995. Excluding sales to Baxter,
critical care products represented 84% of foreign sales in 1997 compared to 83%
in 1996 and 92% in 1995.
In 1998, UM sales should increase due to having the benefit of CMI sales
for the entire year compared to one half year in 1997. UM intends to continue
marketing programs to expand sales of its newer products Epitome, Liberty,
Cordguard, and Filtresse, as well as introduce other Ob/Gyn niche products
currently in development and, if affordable, acquire synergistic products from
other companies. UM continues to believe it has substantial sales potential for
its existing products in international markets, and therefore plans to continue
to commit resources for international business expansion.
b) Gross profits. Gross profit margins (profit after subtracting costs of
manufacturing products from revenues) in 1997 were 51.9% compared to 49.4% in
1996 and 46.4% in 1995. The 1997 improvement in average gross profit margin was
achieved from changes in the product mix and distribution mix. In terms of
product mix, sales of UM's Ob/Gyn products increased to 65% of total sales in
1997 from 50% of total sales in 1996, and 46% of sales in 1995. In terms of
distribution mix, sales in the U.S. by the Company's directly employed
representatives increased to about 81% of total domestic direct sales in 1997,
compared to 58% in 1996 and about 50% in 1995. The distribution mix change is a
result of terminating stocking distributors, and replacing them with employed
sales representatives. Average selling prices increase because fewer products
are sold to distributors at a discount, and therefore gross margins increase as
long as manufacturing costs do not increase in the same proportion. Working
against gross margin improvements in 1997 was the fact that manufacturing
overhead (manufacturing costs excluding the costs of direct materials and direct
labor, e.g. depreciation of PP&E, utilities, engineering, QA and supervision)
were not reduced in proportion to the decline in sales. If UM had reduced
manufacturing overhead costs in proportion to its decline in sales, that is, had
1997 manufacturing overhead expenses as a percentage of sales remained at 1995
and 1996 levels, average gross margins for 1997 would have been 56%. UM has
improved its gross margins as a percentage of sales every year for the last
twelve years. Additional gross margin improvements can be achieved if UM can
increase sales activity to better absorb its overhead expenses. On the other
hand, management expects continued competitive pressure for its established
products that may reduce average selling prices and therefore put additional
pressure on gross margins in 1998.
c) Operating Profits. Operating profits, or income from operations, are
the profits achieved after subtracting operating expenses from gross profits.
Operating profits in 1997 were $5,559,000 compared to $11,809,000 in 1996 and
$11,693,000 in 1995. Even though 1997 gross margins were up as a percentage of
sales, operating profits were down 53% (compared to sales down 37%). UM did not
decrease operating expenses in proportion to the sales decline in 1997 because
of management's belief that certain spending levels were necessary to increase
revenues in future years. Although 1997 expenses in dollars decreased by $0.3
million relative to 1996 and by $0.7 million relative to 1995, operating
expenses increased to 29.0 % as a percentage of revenues in 1997 compared to
18.9% of revenues in 1996 and 18.5% of revenues in 1995.
Operating expenses are subdivided into sales, general and administrative
expenses (SG&A) and research and development expenses (R&D). UM further divides
SG&A into the two categories of sales and marketing expenses (S&M) and general
and administrative expenses (G&A).
SG&A expenses in 1997 increased to 25.1% of revenues compared to 15.3% in
1996 and 14.3% in 1995. There were three primary causes for the substantial
increase in SG&A expenses as a percentage of sales: 1) a substantial increase in
the proportion of UM's business that is direct versus OEM, combined with the
distribution mix change from distributors to directly-employed representatives
in UM's direct portion of its business; 2) amortization of goodwill associated
with the July CMI acquisition, and 3) spreading relatively fixed expenses over
fewer revenue dollars, for example, spending on new product marketing programs,
outside legal and accounting fees, and costs associated with being a publicly-
traded company, among others. Because of the first two fundamental changes to
UM's business expenses, management expects future SG&A expenses as a percentage
of sales to remain closer to the 1997 rate than the earlier 1996 and 1995 rates,
even as sales volume increases.
UM's S&M expenses are driven primarily by the direct sales portion of its
business. Although UM desires to increase its OEM customers, particularly for
its blood pressure monitoring products and other products which serve markets
that are outside UM's sales focus, management expects that the direct portion of
UM's business will grow faster than the OEM portion, which represented about 20%
of total sales in 1997. The distribution mix changes that had a positive impact
on gross margins in 1997 had a negative effect on selling expenses. In 1997, UM
increased its direct sales force headcount by 20%. Management believes that
achieving closer contact with end-users of its specialty products, as well as
having closer control of how its sales resources spend limited time, are key
elements to implementing its value-added niche marketing strategies. In 1998,
UM has terminated an additional distributor, which should yield sales to
stocking distributors as a percentage of total direct U.S. sales less than 10%
in 1998.
Although G&A expenses declined $0.1 million in 1997 relative to 1996, they
did so under greater requirements. Included in the G&A expenses were
amortization of goodwill related to the CMI acquisition of $148,300, plus other
G&A expenses in Ireland and Oregon of $0.4 million that were not present in
1996. In 1998, UM plans to hold its G&A dollar expenses in Utah and Ireland
consistent with 1997, but the addition of G&A expenses related to CMI for a
whole year added together with amortization of goodwill at an annual rate of
about $340,000 will result in G&A expenses as a percentage of sales
approximately the same in 1998 as in 1997.
R&D expenses were 3.9% of sales in 1997 compared to 3.6% of sales in 1996
and 4.3% of sales in 1995. UM's consistent investment of about 4% of annual
sales in R&D has yielded twenty-one 510(k) premarketing submissions to the FDA
over the last five years, a reasonable indicator of new product development
efforts. In 1997, UM submitted four new 510(k) applications to the FDA. In
addition, UM has filed or acquired twenty product patent applications over the
last five years, including nine in 1997. The Company employs specialist R&D
resources not only to internally develop its own new product ideas, but also,
through joint development agreements, licensing of technology, acquisitions and
other arrangements, to enhance and complete to commercialization projects
initiated by others. For example, UM began working in cooperation with Mayo
Clinic in May 1997 to develop and commercialize an advanced endometrial tissue
sampling approach designed by R. Stuart Fowler, M.D., Mayo Clinic, Scottsdale,
Arizona. UM expects to maintain its commitment to R&D in 1998 consistent with
the past as a percentage of sales.
d) Non-operating income. Non-operating income includes royalties from
licensing UM's technology to other companies, interest and capital gains from
investing the Company's cash (offset by interest on UM's debt obligations), and
gains or losses from the sale of assets. Non-operating income of $1.2 million
made a substantial contribution to 1997 performance. Non-operating income in
1997 represented about 18% of pretax income, compared to 13% in 1996 and 9% in
1995. Non-operating income in 1997 was about $0.6 million less than 1996
because of an extraordinary payment in 1996 relating to the use of UM's
technology. Non-operating income in 1997 was slightly higher than in 1995.
Items in 1997 which were different from recent prior years included interest
expense of $250,000 from UM's use of a credit line to finance the purchase of
CMI, and a $196,000 gain from the sale of a small property in Lehi, Utah.
Royalties from other medical device companies continue to constitute a majority
of the non-operating income. Royalties received vary from year to year
depending on the interest in UM's patents and/or success of other companies in
selling licensed product concepts. Barring new technology licensing or other
extraordinary transactions, UM's management estimates that non-operating income
in 1998 will be lower than in 1997, due primarily to continued interest expense
on debt balances and no anticipated sales of property similar to 1997.
e) Earnings before income taxes. Earnings before income taxes (EBT)
result from adding UM's non-operating income to its operating profits. EBT, as
a percentage of sales, were 27.9% in 1997 compared to 35.3% and 30.6% in 1996
and 1995, respectively. Despite much lower sales volume, UM was able to
maintain very high before tax profitability when compared with other publicly-
traded companies' performance. Continued gross margin improvements, tight
controls on operating expenses and excellent non-operating income were the keys.
Except for the extraordinary year of 1996, UM's historical best year of
profitability, the Company achieved profitability consistent with previous years
in terms of earnings before taxes as a percentage of sales in the range of 28-
30%.
f) Net income. Net income is EBT minus income taxes. UM's effective
income tax rate was 36.2% in 1997 compared to 35.8% in 1996 and 35.0% in 1995.
UM's effective rate includes federal and state income taxes in the U.S., as well
as taxes overseas. The increased tax rate in 1997 reflects the non-
deductibility of goodwill for tax purposes associated with the CMI acquisition,
a difference in the distribution of state taxes, a smaller amount of non-
operating income coming from tax-exempt securities, and other fluctuations
associated with the use of a foreign sales corporation and R&D tax credits. The
Ireland operation did not generate enough profits at a lower income tax rate to
help reduce the overall effective rate in 1997.
Net income of $4.3 million in 1997 on $24.3 million in sales ranks in the
top profitability tier of U.S. publicly-traded companies. UM generates profits
equivalent in magnitude to profitable companies three times its size in
revenues. Net income in 1997 was $4,322,000, compared to $8,754,000 in 1996 and
$8,354,000 in 1995. Although an unfavorable comparison, the two years of 1996
and 1995 were by far the most profitable in UM's history, together representing
one-half of the cumulative profits generated over UM's prior 16 years of
business. As further perspective, in the four years of 1993-1996, UM generated
$31.2 million in net profits in comparison to $20.3 million generated in the
fourteen years of 1979-1992. Management believes net profits will grow in 1998.
g) Earnings per share (EPS). EPS is net income divided by the number of
shares of stock outstanding (diluted to take effect for stock options awarded
which have exercise prices below the current market value). Diluted EPS for
1997 were $.51 compared to $.93 for 1996 and $.82 for 1995. Ending weighted
average common shares in 1997 assuming dilution (the number used to calculate
diluted EPS) were 8,495,415 compared to 9,451,581 and 10,042,430 shares in 1996
and 1995, respectively. Actual outstanding common shares as of December 31,
1997 were 8,305,036. The dilution calculation added about 51,000 shares to
basic shares outstanding in 1997, compared to about 181,000 in 1996 and 190,000
in 1995.
h) Return on shareholders' equity (ROE). ROE is the portion of net
income retained by UM to internally finance its growth, divided by average
accumulated shareholders' equity during the period. This ratio determines how
fast the Company can afford to grow without external financing that would dilute
shareholder interests. For example, a 30% ROE will support 30% growth in
revenues. ROE in 1997 at 18% was below management's target of 25%. The primary
factor that lowered ROE in 1997 was the low number of asset turns, that is, the
level of sales activity relative to total assets was too low. Including 1997,
ROE has averaged 30% over the last twelve years.
Cash Flows and Capital Resources.
a) Cash flows. EBDIT (EBT, adjusted for non-cash depreciation and
amortization expenses, asset write-offs, and interest expense) are the measure
of UM's ability to generate cash. 1997 EBDIT were $8.3 million, or as a ratio
of sales, 34%. EBDIT has averaged 34% of sales over the last five years.
Generating cash at a rate of one-third of sales provides UM with a powerful
financial engine for growth. The Company obtained additional cash in 1997
through the use of its credit line, which as of the end of the year, provided an
additional $5.6 million in cash to facilitate the timing of the CMI acquisition.
Cash (and equivalent) balances were $1.0 million at the end of 1997, a
decrease of $3.5 million from December 31, 1996. The two major uses of cash in
1997 were the CMI acquisition which used about $7.3 million in cash after
consolidating with CMI's cash accounts, and repurchases of UM's stock in the
amount of $5.4 million. The $7.3 million for CMI was used for acquiring about
$1.0 million in non-cash working capital (inventories and receivables less
payables), $1.1 million in PP&E (primarily molds and molding presses), and $5.2
million in intangible assets (goodwill, acquisition fees, and patents). Net
working capital changes excluding CMI used $1.2 million, primarily as a
reduction in current liabilities.
b) Capital expenditures. In addition to the $1.1 million in P&E purchased
as part of the CMI acquisition, UM also spent another $35,000 in Oregon to make
communications and computer equipment compatible with Utah. UM expended
$777,000 in Utah and $407,000 in Ireland during 1997 for P&E, including
improvements and capitalized repairs to facilities, new and replacement
furniture, manufacturing equipment and tooling required to sustain operations,
as well as additional communications and computer equipment. UM realized $9,000
from the sale or disposal of P&E assets in 1997. For reference, depreciation
expense of P&E in 1997 for CMI, Utah and Ireland was $121,000, $1,010,000, and
$170,000, respectively.
In addition to the $5.2 million in intangible assets (including goodwill)
purchased as part of the CMI acquisition, UM expended $0.4 million on the
acquisition of patents and trademarks for potential new products. For
reference, amortization expense of intangibles in 1997 for CMI and for Utah was
$160,000 and $54,000, respectively.
Excluding the possibility of additional acquisitions of new products,
technology or marketing rights, UM plans for capital expenditures in 1998 to be
less than current depreciation rates.
c) Financing activities. Financing activities in 1997 netted a cash
increase of $399,000 compared to using cash of $13,982,000 in 1996 and
$3,080,000 in 1995. The Company repurchased its own common stock during 1997 in
the amount of $5,390,000, compared to $14,583,000 in 1996 and $4,154,000 in
1995. Offsetting the 1997 repurchases, UM received $227,000 from the issuance
of 29,500 shares of stock due to exercises of employee options. On April 4,
1997, UM signed a long-term revolving promissory note with its bank under which
the Company can borrow up to $10,000,000 at a floating interest rate tied to
LIBOR or the Prime Rate, at UM's election. Amounts borrowed under the note are
unsecured and are due March 25, 1999. The note provided $5,563,000 at year end
1997.
Management believes that future income from operations and effective
management of its working capital assets will provide the liquidity needed to
finance its internal growth plans. In addition to capital expenditures
supporting operations, UM plans to use cash during the remainder of 1998 to
reduce existing debt incurred in the acquisition of CMI. Additionally, the
credit line may be used for liquidity for selective infusions of technological,
marketing or product manufacturing rights or additional acquisitions to broaden
the Company's product offerings.
Management's Outlook.
Although UM's established business from prior years dramatically contracted
in 1997, management is looking forward to 1998 with renewed optimism. The
Baxter DPT business has gone away. The full financial impact of the change was
realized as expected in 1997. On a positive note, UM no longer has a huge
dependence on one customer. The balance of UM's critical care product sales
appear stable, particularly overseas where DPT sales increased by 6% in 1997
compared to 1996. In 1998, UM will continue to recruit and support OEM
marketing partners in the U.S. with the knowledge it can leverage its ability to
cost effectively produce the commodity blood pressure monitoring DPTs and other
components without additional capital investments.
The more important loss in 1997 business, in terms of potential impact on
long term success, resulted from the change in the competitive landscape with
respect to UM's core obstetrical IUP product, INTRAN. Performance in 2H 1997
demonstrated that Intran sales volume lost has been essentially replaced with
synergistic obstetrics products via the acquisition of CMI. With the help of
the CMI acquisition, UM now offers the most complete line of supplies needed in
labor & delivery departments of hospitals. In prior years, Intran sales
represented more than 80% of UM's Ob/Gyn sales, representing a very high level
of dependence on one product. After the CMI acquisition, Intran represented
less than 60% of UM's Ob/Gyn sales even though IUPC sales in 2H 1997 were 30%
higher than 1H 1997.
UM's direct U.S. sales team demonstrated its ability to communicate the
value of reliability in 2H 1997 by successfully stopping further erosion of
Intran's dominant IUPC market share by cheaper competing products.
Knowledgeable physicians do not wish to increase their risk of a negative
surprise in an inherently risky birthing procedure in order to save a few
dollars. Ironically, experience has shown a higher cost from increased multiple
insertions of new catheters of the cheaper products may result when readings
appear inaccurate. In 1998, the sales team will continue to aggressively
reinforce the superiority of the clinical benefits of UM's Intran Plus,
augmented by several new versions designed to address differences introduced by
new competitors. UM believes these competitors are infringing its patents as
alleged in pending litigation being pursued by UM to protect its patented
technology. The Intran options allow physician choices of tip size, zero button
location and amniotic fluid visualization. In addition, UM expects greater
activity in 1998 toward resolving UM's claims of patent infringement against low
priced competitors. If the Federal Courts support UM's position, the outcome
will be significant monetary awards for UM. UM's IUPC patents have about eight
years of life remaining.
UM believes that the next generation of fetal monitoring should help
physicians more clearly identify a sustained trend of decreasing fetal tissue pH
indicating an increased risk of metabolic acidosis, the persistent physiologic
condition most indicative of a fetus in trouble. The corollary would be
allowing a physician to recognize transitory respiratory low pH, or non-
decreasing pH in conjunction with a non-reassuring FHR pattern, thereby allowing
labor to continue without an unnecessary C-section. The clinical elegance of
the UM fetal pH measurement system in development adds a more timely fetal pH
assessment into the same probe that currently measures fetal heart rate, the
current standard of electronic fetal monitoring. The optical chemistry between
tissue and the probe is patented. In 1998, UM will accelerate investment in
this key project in order to overcome the remaining technical challenges, and
begin human clinical trails to establish the safety and efficacy of the system.
The niche markets for which UM's gynecology /urology /electrosurgery
products are targeted have proven to require many and varied marketing
initiatives. In many cases, they require individual user training together with
clear evidence of improved outcomes. Although 1997 sales of UM's new products
Liberty and Epitome increased by over 50% relative to 1996, growth in dollar
terms remained modest. In 1998, UM will continue to look for ways to increase
the rate of adoption of its newer products, and for additional specific Ob/Gyn
clinical needs where innovations can become the most recognized cost-effective
solution. The Fowler Endocurette for uterine biopsies is an example of such a
device. UM plans to begin marketing the Endocurette during 1998 after receiving
FDA premarketing concurrence. UM will continue to maintain a long-term
perspective and seek to strengthen its disease management focus with Ob/Gyn
physicians who it believes are ultimately responsible for their patients' well-
being.
Year 2000 Compliance
With respect to the potential impact of the turn of the century date
change, UM has reviewed the processing routines used in all its electronic
products for any potential faults and has determined that all products are
"Century Date Independent." The date change at the beginning of the year 2000
will have no effect on the use or operation of UM's products. The software that
UM uses internally to control its business operations along with some equipment
is not currently fully year 2000 compliant. The Company intends to have such
software and equipment year 2000 compliant by late 1999, and does not anticipate
any interruptions to its business operations. It is expected that costs
associated with addressing this issue will not be material to UM's business,
operations or financial condition.
Accounting Policy Changes
The Company has, during 1997, adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". Accordingly, these statements,
including historical information, present basic EPS and diluted EPS, instead of
primary and fully diluted EPS as previously required. Note 9 of the Notes to
Consolidated Financial Statements presents further information regarding SFAS
No. 128.
The Company, during 1996, adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been
recognized in the financial statements. Note 8 of the Notes to Consolidated
Financial Statements presents net income and earnings per share as if the fair
value provisions of SFAS No. 123 had been applied.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to financial statements and financial statement schedule at page
F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 18, 1997, UM determined not to engage Deloitte & Touche LLP,
Salt Lake City, Utah ("D&T SLC") as the Company's principal accountant to audit
and report on the Company's financial statements for the year ended December 31,
1997. Significantly increased fees (bid at least 50% higher than for the
previous year, despite UM's decreased business activity) is the reason for the
change. The report of D&T SLC on UM's financial statements consisting of
consolidated balance sheets as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996, did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
audit scope or accounting principles.
In connection with the Company's two most recent fiscal year audits and any
subsequent interim period preceding the dismissal of D&T SLC, there were no
disagreements with D&T SLC or reportable events on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject matter of the
disagreement in connection with its report. In connection with its audit of
UM's 1996 financial statements, D&T SLC noted no matters involving the internal
control structure and its operations that they considered to be material
weaknesses.
On November 18, 1997, UM engaged Tanner + Co., Salt Lake City, Utah as
independent accountant and auditor to report on UM's financial statements for
the year ended December 31, 1997. No consultations occurred between UM and
Tanner + Co. during the two most recent fiscal years and any subsequent interim
period prior to Tanner + Co.' s appointment regarding either (i) the application
of accounting principles to a specific completed or contemplated transaction,
the type of audit opinion that might be rendered on UM's financial statements,
or other information provided that was considered by the Company in reaching a
decision as to an accounting, auditing, or financial reporting issue, or (ii)
any matter that was the subject of disagreement or a reportable event requiring
disclosure under Item 304(a)(1)(v) of Regulation S-K.
PART III.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information from the definitive proxy statement of the registrant
under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: General," "Directors
and Nominees," "Executive Officers," and "Compliance with Exchange Act
Requirements," is incorporated herein by reference, expressly excluding the
material set forth under the subcaptions "Report of the Compensation and Option
Committee" and "Stock Performance Chart."
ITEM 11 - EXECUTIVE COMPENSATION.
The information from the definitive proxy statement of the registrant
under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Executive
Compensation," "Compensation and Option Committee Interlocks and Insider
Participation," "Employment Agreements, Termination of Employment, and Change in
Control," and "Director's Compensation" is incorporated herein by reference,
expressly excluding the material set forth under the subcaptions "Report of the
Compensation and Option Committee" and "Stock Performance Chart."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information from the definitive proxy statement of the registrant
under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Security Ownership of
Management and Certain Persons" is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report or
incorporated herein by reference.
1. Financial Statements.
(See Index to Consolidated Financial Statements at page F-1.)
2. Supplemental Schedule.
Financial Statement Schedules are omitted because they are inapplicable or
the required information is otherwise included in the accompanying Financial
Statements and the notes thereto.
3. Exhibits.
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- -------- ------------------------------------------ ---------------
1 2 Stock Purchase Agreement, dated as of July Incorporated by
20, 1997 between Utah Medical Products, Reference(1)
Inc., and Columbia Medical & Surgical, Inc.
Articles of Incorporation and Bylaws
2 3 Articles of Restatement of the Articles of Incorporated by
Incorporation Reference(2)
3 3 Bylaws Incorporated by
Reference (2)
4 4 Rights Agreement dated as of October 28, Incorporatedby
1994, between Utah Medical Products, Inc., Reference (2)
and Registrar and Transfer Company
5 4 Designation of Rights, Privileges, and Incorporated by
Preferences of Series "A" Preferred Stock Reference (2)
6 10 Employment Agreement dated December 21, 1992 Incorporated by
with Kevin L. Cornwell Reference (2)
7 10 Utah Medical Products, Inc., 1986 Incentive Incorporated by
Stock Option Plan* Reference (2)
8 10 Utah Medical Products, Inc., 1994 Employee Incorporated by
Incentive Stock Option Plan* Reference (2)
9 10 Utah Medical Products, Inc., 1993 Directors' Incorporated by
Stock Option Plan* Reference (2)
10 10 Utah Medical Products, Inc., Performance Incorporated by
Option Plan* Reference (2)
11 10 Revolving Loan Agreement, dated April 4, This Filing
1997 between Utah Medical Products, Inc.
and First Security Bank, N.A.
12 21 Subsidiaries of Utah Medical Products, Inc. This Filing
13 23 Consent of Tanner + Co., Company's This Filing
independent auditors for the year ending
December 31, 1997
14 23 Consent of Deloitte & Touche LLP, Company's This Filing
independent auditors for the years ending
December 31, 1996 and December 31, 1995
15 27 Financial Data Schedule This Filing
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c).
(1) Incorporated by reference from the Company's current report on form 8-K/A
dated August 7, 1997.
(2) Incorporated by reference from the Company's registration statement on form
S-8 filed with the Commission effective February 10, 1995.
(3) Incorporated by reference from the Company's annual report on form 10-K
filed with the Commission for the year ended December 31, 1992.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned this 24th day of March, 1998.
UTAH MEDICAL PRODUCTS, INC.
By /s/ Kevin L. Cornwell
Chairman and CEO
By /s/ Kevin L. Cornwell
Secretary and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 24th day of March, 1998.
By /s/ Stephen W. Bennett, Director
By: /s/ Kevin L. Cornwell, Director
By: /s/ Ernst G. Hoyer, Director
By: /s/ Perry L. Lane, Director
By: /s/ Barbara A. Payne, Director
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-2
Report of Deloitte & Touche LLP F-3
Consolidated balance sheet F-4
Consolidated statement of income F-5
Consolidated statement of stockholders' equity F-6
Consolidated statement of cash flows F-8
Notes to consolidated financial statements F-10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-1
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Utah Medical Products, Inc.
We have audited the consolidated balance sheet of Utah Medical Products, Inc. as
of December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Utah
Medical Products, Inc. at December 31, 1996 and for the two years then ended,
were audited by other auditors whose report dated January 24, 1997 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Utah Medical
Products, Inc. as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
TANNER+Co.
Salt Lake City, Utah
January 16, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Utah Medical Products, Inc.:
We have audited the accompanying consolidated balance sheet of Utah Medical
Products, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Utah Medical Products, Inc. and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
Salt Lake City, Utah
January 24, 1997
<PAGE> F-3
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets 1997 1996
------
----------------------------
Current assets:
Cash $ 951,084 $3,038,956
Investments available for sale (note 3) - 1,458,543
Accounts receivable, net (note 2) 4,653,805 5,010,842
Inventories (note 2) 5,792,058 4,750,442
Prepaid expenses and other current assets 107,203 91,273
Deferred income taxes (note 7) 548,230 595,639
----------------------------
Total current assets 12,052,380 14,945,695
Property and equipment, net (note 4) 13,340,105 13,367,597
Other assets, net (note 2) 6,066,751 602,393
----------------------------
Total $31,459,236 $28,915,685
============================
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 843,199 $1,885,743
Accrued expenses (note 2) 1,840,357 2,054,096
Deferred revenue (note 10) 85,600 135,600
----------------------------
Total current liabilities 2,769,156 4,075,439
Note payable (note 5) 5,562,933 -
Deferred income taxes (note 7) 489,989 369,759
Deferred revenue (note 10) 1,774 87,492
----------------------------
Total liabilities 8,823,852 4,532,690
----------------------------
Commitments and contingencies (note 6) - -
Stockholders' Equity:
Preferred stock $.01 par value; authorized
5,000,000 shares; no shares issued or
outstanding - -
Common stock $.01 par value; authorized
50,000,000 shares; issued 8,305,036 shares
in 1997 and 8,785,736 shares in 1996 83,050 87,857
Unrealized gain on investments available-for-
sale, net of tax - 58,494
Cumulative foreign currency translation
adjustments (656,345) 217,444
Retained earnings 23,208,679 24,019,200
----------------------------
Total stockholders' equity 22,635,384 24,382,995
----------------------------
Total $31,459,236 $28,915,685
----------------------------
See accompanying notes to financial statements. F-4
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years Ended December 31,
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
----------------------------------------------
Net sales (notes 10 and 12) $24,271,640 $38,672,632 $42,038,082
Cost of sales (note 10) 11,665,207 19,549,252 22,549,039
----------------------------------------------
Gross margin 12,606,433 19,123,380 19,489,043
Expenses:
Selling, general, and administrative 6,089,244 5,926,897 6,006,499
Research and development 958,166 1,387,088 1,789,167
----------------------------------------------
Income from operations 5,559,023 11,809,395 11,693,377
Other income (expense):
Dividend and interest income 85,081 453,918 584,960
Royalty income 732,267 703,352 652,894
Interest expense (249,852) - -
Other, net 648,373 677,067 (79,326)
----------------------------------------------
Income before income tax expense 6,774,892 13,643,732 12,851,905
Income tax expense (note 7) (2,453,188) (4,889,841) (4,498,167)
----------------------------------------------
Net income $4,321,704 $8,753,891 $8,353,738
----------------------------------------------
Earnings per common share (basic)
(notes 8 and 9) $.51 $.93 $.83
----------------------------------------------
Earnings per common share (diluted)
(notes 8 and 9) $.51 $.93 $.82
----------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Gain (loss) on Cumulative
Investments Foreign
Additional Available-for- currency
Common Stock Pain-In Sale, Net of Translation Retained
------------------------
Shares Amount Capital Tax Adjustments Earnings
-----------------------------------------------------------------------
Balance, January 1, 1995 9,993,559 $99,935 $ - ($101,815) $ - $23,442,200
Shares issued upon exercise
of employee stock options for
cash 124,840 1,248 - - - 811,179
Shares issued upon exercise
of employee purchase rights 39,668 397 - - - 260,736
Change in unrealized gain
(loss) on investments
available-for-sale - - - 134,522 - -
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 355,779 - - -
Common stock purchased and
retired (367,130) (3,671) (355,779) - - (3,794,112)
Net income - - - - - 8,353,738
-----------------------------------------------------------------------
Balance, December 31, 1995 9,790,937 97,909 - 32,707 - 29,073,741
Shares issued upon exercise
of employee stock options for
cash 68,599 686 - - - 600,967
Change in unrealized gain
(loss) on investments
available-for-sale - - - 25,787 - -
Foreign currency translation
adjustments - - - - 217,444 -
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 163,164 - - -
Common stock purchased and
retired (1,073,800) (10,738) (163,164) - - (14,409,399)
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Continued
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Gain (loss) on Cumulative
Investments Foreign
Additional Available-for- currency
Common Stock Pain-In Sale, Net of Translation Retained
------------------------
Shares Amount Capital Tax Adjustments Earnings
-----------------------------------------------------------------------
Net income - - - - - 8,753,891
-----------------------------------------------------------------------
Balance, December 31, 1996 8,785,736 87,857 - 58,494 217,444 24,019,200
Shares issued upon exercise
of employee stock options for
cash 29,500 295 - - - 226,330
Change in unrealized gain
(loss) on investments
available-for-sale - - - (58,494) - -
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 26,767 - - -
Common stock purchased and
retired (510,200) (5,102) (26,767) - - (5,358,555)
Foreign currency translation
adjustments - - - - (873,789) -
Net income - - - - - 4,321,704
-----------------------------------------------------------------------
Balance, December 31, 1997 8,305,036 $83,050 $ - $ - ($656,345) $23,208,679
=======================================================================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements. F-7
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------------------------------------------
Cash flows from operating activities:
Net income $4,321,704 $8,753,891 $8,353,738
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,515,153 1,377,051 1,714,906
Provision for (recovery of) losses on accounts
receivable (35,409) (935) 5,359
(Gain) loss on disposal of assets (278,360) 412,224 24,563
Deferred income taxes 195,552 (113,854) (74,293)
Tax benefit attributable to exercise and
disposition of incentive stock options and
stock purchase rights 26,767 163,164 355,779
(Increase) decrease in:
Accounts receivable 544,542 2,669,888 (89,813)
Accrued interest, grant claims, and other
receivables 665,650 (984,323) (8,632)
Inventories (237,299) (1,472,460) 745,957
Prepaid expenses and other current assets 11,512 106,083 (131,502)
Increase (decrease) in:
Accounts payable (1,136,230) 101,903 (37,462)
Accrued expenses (445,298) 216,011 334,551
Deferred revenue (135,716) (35,716) (84,996)
------------------------------------------
Net cash provided by
operating activities 5,012,568 11,192,927 11,108,155
------------------------------------------
Cash flows from investing activities: Capital
expenditures for:
Property and equipment (1,219,408) (5,639,548) (2,074,745)
Intangible assets (454,153) (320,018) (62,144)
Purchases of investments (112,200) (3,315,186) (6,888,832)
Proceeds from sale and maturities of investments 1,577,238 10,015,766 4,483,010
Proceeds from sale of property and equipment 8,510 21,750 350
Net cash paid in acquisition (7,299,561) - -
------------------------------------------
Net cash (used in) provided by
investing activities: (7,499,574) 762,764 (4,542,361)
------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 226,625 601,653 1,073,560
Common stock purchased and retired (5,390,424) (14,583,301) (4,153,562)
Increase in note payable 5,562,933 - -
------------------------------------------
Net cash provided by (used in)
financing activities 399,134 (13,981,648) (3,080,002)
------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements. F-8
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flow
Continued
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Years Ended
December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
Net (decrease) increase in cash (2,087,872) (2,025,957) 3,485,792
Cash at beginning of year 3,038,956 5,064,913 1,579,121
------------------------------------------
Cash at end of year $951,084 $3,038,956 $5,064,913
==========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $2,306,515 $5,111,183 $4,156,894
==========================================
Interest $249,852 $ - $ -
==========================================
</TABLE>
Supplemental schedule for non-cash investing and financing activities:
During 1997, the Company sold property in exchange for a receivable of $340,000.
During 1997, the Company purchased all of the outstanding common stock of
Columbia Medical, Inc. (Columbia) in a purchase transaction. The Company paid
cash of $8,159,829 for the common stock and recorded net assets from the
acquisition as follows:
Cash $860,268
Accounts receivable 477,746
Inventory 804,317
Prepaids and other 27,442
Deferred income taxes 27,913
Property and equipment, net 1,061,896
Intangibles 5,225,492
Accounts payable (93,686)
Accrued expenses (231,559)
---------------
Total cash paid 8,159,829
Less cash received (860,268)
---------------
Net cash investment $(7,299,561)
===============
- --------------------------------------------------------------------------------
See accompanying notes to financial statements. F-9
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
Utah Medical Products, Inc. and its wholly owned subsidiaries, Utah
Medical Products Ltd. which operates a manufacturing facility in Ireland,
and Columbia Medical, Inc. (the Company) are in the business of
producing cost-effective devices for the health care industry. The
Company's broad range of products includes those used in critical care
areas and the labor and delivery departments of hospitals, as well as
outpatient clinics and physician's offices. Products are sold in both
domestic U.S. and International markets.
Basis of Presentation
Effective july 1, 1997, the Company acquired Columbia Medical, Inc. (Columbia)
in a purchase transaction. Operations of Columbia have been included in the
consolidated operations since the date of purchase. A pro forma conensed
income statement for the year ended December 31, 1997 as though the purchase
had taken place effective January 1, 1997 has not been presented as the
amounts are immaterial to the operations of the Company.
Principles of Consolidation
The consolidated financial statements include those of the Company and its
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
Certain changes to the presentation of the 1996 and 1995 consolidated financial
statements have been made to conform with the 1997 presentation.
Investments Available-For-Sale
Investments consist of mutual funds, bonds, and equities. The Company complies
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities. Under
SFAS No. 115, the Company's investments are classified as available-for-sale
which results in an adjustment to stockholders' equity for unrealized gains and
losses (see Note 3). Realized gains and losses are determined by the specific
identification method.
Grant Claims Receivable
Grant claims receivable consists of amounts due from the Industrial Development
Agency (Ireland) under capital and employment grant agreements for the
construction and operation of the Company's Ireland manufacturing facility.
Inventories
Finished products, work-in-process, and raw materials and supplies inventories
are stated at the lower of cost (computed on a first-in, first-out method) or
market (see Note 2).
- --------------------------------------------------------------------------------
F-10
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies Continued
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line and units-of-production methods over estimated
useful lives as follows:
Building and improvements 30-40 years
Furniture, equipment, and tooling 3-10 years
Intangible Assets
Costs associated with the acquisition of patents, trademarks, goodwill, license
rights, and a non-compete agreement, are capitalized and amortized using the
straight-line method over periods ranging from 5 to 17 years.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, whereby deferred taxes are computed under the liability method (see Note
7).
Deferred Revenue
Amounts received in advance from customers for the sale of product rights and
price reductions are recognized as revenue as the related products are sold
considering the future marketability of the products.
Earnings per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year.
Statement of Cash Flow
For purposes of the consolidated statements of cash flows, the Company considers
cash on deposit and short-term investments with original maturities of three
months or less to be cash and cash equivalents.
- --------------------------------------------------------------------------------
F-11
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies Continued
Translation of Foreign Currencies
Assets and liabilities of the Company's foreign subsidiary are translated into
U.S. dollars at the applicable exchange rates at year-end. Income and expense
items are translated at the average rate of exchange during the year. Net gains
or losses resulting from the translation of the Company's assets and liabilities
are reflected as a separate component of stockholders' equity.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of health care providers.
Although the Company is directly affected by the well-being of the medical
industry, management does not believe significant credit risk exists at December
31, 1997.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
- --------------------------------------------------------------------------------
F-12
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts
December 31,
------------------------------------
1997 1996
------------------------------------
Accounts receivable:
Trade receivables $3,820,147 $3,886,943
Grant claim receivables 337,023 961,408
Accrued interest and other 543,312 244,577
Less allowance for
doubtful accounts (46,677) (82,086)
------------------------------------
$4,653,805 $5,010,842
===================================
Inventories:
Finished products $1,231,584 $1,000,438
Work-in-process 1,204,873 1,010,086
Raw materials 3,355,601 2,739,918
-----------------------------------
$5,792,058 $4,750,442
===================================
Other assets:
Goodwill $5,029,613 $1,000
Patents 1,497,781 897,516
License rights 293,151 293,151
Trademarks 220,591 220,898
Non-compete agrement 50,000 -
-----------------------------------
7,091,136 1,412,565
Accumulated amorization (1,024,385) (810,172)
------------------------------------
$6,066,751 $602,393
====================================
Accrued expenses:
Payroll and payroll taxes $777,773 $1,132,309
Reserve for litigation costs 761,556 649,840
Other 301,028 271,947
-----------------------------------
$1,840,357 $2,054,096
===================================
- --------------------------------------------------------------------------------
F-13
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Investments
The amortized cost and estimated market values of investment securities as of
December 31, 1996 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Losses Value
----------------------------------------------------------
Municipal bonds $521,040 $ - ($411) $520,629
Equities and other 843,633 104,286 (10,005) 937,914
----------------------------------------------------------
Total $1,364,673 $104,286 ($10,416) $1,458,543
==========================================================
During the years ended December 31, 1997, 1996, and 1995, there were $1,577,238,
$10,015,766 and $4,483,010, respectively, in proceeds from the sale of
investment securities resulting in gross realized losses of $17,581, $28,476,
and $8,328, respectively, and gross realized gains of $119,940, $15,341, and
$59,187, respectively.
The net unrealized gain on investment securities available-for-sale included in
stockholders' equity for the years ended December 31, 1997, 1996, and 1995 is
$-0-, $58,494, and $32,707, respectively, which are net of the deferred tax
liability of $-0-, $35,376, and $19,792, respectively.
- -------------------------------------------------------------------------------
F-14
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------------------
1997 1996
------------------------------------
Land $1,008,598 $1,126,662
Buildings and improvements 7,818,257 8,288,750
Furniture, equipment, and tooling 12,162,583 10,066,608
Construction-in-progress 562,641 900,622
------------------------------------
21,552,079 20,382,642
Accumulated depreciation and
amortization (8,211,974) (7,015,045)
------------------------------------
$13,340,105 $13,367,597
====================================
Included in the Company's consolidated balance sheets are the assets of its
manufacturing facilities in Oregon and Ireland. Property and equipment, by
location are as follows:
December 31, 1997
-----------------------------------------------------
Utah Oregon Ireland Total
-----------------------------------------------------
Land $ 621,250 $ - $ 387,348 $1,008,598
Building and improvements 3,637,111 32,261 4,148,885 7,818,257
Furniture, equipment, and
tooling 10,286,976 1,083,147 792,460 12,162,583
Construction-in-progress 561,549 1,092 - 562,641
-----------------------------------------------------
Total 15,106,886 1,116,500 5,328,693 21,552,079
Accumulated depreciation
and amortization (7,802,719) (120,596) (288,659) (8,211,974)
-----------------------------------------------------
Property and equipment, net $7,304,167 $995,904 $5,040,034 $13,340,105
=====================================================
- --------------------------------------------------------------------------------
F-15
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property and Equipment Continued
December 31, 1996
-----------------------------------------------
U.S. Ireland Total
-----------------------------------------------
Land $678,447 $448,215 $1,126,662
Building and improvements 3,551,139 4,737,611 8,288,750
Furniture, equipment, and
tooling 9,735,395 331,213 10,066,608
Construction-in-progress 662,514 238,108 900,622
-----------------------------------------------
Total 14,627,495 5,755,147 20,382,642
Accumulated depreciation
and amortization (6,896,623) (118,422) (7,015,045)
-----------------------------------------------
Property and equipment, net $7,730,872 $5,636,725 $13,367,597
===============================================
5. Note Payable
The Company has a bank line-of-credit agreement which allows the Company to
borrow a maximum amount of $10,000,000 at an interest rate equal to the bank's
LIBOR rate plus 1.45% or .8% below the bank's prime rate. The line-of-credit
matures on March 25, 1999, is unsecured and had an outstanding balance of
$5,562,933 at December 31, 1997.
6. Commitments and Contingencies
Operating Leases
The Company has an operating lease agreement for land adjoining the Company's
U.S. facilities for a term of forty years commencing on September 1, 1991. On
September 1, 1996 and subsequent to each fifth lease year, the basic rental is
adjusted for published changes in a price index. The Company also leases certain
buildings under noncancelable operating leases. Rent expense charged to
operations under these operating lease agreements was approximately $75,000,
$33,000 and $32,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
- -------------------------------------------------------------------------------
F-16
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Commitments and Contingencies Continued
Future minimum lease payments under the operating lease obligations as of
December 31, 1997 were as follows:
Year ending December 31: Amounts
-----------------
1998 $115,836
1999 68,607
2000 34,874
2001 34,874
2002 34,874
Thereafter 999,723
-----------------
Total minimum lease payments $1,288,788
=================
Product Liability
The Company is self-insured for product liability risk.
Litigation
The Company is involved in lawsuits which are an expected consequence of its
operations and in the ordinary course of business. The Company believes that
pending litigation will not have a materially adverse effect on its financial
condition or results of operations.
- --------------------------------------------------------------------------------
F-17
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes
Deferred tax assets (liabilities) consist of the following temporary
differences:
December 31,
----------------------------------------
1997 1996
----------------------------------------
Current Long-term Current Long-term
----------------------------------------
Assets
Inventory write-down $103,376 $ - $199,477 $ -
Allowance for doubtful accounts 17,737 - 30,946 -
Accrued liabilities 393,914 - 349,471 -
Deferred revenue 33,203 - 51,121 32,941
Other - - - 9,732
----------------------------------------
Total 548,230 - 631,015 42,673
Liabilities
Unrealized gain on investments available-
for-sale - (382,552) (35,376) -
Depreciation and amortization (412,432)
Earnings from subsidiary - (107,437) - -
----------------------------------------
Deferred income taxes, net $548,230 ($489,989) $595,639 ($369,759)
========================================
The components of income tax expense are as follows:
Years Ended
December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Current $2,285,549 $5,003,695 $4,572,460
Deferred 167,639 (113,854) (74,293)
-----------------------------------------------
Total $2,453,188 $4,889,841 $4,498,167
===============================================
- --------------------------------------------------------------------------------
F-18
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes Continued
Income tax expense differed from amounts computed by applying the statutory
Federal rate to pretax income as follows:
Years Ended
December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
Federal income tax expense at
the statutory rate $2,303,463 $4,638,869 $4,369,648
Non-taxable investment income (7,422) (76,512) (124,604)
State income taxes 309,205 718,724 642,638
Foreign sales corporation (85,000) (223,376) (228,760)
Other (67,058) (167,864) (160,755)
------------------------------------------
Total $2,453,188 $4,889,841 $4,498,167
==========================================
8. Stockholders' Equity Options
The Company has stock option plans which authorize the grant of stock options to
eligible employees, directors, and other individuals to purchase up to an
aggregate 4,722,500 shares of common stock. All options granted under the plans
may be exercised between six months and ten years following the date of grant.
The plans are intended to advance the interest of the Company by attracting and
ensuring retention of competent directors, employees, and executive personnel,
and to provide incentives to those individuals to devote their utmost efforts to
the advancement of the Company.
- --------------------------------------------------------------------------------
F-19
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stockholders' Equity Continued
Changes in stock options were as follows:
Price Range
Shares Per Share
--------------------------------------
1997
Granted 454,700 $6.75 - $11.50
Expired or canceled 229,452 6.75 - 14.25
Exercised 29,500 7.25 - 10.00
Total outstanding at December 31 888,348 6.75 - 14.25
Total exercisable at December 31 355,971 7.25 - 14.25
1996
Granted 451,500 $14.25 - $20.50
Expired or canceled 276,620 7.25 - 20.50
Exercised 68,599 7.25 - 11.33
Total outstanding at December 31 692,600 7.25 - 14.25
Total exercisable at December 31 295,996 7.25 - 11.33
1995
Granted 200,000 $9.50 - $10.63
Expired or canceled 39,517 6.58 - 10.00
Exercised 124,840 6.33 - 10.00
Total outstanding at December 31 586,319 7.25 - 11.33
Total exercisable at December 31 198,500 7.25 - 11.33
For the years ended December 31, 1997, 1996, and 1995, the Company reduced
current income taxes payable and increased additional paid-in capital by
$26,767, $163,164, and $355,779, respectively, for the income tax benefit
attributable to appreciation of common stock related to stock options and
purchase rights.
- --------------------------------------------------------------------------------
F-20
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stockholders' Equity Continued
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Net income as reported $4,321,704 $8,753,891
Net income pro forma $3,933,455 $8,580,509
Earnings per share assuming full
dilution as reported $.51 $.93
Earnings per share assuming full
dilution pro forma $.46 $.91
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
December 31,
-----------------------------------
1997 1996
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 47.6% 48.7%
Risk-free interest rate
(weighted average) 6.27% 6.57%
Expected life of options 3.8 years 3.6 years
===================================
The per-share weighted average fair value of options granted during 1997 and
1996 is $4.10 and $4.67, respectively.
- --------------------------------------------------------------------------------
F-21
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Stockholders' Equity Continued
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/97 (Years) Price 12/31/97 Price
- --------------------------------------------------------------------------------
$6.75 - 8.00 330,349 8.71 $ 7.13 148,136 7.28
9.50 - 14.25 557,999 8.08 11.69 207,835 10.89
- --------------------------------------------------------------------------------
$6.75 - 14.25 888,348 8.40 $ 9.99 355,971 $ 9.39
================================================================================
9. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS as previously
required. The new standard also requires additional informational disclosures,
and makes certain modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new standard is required to
be adopted by all public companies for reporting periods ending after December
15, 1997, and requires restatement of EPS for all prior periods reported. During
the year ended December 31, 1997, the Company adopted this standard.
- --------------------------------------------------------------------------------
F-22
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Earnings Per Share Continued
Earnings per share information in accordance with SFAS 128 is as follows:
Year Ended December 31, 1997
-----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net income $4,321,704
Less preferred stock
dividends -
----------------
Basic EPS
Income available to
common stockholders 4,321,704 8,444,036 $.51
--------------
Effect of Dilutive Securities
Stock options - 51,379
---------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $4,321,704 8,495,415 $.51
===============================================
Year Ended December 31, 1996
-----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net income $8,753,891
Less preferred stock
dividends -
----------------
Basic EPS
Income available to
common stockholders 8,753,891 9,270,861 $.94
--------------
Effect of Dilutive Securities
Stock options - 180,720
---------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $8,753,891 9,451,581 $.93
===============================================
- --------------------------------------------------------------------------------
F-23
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Earnings Per Share Continued
Year Ended December 31, 1995
-----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net income $8,353,738
Less preferred stock
dividends -
----------------
Basic EPS
Income available to
common stockholders 8,353,738 9,852,559 $.85
--------------
Effect of Dilutive Securities
Stock options - 189,871
---------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $8,353,738 10,042,430 $.83
===============================================
10. Product Sale and Purchase Commitments
The Company had exclusive and nonexclusive agreements to sell certain products
to Baxter Healthcare Corporation (Baxter) under license agreements and had sales
to Baxter of approximately $1,286,000, $11,132,000, and $14,996,000 during the
years ended December 31, 1997, 1996, and 1995, respectively.
The Company has license agreements with other unrelated companies to provide
exclusive and nonexclusive rights to purchase, market, distribute, or
manufacture the Company's products. The Company received royalties and license
fees, some of which were received in advance and have been deferred and
amortized over the terms of the respective agreements.
The Company has license agreements for the rights to develop and market certain
products owned by unrelated parties. Under the terms of such agreements, the
Company is required to pay royalties ranging from 1.5% to 5.0% of sales, and in
one case certain payments to the developer contingent upon the product achieving
certain annual revenue thresholds.
- -------------------------------------------------------------------------------
F-24
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Employee Benefit Plan
The Company has a contributory 401(k) savings plan for employees who work 30
hours or more each week, who are at least 21 years of age, and have a minimum of
one year of service with the Company. The Company's contribution is determined
annually by the Board of Directors and was approximately $54,100, $78,800, and
$57,200, for the years ended December 31, 1997, 1996, and 1995, respectively.
12. Export Sales
Sales to customers in foreign countries were approximately $5,218,000,
$9,739,000, and $10,343,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
13. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at December
31, 1997, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
14. Recently Issued Accounting Statements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires entities
presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income, which consists of revenue, expenses, gains, and losses that bypass the
income statement and are reported directly in a separate component of equity.
This statement is effective for fiscal years beginning after December 15, 1997,
and requires restatement of prior period financial statements presented for
comparative purposes.
- --------------------------------------------------------------------------------
F-25
<PAGE>
REVOLVING LOAN AGREEMENT
THIS REVOLVING LOAN AGREEMENT (the "Agreement"), dated as of the 4th day of
April, 1997, is entered between UTAH MEDICAL PRODUCTS, INC., a Utah corporation
(the "Borrower"), and FIRST SECURITY BANK, N.A. ("First Security")
Recitals
Borrower has requested that First Security make an unsecured revolving line
of credit available to Borrower in the maximum principal amount of
$10,000,000.00 (the "Loan"), and First Security is willing to make the Loan
available to Borrower, on the terms and subject to the conditions set forth in
this Agreement.
Agreement
In consideration of the foregoing, the benefits to be derived by the
parties under this Agreement and other good and valuable consideration, the
parties hereby agree as follows:
SECTION 1. AMOUNT AND TERMS OF THE LOAN.
1.1 The maximum principal amount of the Loan shall be $10,000,000.00.
1.2 The Loan shall be a revolving loan (with the right of Borrower to
repay principal and to reborrow up to the maximum principal amount of the Loan
so long as no default exists under this Agreement or any of the related Loan
Documentation).
1.3 The Loan shall be evidenced by a Revolving Promissory Note, dated of
even date herewith, executed by Borrower and payable to First Security in the
maximum principal amount of $10,000,000.00, as amended from time to time (the
"Note").
1.4 Interest on the unpaid balances outstanding will be calculated as
follows:
(a) Unless Borrower notifies First Security that Borrower desires all
or any portion of the advances hereunder to bear interest at the "Prime Based
Rate" in accordance with subsection (b) below, all amounts outstanding under the
Loan shall bear interest at the floating per annum rate (the "Eurodollar Rate"),
subject to daily change, equal to 1.45% (145 basis points) above First
Security's "Daily LIBOR. For purposes of this Agreement, First Security's
"Daily LIBOR" shall mean the thirty-day London Interbank Offered Rate determined
by First Security to be accepted by the British Bankers Association and
published daily in the United States of America by Dow Jones Telerate (or such
other similar source as may be selected by First Security). First Security's
Daily LIBOR approximates (but is not necessarily identical to) the thirty-day
LIBOR published daily in the "Money Rates" section of The Wall Street Journal.
Balances under the Loan that bear interest at a Eurodollar Rate are hereinafter
referred to as "Eurodollar Rate Balances. First Security may make loans bearing
interest above, at or below the applicable Eurodollar Rate, said rate not
necessarily being the best or lowest rate of interest charged by First Security
to its customers, and First Security may make loans based on other rates as
well. The Eurodollar Rate may change from time to time, and the interest payable
on Eurodollar Rate Balances will continue to fluctuate at the same increment
above First Security's Daily LIBOR as stated above. The Eurodollar Rate will
not, however, change more often that each day. With respect to Eurodollar Rate
Balances, any changes in the interest rate shall become effective, without prior
notice, on the date on which First Security's Daily LIBOR changes. First
Security will tell Borrower the current Eurodollar Rate upon Borrower's request.
Subject to the provisions of subsection (c) below, any balances under the Loan
with respect to which Borrower has not affirmatively requested the Prime Based
Rate in accordance with this subsection shall bear interest at the Eurodollar
Rate in accordance with this subsection (a).
(b) Borrower shall have the right, by written notice to First
Security (or by telephonic notice followed within 24 hours by written
confirmation), to elect to have all or any portion of the balances under the
Loan bear interest at the floating per annum rate (the "Prime Based Rate"),
subject to daily change, equal to 0.8% (80 basis points) below First Security's
"Prime Rate. "Prime Rate" shall mean First Security's announced per annum rate
of interest used as a reference point from which the cost of credit to customers
may be calculated, and is subject to change from time to time. First Security
may make loans bearing interest above, at or below the Prime Rate, said rate not
necessarily being the best or lowest rate of interest charged by First Security
to its customers. The Prime Rate may change from time to time, and the interest
payable on balances under the Loan that bear interest at the Prime Based Rate
("Prime Rate Balances") will continue to fluctuate at the same increment below
the Prime Rate as stated above. With respect to Prime Rate Balances, any changes
in the interest rate shall become effective, without prior notice, on the date
on which the Prime Rate of First Security changes.
(c) Borrower may elect at any time and from time to time to convert
Prime Rate Balances (or any portion thereof) to Eurodollar Rate Balances, or to
convert Eurodollar Rate Balances (or any portion thereof) to Prime Rate
Balances. Each such election shall be made by Borrower giving First Security
written notice (or by telephonic notice followed within 24 hours by written
confirmation) at least one business day before the conversion is to become
effective. Unless First Security receives such a conversion notice from
Borrower, all Eurodollar Rate Balances shall continue to bear interest at the
fluctuating Eurodollar Rate and all Prime Rate Balances shall continue to bear
interest at the fluctuating Prime Based Rate.
(d) Notwithstanding the foregoing, upon any default under this
Agreement or under any of the other Loan Documentation, the rate of interest per
annum on all balances hereunder (including both Prime Rate Balances and
Eurodollar Rate Balances) shall be two percent (2%) above the Prime Rate per
annum from and after such default; provided further, however, that if First
Security shall waive in writing or allow a cure of such default, the interest
rate shall revert to the applicable non-default rate from and after such waiver
or completion of cure (whichever is sooner).
1.5 The Loan shall be repaid to First Security as set forth in this
Agreement and the Note. All payments received by First Security shall be applied
as follows: first, toward the satisfaction of attorneys' fees and costs
incidental thereto and to advances made and costs and expenses incurred by First
Security or its agents to enforce Borrower's Obligations hereunder and under the
Loan Documentation or to preserve any collateral securing the Obligations;
second, toward the reduction of any and all accrued and unpaid interest,
including uncollected late charges; and third, toward the reduction of unpaid
principal.
1.6 First Security shall provide periodic accountings to Borrower of all
payments, collections, applications and borrowings. Borrower shall promptly
examine such accountings and shall after learning of any discrepancy,
immediately notify First Security of any discrepancies. Fifteen days after the
rendering of such accountings, in the absence of patent demonstrable error, the
same shall be deemed to be conclusive as between First Security and Borrower.
1.7 In addition to other charges, fees and payments payable under this
Agreement or in connection with the Loan provided hereby, Borrower shall pay
First Security a commitment fee equal to the greater of: (a) $6,250 minus any
interest received by First Security from Borrower during the quarterly period
just ended, or (b) 13/100s of one percent (thirteen basis points) per annum
times the average daily difference, if any, between $10,000,000.00 and the
average daily principal balance outstanding under the Loan during the applicable
quarterly period, using a 360 day year. The commitment fee shall be payable
quarterly, in arrears, on the 25th day of each March, June, September and
December during the term of the Loan; provided that in the event the Loan
expires or is terminated for any reason prior to the end of any such quarterly
period, Borrower shall pay First Security the pro rata portion of the commitment
fee attributable to such shorter period prior to the termination date.
1.8 In addition to this Agreement and the Note, the term "Loan
Documentation" shall include all other instruments, notices, certificates,
guaranties and other documents required by First Security as a condition to or
in connection with the Loan, whether heretofore, now or hereafter executed,
together with all amendments thereto.
1.9 Any of Kevin L. Cornwell, Paul Richins or Lori A. Sessions is
authorized on behalf of Borrower to make a written or oral request to First
Security to advance funds under this Agreement. First Security is under no
obligation to verify the identity of any person representing to be any of the
aforementioned representatives of Borrower. Any advance made pursuant to said
written or oral request is irrebuttably presumed to be made for Borrower's
benefit.
1.10 The obligations, indebtedness, covenants and liabilities of Borrower
set forth or contemplated in the Loan Documentation shall be referred to as the
"Obligations," including without limitation any indebtedness resulting from any
overdraft on any account with First Security (provided that nothing herein shall
be a commitment by First Security to honor overdrafts).
1.11 Borrower may during the term of the Loan prepay the outstanding
principal amount of the Loan, in whole or in part, without premium or penalty.
SECTION 2. GUARANTY.
2.1 As a material inducement and condition to First Security making the
Loan available to Borrower, Utah Medical Products Ltd., a Bermuda corporation
("Guarantor") which is a wholly owned subsidiary of Borrower, shall guaranty the
Obligations of Borrower in connection with the Loan, by executing a Continuing
and Unconditional Guaranty in favor of First Security (the "Guaranty").
SECTION 3. CONDITIONS.
3.1 First Security shall not be required to advance funds under this
Agreement unless First Security shall have received from Borrower the following:
(a) Current financial statements in such form as First Security may
require;
(b) The fully executed Loan Documentation (including without
limitation the Note and the Guaranty); and
(c) Such other documentation and information as First Security or its
counsel may request given the circumstances and terms of the Loan.
3.2 First Security shall not be required to make any advance under the
Loan if a default or an event of default under the Loan Documentation exists or
if an event has occurred that with the passage of time or the giving of notice
or both would constitute such a default or event of default.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BORROWER.
To induce First Security to make the Loan, Borrower warrants and represents
as follows:
(1) Borrower has full power, authority and capacity to incur the
indebtedness described herein and to execute the Loan Documentation.
(2) The execution and performance of the Loan Documentation will not
violate any applicable law, regulation, order, judgment or decree, partnership
agreement, article of incorporation, bylaw, indenture, contract or agreement
that purports to be binding on the Borrower or its assets, and will not result
in the creation of any encumbrance on the assets of Borrower except as
contemplated by the Loan Documentation.
(3) Any financial statements of Borrower heretofore delivered to
First Security are true and correct in all respects. The most recent statements
given to First Security accurately represent the current financial condition of
Borrower, and, since the date of such statements, the business, properties,
assets and liabilities of Borrower have not been adversely affected or changed
in any material way.
(4) All written representations previously made and information
previously given by Borrower or Borrower's agents to First Security or its
agents remain true and correct.
(5) Borrower is not in default under any indebtedness, lease,
contract, license, undertaking or other agreement which will affect the ability
of Borrower to perform under any of the Loan Documentation.
(6) There are no existing actions, suits or proceedings pending or
threatened against Borrower or relating to the business, properties or assets of
Borrower that may have a material adverse effect upon the financial condition,
the business, or the assets of Borrower, and no judgment, order or decree has
been rendered which has not been discharged, satisfied or complied with other
than those disclosed to First Security in writing.
(7) Borrower has filed all federal and state income tax returns which
are required to be filed (except returns for which extensions have been properly
filed) and has paid all taxes, assessments and governmental charges or levies
imposed upon Borrower or upon Borrower's income or profits, or upon any property
belonging to Borrower, to the extent that such taxes and assessments have become
due (except such taxes and assessments that are being contested in good faith by
appropriate proceedings diligently prosecuted and that have been disclosed to
First Security in writing).
(8) Borrower has good title to its assets, including the properties
and assets reflected in the most recent statements given to First Security, free
and clear of all liens and encumbrances.
SECTION 5. COVENANTS OF BORROWER.
5.1 Borrower shall promptly furnish First Security, during the term of the
Loan, copies of such tax returns and financial reports and statements as
requested by First Security, all prepared in a manner and form and at such times
as are acceptable to First Security. Without limiting the generality of the
foregoing, Borrower shall provide the following items to First Security within
the time periods indicated: (i) Copies of Borrower's quarterly reports to the
SEC on form 10-Q shall be provided promptly upon filing with the SEC but in no
event Later than 50 days after the end of the quarter for which the report is
required; (ii) copies of Borrower's annual reports to the SEC on form 10-K shall
be provided promptly upon filing with the SEC but in no event later than 95 days
after the end of the fiscal year for which the report is required; (iii) copies
of Borrower's annual reports to shareholders shall be provided promptly upon
mailing to the shareholders but in no event later than 95 days after the end of
the fiscal year for which the report is prepared; (iv) quarterly compliance
certificates shall be provided within 50 days after the end of each quarter, in
a form acceptable to First Security, certifying Borrower's continuing compliance
with the covenants, representations and warranties contained in the Loan
Documentation; and (v) copies of Guarantor's annual financial statements shall
be provided promptly after being prepared but in no event later than 95 days
after the end of the fiscal year for which said statements are prepared.
5.2 Borrower shall promptly give notice to First Security of (a) the
occurrence of any default or event of default under any of the Loan
Documentation; (b) any litigation, proceedings or event that may have an adverse
effect upon the financial condition, the business or the assets of Borrower; and
(c) any adverse change in the financial condition of Borrower.
5.3 Borrower shall:
(a) duly observe and conform to all requirements of any governmental
authorities relative to the conduct of Borrower's business or to Borrower's
properties or assets; and
(b) pay all obligations and liabilities when due, including without
limitation all taxes, assessments and governmental charges or levies imposed
upon Borrower or upon Borrower's income or profits, or upon any property
belonging to Borrower, and maintain appropriate reserves for the accrual of the
same in accordance with generally accepted accounting principles.
5.4 Borrower shall permit First Security or its agents to inspect the
assets and financial records of Borrower and to discuss the affairs, finances
and assets of Borrower with Borrower's officers, all at such reasonable times
and as often as First Security may reasonably request.
5.5 Borrower shall not create or suffer to exist any lien or encumbrance
on any of Borrower's assets. Borrower shall notify First Security in writing
immediately upon receipt of notice of the imposition of any lien, levy,
attachment or execution on any of its assets. Borrower shall cause such liens or
other process not permitted by this Section to be satisfied immediately. First
Security may discharge such unpermitted liens and encumbrances, and any such
amounts shall become part of the Obligations, shall be repaid to First Security
on demand, and shall accrue interest as set forth in the Note.
5.6 Borrower shall not transfer, sell, pledge or otherwise dispose of or
convey any right, title or interest in or to any material portion of its assets
other than in the ordinary course of Borrower's business, without the prior
written consent of First Security.
5.7 Borrower shall not incur any interest bearing debt other than the
Obligations hereunder, other obligations owed to First Security, or overdrafts
related to demand deposit accounts maintained in Ireland.
5.8 Borrower shall maintain at all times minimum annual earnings before
taxes of at least $8,000,000.00, measured quarterly on a rolling four-quarter
basis and calculated in accordance with generally accepted accounting principles
consistently applied.
5.9 Borrower shall maintain at all times a minimum tangible net worth of
at least $17,000,000.00, calculated as Borrower's book net worth minus
intangible assets and calculated in accordance with generally accepted
accounting principles consistently applied.
5.10 Borrower shall maintain at all times minimum cash and investments (as
currently defined in Borrower's annual report to shareholders) of at least
$2,500,000.00.
SECTION 6. DEFAULT AND REMEDIES.
6.1 The occurrence of any of the following shall constitute an event of
default under this Agreement and the other Loan Documentation:
(a) Failure to pay any principal, interest or other monetary
indebtedness under the Obligations within ten (10) days after the due date
therefor;
(b) Any representation or warranty made by Borrower or Guarantor in
the Loan Documentation or in connection with any borrowing hereunder, or in any
certificate, financial statement or other statement furnished by Borrower or
Guarantor pursuant hereto is untrue in any respect at the time when made;
(c) Failure of Borrower or Guarantor to observe or perform any of the
other covenants or agreements contained in the Loan Documentation within fifteen
(15) days after written notice of such failure has been given to Borrower or
Guarantor (as applicable) by First Security;
(d) Any material provisions of the Loan Documentation shall for any
reason cease to be in full force and effect;
(e) Borrower or Guarantor shall default on (i) any other obligation
owed to First Security, or (ii) any obligation owed to another lender if the
outstanding amount of such obligation to such other lender exceeds
$1,000,000.00;
(f) Filing by or against Borrower or Guarantor of a petition in
bankruptcy or for any other relief under the Bankruptcy Code, as amended, or
under any other insolvency act or law, state or federal, now or hereafter
existing, or any action by Borrower or Guarantor indicating Borrower's or
Guarantor's consent to, approval of, or acquiescence in, any such petition or
proceeding; the application by Borrower or Guarantor, or the consent or
acquiescence of Borrower or Guarantor to the appointment of a receiver or
trustee for Borrower or Guarantor or for all or a substantial part of Borrower's
or Guarantor's property; the making by Borrower or Guarantor of an assignment
for the benefit of creditors under state law; or the admission of Borrower or
Guarantor in writing of its inability to pay its debts as they mature;
(g) The involuntary appointment of a receiver or trustee for Borrower
or Guarantor or for all or a substantial part of Borrower's or Guarantor's
property; or the issuance of a warrant of attachment, execution or similar
process against any substantial part of the property of Borrower or Guarantor;
(h) All or any substantial part of the property of Borrower or
Guarantor shall be sold, assigned, transferred, or shall be condemned, seized or
otherwise appropriated, or custody or control of such property shall be assumed
by any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency; or
(i) The occurrence of any adverse change in the financial condition
of Borrower or Guarantor deemed material by First Security.
6.2 If any of the events set forth in Section 6.1 occurs:
(a) First Security may (i) terminate any obligation to make further
advances under the Loan; (ii) declare the entire Obligations outstanding
hereunder to be immediately due and payable, whereupon the principal amount of
the outstanding Loan, together with accrued interest thereon, shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived, anything contained herein
or in the Note to the contrary notwithstanding; and/or (iii) proceed to enforce
any of its remedies under the Loan Documentation, including this Agreement.
(b) Borrower hereby waives any right to require First Security to
proceed against any collateral for the Obligations. Borrower waives the right to
require First Security to pursue any other remedy for the benefit of Borrower
and agrees that First Security may proceed against Borrower for the amount of
the Obligations owed by Borrower to First Security without taking any action
against any other party and without selling or otherwise proceeding against or
applying any collateral. Borrower authorizes First Security, at its option, to
apply toward the payment of the Obligations all balances of any deposit account
or other account in the name of Borrower held by First Security.
(c) No remedy given to First Security in the Loan Documentation is
intended to be exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given under the Loan Documentation or now or hereafter existing at law or
in equity or by statute.
6.3 Borrower agrees to cooperate with First Security in effectuating First
security's rights notwithstanding any unanticipated inability of Borrower to pay
the Loan or otherwise perform the Obligations.
SECTION 7. MISCELLANEOUS.
7.1 Time is of the essence of this Agreement. No advance under the Loan
shall constitute a waiver of any of the conditions of First Security's
obligation to make further advances, nor, in the event Borrower is unable to
satisfy any such condition, shall any such waiver have the effect of precluding
First Security from thereafter declaring such inability to be an event of
default under this Agreement. No failure or delay on the part of First Security
in exercising any right, power or privilege hereunder or under the Loan
Documentation shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The consent or approval by First Security to or of any act by
Borrower requiring further consent or approval shall not be deemed to waive or
render unnecessary the consent or approval to or of any subsequent act. The
rights and remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law.
7.2 Borrower shall pay all attorney's fees, paralegal fees, costs, taxes
and other expenses incurred by First Security in the enforcement of its rights
hereunder and the other Loan Documentation, whether any default is ultimately
cured or First Security is obligated to pursue its remedies hereunder, including
such expenses incurred before legal action, during the pendency of any such
legal action, during the enforcement of First Security's rights in any
bankruptcy or insolvency proceedings, and continuing to all such expenses in
connection with any appeal to higher courts arising out of matters associated
herewith. Until so paid, all such fees, costs, and expenses shall constitute
part of the obligations of Borrower and shall accrue interest at the default
rate set forth in the Note.
7.3 Borrower hereby agrees to indemnify and hold harmless First Security,
its directors, officers, employees and agents from any and all liabilities,
expenses, costs, charges, damages, demands, claims, lawsuits and assessments,
including attorneys' fees and expenses, arising out of this Agreement or the
other Loan Documentation or in connection therewith, unless arising from First
Security's gross negligence or willful misconduct.
7.4 In addition to this Agreement and the other Loan Documentation, this
finance transaction may include written documentation such as resolutions,
waivers, notices, acknowledgments, statements, closing or escrow instructions,
loan purpose statements, and other documents that First Security may customarily
use in such transactions. Such additional documents are incorporated herein by
reference. The Loan Documentation and other documents to which this Section
refers, as applicable, express, embody and supersede any previous
understandings, agreements or promises (whether oral or written) with respect to
this finance transaction, and said documents represent the final expression of
the agreement between First Security and Borrower, the terms and conditions of
which cannot hereafter be contradicted by any oral understanding not reduced to
writing and identified above. This Section shall govern in the event it is
inconsistent with any similar provision in any other Loan Documentation.
7.5 Any notice required by any Loan Documentation will be deemed effective
if personally delivered to the party to which notice is being given, or, in the
alternative, on the date such notice is sent by confirmed facsimile transmission
or is placed, first class mail, in the U.S. Mail addressed to the party to which
notice is being given, at such address as is set forth below. In the event
another agreement constituting part of the Loan Documentation sets forth a
notice procedure, such procedure shall govern for purposes of that document and
thus supersede the terms of this Section if inconsistent.
7.6 All representations and warranties made in this Agreement and the Note
and in any certificates delivered pursuant hereto and thereto shall survive the
execution and delivery of this Agreement and the making of the Loan hereunder
and shall survive payment of the Loan. This Agreement shall be binding upon and
inure to the benefit of Borrower and First Security and their respective heirs,
devisees, personal representatives, successors and assigns, except that the
Borrower may not assign or transfer its rights hereunder without the prior
written consent of First Security. It is understood that First Security may sell
the Loan and its interests under the Loan Documentation without the need for
Borrower's consent and may procure other lenders to participate in the Loan, and
First Security may issue participation certificates to such other lenders.
7.7 Borrower agrees to execute any other documentation and provide such
other information and documentation as First Security may reasonably require.
Any provision of this Agreement or any other constituents of the Loan
Documentation, which may be found to be invalid, shall be deemed separable and
shall not invalidate the remainder of the provisions. No third party shall,
under any circumstances, be deemed to be a beneficiary under the Loan
Documentation or any condition set forth therein. Nothing in the Loan
Documentation shall create a partnership or joint venture between First Security
and Borrower.
7.8 This Agreement may be signed in any number of counterparts, each of
which shall be deemed an original, and such counterparts together shall
constitute one and the same instrument. This Agreement and the other Loan
Documentation shall be governed by, and construed and interpreted in accordance
with, the laws of the State of Utah. If Borrower is not resident of the State of
Utah, Borrower hereby consents to the jurisdiction of the courts of the State of
Utah and the federal courts located within the State of Utah (as selected by
First Security) to enforce this Agreement and the other Loan Documentation.
Executed as of the date first written above.
BORROWER:
UTAH MEDICAL PRODUCTS, INC.
By: /s/ Kevin L. Cornwell
Its: Chairman & CEO
Address:
7043 South 300 West
Midvale, Utah 84047
FAX: (801) 566-2062
FIRST SECURITY:
FIRST SECURITY BANK, N.A.
By: /s/ Steven M. Kohler
Its: Vice President
Address:
15 East 100 South, 2nd Floor
Salt Lake City, Utah 84111
Attention: Steven M. Kohler
FAX: (801) 246-5532
SUBSIDIARIES OF UTAH MEDICAL PRODUCTS, INC.:
Jurisdiction
Name of Incorporation Business Name
Utah Medical Products Ltd. Bermuda Utah Medical Products, Inc.
Columbia Medical Oregon Columbia Medical, Inc.
& Surgical, Inc.
INDEPENDENT AUDITORS' CONSENT
Utah Medical Products, Inc.
We consent to the incorporation by reference in Registration Statement Nos.
33-24781, 33-44100, 33-89394, and 33-89434 of Utah Medical Products, Inc. on
Forms S-8 of our report dated January 24, 1998, appearing in this Annual Report
on Form 10-K of Utah Medical Products, Inc. for the year ended December 31,
1997.
/s/ Tanner + Co.
Salt Lake City, Utah
March 27, 1998
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 33-
24781, 33-44100, 33-89394, and 33-89434 of Utah Medical Products, Inc. on Forms
S-8 of our report dated January 24, 1997, appearing in the Annual Report on
Form 10-K of Utah Medical Products, Inc. for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF DECEMBER 31, 1997, AND STATEMENTS OF OPERATIONS FOR
THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 951,084
<SECURITIES> 0
<RECEIVABLES> 3,820,147
<ALLOWANCES> (46,677)
<INVENTORY> 5,792,058
<CURRENT-ASSETS> 12,052,380
<PP&E> 21,552,079
<DEPRECIATION> (8,211,974)
<TOTAL-ASSETS> 31,459,236
<CURRENT-LIABILITIES> 2,769,156
<BONDS> 5,562,933
<COMMON> 83,050
0
0
<OTHER-SE> 22,552,334
<TOTAL-LIABILITY-AND-EQUITY> 31,459,236
<SALES> 24,271,640
<TOTAL-REVENUES> 24,271,640
<CGS> 11,665,207
<TOTAL-COSTS> 7,047,410
<OTHER-EXPENSES> (1,467,715)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251,846
<INCOME-PRETAX> 6,774,892
<INCOME-TAX> 2,453,188
<INCOME-CONTINUING> 4,321,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,321,704
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
