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, 1998. 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 12, 1999, based on NYSE closing price: $45,100,000.
The number of shares outstanding of the registrant's common stock as of March
12, 1998: 7,840,336.
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 or
acquiring 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 significant incremental 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 including lower
risk of complications. UM markets a broad range of medical devices used in the
critical care areas, especially the neonatal intensive care unit (NICU), and the
labor and delivery (L&D) department in hospitals, as well as products sold to
outpatient clinics and physician's offices.
The opportunity to apply 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 choose 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 1997, UM purchased Columbia Medical,
Inc. (CMI), a Redmond, Oregon company specializing in manufacturing and
marketing vacuum-assisted obstetrical delivery systems. In July, 1998 UM
acquired the neonatal product line of Gesco International, a subsidiary of Bard
Access Systems and C.R. Bard, Inc. 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
Labor and Delivery/ Obstetrics:
Fetal Monitoring Accessories.
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. UM markets disposable
electrodes, catheters and accessories, but not the monitors, the electronic
capital equipment that process the signals. In addition to products already
offered, UM intends to continue to investigate and introduce tools that enhance
fetal monitoring techniques, a core area of product development.
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 (IUP) catheter product
line provides for clinician choices from a traditional fluid-filled system to
INTRAN7 PLUS, the most widely accepted sensor-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 IUP catheters
include:
- - IUP-075 and UM's other custom fluid-filled 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 change is transmitted through the fluid column to the
external pressure transducer.
- - Introduced in 1987, INTRAN was the first intrauterine pressure catheter that
placed the pressure transducer 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 more widely preferred INTRAN PLUS, also covered by 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 zero switch
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 variations to address user preferences in tip
size and zero switch location.
Vacuum-Assisted Delivery Tools.
UM's 1997 purchase of CMI included the patented soft silicone bell-shaped
birthing cups and patented hand-held vacuum pumps which UM believes are the
safest products available for use in vacuum-assisted operative deliveries.
Operative vaginal deliveries provide knowledgeable physicians with an
alternative to C-section intervention. Although there are risks associated with
operative vaginal 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
the preferred vacuum-assisted delivery approach is used for about 8-10% of all
U.S. births, and will continue to improve on its share versus forceps. UM's
patented bell-shaped soft silicone TENDER TOUCH(r) cups enjoy a low reported
complication rate compared to other vacuum cup designs, as evidenced by the FDA
Medical Device Reporting System.
In May 1998, the FDA issued an advisory which warned of increases in reported
injuries in the use of VADS. The advisory appears to have caused a slow-down in
usage as hospitals evaluated their protocols. UM responded by providing
additional written instructions for use to all its users, and offering
assistance in training. In September 1998, The American College of
Obstetricians and Gynecologists issued a formal Committee Opinion that strongly
recommended continued use of VADS, when used by appropriately trained
physicians. UM's patented soft silicone cup is unique in the industry.
Other Obstetrical Tools
MUC-X is a meconium aspiration device used immediately after birth to clear
neonatal respiratory passages and reduce exposure to potential infections.
AROM-COT(tm) is a finger cover, with patent pending, designed to rupture
maternal membranes with less patient pain and anxiety. CORDGUARD(r) is a
patented 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 cord blood sample, and assisting in the removal of the placenta.
CORDGUARD's sharpless, closed system reduces the risk of exposure to
potentially infected blood, and consequently reduces the high cost of exposure
treatment under OSHA and CDC guidelines. In addition, CORDGUARD facilitates
obtaining neonatal blood that is otherwise hard to obtain safely and cleanly.
The UMBILICUP(tm) System allows larger volume umbilical cord blood collection
without the use of needles.
Neonatal Intensive Care:
DISPOSA-HOOD(tm)
The DISPOSA-HOOD is an infant oxygen hood that is used in the NICU to
administer oxygen to neonates while maintaining a neutral thermal environment
critical to proper physiologic responses. The Disposa-Hood, 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. Because it is a disposable product, it allows for
excellent visualization of the sick infant and prevents cross-contamination.
DELTRAN(r) PLUS
UM's patented DELTRAN blood pressure monitoring system, the source of over $100
million in past UM sales to Baxter over the nine year period of 1988-1996, has
been adapted specifically for use in the NICU. The new closed system reduces
the risk of infection and avoids the loss of scarce blood volume by returning
all blood to the neonate. The system features excellent visualization of
clearing volume and one-handed use.
GESCO(r)
In the third quarter of 1998, UM acquired the neonatal product line of Gesco
International, a subsidiary of Bard Access Systems and C.R. Bard, Inc. The
acquisition provides for continued growth in UM's critical mass of products
directed to special hospital areas which allow practitioners flexibility to
select products based on their value in achieving optimal clinical outcomes,
rather than on negotiated commodity contracts designed to minimize short term
hospital supplies expense.
Gesco's past reputation for focusing on the special needs of the NICU and
delivering high quality solutions, in harmony with UM's objective of providing
products that offer the best chance for a good patient outcome, add extra value
to the acquisition of its product line. Gesco's first significant product,
HEMO-NATE(r), is a patented disposable filter designed to remove microaggregates
from stored blood prior to transfusion into a neonate where any deficiency can
have an overwhelmingly negative impact on a neonate's chances for survival,
given an under-developed vasculature and small total blood volume.
A class of catheters called umbilical vessel catheters (UVC's) are specially
designed for administering vital medications and fluids immediately following
birth through the infant's umbilical vessel into the inferior vena cava.
Because of the neonate's small size and lack of vascular development, there is
no better access to vital organs. The catheters are also called umbilical
artery catheters (UAC's) when placed in one of the umbilical arteries to measure
blood pressure or monitor metabolic processes through blood analysis. In
developing its UMBILI-CATH(r) product line, Gesco pioneered the use of softer,
more biocompatible silicone catheters, helping to reduce the number of
insertions required as well as other complications associated with invasive
applications. Gesco was attentive to product features that were distinct to
neonates, e.g. in the case of invasive catheters, the introducer, the soft
rounded distal tip, mode of securing to patient after insertion to avoid
migration, luer locking hub with minimal dead space, number of lumens, catheter
radiopaque striping for visualization, variations in catheter lengths and
diameters and special packaging. In addition, Gesco provides a convenient
catheterization procedure tray of implements and supplies necessary to place UVC
catheters, as well as perform other similar procedures.
The soft, biocompatible silicone catheter concept had important advantages in
other applications including peripherally inserted central venous catheters
(PICC lines), enteral feeding tubes, urinary drainage catheters, and chest
drainage tubes. Gesco developed all of these neonatal products under the names
PER-Q-CATH(r), NUTRI-CATH(tm), URI-CATH(tm) and THORA-CATH(tm), respectively.
UM has an exclusive distribution agreement with Bard for the only Gesco neonatal
product which was not purchased by UM, the PER-Q-CATH PICC.
Other Gesco specialty products acquired by UM include a disposable peritoneal
dialysis set that is a pre-assembled, sterile, closed system, called DIALY-
NAT(tm); a patented silicone oral protection device used to prevent palatal
soft tissue injury by orotracheal tubes, called PALA-NATE(tm); and a lumbar
puncture kit used for obtaining spinal fluid samples, called MYELO-NAT(tm).
Combining the Gesco products with UM's other proprietary products, DISPOSA-HOOD
and DELTRAN-PLUS, allows UM to claim the most complete armamentarium of NICU
speciality products of any company in the medical device industry.
Gynecology /Urology /Electrosurgery:
LETZ(r) System
The LETZ System is comprised of electrosurgical equipment, electrodes and
supplies used to treat cervical intraepithelial neoplasia (CIN) and other lower
genital tract lesions related to human papilloma virus (HPV) infections. The
electrosurgical excision procedure with hemostasis has widely replaced cold
knife scalpel, laser and cryotherapy procedural approaches because it is
economical, safe, effective, quick and easy to perform, has fewer potential side
effects, and requires little physician training. Most importantly, in contrast
to laser and cryotherapy (freezing of tissue), LETZ provides a tissue specimen
for a pathological assessment. The LETZ procedure may be performed using local
anesthesia in a physician's office, eliminating the time and expense of hospital
or surgical center admittance. UM's system includes patented Prendiville
disposable loop electrodes, the patented FINESSE electrosurgical generator, and
other miscellaneous components. The FINESSE electrosurgical generator is the
only generator on the market that contains an integral smoke evacuator, required
to filter smoke and vapors which contain potentially hazardous particulate
material produced during electrosurgery. The disposable loop 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(r)
that can be positioned so the physician can accurately colposcopically monitor
the amount of tissue being excised.
FINESSE(r) Generator; Specialty Loop, Ball, and Needle Electrodes; FILTRESSE(r)
Evacuator; Other Specialty Electrodes; Other Supplies and Gynecologic Tools
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. UM continues to develop and introduce
specialty tools for specific electrosurgical procedures. In 1998, the Company
introduced a special conization electrode for deep endocervical disease called
C-LETZ, with patent pending, designed to limit the removal of healthy tissue
that might compromise adequate cervical function. Other tools include
disposable electrosurgical pens, dispersive pads, speculums, retractors, and
forceps.
EPITOME(r)
A patented electrosurgical scalpel which delivers precise performance in
incision and excision was introduced in 1996. With the recent completion of an
independent study concluding that the Epitome(r) scalpel provides a significant
improvement over older devices in wound healing and patient comfort, UM looks to
improve sales of its electrosurgical electrodes in 1999. Epitome allows a rapid
incision without countertraction, yielding limited morbidity, less post-surgical
pain and cosmetically superior results. Where minimization of thermal tissue
injury is desired, Epitome offers significant advantages while achieving desired
hemostasis. A bendable version of EPITOME with a smaller active electrode was
introduced in early 1998. Designed to significantly reduce the chance of tissue
burns due to inadvertent electrode contact and where a smaller, bent scalpel tip
is needed, the bendable EPITOME should be of particular value, e.g., to thoracic
surgeons in harvesting the internal mammary artery during coronary artery bypass
surgery, as well as to otolaryngologists for tonsillectomies. Marketing UM's
group of specialty electrosurgery products requires multiple sales call points
and extensive clinical training and familiarization time with users, among other
challenges, resulting in UM's projection of a continued slow adoption growth
rate.
LIBERTY(r) 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 electrical stimulation 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 neuromuscular tissue 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 1998, UM's sales of
Liberty were up 72% compared to the prior year as more patients learned about
the device and decided to try it. UM believes that Liberty is the easiest-to-
use, most cost effective incontinence treatment available that yields a
therapeutic effect, not just a cover-up.
PATHFINDER PLUS(tm)
As part of Columbia Medical Inc., UM acquired 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. UM is marketing the device through independent manufacturers'
representatives who sell primarily to urologists. Other urology tools include
stone baskets.
Tools for Gynecologic Laparoscopy
LUMIN(r) is a patented 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. A number of the tools listed above in other categories
are also useful in laparoscopic procedures.
Blood Pressure Monitoring:
DELTRAN(r) Disposable Pressure Transducer
In pressure monitoring, a transducer is used to convert physiological
(mechanical) pressure into an electrical signal that is displayed on electronic
monitoring equipment. UM developed, patented and is now distributing its
disposable transducer as a stand-alone product, and as a component in sterile
blood pressure monitoring kits through direct representatives and other medical
companies in the U.S., as well as independent distributors and other medical
companies internationally.
Although other large medical companies manufacture disposable pressure
transducers ("DPTs") under rights to UM's technology, the Company believes that
the Deltran DPT which it developed remains the standard in terms of reliability
and ease of use. UM has an automated assembly line which allows UM to
effectively compete with the largest suppliers on the basis of consistent
quality with low manufacturing costs. Introduced in 1998, DELTRAN PLUS may
provide the easiest to use and most secure method of blood sampling currently
available.
Pressure Monitoring Accessories and Components
Components included in blood pressure monitoring kit configurations include
flush devices, stopcocks, fluid administration sets, caps, pressure tubing,
interface cables and organizers. The Company sells similar components designed
for other medical companies which incorporate UM's proprietary technologies.
DELTA-CAL(tm) is a calibration device used to check proper functioning of an
arterial pressure system. In addition, UM sells plastic molded parts on a
subcontract basis to a number of medical and non-medical companies. UM believes
that this practice helps better utilize its investment in fixed plant and
equipment.
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 providing independent clinical evidence of efficacy, as well as
extensive user training and support.
Although the market potential for each of UM's individual products is generally
small because of the Company's niche orientation, in the aggregate, the sales
potential for all of UM's products exceeds $1 billion annually. Enhancing its
reputation for providing solutions to hospital areas which are considered
separate and highly special is critical to the implementation of UM's strategy.
UM has been able to differentiate itself independent from the commodity contract
pressures dominating other hospital medical products suppliers for three
reasons. First, because of the relatively high sensitivity for quality care in
the specialty areas of the NICU and L&D and UM's patented products, UM can often
communicate directly with clinical decision-makers rather than administrative
gatekeepers. Second, because of the relatively low total dollar volume
associated with UM's products compared to products used in other areas in the
hospital, UM can often slip under the fallout rate accepted in contracts with
the large hospital commodities suppliers. Last, there is a significant amount
of goodwill associated over the years with product names manufactured by Utah
Medical Products, Columbia Medical and Gesco, all now part of UM, among
knowledgeable clinicians that gives momentum to their continued use.
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 excluded from
certain customers because of the existence of supply agreements unrelated to
safety and efficacy of products. UM may also be unable to establish viable
relationships with other medical companies who have the access to users but lack
an interest in a different approach.
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 1999, the U.S. direct sales force consisted of
32 territory representatives and sales managers. Through the use of clinical
education programs, the direct sales force positions UM to gain market
leadership with solutions to clinical problems. Through its relationships with
physicians, UM is diversifying its product applications in obstetrics and
gynecological procedures which are trending toward outpatient clinics and
physician offices. Four years ago, independent distributors in the U.S.
represented more than half of UM's direct domestic Ob/Gyn business. In 1999, 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 otherwise
needed for UM's primary business, and does not compete with or dilute UM's
distribution and marketing programs.
Internationally, the Company sells its products through about 60 regional
distributors and through about 20 OEMs (other medical manufacturers).
RESEARCH AND NEW PRODUCT DEVELOPMENT
New product development is a key to UM's growth plans. Product development
takes three fundamental forms, which are interrelated: 1) improvements,
enhancements and extensions of current product lines in response to clinical
needs or clinician requests, 2) invention of devices that allow significantly
different methods of performing medical procedures, representing a quantum
improvement in safety, efficacy and/or cost of care, and 3) acquisitions of
products from others.
During 1998, in addition to the amortization of goodwill expense of $433 (in
thousands), or 1.6% of sales, associated with the acquisitions of new product
lines in 1997 and 1998, the Company spent $946 on internal product development
activities, or 3.4% of sales, a combined total of 5.0% of sales. New product
development expenses and amortization of goodwill expenses were $958 and $148,
respectively in 1997 (combined 4.6% of sales) and $1,387 and zero, respectively
in 1996 (3.6% of sales). Amortization of goodwill expenses and R&D expenses
combined are expected to continue in the range of 5% of sales in 1999. Internal
R&D will be 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.
UM's current product development projects are in four areas of focus: 1)
obstetrics/ fetal monitoring, 2) neonatal intensive care, 3) female
incontinence management, and 4) specialized procedures for the assessment and
treatment of cervical/uterine disease. UM has filed, had issued, or acquired 24
patents in the last five years.
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.
EMPLOYEES
At December 31, 1998, the Company had 258 employees, 18 of which are located in
Oregon, and 28 in Ireland. The Company's continued success will depend to a
large extent upon its ability to retain 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, and as
consideration for receipt of stock option awards and participation in the
management bonus program. 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 or exclusively licenses forty-eight 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, may potentially represent 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 innovations. Patent infringement lawsuits are currently pending
against two companies which UM believes have infringed certain INTRAN patents.
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 1998, royalty expenses were (in thousands)
$118. Royalties are included in cost of goods sold.
Also as a matter of policy, UM licenses its proprietary technology to others in
circumstances where licensing does not directly compete with UM's own marketing
initiatives. During 1998, the Company received (in thousands) $678 in royalty
income, compared to $732 in 1997, and $703 in 1996. In 1998, UM recorded an
additional $447 in net other non-operating income associated with unusual
payments for use of its technology. The non-operating income has been a
material portion of UM's past earnings, and therefore future improved
performance also depends on the performance of other companies who license UM's
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.
All manufacturers of medical devices must register with the FDA and list all
medical devices produced by them. The listing must be updated annually. In
addition, prior to commercial distribution of devices for human use, a
manufacturer must file a notice with the FDA, setting forth certain information
regarding the safety and efficacy of the device that is acceptable in content to
the FDA.
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 essentially all of its products.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Most of the components 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, excluding sales internationally through
Baxter, in 1998 were (in thousands) $4,732 (17% of total sales), as compared to
$5,009 (21% of total sales) in 1997, and $4,804 (12% of total sales) in 1996.
Blood pressure monitoring products represented 79% of international sales in
1998, compared to 84% in 1997 and 83% in 1996. Ob/Gyn and neonatal product
foreign sales were $1,002 in 1998, compared to $799 in 1997 and $839 in 1996.
UM sees the international marketplace as one of the most important elements 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, 1999 was approximately $0.6
million compared to $0.6 million as of January 1, 1998.
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 seven years. 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 situations to help
physicians achieve a more positive outcome than what might otherwise be the
case. Although UM's products are proven to be safe and efficacious over
millions of uses, positive outcomes cannot always occur in the situations where
UM's products are needed. In litigious cultures (such as the U.S.) which are
often driven by attorneys looking for contingency fee windfalls, patients may
look at manufacturers of excellent medical products as possible scapegoats. In
any lawsuit against a company where an individual plaintiff suffers 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. The strength of
UM's balance sheet may be an inducement for some attorneys to file a claim
against UM.
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.
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 an R&D lab, communications and information systems networked real time
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:
1998 1997
--------------- --------------
High Low High Low
1st Quarter $ 8.25 $ 6.50 $ 13 $10.00
2nd Quarter 8.00 6.75 113 6.00
3rd Quarter 7.00 5.00 10.25 7.00
4th Quarter 7.25 5.00 9.00 6.75
Stockholders.
The approximate number of beneficial stockholders of UM's common stock as of
March 12, 1999 was 6,500.
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.
(in thousands, except per share data)
Years Ended December 31
-------------------------------------------------------
1998 1997 1996 1995 1994
Net Sales $27,677 $24,272 $38,673 $42,038 $39,645
Net Income 4,858 4,322 8,754 8,354 7,109
Diluted Earnings
Per Share .59 .51 .93 .83 .68
Total Assets 31,968 31,459 28,916 33,330 27,365
Long-term Debt 3,098 5,571 None None None
Cash Dividends
Per Common Share None None None None None
Quarterly Data for 1998
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- -------- -------
Net Sales $6,375 $6,786 $7,150 $7,366
Gross Profit 3,188 3,420 3,720 3,846
Net Income 1,159 1,127 1,290 1,282
Earnings Per Share
- Diluted .14 .14 .16 .16
Quarterly Data for 1997
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- -------- -------
Net Sales $5,173 $5,101 $7,019 $6,979
Gross Profit 2,708 2,671 3,679 3,549
Net Income 1,040 895 1,153 1,233
Earnings Per Share
- Diluted .12 .10 .14 .15
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. Dollar amounts are in thousands, except per-share amounts and where
noted.
Productivity of Assets and Working Capital.
a) Assets. Total UM asset turns (ratio of sales to total assets) improved in
1998 because sales increased 14% while average total assets increased only 2%
from the prior year. Year-ending total assets were slightly higher because of
the $2,869 increase in net intangible assets from the 3Q acquisition of the
Gesco neonatal product line of CR Bard, which exceeded offsetting substantial
reductions in inventory and net property, plant and equipment assets (PP&E).
1998 year-end net intangible assets represent 28% of total assets. Excluding
the possibility of new intangible assets from 1999 acquisitions, total asset
productivity should continue to improve in 1999 because sales are projected to
grow while working capital remains about the same and net PP&E assets decline as
depreciation exceeds the rate of new purchases.
1998 net (after accumulated depreciation) PP&E in Utah and Oregon decreased
$859, while in Ireland remained about the same in U.S. dollar terms, as a
strengthening dollar offset depreciation. Consolidated PP&E asset turns
improved to 2.2 based on year-ending balances. Productivity of PP&E in 1999
should continue to increase since sales are expected to increase, and net PP&E
decrease, as consolidated new capital expenditures are expected to be less than
one-half of 1999 depreciation.
Inventory turns increased in 1998 due to higher sales together with 30% lower
inventory at year-end. Lower inventory balances resulted from UM using
inventories previously accumulated in its business changes in 1997. Average
inventories of $4,920 in 1998 compared to $5,271 in 1997 and $4,014 in 1996 do
not properly reflect the improvements made, since the year-ending 1998 balance
was $872 less than the 1998 average, and considering that $635 in inventories
were acquired in July 1998 as part of the Gesco acquisition. Inventory turns in
1999 will increase substantially if average inventories for the year remain near
1998 ending levels, and sales increase as expected. The 1998 year-ending
accounts receivable (A/R) balances declined about 3% despite 14% higher sales
activity for the year. Calculated days in receivables improved to 50, based on
4Q 1998 shipments' activity. Despite average aging declining favorably to 50
days in 1998 compared to 54 days in 1997 (4th quarter base), aged A/R over 90
days from invoice date increased to about 9% of total accounts receivable at
1998 year end. The increase in the older receivables balance is due to one
delinquent distributor in the Far East, and two distributors in the U.S. which
were terminated at the end of 1998. UM projects that these older accounts will
be collected without a material write-off.
The working capital decline of $1,161 in 1998 was primarily the result of a
reduction in inventories. Through its excellent profitability, UM expects to
internally finance any working capital growth that is needed to support growth
in sales activity.
b) Liabilities. In 1998, UM's total debt ratio dropped to less than 19% of
total assets from 28% at the end of 1997. In addition to current liabilities
associated with current production and sales activity, UM has a few lease
obligations (see Note 6 on page F-15) and an unsecured line-of-credit. The
balance of the revolving line of credit declined $2,473 in 1998, even though UM
acquired Gesco for $4,188 in cash and paid $1,686 to repurchase its stock in the
open market. In 1999, if no new significant acquisitions or repurchases of
shares are made, the remaining revolving line of credit balance can be
eliminated.
Results of Operations.
a) Revenues. Annual consolidated revenues were up 14% in 1998. On a quarter-
to-previous-year's quarter basis, consolidated 1998 revenues were up 23%, 33%,
2% and 6%, respectively.
UM divides its sales channels in the U.S. into "direct sales" which are sales
to end user customers through UM's direct sales force, independent commissioned
sales representatives, and specialty distributors, and "OEM sales" which are
sales to other medical device companies where products are resold as part of a
component of a kit or a repackaged stand-alone product. In 1998, U.S. direct
sales represented 74% of global consolidated sales compared to 68% in 1997 and
55% in 1996. In the U.S. only, direct sales represented 89% of 1998 sales
compared to 86% in 1997 and 73% in 1996. U.S. direct sales grew 25% relative to
the prior year. As a percentage of total U.S. sales, OEM sales represented 11%
of 1998 sales, compared to 14% in 1997 and 27% in 1996. U.S. OEM sales
excluding sales to Baxter grew 18% in 1998.
Foreign sales were $4,732 in 1998 compared to $5,218 in 1997 and $9,739 in
1996. Foreign sales in 1998 were 17% of global consolidated sales compared to
21% in 1997 and 25% in 1996. The downward trend is due to the loss of foreign
sales to Baxter, and a slow year in 1998 for sales of blood pressure monitoring
(BPM) products, particularly in the Far East. Foreign sales of BPM products
were down 11% relative to the prior year, excluding sales to Baxter.
Historically, practically all international sales have been BPM products.
Ireland operations shipped 62% of foreign sales in 1998, compared with 39% in
1997 and none in 1996. Although still a small sales base in 1998, foreign sales
of Ob/Gyn and neonatal products increased 25%, surpassing $1 million for the
first time. Ob/Gyn and neonatal product sales were 21% of 1998 foreign sales,
compared to 15% in 1997 and 9% in 1996.
Following the acquisition of the Gesco neonatal product line from CR Bard, UM
divides its sales into four product-line categories: 1) obstetrics, comprised
of labor and delivery management tools for monitoring fetal and maternal well-
being, for improving clinician safety and for ease in performing delivery
procedures; 2) gynecology/electrosurgery/urology, comprised of tools for
gynecological office/clinician practices, including LETZ, endometrial sampling,
diagnostic laparoscopy, and other MIS procedures; specialty excision and
incision tools; conservative urinary incontinence therapy devices; and urology
tools; 3) neonatal, comprised of devices for gaining vascular access,
administering vital fluids, maintaining a neutral thermal environment, and other
specialized tools used in the care of critically-ill infants; and 4) blood
pressure monitoring/accessories/other, comprised of specialized tools for
invasively monitoring blood pressure on a continuous basis with pressure
transducer systems, along with products sold on an OEM basis to other companies.
In these four areas, UM's primary revenue contributors generally enjoy a
dominant market share and typically have important product features protected by
patents.
Sales in the obstetrics product category increased 24% in 1998 and represented
53% of total sales. Obstetrics sales were $14,635 in 1998, compared to $11,822
in 1997 and $15,802 in 1996. Direct sales of the market-leading IUP catheter,
INTRAN(r) Plus, grew 18% as users that had previously switched to cheaper
competing products in 1997 returned to Intran, the most reliable product on the
market. Sales of vacuum-assisted delivery systems (VADS) increased 81% in 1998,
only because UM sold those products for the full year in 1998 compared to one-
half year in 1997 after the CMI acquisition. In May 1998, the FDA issued an
advisory which warned of increases in reported injuries in the use of VADS. The
advisory appears to have caused a slow-down in usage as hospitals evaluated
their protocols. UM responded by providing additional written instructions for
use to all its users, and offering assistance in training. In September 1998,
The American College of Obstetricians and Gynecologists issued a formal
Committee Opinion that strongly recommended continued use of VADS, when used by
appropriately trained physicians. UM projects that demand for its VADS
products, accepted by many physicians as the safest available, will increase
again in 1999. UM's patented soft silicone cup is unique in the industry.
Gynecology/electrosurgery/urology product sales grew 8% in 1998, and
represented 15% of total revenues. Sales in this category were $4,174 in 1998,
compared to $3,859 in 1997 and $3,534 in 1996. Several products contributed to
sales growth, including Liberty(tm), Pathfinder(r), and C-LETZ contoured
electrodes. With the recent completion of an independent study concluding that
UM's patented Epitome(tm) scalpel provides a significant improvement over older
devices in wound healing and patient comfort, UM looks to improve sales of its
electrosurgical electrodes in 1999. Marketing this group of products requires
multiple sales call points and extensive clinical training and familiarization
time with users, among other economic challenges, resulting in continued low
adoption growth rates.
Neonatal sales have previously been included in UM's critical care product
category, dominated by BPM product sales. In late July 1998, a significant
initiative was the acquisition of the neonatal product line of Gesco
International. Because of the significance of the renowned Gesco products, and
their growth potential, UM now separates neonatal product sales and BPM product
sales. Compared to 1997, UM's 1998 neonatal product sales grew 168%. Neonatal
product sales were $1,899 in 1998, compared to $708 in 1997 and $794 in 1996.
UM's growth in 1999 is expected to be primarily driven by the neonatal product
line.
BPM and accessories sales represented 25% of consolidated 1998 sales, declining
12% from the prior year. Sales of BPM products in 1998 were $6,970, compared to
$7,882 in 1997 and $18,542 in 1996. In this category, UM depends heavily on the
marketing efforts of other medical device companies which have included Baxter
(the OEM channel), both in the U.S. and overseas. Non-Baxter global OEM sales
grew 2% in 1998. Global OEM sales in 1998 were 15% of total sales, compared to
20% in 1997 and 37% in 1996, confirming that UM is now depending less on the
marketing efforts of other medical device companies.
b) Gross profits. The average gross profit margin (GPM), the surplus
remaining after subtracting costs of manufacturing products from net revenues,
in 1998 was 51.2% compared to 51.9% in 1997 and 49.4% in 1996. UM management
believes that achieving an average GPM above 50% is necessary to successfully
cover the significant sales and marketing, research and development, and
administrative expenses associated with a growth company in a highly complex and
competitive marketplace. The improving long term average GPM trend is explained
by observing that UM has become less dependent on lower margin OEM sales, has
developed its own direct sales force to replace lower margin sales through
distributors, and has reduced the percentage of its sales of low margin blood
pressure monitoring products. In 1998, although UM achieved improvements in
manufacturing overhead productivity as the result of higher sales, GPMs were
slightly lower due to somewhat unfavorable direct materials consumption and
lower BPM product pricing overseas. Less than optimal materials usage
inherently goes with large reductions in inventory, as occurred in 1998.
Looking forward to 1999, offsetting influences are expected to result in GPM of
about 52%. Expected favorable influences include continued growth in sales
volume without significantly increasing overhead expenses, fewer distributors
resulting in higher prices for the same unit volume, and a larger percentage of
total sales from neonatal products. Unfavorable influences are expected to be
continued competitive pressure on pricing and higher wage rates for employees.
c) Operating Profit. Operating profit, or income from operations, is the
surplus remaining after subtracting operating expenses from gross profits.
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). In 1998, operating profits increased 19% to
$6,623 from $5,559 in 1997, exceeding the 14% increase in sales over the same
period. Operating profits in 1996, UM's most profitable year historically, were
$11,809. Total operating expenses were 27.3% of sales in 1998 compared to 29.0%
of sales in 1997, and 18.9% in 1996. UM expects to enjoy further operating
leverage in 1999 as sales continue to grow.
SG&A expenses in 1998 decreased to 23.9% of revenues from 25.1% of 1997
revenues, although in dollar terms SG&A expenses increased to $6,605 in 1998
from $6,089 in 1997. The G&A expenses portion increased to $2,720 in 1998 from
$2,422 in 1997 due essentially to increased expenses from goodwill amortization
(GWA) associated with recent acquisitions. GWA was $433 in 1998, compared to
$148 in 1997 and zero in 1996. Looking forward, GWA in 1999 will be $569,
without consideration for additional acquisitions in 1999. Since the result of
the acquisitions were marketable new products for UM, these expenses can be
regarded as a surrogate to R&D expenses although they are captured in G&A.
S&M expenses are the costs of promoting, selling and providing customer support
of UM's products. Although sales and GPMs improve when sales are made through
directly employed sales representatives in lieu of independent distributors or
OEM customers, S&M operating expenses increase as an offset. Global sales in
1998 increased 14% while S&M expenses increased 6%, improving the productivity
of S&M resources. The majority of UM's S&M expenses pertain to the U.S. "direct
sales" portion of its business. U.S. direct sales increased 25% in 1998. In
1999, UM's S&M expenses to sales ratio is expected to continue to benefit from
sales increasing faster than S&M expenses. At the end of 1998, UM terminated
all of the former Gesco distributors and one additional U.S. distributor
previously representing about 3% of domestic direct sales.
R&D expenses in 1998 were 3.4% of sales compared to 3.9% of sales in 1997, and
3.6% in 1996. Although lower as a percentage of sales, 1998 R&D expenses in
dollar terms were about the same as the prior year. The majority of expenses in
1998 were committed to UM's novel fetal pH monitoring program still under
development. Other key 1998 projects, some of which are ongoing, included the
development of the Fowler Endocurette, enhancements to both CMI VADS and Gesco
neonatal product lines, a novel Prendiville contoured cervical biopsy electrode,
and continuing improvements to Liberty, Deltran Plus and Cordguard. A number of
important improvements in materials and configuration of components were also
achieved which will reduce manufacturing costs and/or increase product quality.
At UM, R&D resources are kept involved in the support of manufacturing
processes, as UM finds it makes long term sense to keep its most technical
people involved with products throughout their life cycles. UM expects to
continue R&D expenses at approximately the same dollar level in 1999.
d) Non-operating income. Non-operating income includes primarily royalties
from licensing UM's technology to other companies, but also interest and capital
gains from investing the Company's cash offset by interest expenses and bank
fees on the revolving line of credit, and gains or losses from the sale of
assets. Non-operating income in 1998 was $900, compared to $1,216 in 1997 and
$1,834 in 1996. There were unusual payments received in all three years for the
use of UM's pressure monitoring technology, which are subject to a
confidentiality agreement. Those particular payments have now been concluded.
Royalties received in 1998 were $54 less than in the prior year. In 1997, there
was also a one-time $200 gain from the sale of a small property no longer used
by the Company. Interest expenses and bank fees associated with the line of
credit were $318 in 1998, $255 in 1997 and zero in 1996. Assuming no change in
current interest rates and no new borrowing to finance an unusual capital
requirement, 1999 net non-operating income is expected to be about $450.
Royalties received vary from period to period depending on the desire and/or
success of other companies in selling products licensed by UM.
Earnings before income taxes (EBT) result from adding UM's non-operating income
to its operating profits. 1998 EBT, as a percentage of sales, was 27.2%
compared to 27.9% and 35.3% in 1997 and 1996, respectively. These profit
margins are all extremely high when compared with similar firms in the medical
device industry, or other industries. The resulting profit dollars are
equivalent to profits generated by well-performing companies with twice or more
the sales of UM. EBT in 1998 were up only 11% relative to the prior year, while
sales were up 14%, because of the lower non-operating income in 1998. UM
expects that it can continue its excellent profit performance in 1999.
e) Net Income, EPS and ROE. Net Income is EBT minus income taxes. UM's Net
Income expressed as a percentage of sales ranks in the top tier of all U.S.
publicly-traded companies at 18%, 18% and 23% for 1998, 1997 and 1996,
respectively. Net Income in 1998 was up 12%. After income taxes, 1998 Net
Income was $4,858, compared to $4,322 in 1997 and $8,754 in 1996, UM's record
year. The effective income tax rate in 1998 was 35.4% compared to 36.2% in 1997
and 35.8% in 1996. Year to year fluctuations in the tax rate have resulted from
1) the use of a foreign sales corporation, 2) differing balances in tax-exempt
investments, 3) variations in the amount of exercised employee options which
result in a tax benefit to the Company, 4) differences in distribution of state
income taxes, 5) differences in profitability of the Ireland subsidiary which
is taxed at a 10% rate on manufactured products, 6) changes in the amount of
non-deductible goodwill expense resulting from a new acquisition, and 7) other
factors such as R&D tax credits and actual litigation costs versus accrued
expenses. The amortization of goodwill associated with the 1997 Columbia
Medical, Inc. acquisition is not tax deductible.
Earnings per Share (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 1998 EPS were up 15%
to $.59 compared to $.51 in 1997. 1996 EPS were $.93. 1998-ending weighted
average number of diluted common shares (the number used to calculate diluted
EPS) (in thousands) were 8,273 compared to 8,495 and 9,452 shares in 1997 and
1996, respectively. Actual outstanding common shares as of December 31, 1998
were 8,046. Future EPS can be increased by investing current Net Income to
increase future net profits through expanded product offerings and profitable
business operations, or by repurchasing stock, thereby reducing the number of
outstanding shares. UM believes that shareholder value is improved primarily by
consistently increasing EPS.
Although UM's EPS increased 15% in 1998, the price of its stock decreased 4%.
In contrast, the Dow Jones Industrial Average increased 16%, the S&P 500 Index
increased 27%, the NASDAQ Composite Index increased 40%, and the MDDI Index of
medical device companies increased 46%. Small cap companies were out of favor
compared with the rest of the stock market in 1998. The ValueLine Index, a
widely accepted indicator of broader market values, declined 4%. Historically,
the progression of UM's stock price has followed closely with its institutional
ownership. Percentage institutional ownership of UM at the end of 1998 was
about 26% compared with institutional ownership of the S&P 500 of about 60%.
Return On Shareholders' Equity (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 any external financing that would dilute
shareholder interests. For example, a 20% ROE will support 20% growth in
revenues. Achieving growth in revenues and EPS without diluting shareholder
interests maximizes shareholders' value. ROE in 1998 was 20%, and has averaged
over 30% for the last twelve years.
Cash Flows and Capital Resources.
a) Cash flows. EBDIT (EBT, adjusted for non-cash depreciation and
amortization expenses, asset dispositions, and interest expense and bank fees
associated with the line of credit) is a good measure of UM's ability to
generate cash. 1998 EBDIT was $10.3 million, up 25% from 1997, or as a ratio of
sales, 37%. EBDIT has averaged 35% of sales over the last five years. The
extraordinarily strong cash generation performance resulted from a combination
of excellent operating earnings and receipt of payments for the use of UM's
technology. Because of EBDIT performance, UM was able to simultaneously acquire
the Gesco neonatal product line with a $4.2 million cash payment, purchase $0.5
million in new property and equipment to maintain its facilities, equipment and
tooling in good working order, acquire $0.3 million in technology rights for new
products in development, repurchase $1.7 million worth of its shares, and reduce
its bank revolving line of credit balance by $2.5 million.
Cash (and equivalent) balances were $1,367 at the end of 1998. UM effectively
maintains zero-balance "sweep" cash account balances that minimize the line of
credit balance, except for amounts held to meet operating requirements in
Ireland and separate physical reserves set aside for litigation expenses and
other contractual commitments where cash has been committed.
Net cash provided by operating activities, including adjustments for
depreciation and other non-cash operating expenses, along with changes in
working capital, totaled $9,463 in 1998, compared to $4,978 in 1997 and $11,193
in 1996.
Financing activities in 1998 used cash of $2,470 to reduce the line of credit
balance. In addition, 267,300 shares of stock were repurchased at an average
cost, including commissions, of $6.31/share, using $1,686 in cash. UM
received $58 in cash from the sale of 8,000 shares of stock through an employee
option exercise at a price of $7.25.
In six years since the end of 1992, UM has invested $41.5 million in
repurchasing 4.2 million of its common shares at an average price, including
commissions, of $9.87 per share. During the same time span, UM received $2.7
million from the issuance of 0.4 million shares of stock at an average price of
$6.79 per share from exercises of employee options. Ten times more shares were
retired than were issued. In the four years prior to 1993 under prior
management, UM received $1.3 million from the issuance of 0.8 million shares
from employee options at an average price of $1.65 per share. During the same
time span, UM repurchased 0.1 million shares at an average cost of $10.67 per
share. Under previous management, 8 times more shares were issued than were
repurchased, diluting shareholder interests while receiving only $1.65 per
share.
Management believes that future income from operations and effective management
of working capital will provide the liquidity needed to finance growth plans.
Planned 1999 capital expenditures, expected to be consistent in magnitude with
1998, will keep facilities, equipment and tooling in good working order. In
addition to the capital expenditures, UM plans to use cash in 1999 for selective
infusions of technological, marketing or product manufacturing rights to broaden
the Company's product offerings, for continued share repurchases while the price
of the stock remains extremely undervalued, and, if available for a reasonable
price, acquisitions that strategically fit UM's business and are accretive to
performance. UM plans to use any cash not needed for the above pursuits during
the remainder of 1999 to reduce the line of credit balance. However, the
revolving credit line will continue to be used for liquidity when the timing of
acquisitions or repurchases of stock require a large amount of cash in a short
period of time.
Management's Outlook.
There are three key points for shareholders to remember with regard to 1998
performance:
1) All key measures of UM's performance in 1998 were positive, as a quick
review of the accompanying financial statements will demonstrate;
2) The major initiative for the year was the Gesco acquisition. UM
successfully completed integration of manufacturing operations in Utah. The
sales battle to retain the base of business is ongoing, given that the C.R.Bard
distributor contracts acquired with the deal expired at the end of 1998; and
3) UM continued to successfully defend its dominant obstetrical market position
of its #1 product, INTRAN(r) Plus.
In 1999, management expects to be able to build on the 1998 momentum. UM now
has a focus in two special and independent areas of hospitals in the U.S., L&D
departments and NICU's, where it can supply a robust line of well-accepted and
differentiated specialty products. The success of the Gesco neonatal product
line will be most responsible for UM's short term growth.
UM's direct U.S. sales team has evolved following several years of investment
and development into a key resource for achieving UM's objectives to help
clarify clinician needs, to responsively provide excellent solutions for those
needs, and to assure timely support for clinical customers' use of UM's
solutions.
Access to U.S. hospital customers is increasingly constrained by group
purchasing decisions. To be successful in its marketing programs, UM must
provide clinicians with the information they need to make important judgments
about using certain products in obtaining optimal clinical outcomes, which
include minimizing risk of complications. UM must also be able to provide
support for physicians to explain those needs to hospital administrators who are
primarily focused on reducing current operating costs. Being able to survive
and prosper in an environment favoring a commodity marketing orientation which
is contrary to UM's approach is the clearest manifestation of UM's competitive
success. For example, UM's challenge is to demonstrate that all intrauterine
pressure monitoring catheters used in high risk child births are NOT the same
when it comes to risk of complications or adverse surprises.
Where UM has a proprietary advantage, it must actively defend its existing
patents from infringers and continue to develop new products representing a
quantum improvement in care. It is management's hope that the fetal pH
monitoring product, under development for the past five years, may become such
a product. Although in 1998 UM did not achieve the technical milestones it
targeted, it will continue to invest in the fetal pH project, which, if
successful, would be a major company-defining event. In addition, UM hopes the
Federal judicial process will allow a resolution of its two Intran IUPC patent
infringement lawsuits in 1999.
UM's growing number of gynecology practice tools are intended to leverage UM's
reputation with physicians outside the hospital. The niche markets for which
UM's gynecology/electro-surgery/urology products are targeted have proven to
require many and varied marketing initiatives. They require individual user
training together with clear evidence of improved outcomes. Sales of new
products are growing slowly, but consistently. UM's financial strength and
stability allows it to patiently investigate economic ways to increase the rate
of adoption of its newer products. The Fowler Endocurette for uterine biopsies,
delayed in 1998 by the FDA regulatory approval process, is an example of such a
project. UM will continue to maintain a long-term perspective and seek to
strengthen its disease management focus with physicians who it believes are
ultimately responsible for their patients' well-being.
Internationally, where UM must depend on the knowledge, focus, relationships
and energy of independent distributors, management will continue to closely
monitor performance and actively recruit needed new business partners. In 1999,
UM expects its Ireland subsidiary, which shipped 62% of all foreign sales in
1998, to increasingly contribute to UM's excellent performance.
YEAR 2000
State of Readiness
UM believes it will experience no material adverse consequences from the "Year
2000 (Y2K) Problem," and is taking appropriate actions to see that it is
prepared in all of its operations globally. UM has developed a Y2K plan it is
using to identify and solve potential Y2K problems.
The Company has determined that all of the products it sells are Y2K compliant
since none of them use or process dates in any form.
A complete inventory of all known internal systems (both Information Technology
and Non-IT), along with initial testing of those systems has been completed.
These efforts show that most, but not all of the systems UM relies on to
manufacture, test, assemble, and package its products are Y2K compliant. The
version of the integrated manufacturing control software (Dataworks) UM uses was
recently upgraded and is currently being tested to ensure it is Y2K compliant.
Other systems that were identified as non-compliant either have been or are
scheduled to be updated prior to May 31, 1999. Solutions to all identified Y2K
problems are expected to be in place, along with Company-wide Y2K compliance, by
July 31, 1999.
UM has surveyed those outside vendors it considers critical to its business,
including utilities and other providers of auxiliary systems, regarding their
Y2K readiness. Response assessment and implementation of appropriate remedial
action is ongoing.
Costs
UM does not expect its Y2K costs to be material. UM's products are all
compliant and its major software systems are now or should soon be compliant
with upgrades provided under maintenance contracts. Some software and older
systems must be replaced, with the total cost expected to be less than $75,000.
Risks
As UM's products do not incorporate date codes, Y2K risks based on its products
are minor. Because the major internal systems UM relies on have either been
confirmed compliant or will be upgraded to a compliant version prior to July 31,
1999, the risk of these systems failing also appears to be low. However,
although considered unlikely, it is possible that a major Y2K problem might be
identified. UM has competent employees who it believes can find solutions to
problems identified. Perhaps the greatest internal risk would be from a Y2K
issue that remains hidden despite diligent testing. If such a problem developed
either shortly before or after January 1, 2000, UM could face delays and costs
that might be material to its business.
UM believes external Y2K problems constitute a higher magnitude of risk to its
business. If mission critical vendors do not timely and accurately report to UM
their Y2K readiness, or adequately solve Y2K problems as anticipated, the
Company's business could be materially impacted. If alternate vendors cannot be
identified and qualified in time to replace vendors who will not be Y2K
compliant, UM's business could be negatively impacted.
The failure of communications, financial and transportation systems could have
a major negative impact on UM, as would the failure of local utilities to
deliver water, natural gas, and electricity.
Contingency Plans
Execution of the Company's Y2K plan is UM's most important contingency plan.
It will not only identify what Y2K risks it faces, but provide a framework for
how to solve them. For example, UM is prepared to switch vendors, install Y2K
compliant systems and stock excess raw material and finished goods inventory to
mitigate Y2K risks. UM employs skilled individuals who have the technical know-
how to solve most challenges likely to be presented by the Y2K problem.
UM believes that the most likely worst-case scenario would involve business
interruptions of up to one or two weeks. UM believes it could solve such
problems before they became major risks to its business. UM does not believe it
can develop contingency plans to deal adequately with major external
infrastructure failures such as in communications, transportation, or utilities.
However, such failures would likely not impact UM any more than it would other
businesses.
Accounting Policy Changes
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. UM believes that the adoption of
SFAS 133 will not have a material effect on the financial statements of the
Company.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has manufacturing operations, including assets, in Ireland
denominated in Irish Punts, and sells products under agreements denominated in
various Western European currencies. The Irish Punt and other currencies are
subject to exchange rate fluctuations that are beyond the control of UM. The
exchange rate for the Irish Punt was .6720, .6981 and .6033 per U.S. Dollar as
of December 31, 1998, 1997 and 1996, respectively. Please see Note 1, page F-
11.
UM minimizes its foreign currency risk without separate hedging transactions by
converting currencies as transactions occur.
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. The report of D&T SLC on UM's financial statements consisting of the
consolidated statements of income, stockholders' equity, and cash flows for the
year 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.
UM has engaged Tanner + Co., Salt Lake City, Utah as independent accountant and
auditor to report on UM's consolidated financial statements for the two years
ended December 31, 1998. 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 Refer-
Exhibit # ence # Title of Document Location
- -------- ------- ------------------------------ ----------------
1 2 Asset Purchase Agreement, dated
July 29, 1998 between Utah Medical Incorporated by
Products, Inc., Bard Access Reference(1)
Systems, Inc., and Gesco
International, Inc.
2 3 Articles of Restatement of the Incorporated by
Articles of Incorporation Reference(2)
3 3 Bylaws Incorporated by
Reference(2)
4 4 Rights Agreement dated as of October
28, 1994, between Utah Medical Incorporated by
Products,Inc., and Registrar Reference(2)
and Transfer Company
5 4 Designation of Rights, Privileges,
and Preferences of Series "A" Incorporated by
Preferred Stock Reference(2)
6 10 Employment Agreement dated December 21, Incorporated by
1992 with Kevin L. Cornwell* Reference(3)
7 10 Amendment, effective May 15, 1998,
to Employment Agreement dated This Filing
December 21, 1992 with Kevin L.
Cornwell*
8 10 Utah Medical Products, Inc., 1986 Incorporated by
Incentive Stock Option Plan* Reference(3)
9 10 Utah Medical Products, Inc., 1994 Incorporated by
Employee Incentive Stock Option Plan* Reference(2)
10 10 Utah Medical Products, Inc., 1993 Incorporated by
Directors' Stock Option Plan Reference(2)
11 10 Utah Medical Products, Inc., Performance Incorporated by
Option Plan* Reference(2)
12 10 Revolving Loan Agreement, dated April Incorporated by
4, 1997 Between Utah Medical Reference(4)
Products, Inc and First Security
Bank, N.A.
13 10 Modification Agreement, effective
October 15, 1998 between Utah Medical This Filing
Products, Inc. and First Security
Bank, N.A.
14 21 Subsidiaries of Utah Medical Products, This Filing
Inc.
15 23 Consent of Tanner + Co., Company's
independent auditors for the This Filing
years ending December 31, 1998
And December 31, 1997
16 23 Consent of Deloitte & Touche LLP,
Company's independent auditors This Filing
for the year ending December 31, 1996
17 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, 1998.
(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.
(4) Incorporated by reference from the Company's annual report on form 10-K
filed with the Commission for the year ended December 31, 1997.
(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, 1999.
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/ Barbara A. Payne
Director
By: /s/ Paul O. Richins
Director
<PAGE>
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, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for the years ended December 31,
1998 and 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, the 1998 and 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, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ TANNER + CO.
Salt Lake City, Utah
January 14, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
Utah Medical Products, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Utah Medical Products, Inc. and
subsidiary for the year 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Utah Medical
Products, Inc. and subsidiary for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
January 24, 1997
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
-----------------------
ASSETS 1998 1997
------ ------
Current assets:
Cash $1,367 $ 951
Accounts receivable, net (note 2) 4,531 4,654
Inventories (note 2) 4,048 5,792
Prepaid expenses and other current assets 151 107
Deferred income taxes (note 7) 446 548
------ ------
Total current assets 10,543 12,052
Property and equipment, net (note 4) 12,489 13,340
Other assets, net (note 2) 8,936 6,067
------ ------
Total $31,968 $31,459
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $525 $843
Accrued expenses (note 2) 1,886 1,832
Deferred revenue (note 11) 2 86
------ ------
Total current liabilities 2,413 2,761
Notes payable (note 5) 3,098 5,571
Deferred income taxes (note 7) 440 490
Deferred revenue (note 11) - 2
------ ------
Total liabilities 5,951 8,824
------ ------
Commitments and contingencies (note 6) - -
Stockholders' Equity:
Preferred stock $.01 par value;
authorized 5,000 shares; no shares - -
issued or outstanding
Common stock $.01 par value; authorized
50,000 shares; issued 8,046 shares in
1998 and 8,305 shares in 1997 80 83
Cumulative foreign currency translation (509) (657)
adjustments
Retained earnings 26,446 23,209
------ ------
Total stockholders' equity 26,017 22,635
------ ------
Total $31,968 $31,459
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------ ------
Net sales (notes 10, 11, and 13) $27,677 $24,272 $38,673
Cost of sales (note 11) 13,503 11,666 19,550
------- ------- -------
Gross margin 14,174 12,606 19,123
Expenses:
Selling, general, and administrative 6,605 6,089 5,927
Research and development 946 958 1,387
------- ------- -------
Income from operations 6,623 5,559 11,809
Other income (expense):
Dividend and interest income 58 85 454
Royalty income 678 732 703
Interest expense (310) (250) -
Other, net 474 649 678
------- ------- -------
Income before income tax expense 7,523 6,775 13,644
Income tax expense (note 7) (2,665) (2,453) (4,890)
------- ------- -------
Net income $4,858 $4,322 $8,754
======= ======= =======
Earnings per common share (basic)
(notes 8 and 9) $.59 $.51 $.94
------- ------- -------
Earnings per common share (diluted)
(notes 8 and 9) $.59 $.51 $.93
======= ======= =======
Other comprehensive income - foreign
currency translation net of taxes of
$50, $(297), and $74 98 (577) 143
------- ------- -------
Total comprehensive income $4,956 $3,745 $8,897
======= ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997, 1996
<S> <S> <C> <C> <C> <C> <C>
UNREALIZED GAIN ON CUMULATIVE
COMMON STOCK INVESTMENTS FOREIGN CURRENCY
------------------- ADDITIONAL PAID-IN AVAILABLE-FOR- TRANSLATION RETAINED
SHARES AMOUNT CAPITAL SALE, NET OF TAX ADJUSTMENT EARNINGS
------ ------ ------------------ ---------------- -------------- --------
Balance January 1, 1996 9,791 $98 $- $33 $- $29,073
Shares issued upon exercise of
employee stock options for
cash 69 1 - - - 601
Change in unrealized gain on
investments available-for-sale
- - - 26 -
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 163 - -
Common stock purchased and
retired (1,074) (11) (163) - - (14,409)
Foreign currency translation
adjustments - - - - 217
Net income - - - - - 8,754
------ ------ ------ ------ ------
Balance, December 31, 1996 8,786 88 - 59 217 24,019
Shares issued upon exercise of
employee stock options for
cash 29 - - - - 227
Change in unrealized gain on
investments available-for-sale - - - (59) - -
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 27 - - -
Common stock purchased and
retired (510) (5) (27) - - (5,359)
Foreign currency translation
adjustments - - - - (874) -
Net income - - - - - 4,322
------ ------ ------ ------ ------
Balance, December 31, 1997 8,305 83 - - (657) 23,209
Shares issued upon exercise of
employee stock options for cash 8 - - - -
58
Tax benefit attributable to
appreciation of common stock
related to stock options and
purchase rights - - 5 - - -
Common stock purchased and retired
(267) (3) (5) - - (1,679)
Foreign currency translation
adjustments - - - - 148 -
Net income - - - - - 4,858
------ ------ ------ ------ ------
Balance, December 31, 1998 8,046 $80 $- $- $(509) $26,446
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,858 $4,322 $8,754
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,058 1,515 1,377
Provision for (recovery of) losses on
accounts receivable 22 (35) (1)
Loss (gain) on disposal of assets 438 (278) 412
Deferred income taxes 52 195 (114)
Tax benefit attributable to exercise and
disposition of incentive stock options
and stock purchase rights 5 27 163
(Increase) decrease in:
Accounts receivable 55 514 2,670
Accrued interest, grant claims,
and other receivables 68 562 (984)
Inventories 2,317 (268) (1,472)
Prepaid expenses and other current
assets (43) 11 106
Increase (decrease) in:
Accounts payable (328) (1,010) 102
Accrued expenses 45 (441) 216
Deferred revenue (84) (136) (36)
------ ------ ------
Net cash provided by
operating activities 9,463 4,978 11,193
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (480) (1,134) (5,640)
Intangible assets (306) (454) (320)
Purchases of investments - (112) (3,315)
Proceeds from sale and maturities of
investments - 1,577 10,016
Proceeds from sale of property and
equipment 12 9 22
Net cash paid in acquisition (4,188) (7,300) -
------ ------ ------
Net cash (used in) provided by
investing activities: (4,962) (7,414) 763
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 58 227 601
Common stock purchased and retired (1,686) (5,391) (14,583)
(Decrease) increase in note payable (2,470) 5,563 -
------ ------ ------
Net cash (used in) provided by
financing activities (4,098) 399 (13,982)
------ ------ ------
Effect of exchange rate changes 13 (51) -
------ ------ ------
Net increase (decrease) in cash 416 (2,088) (2,026)
Cash at beginning of year 951 3,039 5,065
------ ------ ------
Cash at end of year $1,367 $951 $3,039
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(In thousands)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------ ------
Cash paid during the year for:
Income taxes $2,197 $2,307 $5,111
Interest $310 $250 $-
During the year ended December 31, 1998 the Company purchased assets from Gesco
International, Inc. The Company paid $4,188, and recorded net assets from the
acquisition as follows:
Inventory $635
Property and equipment 48
Intangibles 3,505
------
Net cash investment $4,188
======
During the year ended December 31, 1997:
-The Company sold property in exchange for a receivable of $340.
-The Company purchased all of the outstanding common stock of Columbia
Medical, Inc. (Columbia) in a purchase transaction. The Company paid cash
for the common stock and recorded net assets from the acquisition as
follows:
Cash $860
Accounts receivable 478
Inventory 805
Prepaids and other 27
Deferred income taxes 28
Property and equipment, net 1,062
Intangibles 5,225
Accounts payable (94)
Accrued expenses (231)
-----
Total cash paid 8,160
Less cash received (860)
------
Net cash investment $7,300
See accompanying notes to consolidated financial statements.
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Utah Medical Products, Inc. and its wholly owned subsidiaries, principally 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 condensed
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.
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).
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 non-compete agreements, are capitalized and amortized using the
straight-line method over periods ranging from 5 to 17 years.
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.
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).
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 statement 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.
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, 1998.
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 accounts 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.
RECLASSIFICATIONS
Certain changes to the presentation of the 1997 and 1996 consolidated financial
statements have been made to conform with the 1998 presentation.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
DECEMBER 31,
-----------------------
1998 1997
------- -------
Accounts Receivable (in thousands):
Trade receivables $4,134 $3,820
Grant claim receivables 49 337
Accrued interest and other 416 543
Less allowances for doubtful
accounts (68) (46)
------- -------
$4,531 $4,654
======= =======
Inventories (in thousands):
Finished products $1,041 $1,232
Work-in-process 771 1,205
Raw materials 2,236 3,355
------- -------
$4,048 $5,792
======= =======
Other assets (in thousands):
Goodwill $8,533 $5,030
Patents 1,743 1,498
License rights 293 293
Trademarks 223 220
Non-compete agreements 75 50
------- -------
10,867 7,091
Accumulated amortization (1,931) (1,024)
------- -------
$8,936 $6,067
======= =======
Accrued expenses (in thousands):
Payroll and payroll taxes $847 $778
Reserve for litigation costs 542 761
Other 497 293
------- -------
$1,886 $1,832
======= =======
3. INVESTMENTS
During the years ended December 31, 1998, 1997, and 1996, there were (in
thousands) $0, $1,577 and $10,016 respectively, in proceeds from the sale of
investment securities resulting in gross realized losses of $-0- $18, and $28,
respectively, and gross realized gains of $0, $120 and $15, respectively.
The net unrealized gain on investment securities available-for-sale included in
stockholders' equity for the years ended December 31, 1998, 1997, and 1996 is
(in thousands) $-0-, $-0-, and $59, respectively, which are net of the deferred
tax liability of $-0-, $-0-, and $35, respectively.
4.PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
-----------------------
1998 1997
------- -------
Land $1,024 $1,009
Building and improvements 7,998 7,818
Furniture, equipment, and tooling 13,018 12,162
Construction-in-progress 164 563
------- -------
22,204 21,552
Accumulated depreciation and
amortization (9,715) (8,212)
------- -------
$12,489 $13,340
======= =======
Included in the Company's consolidated balance sheet are the assets of its
manufacturing facilities in Utah, Oregon and Ireland. Property and equipment,
by location are as follows (in thousands):
DECEMBER 31, 1998
----------------------------------------
Utah Oregon Ireland Total
------ ------- ------ ------
Land $ 621 $ -- $403 $1,024
Building and improvements 3,656 32 4,310 7,998
Furniture, equipment, and
tooling 11,090 1,092 836 13,018
Construction-in-progress 157 7 -- 164
------ ------- ------ ------
Total 15,524 1,131 5,549 22,204
Accumultated depreciation and
amortization (8,817) (397) (501) (9,715)
------ ------- ------ ------
Property and equipment, net $6,707 $734 $5,048 $12,489
====== ======= ====== =======
DECEMBER 31, 1997
----------------------------------------
Utah Oregon Ireland Total
------ ------- ------ ------
Land $ 621 $ -- $ 387 $1,009
Building and improvements 3,637 32 4,149 7,818
Furniture, equipment, and
tooling 10,287 1,083 793 12,162
Construction-in-progress 562 1 -- 563
------ ------- ------ ------
Total 15,107 1,116 5,329 21,552
Accumultated depreciation and
amortization (7,803) (120) (289) (8,212)
------ ------- ------ ------
Property and equipment, net $7,304 $996 $5,040 $13,340
====== ======= ====== =======
5. NOTE PAYABLE
The Company has a bank line-of-credit agreement which allows the Company to
borrow a maximum amount (in thousands) of $12,500 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, 2000, is unsecured and had an outstanding balance
of (in thousands) $3,093 and $5,563 at December 31, 1998 and 1997, respectively.
In addition, the Company has certain other long-term obligations which require
monthly payments and are secured by equipment. The balance at December 31, 1998
and 1997 was (in thousands) $5 and $8, respectively.
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 (in
thousands) $116, $75, and $33, for the years ended December 31, 1998, 1997, and
1996, respectively.
Future minimum lease payments under the operating lease obligations as of
December 31, 1998 were as follows (in thousands):
Year Ending December 31: Amounts
------------------------ -------
1999 $ 69
2000 35
2001 35
2002 35
2003 35
Thereafter 1,139
-------
Total minimum lease payments $ 1,348
=======
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.
7. INCOME TAXES
Deferred tax assets (liabilities) consist of the following temporary differences
(in thousands):
DECEMBER 31,
--------------------------------------
1998 1997
------------------ ------------------
ASSETS Current Long-term Current Long-term
------- --------- ------- ---------
Inventory write-down $ 95 $ -- $103 $ --
Allowance for doubtful accounts 26 -- 18 --
Accrued liabilities 278 -- 394 --
Deferred revenue 1 -- 33 --
Other 46 -- -- --
---- ---- ---- ----
Total 446 -- 548 --
LIABILITIES
Unrealized gain on investments
available for sale -- -- -- --
Depreciation and amortization -- (440) -- (383)
Earnings from subsidiary -- -- -- (107)
---- ---- ---- ----
Deferred income taxes, net $446 $(440) $548 $(490)
The components of income tax expense are as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
Current $2,613 $2,285 $5,004
Deferred 52 168 (114)
------ ------ ------
Total $2,665 $2,453 $4,890
====== ====== ======
Income tax expense differed from amounts computed by applying the statutory
federal rate to pretax income as follows (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
Federal income tax expense at
statutory rate $2,558 $2,303 $4,639
Non-taxable investment income -- (7) (77)
State income taxes 376 309 719
Foreign sales corporation (76) (85) (223)
Other (193) (67) (168)
Total $2,665 $2,453 $4,890
====== ====== ======
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.
Changes in stock options were as follows:
Shares Price Range per Share
--------- ---------------------
1998
Granted 267,500 $ 6.75 - $ 8.06
Expired or canceled 155,067 6.75 - 14.25
Exercised 8,000 7.25 - 7.25
Total outstanding at December 31 992,781 6.75 - 14.25
Total exercisable at December 31 478,902 6.75 - 14.25
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
For the years ended December 31, 1998, 1997, and 1996, the Company reduced
current income taxes payable and increased additional paid-in capital by (in
thousands) $5, $27, and $163, respectively, for the income tax benefit
attributable to appreciation of common stock related to stock options and
purchase rights.
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 1998, 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
as follows: (in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
Net income as reported $4,858 4,322 $8,754
Net income pro forma 4,382 3,933 8,581
Earnings per share assuming
dilution as reported .59 .51 .93
Earnings per share assuming
dilution pro forma .53 .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:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
----- ----- ----
Expected dividend yield $-- $-- $--
Expected stock price
volatility 49.9% 47.6% 48.7%
Risk-free interest rate
(weighted average) 5.4% 6.3% 6.6%
Expected life of options 3.8 years 3.8 years 3.6 years
The per-share weighted average fair value of options granted during 1998, 1997
and 1996 is $3.20, $4.10, and $4.67, respectively
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
average Weighted
Number remaining Weighted Number average
Range of outstanding contractual Average exercisable exercise
prices at 12/31/98 life (years) exercise price at 12/31/98 price
- ----------- ----------- ----------- -------------- ----------- ---------
$6.75-8.00 510,775 8.32 $7.16 170,401 $7.20
9.50-14.25 482,006 7.11 11.70 308,501 11.33
- ----------- ------- ---- ----- ------- -----
$6.75-14.25 992,781 7.86 $9.37 478,902 $9.86
=========== ======= ==== ===== ======= =====
9. EARNINGS PER SHARE
Financial accounting standards require companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows (in
thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
----- ------ ------
BASIC EPS:
Net income available to common
stockholders $4,858 $4,322 $8,754
Weighted average common shares 8,269 8,444 9,272
Net income per share .59 .51 .94
DILUTED EPS:
Net income available to common
stockholders 4,858 4,322 8,754
Weighted average common shares 8,273 8,495 9,452
Net income per share $.59 $.51 $.93
10. GEOGRAPHIC SALES INFORMATION
The Company had sales in the following geographic areas (in thousands):
YEAR UNITED STATES OTHER
1998 $22,945 $4,732
1997 19,053 5,218
1996 28,933 9,739
11. PRODUCT SALE AND PURCHASE COMMITMENTS
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.
The Company has license agreements with unrelated companies to provide exclusive
and nonexclusive rights to purchase, market, distribute, or manufacture the
Company's products
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 (in thousands) $587, $1,286, and $11,132, during the
years ended December 31, 1998, 1997, and 1996, respectively
12. 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 (in thousands) $63,
$54, and $79, for the years ended December 31, 1998, 1997, and 1996,
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, 1998, 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. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
MODIFICATION AGREEMENT
First Security Bank, N.A. ("Lender') has extended credit (the "Loan") to Utah
Medical Products, Inc. (individually and collectively "Borrower") pursuant to a
promissory note dated April 4, 1997 the "Note") in the stated principal amount
of $10,000,000.00. The Loan is unsecured.
The Note and any loan agreements, guaranties, subordinations, Collateral
Documents, and other instruments and documents executed in connection therewith,
together with any previous modifications to any of these instruments or
documents, shall be referred to as the "Loan Documents."
Borrower has requested certain modifications to the Loan Documents and Lender is
willing to grant such modifications on the following terms and conditions:
1.Provided that all conditions stated herein are satisfied, the terms of the
Loan Documents are hereby modified as follows:
Modifications to the Terms of the Note:
The maturity date of the Note is extended to March 25, 2000.
The principal amount available under the Note is being changed as follows: The
Note is a revolving line of credit and the maximum permitted outstanding
principal is changed to $12,500,000.00. If the current outstanding principal
balance is greater than this amount, Borrower must pay the loan down to this
amount concurrently with the execution of this Agreement.
This Agreement does not constitute a repayment or extinguishment of the Note,
but only a modification thereof.
Other Modifications to the Loan Documents:
The Loan Documents shall be amended as follows:
Section 5 of the Revolving Loan Agreement dated April 4, 1997 will be
amended as follows:
Subsection 5.1(v) Which requires copies of Guarantor's annual financial
statements will be deleted in its entirety.
Subsection 5.8 Borrower shall maintain at all times minimum annual earnings
before taxes of at least $6,000,000.00, measured quarterly on a rolling
four-quarter basis and calculated in accordance with generally accepted
accounting principles consistently applied.
Subsection 5.9 Borrower shall maintain at all times a minimum tangible net
worth of at least $14,000,000.00, calculated as Borrower's book net worth
minus intangible assets and calculated in accordance with generally
accepted accounting principles consistently applied.
In addition, the following additional covenants will be added to Section 5:
5.11 Borrower's subsidiaries shall not create or suffer to exist any lien
or encumbrance on any of the subsidiaries' assets. Borrower's subsidiaries
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's subsidiaries shell 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.
5.12 Borrower's subsidiaries 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 business,
without the prior written consent of First Security.
5.13 Borrower's subsidiaries 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.
2. As preconditions to the terms of this Agreement, Borrower shall complete or
provide the following:
Borrower shall pay or shall have paid all reasonable fees, costs, and
expenses, of whatever kind or nature, incurred by Lender in connection with
this Agreement, including but not limited to attorneys fees, lien search fees,
title reports and policies, and recording and filing fees.
Columbia Medical, Inc. agrees to become a Guarantor on the Note by executing a
Commercial Guaranty of even date herewith.
Utah Medical Products Ltd. will execute a new Commercial Guaranty for the
increased amount of the Loan.
Borrower will execute and provide the attached Year 2000 Compliance (Y2K)
Addendum. Upon execution, said addendum will be added as part of the Loan
Documents.
3.It is the intention and agreement of Borrower and Lender that: (i) all
collateral security in which Lender has acquired a security interest or other
lien pursuant to the Loan Documents shall continue to serve as collateral
security for payment and performance of all the obligations of the Borrower
under the Loan Documents, and (ii) all agreements, representations,
warranties, and covenants contained in the Loan Documents are hereby
reaffirmed in full by Borrower except as specifically modified by this
Agreement.
4.Borrower hereby acknowledges that: (i) the Loan Documents are in full force
and effect, as modified by this Agreement, and (ii) by entering into this
Agreement, Lender does not waive any existing default or any default hereafter
occurring or become obligated to waive any condition or obligation under the
Loan Documents.
5.Borrower hereby acknowledges that Borrower has no claim, demand, lawsuit,
cause of action, claim for relief, remedy, or defense against enforcement of
the Loan Documents that could be asserted against Lender, its affiliates,
directors, officers, employees, or agents, whether known or unknown, for acts,
failures to act (whether such act or failure to act is intentional or
negligent), representations, commitments, statements or warranties, including
without limitation any such conduct arising out of or in any way connected
with the Loan Documents. Notwithstanding the foregoing, Borrower hereby
waives, releases, and relinquishes any and all claims, demands, lawsuits,
causes of action, claims for relief, remedies, or defenses against enforcement
of the Loan Documents that could be asserted against Lender, its affiliates,
directors, officers, employees, or agents, whether known or unknown.
6.In addition to this Agreement, the Loan Documents, and any additional
documents that this Agreement requires, this finance transaction may include
other written closing documentation such as resolutions, waivers,
certificates, financing statements, filings, statements, closing or escrow
instructions, loan purpose statements, and other documents that Lender may
customarily use in such transactions. Such documents are incorporated herein
by this reference. All the documents to which this paragraph makes reference
express, embody, and supersede any previous understandings, agreements, or
promises (whether oral or written) with respect to this finance transaction,
and represent the final expression of the agreement between Lender and
Borrower, the terms and conditions of which cannot hereafter be contradicted
by any oral understanding (if any) not reduced to writing and identified
above.
FINAL AGREEMENT. Borrower understands that the loan documents signed in
connection with this loan are the final expression of the agreement between
Lender and Borrower and may not be contradicted by evidence of any alleged oral
agreement.
Effective as of October 15, 1998.
LENDER:
First Security Bank. NA.
By: /s/ Steven M. Kohler
Authorized Officer
BORROWER:
Utah Medical Products, Inc.
By: /s/ Kevin L. Cornwell
President
AFFIRMATION OF GUARANTORS, GRANTORS, AND SUBORDINATORS
Each of the following Guarantors, Grantors, Subordinators, and other parties to
the Loan Documents hereby acknowledges and consents to the foregoing
Modification Agreement and affirms and restates each of their respective
liabilities, obligations, and agreements set forth in the Loan Documents. In
addition, the following specifically agree to continuing their respective
guaranties and subordinations as to any increase in the principal amount of the
Loan and specifically agree that the Collateral Documents secure any increase in
the principal amount of the Loan. Each of the following also hereby give the
same assurances, representations, waivers, releases, and relinquishments given
by Borrower in paragraph 5 of the Modification Agreement as if it were restated
as part of this affirmation.
GUARANTOR:
Utah Medical Products Ltd.
By: /s/ Kevin L. Cornwell
President
Amendment to Employment Agreement with Kevin L. Cornwell dated December 21,
1992.
ARTICLE IV
COMPENSATION
4.2 Severance Payments. If Cornwell is terminated at any time after the
term of this Agreement (of December 21, 1992) for any reason other than pursuant
to Sections 3.2(b), 3.2(c) or 3.2(d), the Company agrees that it will pay
Cornwell a lump sum payment equal to his annual compensation, inclusive of base
salary and management bonus, averaged over the prior three calendar years,
within thirty (30) days of the date his employment terminates, plus two
additional lump sum payments, each of the same amount as the first payment, on
the ensuing two anniversary dates of his termination. In the event of a "Change
of Control" as defined in Section 1.2, for each $1.00 per share of common stock
in excess of an equivalent $14.00 per share purchase price by an acquiring
entity of a controlling interest of UM's common stock, of for each portion of
$1.00 above the $14 threshold price, each annual lump sum severance payment
shall be increased by Twenty-Five Thousand Dollars ($25,000), or applicable
proration thereof.
The other surviving applicable provisions of the Agreement including ARTICLE I,
DEFINITIONS, shall continue to apply.
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 years ended December 31,
1998 and December 31, 1997.
/s/ Tanner + Co.
Salt Lake City, Utah
March 24, 1999
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, 1998.
/S/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1998, 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-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,367,000
<SECURITIES> 0
<RECEIVABLES> 4,134,000
<ALLOWANCES> (68,000)
<INVENTORY> 4,048,000
<CURRENT-ASSETS> 10,543,000
<PP&E> 22,204,000
<DEPRECIATION> (9,715,000)
<TOTAL-ASSETS> 31,968,000
<CURRENT-LIABILITIES> 2,413,000
<BONDS> 3,098,000
<COMMON> 0
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80,000
<OTHER-SE> 25,937,000
<TOTAL-LIABILITY-AND-EQUITY> 31,968,000
<SALES> 27,677,000
<TOTAL-REVENUES> 27,677,000
<CGS> 13,503,000
<TOTAL-COSTS> 7,551,000
<OTHER-EXPENSES> (1,210,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,000
<INCOME-PRETAX> 7,523,000
<INCOME-TAX> 2,665,000
<INCOME-CONTINUING> 4,858,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,858,000
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
SUBSIDIARIES OF UTAH MEDICAL PRODUCTS, INC.:
Jurisdiction of Business
Subsidiary Name Organization Name
- ------------------------- --------------- -------------
Utah Medical Products Ltd. Bermuda Utah Medical
Products
Columbia Medical
& Surgical, Inc. Oregon Columbia
Medical
Utah Medical Products,
California, Inc. California Utah Medical
Products
Utah Medical Products,
Florida, Inc. Florida Utah Medical
Products
Utah Medical Products,
Ohio, Inc. Ohio Utah Medical
Products
Utah Medical Products,
Pennsylvania, Inc. Pennsylvania Utah Medical
Products
Utah Medical Products,
Texas, Inc. Texas Utah Medical
Products
