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, 2003.2004. Commission File No. 0-11178
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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, including area code: (801) 566-1200
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
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Common Stock, $.01 par value
Preferred Stock Purchase Rights
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]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. [X]X
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
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State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. As of June 30, 2003,2004, the aggregate market value of the voting
and nonvoting common equity held by nonaffiliates of the registrant was
$86,897,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 5, 2004,4, 2005, based on NASDAQ/NMS closing price: $106,259,000.$83,079,000.
The number of shares outstanding of the registrant's common stock as of
March 5, 2004: 4,482,6284, 2005: 4,090,061
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.
INDEX TO FORM 10-K
PAGE
PART I
Item 1. Business ......................................................................... 1
Item 2. Properties ...................................................................... 12
Item 3. Legal Proceedings ............................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ............................. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ....... 13
Item 6. Selected Financial Data ......................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................................... 26
Item 9A. Controls and Procedures ......................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant .............................. 28
Item 13. Certain Relationships and Related Transactions .................................. 28
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K ............... 29
Index to Consolidated Financial Statements ....................................................INDEX TO FORM 10-K
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PAGE
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PART I
Item 1 Business ........................................................ 1
Item 2 Properties ...................................................... 11
Item 3 Legal Proceedings ............................................... 12
Item 4 Submission of Matters to a Vote of Security Holders ............. 12
PART II
Item 5 Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................. 13
Item 6 Selected Financial Data ......................................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 17
Item 7A Quantitative and Qualitative Disclosures about Market Risk ...... 25
Item 8 Financial Statements and Supplementary Data ..................... 25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 25
Item 9A Disclosure Controls and Procedures .............................. 25
Item 9B Other Information ............................................... 25
PART III
Item 10 Directors and Executive Officers of the Registrant .............. 26
Item 11 Executive Compensation .......................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ..................... 26
Item 13 Certain Relationships and Related Transactions .................. 26
Item 14 Principal Accountant Fees and Services .......................... 26
PART IV
Item 15 Exhibits and Financial Statements Schedules ..................... 27
Signatures ...................................................... 29
Index to Consolidated Financial Statements ................................ F-1
Management's Report on Internal Control Over Financial Reporting .......... F-2
Report of Independent Registered Public Accounting Firm on Management's
Assessment on Internal Control Over Financial Reporting ................. F-3
Report of Independent Registered Public Accounting Firm on
Financial Statements .................................................... F-5
PART I
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ITEM I - BUSINESS.BUSINESS
Utah Medical Products, Inc. ("UTMD" or "the Company") is in the business of
producing high quality cost-effective healthcare industry devices that 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 that gain regulatory approval, 3) reliably
producing products that meet those clinical needs, and then 4) selling through
a) UTMD'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.
UTMD's success in providing reliable solutions comes from its proven ability
to integrate a number of engineering and technical disciplines in electronics,
software, mechanical packaging, instrumentation, plastics processing and
materials. The resulting proprietary products represent significant incremental
improvements over preexisting clinical tools. UTMD'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 healthcare including lower
risk of complications. UTMD markets a broad range of medical devices used in
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 introduce ideas to the Company, and
key employees who are both clinical applications savvy and development
engineering adept.
UTMD's products are sold directly to end users in the U.S. domestic market by
the Company's own direct sales representatives and independent manufacturers'
representatives. In addition, some of UTMD's products are sold through specialty
distributors, national hospital distribution companies and other medical device
manufacturers. Internationally, products are sold through other medical device
companies and through independent medical products distributors. UTMD has
representation in all major developed countries with approximately 100
international distributors.
Negative factors that may adversely impact future performance include managed
care reforms or hospital group buying agreements that may limit physicians'
ability to choose certain products or procedures, new products introduced by
other companies that displace UTMD's products, new product regulatory approval
delays, changes in the Company's relationships with distribution partners, and
loss of key personnel.
UTMD was formed as a Utah corporation in 1978. UTMD publicly raised equity
capital one time in 1982. In 1995, Utah Medical Products Ltd., a wholly-owned
subsidiary located in Ireland, was formed to establish an international
manufacturing capability. In 1997, UTMD purchased Columbia Medical, Inc. (CMI),
a Redmond, Oregon company specializing in silicone injection molding, assembly
and marketing vacuum-assisted obstetrical delivery systems. In July, 1998 UTMD
acquired the neonatal product line of Gesco International, a subsidiary of Bard
Access Systems and C.R. Bard, Inc. On March 8, 2000, UTMD returned to the Nasdaq
Stock Market after trading on the New York Stock Exchange for about 3 years. The
Company was previously listed on Nasdaq for 14 years. 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 Business and Technology Park, Athlone, County Westmeath, Ireland. The
telephone number in Ireland is (90) 647-3932. CMI's mailing address is 1830 S.E.
1st, Redmond, Oregon 97756. The phone number in Oregon is (541) 548-7738.
1-1-
PRODUCTS
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Labor and Delivery/ Obstetrics:
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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 Cesarean Section procedure, and be
prepared for complications following childbirth.
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. UTMD's intrauterine pressure (IUP) catheter product
line provides for clinician choices from a traditional fluid-filled system to
INTRAN(R) PLUS, the most widely accepted transducer-tipped system. In addition,
adjunct FHR electrodes, leg plates, belly bands and chart paper are offered by
UTMD to complete a package of fetal monitoring supplies. UTMD's IUP catheters
include:
- IUP-075 and UTMD'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 disposable intrauterine pressure
catheter that placed the pressure transducer at the pressure 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 UTMD'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 essentialhelpful in the diagnosis and
intervention of certain fetal conditions. In 1996, a viewport enhancement
which allows physicians to observe amniotic fluid in a closed system was
added to INTRAN PLUS. In 1997, UTMD introduced several variations to
address user preferences in tip size and zero switch location.
UTMD markets disposable electrodes, catheters and accessories as outlined
above, but does not currently market monitors, the electronic capital equipment
that process the electrical signals. In addition to products currently offered,
UTMD intends to continue to investigate and introduce tools that enhance fetal
monitoring techniques, a core area of product development focus.
Vacuum-Assisted Delivery Systems (VAD).
UTMD's VAD Systems include CMI(R) patented soft silicone bell-shaped birthing
cups and patented hand-held vacuum pumps which UTMD believes are the safest
products available for use in vacuum-assisted operative deliveries. UTMD's
patented soft silicone cup is unique in the industry. A softa bell-shaped cup design should be preferred for
fetal well-being in low or outlet fetal stations with occiput anterior
presentations, which should represent more than 90% of the cases where VAD is
indicated. Operative vaginal deliveries using forceps or vacuum-assisted
delivery systems 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. UTMD estimates that the VAD operative approach is used for 2
about
8-10% of all U.S. births, with forceps continuing to lose ground as the
alternative. UTMD'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 which reports specific
names of products used in hospitals.
-2-
Other Obstetrical Tools.
AROM-COT(TM) is a finger cover with a patented prong design to rupture
maternal membranes with less patient pain and anxiety. MUC-X is an aspiration
device used immediately after birth to clear neonatal respiratory passages and
reduce exposure to potential infections. 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. Abcorp belts and straps for
fetal monitoring by an external tocodynamometer are provided in latex free form
in several configurations.
Neonatal Intensive Care:
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DISPOSA-HOOD(TM)
The DISPOSA-HOOD is an infant respiratory hood that is used in the NICU to
administer oxygen to neonates and flush CO2 (carbon dioxide) 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 underdeveloped infant and prevents
cross-contamination.
DELTRAN(R) PLUS
UTMD's DELTRAN blood pressure monitoring system has been adapted specifically
for use in the NICU. The new streamlined version eliminates needles used for blood
sampling, avoids the loss of scarce neonatal blood volume and provides a closed
system that reduces the risk of infection. The system features excellent
visualization of clearing volume and one-handed use.
GESCO(R)
In the third quarter of 1998, UTMD acquired the neonatal product line of Gesco
International, a subsidiary of Bard Access Systems and C.R. Bard, Inc. GESCO,
best known for innovative silicone catheters, gained an early distinctive
reputation for its focus on the special developmental needs of tiny
critically-ill babies.
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(TM) product line, Gesco pioneered the use of soft, biocompatible
silicone catheters, helping to reduce the number of insertions required as well
as other complications associated with invasive applications. UTMD has expanded
the UVC product line to include catheters made from a patented thermosensitive
polyurethane (Tecoflex(R)) that offers many of the flexibility and
biocompatibility advantages of silicone after insertion, with the greater
rigidity of polyurethane preferred by many clinicians for insertion. 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.
3
The primary distinction of GESCO products is that they arewere developed with
the special needs of the neonate in mind, not just cut-down or smaller versions
of adult devices. For example, in the case of invasive catheters, the
introducer, the soft rounded distal tip, mode of securing to the 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 are all features specially
designed for neonates. UTMD continues to modify product features to incorporate
current neonatal nurse practitioner preferences.
-3-
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 and marketed initial versions of all of these
neonatal products. In order to keep pace with the trend of caring for smaller
babies, UTMD has added smaller diameter versions of its URI-CATH(R) and
NUTRI-CATH(R) products. In 2000, UTMD gained FDA premarketing clearance of a new
PICC family of products specifically designed to minimize trauma to the
critically ill neonate, named PICC-NATE(R). The PICC-NATE product line was
designed with the input of experienced neonatal nurse practitioners for use as a
long-term indwelling catheter system for single-use, therapeutic central venous
infusion of drug solutions, blood products or other fluids and for blood
sampling. The soft, strong silicone PICC-Nate comes in two diameter sizes, two
types of venipuncture introducers, and two hub configurations and the option of an
integral stylet that aides insertion.configurations. In early 2003,
UTMD added a Tecoflex polyurethane version that offers many of the flexibility
and biocompatibility advantages of silicone after insertion, with the greater
rigidity of polyurethane preferred by many clinicians for insertion.
Other GESCO specialty products include a disposable peritoneal dialysis set
that is a pre-assembled, sterile, closed system, called DIALY-NATE(R); a
patented silicone oral protection device used to prevent palatal soft tissue
injury by orotracheal tubes, called PALA-NATE(R); and a lumbar sampling kit with
a tiny, specially-beveled needle for obtaining cerebral spinal fluid samples,
called MYELO-NATE(R).
GESCO's first patented product, HEMO-NATE(R), is a 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. In 2001, UTMD introduced a new filter and an improved blood bag spike
for Hemo-Nate, and a needleless version.
In 2004,2005, UTMD will continue to improve and expand its neonatal product line,
seeking to reinforce a reputation as having the most developmentally-friendly
NICU specialty products in the medical device industry. In addition to products
already offered and being developed internally, UTMD will look to expand sales
through distribution arrangements with other manufacturers, or through selective
acquisitions.
Gynecology /Urology /Electrosurgery:
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LETZ(R) System
The LETZ System is used to excise cervical intraepithelial neoplasia (CIN) and
other lower genital tract lesions related to human papilloma virus (HPV)
infections. The electrosurgery procedure with hemostasis has become the standard
of care for HPV cervical infection treatment, replacing 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
(tissue ablation) and cryotherapy (freezing of tissue), LETZ provides a fine
tissue specimen for pathological assessment. Therefore, LETZ is effective both
as a diagnostic and therapeutic procedure. The LETZ procedure may be performed
using local anesthetic in a physician's office, eliminating the time and expense
of hospital or surgical center admittance.
UTMD's LETZ System includes patented disposable electrodes, the patented
FINESSE(R) electrosurgical generator, and other miscellaneous components. A
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
4
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. UTMD
continues to augment its specialty electrodes. For example, the Company
introduced a patented conization electrode for deep endocervical disease called
C-LETZ(R), designed to limit the removal of healthy tissue margins that might
compromise adequate cervical function. UTMD also will continue to provide
adapters and other components which allow its market-leading specialty
electrodes to be used with other manufacturers' electrosurgical generators. The
FINESSE electrosurgical generator is the only generator on the market that
contains an integral smoke evacuator, required to filter smoke and vapors that
contain potentially hazardous particulate material produced during
electrosurgery.
FINESSE(R) Generator; Specialty Loop, Ball, and Needle Electrodes; FILTRESSE(R)
Evacuator; Other Specialty Electrodes; Other Supplies and Gynecologic Tools.
-4-
UTMD has FDA clearance to market its electrosurgical system and tools for use
in general surgery applications, including dermatology, plastic surgery and
otolaryngology. In 2002, UTMD recently introduced a new product line of ultra-fine tipped
microdissection needles, called OptiMicro(TM) Needles. The newThese electrosurgical
needles are particularly useful in plastic and reconstructive surgery
applications. FILTRESSE is a stand-alone surgical smoke filtration system that
combines high filtration efficiency, low cost and convenient use in a surgical
office setting. Other electrosurgery tools and accessories include disposable
electrosurgical pens, dispersive pads, footswitches, filter packs, speculums,
retractors, forceps, tenacula and hooks. UTMD acquired the distribution rights
to a unique reusable four-way expander system which facilitates access to, and
visualization of, the cervix, eliminating the need for less effective specula
and lateral retractors.
EPITOME(R)
EPITOME is a patented electrosurgical scalpel which delivers precise
performance in incision and excision with hemostasis while minimizing thermal
side effects. Where rapid yet precise dissection of dense tissue is necessary,
such as in mammaplasty or abdominoplasty, EPITOME has no peer. An independent
study concludes that the EPITOME scalpel provides a significant improvement over
older devices in wound healing and patient comfort. EPITOME allows a rapid
incision without countertraction, yielding limited morbidity, less post-surgical
pain and cosmetically superior results. EPITOME is useful where minimization of
thermal tissue injury is important but control of bleeding needed. A patented
bendable version of EPITOME with a smaller active electrode was introduced in
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 is 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.
LIBERTY(R) System
LIBERTY is a device for the conservative treatment and effective control of
urinary incontinence in women. UTMD believes that LIBERTY is the easiest-to-use,
most cost effective incontinence treatment available that yields a therapeutic
effect, not just a cover-up. 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.
Since HCFA (Health Care Financing Administration) now called CMS (Center for
Medicaid/ Medicare Services) decided in late 2000 to allow reimbursement for
electrical stimulation devices, adoption of Liberty has substantially increased.
5
PATHFINDER PLUS(TM)
PATHFINDER PLUS is a proprietary endoscopic irrigation device that allows a
uro/gyn surgeon to precisely irrigate with the same hand that controls the
endoscope, eliminating the need for a separate assistant to irrigate without
visualization.
ENDOCURETTE(TM)
In cooperation with Mayo Clinic, UTMD developed an advanced curette for
uterine endometrial tissue sampling in the doctor's office. The sampling
procedure is intended primarily to rule out precancer or cancerous change of the
uterus in premenopausal women with abnormal uterine bleeding, or women with
postmenopausal bleeding. The device is part of a class of catheters designed to
be used without dilitation of the cervix and without general anesthetic. The
inherent weakness of this type of device, which is related to its small size, is
that it may not remove enough tissue of the endometrium for an accurate
histologic assessment. The patented tip of the ENDOCURETTE was designed to
obtain a more thorough tissue specimen without the need for dilitation, and
without an increase in patient discomfort.
LUMIN(R)
LUMIN(R) is a patented tool developed by UTMD for reliably and safely
manipulating the uterus in gynecological laparoscopic procedures. LUMIN combines
the strength, range of motion and versatility of the higher end reusable
instruments with the lower cost and cleanliness of the inexpensive less
functional disposable instruments presently on the market, while at the same
time reducing the number of tools needed to move and secure the uterus.
-5-
Blood Pressure Monitoring:
DELTRAN(R) Disposable Pressure Transducer (DPT)
In pressure monitoring, a transducer is used to convert physiological
(mechanical) pressure into an electrical signal that is displayed on electronic
monitoring equipment. UTMD 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
device companies internationally.
Although other large medical companies manufacture and market disposable
pressure transducers ("DPTs") under rights to UTMD's technology, theThe Company believes that the DELTRAN DPT which it designed nearly twenty
years ago, and currently manufactures, remains the standard in terms of
accuracy, reliability and ease of use. UTMD has an automated assembly line which
allows the Company to effectively compete with the largestlarger suppliers on the basis of
consistent quality and low manufacturing costs. Introduced in 1998, the DELTRAN
PLUS provides a closed system for blood sampling, without the use of needles,
reducing the risk of an unwanted infection for both the patient and the
practitioner.
Pressure Monitoring Accessories, Components and Other Molded Parts.
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 companiesdevice company applications which incorporate UTMD's
technologies and designs. DELTA-CAL(TM) is a calibration device used to check
proper functioning of an arterial pressure system. In addition, UTMD sells
plastic molded parts on a subcontract basis to a number of medical and
non-medical device companies. UTMD believes that this practice helps better
utilize its investment in fixed plant and equipment.
MARKETING
- ---------
UTMD competes on the basis of its value-added technologies and cost effective
clinical solutions. UTMD believes that a number of its products are strong
brands because they are recognized as clinically different. The Company's
primary marketing challenge is to keep its customers focused on those
differences and their important clinical benefits. Access to the clinical
decision-makers, together with the active involvement of clinicians in medical
device purchasing decisions, is critical to the Company's success.
6
UTMD's specialty focus, innovation and extensive experience in its specialtyspecialties
are important marketing attributes which help assure its ability to successfully
compete and survive in a consolidating marketplace where many suppliers are
trying to degrade product differences.
For U.S. hospitals, which represent about 60% of UTMD's productdevice sales,
marketing efforts are complicated and fragmented. Although UTMD's focus is with
clinicians who take responsibility for obtaining optimal patient care outcomes,
other people are generally administratively responsible for hospital purchasing
decisions.
DISTRIBUTION
- ------------
UTMD believes anotherAn important success factor in the current healthcare industry is access to
customers. Although the U.S. hospital supplier environment has been
consolidating as a result of group purchasing organizations (GPOs), or their
equivalent, establishing long term contracts with large medical device suppliers
with diverse product lines in recent years, theirthe financial relationships and true
benefits for hospitals has come under increased scrutiny, both by hospitals'
managements themselves and by the government. As a potential positive factor to
UTMD's future performance, the increased scrutiny may lead to an understanding
consistent with UTMD's belief that hospitals mayare not be currently saving money
under many of the GPO contracts, andcontracts. In addition, the longer term overall cost of
care will be substantially higher, with quality of care lower, as innovative
suppliers are excluded from participating in the marketplace.
The length of time and number of administrative steps required in evaluating
new products for use in hospitals has grown substantially in recent years. As a
potential negative factor to future performance, as UTMD introduces new products
-6-
it believes are safer and more effective, it may find itself excluded from
certain customers because of the existence of long term supply agreements for
existing products. UTMD may also be unable to establish viable relationships
with other medical device companies that do have access to users but lack an
interest in the Company's approach.
In the United States, UTMD sells its products primarily through its own directly
employed sales force.force and through selective independent manufacturer
representatives. The current network of direct representatives is
employed to concentrate on select market applications for UTMD
products and to
provide properwhere customer training and support.support are important. As of March 2004,2005,
the U.S. direct sales force is comprised of both outside territory representatives
operating remotely geographically, as well asand inside representatives who operate by
telephone.telephone from corporate offices. Direct representatives are trained to
understand the medical procedures being performed within UTMD's clinical focus.
Through the use of its one-on-one contacts with physicians and other clinicians
directly involved in patient care, the direct sales force positions UTMD to gain
market leadership with solutions to clinical problems. In addition to its direct
representatives, UTMD utilizes third party consulting clinical specialists to
augment its customer training programs.
When hospital customers request it, UTMD provides its products through
national distribution companies, also known as Med/Surg distributors. Sales to
Med/Surg distributors currently comprise aboutless than 10% of total domestic sales.
In contrast, seveneight years ago, national distributors and independent stocking
distributors in the U.S. represented more than 65% of UTMD's direct domestic
Ob/Gyn business.
In addition to the above traditional distribution methods,sales approaches, UTMD encourages
customers to take advantage of fast and easy direct online ordering at
www.order.utahmed.com. UTMD's website provides all the convenience of e-commerce
expected ofdemonstrated on other sites. UTMD's experience to date with third party
Internet-based exchanges suggests that they do not warrant a significant
investment of UTMD resources until customers show more interest in their use.
Additionally, UTMD sells component parts to medical companies for use with
their product lines. This OEM distribution channel effort is simply maximizing
utilization of manufacturing resources that are otherwise needed for UTMD's
7
primary business, and does not compete with or dilute UTMD's direct distribution
and marketing programs.
Internationally, the Company sells its products through about 80 regional
distributors and through about 20 OEMs (other medical device manufacturers). The
international business is driven by the initiative and resourcefulness of these
distributors. UTMD's Internet website www.utahmed.com is a frequent conduit for
international customer inquiries.
NEW PRODUCT DEVELOPMENT
- -----------------------
New product development is a key to UTMD's market identity as an innovator.
Product development takes three interrelated forms: 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 or technology from others.
Because of UTMD's reputation as a successful innovator, its financial strength
and its established clinician user base, it enjoys a substantial flowinflow 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 ten
projects on the average, depending on the level of resources required, are
underway at UTMD at any given time. More than 50% of assigned projects do not
succeed in attaining a product that 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
-7-
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 or exclusionary contracts of
GPOs.
UTMD's current product development projects are in three areas of focus: 1)
obstetrics/ fetal monitoring, 2) neonatal intensive care, and 3) specialized
procedures for the assessment and treatment of cervical/uterine disease. UTMD
has had 7 patents issued in the last five years. Internal product development
expenses are expected to be in the range of 1-2% of sales in 2004.2005. In 2003,2004, UTMD
spent $288$292 (in thousands) on internal product development activities, or 1.1% of
sales. In addition, the Company invested $120$10 in new technology rights which have
not resulted in a marketable product yet. In 20022003 and 2001,2002, internal new product
development expenses were $285 (1.0%$288 (1.1% of sales) and $364 (1.3%$285 (1.0% of sales),
respectively.
EMPLOYEES
- ---------
At December 31, 2003,2004, the Company had 211206 employees. The average tenure of all
of UTMD's employees is aboutover eight years. 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 wish 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 UTMD's programs. All professional employees sign
a code of conduct and 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. All employees participate in
8
performance-based bonus programs. None of the Company's employees is represented
by labor unions or other collective bargaining groups.
PATENTS AND TECHNOLOGY LICENSES
- -------------------------------
The Company owns or exclusively licenses thirty-one unexpired patents, and is
the licensee of certain other technology. There can be no assurance, however,
that patents will be issued with respect to any pending applications, that
marketable products will result from the patents or that issued patents can be
successfully defended in a patent infringement situation.
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 UTMD's technology, the
Company has an obligation to its shareholders to defend its intangible property
to the extent that it can afford to do so.
In January 2002, a jury in the U.S. Federal District Court for the District of
Utah rendered a verdict in favor of UTMD that the Tyco/KendalloLTP Softrans 4000
Intrauterine Pressure Catheter literally infringes UTMD's Patent No. 4,785,822
for inventions relating to a "Disposable Intracompartmental Pressure
Transducer." UTMD markets the Intran(R) Plus which practices this patent. The
patent infringement lawsuit had been filed in early 1997. In September 2002, the
US Federal District Court issued a formal judgment awarding UTMD approximately
$23 million in damages and accrued interest. Additional damages for infringing
product sold by Tyco after the January verdict were to be determined by the
Court at a later date. In addition, the Court issued a permanent injunction
against Tyco prohibiting the manufacturing, marketing, selling and/or otherwise
distributing of the 4000 Softrans IUPC for the duration of UTMD's patent.
Tyco/Kendall filed an appeal to the decision. In December 2003, the United
States Court of Appeals for the Federal Circuit upheld in entirety the District
Court's judgment. In January 2004, UTMD received $31 million from Tyco/Kendall,
including post judgment augmented damages and interest.
One other patent
infringement lawsuit where UTMD is plaintiff is currently pending.
As a matter of policy, UTMD has acquired and will continue to acquire the use
of technology from third parties that can be synergistically combined with UTMD
proprietary product ideas. During 2003,2004, ongoing royalties included in cost of
goods sold were $3 (in thousands). Other royalties have been previously paid as
-8-
a lump sum, or are incorporated into the cost of supplied components which
practice certain patents of third parties. Also as a matter of policy, UTMD
licenses its proprietary technology to others in circumstances where licensing
does not directly compete with UTMD's own marketing initiatives. During 2003,2004,
the Company received $450 in royalty income, compared to $450the same as in 20022003 and $452
in 2001.2002.
Non-operating income remains a significant portion of UTMD's earnings. UTMD's
future financial performance also depends on the marketing ability of other
companies that license UTMD's technology.
GOVERNMENT REGULATION
- ---------------------
UTMD'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 productsdevices 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 some devices for human use, a
manufacturer must file a notice with the FDA, setting forth certain information
regarding the safety and effectiveness of the device that is acceptable in
content to the FDA.
9
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 special controls or performance standards promulgated
by the FDA.
The Company believes all of its present products are Class I or Class II
productsdevices and that the Company is in full compliance with all applicable material
performance standards as well as FDA cGMP (current good manufacturing practice)
quality standards, record keeping and reporting (QSR).reporting.
In 2003 the FDA began withholding export certificates from UTMD, which action
was part of an unresolved disagreement regarding the issuance of a QSR
Warning
Letter by FDA to UTMD in September 2001. Export certificates are non-bindingnonbinding
letters assuring other countries that a company is in compliance with FDA
regulations. The export certificates have now been withheld for many months
while UTMD distributes its products in the U.S. without any FDA interference.restriction, or
any FDA claim that UTMD's products are unsafe or ineffective. The Company
strongly believes that there is no reasonable basis for this decision,denial.
On August 10, 2004, the FDA issued a press release announcing it would seek
an injunction against UTMD until it had corrected alleged "deviations" from the
Quality System Regulation, 21 CFR Part 820 (QSR). UTMD responded with several
press releases shortly following the FDA's announcement, and has filed two lawsuitswith periodic
public updates since then. The FDA press release and filing of the action in the
U.S. FederalDistrict Court for the District of Utah caused significant disruption to
UTMD's business, in part because of inappropriate activities of UTMD competitors
incorrectly telling customers that the Company has been, or was about to be,
shut down. As a matter of fact, through the date of this report: 1) UTMD
continues to manufacture and distribute all of its products worldwide without
any regulatory restriction, 2) there has been no mandated recall or any other
regulatory enforcement action that restricts customers from using UTMD's
products, 3) There has not been, and is not now, any allegation by the FDA that
UTMD's products are not safe or effective, 4) there is no FDA claim of defective
products or products not conforming to specifications, and 5) the proven
extremely low product liability risk using UTMD's products has not changed. On
November 16, 2004 UTMD announced that an effort to rectifyFDA enforcement official, officially
designated as the situation.knowledgable FDA representative, testified under oath that the
FDA is not claiming in the lawsuit that UTMD's devices are either unsafe or
ineffective. Discovery in the lawsuit is ongoing at the date of this report,
with a pre-trial conference scheduled for June 20, 2005. As part of its expert
witness testimony in the lawsuit, the Company has provided independent QSR
expert certification that UTMD is in substantial compliance with the QSR. (See
Item 3. - Legal Proceedings.)
-9-
In 1994, UTMD received certification of its quality system under the ISO
9001/EN 46001 standards ("ISO" stands for "International Organization of
Standardization") which wasit maintained until December 2003. BecauseIn October 2003,
UTMD's Utah facility was initially certified under the more stringent ISO 13485
standard for medical devices, which it currently maintains. UTMD's Ireland
facility is certified under the concomitant ISO 13488 standard. The U.S. FDA QSR
was developed in harmony with the ISO standards are in perpetual modification,standards. UTMD has remainedremains on a continuous
periodic audit schedule by its independent notified body in order to stay
abreast ofcurrent with international regulatory standards. In October 2003, UTMD's Utah
facilitystandards, and retain its certification.
The most recent audit was certified under the more stringent ISO 13485 standard for medical
devices. UTMD's Ireland facility is now certified under ISO 13488.conducted in November 2004. UTMD has received formal
product certificationcertifications allowing the use of the CE Mark (demonstrates proof of
compliance with the European Community's productISO 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 for conformance to specifications.
EXPORTS
- -------
Revenues from customers outside the U.S. in 20032004 were (in thousands) $5,872
(22%$6,029
(23% of total sales), as compared to $5,872 (22% of total sales) in 2003, and
$5,735 (21% of total sales) in 2002, and
$5,202 (19% of total sales) in 2001.2002. Blood pressure monitoring products
represented 67% of international sales in both 2004 and 2003, compared to 70% in
2002 and 67%
in 2001.2002. International Ob/Gyn and neonatal product sales were $2,019 in 2004,
compared to $1,930 in 2003 compared toand $1,743 in 2002 and $1,718 in 2001.2002. For financial information by
geographical area, please see Notes 1,41, 4 and 9 to the Consolidated Financial
Statements.
UTMD seesregards the international marketplace as one of the important elements of
its growth strategy. UTMD 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 UTMD completed construction of a manufacturing
facility in Athlone, County Westmeath, 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.
10
BACKLOG
- -------
As a supplier of primarily disposable hospital products, the nature of UTMD's
business necessitates being very responsive to customer orders and delivering
products quickly. Virtually all direct shipments to end users are accomplished
within one week of receipt of customer purchase order. Backlog shippable in less
than 60 days was approximately $0.3 million as of both January 1, 20042005 and
January 1, 2003.2004.
SEASONAL ASPECTS
- ----------------
The Company's business is generally not affected by seasonal factors.
PRODUCT LIABILITY RISK MANAGEMENT
- ---------------------------------
The risk of product liability lawsuits is a negative factor in UTMD's business
because UTMD'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. In any lawsuit against a company where an individual
plaintiff suffers a permanent physical injury, a possibility of a large award
for damages exists whether or not a causal relationship exists. However, no such
damages have been awarded against UTMD in its 25 year history.
-10-
UTMD is self-insured for product liability risk and reserves funds against its
current performance on an ongoing basis to provide for its defense should any
lawsuits be filed. The best defense the Company has is the consistent
conformance of its proven safe and effective products to specifications. In the
last tentwelve years, UTMD has been named as a defendant, along with each attending
physician and hospital, in four product liability lawsuits. All four were
related to operative vaginal deliveries where a VAD product was used. The VADS
products did conform to specifications. UTMD was ultimately dismissed as a
defendant in the lawsuits, and legal costs were not material to performance.
During the same period of time, no other UTMD products were the subject of a
product liability lawsuit. There are currently no product liability lawsuits in
which UTMD is a defendant.
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 management based on information currently available. 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 stated 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 includeinclude: the
market acceptance of competitive products,products; administrative practices of group
purchasing organizations,organizations; obsolescence caused by new technologies,technologies; the possible
introduction by competitors of new products that claim to have many of the
advantages of UTMD's products at lower prices,prices; the timing and market acceptance
of UTMD's own new product introductions,introductions; UTMD's ability to efficiently and
responsively manufacture its products, including the possible effects of lack of
performance of suppliers,suppliers; success in gaining access to important global
distribution channels,channels; budgetary constraints,constraints; the timing of regulatory approvals
for newly introduced products,products; regulatory intervention in current operations,
including the current action filed by the Justice Department on behalf of the
FDA against UTMD in the U.S. District Court for the District of Utah (see
Government Regulation, above); and third party reimbursement of health care
costs of customers.
11
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, includeinclude: risks inherent to companies manufacturing
products used in healthcare, including claims resulting from the improper use of
devices and other product liability claims,claims; defense of the Company's
intellectual property,property; productive use of assets in generating revenues,revenues;
management of working capital, including inventory levels required to meet
delivery commitments at a minimum costcost; and timely collection of accounts
receivable.
Additional risk factors that may affect non-operating income includeinclude: the
continuing viability of the Company's technology license agreements,agreements; actual cash
and investment balances,balances; asset dispositionsdispositions; and acquisition activities that may
require external funding.
ITEM 2 - PROPERTIES
Office and Manufacturing Facilities.
The Company's current operations are located in an 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,
County Westmeath, Ireland. UTMD 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 facility is leased.
-11-
UTMD is a vertically-integrated manufacturing company. Capabilities include
silicone and plastics-forming operations including injection molding, insert and
over-molding, thermoforming and extrusion; sensor production; manual and
automated assembly of mechanical, electrical and electronic components; parts
printing; various testing modalities; advanced packaging in clean room
conditions; and a machine shop for mold-making and fabrication of assembly tools
and fixtures. Capabilities also include an R&D laboratory for both electronic
and chemical processes, software development resources, communications and
computer systems networked real time internationally, and administrative
offices.
ITEM 3 - LEGAL PROCEEDINGS
The Company may be a party from time to time in routine litigation incidental
to its business. Presently, there is no such routine litigation ongoing.
On August 9, 2004, the United States of America filed a lawsuit in The outcomesUnited
States District Court, Central District of lawsuitsUtah v. UTMD, Kevin L. Cornwell,
Chairman & CEO, and Ben D. Shirley, Vice President, Product Development &
Quality Assurance. The presiding judge is Judge Bruce R. Jenkins. The government
(FDA) is seeking a permanent injunction from alleged deviations of the Quality
System Regulation (QSR). The FDA is not seeking a preliminary injunction. The
FDA is not claiming that the Company's devices are unsafe or ineffective, or do
not meet predetermined specifications. UTMD maintains that it has been and is in
substantial compliance with all applicable government regulations. The FDA has
the burden to prove its allegations.
UTMD was served with the complaint on August 12, 2004. On August 10, the FDA
released an announcement on its official website regarding filing the lawsuit
which are currently pending arecontained a personal quotation from Acting Commissioner Lester Crawford
which UTMD believes confused and upset people who use UTMD's devices, and
thereby harmed UTMD's commerce and shareholder value. The FDA makes allegations
of violations/ deviations in hundreds of Warning Letters it issues to medical
device firms annually. Yet, it is rarely challenged to prove these allegations.
There is not projectedand never has been an imminent public health risk relating to haveuse
of UTMD's products. The FDA has a materially adverse effectvariety of remedies to address device risks
without any resort to the courts. None of those remedies has ever been applied
to any UTMD device, because none has been justified. Despite statements in the
media otherwise, the FDA Denver District Office shut off dialogue with UTMD
after 2001 while it performed inspection after inspection in an attempt to build
a case. The case that was finally filed involves alleged QSR violations that the
agency has been unable to substantiate, despite an effort coordinated by the
CDRH including four comprehensive inspections, some involving "national expert"
FDA inspectors. An independent expert, a nearly thirty year FDA compliance
veteran and former District Director, retained by UTMD, has alleged misconduct
within FDA. On February 1, 2005, the U.S. Court granted UTMD's motion to file a
counterclaim for abuse of process.
Please review UTMD's SEC 8-K disclosures (a link is available on UTMD's
financial condition or
results of operations.
Please refer to the GOVERNMENT REGULATION section on pages 9-10website at http://utahmed.com/sec.htm) for a more complete description of a legal action UTMD filed beginning in 2003 againstUTMD's
position regarding its dispute with the FDA.
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.
[Remainder of Page Intentionally Left Blank]
12-12-
PART II
-------
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS.MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information.
UTMD's common stock began trading (again) on the Nasdaq National Market (symbol:UTMD)
on March 8, 2000. Betweenin 1983. From December 26, 1996 anduntil March 7, 2000, UTMD traded on the New York
Stock Exchange (symbol: UM). Previous to December
26, 1996,Since March 8, 2000, UTMD has again traded on the
Nasdaq National Market under the UTMD symbol.Market. The following table sets forth the high and low sales
price information as reported by Nasdaq for the periods indicated:
2004 2003
2002-------------------- --------------------
High Low High Low
---- ---- ---- ---------- ------ ------ ------
1st Quarter $26.45 $23.52 $19.35 $17.41
$16.36 $12.51
2nd Quarter 27.19 23.80 20.87 18.10
16.35 14.90
3rd Quarter 27.00 16.02 24.99 20.05
17.04 13.48
4th Quarter 23.45 17.50 26.30 21.00 20.07 16.55
Stockholders.
The approximate number of beneficial stockholders of UTMD's common stock as of
March 4, 2005 was 3,100.
Dividends.
On May 10, 2004, UTMD announced that it would begin paying a quarterly cash
dividend. The following sets forth cash dividends declared and paid on UTMD
common stock over the past two years:
Record Date Payable Date Per Share Amount
----------- ------------ ----------------
June 16, 2004 July 5, 2004 was 3,300.
Dividends.$0.15
September 16, 2004 October 5, 2004 0.15
December 16, 2004 January 5, 2005 0.15
----
2004 total paid $0.30
2003 total paid None
Issuer Purchases of Equity Securities.
The Company does not currently intend to pay cash dividends onfollowing table details purchases by UTMD of its own securities during
fourth quarter 2004.
Total Number of Maximum Number (or
Shares Purchased Approximate Dollar
Total Number Average as Part of Publicly Value) of Shares that
of Shares Price Paid Announced Plans May be Purchased Under
Period Purchased (1) per Share or Programs (1) the Plans or Programs (1)
- ------------------- ------------- ---------- ------------------- -------------------------
10/01/04 - 10/31/04 233,200 $ 17.61 233,200
11/01/04 - 11/30/04 6,000 17.96 6,000
12/01/04 - 12/31/04 15,488 21.92 15,488
- ------------------- ------------- ---------- ------------------- -------------------------
Total 254,688 $ 17.88 254,688
(1) In fourth quarter 2004 UTMD repurchased an aggregate of 254,688 shares of
its common stock at an average cost of $17.88 per share pursuant to a continued
open market repurchase program initially announced in August 1992. Since 1992
through 2004, the foreseeable future. It isCompany has repurchased 5,979,792 shares at an average cost of
$10.70 per share including broker commissions and fees in open market
transactions. In addition, the present intentionCompany conducted tender offer transactions in
-13-
which it purchased an additional 2,775,742 shares at an average cost of $9.76
per share including fees and administrative costs. In total, UTMD has
repurchased over 8.7 million of its shares at an average price of $10.40 per
share since 1992. To complete the picture relating to current shares
outstanding, since 1992 the Company's employees and directors have exercised and
purchased 1.4 million option shares at an average price of $6.24 per share. All
options were awarded at the market value of the Company to
use current cash and investment balances and earnings to finance future growth,
for selective infusionsstock on the date of technological, marketing or product manufacturing
rights to broaden the Company's product offerings, and for continuedaward.
The frequency of UTMD's open market share repurchases whendepends on the
availability of sellers and the price of the stock remains undervalued.stock. Since the conclusion of its
November 2002 tender offer, the Company has repurchased shares on a total of
thirty-nine trading days, about 8% of the total trading days available. The
board of directors has not established an expiration date or a maximum dollar or
share limit for UTMD's continuing and long term pattern of open market share
repurchases.
The purpose of UTMD's ongoing share repurchases is to maximize the value of
the Company for its continuing shareholders, and maximize its return on
shareholder equity by employing excess cash generated by effectively managing
its business. UTMD does not intend to repurchase shares that would result in
terminating its Nasdaq National Market listing.
[Remainder of Page Intentionally Left Blank]
13-14-
ITEM 6 - SELECTED FINANCIAL DATA.DATA
(in thousands, except per share data)
The following selected consolidated financial data of UTMD and its subsidiaries
for the five years ended December 31, 2003,2004, are derived from the audited
financial statements and notes of UTMD and its subsidiaries, certain of which
are included in this report. The selected consolidated financial data should be
read in conjunction with UTMD's Consolidated Financial Statements and the Notes
included elsewhere in this report.
Year Ended December 31
----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net Sales $27,137 $27,361 $26,954 $27,193 $29,444
Net Income 20,761 7,165 5,934 5,373 5,468
Earnings Per Common Share -
(Diluted) 4.25 1.36 1.14 .90 .76
Total Assets 49,694 23,387 23,572 25,423 27,756
Working Capital 21,405 5,437 5,400 5,418 5,877
Long-term Debt 0 4,956 2,501 10,000 5,934
Cash Dividends Per Common Share None None None None None
Quarterly Data for 2003
-----------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $6,877 $6,840 $6,761 $6,659
Gross Profit 3,977 4,033 3,979 3,902
Net Income 1,788 1,837 1,861 15,274
Earnings Per Common Share -
(Diluted) .37 .38 .38 3.10
Quarterly Data for 2002
-----------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $6,705 $6,800 $7,005 $6,854
Gross Profit 3,816 3,917 4,079 3,951
Net Income 1,712 1,785 1,883 1,785
Earnings Per Common
Share (Diluted) .32 .33 .36 .35
14
Year Ended December 31
----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Sales $26,485 $27,137 $27,361 $26,954 $27,193
Net Income 10,220 20,761 7,165 5,934 5,373
Earnings Per Common Share -
(Diluted) 2.19 4.25 1.36 1.14 .90
Total Assets 41,262 49,694 23,387 23,572 25,423
Working Capital 20,194 21,405 5,437 5,400 5,418
Long-term Debt 0 0 4,956 2,501 10,000
Cash Dividends Per Common Share 0.30 None None None None
Quarterly Data for 2004
-----------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $6,616 $6,827 $6,670 $6,372
Gross Profit 3,850 3,934 3,779 3,503
Net Income 5,175 1,841 1,807 1,397
Earnings Per Common Share -
(Diluted) 1.07 .38 .39 .32
Quarterly Data for 2003
-----------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Net Sales $ 6,877 $ 6,840 $ 6,761 $ 6,659
Gross Profit 3,977 4,033 3,979 3,902
Net Income 1,788 1,837 1,861 15,274
Earnings Per Common
Share (Diluted) .37 .38 .38 3.10
-15-
EXTRAORDINARY ITEMITEMS
- -------------------------------------
In 4Q 2003,2004, UTMD recognized $500 in extraordinary operating expenses resulting
from increasing the Company's reserve for litigation expenses in anticipation of
costs to complete the litigation process with the FDA through June 2005. The
reduction in accrued income taxes due to the expense was $204, resulting in a
$296 decrease to 2004 net income.
In 1Q 2004, UTMD recognized extraordinary non-operating income of $6,060 from
settlement of additional damages following $24,884 from
damages recognized in 4Q 2003
which had been awarded and upheld on appeal as a result offrom a patent infringement lawsuit
with Tyco International. Associated with thisthe extraordinary non-operating income
from patent infringement damages were G&A Expenses (included in Operating
Expenses) of $2,208.$350 in 1Q 2004 and $2,208 in 4Q 2003. These expenses were due to
bonuses and additional litigation expenses. The impact ofAccrued income tax on the
extraordinary event on UTMD's 12-31-03 Balance Sheetnon-operating income was $24,884$2,361 in receivables (Current
Assets)1Q 2004 and $11,458$9,250 in accrued liabilities (Current Liabilities) resulting from
accrued income taxes, litigation expense reserve and management bonuses. In
addition, year- end Shareholders' Equity was $13,426 higher than would otherwise
have been the case without the extraordinary event.4Q 2003.
In the following tables, financial data on the previous page have been adjusted
to eliminate the extraordinary items.
Year Ended December 31 (adjusted)
---------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Sales $26,485 $27,137 $27,361 $26,954 $27,193
Net Income 7,166 7,335 7,165 5,934 5,373
Earnings Per Common Share -
(Diluted) 1.53 1.50 1.36 1.14 .90
Quarterly dataData for 2002 is not included
below since there is no adjustment applicable to 2002.
Year Ended December 31 (adjusted)
---------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net Sales $27,137 $27,361 $26,954 $27,193 $29,444
Net Income 7,335 7,165 5,934 5,373 5,468
Earnings Per Common Share -
(Diluted) 1.50 1.36 1.14 .90 .76
Total Assets 24,810 23,387 23,572 25,423 27,756
Working Capital 7,979 5,437 5,400 5,418 5,877
Long-term Debt 0 4,956 2,501 10,000 5,934
Cash Dividends Per Common Share None None None None None
Quarterly Data for 2003 (adjusted)
----------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------2004 (adjusted)
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $6,616 $6,827 $6,670 $6,372
Gross Profit 3,850 3,934 3,779 3,503
Net Income 1,826 1,841 1,807 1,693
Earnings Per Common Share -
(Diluted) .38 .38 .39 .39
Quarterly Data for 2003 (adjusted)
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $6,877 $6,840 $6,761 $6,659
Gross Profit 3,977 4,033 3,979 3,902
Net Income 1,788 1,837 1,861 1,848
Earnings Per Common Share -
(Diluted) .37 .38 .38 .38
15-16-
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.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.
In management's opinion, the extraordinarilyunfavorable extraordinary event in 4Q 2004 of
increasing the Company's litigation reserve and the favorable eventextraordinary
events in 1Q 2004 and 4Q 2003 of recognizing the Tyco patent infringement
damages award hashave an impact on the financialincome statements that does not allow a meaningful
comparison of financial ratios and other financial measures with prior periods.
Consequently, Item 7 (MD&A) adjusts out the following items related to the
extraordinary event,events, prior to making comparisons:
BALANCE SHEET adjustment
- ------------- ----------
Litigation receivable (24,884)
Total current assets (24,884)
Total assets (24,884)
Accrued expenses - Income taxes payable (9,250)
Accrued expenses - Reserve for litigation costs (1,337)
Accrued expenses - Payroll and payroll taxes (871)
Total current liabilities (11,458)
Total liabilities (11,458)
Stockholders' Equity (13,426)
INCOME STATEMENT
- ----------------
Extraordinary item - after tax gain from litigation (13,426) [for year ended 12/31/03]
Extraordinary items - (3,054) [for year ended 12/31/04]
Note: Income statement comparisons which follow, including earnings per share,
are "beforeComparison of balance sheet items and ROE do include the extraordinary
item".
CASH FLOW STATEMENT adjustment
- ------------------- ----------
Net income (13,426)
Litigation receivable 24,884
Accrued expenses (11,458)items. --
Productivity of Assets and Working Capital.
a) Assets. Year-end 20032004 total assets (adjusted per above) were $24,810,$41,262, compared to $23,387$49,694 in
2002. Because2003. Year-end assets in both years were substantially higher than in prior
years due to the extraordinary Tyco patent infringement damages, reflected in
cash and investments in year-end 2004 and receivables in year-end 2003. The
change in total assets increased whilewas not related to sales were
slightly lower relativeactivity. It reflected the
difference in the Tyco damages due UTMD at the end of 2003 and the cash and
investment balances resulting from the damages at the end of 2004 after income
taxes on the extraordinary income had been paid. The same statement applies to
2002, UTMD'sthe net change in current assets. In 2005, total asset turns decreased from 1.2 to
1.1. Ending 2003 current assetswill depend
primarily on UTMD's use of $9,018 were higher than 2002 ending current
assets of $7,757 primarily because the elimination of the line of credit balance
in 3Q 2003 allowed aits cash and investments build-up in 4Q of about $1,200
compared to the end of 2002, whileinvestment balances.
Although other current asset categories netted out to remain about the same. Endingsame,
2004 ending inventory balances were about $400 lower and receivables were about
$200 higher and ending
inventory was about $200 lower. Net property and equipment (PP&E) increased $114
because of the net increase in dollar-valued Ireland PP&E compared to the end of
2002 of about $750, representing about$400 higher. As a 20% change in the U.S. Dollar
(USD)/EURO conversion rate. 2003 total PP&E depreciation of $910 exceeded new
purchases of $272. Net intangible assets increased $47 because amortization was
offset by $121 in new intellectual property investment. After the 2002 adoption
of FASB Rule No. 142, UTMD suspended amortizing goodwill from previous
acquisitions. Year-ending 2003 net intangible assets were 27% of total assets,
compared to 29% at year end 2002. In 2004, asset turns will decrease because of
continued cash build-up, unless UTMD makes a substantial acquisition,
repurchases stock or takes some other action that consumes cash. Depreciation of
fixed assets should continue to exceed new purchases. Net intangible assets may
change as the result, of an acquisition or a determination that current goodwill
is impaired, although the latter seems unlikely at this time. 2004 total asset
turns will depend primarily upon what management can achieve in utilizing excess
cash balances.
16
Except for the Oregon facility involved as part of the 1997 CMI acquisition
and a portion of UTMD's Midvale parking lot, the Company owns its PP&E assets.
PP&E assets are comprised of Utah and Ireland manufacturing facilities, molds,
production tooling and equipment, test equipment, computer/ communications
equipment and software. Net PP&E in the U.S. decreased $508 due to depreciation
in excess of purchases. In Ireland, PP&E increased $622, despite no significant
new asset purchases and depreciation expense of $153 because of the weaker USD.
With slightly lower consolidated sales and higher PP&E in USD terms, 2003 PP&E
turns decreased to 3.0 from 3.1. The current book value of consolidated PP&E is
38% of acquisition cost. Management believes that PP&E is in good working order
and capable of supporting increased sales activity. Going forward, financial
performance should be enhanced by lower rates of depreciation and continuing
higher PP&E turns.
The goodwill on UTMD's balance sheet is the result of two acquisitions in 1997
and 1998 which were made in cash at conservative valuations. As of December 31,
2003, the goodwill on the balance sheet has been reduced by 27% from the
acquisition price as a result of UTMD using previous GAAP through 2001 for the
purchase method of acquisition accounting. UTMD's future income statement
performance could be affected in the case of impairment of the existing
goodwill. The acquired 1998 Gesco neonatal products and 1997 CMI products
continue to be viable parts of UTMD's overall business activities, representing
22% of total sales in 2003. Net goodwill on the December 31, 2003 balance sheet
is 23% of 2003 sales. UTMD does not expect its goodwill intangible assets to
become impaired in the foreseeable future.
Average inventory turns decreased in 2003 to 3.3 from 3.4 because average
inventory balances remained about the same as 2002 while sales declined
slightly. The 2003 ending inventory balance was about $100 below the year's
average. Management continues to target 4.0 average inventory turns as its
objective, and believesincreased to 3.7 in 2004 from
3.3 in 2003 despite a decline in sales activity. Management expects to sustain
3.7 inventory turns will improve in 2004. Year-ending 20032005. Because year-ending 2004 accounts receivable (A/R)
balances increased 8%. Calculated12%, calculated average days in A/R were 45aging was 51 on December
31, 20032004 based on 4Q 20032004 shipment activity. ThisAlthough this is well within
management's objective of 55 days.days, it is less favorable than at the end of 2003.
A/R over 90 days from invoice date were about 4%5% of total A/R at year end,year-end 2004,
compared to 7%4% at year-end 2002.2003. The Company believes these older A/R are
collectible or within its reserve balances for uncollectible accounts.
Working capital at year-end 20032004 was $7,979$20,194 compared to $5,437$21,405 at year-end
2002 because in addition2003. Both amounts far exceed UTMD's working capital needs for normal
operations. UTMD's current ratio increased to 5.7 from 2.7, due mainly to the
increasedecrease in cash and investment balances of
about $1,200, current liabilities atincome taxes due resulting from the end of the year were about $1,300
lower. As a result, UTMD's Current Ratio improved to 8.7 from 3.3. 2004extraordinary items. 2005
working capital balances and current ratio will depend primarily upon the timing
and extent of management'suse of cash and investment balances. The non-cash and investment
components of working capital are expected utilizationto remain within management targets.
Property, plant and equipment (PP&E) assets are comprised of excess cash.Utah, Oregon and
Ireland manufacturing molds, production tooling and equipment, test equipment,
computer/ communications equipment and software, and the Utah and Ireland
facilities. UTMD leases the Oregon facility, involved in the 1997 CMI
acquisition, and a portion of the Midvale parking lot. In 2004, PP&E
depreciation of $739 exceeded new PP&E asset purchases of $411. Net PP&E assets,
however, increased $53 compared to the end of 2003 because of a $252 increase in
dollar-valued Ireland PP&E assets. In 2004, the U.S. dollar (USD) declined in
value relative to the euro by about 8%. Slightly higher consolidated PP&E (in
U.S. dollar terms) and lower sales resulted in a slightly lower PP&E turn. In
2005, depreciation of fixed assets is expected to exceed new fixed asset
purchases required to sustain current operations, which will improve PP&E asset
turns unless the U.S. dollar continues to weaken, further inflating the dollar
value of Ireland PP&E.
The current book value of consolidated PP&E is 37% of acquisition cost.
Management believes that PP&E is in good working order and capable of supporting
increased sales activity.
-17-
Intangible assets are comprised of goodwill resulting from acquisitions and
the costs of obtaining patents and other technology rights. Net intangible
assets (NIA) increased to $7,674 at the end of 2004 from $6,787 at the end of
2003. The $7,191 goodwill portion of NIA at the end of 2004 is the result of
three acquisitions in 1997, 1998 and 2004 which were made in cash at
conservative valuations. Goodwill increased $946 in 2004 as a result of the
acquisition of Abcorp Medical, UTMD's supplier of fetal monitoring belts. The
increase in 2004 goodwill was offset by $70 amortization of other intangible
assets. As of the end of 2004, goodwill on the balance sheet has been reduced by
24% from the goodwill resulting at time of acquisition. The reduction is a
result of UTMD using previous GAAP through 2001 for the purchase method of
acquisition accounting. Under current GAAP, the goodwill will not be amortized
as an expense unless and until the value of the acquired entity becomes
impaired. The acquisitions reflected in goodwill continue to be viable parts of
UTMD's overall business activities, representing 26% of total sales in 2004.
UTMD does not expect its goodwill intangible assets to become impaired in the
foreseeable future.
b) Liabilities. In the years 2002-2003,Excluding accrued and deferred income taxes, UTMD's total
liabilities at the end of 2004 and 2003, which were $3,952 and $3,227,
respectively, were both less than 10% of total debt ratio have been drivenassets reduced by the timing of debt incurred for financing share
repurchases, not in providing cash to operate its business.total
accrued tax liability. At the end of 2003,2004, UTMD's total debt ratio decreased to
7%12% from 33%26% at the end of 2002 primarily
because the line-of-credit balance2003. The decline was paid off. In 3Q 2003, UTMD retired the
debt associated with its November 2002 tender offer under which it repurchased
503 thousand shares at a cost of $8.6 million. Total shares repurchased in 2002
including the tender offer were 721 thousand at a cost of $11.8 million. In
2003, in addition to eliminating the debt balance from financing the 2002 share
repurchases, UTMD repurchased 97 thousand shares in the open market at a cost of
$2.2 million. UTMD's total debt ratio in 2004 will depend on any financing
required to continue to repurchase shares or make acquisitions. Without
requirement for any of those financing activities, the total debt ratio due to normal current liabilities should beaccrued taxes on the
extraordinary item on the balance sheet at the end of 2003 which were paid in
the range of 10%.2004.
Results of Operations.
a) Revenues. Global consolidated sales decreased about 1%2% in 20032004 compared to 2002.2003.
Foreign (international) sales increased 2% and3% while U.S. (domestic) sales declined
2%4%. 17
Revenues were negatively affected by an August 10 FDA press release that
announced that the FDA filed a lawsuit against UTMD. International revenues
continued to be negatively affected by the FDA's refusal, continuing since 2003,
to provide Certificates to Foreign Governments (CFGs).
UTMD divides its domestic sales into two primary distribution channels:
"direct sales" which are sales to end user customers by UTMD's direct sales
force, independent commissioned sales reps, specialty distributors and national
hospital distribution companies, and "OEM sales" which are component sales to
other companies where products are packaged and resold as part of another
company's product offerings. As a percentage of total domestic sales, 2003 direct
sales representedwere 93% compared toof domestic sales in both 2004 and 2003, and 94% in 2002 and 92% in 2001.2002. The
remaining sales were OEM sales, e.g. 7% of domestic sales in 20032004 were domestic
OEM sales. Domestic direct sales represented 73%72% of global consolidated sales in
20032004 compared to 73% in 2003 and 74% in both 20022002.
Domestic direct sales which appeared least affected by the FDA announcement
were sales where clinicians make the purchase decision. Consequently, the least
affected sales were sales to physician offices and 2001.clinics. Hospital labor and
delivery (L&D) department sales appeared to be the most affected. Hospital NICU
sales were less affected than L&D because practitioners still have major
discretion in determining what products are purchased. In order to help gain
further attention of concerned hospital administrators, UTMD instituted a
special "loyalty discount" in late August. Ignoring the effect of the special
U.S. hospital customer loyalty discount (the Discount) in effect from August 20
through November 30, 2004, UTMD's sales were down 1% from 2003. The amount of
the Discount was $374.
International sales in 20032004 were 22%23% of global consolidated sales compared to
21%22% and 19%21% in years 2003 and 2002, and 2001 respectively. InOf the first half of the year,2004 international
sales, had increased 12% primarily helped by a weaker U.S. Dollar.
In the second half, a decision by the FDA to withhold export certificates from
UTMD probably contributed to an international sales decline of 6%. Of the 2003
foreign sales, 58%60% were made in Europe, the same ascompared to 58% in both 20022003 and 2001.2002. Ireland
operations (UTMD Ltd.) shipped 63%59% of international sales (in USD terms) in 20032004
compared to 63% in 2003 and 59% in 2002 and 54% in 2001. Shipments,2002. UTMD Ltd. 2004 shipments, including
intercompany from
UTMD Ltd. (Ireland)to Midvale, were down 2%15% in Euroeuro terms, and up 16%down 5% in USD terms,
compared to the prior year.2003.
UTMD groups its sales into four product-line categories: 1) obstetrics, comprised
of labor and delivery management tools for monitoring fetal and maternal
well-being, for reducing risk in performing difficult delivery procedures and
for improving clinician safety; 2) gynecology/ electrosurgery/ urology,
comprised of tools for gynecological procedures associated primarily with
cervical/ uterine disease including LETZ, endometrial sampling, diagnostic
laparoscopy, and other MIS procedures; specialty excision and incision tools;
-18-
conservative urinary incontinence therapy devices; and urology tools; 3)
neonatal care, comprised of devices that provide developmentally-friendly care
to the most critically ill babies including providing vascular access,
administering vital fluids, maintaining a neutral thermal environment, providing
protection and assisting in specialized applications; and 4) blood pressure
monitoring/ accessories/ other, comprised of specialized components for
invasively monitoring blood pressure on a continuous basis with pressure
transducer systems, and subcontract molded
parts along with other components and
products sold on an OEM basis to other companies. In these four categories, UTMD's
primary revenue contributors often enjoy a dominant market share and typically
have differentiated product features protected by patents.
Revenues by product category:
1. Worldwide obstetrics product sales were $10,918 in 2004 compared to $11,435
in 2003 compared toand $11,977 in 2002 and $12,276 in 2001.2002. Without the Discount, 2004 obstetrics sales were
$11,120. Of the $542$517 decline in total obstetrics sales, $252$154 was from lower
sales of vacuum-assisted delivery systems (VADS), a 15%an 11% decline, and $237$1,136
from lower Intran Plus (IUPC) sales, a 2%12% decline. TheAbcorp sales of $842 helped
offset the declines. After August 10, the lower IUPC and VADS sales resulted
primarily from concerns of hospital administrators related to the press release
from the FDA. Other contributing factors included a changetrend in obstetrics practice
that favors abdominal operative deliveries over vaginal operative deliveries
because of medical malpractice litigation risk. Lower obstetrics sales in general resulted fromrisk, and increased competition
including effects of product bundling agreements with U.S. hospital
administrators. Despite the decline in utilization, UTMD agrees with ACOG (The
American College of Obstetricians & Gynecologists) that using VADS remains the
trained physician's best choice in many operative deliveries, and will continue
its educational programs regarding appropriate indications and proper use of the
procedure.agreements. Cheaper priced, less
clinically-effective products represent significant competition where hospital
administrators are constrained by GPO contracts or may not take the total cost
of care into consideration, including increased risk of complications and
utilization rates. International obstetrics sales increased to $774 in 2004 from
$665 in 2003 from $613 in 2002.2003.
2. Consolidated global gynecology/ electrosurgery/ urology product sales were
$5,142 in 2004 compared to $5,324 in 2003 compared toand $5,271 in 2002 and $4,924 in 2001.2002. Without the
Discount, 2004 sales were $5,212. International sales in this category increased 19%decreased
9%. A number of UTMD products in this
fragmented category are patented, soInternational sales should continuewere negatively affected by not being able to grow as physicians
learn more about their advantages.
18
supply
requested FDA CFGs to international distributors.
3. Consolidated global neonatal product sales were $4,134 in 2004 compared to
$4,142 in 2003 compared toand $3,852 in 2002 and $3,801 in 2001.2002. Without the Discount, 2004 sales were $4,217.
International neonatal product sales decreased 16%increased 39%.
4. Worldwide blood pressure monitoring and accessories (BPM) sales were $6,292
in 2004 compared to $6,236 in 2003 compared toand $6,261 in 2002 and $5,953 in 2001. Domestic OEM2002. Without the Discount,
2004 sales were $6,310. International sales in this category, which includes
plastic molded components used in other industries
affected by the weak U.S. economy, increased 2%.
Looking forward to 2004, UTMD expects2005, UTMD's improvement in sales depends primarily on the
timing of a favorable resolution of the lawsuit with the FDA, receipt of CFGs
and restoration of its good reputation for supplying high quality devices. If
the FDA lawsuit is resolved by the middle of the year, management believes that
it can achieve a 2-3% increase in 2005 sales relative to maintain or modestly increase sales
for its established products even though markets for its products will remain
intensely competitive; despite the fact that administrative barriers in the U.S.
that prevent smaller companies from fairly competing for hospital sales have not
been significantly diminished; and despite disappointment in U.S. FDA
administrators who we believe have inappropriately withheld export certificates
to foreign governments since 2003.2004.
b) Gross Profit. UTMD's average 20032004 gross profit margin (GPM), the surplus
after costs of manufacturing, inspecting, packaging, sterilizing and shipping
products (COGS) are subtracted from net revenues, was 56.9% compared to a
Company record 58.6% compared toin 2003 and 57.6% in 20022002. As a percentage of sales, the
negative effect of the Discount was more pronounced on gross profits than on
sales. In 2004, UTMD experienced higher materials costs, particularly for
plastics, along with increased labor costs, lower absorption of fixed overhead
costs because of lower sales, and 57.1% in 2001. UTMD continued to experience a
favorablean unfavorable shift from lowerhigher margin
products to higherlower margin products as a
percentage of sales,products. The unfavorable cost trends were partially
offset by lower depreciation expense on fixed assets and improved
efficienciesrecoveries of previous
years' misappropriated funds. With regard to the latter, UTMD recognized a
favorable contribution to gross profit of $180,830 and $241,670 for 4Q 2004 and
2004, respectively, as the result of recovery of misappropriated funds that had
reduced gross profit performance in overhead costs.prior years. The Audit Committee of UTMD was
fully involved in the investigation and resolution of this matter.
With respect to gross profits in UTMD's sales channels, OEM sales are sales of
UTMD productscomponents that are marketed by other companies in conjunction withas part of their product
offerings, and are not sold under UTMD's label.offerings. UTMD utilizes "OEM
sales"OEM sales as a means to help maximize utilization of
its capabilities established to satisfy its "direct sales"direct sales business. As a general
rule, prices for "OEM
product sales"OEM sales expressed as a multiple of direct variable
manufacturing expenses are lower than for "direct sales"direct sales because, in the OEM and
international channels, UTMD's business partners incur significant expenses of
sales and marketing. Because of UTMD's small size and period-to-period
fluctuations in OEM business activity, allocations of fixed manufacturing
-19-
overheads cannot be meaningfully allocated between direct and OEM sales.
Therefore, UTMD does not report GPM by sales channels.
UTMD targets an average GPM greater than or equal to 55%, which it believes is
necessary to successfully support the significant operating expenses required in
a highly complex and competitive medical device marketplace. Management expects
to achieve itsthis GPM target again in 2004.2005. Expected favorable influences include
growth in sales volume without a similar increase in manufacturing overhead
expenses, a larger percentage of total sales from higher margin products and a
continued emphasis on reengineering products and processes to reduce costs.
Expected unfavorable influences are continued increases in material costs,
competitive pressure on pricing and higher wage rates.
c) Operating Profit. Operating profit, or income from operations, is the
surplus after operating expenses are subtracted from gross profits. Operating
expenses include sales and marketing (S&M) expenses, research and development
(R&D) expenses and general and administrative (G&A) expenses. 2003Operating expenses
in 2004 were lower by $214 than in 2003. However, because of lower gross
profits, 2004 operating profit increased 2%decreased 6% to $10,109 compared to $10,722 compared to $10,542 in
2003. 2002 and $9,278 in 2001.operating profits were $10,542. UTMD's operating profit margin
(operating profits divided by total sales) was also a Company record38.2% in 2003. The 2003 operating profit margin of 39.5%2004, compared to a
record 39.5% in 2003 and 38.5% in 2002 and 34.4% in 2001.2002. Operating expenses as a percentage of
sales were 18.7% in 2004, compared to 19.1% in both 2003 and 2002, compared to 22.7% in 2001. A major portion
of the decrease in 2002 from 2001 was due to UTMD's required GAAP adoption of
SFAS Statement No. 142, under which the Company recognized no goodwill
amortization expense (GWA) in 2003 or 2002. GWA was $569 in 2001. For
comparison, $569 represents 2.1% of 2003 and 2002 sales. Looking
forward to 2004,2005, UTMD expects to continue to achieve an outstanding operating
margin similar to 2003,
primarily as a result of an increase in sales coupled with holdingby maintaining its GPM above 55% and controlling operating expenses aboutbelow
19% of sales. The primary risk to achieving that expectation is a delay in the
same. In orderexpected resolution of the lawsuit with the FDA. A further delay would be a
double negative by continuing to hold operating expensesretard sales activity while at the same UTMD
expects to be able to offset an increase in S&M expenses with a decrease intime
increasing litigation expenses (G&A expenses).
19
costs which are time-related.
i) S&M expenses: S&M expenses are the costs of communicating UTMD's
differences and product advantages, providing training and other customer
service in support of the use of UTMD's solutions, processing orders and funding
GPO fees. Because UTMD sells internationally through third party distributors,
its S&M expenses are predominantly neededemployed for U.S. business activity where it
sells directly to clinical users. The largest component of S&M expenses is the
cost of directly employing representatives that provide coverage across the U.S.
Year 20032004 S&M expenses decreased to $2,253 from $2,364 fromin 2003 and $2,472 in
2002, and $2,773 in
2001, as UTMD continued to improvefocus on the productivity of its direct sales force.
As a percent of total sales, S&M operating expenses were 8.5% in 2004, 8.7% in
2003 and 9.0% in 2002 and 10.3% in 2001.2002. Looking forward, UTMD plans higher S&M expenses during
20042005 due to Group Purchasing Organization fees, increased advertising expenses
and new marketing initiatives, but intends to manage S&M expenses to remain less
than 10%9% of total sales.
ii) R&D expenses: R&D expenses include the costs of investigating
clinical needs, developing innovative concepts, testing concepts for viability,
validating methods of manufacture, completing regulatory documentation and other
activities required for design control, responding to customer requests for
product enhancements, and assisting manufacturing engineering on an ongoing
basis in developing new processes or improving existing processes. Internal R&D
expenses were $292 in 2004, $288 in 2003 and $285 in 2002 and $364 in 2001.2002. As a percent of
sales, 20032004 and 20022003 R&D expenses were 1.0%1.1% compared to 1.3%1.0% in 2001. In 2003,
the efforts of R&D aided UTMD's continued GPM improvements.2002. In
addition to new products still being developed, a number of existing products
were enhanced or updated.updated in 2004. In 2004,2005, UTMD will opportunistically employ
R&D resources to invest where management anticipates it can get a significant
return with future new product sales. 20042005 R&D expenses are again likely to be
in the range of 1%-2% of sales.
iii) G&A expenses: G&A expenses include the "front office" functional
costs of executive management, finance and accounting, corporate information
systems, human resources, shareholder relations, legal, risk management and
protection of intellectual property. In addition to employing the personnel
required to coordinate or manage the preceding functions, G&A expenses include
outside director costs, outside legal counsel, independent accounting audit
fees, 401(k) administration, NASDAQ exchange fees, write-offs of uncollectible
receivables, business insurance costs and corporate contributions to charitable
organizations. Prior to 2002, G&A expenses also included GWA. G&A expenses were $2,412 in 2004, $2,517 in 2003 and $2,464 in
2002 and $2,978 in 2001.2002. As a percent of sales, G&A expenses were 9.1% in 2004, 9.3% in 2003 and
9.0% in 2002 and 11.1% in 2001.2002. All three years included considerable litigation expenses relating to the
patent infringement lawsuit with Tyco/Kendallo LTP.KendalloLTP or lawsuits with the FDA. In
addition, 2002 and 2003all three years include increasedincreasing G&A expenses to comply with
-20-
required governance activities mandated by theThe Sarbanes Oxley Act of 2002. It is
management's objective to hold G&A expenses to about 9% of sales again in 2005.
d) Non-operating Income, Non-operating Expense and EBT. Non-operating income
includes royalties from licensing UTMD's technology to other companies, rent
from leasing unutilizedunderutilized property to others, interestincome earned from investing the
Company's excess cash and gains or losses from the sale of assets, offset by
non-operating expenses which includesinclude interest expenses and bank fees.
Non-operating income was $798 in 2004, $454 in 2003 and $453 in 20022002. The
increase in 2004 resulted from investment income on much higher average cash and
$202 in 2001.investment balances, higher rental income and no interest expense. Royalties
received were $450 in all three years. Future royalties may vary depending on
the success of other companies in selling products licensed by UTMD, and the
remaining life of the applicable patents. InterestIn 2004, UTMD had no interest expense
associated with the
line-of-credit which reduced non-operating income was $47 in 2003, $36 in 2002
and $370 in 2001. Interest costs inbecause it did not utilize its bank line-of-credit. In 2003 and 2002,
were lower compared to 2001
because of significantly lower average LOC debt balances,respectively, interest expense was $47 and because interest
rates were lower after 2001.$36. UTMD expects non-operating
income in 20042005 to be higher than 2003 because of interest income on excess cash balances, but thisbetween $500 and $800. The actual amount received will
depend on many factors including: the timing of utilization of cash balances for
share repurchases, dividends or acquisitions; the excessmarket performance of UTMD's
liquid investments; the need for capital to support litigation; and cash as well as
prevailing interest rates.flow
from normal operating performance.
Earnings before income taxes (EBT) result from adding UTMD's non-operating
income to its operating profits. EBT were $10,907 in 2004, $11,176 in 2003 and
$10,996 in 2002 and
$9,480 in 2001.2002. EBT in 20032004 were 2% higherlower than in 2002 although sales were 1%
lower because of record gross profit margins.2003, the same percentage
decrease as sales. Given the 2005 projections previously noted, above, management is
targeting 20042005 EBT of about the same as 2003 EBT (excluding the
extraordinary non-operating income and operating expenses associated with the
Tyco patent infringement lawsuit).
20
$11,000.
e) Net Income, EPS and ROE. Net income is EBT minus income taxes. Net income
increasedin 2004 decreased 2%, consistent with the change in sales, to $7,166 from $7,335
in 2003 from $7,165 in 2002. 20012003. 2002 net income was $5,934.$7,165. The growth rate in Net Income was slightly higher than EBT because UTMD's 2003
effective tax rate was lower than in 2002. The (adjusted) effective income tax rate in 20032004 was
34.4%34.3% compared to 34.4% in 2003 and 34.8% in 2002 and 37.4% in 2001.2002. Tax on the extraordinary
itemitems was 40.8%41.4%, resulting in a combined tax rate of 38.7%36.6%. Year to year
fluctuations in the tax rate have resulted fromfrom: 1) the use of a foreign
sales corporation, 2) differences in distribution
of state income taxes, 3)
differencestaxes; 2) variations in profits of the Ireland subsidiary which
is taxed at a 10% rate on exported manufactured products,products; 3) extraterritorial
income exclusions; 4) increases inhigher marginal tax rates for EBT above $10 million,million; and
5) other factors such as R&D tax credits and the timing of
actual versus accrued litigation expenses. The Company eliminated its foreign
sales corporation in 2002.credits. Management expects that UTMD's
consolidated income tax rate mayshould be highersimilar in 20042005 compared to 2003,2004, but
this is difficult to predict.
UTMD's normal net income expressed as a percentage of sales ranks in the top
performance tier of all U.S. publicly-traded companies at 27.0%27.1%, 26.2%27.0% and 22.0%26.2%
for years 2004, 2003 2002 and 2001,2002, respectively. This profitability performance
factor is the primary driver for UTMD's return on shareholders' equity (ROE).
Earnings per share (EPS) is net income divided by the number of shares of
stock outstanding (diluted to take into consideration stock option awards which
are "in the money" -money," i.e., have exercise prices below the current period's
weighted average market value). Diluted 20032004 EPS were $1.53, up 2% from $1.50 up 10% from $1.36 in
2002.2003. In 2001,2002, EPS were $1.14 with sales about the same as 2003. The combination of
higher profitability and fewer$1.36. Fewer outstanding shares accounted for the substantial
increase in EPS. UTMD management believes shareholder value is improved by
consistently increasing EPS. InOver the last six year periodseven years since 1997, UTMD has
increased EPS at an annually compounded rate of 20%17% per year. The end of 20032004
weighted average number of diluted common shares (the number used to calculate
diluted EPS) were 4,8854,675 (in thousands) compared to 4,885 shares in 2003 and
5,263 shares in 2002 and
5,210 shares in 2001.2002. Dilution for "in the money" unexercised options for the
year 20032004 was 359276 (in thousands) shares compared to 359 in 2003 and 350 in 2002, and 191 in
2001.2002.
The total number of unexercised options outstanding declinedat year-end was about 23%the same in 2004
as 2003, following a 9%23% decline in the prior year. Dilution has increased despite
much fewerdecreased in 2004
from 2003 because the average number of options outstanding option shares due to UTMD'sdecreased
substantially, partially offset by a higher average share price in the stock
market. Actual outstanding common shares as of December 31, 20032004 were 4,544,000.4,105,000.
Return on shareholders' equity (ROE) is the portion of net income retained by
UTMD (after payment of dividends) to internally finance its growth, divided by
the average accumulated shareholders' equity during the applicable time period.
Because ROE includes balance sheet measures as well as income statement
measures, the calculations of ROE which follow do not exclude the extraordinary
items. ROE in 20032004 was 38%23% (28% before dividends), compared to 79% in 2003 and
42% in 2002 and 39% in 2001.2002. This ratio determines how fast the Company can afford to grow
-21-
without adding external financing that would dilute shareholder interests. For
example, a 20% ROE will financially support 20% growth in revenues without
issuing more stock. Record profitabilityThe lower ROE in 2004, despite a continued excellent net
profit margin, was primarily
responsible fordue to payment of dividends to shareholders which reduced
retained profits, much higher average cash and investment balances which reduced
total asset turns, and no long-term debt which reduced financial leverage
compared to prior years. Looking forward, 2005 ROE is projected to be lower than
2004 if cash and investment balances are maintained at current levels,
shareholder dividends are continued outstanding ROE result in 2003.and no other extraordinary income is
received. In UTMD's opinion, achieving growth in revenues and EPS without
diluting shareholder interests maximizes shareholders'shareholder value. Management's goal is to consistently achieve ROE
in excess of 25%. UTMD's ROE has
averaged 31%34% per year over the last 18 years.
Although the accumulation of cash in the absence of share repurchases or
acquisitions could reduce total asset turns, and the elimination of long term
debt would reduce financial leverage that enhances ROE, management expects to be
able to achieve its ROE objective again in 2004 primarily by accomplishing
another record year in profitability, assuming UTMD effectively deploys its
excess cash resulting from the extraordinary event.
Liquidity and Capital Resources.
Cash flows.Flows. Cash (and investment) balances were $16,928 at the end of 2004,
compared to $1,484 at the end of 2003,
compared to $285 at the end of 2002.
21
2003.
Net cash provided by operating activities, including adjustments for
depreciation and other non-cash operating expenses, along with changes in
working capital, totaled $27,459 in 2004 compared to $8,335 in 2003 compared toand $8,656
in 20022002. Major changes in operating assets and $7,860liabilities in 2001.both 2004 and 2003
were related to the accrual and receipt of about $31 million from Tyco
International for patent infringement, and taxes on that income. Cash provided
by operating activities demonstrates the company'sin 2004 includes continued control of operatingexcellent net income
performance, aided by a $1,108$446 tax benefit attributable to exercise of employee
options, in 2003, compared to the same tax benefit in 20022003 of $1,108 and $354 and in 2001 of $60.2002.
The increase in the Company's use of cash for investing activities was fromprimarily as a result
of purchases of short termshort-term investments, in an effort to make prudent use of
excess cash. The Company realized $41UTMD expended $22,103 in gains from the sale of investments.2004 on such purchases, compared to $737
in 2003 and none in 2002. In 2003,2004, UTMD received $882$8,202 from selling short-term
investments. UTMD invested $1,012 in second quarter 2004 to acquire Abcorp,
Inc., its vendor for fetal monitoring belts. Please see the table under
Supplemental Disclosure of Cash Flow Information for detail of the Abcorp assets
purchased.
In 2004, UTMD received $1,111 and issued 197,432117,482 shares of stock upon the
exercise of employee and director stock options. Employees and directors
exercised a total of 298,852122,908 option shares in 2003,2004, with 101,4205,426 shares
immediately being retired as a result of the individuals trading the shares in
payment of the exercise price of the options and relatedoptions. UTMD paid $6 to meet tax
withholding requirements. UTMD paid $555 to meet those tax withholding requirements.requirements on options exercised. UTMD repurchased 96,900555,765 shares
of stock in the open market at a cost of $2,240$10,692 during 2003.2004. Option exercises
in 20032004 were at an average price of $8.26$10.05 per share. Share repurchases in the
open market were at an average cost of $23.12$19.24 per share, including commissions
and fees. In 2002,2003, the Company received a net
$1,082$882 from issuing 135,362197,432 shares of
stock on the exercise of employee and director stock options, including 1,727101,420
shares retired upon an employee trading those shares in payment of the stock
option exercise price.price and related tax withholding requirements.
During 2004, UTMD did not utilize its bank line of credit. In 2003, UTMD made
repayments of $4,956 on its note payable, which waseliminated the line of credit
balance remaining balance at the end of 2002, while receiving $0 in proceeds from the
note (lineline of credit).credit. In 2002, UTMD made loan repayments of $2,501 and received $4,956
in proceeds from the noteline of credit to finance the November 2002 tender offer. The
2002 loan proceeds were used to payoffer
for UTMD share repurchases as the result of
a tender offer.repurchases.
Management believes that future income from operations and effective
management of working capital will provide the liquidity needed to finance
growth plans. Planned 20042005 capital expenditures are expected to be approximately
$600 to keep facilities, equipment and tooling in good working order. In
addition to capital expenditures, UTMD plans to use cash in 20042005 for selective
infusions of technological, marketing or product manufacturing rights to broaden
the Company's product offerings; for continued share repurchases if the price of
the stock remains undervalued; and if available for a reasonable price,
acquisitions that may strategically fit UTMD's business and are accretive to
performance. The revolving line of credit line will continue to be available for
liquidity when the timing of acquisitions or repurchases of stock require a
large amount of cash in a short period of time in excess ofnot otherwise available from
existing cash and investment balances.
Management-22-
In summary, management plans to use theutilize cash from the Tyco damagesnot needed to support normal
operations in one or a combination of the following: 1) to make investments in
new technology,technology; 2) to acquire a product line that will help spur revenue growth
and better utilize UTMDs
infrastructure,UTMD's infrastructure; and/or 3) to buy back UTMD shares
in the open marketplace.
[Remainder of Page Intentionally Left Blank]
22
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of UTMD's significant contractual obligations and
commitments as of December 31, 20032004 (in thousands):
Less More
Contractual Obligations and Less More
Commitments than 1 1-3 3-5 than 5
-----------Commitments Total year years years years
------- ------------------ ------ ------ ------ ------ ------
Long-term debt obligations ..... $ --- $ --- $ --- $ --- $ ---
Operating lease obligations..... 1,065 66obligations 1,095 108 142 111 111 777734
Purchase obligations (1)........ 2,720 2,720 - - -
------- ------- 1,788 1,788 -- -- --
------ ------ ------ Total.....................------ ------
Total $2,883 $1,896 $ 3,785 $ 2,786142 $ 111 $ 111 $ 777
======= =======734
====== ====== ====== ====== ======
(1) The majority of UTMD's purchase obligations constitute raw
materials for use in its manufacturing operations. UTMD has the right to make
changes in, among other things, purchase quantities, delivery schedules and
order acceptance.
Off-Balance Sheet Arrangements
UTMD's only off-balance sheet arrangements are 1) an operating leaseslease on its
Oregon manufacturing facility, and on2) a lease for a portion of the parking lot
adjacent to its Utah facilities.manufacturing facility. Details on those arrangements are
provided above, and in Note 6 on page F-17.
Other Financial Measures
EBITDA (=(equals EBT, plus depreciation and amortization expenses, plus interest
expense) is a term used for measuring a company's ability to generate cash from
its operations without regard for changes in working capital, cash consumed for
fixed asset purchases, its cost of borrowing or income tax burden. UTMD's EBITDA
from normal operations in 20032004 was $12.2$11.7 million, or 45%44% as a ratio of sales. UTMD'sIn
both 2003 and 2002, EBITDA has averaged 40%was 45% of sales over the last five years.sales. The
extraordinarily strong cash generation
performance resulted from a combination of outstanding operating profit performance andexcellent profitability together with
royalty income from others' use of UTMD's technology. UTMD's 2004 EBITDA
including extraordinary items was $16.9 million. With sales and other
performance factors approximately the
same as in 2003,projected above, management projectsexpects 2005 EBITDA from
normal operations to be about the same in 2004.$12 million.
Please note that EBITDA is not defined or described by Generally Accepted
Accounting Principles (GAAP). As such, it is not prepared in accordance with
GAAP, is not a measure of liquidity, and is not a measure of operating results.
However, the components of EBITDA are prepared in accordance with GAAP, and UTMD
believes that EBITDA is an important measure of the Company's operating
performance and financial well-being.
Management's Outlook.
In summary, in 20042005 UTMD plans to
1) clear up its apparently unresolved QSR status with the U.S. FDA that has hindered
international sales, slowed new product development, stymied business
development and consumed an inordinate amount of human capital since 2002;2001;
2) continue outstanding operating performance;
3) actively look for new acquisitions to facilitate sales growth; and
4) utilize current excess cash balances in shareholders' best long termlong-term interest.
The following factors provide optimism that 2004 will demonstrate better top
line growth:
23-23-
1) the continued scrutiny by government agencies into the anti-competition,
anti-innovation and anti-good healthcare effects of bundling agreements and
exclusive agreements for physician preference products by hospital
administrators.
2) recent supply agreements with five of the top seven hospital GPOs.
3) continued improvements in a maturing U.S. direct sales force.
4) improvement in general economic conditions that have negatively affected U.S.
OEM activity.
5) elimination of unfavorable regulatory interference affecting export sales.
UTMD will continue to focus on differentiating itself, especially from
commodity-oriented competitors. UTMD is small, but its employees are experienced
and diligent in their work. Our passion is in providing innovative clinical
solutions that will help reduce health risks for women and their babies. The
Company has a defined focus and does not seek to become big as a primary
motivation. We just want to do an excellent job in meeting our customers' needs
and provide our shareholders with excellent returns.
The reliability and performance of UTMD's products is high and represents
significant clinical benefits as well as minimal total cost of care. Physicians
do care about the well-being of their patients, but their time is limited to
evaluate choices, and they have hospital administrators to deal with who often
look at the initial price of a product, without understanding the total picture
including complications and other less obvious costs.cost of
care picture.
In the U.S., UTMD will continue to leverage its reputation as an innovator
which will responsively take on challenges to work with physicians who use its
products in specialty hospital areas, or outside the hospital in their office
practices. Internationally, where UTMD must depend on the knowledge, focus,
relationships and energy of independent distributors, management will continue
to closely monitor performance and recruit needed new business partners.
UTMD's 2004 EPS were up 2%, and its $22.47 2004 ending share price was down
14% relative to the end of 2003. In 2003,comparison, the NASDAQ Composite, S&P 500
Index and DJIA were up, 9%, 9% and 3%, respectively, in 2004. Looking back five
years to the end of 1999, UTMD's EPS have more than doubled, and its year-ending
share price has more than tripled. In comparison, the NASDAQ Composite, S&P 500
Index and DJIA were down 46%, down 17% and down 6%, respectively, over that same
five year time span.
In 2004, UTMD again demonstrated a high positive cash flow, reflected by
achieving record EBITDA performance of 45% of sales, managing working
capital effectively and keeping new capital expenditures below its rate of
depreciation of existing assets. UTMD's balance sheet is strong enough to
finance an acquisition in 20042005 without issuing stock. In considering
acquisitions, UTMD looks to acquire successful companies that will enhance its
specialist focus. When UTMD acquires a company, it probably will be for cash and
with the idea that it will be able to retain key resources that helped make the
acquired entity previously successful.
Over the last six years, UTMD has made some significant accomplishments:
1) compounded EPS growth of 20% per year (not including receipt of patent
infringement damages); 2) two accretive acquisitions which now represent about
22% of the Company's business activity; 3) repurchase of 45% of the ownership of
the Company (including dilution of options) for $36 million (3.7 million net
shares at an average cost of $9.75 per share including commissions, other
repurchase costs and the difference between option exercise price and market
price for option shares exercised); and 4) a successful effort defending the
patent rights of UTMD's flagship product technology and core franchise of UTMD's
market identity, resulting in a $31 million damages award.
Looking back, UTMD's EPS were up 10% in 2003, and the $26.14 ending share
price was up 37% relative to the end of 2002. The NASDAQ Composite, S&P 500
Index and DJIA were up, 50%, 29% and 25% respectively in 2003. With 2003 EPS of
$1.50 (excluding Tyco damages award), UTMD's year-end price to trailing earnings
ratio (PER) was 17, suggesting that a combination of PER expansion closer to the
medical device industry average and continued increases in EPS performance could
again provide excellent shareholder returns in 2004.
Accounting Policy Changes.
In May 2003,December 2004, the FASB issued SFAS 150,123 (revised 2004), "Accounting for
Certain Financial
Instruments with Characteristics of both Liabilities and Equity.Stock Based Compensation." This new
statement changessupersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This revised statement establishes
standards for the accounting of transactions in which an entity exchanges its
equity instruments for certain financial instruments that, under
24
previous guidance, issuers could account for as equity or classifications
between liabilitiesgoods and equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be classified as
liabilities in balance sheets. Mostservices, including the grant of the guidance in SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003.stock options
to employees and directors. The
adoption of SFAS 150 did not have any impact on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003, with certain
exceptions. The adoption of SFAS 149 did not have any effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46), which addresses consolidation by business
enterprises of variable interest entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim periodperiods beginning
after June 15, 2003,2005, and will require the Company to variable
interest entities in which an enterprise holds a variable interest thatrecognize compensation cost
based on the grant date fair value of the equity instruments it acquired before February 1, 2003.awards. The
Company currently accounts for those instruments under the recognition and
measurement principles of APB Opinion 25, including the disclosure-only
provisions of the original SFAS 123. Accordingly, no compensation cost from
issuing equity instruments has not identified and does not
expect to identify any variable interest entitiesbeen recognized in the Company's financial
statements. The Company estimates that must be consolidated.
In December 2002, the Financial Accounting Standards Board issued SFAS 148
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement 123," which is effective for all fiscal years ending
after December 15, 2002. SFAS 148 provides alternative methods of transition for
a voluntary change to fair value based method of accounting for stock-based
employee compensation under SFAS 123 from intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion 25. SFAS 148 also
changes the disclosure requirementrequired adoption of SFAS 123 requiring(R) in
third quarter 2005 will have a more prominent
disclosurenegative impact on its consolidated financial
statements. Please see note 1, starting on page F-12 for an estimate of the
pro-forma effect of the fair value based method of accounting
for stock-based compensation. The adoption of SFAS 148 by the Company did notimpact this Statement would have any impacthad on the Company's consolidated financial statements and is not
expected to have any impact on future operations.net income for the periods
covered by this report.
-24-
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Prior to January 1, 2002, theRISK
The Company had manufacturing operations, including related assets, in Ireland
denominated in Irish Pounds,the EURO, and sold products under agreements denominated in
various Western European currencies. On January 1,
2002, UTMD converted its Irish operations and assets to the EURO currency,
consistent with conversion of Ireland and many other Western European countries
to the new common EURO currency. The EURO Irish Pound and other currencies have been and
are subject to exchange rate fluctuations that are beyond the control of UTMD.
The exchange rate for the EURO was .7335, .7958 and .9551 per U.S. Dollar as of
December 31, 2004, 2003 and 2002, respectively. The exchange rate for the Irish
Pound was .8869 per U.S. Dollar as of December 31, 2001. Please see Note 1, starting on
page F-9.F-12. UTMD manages its foreign currency risk without separate hedging
transactions by converting currencies as transactions occur.
25
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.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 2, 2003, the Audit Committee of the Board of Directors of UTMD
decided to engage Jones Simkins, P.C., Logan, Utah as independent accountant and
auditor to report on UTMD's financial statements for the year ended December 31,
2003, and to complete quarterly reviews in 2004.
In conjunction with the new engagement, UTMD discontinued the services of
Tanner + Co., Salt Lake City, Utah as the Company's principal accountant to
audit and report on the Company's financial statements. Tanner + Co. had served
UTMD as external auditor for the last six years. Under SEC Regulation S-K, Reg
ss.229.304, the reason for the auditor change was dismissal, not resignation for
declining to stand for re-election.
The report of Tanner + Co. on UTMD's financial statements consisting of
consolidated balance sheets as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002, did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
audit scope or accounting principles. In addition to acting as UTMD's principal
accountant, Tanner + Co. prepared UTMD's tax filings for the prior nine years
and its quarterly reviews since such reviews have been required by SEC policies.
Russell Brennan Keane, Athlone, Ireland has audited UTMD's Ireland subsidiary,
Utah Medical Products Ltd., for the prior five years.
In connection with the Company's two most recent fiscal year audits and any
subsequent interim period preceding the disengagement of Tanner + Co., there
were no disagreements with Tanner + Co. 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 UTMD's 2002 financial statements, Tanner + Co. noted no matters
involving the internal control structure and operations that they considered to
be material weaknesses.
The Audit Committee, comprised of UTMD's outside directors, believed a change
in auditors would be beneficial to executing its oversight responsibilities by
providing a fresh look at the Company's records and financial controls. The
Audit Committee believes Jones Simkins has an experienced staff and partners
well suited to serve the needs of UTMD.
No consultations occurred between UTMD and Jones Simkins during the two most
recent fiscal years and any subsequent interim period prior to Jones Simkins'
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 UTMD'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.
26
DISCLOSURE
None.
ITEM 9A - DISCLOSURE CONTROLS AND PROCEDURES.PROCEDURES
Evaluation of Disclosure Controls and Procedures.
UTMD maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of its consolidated condensed
financial statements and other disclosures included in this report. UTMD's Board
of Directors, operating through its audit committee, provides oversight to its
financial reporting process.
Within the 90-day period prior to the date of this report, UTMD evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, UTMD's Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures are effective in alerting
them in a timely manner to material information relating to UTMD required to be
included in this annual report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has
included, as part of this Form 10-K, a report of management's assessment of the
effectiveness of its internal controls as of December 31, 2004. Jones Simkins,
P.C., the independent registered public accounting firm of the Company, has
audited management's assessment of, and the effectiveness of, the Company's
internal control over financial reporting. Management's report, and the report
of Jones Simkins, P.C. appear on pages F-2 and F-3 of this Form 10-K under the
captions "Management's Report on Internal Control Over Financial Reporting" and
"Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting" and are incorporated herein by reference.
Changes in Internal Control Over Financial Reporting.
There have been no significant changes in UTMD's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
that it carried out its evaluation and there were no corrective actions
regarding significant deficiencies or material weaknesses.
[Remainder of Page Intentionally Left Blank]
27ITEM 9B- OTHER INFORMATION
None.
-25-
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."
UTMD adopted a Code of Ethics for its executive officers, including the Chief
Executive Officer, and outside directors in October 2003. The Code of Ethics,
along with UTMD's Code of Conduct, which covers all exempt employees (including
all officers and outside directors) and certain non-exempt employees, is posted
on UTMD's web site at www.utahmed.com. UTMD intends to post on its website any
waivers of or amendments to its Code of Ethics.
ITEM 11 - EXECUTIVE COMPENSATION.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.MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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.TRANSACTIONS
None.
28ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information from the definitive proxy statement for the 2005 annual
meeting of stockholders under the caption "Independent Public Accountants" is
incorporated herein by reference.
-26-
PART IV
---------------
ITEM 1415 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report or incorporated
herein by reference.
1. Financial Statements.
(See Index to Consolidated Financial Statements at page F-1.)
2. Supplemental Schedule.
Financial Statement Schedules are omitted because they are inapplicable or
the required information is otherwise included in the accompanying Financial
Statements and the notes thereto.
3. Exhibits.
SEC
Exhibit # Reference # Title of Document Location
- ---------- ----------- ------------------------------------------------------------------ ----------------
1 3 Articles of Restatement of the Articles of Incorporation Incorporated by
Reference (1)
2 3 Bylaws Incorporated by
Reference (1)
3 4 Rights Agreement dated as of October 28, 1994, between Utah Incorporated by
Medical Products, Inc., and Registrar and Transfer Company Reference (1)
4 4 Designation of Rights, Privileges, and Preferences of Series "A" Incorporated by
Preferred Stock Reference (1)
5 10 Employment Agreement dated December 21, 1992 with Kevin L. This Filing
Cornwell*
6 10 Amendment, effective May 15, 1998, to Employment Agreement dated This Filing
December 21, 1992 with Kevin L. Cornwell*
7 10 Utah Medical Products, Inc., 2003 Employees' and Directors' Incorporated by
Incentive Plan* Reference (2)
8 10 Utah Medical Products, Inc., 1994 Employee Incentive Stock Incorporated by
Option Plan* Reference (1)
9 10 Loan Agreement, dated 3 July, 2002 between Utah Medical Incorporated by
Products, Inc and U.S. Bank National Association Reference (3)
10 10 Revolving Promissory Note, dated July 3, 2002 by Utah Medical Incorporated by
Products, Inc. to U.S. Bank National Association Reference (3)
11 10 First Amendment to Loan Agreement, dated 21 May 2003 between Incorporated by
Utah Medical Products, Inc. and U.S. Bank National Association Reference (4)
12 21 Subsidiaries of Utah Medical Products, Inc. Incorporated by
Reference (5)
13 23 Consent of Jones Simkins, P.C., Company's independent auditors This Filing
for the year ending December 31, 2003
29
SEC
Exhibit # Reference # Title of Document Location
- --------- ----------- ----------------- --------
14 23 Consent of Tanner + Co., Company's independent This Filing
Auditors for the years ending December 31, 2002 and
December 31, 2001
15 31 Certification of CEO pursuant to Rule 13a-14(a) as adopted This Filing
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
16 31 Certification of Principal Financial Officer pursuant to Rule This Filing
13a-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
17 32 Certification of CEO pursuant to 18 U.S.C. ss.1350, as Adopted This Filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18 32 Certification of Principal Financial Officer pursuant to 18 This Filing
U.S.C. ss.1350,SEC
Exhibit # Reference # Title of Document Location
- --------- ----------- -------------------------------------- ---------------
1 3 Articles of Restatement of the Articles This Filing
of Incorporation
2 3 Articles of Correction to the Restated This Filing
Articles of Incorporation
3 3 Bylaws Incorporated by
Reference (1)
4 4 Rights Agreement dated as of July 30, Incorporated by
2004, between Utah Medical Products, Reference (2)
Inc., and Registrar and Transfer Company
5 4 Designation of Rights, Privileges, and Incorporated by
Preferences of Series "A" Preferred Stock Reference (1)
6 10 Employment Agreement dated December 21, Incorporated by
1992 with Kevin L. Cornwell* Reference (3)
7 10 Amendment, effective May 15, 1998, to Incorporated by
Employment Agreement dated December 21, Reference (3)
1992 with Kevin L. Cornwell*
8 10 Utah Medical Products, Inc., 2003 Incorporated by
Employees' and Directors' Incentive Plan* Reference (4)
9 10 Loan Agreement, dated 3 July, 2002 Incorporated by
between Utah Medical Products, Inc and Reference (5)
U.S. Bank National Association
10 10 Revolving Promissory Note, dated July 3, Incorporated by
2002 by Utah Medical Products, Inc. to Reference (5)
U.S. Bank National Association
11 10 Second Amendment to Loan Agreement, Incorporated by
dated 30 August 2004 between Utah Reference (6)
Medical Products, Inc. and U.S.
Bank National Association
12 10 Summary of Officer and Director This Filing
Compensation
13 21 Subsidiaries of Utah Medical Products, Incorporated by
Inc. Reference (7)
14 23 Consent of Jones Simkins, P.C., Company's This Filing
independent auditors for the years ended
December 31, 2004 and December 31, 2003
15 23 Consent of Tanner + Co., Company's This Filing
independent auditors for the year ended
December 31, 2002
-27-
SEC
Exhibit # Reference # Title of Document Location
- --------- ----------- ---------------------------------------- -----------
16 31 Certification of CEO pursuant to Rule This Filing
13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
17 31 Certification of Principal Financial This Filing
Officer pursuant to Rule 13a-14(a) as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
18 32 Certification of CEO pursuant to 18 U.S.C. This Filing
1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
19 32 Certification of Principal Financial This Filing
Officer pursuant to 18 U.S.C. 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Management contract of compensatory plan or arrangement required to be filed
pursuant to Item 14(c).
(1) Incorporated by reference from the Company's registration statement on
form S-8 filed with the Commission effective February 10, 19951995.
(2) Incorporated by reference from the Company's report on form 8-K filed
with the Commission on October 1, 2004.
(3) Incorporated by reference from the Company's annual report on form
10-K filed with the Commission for the year ended December 31, 2003.
(4) Incorporated by reference from the Company's annual report on form
10-K filed with the Commission for the year ended December 31, 2002.
(3)(5) Incorporated by reference from the Company's quarterly report on form
10-Q filed with the Commission for the quarter ended June 30, 2002.
(4)(6) Incorporated by reference from the Company's quarterly report on form
10-Q filed with the Commission for the quarter ended JuneSeptember 30,
2003.
(5)2004.
(7) Incorporated by reference from the Company's annual report on form
10-K filed with the Commission for the year ended December 31, 1999.
(b) Reports on Form 8-K.
On October 21, 2003, UTMD filed a report on Form 8-K, Item 12, Results of
Operations and Financial Condition, reporting financial results for third
quarter 2003.
On November 7, 2003, UTMD filed a report on Form 8-K, Item 4, Changes in
Registrant's Certifying Accountant, reporting the audit committee's decision to
change UTMD's certifying accountant from Tanner + Co. to Jones Simkins, P.C.
On December 5, 2003, UTMD filed a report on Form 8-K, Item 5, Other Items,
reporting that the U.S. Court of Appeals affirmed a 2002 judgment by the Federal
District Court awarding UTMD approximately $23 million in damages and accrued
interest from Tyco International for patent infringement.
30-28-
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 15th16th day of March, 2004.2005.
UTAH MEDICAL PRODUCTS, INC.
By: /s/ Kevin L. Cornwell
--------------------------------------------------------------
Kevin L. Cornwell
CEO
Chief Executive Officer
By: /s/ Greg A. LeClaire
--------------------------------------------------------------
Greg A. LeClaire
Chief Financial Officer
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 15th16th day of March, 2004.2005.
By: /s/ Stephen W. Bennett
-----------------------------------------------------------------
Stephen W. Bennett, Director
By: /s/ Kevin L. Cornwell
-----------------------------------------------------------------
Kevin L. Cornwell, Director
By: /s/ Ernst G. Hoyer
-----------------------------------------------------------------
Ernst G. Hoyer, Director
By: /s/ Barbara A. Payne
-----------------------------------------------------------------
Barbara A. Payne, Director
By: /s/ Paul O. Richins
-----------------------------------------------------------------
Paul O. Richins, Director
31-29-
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 2002 and 20012002
UTAH MEDICAL PRODUCTS, INC.
---------------------------
Index to Consolidated Financial Statements
------------------------------------------
December 31, 2004, 2003 2002 and 20012002
--------------------------------
Page
----
Management's Report on Internal Control Over Financial Reporting F-2
Report of Jones Simkins, P.C. F-2on Management's Assessment
on Internal Control Over Financial Reporting F-3
Report of Jones Simkins, P.C. on Financial Statements F-5
Report of Tanner + Co. F-3on Financial Statements F-6
Consolidated balance sheet F-4F-7
Consolidated statement of income and comprehensive income F-5F-8
Consolidated statement of cash flows F-6F-9
Consolidated statement of stockholders' equity F-7F-11
Notes to consolidated financial statements F-8F-12
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
Company's internal control over financial reporting includes those policies and
procedures that:
- pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
- provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
- provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of December
31, 2004.
The Company's independent registered public accounting firm, Jones Simkins,
P.C., has audited management's assessment of the Company's internal control over
financial reporting as of December 31, 2004, and their report is shown on the
next pages.
By: /s/ Kevin L. Cornwell
-------------------------
Kevin L. Cornwell
Chief Executive Officer
By: /s/ Greg A. LeClaire
-------------------------
Greg A. LeClaire
Chief Financial Officer
F-2
REPORT OF INDEPENDENT AUDITORS'REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited management's assessment, included in the accompanying report
titled Management's Report On Internal Control Over Financial Reporting, that
Utah Medical Products, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Utah Medical Products, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Utah Medical Products, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
F-3
Also in our opinion, Utah Medical Products, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the December 31, 2004 consolidated
financial statements of Utah Medical Products, Inc. and our report dated January
17, 2005 expressed an unqualified opinion.
/s/ Jones Simkins, P.C.
- -----------------------
JONES SIMKINS, P.C.
Logan, Utah
January 17, 2005
F-4
REPORT OF INDEPENDENT REGISTERED
--------------------------------
PUBLIC ACCOUNTING FIRM
----------------------
To the Board of Directors and Stockholders' of
Utah Medical Products, Inc.
We have audited the accompanying consolidated balance sheetsheets of Utah Medical
Products, Inc. as of December 31, 2004 and 2003 and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Utah Medical
Products, Inc. as of December 31, 2004 and 2003 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Utah Medical
Products, Inc. internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated January 17, 2005 expressed an unqualified opinion.
/s/ Jones Simkins, P.C.
- -----------------------
JONES SIMKINS, P.C.
Logan, Utah
January 17, 2005
F-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Utah Medical Products, Inc.
We have audited the consolidated statements of income and other comprehensive
income, stockholders' equity, and cash flows of Utah Medical Products, Inc. for
the year ended December 31, 2003.2002. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial positionresults of operations and cash flows of
Utah Medical Products, Inc. as of December 31, 2003 and the results of its operations and its
cash flows for the year ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Jones Simkins, P.C.
JONES SIMKINS, P.C.
Logan, Utah
January 20, 2004
F-2
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, 2002 and the related consolidated statements of income and
other comprehensive income, stockholders' equity, and cash flows for the years
ended December 31, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Utah Medical
Products, Inc. as of December 31, 2002, and the results of their operations and
their cash flows for the years ended December 31, 2002 and 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Tanner + CompanyCo.
Salt Lake City, Utah
January 21, 2003
F-3F-6
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
December 31, 2004 and 2003
and 2002--------------------------
(In thousands)
ASSETS 2004 2003 2002
------ -------- --------
Current assets:
Cash $ 1,818 $ 762 285
Investments, available-for-sale (note 3) 15,110 722 --
Accounts receivable, net (note 2) 3,730 3,326 3,093
Inventories (note 2) 2,859 3,268 3,478
Prepaid expenses and other current assets 263 219 502
Litigation receivable (note 13) -- 24,884 --
Deferred income taxes (note 7) 750 721 399
-------- --------
Total current assets 24,530 33,902 7,757
Property and equipment, net (note 4) 9,058 9,005 8,890
Other assets, net (note 2) 7,674 6,787 6,740
-------- --------
Total assets $ 41,262 $ 49,694 23,387
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 698 $ 368 631
Accrued expenses (note 2) 3,638 12,129 1,688
-------- --------
Total current liabilities 4,336 12,497 2,319
Note payable (note 5) -- 4,956
Deferred income taxes (note 7) 769 665 390
-------- --------
Total liabilities 5,105 13,162 7,665
-------- --------
Commitments and contingencies (notes 6 and 10) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.01 par value; 50,000 shares
authorized, issued 4,105 shares in 2004 and
4,544 shares in 2003 and
4,443 shares in 200241 45 44
Accumulated other comprehensive income 226 (260) (1,115)
Retained earnings 35,890 36,747 16,793
-------- --------
Total stockholders' equity 36,157 36,532 15,722
-------- --------
Total liabilities and stockholders' equity $ 41,262 $ 49,694 23,387
======== ========
See accompanying notes to financial statements.
F-4statements
F-7
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
AND COMPREHENSIVE INCOME
------------------------
Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------
(In thousands, except per share amounts)
----------------------------------------
2003 2002 2001
-------- -------- --------
Sales, net (note 9) $ 27,137 $ 27,361 $ 26,954
Cost of goods sold (notes 9 and 10) 11,245 11,598 11,561
-------- -------- --------
Gross margin 15,892 15,763 15,393
Operating expenses:
Sales and marketing 2,364 2,472 2,773
Research and development 288 285 364
General and administrative 2,518 2,464 2,978
-------- -------- --------
Income from operations 10,722 10,542 9,278
Other income (expense):
Dividend and interest income 5 6 9
Royalty income 450 450 450
Interest expense (47) (36) (370)
Other, net 46 34 113
-------- -------- --------
Income before provision for income taxes
and extraordinary item 11,176 10,996 9,480
Provision for income taxes (note 7) 3,841 3,831 3,546
-------- -------- --------
Income before extraordinary item 7,335 7,165 5,934
Extraordinary item - gain from litigation, net of
income taxes of $9,250 (note 13) 13,426 -- --
-------- -------- --------
Net income $ 20,761 $ 7,165 $ 5,934
======== ======== ========
Earnings per common share (basic) (notes 1 and 2):
Before extraordinary item $ 1.62 $ 1.46 $ 1.18
Extraordinary item 2.97 -- --
-------- -------- --------
Total $ 4.59 $ 1.46 $ 1.18
======== ======== ========
Earnings per common share (diluted) (notes 1 and 2):
Before extraordinary item $ 1.50 $ 1.36 $ 1.14
Extraordinary item 2.75 -- --
-------- -------- --------
Total $ 4.25 $ 1.36 $ 1.14
======== ======== ========
Other comprehensive income:
Foreign currency translation net of taxes of
$288, $244, and $(87)UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
AND COMPREHENSIVE INCOME
------------------------
Years ended December 31, 2004, 2003 and 2002
--------------------------------------------
(In thousands, except per share amounts)
2004 2003 2002
-------- -------- --------
Sales, net (note 9) $ 26,485 $ 27,137 $ 27,361
Cost of goods sold (notes 9 and 10) 11,419 11,245 11,598
-------- -------- --------
Gross margin 15,066 15,892 15,763
Operating expenses:
Sales and marketing 2,253 2,364 2,472
Research and development 292 288 285
General and administrative 2,412 2,518 2,464
-------- -------- --------
Income from operations 10,109 10,722 10,542
Other income (expense):
Dividend and interest income 238 5 6
Royalty income 450 450 450
Interest expense -- (47) (36)
Other, net 110 46 34
-------- -------- --------
Income before provision for income taxes
and extraordinary items 10,907 11,176 10,996
Provison for income taxes (note 7) 3,741 3,841 3,831
-------- -------- --------
Income before extraordinary items 7,166 7,335 7,165
Extraordinary items, net of income taxes of
$2,156 in 2004 and $9,250 in 2003 (note 13) 3,054 13,426 --
-------- -------- --------
Net income $ 10,220 $ 20,761 $ 7,165
======== ======== ========
Earnings per common share (basic)
(notes 1 and 2):
Before extraordinary items $ 1.63 $ 1.62 $ 1.46
Extraordinary items 0.69 2.97 --
-------- -------- --------
Total $ 2.32 $ 4.59 $ 1.46
======== ======== ========
Earnings per common share (diluted)
(notes 1 and 2):
Before extraordinary items $ 1.53 $ 1.50 $ 1.36
Extraordinary items 0.65 2.75 --
-------- -------- --------
Total $ 2.19 $ 4.25 $ 1.36
======== ======== ========
Other comprehensive income:
Foreign currency translation net
of taxes of $107, $288 and $244 $ 222 $ 548 $ 457 $ (170)
Unrealized gain on investments net
of taxes of $61, $12 $0, and $0 157 19 -- --
-------- -------- --------
Total comprehensive income $ 10,599 $ 21,328 $ 7,622 $ 5,764
======== ======== ========
See accompanying notes to financial statements.
F-5F-8
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOW
-----------------------------------
Years Ended December 31, 2004, 2003 2002 and 20012002
--------------------------------------------
(In thousands)
--------------2004 2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
- -------------------------------------
Net income $ 10,220 $ 20,761 $ 7,165
$ 5,934-------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 809 984 1,172 1,933
Gain on investments (52) (11) -- --
Provision for (recovery of) losses on accounts receivable 3 (93) 18 70
Loss on disposal of assets 5 4 -- 6
Deferred income taxes 75 (47) 108 (26)
Tax benefit attributable to exercise of stock options 446 1,108 354 60
(Increase) decrease in:
Accounts receivable (226) 36 577 164
Accrued interest and other receivables (191) 257 (316)
121
Inventories 437 174 (168) (239)
Prepaid expenses and other current assets (43) (32) (31)
(20)
Litigation receivable 24,884 (24,884) -- --
Increase (decrease) in:
Accounts payable 312 (291) 154
(208)
Accrued expenses (9,220) 10,369 (377) 65
-------- -------- --------
Net cash provided by operating activities 27,459 8,335 8,656 7,860
-------- -------- --------
Cash flows from investing activities:
- -------------------------------------
Capital expenditures for:
Property and equipment (411) (272) (517)
(524)
Intangible assets (10) (122) --
--
PurchasePurchases of investments (22,103) (737) -- --
Proceeds from the sale of investments 8,202 98 --
Net cash paid in acquisition (1,012) -- --
-------- -------- --------
Net cash used in investing activities (15,334) (1,033) (517) (524)
-------- -------- --------
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of common stock - options 1,111 882 1,113 316
Common stock purchased and retired (10,692) (2,240) (11,787) (193)
Common stock purchased and retired - options (6) (555) (31) --
Proceeds from note payable -- -- 4,956 --
Repayments of note payable -- (4,956) (2,501)
(7,499)Dividends paid (1,331) -- --
-------- -------- --------
Net cash used in financing activities (10,918) (6,869) (8,250) (7,376)
-------- -------- --------
Effect of exchange rate changes on cash (151) 44 26 (4)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,056 477 (85) (44)
Cash at beginning of year 762 285 370 414
-------- -------- --------
Cash at end of year $ 1,818 $ 762 $ 285 $ 370
======== ======== ========
Supplemental disclosures of cash flow information:
- ---------------------------------------------------
Cash paid during the year for:
Income taxes $ 2,628 $ 3,568 $ 3,399
======== ======== ========
Interest $ 47 $ 25 $ 370
======== ======== ========
See accompanying notes to financial statements.
F-6F-9
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOW
-----------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
(In thousands)
Continued
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
2004 2003 2002
-------- -------- --------
Cash paid during the year for:
Income taxes $ 14,294 $ 2,628 $ 3,568
Interest $ -- $ 47 $ 25
During 2004, the Company purchased
all of the oustanding stock of Abcorp
Medical, Inc. The Company paid cash
and recorded net assets from the
acquisition as follows:
Cash $ 11
Accounts receivable 127
Inventory 25
Prepaid insurance 19
Equipment, net 16
Accounts payable (96)
Accrued expenses (25)
Goodwill 946
--------
Total cash paid 1,023
Less cash received (11)
--------
Net cash investment $ 1,012
See accompanying notes to financial statements.
F-10
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
Years Ended December 31, 2004, 2003 2002 and 20012002
--------------------------------------------
(In thousands)
--------------
Accumulated
Common Stock Additional Other Total
--------------------- Paid-In------------------- Paid-in Comprehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
-------- -------- -------- -------- -------- --------
Balance at January 1, 2001 5,003 $ 50 $ -- $ (1,559) $ 13,856 $ 12,347
Shares issued upon exercise of employee
stock options for cash 45 -- 316 -- -- 316
Tax benefit attributable to appreciation
of stock options -- -- 60 -- -- 60
Common stock purchased and retired (19) -- (376) -- 183 (193)
Foreign currency translation adjustment -- -- -- (257) -- (257)
Net income -- -- -- -- 5,934 5,934
-------- -------- -------- -------- -------- --------
Balance at December 31, 2001 5,029 $ 50 $ -- $ (1,816) $ 19,973 $ 18,207
2002
Shares issued upon
exercise of employee
stock options for cash 137 1 1,112 -- -- 1,113
Shares received and
retired upon exercise
of stock options (2) -- (31) -- -- (31)
Tax benefit attributable
to appreciation of stock
options -- -- 354 -- -- 354
Common stock purchased and
retired (721) (7) (1,435) -- (10,345) (11,787)
Foreign currency
translation adjustment -- -- -- 701 -- 701
Net income -- -- -- -- 7,165 7,165
-------- -------- -------- -------- -------- --------
Balance at December 31,
2002 4,443 $ 44 $ -- $ (1,115) $ 16,793 $ 15,722
Shares issued upon
exercise of employee
stock options for cash 299 3 2,465 -- -- 2,468
Shares received and
retired upon exercise
of stock options (101) (1) (2,141) -- -- (2,142)
Tax benefit attributable
to appreciation of stock
options -- -- 1,108 -- -- 1,108
Common stock purchased
and retired (97) (1) (1,432) -- (807) (2,240)
Foreign currency
translation adjustment -- -- -- 836 -- 836
Unrealized holding gain
from investments,
available-for-sale,
net of taxtaxes -- -- -- 19 -- 19
Net income -- -- -- -- 20,761 20,761
-------- -------- -------- -------- -------- --------
Balance at December 31,
2003 4,544 $ 45 $ -- $ (260) $ 36,747 $ 36,532
Shares issued upon
exercise of employee
stock options for cash 123 1 1,234 -- -- 1,235
Shares received and
retired upon exercise
of stock options (5) (0) (124) -- -- (124)
Tax benefit attributable
to appreciation of stock
options -- -- 446 -- -- 446
Common stock purchased
and retired (557) (5) (1,556) -- (9,130) (10,691)
Foreign currency
translation adjustment -- -- -- 329 -- 329
Unrealized holding gain
from investments,
available-for-sale,
net of taxes -- -- -- 157 -- 157
Common stock dividends -- -- -- -- (1,947) (1,947)
Net income -- -- -- -- 10,220 10,220
-------- -------- -------- -------- -------- --------
Balance at December 31,
2004 4,105 $ 41 $ -- $ 226 $ 35,890 $ 36,157
======== ======== ======== ======== ======== ========
See accompanying notes to financial statements.
F-7F-11
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 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
specialized devices for the health carehealthcare 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'sphysicians' offices.
Products are sold in both domestic U.S. and international markets.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Although actual results could differ from those
estimates, management believes it has considered and disclosed all relevant
information in making its estimates that materially affect reported performance
and current values.
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.
Cash and Cash Equivalents
- -------------------------
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.
Investments
- -----------
The Company classifies its investments as "available for sale." Securities
classified as "available for sale" are carried in the financial statements at
fair value. Realized gains and losses, determined using the specific
identification method, are included in operations; unrealized holding gains and
losses are reported as a separate component of accumulated other comprehensive
income. Declines in fair value below cost that are other than temporary are
included in operations.
F-8F-12
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Concentration of Credit Risk
- ----------------------------
The primary concentration of credit risk consists 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 as reflected by its reserves.
The Company's customer base consists primarily of hospitals, medical product
distributors, physician practices and others directly related to healthcare
providers. Although the Company is affected by the well-being of the global
healthcare industry, management does not believe significant trade receivable
credit risk exists at December 31, 2003.2004.
The Company maintains its cash in bank deposit accounts, which at times, may
exceed federally insured limits in addition to Fidelity Investments'Investments accounts.
The Company has not experienced any losses in such accounts and believes it is
not exposed to a significant credit risk on cash and cash equivalent balances.
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
Long-Lived Assets
- -----------------
The Company evaluates its long-lived assets in accordance with SFASStatement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment of
Long-Lived Assets".Assets." Long-lived assets held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows
associated with the related asset or group of assets over their estimated useful
lives against their respective carrying amounts. Impairment, if any, is based on
the excess of the carrying amount over the fair value of those assets and is
recorded in the period in which the determination was made.
F-9F-13
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- ------------------------------------------------------------------------------------------------------------------
Intangible Assets
- -----------------
Costs associated with the acquisition of patents, trademarks, license rights and
non-compete agreements are capitalized and are being amortized using the
straight-line method over periods ranging from 5 to 17 years. On January 1,
2002,The Company
evaluates the Company adoptedcarrying value of its goodwill in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets".
SFAS No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization method to an impairment approach. Other
intangible assets will continue to be amortized over their estimated useful
lives. Amortization of goodwill which relates to the Company's 1997 and 1998
acquisitions ceased on January 1, 2002. Goodwill amortization expense in 2001was
(in thousands) $569.
The Company has completed its annual impairment test of goodwill required by
SFAS No. 142 andAssets." At December 31, 2004 no impairment was
indicated.
Loans to Related Parties
- ------------------------
Except as further disclosed in these notes, the Company has not made loans to
related entities including employees, directors, shareholders, suppliers or
customers, nor does it guarantee the debt of related entities.
Revenue Recognition
- -------------------
Revenue from product sales is generally recognized at the time the product is
shipped and invoiced and collectibility is reasonably assured. The Company also
provides for the estimated cost that may be incurred for product warranties and
unforeseen uncollectible accounts. The Company believes that revenue should be
recognized at the time of shipment as title generally passes to the customer at
the time of shipment. This policy meets the criteria of Staff Accounting
Bulletin 101 in that there is persuasive evidence of an existing contract or
arrangement, delivery has occurred, the price is fixed and determinable and the
collectibility is reasonably assured.
Income Taxes
- ------------
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," whereby deferred taxes are computed under the asset and liability
method.
Legal Costs
- -----------
The Company has been and continues to be involved in lawsuits which are an expected and at times unexpected consequence of
its operations and in the ordinary course of business. The Company is currently
involved in litigation with the FDA which it does not consider an expected
consequence of its operations, or in the ordinary course of its business. The
Company maintains a reserve for legal costs consistent with its previous
experience and anticipated costs. The reserve for legal costs at December 31,
20032004 and 20022003 was (in thousands) $1,050$1,260 and $125,$1,050, respectively (see Note 2).
F-10F-14
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- -------------------------------------------------------------------------------------------------------------------
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 earnings per common share assuming dilution is based on the
weighted average number of shares outstanding during the year plus the weighted
average common stock equivalents which would arise from the exercise of stock
options outstanding using the treasury stock method and the average market price
per share during the year.
The shares (in thousands) used in the computation of the Company's basic and
diluted earnings per share are reconciled as follows:
2004 2003 2002 2001
------ ------ ------
Weighted average number of shares
outstanding - basic 4,399 4,526 4,913 5,019
Dilutive effect of stock options 276 359 350 191
------ ------ ------
Weighted average number of shares
outstanding, assuming dilution 4,675 4,885 5,263
5,210
===== ===== =========== ====== ======
Stock-Based Compensation
- ------------------------
At December 31, 2003,2004, the Company has stock-based employee compensation plans,
which are described more fully in Note 8. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion 25, "Accounting
for Stock Issued to Employees",Employees," and related Interpretations, and has adopted the
disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized in the
financial statements, as all options granted under those plans had an exercise
price equal to or greater than the market value of the underlying common stock
on the date of grant.
Starting July 1, 2005, in accordance with SFAS 123 (revised 2004), the Company
will be required to begin recognizing compensation cost related to its stock
option plans. Please see note 14, below.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards starting in 1995 consistent with
the provisions of SFAS 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
F-11F-15
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- -------------------------------------------------------------------------------------------------------------------
Stock-Based Compensation (continued)
- -------------------------
Years ended December 31,
-----------------------------------
2003 2002 2001
---------- ---------- ---------
Net income as reported $ 20,761 $ 7,165 $ 5,934
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (178) (175) (248)
---------- ---------- ---------
Net income pro forma $ 20,583 $ 6,990 $ 5,686
========== ==========Years ended December 31,
--------------------------------------
2004 2003 2002
------------ ----------- ---------
Net income as reported $ 10,220 $ 20,761 $ 7,165
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (388) (178) (175)
------------ ----------- ---------
Net income pro forma $ 9,832 $ 20,583 $ 6,990
============ =========== =========
Earnings per share:
Basic - as reported $ 2.32 $ 4.59 $ 1.46
============ =========== =========
Basic - pro forma $ 2.24 $ 4.55 $ 1.42
============ =========== =========
Diluted - as reported $ 2.19 $ 4.25 $ 1.36
============ =========== =========
Diluted - pro forma $ 2.10 $ 4.21 $ 1.33
============ =========== =========
Earnings per shared:
Basic - as reported $ 4.59 $ 1.46 $ 1.18
========== ========== =========
Basic - pro forma $ 4.55 $ 1.42 $ 1.13
========== ========== =========
Diluted - as reported $ 4.25 $ 1.36 $ 1.14
========== ========== =========
Diluted - pro forma $ 4.21 $ 1.33 $ 1.09
========== ========== =========
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. Net gains or losses
resulting from the translation of the Company's assets and liabilities are
reflected as a separate component of stockholders' equity. A negative
translation impact on stockholders' equity reflects a current relative U.S.
Dollar value higher than at the point in time that assets were actually acquired
in a foreign currency. A positive translation impact would result from a U.S.
Dollardollar weaker in value than at the point in time foreign assets were acquired.
Income and expense items are translated at the weighted average rate of exchange
(based on when transactions actually occurred) during the year.
F-12F-16
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 2 - Detail of Certain Balance Sheet Accounts
- -------------------------------------------------
December 31,
-----------------------------------------------
2004 2003 2002
-------- --------
Account receivable (in thousands):
Receivables $ 3,3733,636 $ 3,2523,373
Accrued interest and other 171 27 8
Less allowance for doubtful accounts (77) (74) (167)
-------- --------
$ 3,3263,730 $ 3,0933,326
======== ========
Inventories (in thousands):
Finished products $ 932 $ 1,495
$ 1,236
Work-in-process 640 631 907
Raw materials 1,287 1,142 1,335
-------- --------
$ 3,2682,859 $ 3,4783,268
======== ========
Other assets (in thousands):
Goodwill $ 8,5339,479 $ 8,533
Patents 2,025 2,015 1,893
License rights 293 293
Trademarks 224 224
Non-compete agreements $ 175 175
-------- --------
12,196 11,240 11,118
Accumulated amortization (4,522) (4,453) (4,378)
-------- --------
$ 6,7877,674 $ 6,7406,787
======== ========
Accrued expenses (in thousands):
Income taxes payable $ 9,270384 $ --9,270
Payroll and payroll taxes 963 1,479 1,019
Reserve for litigation costs 1,260 1,050
125Dividends payable 616 --
Other 415 330 544
-------- --------
$ 12,1293,638 $ 1,68812,129
======== ========
The following table reflects a comparison of net income and net income per share
for each of the three years ended December 31, adjusted to give effect to the
adoption of SFAS 142 (in thousands, except per share amounts):
F-13
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 2 - Detail of Certain Balance Sheet Accounts (continued)
- -------------------------------------------------
2003 2002 2001
---- ---- ----
Reported net income $ 20,761 $ 7,165 $ 5,934
Add-back goodwill amortization, net of taxes - - 484
-------- --------- ---------
484
Adjusted net income $ 20,761 $ 7,165 $ 6,418
======== ========= =========
Reported earnings per share - basic $ 4.59 $ 1.46 $ 1.18
Add-back goodwill amortization - - .10
-------- --------- ---------
Adjusted earnings per share - basic $ 4.59 $ 1.46 $ 1.28
======== ========= =========
Reported earnings per share - diluted $ 4.25 $ 1.36 $ 1.14
Add-back goodwill amortization - - .09
-------- --------- ---------
Adjusted net income per share - diluted $ 4.25 $ 1.36 $ 1.23
======== ========= =========
During the years ended December 31, 20032004 and 2002,2003, the carrying amount of
goodwill remained unchanged atincreased (in thousands) $8,533$946 due to the Abcorp acquisition, which is
described in detail in the consolidated statement of cash flow under
"Supplemental Disclosure of Cash Flow Information".
F-17
Note 3 - Investments
- --------------------
The Company's investments, classified as available-for-sale consist of the
following (in thousands):
December 31,
-----------------------------
2004 2003
2002
---- ----------- -------
Investments, aTat
cost $14,822 $ 691 $ -
Unrealized holding gain 288 31
-
--------------- -------
Investments, at fair value $15,110 $ 722
$ -
=============== =======
Changes in the unrealized holding gain on investment securities
available-for-sale and reported as a separate component of accumulated other
comprehensive income are as follows (in thousands):
December 31,
-----------------
2004 2003
2002
---- ----------- -------
Balance, beginning of year $ -19 $ -
Unrealized holding gain 257 31 -
Deferred income taxes on
unrealized holding gain (100) (12)
-
---------------- -------
Balance, end of year $ 176 $ 19
$ -
========= ======= F-14
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------=======
Note 4 - Property and Equipment
- -------------------------------
Property and equipment consists of the following (in thousands):
2004 2003
2002
--------------- --------
Land $ 1,0521,089 $ 9801,052
Buildings and improvements 9,283 8,738 7,816
Furniture, equipment and tooling 13,763 13,966
14,113
Construction-in-progress 41 111 190
-------- --------
24,176 23,867 23,099
Accumulated depreciation and amortization (15,118) (14,862)
(14,209)
--------------- --------
$ 9,0059,058 $ 8,8909,005
======== ========
F-18
Note 4 - Property and Equipment (continued)
- -------------------------------------------
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, 2003
-----------------
Utah Oregon Ireland Total
--------- -------- ------- --------
Land $ 621 $ - $ 431 $ 1,052
Building and improvements 4,082 32 4,624 8,738
Furniture, equipment, and tooling 11,901 1,245 820 13,966
Construction-in-progress 111 - - 111
--------- -------- ------- --------
Total 16,715 1,277 5,875 23,867
Accumulated depreciation and amortization (12,221) (1,267) (1,374) (14,862)
--------- -------- ------- --------
Property and equipment, net $ 4,494 $ 10 $ 4,501 $ 9,005
=========December 31, 2004
-----------------
Utah Oregon Ireland Total
-------- -------- -------- --------
Land $ 621 $ -- $ 468 $ 1,089
Building and improvements 4,234 32 5,017 9,283
Furniture, equipment and tooling 11,627 1,245 891 13,763
Construction-in-progress 41 -- -- 41
-------- -------- -------- --------
Total 16,523 1,277 6,376 24,176
Accumulated depreciation and
amortization (12,224) (1,271) (1,623) (15,118)
-------- -------- -------- --------
Property and equipment, net $ 4,299 $ 6 $ 4,753 $ 9,058
======== ======== ======== ======== ======= ========
F-15
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003
2002-----------------
Utah Oregon Ireland Total
-------- -------- -------- --------
Land $ 621 $ -- $ 431 $ 1,052
Building and 2001
--------------------------------
Note 4 -improvements 4,082 32 4,624 8,738
Furniture, equipment and tooling 11,901 1,245 820 13,966
Construction-in-progress 111 -- -- 111
-------- -------- -------- --------
Total 16,715 1,277 5,875 23,867
Accumulated depreciation and
amortization (12,221) (1,267) (1,374) (14,862)
-------- -------- -------- --------
Property and Equipment (continued)
- --------------------------------
December 31, 2002
-----------------
Utah Oregon Ireland Total
--------- ---------- ----------- ----------
Land $ 621 $ - $ 359 $ 980
Building and improvements 3,931 32 3,853 7,816
Furniture, equipment, and tooling 12,111 1,244 758 14,113
Construction-in-progress 190 - - 190
--------- ---------- ----------- ----------
Total 16,853 1,276 4,970 23,099
Accumulated depreciation and amortization (11,862) (1,256) (1,091) (14,209)
--------- ---------- ----------- ----------
Property and equipment, net $ 4,991 $ 20 $ 3,879 $ 8,890
========= ========== =========== ==========
equipment, net $ 4,494 $ 10 $ 4,501 $ 9,005
======== ======== ======== ========
F-19
Note 5 - Note Payable
- ---------------------
The Company has an unsecured bank line-of-credit agreement which allows the
Company to borrow up to a fixed maximum amount (in thousands) of $15,000$5,000 at an
interest rate equal to either the bank's LIBOR rate plus 1.25%, the bank's prime
rate less 1.00%, or a daily rate based on LIBOR plus 1.35%. The
line-of-credit-balance matures on May 31, 20052006 and hashad an outstanding balance of
(in thousands) $0 and $4,956 at both December 31, 20032004 and 2002, respectively.2003. The principal financial loan covenants
are a restriction on the total amount available for borrowing to 1.25 times the
last twelve months' EBITDA, which as of December 31, 20032004 and 20022003 was equal to
(in thousands) $43,506$21,158 and $15,255,$43,506, respectively, and a requirement to maintain
a net worth in excess of $10 million, which at the end of 20032004 and 20022003 was (in
thousands) $36,157 and $36,532, and
$15,722, respectively.
F-16
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 6 - Commitments and Contingencies
- --------------------------------------
Operating Leases
- ----------------
The Company has a lease agreement for land adjoining the Company'sits Utah facility for a
term of forty years commencing on September 1, 1991. On September 1, 2001 and
subsequent to each fifth lease year, the basic rental was and will be adjusted
for published changes in a price index. The Company also leases its CMI building
in Oregon under a short-termtwo-year noncancelable operating lease. Rent expense charged
to operations under these operating lease agreements was approximately (in
thousands) $107, $105 $104, and $101$104 for the years ended December 31, 2004, 2003 2002 and
2001,2002, respectively.
Future minimum lease payments under its lease obligations as of December 31,
20032004 were as follows (in thousands):
Years ending December 31: Amount
------------------------- ------
20042005 $ 66
2005 37107
2006 3766
2007 37
2008 37
2009 37
Thereafter 851
--------808
---------
Total future minimum lease payments $ 1,065
========1,092
=========
F-20
Note 6 - Commitments and Contingencies (continued)
- --------------------------------------------------
Product Liability
- -----------------
The Company is self-insured for product liability risk. "Product liability" is
an insurance industry term for the cost of legal defense and possible eventual
damages awarded as a result of use of a company's product during a procedure
that results in an injury of a patient. The Company maintains a reserve for
product liability litigation and damages consistent with its previous long-term
experience. Actual product liability litigation costs and damages during the
last three reporting years have been immaterial which is consistent with the
Company's overall history.
The Company absorbs the costs of clinical training, trouble-shooting and product
warranties in its on-going operating expenses.
Litigation
- ----------
The Company has been involved in lawsuits which are an expected consequence of
its operations and in the ordinary course of business. TheThere are no such
lawsuits currently pending. With respect to the current litigation with the FDA,
the Company believeshas always strongly maintained that pending litigation will not haveit is in substantial compliance
with all government regulations. If the U.S. Court disagrees with the Company,
there may be a materialmaterially adverse effect on itsthe Company's financial condition or
results of operations. F-17
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002Alternatively, if the U.S. Court agrees with it, the
Company may have the opportunity to seek restitution of litigation costs and
2001
--------------------------------
Note 6 - Commitments and Contingencies (continued)
- --------------------------------------damages. The final pretrial conference is scheduled for June 20, 2005.
Irish Development Agency
- ------------------------
In order to satisfy requirements of the Irish Development Agency in assisting
the start-up of its Ireland subsidiary, the Company agreed to invest certain
amounts and maintain a certain capital structure in its Ireland subsidiary. The
effect of these financial relationships and commitments are reflected in the
consolidated financial statements and do not represent any significant credit
risk that would affect future liquidity.
F-21
Note 7 - Income Taxes
- ---------------------
Deferred tax assets (liabilities) consist of the following temporary differences
(in thousands):
December 31,
------------
2003 2002
---- ----
Current Long-term Current Long-term
-------- ---------- ------- ---------
Inventory write-downs and differences
due to UNICAP $ 169 $ - $ 178 $ -
Allowance for doubtful accounts 29 - 57 -
Accrued liabilities and reserves 523 12 164 -
Other - 22 - -
Depreciation and amortization - 164 - 162
Earnings from subsidiary - (863) - (552)
-------- ---------- ------- ---------
Deferred income taxes, net $ 721 $ (665) $ 399 $ (390)
======== ========= ======= ========
The components of income tax expense are as follows (in thousands):
Years ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Current $ 3,888 $ 3,715 $ 3,520
Deferred (47) 116 26
------- ------ ------December 31,
------------
2004 2003
---- ----
Current Long-term Current Long-term
------- --------- ------- ---------
Inventory write-downs and
differences due to UNICAP $ 73 $ -- $ 169 $ --
Allowance for doubtful accounts 30 -- 29 --
Accrued liabilities and reserves 641 23 523 12
Other 6 (42) -- 22
Depreciation and amortization -- 161 -- 164
Earnings from subsidiary -- (911) -- (863)
----- ----- ----- -----
Deferred income taxes, net $ 750 $(769) $ 721 $(665)
===== ===== ===== =====
The components of income tax expense are as follows (in thousands):
Years ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Current $ 3,666 $ 3,888 $ 3,715
Deferred 75 (47) 116
----- ----- -----
Total $ 3,741 $ 3,841 $ 3,831 $ 3,546
===== ===== =====
Income tax expense differed from amounts computed by applying the statutory
federal rate to pretax income as follows (in thousands):
F-18
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 7 - Income Taxes (continued)
- ---------------------
Years ended December 31,
------------------------
2004 2003 2002
2001
--------- ---------- -------------- ---- ----
Federal income tax expense at the
statutory rate $ 3,709 $ 3,716 $ 3,738
$ 3,062
State income taxes 545 559 482 474
ETI, foreign sales corporation and
tax credits (164) (68) (182)
(60)
Other (349) (366) (207)
70
--------- ---------- --------------- ----- -----
Total $ 3,741 $ 3,841 $ 3,831
$ 3,546
========= ========== =============== ===== =====
F-22
Note 8 - 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 of 2,200,0001,014,226 shares of common stock, of which 759,101755,526 are outstanding
as of December 31, 2003.2004. All options granted under the plans are granted at
current market value at date of grant, and 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:
Price Range
2004 Shares Per Share
------ ---------
Granted 164,100 $ 18.00 - $ 25.59
Expired or canceled 44,767 6.75 - 25.59
Exercised 122,908 6.50 - 17.71
Total outstanding at December 31 755,526 6.50 - 25.59
Total exercisable at December 31 554,727 6.50 - 24.02
Price Range
2003 Shares Per Share
------ ---------
Granted 82,200 $ 17.71 - $ 24.02
Expired or canceled 12,562 6.75 - 17.71
Exercised 298,852 6.50 - 15.01
Total outstanding at December 31 759,101 6.50 - 24.02
Total exercisable at December 31 625,859 6.50 - 14.60
Price Range
2002 Shares Per Share
------ ---------
Granted 74,100 $ 14.60 - $ 15.01
Expired or canceled 31,574 6.50 - 15.01
Exercised 137,089 6.50 - 14.25
Total outstanding at December 31 988,315 6.50 - 15.01
Total exercisable at December 31 870,414 6.50 - 14.25
Price Range
2001 Shares Per Share
------ ---------
Granted 81,400 $ 9.13 - $ 12.00
Expired or canceled 28,855 6.50 - 14.25
Exercised 44,500 6.50 - 11.50
Total outstanding at December 31 1,082,878 6.50 - 14.25
Total exercisable at December 31 912,185 6.50 - 14.25
F-19
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 8 - Options (continued)
- ----------------
For the years ended December 31, 2004, 2003 2002 and 2001,2002, the Company reduced
current income taxes payable and increased additional paid-in capital by (in
thousands) $446, $1,109 $354 and $60,$354, respectively, for the income tax benefit
attributable to sale by optionees of common stock received upon the exercise of
stock options.
F-23
Note 8 - Options (continued)
- ----------------------------
Stock-Based Compensation
- ------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS)SFAS No. 123,
"Accounting for Stock-Based Compensation," as described in Note 1.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Years ended December 31,
------------------------
2004 2003 2002 2001
---- ---- ----
Expected dividend yield -0.7% - -
Expected stock price volatility 39.0% 40.5% 41.7% 44.6%
Risk-free interest rate (weighted average) 3.7% 3.5% 4.3% 4.9%
Expected life of options 6.2 years 5.9 years 5.2 years 5.0 years
The per-share weighted average fair value of options granted during 2004, 2003
and 2002 is $10.07, $8.89 and 2001 is $8.89, $6.52, and $4.27, respectively.
F-20
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 8 - Options (continued)
- ----------------
Stock-Based Compensation (continued)
- ------------------------
The following table summarizes information about stock options outstanding at
December 31, 2003:2004:
Options Outstanding Options Exercisable
--------------------------------- -------------------------------------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------- ----------------- ----------- ------- ----- ----------- -----
$ 6.50 - 7.75 307,634 4.707.25 276,052 3.71 $ 6.84 304,8706.83 276,052 $ 6.846.83
9.125 - 24.02 451,467 4.71 13.68 320,989 12.20
---------------15.01 280,068 2.97 12.81 260,510 12.72
17.71 - 25.59 199,406 9.03 22.72 18,165 20.32
---------------- ------- ---- ----- ------------- -----
$ 6.50 - 24.02 759,101 4.7025.59 755,526 4.84 $ 10.91 625,85913.24 554,727 $ 9.5910.04
=============== ======= ==== ===== ======= =========
F-24
Note 9 - Geographic Sales Information
- -------------------------------------
The Company had sales in the following geographic areas (in thousands):
United States Europe Other
------------- ------ -----
2004 $ 20,452 $ 3,639 $ 2,394
2003 $ 21,266 $ 3,376 $ 2,495
2002 $ 21,626 $ 3,337 $ 2,398
2001 $ 21,752 $ 3,012 $ 2,190
Note 10 - Product Sale and Purchase Commitments
- -----------------------------------------------
The Company has license agreements for the rights to develop and market certain
products or technologies owned by unrelated parties. The confidential terms of
such agreements are unique and varied, depending on many factors relating to the
value and stage of development of the technology licensed. Royalties on future
product sales are a normal component of such agreements and are included in the
Company's cost of goods sold on an ongoing basis.
The Company has in the past received and continues to receive royalties as a
result of license agreements with unrelated companies that allow exclusive or
nonexclusive rights to the Company's technology.
F-21
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 11 - Employee Benefit Plan
- -------------------------------
The Company has a contributory 401(k) savings plan for employees, who are at
least 21 years of age, work 30 hours or more each week, and have a minimum of
one year of service with the Company. The Company's contribution is determined
annually by the board of directors. Company contributions were approximately (in
thousands) $92, $95 $94 and $85$94 for the years ended December 31, 2004, 2003 2002 and
2001,2002, respectively.
Note 12 - Fair Value Financial Instruments
- ------------------------------------------
None of the Company's financial instruments, which are current assets and
liabilities that could be readily traded, are held for trading purposes.purposes, except
investments. Detail on investments is provided in note 3, above. The Company
estimates that the fair value of all financial instruments at December 31, 2003,2004,
does not differ materially from the aggregate carrying value of its financial
instruments recorded in the accompanying consolidated balance sheet.
F-25
Note 13 - Extraordinary ItemItems
- ---------------------------------------------------------
In December 2003,fourth quarter 2004, the Company recognized extraordinary non-operating
incomeexpense of (in thousands) $24,884 including$500 resulting from increasing the Company's reserve
for litigation expenses related to the litigation process with the U.S. Food &
Drug Administration. Taxes on the expense were (in thousands) $204, resulting in
a decrease to 2004 net income of $296.
In January 2004, the Company received a payment of (in thousands) $30,944 in
damages and interest resulting from thea 2002 District Federal Court judgment
relating to the Company's patent infringement litigation against
Tyco/Kendall-LTP, which was upheld by appellate court
decision.KendalloLTP. The Company recognized extraordinary non-operating income from
that payment of (in thousands) $6,060 in first quarter 2004 and (in thousands)
$24,884 in fourth quarter 2003. After subtraction of additional expenses of (in
thousands) $350 and income taxes of (in thousands) $2,361, the extraordinary
income adds (in thousands) $3,349 to 2004 net income. Likewise, after
subtraction of additional expenses of (in thousands) $2,208 and income taxes of
(in thousands) $9,250, the extraordinary income adds (in thousands) $13,426 to
2003 net income.
The actual payment from Tyco, which was received on January 20, 2004, included
an additional approximately (in thousands) $6,000 in augmented damages and
interest which will be recognized as an extraordinary gain in the first quarter
2004.
Note 14 - Recent Accounting Pronouncements
- ------------------------------------------
In May 2003,December 2004, the FASB issued SFAS 150,123 (revised 2004), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.Stock
Based Compensation." This new
statement changessupersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting of transactions in which an entity exchanges its equity
instruments for certain financial instruments that, under
previous guidance, issuers could account for as equity or classifications
between liabilitiesgoods and equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be classified as
liabilities in balance sheets. Mostservices, including the grant of the guidance in SFAS 150stock options to
employees and directors. The statement is effective for all financial instruments entered into or modified after May 31, 2003. The
adoption of SFAS 150 did not have any impact on the Company's consolidated
financial statements.
F-22
UTAH MEDICAL PRODUCTS, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2003, 2002 and 2001
--------------------------------
Note 14 - Recent Accounting Pronouncements (continued)
- ------------------------------------------
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003, with certain
exceptions. The adoption of SFAS 149 did not have any effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46), which addresses consolidation by business
enterprises of variable interest entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim periodperiods beginning after
June 15, 2003,2005, and will require the Company to variable
interest entities in which an enterprise holds a variable interest thatrecognize compensation cost based
on the grant date fair value of the equity instruments it acquired before February 1, 2003.awards. The Company
currently accounts for those instruments under the recognition and measurement
principles of APB Opinion 25, including the disclosure-only provisions of the
original SFAS 123. Accordingly, no compensation cost from issuing equity
instruments has not identified and does not
expect to identify any variable interest entitiesbeen recognized in the Company's financial statements. The
Company estimates that must be consolidated.
In December 2002, the Financial Accounting Standards Board issued SFAS 148
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement 123," which is effective for all fiscal years ending
after December 15, 2002. SFAS 148 provides alternative methods of transition for
a voluntary change to fair value based method of accounting for stock-based
employee compensation under SFAS 123 from intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion 25. SFAS 148 also
changes the disclosure requirementrequired adoption of SFAS 123 requiring(R) in third quarter
2005 will have a more prominent
disclosurenegative impact on its consolidated financial statements.
Please see note 1 for an estimate of the pro-forma effect of the fair value based method of accounting
for stock-based compensation. The adoption of SFAS 148 by the Company did notimpact this statement would have any impacthad on
the Company's consolidated financial statements and is not
expected to have any impact on future operations.
F-23
net income for the periods covered by this report.
F-26