UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section
ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of
the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004. 2006
Commission File No. 0-11178
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Number: 000-11178
UTAH MEDICAL PRODUCTS, INC.
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(Exact
(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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Utah | 87-0342734 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
7043 S 300 W, Midvale Utah | 84047 |
| (Address of principal executive offices) | (Zip Code) |
| |
| Registrant’s telephone number, including area code: | Telephone (801) 566-1200 |
| Facsimile (801) 566-2062 |
| |
| Securities registered pursuant to Section 12(b) of the Act: | |
| Title of each class | Name of each exchange on which registered |
Common Stock, $.01 Par Value | The NASDAQ Global Market |
Preferred Stock Purchase Rights | |
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
Class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No x
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;, and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No ---
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’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
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x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes Xo No ---
x
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'sregistrant’s most recently completed second fiscal quarter. As of June 30, 2004,2006, 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$104,900,000.
Indicate the voting stock held by non-affiliates of the
registrant as of March 4, 2005, based on NASDAQ/NMS closing price: $83,079,000.
The number of shares outstanding of each of the registrant'sregistrant’s classes of common stock, as of the latest practicable date. As of March 4, 2005: 4,090,061
10, 2007, common shares outstanding were 3,946,000.
DOCUMENTS INCORPORATED BY REFERENCE
List herein the documents incorporated by reference: REFERENCE. The Company'sCompany’s definitive proxy statement for the Annual Meeting of Shareholders is incorporated by reference into Part III, ItemsItem 10, 11, 12, and 13, and 14 of this Form 10-K.
INDEX TO FORM 10-K
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PAGE
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| | PAGE |
| PART I | | |
| Item 1 | Business | 1 |
| Item 1A | Risk Factors | 11 |
| Item 1B | Unresolved Staff Comments | 11 |
| 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 Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13 |
| Item 6 | Selected Financial Data | 14 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Item 8 | Financial Statements and Supplementary Data | 24 |
| Item 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 44 |
| Item 9A | Controls and Procedures | 44 |
| Item 9B | Other Information | 44 |
| | |
| PART III | | |
| Item 10 | Directors, Executive Officers and Corporate Governance | 45 |
| Item 11 | Executive Compensation | 45 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 45 |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 45 |
| Item 14 | Principal Accounting Fees and Services | 46 |
| | |
| PART IV | | |
| Item 15 | Exhibits, Financial Statement Schedules | 47 |
| | |
| SIGNATURES | | 49 |
PART I
Item
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
Utah Medical Products, Inc. ("UTMD"(“UTMD” or "the Company"“the Company”) is in the business of producing high quality cost-effective healthcare industrymedical 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 premarketing regulatory approval,concurrence, 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.
| 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 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 in patient safety, clinical outcomes and/or total cost 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 and the women’s health center 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
UTMD’s products are sold directly to end users in the U.S. domestic market by the Company'sCompany’s own direct sales representatives and independent manufacturers'manufacturers’ representatives. In addition, some of UTMD'sUTMD’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 100through 136 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 certaindistributors, each of which purchased at least five thousand dollars in UTMD 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.
during 2006.
UTMD was formed as a Utah corporation in 1978. UTMD publicly raised equity capital one time in 1982.
In 1994, UTMD acquired all of the tangible and intangible assets of OB Tech, Inc, a Huntington Beach, CA company, the original owner of the Cordguard® concept. 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.
In 2004, UTMD acquired Abcorp, Inc., its supplier of fetal monitoring belts. The Company's corporate offices are located at 7043 South 300 West, Midvale, Utah 84047 USA. The corporate telephone number is (801) 566-1200.
EuropeanIreland operations are located at Athlone Business and Technology Park, Athlone, County Westmeath, Ireland. The telephone number in Ireland is
353 (90) 647-3932.
CMI'sCMI’s mailing address is 1830 S.E. 1st, Redmond, Oregon 97756. The phone number in Oregon is (541) 548-7738.
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Dollar amounts throughout this report are in thousands except per-share amounts and where noted.
PRODUCTS
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Labor and Delivery/ Obstetrics:
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Obstetrics:
Fetal Monitoring Accessories.
About 60%
The majority of births are considered "higher risk" due to lack of prenatal care, or use of anesthesia, among other factors. In many of these births, labor may become complicated and does not progress normally. The obstetrician or perinatologist 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 Sectionan operative procedure, and then be prepared for complications immediately following childbirth.
To assist the physician in assessingcontrolling the effectiveness of administration of oxytocin and monitoring effects of amnioinfusion, contraction intensities, uterine resting tones and peak contraction pressures are closely monitored through the use of an invasive intrauterine pressure catheter system. In addition, to help identify the possible onset of fetal well-being,hypoxia, correlation of the changes in fetal heart rate (FHR) in conjunction with trends in intrauterine pressurerelative to the frequency and duration of contractions are often electronically monitored. UTMD'sUTMD’s intrauterine pressure (IUP) catheter product
line providescatheters provide for clinician choices from a traditional fluid-filled system to INTRAN(R)INTRAN® PLUS, the most widely accepted transducer-tipped system. In addition, adjunct FHR electrodes, leg plates, belly bandstoco belts and chart paper are offeredprovided by UTMD to complete a package of fetal monitoring supplies. UTMD'sUTMD’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 helpful 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.
| · | IUP-075 and UTMD’s other custom fluid-filled clear 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 zeroing switch that allows the clinician to reset the reference of the monitor, and a dedicated amnio lumen which provides access to the amniotic fluid environment which may be helpful 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 allow user preferences in tip size, zero switch location and amniotic fluid visualization. |
UTMD markets tocodynamometer belts, disposable electrodes, catheters and accessories as outlined above, but does not currently market electronic 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
UTMD’s VAD Systems include
CMI(R)CMI® 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'sUTMD’s patented soft silicone cup is a bell-shaped cup design
that should be preferred for fetal well-being in low or outlet fetal stations with occiput anterior presentations, which 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 alternativea trial vaginal operative delivery prior to
a more invasive C-section intervention. Although there are risks associated with
vaginal operative
vaginal deliveries which
may represent
about 15%10-15% 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 about
8-10%7-9% of all U.S. births, with forceps continuing to lose ground as the alternative.
UTMD'sUTMD’s patented bell-shaped soft silicone TENDER
TOUCH(R)TOUCH® 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.
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Other Obstetrical Tools.
AROM-COT(TM)
AROM-COT™ 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)CORDGUARD® is a patented product which unifies the multiple steps of clamping the neonate'sneonate’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'sCORDGUARD’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 toco belts and straps for fetal monitoring by an external tocodynamometer are provided in latex freelatex-free form in several configurations.
Neonatal Intensive Care:
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DISPOSA-HOOD(TM)
Care:
DISPOSA-HOOD™
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 by ventilation. DISPOSA-HOOD, in contrast to an incubator, allows for excellent access to and visualization of the underdeveloped infant. Because it is a disposable product, it allows
for excellent visualization of the underdeveloped infant andalso prevents cross-contamination.
DELTRAN(R)
DELTRAN® PLUS
UTMD's
UTMD’s DELTRAN blood pressure monitoring system has been adapted specifically for use in the NICU. The 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)
GESCO®
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.International. 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)(UVCs) are specially designed for administering vital medications and fluids immediately following birth through the infant'sinfant’s umbilical vessel into the inferior vena cava. Because of the neonate'sneonate’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)(UACs) 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)UMBILI-CATH™ 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)(Tecoflex®) 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.
The primary distinction of GESCO products is that they were 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 lockingluer-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.
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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)URI-CATH® and NUTRI-CATH(R)NUTRI-CATH® 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)PICC-NATE®. 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. 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. In 2006, UTMD developed a unique enteral feeding-only extension set that addresses an important safety risk in the NICU - inadvertent delivery of enteral feeding intravenously. Named Nutri-Lok, the adapter ensures a secure connection to the enteral feeding catheter (Nutri-Cath) and will not mate with an IV line connector. Nutri-Lok was launched to the market in January 2007. Also in 2006, UTMD completed the replacement of all DEHP plasticizer PVC materials in its Gesco product line that may come in contact with neonatal patients, addressing another evolving safety concern related specifically to the possible maldevelopment of male neonates.
Other GESCO specialty products include a disposable peritoneal dialysis set that is a pre-assembled, sterile, closed system, called DIALY-NATE(R)DIALY-NATE®; a patented silicone oral protection device used to prevent palatal soft tissue injury by orotracheal tubes, called PALA-NATE(R)PALA-NATE®; and a lumbar sampling kit with a tiny, specially-beveled needle for obtaining cerebral spinal fluid samples, called MYELO-NATE(R)MYELO-NATE®. GESCO'sIn 2006, UTMD introduced a second configuration of Dialy-Nate with uncoiled tubing to facilitate clinician use of a fluid/blood warmer.
GESCO’s first patented product, HEMO-NATE(R)HEMO-NATE®, 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'sneonate’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 2005,2007, 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 international distribution arrangements, with other manufacturers, orand through selective complementary product acquisitions.
Gynecology /Urology /Electrosurgery:
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LETZ(R)/Electrosurgery:
LETZ® 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),A major incentive for performing the LETZ provides a fine
tissue specimen for pathological assessment. Therefore, LETZprocedure is effective both
as a diagnostic and therapeutic procedure. The LETZ procedurethat it may be performed using local anesthetic in a physician's office, eliminating the time and expense of hospital or surgical center admittance. UTMD'sMost importantly clinically, in contrast to laser (tissue ablation) and cryotherapy (freezing of tissue), LETZ provides a fine tissue specimen for pathological assessment.
In mid-2006, the FDA licensed the first vaccine for HPV, which has gained widespread media attention. Such an advancement is welcome as an effective preventive measure for 70% of higher level CIN lesions which may progress into cervical cancer. UTMD believes there will be a significant time lag, however, before the new vaccine affects the approximately 500,000 current annual CIN removal procedures based on several factors: the adoption rate of the vaccine, the evolution of the disease in patients already infected and the fact that a portion of CIN-types are unaffected by the vaccine.
UTMD’s LETZ System includes patented disposable electrodes, the patented FINESSE(R)FINESSE® 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 sizes and includes a Safe-T-Gauge(R)patented Safe-T-Gauge® 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)C-LETZ®, 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'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)
FINESSE® Generator; Specialty Loop, Ball, and Needle Electrodes;
FILTRESSE(R)FILTRESSE® Evacuator; Other Specialty Electrodes; Other Supplies and Gynecologic Tools.
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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 introduced a product line of ultra-fine tipped microdissection needles, called OptiMicro(TM)OptiMicro™ Needles. These electrosurgical needles are particularly useful in small-scale 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®
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, UTMD believes that EPITOME has no peer. Anclose substitute. Furthermore, 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)tonsillectomies or uvulapalatalplasties.
LIBERTY® 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.
PATHFINDER PLUS(TM)
PLUS™
PATHFINDER PLUS is a proprietary endoscopic irrigation device that allows a uro/gyn surgeon to precisely irrigate, clearing the visual field, with the same hand that controls the endoscope, eliminating the need for a separate assistant to irrigate without visualization. ENDOCURETTE(TM)
An example of a procedure where Pathfinder has found success is ureteroscopic stone ablation.
ENDOCURETTE™
In cooperation with Mayo Clinic, UTMD developed an advanced curette for uterine endometrial tissue sampling in the doctor'sdoctor’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.assessment, in contrast to a more invasive D&C hospital procedure. 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)
LUMIN®
LUMIN® 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.
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Blood Pressure Monitoring:
DELTRAN(R)
DELTRAN® 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.
The 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 larger 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 device company applications which incorporate UTMD'sUTMD’s technologies and designs. DELTA-CAL(TM)DELTA-CAL™ 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
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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.different, and consistently reliable in achieving their intended results. The Company'sCompany’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'sCompany’s success. UTMD's
UTMD’s specialty focus, innovation and extensive experience in its specialties are important marketing attributes which help assure its ability to successfully compete and survive in a consolidating marketplace where many suppliers are
tryingcompetitors try to degrade UTMD’s product differences.
For U.S. hospitals, which represent about 60% of UTMD'sUTMD’s device sales, marketing efforts are complicated and fragmented. Although UTMD'sUTMD’s focus is with clinicians who take responsibility for obtaining optimal patient care outcomes, other people who are generally administrativelyprimarily administrative are often responsible for hospital purchasing decisions.
DISTRIBUTION
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An 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, the financial relationships and true benefits for hospitals has come under increased scrutiny, both by hospitals'hospitals’ managements themselves and by the government. As a potential positive factor to UTMD'sUTMD’s future performance, the increased scrutiny may lead to an understanding consistent with UTMD'sUTMD’s belief that hospitals are not currently saving money under many of the GPO contracts. 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
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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.
Company’s approach or demand too great a financial or administrative burden.
In the United States, UTMD sells its products through its own directly employed sales force and through selective independent manufacturer representatives. The direct representatives concentrate on applications for UTMD products where customer training and support are important. As of March 2005,February 2007, the direct sales force is comprised both of both outside territory“outside” representatives operating remotely geographically,in specific geographic areas, and inside“inside” representatives who operate by telephone from corporate offices. Direct representatives are trained to understand the medical procedures being performed within UTMD'sUTMD’s clinical focus. Through the use of its one-on-one contacts with physicians and other cliniciansclinical practitioners 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 less than 10%8% of total domestic sales. In contrast, eightten years ago, national distributors and independent stocking distributors in the U.S. represented more than 65% of UTMD'sUTMD’s direct domestic Ob/Gyn business.
In addition to the above traditional sales approaches, UTMD encourages customers to take advantage of fast and easy direct online ordering at www.order.utahmed.com. UTMD's websitehttps://storefront.utahmed.com. In 2006, UTMD introduced this advanced “portal” website. It provides alla convenient and secure method for placing orders, allows the conveniencecustomer to easily monitor the status of e-commerce
demonstrated on other sites. UTMD's experienceorders and shipments, and gives quick access 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.
account information.
Additionally, UTMD sells component parts to other medical companies for use with their product lines. This OEM distribution channel effort is simply maximizing utilization of manufacturing resourcescapabilities that are otherwise needed for UTMD's primary business, and does not compete with or dilute UTMD'sUTMD’s direct distribution and marketing programs.
Internationally, the Company sells its products through about 80over 300 regional distributors and through about 20 OEMs (other medical device manufacturers). The international business is driven by the initiative and resourcefulness of thesethose independent distributors. UTMD'sUTMD’s Internet website www.utahmed.com is a frequent conduit for international customer inquiries.
NEW PRODUCT DEVELOPMENT
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New product development ishas been a key ingredient to UTMD'sUTMD’s market identity as an innovator.identity. Product development takes three interrelated forms: 1) improvements, enhancements and extensions of current product lines in response to clinical needs or clinician requests, 2) inventionintroduction of new or augmented devices that allow significantly
different methods of performing medical procedures, representingrepresent a quantumsignificant improvement in safety, efficacyeffectiveness and/or cost of care, and 3) acquisitions of products or technology from others.
Because of
UTMD'sUTMD’s reputation as a
successful innovator,focused product developer, its financial strength and its established clinician user base, it enjoys a substantial inflow of new product
development 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'steam’s objective is to have a clinically
proven,acceptable, 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'sCompany’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
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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
UTMD’s current product development projects are in three areas of focus: 1) obstetrics/ fetal monitoring,labor & delivery, 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 2005.2007. In 2004,2006, UTMD spent $292 (in thousands)$316 on internal product development activities, or 1.1% of sales. In addition, the Company invested $10 in new technology rights which have
not resulted in a marketable product yet. In 20032005 and 2002,2004, internal new product development expenses were $288$320 (1.2% of sales) and $292 (1.1% of sales) and $285 (1.0% of sales), respectively.
EMPLOYEES
- ---------
At December 31, 2004,2006, the Company had 206204 employees, and an additional six contract employees. The contract employees represent UTMD’s desire to provide handicapped persons additional work opportunities, hired through the Utah state-supported Work Activity Center. The average tenure of all
of UTMD'sUTMD’s employees is over eight years.about nine years, which conveys an important benefit due to the level of training required to produce consistently high quality medical devices. 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 reliable, 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'sUTMD’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 performance-based bonus programs. None of the Company's employees is represented by labor unions or other collective bargaining groups.
PATENTS, TRADEMARKS AND TECHNOLOGY LICENSES
- -------------------------------
The Company owns or exclusively licenses thirty-onetwenty-nine 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 Company also owns a number of trademarks which have achieved brand recognition.
The ability of the Company to achieve critical mass in the marketplacecommercial success depends in large part on the protection afforded by its patents.patents and trademarks. However, we believe that the protections afforded by patents and trademarks are less important to UTMD’s business, taken as a whole, than a medical device’s incremental clinical utility, which may be dominated by a number of other factors including relative cost, ease of use, ease of training/adoption, perceived clinical value of different design features, risk of use in applicable procedures, the reliability of achieving a desired outcome in the hands of different users and market access to potential users. In cases where competitors introduce products that may infringe on UTMD'sUTMD’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 UTMDso and 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 appealit is material 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,Company’s success. The Company must also defend itself when competitors allege that UTMD received $31 million from Tyco/Kendall,
including post judgment augmented damages and interest.
may be infringing their technology.
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
2004,2006, ongoing royalties included in cost of goods sold were
$3 (in thousands).$2. Other royalties have been previously paid as
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a lump sum, or are incorporated into the price of acquisitions, or into the cost of suppliedpurchased 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 2004,2006, the Company received $450 in royalty income, the same as in 20032005 and 2002.
Non-operating2004. Based on the expiration dates of the patents for which the current royalty income remainsis being received, UTMD expects royalties of $450, $391, $184 and $92 in 2007, 2008, 2009 and 2010, respectively. As a significant portionresult of UTMD's earnings. UTMD'sreceiving royalties on its patents, UTMD’s future financial performance also dependsmay depend on the marketing ability of other companies that license UTMD'sUTMD’s technology.
GOVERNMENT REGULATION
- ---------------------
UTMD's products and manufacturing processes are subject to regulation by the U.S. Food & Drug Administration ("FDA"(“FDA”), as well as other regulatory bodies globally. The FDA has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of medical devices 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.
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
All of
itsUTMD’s present products are Class I or Class II
devices and that thedevices. The Company is in compliance with all applicable
material
performanceU.S. regulatory standards
including CFR Part 820, the FDA Quality System Regulation (QSR) effective in 1997, also known as
well as FDA cGMPcGMPs (current good manufacturing
practice)
quality standards, record keeping and reporting.
In 2003 the FDA began withholding export certificates from UTMD, which action
was part of an unresolved disagreement regarding the issuance of a Warning
Letter by FDA to UTMD in September 2001. Export certificates are nonbinding
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 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 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)practices).
UTMD responded with several
press releases shortly following the FDA's announcement, and with periodic
public updates since then. The FDA press release and filing of the action in the
U.S. District 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 FDA enforcement official, officially
designated as the 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.)
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In 1994, UTMD received certification of its quality system under the ISO 9001/EN 46001 standards ("ISO"(“ISO” stands for "International“International Organization of Standardization"Standardization”) which it maintained until December 2003. In October 2003, UTMD'sUTMD’s Utah facility was initially certified under the more stringent ISO 13485 standard for medical devices, which it currently maintains. UTMD'sdevices. UTMD’s Ireland facility iswas certified under the concomitant ISO 13488 standard. The U.S. FDA QSR
was developed in harmony withIn July 2006, both facility ISO certifications were upgraded to the even more stringent ISO standards.13485:2003 standards, which continue to be maintained. UTMD remains on a continuous periodic audit schedule by its independent notified body in order to stay current with international regulatory standards, and retain its certification. The most recent audit was conducted in November 2004.February 2007. UTMD has received formal product certifications allowing the use of the CE Mark (demonstrates proof of compliance with the European Community'sCommunity’s ISO standards) for essentially all of its products. The U.S. FDA QSR was developed in harmony with the ISO standards.
SOURCES AND AVAILABILITY OF RAW MATERIALS
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Most of the components which the Company purchases from various vendors are readily available from a number of sources. AlternateAlternative sourcing of various components is continually underway. Vendors are qualified by Corporate Quality Assurance. The Company has a vendor quality monitoring program that includes routinely checks allchecking incoming material for conformance to specifications.
specifications, as required per written procedures.
EXPORTS
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Revenues from customers outside the U.S. in 20042006 were (in thousands) $6,029$7,390 (26% of total sales), compared to $6,392 (23% of total sales), as compared to $5,872 (22% in 2005 and $6,028 (23% of total sales) in 2003, and
$5,735 (21% of total sales) in 2002.2004. Blood pressure monitoring products represented 67%58% of international sales in both 2004 and 2003,2006, compared to 70%66% in 2002.2005 and 67% 2004. International Ob/Gyn and neonatal product sales were $3,109 in 2006, compared to $2,191 in 2005 and $2,019 in 2004,
compared to $1,930 in 2003 and $1,743 in 2002.2004. For financial information by geographical area, please see Notes 1, 4 and 910 to the Consolidated Financial Statements.
UTMD regards the international marketplace as one of thean important elementselement 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, fasterbetter 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 atfor existing U.S. facilities.
BACKLOG
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As a supplier of primarily disposable hospital products, the nature of UTMD'sUTMD’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 6090 days was approximately $0.3 million$906 as of both January 1, 2005 and2007, $910 as of January 1, 2004.
2006 and $653 as of January 1, 2005.
SEASONAL ASPECTS
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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'sthe medical device 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
2528 year history.
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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 believes that it has is the consistent conformance to specifications of its proven safe and effective products to specifications.products. In the last twelvefourteen 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 UTMD VAD productbirthing cup or hand pump was used.used by the surgeon. The VADS products in all four cases 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 fourteen year period of time, in which more than 17 million UTMD finished devices were used, no other UTMD products wereproduct was the subject of a product liability lawsuit. There are currently no product liability lawsuits in which UTMD is a defendant.
defendant, and there have been no product liability lawsuits during the last three years.
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"“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. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and the Company assumes no obligation to update or disclose revisions to those estimates.
ITEM 1A - RISK FACTORS
General risk factors that may impact the Company'sCompany’s revenues include: the market acceptance of competitive products; administrative practices of group purchasing organizations; obsolescence caused by new technologies; the possible introduction by competitors of new products that claim to have many of the advantages of UTMD'sUTMD’s products at lower prices; the timing and market acceptance of UTMD'sUTMD’s own new product introductions; UTMD'sUTMD’s ability to efficiently and responsively manufacture its products, including the possible effects of lack of performance of suppliers; successopportunities in gaining access to important global distribution channels; budgetary constraints; the timing of regulatory approvals for newly introduceddeveloped 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);operations; and third party reimbursement of health care costs of customers.
patients.
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.
The length of time and number of administrative steps required in adopting 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 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 or present unreasonable burdens.
Risk factors, in addition to the risks outlined in the previous paragraph and elsewhere in this report that may impact the Company'sCompany’s assets and liabilities, as well as cash flows, include: risks inherent to companies manufacturing products used in healthcare, including claims resulting from the improper use of devices and other product liability claims; defense of the Company'sCompany’s intellectual property;property and infringement claims of others; productive use of assets in generating revenues; management of working capital, including inventory levels required to meet delivery commitments at a minimum cost; and timely collection of accounts receivable.
Additional risk factors that may affect non-operating income include: the continuing viability of the Company'sCompany’s technology license agreements; actual cash and investment balances; asset dispositions; and acquisition activities that may or may not require external funding.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None
ITEM 2 - PROPERTIES
Office and Manufacturing Facilities.
The Company's current operations are located in
ana 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.
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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,for which the United StatesCompany believes the outcome may be material to its financial results.
Notwithstanding the foregoing statement, the Company has been involved since 2005, and remains involved, as a defendant in a patent infringement lawsuit with Clinical Innovations Associates (CIA), founded by W. Dean Wallace, formerly President and CEO of America filedUTMD from 1987 to 1992. CIA alleges that a lawsuitversion of Intran Plus with a clear portion of its catheter body infringes U.S. Patent No. 6,231,524, with filing date of May 11, 1999. Intran Plus was first marketed in 1991 under the supervision of Dr. Wallace while he was employed by UTMD, predating organization of, and any patent application by, CIA. The United
States District Court, Central Districtonly difference between the original Intran Plus version and the alleged infringing version is a clear catheter body. UTMD believes that clear catheters are obvious in the art in medical device industry. An example of Utah v.prior art is UTMD’s IUP-075, a dual lumen IUPC with a clear body, which was released for marketing by Dr. Wallace while employed by UTMD. UTMD Kevin L. Cornwell,
Chairman & CEO, and Ben D. Shirley, Vice President, Product Development &
Quality Assurance. The presiding judgebelieves the case is Judge Bruce R. Jenkins. The government
(FDA) is seekingwithout merit, but needs to protect its reputation from unwarranted claims of a permanent injunction from alleged deviationsdirect competitor. Although the outcome of the Quality
System Regulation (QSR). The FDAlawsuit is not seekingexpected to be material to financial results because the number of Intran Plus catheters with clear bodies has been relatively small, the prosecution of the case through discovery and a preliminary injunction.trial may have some dilutive effect on 2007 financial performance. In 2006, UTMD had $154 in litigation expenses related to this lawsuit which were part of G&A expenses. The FDAtrial is not claimingcurrently scheduled for September 2007. If the court rules in UTMD’s favor and agrees that the Company's devices are unsafe or ineffective, or do
not meet predetermined specifications.lawsuit is frivolous, UTMD maintains that it has been and is in
substantial compliance with all applicable government regulations. The FDA has
the burdenmay be entitled to provereimbursement of 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 contained 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 and never has been an imminent public health risk relating to use
of UTMD's products. The FDA has a variety 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
website at http://utahmed.com/sec.htm) for a more complete description of UTMD's
position regarding its dispute with the FDA.
legal expenses.
ITEM 4.4 - 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.
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PART II
-------
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information.
UTMD's common stock began tradingtrades on the Nasdaq NationalNASADQ Global Market (symbol:UTMD)
in 1983. From December 26, 1996 until March 7, 2000, UTMD traded on the New York
Stock Exchange (symbol: UM). Since March 8, 2000, UTMD has again traded on the
Nasdaq National Market. The following table sets forth the high and low sales price information as reported by NasdaqNASDAQ for the periods indicated:
2004 2003
-------------------- --------------------
High Low High Low
------ ------ ------ ------
1st Quarter $26.45 $23.52 $19.35 $17.41
2nd Quarter 27.19 23.80 20.87 18.10
3rd Quarter 27.00 16.02 24.99 20.05
4th Quarter 23.45 17.50 26.30 21.00
| | | 2006 | | 2005 | |
| | | High | | Low | | High | | Low | |
| 1st Quarter | | $ | 33.50 | | $ | 28.33 | | $ | 22.80 | | $ | 20.06 | |
| 2nd Quarter | | | 32.10 | | | 29.50 | | | 23.50 | | | 20.20 | |
| 3rd Quarter | | | 33.10 | | | 28.25 | | | 24.88 | | | 22.80 | |
| 4th Quarter | | | 34.96 | | | 31.51 | | | 32.80 | | | 24.50 | |
Stockholders.
The approximate number of beneficial stockholders of UTMD'sUTMD’s common stock as of March 4, 200510, 2007 was 3,100.
2,800.
Dividends.
On May 10, 2004, UTMD announced that it would beginresume 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 $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
since May 10, 2004:
Record Date | | Payable Date | | Per Share Amount |
| June 16, 2004 | | July 5, 2004 | | $ 0.15 |
| September 16, 2004 | | October 5, 2004 | | 0.15 |
| December 16, 2004 | | January 5, 2005 | | 0.15 |
| March 16, 2005 | | April 5, 2005 | | 0.15 |
| June 17, 2005 | | July 5, 2005 | | $ 0.155 |
| September 16, 2005 | | October 5, 2005 | | 0.155 |
| December 16, 2005 | | January 5, 2006 | | 0.17 |
| March 16, 2006 | | April 5, 2006 | | 0.18 |
| June 16, 2006 | | July 5, 2006 | | 0.19 |
| September 15, 2006 | | October 4, 2006 | | 0.20 |
| December 14, 2006 | | January 4, 2007 | | 0.21 |
| | | | |
| 2004 total paid | | | | $ 0.30 |
| | | | |
| 2005 total paid | | | | $ 0.61 |
| | | | |
| 2006 total paid | | | | $ 0.74 |
Issuer Purchases of Equity Securities.
The following 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
2006.| Period | | Total Number of Shares purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (1) |
| 10/01/06 - 10/31/06 | | - | | $ - | | - | | see (1) below |
| 11/01/06 - 11/30/06 | | - | | - | | - | | |
| 12/01/06 - 12/31/06 | | 9,801 | | 32.81 | | 9,801 | | |
| Total | | 9,801 | | $ 32.81 | | 9,801 | | |
(1) In fourth quarter
20042006 UTMD repurchased an aggregate of
254,6889,081 shares of its common stock at an average cost of
$17.88$32.81 per share pursuant to a continued open market repurchase program
initially announcedinstituted in August 1992. Since
19921993 through
2004,2006, the Company has repurchased
5,979,7926,327,356 shares at an average cost of
$10.70$11.65 per share including broker commissions and fees in open market transactions. In addition, the Company 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 8.79.1 million of its shares at an average price of $10.40$11.07 per share since 1992.1993. To complete the picture relating to current shares outstanding, since 19921993 the Company'sCompany’s employees and directors have exercised and purchased 1.41.6 million option shares at an average price of $6.24$8.88 per share. All options were awarded at the market value of the stock on the date of the award.
The frequency of UTMD'sUTMD’s open market share repurchases depends on the availability of sellers and the price of the 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'sUTMD’s continuing and long term patternprogram of open market share repurchases.
The purpose of
UTMD's ongoingUTMD’s 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
byfrom effectively managing its business. UTMD does not intend to repurchase shares that would result in terminating its
Nasdaq NationalNASDAQ Global Market listing.
[Remainder of Page Intentionally Left Blank]
-14-
ITEM 6 - SELECTED FINANCIAL DATA
(in
Dollar amounts are in thousands, except per share data)
data.
The following selected consolidated financial data of UTMD and its subsidiaries for the five years ended December 31,
2004,2006, 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'sUTMD’s Consolidated Financial Statements and the Notes included elsewhere in this report.
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 ITEMS
- -------------------
In 4Q 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 damages recognized in 4Q 2003
which had been awarded and upheld on appeal from a patent infringement lawsuit
with Tyco International. Associated with the extraordinary non-operating income
from patent infringement damages were G&A Expenses (included in Operating
Expenses) of $350 in 1Q 2004 and $2,208 in 4Q 2003. These expenses were due to
bonuses and additional litigation expenses. Accrued income tax on the
extraordinary non-operating income was $2,361 in 1Q 2004 and $9,250 in 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 Data for 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
-16-
| | | Year Ended December 31 | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| Net Sales | | $ | 28,753 | | $ | 27,692 | | $ | 26,485 | | $ | 27,137 | | $ | 27,361 | |
| Net Income | | | 8,168 | | | 7,547 | | | 10,220 | | | 20,761 | | | 7,165 | |
| Earnings Per Common Share (Diluted) | | | 2.02 | | | 1.80 | | | 2.19 | | | 4.25 | | | 1.36 | |
| Total Assets | | | 44,187 | | | 41,642 | | | 41,262 | | | 49,694 | | | 23,387 | |
| Working Capital | | | 25,471 | | | 22,683 | | | 20,194 | | | 21,405 | | | 5,437 | |
| Long-term Debt | | | 4,824 | | | 5,336 | | | - | | | - | | | 4,956 | |
| Cash Dividends Per Common Share | | | 0.74 | | | 0.61 | | | 0.30 | | | None | | | None | |
|
| | | Quarterly Data for 2006 | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Net Sales | | $ | 7,104 | | $ | 7,293 | | $ | 7,001 | | $ | 7,355 | |
| Gross Profit | | | 4,007 | | | 4,077 | | | 3,971 | | | 4,092 | |
| Net Income | | | 2,036 | | | 2,059 | | | 2,003 | | | 2,070 | |
| Earnings Per Common Share (Diluted) | | | .50 | | | .51 | | | .50 | | | .51 | |
|
| | | Quarterly Data for 2005 | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Net Sales | | $ | 6,652 | | $ | 7,028 | | $ | 7,001 | | $ | 7,011 | |
| Gross Profit | | | 3,734 | | | 4,022 | | | 4,014 | | | 3,983 | |
| Net Income | | | 1,969 | | | 1,887 | | | 1,789 | | | 1,903 | |
| Earnings Per Common Share (Diluted) | | | .46 | | | .45 | | | .44 | | | .46 | |
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following comments should be read in conjunction with accompanying financial
statements.
Dollar amounts are in thousands except per-share amounts, and where noted.
In management's opinion,
The following comments should be read in conjunction with the unfavorable extraordinary event in 4Q 2004 of
increasing the Company's litigation reserve and the favorable extraordinary
events in 1Q 2004 and 4Q 2003 of recognizing the Tyco patent infringement
damages have an impact on the income statements that does not allow a meaningful
comparison ofaccompanying financial ratios and other financial measures with prior periods.
Consequently, Item 7 (MD&A) adjusts out the following items related to the
extraordinary events, prior to making comparisons:
INCOME STATEMENT
- ----------------
Extraordinary item - (13,426) [for year ended 12/31/03]
Extraordinary items - (3,054) [for year ended 12/31/04]
Note: Comparison of balance sheet items and ROE do include the extraordinary
items. --
statements.
Productivity of Assets and Working Capital.
a) Assets.Assets. Year-end 20042006 total assets were $41,262,$44,187, compared to $49,694$41,642 in 2003. Year-end assets2005. The increase was due essentially to an increase 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 was not related to sales activity. It reflected the
difference in the Tyco damages due UTMD at the end of 2003 and the cash and investment balances resulting fromallowed by a substantial decrease in inventories and receivables coupled with continued excellent operating profitability. The 2006 productivity of total assets (= average total asset turns; total sales divided by average total assets for the damages atyear) was consistent with 2005, with both years’ productivity diluted by the endlarge cash-equivalent balances. Year-end 2006 and 2005 cash and investment balances were $21,049 and $17,453 respectively, representing 48% and 42% of 2004total assets. Year-end cash and investment balances increased $3,596 after income
taxesUTMD paid $2,902 in shareholder dividends, $2,094 in share repurchases, $2,700 to meet optionee tax withholding requirements on options exercised in return for option shares, and $1,057 in principal repayments for the extraordinary income had been paid. The same statement applies to
the net change in current assets. In 2005,Ireland loan. Excluding average cash and investment balances, average total asset turns will depend
primarily on UTMD's use of itsin 2006 and 2005 were 1.22 and 1.14 respectively. In 2007, total assets excluding cash and investment balances.
Although other currentbalances will continue to be substantially less than annual sales, which benefits return on average shareholders equity (ROE). Improvement in total asset categories netted out to remain about the same,
2004 ending inventory balances were about $400 lowerturns (including cash and receivables were about
$400 higher. As a result, average inventory turns increased to 3.7 in 2004 from
3.3 in 2003 despite a decline in sales activity. Management expects to sustain
3.7 inventory turns in 2005. Because year-ending 2004 accounts receivable (A/R)
balances increased 12%, calculated average days in A/R aging was 51 on December
31, 2004 based on 4Q 2004 shipment activity. Although this is well within
management's objective of 55 days, it is less favorable than at the end of 2003.
A/R over 90 days from invoice date were about 5% of total A/R at year-end 2004,
compared to 4% at year-end 2003. The Company believes these older A/R are
collectible or within its reserve balances for uncollectible accounts.
Working capital at year-end 2004 was $20,194 compared to $21,405 at year-end
2003. 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
decrease in income taxes due resulting from the extraordinary items. 2005
working capital balances and current ratioinvestments) will depend primarily uponon the timing and extent of usedeployment of excess cash and investment balances. The non-cash and investment
components of working capital are expected to remain within management targets.
Property, plant and equipment (PP&E) assets are comprised of 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 inas a result of the 1997 CMI acquisition, and a portion of
theits Midvale,
Utah parking lot. In
2004,2006, net PP&E
(depreciated book value) increased $171 despite the fact that actual depreciation of
$739assets exceeded new
capital expenditures by $251. The increase in net PP&E
asset purchaseswas due to currency exchange translation of
$411. Net PP&Ebook value of Ireland assets
however, increased $53which appreciated in U.S. dollar value terms because of a weaker USD compared to the
end of 2003 because ofEuro. Even with the weaker USD, consolidated PP&E balances increased at a
$252slower rate than the increase in
dollar-valued Irelandsales, resulting in significantly higher 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.turns. The current book value of consolidated PP&E is
37%34% of
actual acquisition
cost.
Management believescost, which means that the continued productivity of the company’s fixed assets will remain a source of future profitability, given that PP&E is in good working order and capable of supporting increased sales activity.
-17-
IntangibleIn 2007, depreciation of fixed assets should again equal or exceed new PP&E purchases required to sustain current operations.
Average inventory turns in 2006 increased to 4.0 from 3.9 in 2005, meeting management’s continuing objective for inventory turns for the first time since losing the Baxter OEM supply business ten years ago. The improved turns were the result of a combination of 4% higher sales and 8% lower inventories compared to the end of 2005. Net (after allowance for doubtful accounts) year-end trade accounts receivable (A/R) balances increased $37 or about 1% at the same time that 2006 sales activity increased 4%, improving average days in A/R on December 31, 2006 to 43 days, based on 4Q 2006 shipments, compared to 45 days at the end of 2005. This performance remained well within management’s continuing objective of 55 days. A/R over 90 days from invoice date at year-end 2006 were 6% of A/R, up from 5% at the end of the prior year. The Company believes the older A/R will be collected or are within its reserve balances for uncollectible accounts.
Working capital at year-end 2006 was $25,030 compared to $22,230 at year-end 2005. Both of these amounts exceed working capital needs for growth in normal operations. UTMD’s current ratio increased to 8.4 from 7.1, mainly due to increases in cash and investments. Since the large majority of the working capital balance is excess cash (and cash investments), the current ratio going forward in 2007 will depend primarily upon the timing and extent of use of existing cash and investment balances. The other current asset and current liability components of working capital are expected to remain within management objectives, consistent with 2006 and earlier years.
Net (after accumulated amortization) intangible assets, which are comprised of goodwill resulting from acquisitions and the costs of obtaining patents and other intellectual property including technology rights. Net intangible
assets (NIA) increased to $7,674rights, were $7,445 at the end of 2004 from $6,787 at2006 compared to $7,624 sat the end of 2003.2005. The goodwill balance of $7,191, goodwill portionreduced 24% from time of NIA at the end of 2004acquisition, 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 iswas goodwill amortization as a result of UTMD using previous GAAP through 2001 for the purchase method of acquisition accounting. Under current GAAP, the goodwill willis not be amortized
as an expenseexpensed unless and until the market value of the acquired entity becomes impaired. The three acquisitions reflected in goodwill continue to be viable parts of UTMD'sUTMD’s overall business, activities, representing 26%33% of total sales in 2004.2006. UTMD does not expect itsthe goodwill intangible assetsvalue of the acquisitions to become impaired in 2007. Other intangible assets decreased $179 in 2006. Of that decline, $130 resulted from sale of intellectual property rights, which had no impact on the foreseeable future.
b) Liabilities. Excluding accrued and deferred income taxes, UTMD's total
liabilitiesstatement. The remaining $49 decrease was the result of amortization expense. Net intangible assets at the end of 2004 and 2003, which were $3,952 and $3,227,
respectively, were both less than 10%2006 represented 17% of total assets reduced by the total
accrued tax liability. At the end of 2004, UTMD's total debt ratio decreasedcompared to 12% from 26%18% at the end of 2003.2005.
Liabilities. UTMD’s current liabilities decreased $235, and total liabilities decreased $713, from the end of 2005 to the end of 2006. The declineresulting 2006-ending total debt ratio was due to accrued taxes on the
extraordinary item on the balance sheet18% of total assets, down from a total debt ratio of 21% at the end of 20032005. Current liabilities declined because of a normal fluctuation in timing of payments of accounts payable and accrued liabilities. The long term Ireland note payable, which were paidis denominated in Euros, declined just $512 in book value despite actual principal payments of $1,057 because of the decline in the value of the USD. In Euros, the note declined from €4,500 at the beginning of 2006 to €3,672 at the end of 2006. As a reminder to shareholders, the note was initiated in December 2005 to finance repatriation of profits achieved in Ireland since 1996 under The American Jobs Creation Act of 2004. UTMD Ltd. plans to repay this note from profits generated in Ireland over about the next four years. In addition to liabilities, UTMD has operating lease and purchase obligations described in note 7.
Results of Operations.
a) Revenues.Revenues. Global consolidated sales decreased 2%increased 4% in 20042006 compared to 2003.the prior year. Foreign (international) sales increased 3% while16%. Increases and decreases in U.S. (domestic) sales declined
4%. Revenuescategories essentially offset each other.
Domestic sales were negatively affected by an August 10 FDA press release that
announced that the FDA filed a lawsuit against UTMD. International revenues
continued$21,363 in 2006 compared to be negatively affected by the FDA's refusal, continuing since 2003,
to provide Certificates to Foreign Governments (CFGs).$21,301 in 2005 and $20,456 in 2004. UTMD divides its domestic sales into two primary distribution channels: "direct sales"“direct sales” which are sales to end user customers by UTMD'sUTMD’s direct sales force, independent commissioned sales reps, specialty distributors and national hospital distribution companies, and "OEM sales"“OEM sales” which are component sales to other companies where products are packaged and resold as part of another company'scompany’s finished product offerings. As a percentage of total domestic sales, direct sales in 2006 were 94% of domestic sales compared to 94% in 2005 and 93% in 2004. Therefore domestic OEM sales were 6% of domestic sales in both 20042006 and 2003,2005, and 94% in 2002. The
remaining sales were OEM sales, e.g. 7% of domestic sales in 2004 were2004. 2006 domestic OEM sales.sales were up 6% at $1,342 in 2006, compared to $1,268 in 2005 and $1,491 in 2004. Domestic direct sales in 2006 were essentially the same as in 2005, and represented 72%70% of global consolidated sales in 20042006 compared to 73%72% in 2003both 2005 and 74% in 2002.
Domestic direct sales which appeared least affected by the FDA announcement
were sales where clinicians make the purchase decision. Consequently, the least
affected2004.
International sales were sales$7,390 in 2006 compared to physician offices$6,392 in 2005 and 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$6,028 in 2004, and were 23%26% of global consolidated sales in 2006 compared to 22%23% in both 2005 and 21% in years 2003 and 2002, respectively.2004. Of the 20042006 international sales, 60%53% were madedistributed to customers in Europe, compared to 58%55% in both 20032005 and 2002.60% in 2004. Ireland operations (UTMD Ltd.) shipped 59%52% of international sales (in USD terms) in 20042006, compared to 63%57% in 20032005 and 59% in 2002.2004. UTMD Ltd. 20042006 shipments, including intercompany sales of subassemblies to Midvale, were down 15%up 12% in euroEuro terms and down 5%up 13% in USD terms compared to 2003.
2005.
UTMD groups
its sales into four
general 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
and patient 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 andas well as molded parts sold on an OEM basis to other companies. In these four categories, UTMD'sUTMD’s primary revenue contributors often enjoy a dominant market share and typicallymay have differentiated product features protected by patents.
Revenues
Global revenues by product category:
1. Worldwide obstetrics
| | | 2006 | | % | | 2005 | | % | | 2004 | | % | |
| Obstetrics | | $ | 9,371 | | | 33 | | $ | 9,774 | | | 36 | | $ | 10,918 | | | 41 | |
| Gynecology/ Electrosurgery/ Urology | | | 6,106 | | | 21 | | | 5,397 | | | 19 | | | 5,142 | | | 19 | |
| Neonatal | | | 7,073 | | | 25 | | | 6,475 | | | 23 | | | 4,134 | | | 16 | |
| Blood Pressure Monitoring and Accessories* | | | 6,203 | | | 21 | | | 6,046 | | | 22 | | | 6,292 | | | 24 | |
| Total: | | $ | 28,753 | | | 100 | | $ | 27,692 | | | 100 | | $ | 26,485 | | | 100 | |
| *includes molded components sold to OEM customers. | | | | |
International revenues by product sales were $10,918category:
| | | 2006 | | % | | 2005 | | % | | 2004 | | % | |
| Obstetrics | | $ | 764 | | | 10 | | $ | 593 | | | 9 | | $ | 774 | | | 13 | |
| Gynecology/ Electrosurgery/ Urology | | | 1,820 | | | 25 | | | 1,199 | | | 19 | | | 966 | | | 16 | |
| Neonatal | | | 525 | | | 7 | | | 400 | | | 6 | | | 278 | | | 5 | |
| Blood Pressure Monitoring and Accessories* | | | 4,281 | | | 58 | | | 4,200 | | | 66 | | | 4,010 | | | 66 | |
| Total: | | $ | 7,390 | | | 100 | | $ | 6,392 | | | 100 | | $ | 6,028 | | | 100 | |
| *includes molded components sold to OEM customers. | |
As a brief explanation of revenues in 2004 compared to $11,435
in 2003 and $11,977 in 2002. Without the Discount, 2004 obstetrics sales were
$11,120.above tables,
1. Of the $517$403 decline in total obstetrics sales $154in 2006, $108 was from lower sales of vacuum-assisted delivery systems (VADS), an 11%a 9% decline, and $1,136$320 from lower Intran Plus (IUPC)IUPC sales, a 12%4% decline. Abcorp sales of $842 helped
offset the declines. After August 10, theThe lower IUPCVADS and VADSIUPC sales resulted primarily from concerns of hospital administrators related to the press release
from the FDA. Other contributing factors included a trend in obstetrics practice that favors abdominal operative deliveries over vaginal operative deliveries because of medical malpractice litigation risk, and increased competition including effects of GPO product bundling 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.
2. Consolidated global gynecology/Gynecology/ electrosurgery/ urology product sales were
$5,142 in 2004 compared to $5,324 in 2003increased $711 or 13%, with 80% of the increase coming from higher electrosurgical generator and $5,271 in 2002. Without the
Discount, 2004 sales were $5,212. International sales in this category decreased
9%. International sales were negatively affected by not being able to supply
requested FDA CFGs to international distributors.
electrode sales.
3. Consolidated global neonatal product sales were $4,134increased $598 or 9% in 2004 compared to
$4,142 in 2003 and $3,852 in 2002. Without the Discount, 2004 sales were $4,217.
International2006. The international portion of neonatal product sales increased 39%.
grew 31%, and represented 21% of the increase.
4. WorldwideDomestic blood pressure monitoring and accessories (BPM) sales were $6,292
in 2004 compared to $6,236 in 2003 and $6,261 in 2002. Without the Discount,
2004increased 4%, while international BPM sales were $6,310. International sales in this category, which includes
plastic molded components increased 2%.
Looking forward to 2005, UTMD's2007, UTMD’s improvement in sales depends primarily on its continued ability to maintain medical staff involvement in purchasing decisions for UTMD’s “physician-preference” products used in U.S. hospitals where administrators are increasingly making the timingproduct decisions through the use of anticompetitive GPOs contracts, continued expansion in clinical acceptance of its newer specialty products, release of new products after FDA concurrence with premarketing submissions and continued development of UTMD’s international distribution channels. Excluding the possibility of addition of a favorable resolution of the lawsuitproduct line 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,established sales, management believes that
it can achieveprojects a 2-3%3% overall revenue increase in 2005 sales relative to 2004.
2007.
b) Gross Profit. UTMD's average 2004Profit. UTMD’s 2006 gross profit, margin (GPM), the surplus after subtracting costs of manufacturing, inspecting, packaging, sterilizing and shipping products (COGS) are subtracted(CGS) from net revenues, was 56.9%$16,147 compared to a
Company record 58.6%$15,753 in 20032005 and 57.6%$15,066 in 2002. As2004. Gross profit margins (GPMs), gross profits expressed as a percentage of net sales, were 56.2% in 2006 compared to 56.9% in both 2005 and 2004. The lower GPM in 2006 reflects inflation in wages and raw material cost, particularly in Ireland where at the negative effectsame time costs increased, unit sales prices declined in USD terms because of a weaker Dollar. In addition, from a sales channel mix perspective, the Discount was more pronounced on gross profits2006 increase in sales came predominantly from international sales at relatively lower than on
sales. In 2004,average unit selling prices. UTMD experienced higher materials costs, particularly for
plastics, along with increased labor costs, lower absorptioncontinues to retain facilities and other manufacturing capabilities in excess of its needs. As a result, it projects that the dilution of fixed overhead costs becausethat will occur with increased sales in 2007 will help mitigate a continuing expected increase in incremental direct material and labor costs together with some competitive pressure on prices. Also, the company will move much of lower sales, and an unfavorable shift from higher margin
products to lower margin products. The unfavorable cost trends were partially
offset by lower depreciation expense on fixed assets and recoveries of previous
years' misappropriated funds. With regardthe intercompany work performed in Ireland during the last few years back to the latter, UTMD recognized a
favorable contributionU.S. and offset the loss of that work in Ireland with expected continued increases in international trade sales, yielding an overall GPM in 2007 comparable 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 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, 2006.
OEM sales are sales of UTMD components
and subassemblies that are marketed by other companies as part of their product offerings. UTMD utilizes OEM sales as a means to help maximize utilization of its capabilities established to satisfy its direct sales business. As a general rule, prices for OEM sales expressed as a multiple of direct variable manufacturing expenses are lower than for direct sales because, in the OEM and international channels,
UTMD'sUTMD’s business partners incur significant expenses of sales and marketing. Because of
UTMD'sUTMD’s small size and period-to-period fluctuations in OEM business activity, allocations of fixed manufacturing
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overheadsoverhead expenses 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 this GPM target again in 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.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 andproduct development (R&D) expenses and general and administrative (G&A) expenses. OperatingCombined operating expenses were $5,312 in 2004 were lower by $214 than2006, compared to $6,516 in 2003. However, because of lower gross
profits,2005 and $5,807 in 2004. In 2004, operating profit decreased 6%includes other operating income, net of associated expenses, resulting from UTMD’s patent infringement victory over Tyco. Litigation expenses are included as part of G&A expenses. The decline in total operating expenses in 2006 was due primarily to $10,109 compared to $10,722the favorable conclusion of the FDA litigation in 2003. 2002 operatinglate 2005, as noted in the table below:
| | | 2006 | | 2005 | | 2004 | |
| R&D expenses | | $ | 316 | | $ | 320 | | $ | 292 | |
| S&M expenses | | | 2,272 | | | 2,214 | | | 2,253 | |
| G&A - FDA litigation expenses | | | - | | | 1,527 | | | 850 | |
| G&A - stock option expense | | | 140 | | | - | | | - | |
| G&A - all other expenses | | | 2,585 | | | 2,454 | | | 2,412 | |
| G&A expenses - total | | | 2,725 | | | 3,981 | | | 3,262 | |
| Total operating expenses | | $ | 5,312 | | $ | 6,516 | | $ | 5,807 | |
Operating profits in 2006 were $10,542. UTMD's$10,835. UTMD’s operating profit margin (operating profits divided by total sales) was 38.2%37.7% in 2004,2006, compared to 33.4% in 2005 and 57.8% in 2004. The 2005 and 2004 margins do not correlate to sales since there were substantial expenses and/or other income in those two years that were unrelated to sales. Excluding the other operating income related to patent infringement damages and FDA litigation expenses, operating profits would have been $10,764 and $10,109, and operating profit margins would have been 38.9% and 38.2%, in 2005 and 2004 respectively, which management believes is a record 39.5%better measure of operating profits relative to sales activity in 2003 and 38.5% in 2002. Operating expenses as a percentage of
sales were 18.7% in 2004, compared to 19.1% in both 2003 and 2002.the prior two years. Looking forward to 2005,2007, UTMD expects to continue to achieve an outstandingcontrol operating margin by maintaining its GPM above 55% and controlling operating expenses, excluding consideration for litigation expenses which are less predictable, at a level below 19% of sales. The primary risk to achieving that expectation issales, yielding a delay in the
expected resolution of the lawsuit2007 operating profit margin consistent with the FDA. A further delay would be a
double negative by continuing to retard sales activity while at the same time
increasing litigation costs which are time-related.
2006.
i) S&M expenses: S&M expenses are the costs of communicating UTMD'sUTMD’s differences and product advantages, providing training and other customer service in support of the use of UTMD'sUTMD’s solutions, attending clinical meetings and medical trade shows, processing orders and funding GPO fees. Because UTMD sells internationally through third party distributors, its S&M expenses are predominantly employed 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 customer support coverage across the U.S.
Year 2004 S&M expenses decreased to $2,253 from $2,364 in 2003 and $2,472 in
2002, as UTMD continued to focus on the productivity of its direct sales force. As a percent of total sales, S&M operating expenses were 7.9% in 2006, 8.0% in 2005 and 8.5% in 2004, 8.7% in
2003 and 9.0% in 2002. Looking forward,2004. In 2007, UTMD plans higher S&M expenses during
2005 dueintends to Group Purchasing Organization fees, increased advertising expenses
and new marketing initiatives, but intendscontinue to manage S&M expenses to remain less than 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 premarketing 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. As a percent of sales, 2004 and 2003 R&D expenses were 1.1% in 2006 compared to 1.0%1.2% in 2002. In
addition to new products still being developed, a number of existing products
were enhanced or updated2005 and 1.1% in 2004. In 2005,2007, UTMD will opportunistically employinvest in R&D resourcesin order to invest where management anticipates it can get a significant
return with future newreinvigorate its product sales. 2005 R&D expenses are again likely to be
in the range of 1% of sales.
development pipeline.
iii) G&A expenses: G&A expenses include the
"front office"“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.property, and legal costs. Starting in 2006, G&A expenses also included estimated stock option compensation expense, which was $140, as required by new accounting rules. In addition to employing the personnel required to coordinate or manage
the precedingthose “front office” functions, G&A expenses include outside director
fees and costs, outside legal
counsel,counsels’ and litigation experts’ fees, independent accounting audit fees
including auditing for internal controls under SOX 404, 401(k)
Plan administration, NASDAQ exchange fees, write-offs of uncollectible receivables,
general business insurance
costs and corporate contributions to charitable organizations.
Aggregate G&A expenses
were $2,412 in 2004, $2,517 in 2003 and $2,464 in
2002. Asas a percent of sales
were 9.5% in 2006, 14.4% in 2005 and 12.3% in 2004. G&A expenses
excluding all litigation expenses were
8.7%, 8.4% and 9.1%
of sales in
2006, 2005 and 2004,
9.3%respectively, which may provide a clearer comparison of G&A expense ratios. Total litigation expenses in
2003 and
9.0% in 2002. Allthe three years
includedof 2004-2006 were $2,728, of which the expenses associated with the unwarranted FDA lawsuit were $2,453. The $275 balance was due to expenses associated with defense or prosecution of patent infringement claims. There were no litigation expenses
relating toduring the
patent infringement lawsuit with Tyco/KendalloLTP or lawsuits with the FDA. In
addition, all three years
include increasing G&A expensesrelated to
comply with
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required governance activities mandated by The Sarbanes Oxley Act of 2002. It is
management's objectiveproduct liability. UTMD plans to hold G&A expenses toat a level about 9% of 2007 sales, againexcluding any currently unexpected significant litigation costs.
iv) Other operating income: Other operating income in 2005.
2004 resulted from UTMD’s patent infringement victory over Tyco. In January 2004, the Company received a payment of $30,944 in damages and interest resulting from a 2002 District Federal Court judgment, and a post judgment settlement. The Company recognized other operating income of $6,060 in first quarter 2004 and $23,992 (net of expenses) in fourth quarter 2003. In 2007, an unexpected favorable result would occur if the government does the right thing and accepts UTMD’s claims for damages for the FDA’s abuse of process in 2001-2005.
d) Non-operating Income, Non-operating Expense and EBT.EBT. Non-operating income includes royalties from licensing UTMD'sUTMD’s technology to other companies, rent from leasing underutilized property to others, income earned from investing the Company'sCompany’s excess cash and gains or losses from the sale of assets, offset by non-operating expenses which include interest expenses and bank fees. Non-operating income was $1,582 in 2006, $977 in 2005 and $798 in 2004, $454 in 2003 and $453 in 2002.2004. The significant increase in 20042006 resulted from investment income on much higher averagecapital gains, corporate dividends and interest from UTMD investing its excess cash and
investment balances, higher rental income and no interest expense.which exceeded 2005. Royalties received were $450 in all three years. Futureyears, which came from one source. The licensed patents for which the royalties may vary depending onwere received are due to expire in mid-2008. In 2006, UTMD paid $255 for interest compared to $10 in 2005 and none in 2004. The interest in 2006 and 2005 resulted from borrowing €4.5 million ($5,336) in December 2005 to facilitate the successrepatriation in 2005 of other companiesprofits generated by UTMD’s Ireland operations since 1996. UTMD expects interest expense of about $258 in selling products licensed by UTMD, and the
remaining life2007 as a result of the applicable patents. In 2004, UTMD had noIreland note payable. Although average loan balances will be lower in 2007, the interest expense
because it did not utilize its bank line-of-credit. In 2003rate will be higher and 2002,
respectively, interest expense was $47 and $36. UTMD expects the average conversion rate of the USD from the Euro will be weaker than in 2006, resulting in about the same amount of USD interest. Management expects 2007 non-operating income will be about $360 lower in 2005 to be between $500 and $800.2007 than in 2006 because the Company’s cash is now invested solely in short-term money market instruments. In 2006, UTMD realized $520 in capital gains when liquidating its investments in equities. The actual amount received will
depend on many factors including: the timing of utilization of2007 non-operating income may be even lower if UTMD utilizes excess cash balances for an acquisition, unexpected litigation costs or substantial share repurchases, dividends or acquisitions; the market performance of UTMD's
liquid investments; the need for capital to support litigation; and cash flow
from normal operating performance.
repurchases.
Earnings before income taxes (EBT) result from adding UTMD'sUTMD’s non-operating income to its operating profits. EBT were $10,907was $12,418 in 2006 compared to $10,214 in 2005 and $16,117 in 2004. EBT margin is EBT divided by total sales. UTMD’s EBT margin was 43.2%, 36.9% and 60.9% in 2006, 2005 and 2004, $11,176 in 2003 and
$10,996 in 2002.respectively. Excluding the Tyco income, the 2004 EBT margin would have been 38.0%, which management believes is a better indicator of EBT in 2004 were 2% lower than in 2003, the same percentage
decreasethat year. Given 2007 projections as sales. Given the 2005 projections previously noted, management is targeting 20052007 EBT of about $11,000.
the same as 2006, as the expected lower non-operating income will be offset by higher consolidated operating profits.
e) Net Income, EPS and ROE.ROE. Net income is EBT minus income taxes.taxes, often called the “bottom line”. Net income was $8,168, $7,547 and $10,220 in 2006, 2005 and 2004, decreased 2%, consistent with the change in sales, to $7,166 from $7,335
in 2003. 2002 net income was $7,165.respectively. The effective income tax rate was 34.2%, 26.1% and 36.6% respectively. The significantly lower income tax provision in 2005 was a result of The American Jobs Creation Act of 2004 was
34.3% compared(the Act) enacted in October 2004 which allowed a temporary tax deduction on repatriated foreign earnings accomplished in 2005. Prior to 34.4%2005, UTMD included a deferred tax liability in 2003 and 34.8%reported results, anticipating that profits generated by its Ireland facility would eventually be repatriated, triggering U.S. income taxes. Also, UTMD recorded a favorable deferred tax liability adjustment after the conclusion of an IRS audit in 2002. Tax on3Q 2005. These were non-recurring tax benefits limited to the extraordinary
items was 41.4%, resultingyear 2005 which provided the much lower tax provision in a combined tax rate of 36.6%. Yearthat year. Other year to year fluctuations in the tax rate have resultedmay result from: 1) differences in distribution
of state income taxes; 2) variations in profits of the Ireland subsidiary which is taxed at a 10% rate on exported manufactured products; 3)products and a 25% rate on rental income; 2) extraterritorial income (ETI) exclusions; 4)3) higher marginal tax rates for EBT above $10 million; and 5)4) other factors such as R&D tax credits. Management expects that UTMD'sthe consolidated income tax rate should be similarto increase in 2005 compared to 2004, but
this is difficult to predict.
UTMD's normal2007 because the ETI exclusion has been repealed.
UTMD’s net income expressed as a percentage of sales rankswas 28.4%, 27.3% and 38.6% for years 2006, 2005 and 2004, respectively. UTMD’s profitability has consistently ranked in the top performance tier of all U.S. publicly-traded companies, at 27.1%, 27.0% and 26.2%
for years 2004, 2003 and 2002, respectively. This profitability performance
factor is thehas been a primary driver for UTMD's returnUTMD’s past excellent returns on shareholders'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“in the money,"” i.e., have exercise prices below the current period'sapplicable period’s weighted average market value). Diluted 2004 EPS were $1.53, up 2% from $1.50$2.02, $1.80 and $2.19 in 2003. In 2002,2006, 2005 and 2004, respectively. UTMD’s EPS were $1.36. Fewer outstanding shares accounted for the
increase in EPS. UTMD management believes shareholder value is improved by
consistently increasing EPS. Over the last seven years since 1997, UTMD has increased EPSgrown at an annually compounded rate of 17% per year. year during the nine years since 1997.
The end of 20042006 weighted average number of diluted common shares (the number used to calculate diluted EPS) were 4,6754,043 (in thousands) compared to 4,8854,192 shares in 20032005 and 5,2634,675 shares in 2002.2004. Dilution for "in“in the money"money” unexercised options for the year 20042006 was 276100 (in thousands) shares compared to 359230 in 20032005 and 350276 in 2002.2004. The total number of options outstanding at year-end was about the same in 2004
as 2003, following a 23% decline in the prior year.2006 declined 58% from year-end 2005. Dilution decreased in 20042006 from 20032005 because the average number of options outstanding decreased substantially, partially offset byeven though a higher average share price in the stock market.market increased the dilution effect of each option. Actual outstanding common shares as of December 31, 20042006 were 4,105,000.
3,944,000.
Return on
shareholders'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'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.measures. ROE in
2006 was 15% (24% before dividends), the same as in 2005. Compared to 2005 and 2004,
ROE in 2006 was
23%helped by lower litigation costs. A higher net profit margin in 2006 was offset by higher dividends to shareholders and lower financial leverage. Asset turns remained about the same. ROE in 2005 was 15% (22% before dividends) and 24% (28% before dividends)
, compared to 79% in
2003 and
42% in 2002.2004. The 2004 ROE was aided by Tyco patent infringement damages. UTMD’s ROE (before dividends) has averaged 32% per year over the last 21 years. This ratio determines how fast the Company can afford to grow
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without adding external financing that would dilutediluting shareholder interests. For example, a 20%30% ROE will financially support 20%30% annual growth in revenues without issuing more stock. The
Looking forward, unless UTMD utilizes its cash to make an acquisition or repurchase shares, 2007 ROE will be lower ROE in 2004, despite a continued excellentthan 2006 because net profit margin, was dueprofitability is projected to payment ofremain about the same while average shareholders’ equity and dividends to shareholders which reduced
retained profits, much higher average cashincrease 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 ifdecrease. Retaining a high cash and investment balances are maintained at current levels,
shareholder dividends are continued and no other extraordinary income is
received. In UTMD's opinion, achieving growth in revenues and EPS without
diluting shareholder interests maximizes shareholder value. UTMD's ROE has
averaged 34% per year over the last 18 years.
balance which returns only about 5% dilutes overall ROE.
Liquidity and Capital Resources.
Cash Flows. Cash (and investment) balances were $16,928 at the end of 2004,
compared to $1,484 at the end of 2003.
Flows.
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 and $8,656
in 2002. Major changes in operating assets and liabilities in 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 in 2004 includes continued excellent net income
performance, aided by a $446 tax benefit attributable to exercise of employee incentive stock options, totaled $10,853 in 2006 compared to the same$6,451 in 2005 and $27,459 in 2004. Compared to 2005, net cash provided by operating activities was enhanced in 2006 by an increase of $621 in net profits, a substantial tax benefit of $2,450 from the exercise of employee options (compared to $936 in 20032005 and $446 in 2004) and excellent balance sheet management by decreasing inventories, receivables and other current assets in the presence of $1,108 and $354 in 2002.
higher sales activity. In 2004, the major contributor was a receivable of about $25 million from Tyco International for patent infringement.
The Company'sCompany’s use of cash for investing activities was primarily as a result of purchases of short-termliquid investments, in an effort to make prudent use ofmaximize returns on excess cash.cash balances while maintaining safety and liquidity. UTMD expended $22,103$6,600 in 20042006 on such purchases, compared to $737$10,600 in 20032005 and none$22,103 in 2002.2004. In 2004,2006, UTMD received $8,202$4,306 from selling short-term investments.investments, compared to $9,045 in 2005 and $8,202 in 2004. No cash acquisitions were made in 2006 or 2005. 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 more detail of the Abcorp assets purchased.
In 2004,2006, UTMD received $1,111$627 and issued 117,482155,823 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 122,908324,548 option shares in 2004,2006, with 5,426168,725 shares immediately being retired as a result of the individuals trading the shares in payment of the exercise price of the options.options and related tax withholding subject to statutory limitations. UTMD paid $6$2,700 in 2006 to meet tax withholding requirements on options exercised. UTMD repurchased 555,76568,565 shares of stock in the open market at a cost of $10,692$2,094 during 2004.2006. Option exercises in 20042006 were at an average price of $10.05$10.50 per share. Share repurchases in the open market were at an average cost of $19.24$31.00 per share, including commissions and fees. In 2003, the Companycomparison, in 2005 UTMD received $882$858 from issuing 197,432123,478 shares of stock on the exercise of employee and director stock options, including 101,42083,655 shares retired upon an employeeemployees and directors trading those shares in payment of the stock option exercise price and related tax withholding requirements.
Duringwithholding. In 2004, the Company received $1,111 from issuing 117,482 shares of stock on the exercise of employee and director stock options, including 5,426 shares retired upon employees trading those shares in payment of the stock option exercise price.
In December 2005, UTMD’s foreign subsidiary borrowed €4.5 million ($5,336) to finance repatriation (from Ireland to the U.S.) of profits achieved since 1996 under The American Jobs Creation Act of 2004. UTMD did not utilize its bank line of credit.borrow during 2006 or 2004. In 2003,2006, UTMD made repayments of $4,956$1,057 on the Ireland note. Although UTMD has not borrowed under its note payable, which eliminatedrevolving line of credit since it paid off the balance in 2003, the line of credit balance remaining atis used to guarantee the end of 2002, while receiving $0current Ireland loan in proceeds fromorder to achieve the line of credit. In 2002, UTMD made loan repayments of $2,501 and received $4,956
in proceeds from the line ofmost favorable credit to finance the November 2002 tender offer
for UTMD share repurchases.
terms.
Management believes that future income from operations and effective management of working capital will provide the liquidity needed to finance
internal growth plans. Planned
20052007 capital expenditures are expected to be
approximatelyless than $600 to keep facilities, equipment and tooling in good working order. In addition,
to capital expenditures, UTMD
plans tomay use cash in
20052007 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
remainsbecomes undervalued; and if available for a reasonable price, acquisitions that may strategically fit
UTMD'sUTMD’s business and are accretive to performance. The revolving line of credit 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 not otherwise available from existing cash and investment balances.
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In summary, management plans to utilize cash not needed to support normal operations in one or a combination of the following: 1) to make investments in new technology;technology and/or processes; 2) to acquire a product line that will help spuraugment revenue growth and better utilize UTMD'sUTMD’s existing infrastructure; and/or 3) to buy backrepurchase UTMD shares in the open marketplace.
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of UTMD's significant contractual obligations and
commitments as of December 31, 2004 (in thousands):
Less More
Contractual Obligations and than 1 1-3 3-5 than 5
Commitments Total year years years years
----------- ------ ------ ------ ------ ------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Operating lease obligations 1,095 108 142 111 734
Purchase obligations (1) 1,788 1,788 -- -- --
------ ------ ------ ------ ------
Total $2,883 $1,896 $ 142 $ 111 $ 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 lease on its
Oregon manufacturing facility, and 2) a lease for a portion of the parking lot
adjacent to its Utah 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 2004 was $11.7 million, or 44% as a ratio of sales. In
both 2003 and 2002, EBITDA was 45% of sales. The strong cash generation
performance resulted from a combination of excellent 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 as projected above, management expects 2005 EBITDA from
normal operations to be about $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
20052007 UTMD plans to
1) clear up its 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 2001;
2) continue outstanding operating performance;
3) actively look for new acquisitions to facilitate sales growth; and
4) utilize current cash balances in shareholders' best long-term interest.
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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.
| 1) | retain the significant U.S. market shares of key products, and continue growth of newer products; |
| 2) | add proprietary products helpful to clinicians through internal new product development; |
| 3) | continue to disproportionately increase international sales; |
| 4) | make effective adjustments to intracompany manufacturing operations to minimize consolidated manufacturing costs; |
| 5) | continue outstanding overall financial operating performance; |
| 6) | look for new acquisitions to augment sales growth; and |
| 7) | utilize current cash balances in shareholders’ best long-term interest. |
The reliability and performance of UTMD'sUTMD’s products is high and representsrepresent significant clinical benefits as well as minimalwhile providing minimum 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 cost of care picture.
which includes risk of unwanted complications and unnecessary utilization.
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 business partners.
UTMD's 2004 EPS were up 2%,
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 revenue growth as its $22.47 2004 ending share price was down
14% relativeprimary motivation. We fundamentally seek to do an excellent job in meeting our customers’ and their patients’ needs, and provide our shareholders with excellent returns.
Looking back five years from the end of 2006 to the end of 2003.2001, UTMD’s EPS have increased 77% while the year-ending share price has more than doubled (up 142%). In comparison, the NASDAQ Composite, S&P 500 Index and DJIA indices were all 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,only about 24% over that same time span. Over the most recent five year time span.
period, UTMD’s share price appreciated six times the rate of increase of the major indices, providing long term shareholders with excellent returns.
In 2004,2006, while the year ending share price only increased 3%, UTMD increased dividends/share paid to shareholders by 21%, and decreased outstanding unexercised options by 58%. Diluted shares outstanding declined about 4%. This was achieved in 2006 by UTMD again demonstrateddemonstrating a high positive cash flow by meeting its operational goals, managing working capital effectively and keeping new capital expenditures below itsthe rate of depreciation of existing assets. UTMD'sUTMD’s balance sheet is strong enough to be able to finance ana substantial acquisition in 20052007 without issuing stock.stock, should an attractive one become available. In considering acquisitions, UTMD looks to acquire successful companies, products or technologies that will enhance its specialist focus. When UTMD acquires a company, it probablyfocus, but not significantly increase its business risk and not dilute its financial performance.
Critical Accounting Policies and Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Management has identified the following as the Company’s most critical accounting policies which require significant judgment and estimates. Although management believes its estimates are reasonable, actual results may differ from these estimates under different assumptions or conditions.
| · | Allowance for doubtful accounts: The majority of the Company’s receivables are with hospitals and medical device distributors. Although the Company has historically not had significant write-offs of bad-debt, the possibility exists, particularly with foreign customers where collection efforts can be difficult or in the event of widespread U.S. hospital bankruptcies. |
| · | Inventory valuation reserves: The Company strives to maintain a good balance of inventory to (1) meets its customer’s needs while (2) not tying-up an unnecessary amount of the Company’s resources increasing the possibility of, among other things, obsolescence. The Company believes its method of reviewing actual and projected demand for its existing inventory allows it to arrive at a fair inventory valuation reserve. While the Company has historically not had significant inventory write-offs, the possibility exists that one or more of its products may become unexpectedly obsolete for which a reserve has not previously been created. The Company’s historical write-offs have not been materially different from its estimates. |
Accounting Policy Changes.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This statement clarifies the accounting for uncertainty in income tax positions. The provisions of FIN 48 will be
effective for
cash andUTMD starting in First Quarter 2007, with the
idea that it will be ablecumulative effect of the change, if material, recorded as an adjustment to
retain key resources that helped makeopening retained earnings. Management is currently evaluating the
acquired entity successful.
Accounting Policy Changes.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Accounting for
Stock Based Compensation." This statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This revised statement establishes
standards for the accountingimpact of
transactions in which an entity exchanges its
equity instruments for goods and services, including the grant of stock options
to employees and directors. The Statement is effective for periods beginning
after June 15, 2005, and will require the Company to recognize compensation cost
basedFIN 48 on the
grant date fair value of the equity instruments it 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 been recognized in the Company's financial
statements. The Company estimates that the required adoption of SFAS 123 (R) in
third quarter 2005 will have a negative impact on its consolidated financial statements.
Please see note 1, starting on page F-12 for an estimate of the
impact this Statement would have had on the Company's net income for the periods
covered by this report.
-24-
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had manufacturing operations, including related assets, in Ireland denominated in the EURO,Euro, and sold products under agreements denominated in various Western European currencies. The EUROEuro and other currencies have been and are subject to exchange rate fluctuations that are beyond the control of UTMD. The exchange rate for the EUROEuro was .7335, .7958.7611, .8433 and .9551.7335 per U.S. Dollar as of December 31, 2004, 20032006, 2005 and 2002,2004, respectively. Please see Note 1 starting on
page F-12.in Item, 8, below under “Translation of Foreign Currencies” for more information. UTMD manages its foreign currency risk without separate hedging transactions by converting currencies as transactions occur.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements
Dollar amounts are in thousands except per-share amounts and
financial statement schedule at page
F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - DISCLOSURE CONTROLS AND 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.
ITEM 9B- OTHER INFORMATION
None.
-25-
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERSwhere noted.
TABLE 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
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 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
None.
ITEM 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 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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 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, 1995.
(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.
(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.
(6) Incorporated by reference from the Company's quarterly report on form
10-Q filed with the Commission for the quarter ended September 30,
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.
-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 16th day of March, 2005.
UTAH MEDICAL PRODUCTS, INC.
By: /s/ Kevin L. Cornwell
------------------------------
Kevin L. Cornwell
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 16th day of March, 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
-29-
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
UTAH MEDICAL PRODUCTS, INC.
---------------------------
Index to Consolidated Financial Statements
------------------------------------------
December 31, 2004, 2003 and 2002
--------------------------------
Page
----
Management's Report on Internal Control Over Financial Reporting F-2
Report of Jones Simkins, P.C. on 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. on Financial Statements F-6
Consolidated balance sheet F-7
Consolidated statement of income and comprehensive income F-8
Consolidated statement of cash flows F-9
Consolidated statement of stockholders' equity F-11
Notes to consolidated financial statements F-12
F-1
MANAGEMENT'SCONTENTS | Management’s Report on Internal Control Over Financial Reporting | 25 |
| Report of Independent Registered Public Accounting Firm on Management’s Assessment on Internal Control Over Financial Reporting | 26 |
| Report of Independent Registered Public Accounting Firm on Financial Statements | 27 |
| Consolidated Balance Sheet | 28 |
| Consolidated Statement of Income and Comprehensive Income | 29 |
| Consolidated Statement of Cash Flow | 30 |
| Consolidated Statement of Stockholders’ Equity | 32 |
| Notes to Consolidated Financial Statements | 33 |
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, 2004.2006. 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.
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.
2006.
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,
2004,2006, 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
page.
| By: | /s/ Kevin L. Cornwell |
| Kevin L. Cornwell |
| Chief Executive Officer |
| |
| |
| |
| By: | /s/ Paul O. Richins |
| Paul O. Richins |
| Principal Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
of Utah Medical Products, Inc.
We have audited management's assessment, included in the accompanying report titled Management'sManagement’s Report Onon Internal Control Over Financial Reporting, that Utah Medical Products, Inc. maintained effective internal control over financial reporting as of December 31, 2004,2006, 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’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'sCompany'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, 2004,2006, 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, 20042006, 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 financialbalance sheets and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows of Utah Medical Products, Inc., and our report dated January
17, 2005March 8, 2007 expressed an unqualified opinion.
/s/
/s/ Jones Simkins, P.C. - -----------------------
JONES SIMKINS, P.C.
Logan, Utah
January 17, 2005
F-4
March 8, 2007
REPORT OF INDEPENDENT REGISTERED
-------------------------------- PUBLIC ACCOUNTING FIRM
----------------------
To the Board of Directors and Stockholders' Stockholders
of Utah Medical Products, Inc.
We have audited the accompanying consolidated balance sheets of Utah Medical Products, Inc. as of December 31, 20042006 and 20032005, and the related consolidated statements of income and comprehensive income, stockholders'stockholders’ equity, and cash flows for each of the years then ended.in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company'scompany’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, 20042006 and 20032005, and the results of its operations and its cash flows for each of the years thenin the three-year period ended December 31, 2006 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.’s internal control over financial reporting as of December 31, 2004,2006, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 17, 2005March 8, 2007 expressed an unqualified opinion.
/s/opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.
/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, 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 results of operations and cash flows of
Utah Medical Products, Inc. for the year ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Tanner + Co.
Salt Lake City, Utah
January 21, 2003
F-6
March 8, 2007
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
December 31, 20042006 and 2003
--------------------------
(In2005
(In thousands)
ASSETS 2004 2003
------ -------- --------
Current assets:
Cash $ 1,818 $ 762
Investments, available-for-sale (note 3) 15,110 722
Accounts receivable, net (note 2) 3,730 3,326
Inventories (note 2) 2,859 3,268
Prepaid expenses and other current assets 263 219
Litigation receivable (note 13) -- 24,884
Deferred income taxes (note 7) 750 721
-------- --------
Total current assets 24,530 33,902
Property and equipment, net (note 4) 9,058 9,005
Other assets, net (note 2) 7,674 6,787
-------- --------
Total assets $ 41,262 $ 49,694
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 698 $ 368
Accrued expenses (note 2) 3,638 12,129
-------- --------
Total current liabilities 4,336 12,497
Deferred income taxes (note 7) 769 665
-------- --------
Total liabilities 5,105 13,162
-------- --------
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 41 45
Accumulated other comprehensive income 226 (260)
Retained earnings 35,890 36,747
-------- --------
Total stockholders' equity 36,157 36,532
-------- --------
Total liabilities and stockholders' equity $ 41,262 $ 49,694
======== ========
ASSETS | | 2006 | | 2005 | |
| Current assets: | | | | | |
| Cash | | $ | 610 | | $ | 703 | |
| Investments, available-for-sale (note 3) | | | 20,439 | | | 16,750 | |
| Accounts and other receivables, net (note 2) | | | 3,746 | | | 4,418 | |
| Inventories (note 2) | | | 3,037 | | | 3,305 | |
| Prepaid expenses and other current assets | | | 274 | | | 280 | |
| Deferred income taxes (note 8) | | | 305 | | | 402 | |
| Total current assets | | | 28,411 | | | 25,858 | |
| | | | | | | | |
| Property and equipment, net (note 4) | | | 8,331 | | | 8,160 | |
| | | | | | | | |
| Goodwill | | | 7,191 | | | 7,191 | |
| | | | | | | | |
| Other intangible assets - net (note 2) | | | 254 | | | 433 | |
| | | | | | | | |
| Total assets | | $ | 44,187 | | $ | 41,642 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 599 | | $ | 757 | |
| Accrued expenses (note 2) | | | 2,341 | | | 2,418 | |
| Current portion of note payable (note 5) | | | 441 | | | 453 | |
| Total current liabilities | | | 3,381 | | | 3,628 | |
| | | | | | | | |
| Note payable (note 6) | | | 4,383 | | | 4,883 | |
| Deferred income taxes (note 8) | | | 308 | | | 274 | |
| Total liabilities | | | 8,072 | | | 8,785 | |
| Commitments and contingencies (notes 7 and 11) | | | - | | | - | |
| 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 3,944 shares in 2006 and 3,856 shares in 2005 | | | 39 | | | 39 | |
| Accumulated other comprehensive income | | | (720 | ) | | (495 | ) |
| Retained earnings | | | 36,796 | | | 33,314 | |
| Total stockholders' equity | | | 36,115 | | | 32,857 | |
| | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 44,187 | | $ | 41,642 | |
See accompanying notes to financial statements
F-7
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
AND COMPREHENSIVE INCOME
------------------------
Years ended December 31, 2004, 20032006, 2005 and 2002
--------------------------------------------
(In2004
(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
Unrealized gain on investments net
of taxes of $61, $12 and $0 157 19 --
-------- -------- --------
Total comprehensive income $ 10,599 $ 21,328 $ 7,622
======== ======== ========
| | | 2006 | | 2005 | | 2004 | |
| Sales, net (notes 10 and 11) | | $ | 28,753 | | $ | 27,692 | | $ | 26,485 | |
| Cost of goods sold (notes 10 and 11) | | | 12,606 | | | 11,939 | | | 11,419 | |
| Gross margin | | | 16,147 | | | 15,753 | | | 15,066 | |
| | | | | | | | | | | |
| Operating income (expense): | | | | | | | | | | |
| Sales and marketing expense | | | (2,272 | ) | | (2,214 | ) | | (2,253 | ) |
| Research and development expense | | | (316 | ) | | (320 | ) | | (292 | ) |
| General and administrative expense | | | (2,725 | ) | | (3,981 | ) | | (3,262 | ) |
| Other operating income (note 12) | | | - | | | - | | | 6,060 | |
| Operating income | | | 10,835 | | | 9,237 | | | 15,320 | |
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Dividend and interest income | | | 862 | | | 398 | | | 238 | |
| Royalty income | | | 450 | | | 450 | | | 450 | |
| Interest expense | | | (255 | ) | | (10 | ) | | - | |
| Other, net | | | 525 | | | 139 | | | 110 | |
| Income before provision for income taxes | | | 12,418 | | | 10,214 | | | 16,117 | |
| | | | | | | | | | | |
| Provison for income taxes (note 8) | | | 4,250 | | | 2,667 | | | 5,897 | |
| Net income | | $ | 8,168 | | $ | 7,547 | | $ | 10,220 | |
| | | | | | | | | | | |
| Earnings per common share (basic) (notes 1 and 2): | | $ | 2.07 | | $ | 1.91 | | $ | 2.32 | |
| | | | | | | | | | | |
| Earnings per common share (diluted) (notes 1 and 2): | | $ | 2.02 | | $ | 1.80 | | $ | 2.19 | |
| | | | | | | | | | | |
| Other comprehensive income: | | | | | | | | | | |
| Foreign currency translation net of taxes of $(36), $(153) and $107 | | $ | (75 | ) | $ | (502 | ) | $ | 222 | |
| Unrealized gain (loss) on investments net of taxes of $(69), $(42) and $100 | | | (109 | ) | | (65 | ) | | 157 | |
| Total comprehensive income | | $ | 7,984 | | $ | 6,980 | | $ | 10,599 | |
See accompanying notes to financial statements.
F-8
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOW
-----------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
(In thousands)
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net income $ 10,220 $ 20,761 $ 7,165
-------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 809 984 1,172
Gain on investments (52) (11) --
Provision for (recovery of) losses on accounts receivable 3 (93) 18
Loss on disposal of assets 5 4 --
Deferred income taxes 75 (47) 108
Tax benefit attributable to exercise of stock options 446 1,108 354
(Increase) decrease in:
Accounts receivable (226) 36 577
Accrued interest and other receivables (191) 257 (316)
Inventories 437 174 (168)
Prepaid expenses and other current assets (43) (32) (31)
Litigation receivable 24,884 (24,884) --
Increase (decrease) in:
Accounts payable 312 (291) 154
Accrued expenses (9,220) 10,369 (377)
-------- -------- --------
Net cash provided by operating activities 27,459 8,335 8,656
-------- -------- --------
Cash flows from investing activities:
Capital expenditures for:
Property and equipment (411) (272) (517)
Intangible assets (10) (122) --
Purchases 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)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - options 1,111 882 1,113
Common stock purchased and retired (10,692) (2,240) (11,787)
Common stock purchased and retired - options (6) (555) (31)
Proceeds from note payable -- -- 4,956
Repayments of note payable -- (4,956) (2,501)
Dividends paid (1,331) -- --
-------- -------- --------
Net cash used in financing activities (10,918) (6,869) (8,250)
-------- -------- --------
Effect of exchange rate changes on cash (151) 44 26
Net increase (decrease) in cash and cash equivalents 1,056 477 (85)
Cash at beginning of year 762 285 370
-------- -------- --------
Cash at end of year $ 1,818 $ 762 $ 285
======== ======== ========
See accompanying notes to financial statements.
F-9
CONSOLIDATED STATEMENT OF CASH FLOW
-----------------------------------
Years Ended December 31, 2004, 20032006, 2005 and 2002
--------------------------------------------
(In2004
(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
| | | 2006 | | 2005 | | 2004 | |
Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 8,168 | | $ | 7,547 | | $ | 10,220 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 634 | | | 676 | | | 809 | |
| Gain on investments | | | (1,375 | ) | | (70 | ) | | (52 | ) |
| Provision for (recovery of) losses on accounts receivable | | | 29 | | | (4 | ) | | 3 | |
| (Gain) Loss on disposal of assets | | | - | | | (5 | ) | | 5 | |
| Deferred income taxes | | | 118 | | | (129 | ) | | 75 | |
| Stock-based compensation expense | | | 140 | | | - | | | - | |
| Tax benefit attributable to exercise of stock options | | | 2,450 | | | 936 | | | 446 | |
| (Increase) decrease in: | | | | | | | | | | |
| Accounts receivable | | | (37 | ) | | (51 | ) | | (226 | ) |
| Accrued interest and other receivables | | | 709 | | | (770 | ) | | (191 | ) |
| Inventories | | | 35 | | | (573 | ) | | 437 | |
| Prepaid expenses and other current assets | | | 1 | | | (13 | ) | | (43 | ) |
| Litigation receivable | | | - | | | - | | | 24,884 | |
| Increase (decrease) in: | | | | | | | | | | |
| Accounts payable | | | 74 | | | 81 | | | 312 | |
| Accrued expenses | | | (92 | ) | | (1,175 | ) | | (9,220 | ) |
| Net cash provided by operating activities | | | 10,853 | | | 6,451 | | | 27,459 | |
| | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
| Capital expenditures for: | | | | | | | | | | |
| Property and equipment | | | (334 | ) | | (345 | ) | | (411 | ) |
| Intangible assets | | | - | | | - | | | (10 | ) |
| Purchases of investments | | | (6,600 | ) | | (10,600 | ) | | (22,103 | ) |
| Proceeds from the sale of: | | | | | | | | | | |
| Investments | | | 4,306 | | | 9,045 | | | 8,202 | |
| Property and equipment | | | - | | | 5 | | | - | |
| Net cash paid in acquisition | | | - | | | - | | | (1,012 | ) |
| Net cash used in investing activities | | | (2,628 | ) | | (1,895 | ) | | (15,334 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from issuance of common stock - options | | | 627 | | | 858 | | | 1,111 | |
| Common stock purchased and retired | | | (2,094 | ) | | (8,604 | ) | | (10,692 | ) |
| Common stock purchased and retired - options | | | (2,700 | ) | | (833 | ) | | (6 | ) |
| Proceeds from note payable | | | - | | | 5,336 | | | - | |
| Repayments of note payable | | | (1,057 | ) | | - | | | - | |
| Dividends paid | | | (2,902 | ) | | (2,445 | ) | | (1,331 | ) |
| Net cash used in financing activities | | | (8,126 | ) | | (5,687 | ) | | (10,918 | ) |
| | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | (191 | ) | | 16 | | | (151 | ) |
| | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (92 | ) | | (1,116 | ) | | 1,056 | |
| | | | | | | | | | | |
| Cash at beginning of year | | | 703 | | | 1,818 | | | 762 | |
| | | | | | | | | | | |
| Cash at end of year | | $ | 610 | | $ | 703 | | $ | 1,818 | |
See accompanying notes to financial statements.
F-10
UTAH MEDICAL PRODUCTS, INC.
---------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
(In thousands)
Accumulated
Common Stock Additional Other Total
------------------- Paid-in Comprehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
-------- -------- -------- -------- -------- --------
Balance at January 1, 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 taxes -- -- -- 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-11
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
Years Ended December 31, 2006, 2005 and 2004
(In thousands)
Continued
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | |
| | | 2006 | | 2005 | | 2004 | |
| Cash paid during the year for: | | | | | | | |
| Income taxes | | $ | 1,866 | | $ | 2,915 | | $ | 14,294 | |
| Interest | | | 255 | | | 10 | | | - | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 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.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2006, 2005 and 2004
(In thousands)
| | | | | | | | | Accumulated | | | | | |
| | | | | | | Additional | | Other | | | | Total | |
| | | Common Stock | | Paid-in | | Comprehensive | | Retained | | Stockholders' | |
| | | Shares | | Amount | | Capital | | Income | | Earnings | | Equity | |
| 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 | |
| Shares issued upon exercise of employee stock options for cash | | | 207 | | | 2 | | | 2,420 | | | - | | | - | | | 2,422 | |
| Shares received and retired upon exercise of stock options | | | (84 | ) | | (1 | ) | | (2,395 | ) | | - | | | - | | | (2,396 | ) |
| Tax benefit attributable to appreciation of stock options | | | - | | | - | | | 936 | | | - | | | - | | | 936 | |
| Common stock purchased and retired | | | (373 | ) | | (4 | ) | | (960 | ) | | - | | | (7,640 | ) | | (8,604 | ) |
| Foreign currency translation adjustment | | | - | | | - | | | - | | | (654 | ) | | - | | | (654 | ) |
| Unrealized holding loss from investments, available-for-sale, net of taxes | | | - | | | - | | | - | | | (67 | ) | | - | | | (67 | ) |
| Common stock dividends | | | - | | | - | | | - | | | - | | | (2,484 | ) | | (2,484 | ) |
| Net income | | | - | | | - | | | - | | | - | | | 7,547 | | | 7,547 | |
| Balance at December 31, 2005 | | | 3,856 | | $ | 39 | | $ | - | | $ | (495 | ) | $ | 33,314 | | $ | 32,857 | |
| Shares issued upon exercise of employee stock options for cash | | | 325 | | | 3 | | | 3,406 | | | - | | | - | | | 3,409 | |
| Shares received and retired upon exercise of stock options | | | (169 | ) | | (2 | ) | | (5,481 | ) | | - | | | - | | | (5,483 | ) |
| Tax benefit attributable to appreciation of stock options | | | - | | | - | | | 2,450 | | | - | | | - | | | 2,450 | |
| Stock option compensation expense | | | - | | | - | | | 140 | | | - | | | - | | | 140 | |
| Common stock purchased and retired | | | (69 | ) | | (1 | ) | | (515 | ) | | - | | | (1,610 | ) | | (2,125 | ) |
| Foreign currency translation adjustment | | | - | | | - | | | - | | | (116 | ) | | - | | | (116 | ) |
| Unrealized holding loss from investments, available-for-sale, net of taxes | | | - | | | - | | | - | | | (109 | ) | | - | | | (109 | ) |
| Common stock dividends | | | - | | | - | | | - | | | - | | | (3,076 | ) | | (3,076 | ) |
| Net income | | | - | | | - | | | - | | | - | | | 8,168 | | | 8,168 | |
| Balance at December 31, 2006 | | | 3,944 | | $ | 39 | | $ | - | | $ | (720 | ) | $ | 36,796 | | $ | 36,115 | |
See accompanying notes to financial statements.
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Dollar amounts are in thousands except per-share amounts and where noted.
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 healthcare industry. The Company'sCompany’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 physicians'physicians’ 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“available for sale.
"” Securities classified as
"available“available for
sale"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-12
Note 1 - SummaryAs of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
December 31, 2006 all of the Company’s investments are held in Fidelity Cash Reserves (FDRXX).
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.providers, as well as other manufacturing companies. 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, 2004.
2006.
The Company maintains its cash in bank deposit accounts which at times, may
exceed federally insured limits in addition to Fidelity 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
Accounts Receivable
Accounts receivable are amounts due on product sales and are unsecured. Accounts receivable are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus accounts receivable do not bear interest although a finance charge may be applied to such receivables that are past the due date. Accounts receivable are periodically evaluated for collectiblity based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions (see Note 2).
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 1 - -----------
Summary of Significant Accounting Policies (continued)
Inventories
Finished products, work-in-process, 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
| 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 Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting“Accounting for the Impairment of Long-Lived 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-13
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. The Company
evaluatesUTMD’s goodwill is tested for impairment annually, in the carryingfourth quarter of each year, using a fair value of its goodwillmeasurement test, in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets." At December 31, 2004 no142. UTMD would also perform an impairment was
indicated.
test, between annual tests, if circumstances changed that would more than likely reduce the fair value of goodwill below its net book value. If UTMD determined that its goodwill were impaired, a second step would be completed to measure the amount of the impairment loss. UTMD does not expect its goodwill to become impaired in the foreseeable future (see Note 2).
Loans to Related Parties
- ------------------------
Except as further disclosed in these notes, the
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 thatrecognizes revenue should be
recognized at the time of shipment as title generally passes to the customer at the time of shipment. This policy meetsRevenue recognized by UTMD is based upon documented arrangements and fixed contracts in which the criteria of Staff Accounting
Bulletin 101 in that there is persuasive evidence of an existing contract or
arrangement, delivery has occurred, theselling price is fixed prior to completion of an order. Revenue from product and determinableservice sales is generally recognized at the time the product is shipped or service completed and theinvoiced, and collectibility is reasonably assured. There are circumstances under which revenue may be recognized when product is not shipped, which meet the criteria of SAB 104: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD’s service has been completed according to a fixed contractual agreement.
Income Taxes
- ------------
The Company accounts for income taxes under SFAS No. 109, "Accounting“Accounting for Income Taxes,"” whereby deferred taxes are computed under the asset and liability method.
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
Legal Costs
- -----------
The Company has been involved in lawsuits which are an expected 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 withwhich are probable and estimated based on its previous
experience and anticipated costs.experience. The reserve for legal costs at December 31,
20042006 and
20032005 was
(in thousands) $1,260$66 and
$1,050,$125, respectively (see Note 2).
F-14
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'sCompany’s basic and diluted earnings per share are reconciled as follows:
2004 2003 2002
------ ------ ------
Weighted average number of shares
outstanding - basic 4,399 4,526 4,913
Dilutive effect of stock options 276 359 350
------ ------ ------
Weighted average number of shares
outstanding, assuming dilution 4,675 4,885 5,263
====== ====== ======
| | | 2006 | | 2005 | | 2004 |
| | | | | | | |
| Weighted average number of shares outstanding - basic | | 3,943 | | 3,962 | | 4,399 |
| Dilutive effect of stock options | | 100 | | 230 | | 276 |
| | | | | | | |
| Weighted average number of shares outstanding, assuming dilution | | 4,043 | | 4,192 | | 4,675 |
Stock-Based Compensation
- ------------------------
At December 31, 2004,2006, the Company has stock-based employee compensation plans, which are described more fully in Note 8. The9. Effective January 1, 2006, the Company accountsadopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, using the modified prospective method. This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors. In 2006, the Company recognized $140 in compensation cost related to adoption of the statement. Prior to December 31, 2005, the Company accounted for thoseits stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "AccountingAccounting for Stock Issued to Employees", and related Interpretations, and hashad adopted the disclosure-only provisions of SFAS No. 123, "AccountingAccounting for Stock-Based Compensation."Compensation. Accordingly, no compensation cost has beenwas recognized in the financial statements prior to 2006, as all options granted under those plans had an exercise priceprices 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
A comparison of reported net income 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 earningslast three years, and
earnings per share
would have been reduced to the pro forma
amounts indicated below (in thousands,
except per share amounts):
F-15
net income for 2005 and 2004, including effects of expensing stock options, follows.
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Net income, as reported | | $ | 8,168 | | $ | 7,547 | | $ | 10,220 | |
| Earnings per share, as reported | | | | | | | | | | |
| Basic | | | 2.07 | | | 1.91 | | | 2.32 | |
| Diluted | | | 2.02 | | | 1.80 | | | 2.19 | |
| Stock option expense included in calculation of net income | | | 140 | | | - | | | - | |
| | | | | | | | | | | |
Pro forma effects | | | | | | | | | | |
| Stock option expense not included in net income, net of related tax effects | | | | | $ | 869 | | $ | 388 | |
| Net income on a pro forma basis | | | | | | 6,678 | | | 9,832 | |
| Earnings per share on a pro forma basis | | | | | | | | | | |
| Basic | | | | | | 1.69 | | | 2.24 | |
| Diluted | | | | | | 1.59 | | | 2.10 | |
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Stock-Based
On May 6, 2005 the Compensation (continued)
- -------------------------
Years endedand Option Committee of the Board accelerated the vesting of certain unvested stock options awarded to employees, officers and directors under the Company’s stock option plans, which had exercise prices that were under water as of market close May 5, 2005.
Options to purchase 124,800 shares become fully exercisable on December 31,
--------------------------------------
2004 2003 2002
------------ ----------- ---------
Net income1, 2005 as reported $ 10,220 $ 20,761 $ 7,165
Deduct:
Total stock-based employeea result of the vesting acceleration. Exercise prices of the options accelerated are $24.02 and $25.59 per share. These options previously became fully vested on October 1, 2007 and January 1, 2008. The Company took this action to avoid an accounting charge (as compensation expense) for these options starting in 2006, as required by FAS 123R. The increase in pro forma compensation expense determined
under fair value based method
for all awards, netin 2005, as shown above, is a result 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
============ =========== =========
the vesting acceleration.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of the Company'sCompany’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'sCompany’s assets and liabilities are reflected as a separate component of stockholders'stockholders’ equity. A negative translation impact on stockholders'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. dollar 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-16
Reclassifications
This report reclassifies $453 from note payable to current portion of note payable on the balance sheet at December 31, 2005 to reflect minimum required principal payments on the note during 2006.
Note 2 - Detail of Certain Balance Sheet Accounts
| | | December 31, | |
| | | 2006 | | 2005 | |
| Accounts and other receivables: | | | | | |
| Accounts receivable | | $ | 3,607 | | $ | 3,542 | |
| Income tax receivable | | | 212 | | | 783 | |
| Accrued interest and other | | | 28 | | | 166 | |
| Less allowance for doubtful accounts | | | (101 | ) | | (73 | ) |
| | | $ | 3,746 | | $ | 4,418 | |
| | | | | | | | |
| Inventories: | | | | | | | |
| Finished products | | $ | 1,002 | | $ | 1,058 | |
| Work-in-process | | | 984 | | | 657 | |
| Raw materials | | | 1,051 | | | 1,590 | |
| | | $ | 3,037 | | $ | 3,305 | |
| | | | | | | | |
| Other intangible assets: | | | | | | | |
| Patents | | $ | 1,896 | | $ | 2,025 | |
| License rights | | | 293 | | | 293 | |
| Trademarks | | | 224 | | | 224 | |
| Non-compete agreements | | | 175 | | | 175 | |
| | | | 2,588 | | | 2,717 | |
| Accumulated amortization | | | (2,334 | ) | | (2,284 | ) |
| | | $ | 254 | | $ | 433 | |
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 2 - -------------------------------------------------
December 31,
-----------------------
2004 2003
-------- --------
Account receivable (in thousands):
Receivables $ 3,636 $ 3,373
Accrued interest and other 171 27
Less allowance for doubtful accounts (77) (74)
-------- --------
$ 3,730 $ 3,326
======== ========
Inventories (in thousands):
Finished products $ 932 $ 1,495
Work-in-process 640 631
Raw materials 1,287 1,142
-------- --------
$ 2,859 $ 3,268
======== ========
Other assets (in thousands):
Goodwill $ 9,479 $ 8,533
Patents 2,025 2,015
License rights 293 293
Trademarks 224 224
Non-compete agreements 175 175
-------- --------
12,196 11,240
Accumulated amortization (4,522) (4,453)
-------- --------
$ 7,674 $ 6,787
======== ========
Accrued expenses (in thousands):
Income taxes payable $ 384 $ 9,270
Payroll and payroll taxes 963 1,479
Reserve for litigation costs 1,260 1,050
Dividends payable 616 --
Other 415 330
-------- --------
$ 3,638 $ 12,129
======== ========
During the years ended December 31, 2004 and 2003, the carrying amountDetail of goodwill increased (in thousands) $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
Certain Balance Sheet Accounts (continued)
| | | December 31, | |
| | | 2006 | | 2005 | |
| Accrued expenses: | | | | | | | |
| Income taxes payable | | $ | 36 | | $ | 45 | |
| Payroll and payroll taxes | | | 948 | | | 949 | |
| Reserve for litigation costs | | | 66 | | | 125 | |
| Dividends payable | | | 829 | | | 658 | |
| Other | | | 462 | | | 641 | |
| | | $ | 2,341 | | $ | 2,418 | |
Note 3 - Investments
- --------------------
The Company'sCompany’s investments, classified as available-for-sale consist of the following (in thousands):
December 31,
-----------------
2004 2003
------- -------
Investments, at
cost $14,822 $ 691
Unrealized holding gain 288 31
------- -------
Investments, at fair value $15,110 $ 722
======= =======
following:
| | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Investments, at cost | | $ | 20,439 | | $ | 16,571 | |
| Equity securities: | | | | | | | |
| -Unrealized holding gains | | | - | | | 298 | |
| -Unrealized holding (losses) | | | - | | | (119 | ) |
| | | | | | | | |
| Investments, at fair value | | $ | 20,439 | | $ | 16,750 | |
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,
-----------------follows:
| | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Balance, beginning of year | | $ | 109 | | $ | 176 | |
| Gross unrealized holding gains, net of (losses), in equity securities | | | (179 | ) | | (110 | ) |
| Deferred income taxes on unrealized holding gain | | | 70 | | | 43 | |
| | | | | | | | |
| Balance, end of year | | $ | - | | $ | 109 | |
During 2006, 2005 and 2004, 2003
------- -------
Balance, beginningUTMD had proceeds from sales of year $ 19 $ -
Unrealized holding gain 257 31
Deferred income taxes on
unrealized holding gain (100) (12)
------- -------
Balance, endavailable-for-sale securities of year $ 176 $ 19
======= =======
$4,306, $9,045 and $8,202, respectively and associated realized gains of $1,375, $70 and $52, respectively. UTMD uses the specific identification method to calculate its realized gains.
Note 4 - Property and Equipment
- -------------------------------
Property and equipment consists of the
following (in thousands):
2004 2003
-------- --------
Land $ 1,089 $ 1,052
Buildings and improvements 9,283 8,738
Furniture, equipment and tooling 13,763 13,966
Construction-in-progress 41 111
-------- --------
24,176 23,867
Accumulated depreciation and amortization (15,118) (14,862)
-------- --------
$ 9,058 $ 9,005
======== ========
F-18
following:| | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Land | | $ | 1,072 | | $ | 1,028 | |
| Buildings and improvements | | | 9,216 | | | 8,631 | |
| Furniture, equipment and tooling | | | 14,141 | | | 13,781 | |
| Construction-in-progress | | | 115 | | | 179 | |
| | | | 24,544 | | | 23,619 | |
| | | | | | | | |
| Accumulated depreciation and amortization | | | (16,213 | ) | | (15,459 | ) |
| | | | | | | | |
| | | $ | 8,331 | | $ | 8,160 | |
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 4 - Property and Equipment (continued)
- -------------------------------------------
Included in the
Company'sCompany’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, 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
======== ======== ======== ========
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
======== ======== ======== ========
F-19
follows:
| | | December 31, 2006 | |
| | | Utah | | Oregon | | Ireland | | Total | |
| | | | | | | | | | |
| Land | | $ | 621 | | $ | - | | $ | 451 | | $ | 1,072 | |
| Building and improvements | | | 4,431 | | | 32 | | | 4,753 | | | 9,216 | |
| Furniture, equipment and tooling | | | 11,994 | | | 1,261 | | | 886 | | | 14,141 | |
| Construction-in-progress | | | 112 | | | 3 | | | - | | | 115 | |
| | | | | | | | | | | | | | |
| Total | | | 17,158 | | | 1,296 | | | 6,090 | | | 24,544 | |
| | | | | | | | | | | | | | |
| Accumulated depreciation | | | (13,147 | ) | | (1,277 | ) | | (1,789 | ) | | (16,213 | ) |
| | | | | | | | | | | | | | |
| Property and equipment, net | | $ | 4,011 | | $ | 19 | | $ | 4,301 | | $ | 8,331 | |
| | | | | | | | | | | | | | |
| | | | December 31, 2005 | |
| | | Utah | | Oregon | | Ireland | | Total | |
| | | | | | | | | | | | | | |
| Land | | $ | 621 | | $ | - | | $ | 407 | | $ | 1,028 | |
| Building and improvements | | | 4,236 | | | 32 | | | 4,363 | | | 8,631 | |
| Furniture, equipment and tooling | | | 11,750 | | | 1,251 | | | 781 | | | 13,782 | |
| Construction-in-progress | | | 179 | | | - | | | - | | | 179 | |
| | | | | | | | | | | | | | |
| Total | | | 16,786 | | | 1,283 | | | 5,551 | | | 23,619 | |
| | | | | | | | | | | | | | |
| Accumulated depreciation | | | (12,672 | ) | | (1,274 | ) | | (1,513 | ) | | (15,459 | ) |
| | | | | | | | | | | | | | |
| Property and equipment, net | | $ | 4,114 | | $ | 9 | | $ | 4,038 | | $ | 8,160 | |
Note 5 - Long-term Debt
In December 2005 the Company borrowed €4.5 million ($5,336) from the Bank of Ireland to finance repatriation of profits achieved since 1996 under The American Jobs Creation Act of 2004. The loan term is 10-years at an interest rate of 0.70% plus the bank’s money market rate, which is a total of the bank’s cost of funds and cost of liquidity. The balance on the note at December 31, 2006 was $4,824 (€3,672).
The following table shows estimated minimum required amortization of the note during the next five years using the current interest rate of 4.71%, starting with a December 31, 2006 balance of $4,824:
| Year | | Payments | | Interest | | Principal | | Ending Balance | |
| | | | | | | | | | |
| 2007 | | $ | 659 | | $ | 219 | | $ | 441 | | $ | 4,384 | |
| 2008 | | | 659 | | | 197 | | | 462 | | | 3,922 | |
| 2009 | | | 659 | | | 175 | | | 484 | | | 3,438 | |
| 2010 | | | 659 | | | 152 | | | 508 | | | 2,930 | |
| 2011 | | | 659 | | | 127 | | | 532 | | | 2,398 | |
| Thereafter | | | 2,637 | | | 239 | | | 2,398 | | | - | |
| | | | | | | | | | | | | | |
| Total | | | 5,933 | | | 1,109 | | | 4,824 | | | | |
Note Payable6 - ---------------------
Line of Credit
The Company has an unsecured bank line-of-credit agreement with U.S. Bank which allows the Company to borrow up to a fixed maximum amount (in thousands) of $5,000$8,000 at an interest rate equal to either the bank's one-month 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, 20062008 and had an outstanding balance of $0 at both December 31, 20042006 and 2003.2005. The principal financial loan covenants are a restriction on the total amount available for borrowing to 1.25 times the last twelve months'months’ EBITDA, which as of December 31, 2004 and 2003 was equal to
(in thousands) $21,158 and $43,506, respectively, and a requirement to maintain a net worth in excess of $10$18.5 million, which at the end of 20042006 and 20032005 was (in
thousands) $36,157$36,115 and $36,532,$32,857, respectively. U.S. Bank also guarantees the Bank of Ireland loan through a letter of credit arrangement at an interest rate of 1.25%.
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 67 - Commitments and Contingencies
- --------------------------------------
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of UTMD’s significant contractual obligations and commitments as of December 31, 2006:
Contractual Obligations and Commitments | | Total | | 2007 | | 2008- 2009 | | 2010- 2011 | | 2012 and thereafter | |
| | | | | | | | | | | | |
| Long-term debt obligations | | $ | 5,966 | | $ | 663 | | $ | 1,326 | | $ | 1,326 | | $ | 2,651 | |
| Operating lease obligations | | | 952 | | | 68 | | | 75 | | | 75 | | | 734 | |
| Purchase obligations | | | 1,293 | | | 1,293 | | | - | | | - | | | - | |
| Total | | $ | 8,211 | | $ | 2,024 | | $ | 1,401 | | $ | 1,401 | | $ | 3,385 | |
Operating Leases
- ----------------
The Company has a lease agreement for land adjoining its 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 two-year noncancelableone-year non-cancelable operating lease. Rent expense charged to operations under these operating lease agreements was approximately (in
thousands) $107, $105$107 and $104$107 for the years ended December 31, 2006, 2005 and 2004, 2003 and
2002, respectively.
Future minimum lease payments under its lease obligations as of December 31,
20042006 were as
follows (in thousands):
Years ending December 31: Amount
2005 $ 107
2006 66
2007 37
2008 37
2009 37
Thereafter 808
---------
Total future minimum lease payments $ 1,092
=========
F-20
Note 6 - Commitmentsfollows:
Years ending December 31: | | Amount | |
| | | | |
| 2007 | | $ | 68 | |
| 2008 | | | 37 | |
| 2009 | | | 38 | |
| 2010 | | | 37 | |
| 2011 | | | 38 | |
| Thereafter | | | 734 | |
| | | | | |
| Total future minimum lease payments | | $ | 952 | |
Purchase Obligations
The Company has obligations to purchase raw materials for use in its manufacturing operations. The Company has the right to make changes in, among other things, purchase quantities, delivery schedules and Contingencies (continued)
- --------------------------------------------------
order acceptance.
Product Liability
- -----------------
The Company is self-insured for product liability risk. "Product liability"“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'scompany’s product during a procedure thatwhich 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'sCompany’s overall history.
The Company absorbs the costs of clinical training trouble-shooting and product
warrantiestrouble-shooting in its on-going operating expenses.
Litigation
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 7 - ----------
Commitments and Contingencies (continued)
Warranty Reserve
UTMD maintains a warranty reserve to provide for estimated costs which are likely to occur. The amount of this reserve is adjusted, as required, to reflect its historical experience. The following table summarizes changes to UTMD’s warranty reserve during 2006:
| Beginning balance, January 1, 2006 | | $ | 60 | |
Changes in warranty reserve during 2006: | | | | |
| Aggregate reductions for warranty repairs | | | (3 | ) |
| Aggregate changes for warranties issued during reporting period | | | 16 | |
| Aggregate changes in reserve related to preexisting warranties | | | (13 | ) |
| Ending balance, December 31, 2006 | | $ | 60 | |
Litigation
The Company has been involved in lawsuits which are an expected consequence of its operations and in the ordinary course of business. There are notwo such lawsuits currently pending. With respectThe Company applies its accounting policy to the current litigation with the FDA,
the Company has always strongly maintainedaccrue legal costs that it is in substantial compliance
with all government regulations. If the U.S. Court disagrees with the Company,
there maycan be a materially adverse effect on the Company's financial condition or
results of operations. Alternatively, if the U.S. Court agrees with it, the
Company may have the opportunity to seek restitution of litigation costs and
damages. The final pretrial conference is scheduled for June 20, 2005.
reasonably estimated.
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 78 - Income Taxes
- ---------------------
Deferred tax assets (liabilities) consist of the following temporary differences
(in thousands):
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)
===== ===== ===== =====
differences:
| | | December 31, | |
| | | 2006 | | 2005 | |
| | | Current | | Long-term | | Current | | Long-term | |
| | | | | | | | | | |
| Inventory write-downs and differences due to UNICAP | | $ | 88 | | $ | - | | $ | 84 | | $ | - | |
| Allowance for doubtful accounts | | | 29 | | | - | | | 28 | | | - | |
| Accrued liabilities and reserves | | | 188 | | | 24 | | | 290 | | | (63 | ) |
| Other | | | - | | | (216 | ) | | - | | | (53 | ) |
| Depreciation and amortization | | | - | | | (116 | ) | | - | | | (89 | ) |
| Unrealized investment gains | | | - | | | - | | | - | | | (70 | ) |
| Earnings from subsidiary | | | - | | | - | | | - | | | - | |
| Deferred income taxes, net | | $ | 305 | | $ | (308 | ) | $ | 402 | | $ | (274 | ) |
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
===== ===== =====
follows:
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Current | | $ | 4,049 | | $ | 2,519 | | $ | 5,822 | |
| Deferred | | | 201 | | | 148 | | | 75 | |
| | | | | | | | | | | |
| Total | | $ | 4,250 | | $ | 2,667 | | $ | 5,897 | |
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 8 - Income Taxes (continued)
Income tax expense differed from amounts computed by applying the statutory federal rate to pretax income as
follows (in thousands):
Years ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Federal income tax expense at the
statutory rate $ 3,709 $ 3,716 $ 3,738
State income taxes 545 559 482
ETI, foreign sales corporation and
tax credits (164) (68) (182)
Other (349) (366) (207)
----- ----- -----
Total $ 3,741 $ 3,841 $ 3,831
===== ===== =====
F-22
follows:
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| Federal income tax expense at the statutory rate | | $ | 4,222 | | $ | 3,473 | | $ | 5,480 | |
| State income taxes | | | 410 | | | 337 | | | 806 | |
| ETI, foreign sales corporation and tax credits | | | (154 | ) | | (172 | ) | | (164 | ) |
| Reversal of deferred tax for foreign subsidiary earnings, net of repatriation tax | | | - | | | (434 | ) | | - | |
| Other | | | (228 | ) | | (537 | ) | | (225 | ) |
| | | | | | | | | | | |
| Total | | $ | 4,250 | | $ | 2,667 | | $ | 5,897 | |
Note 89 - 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 1,014,226666,558 shares of common stock, of which 755,526227,944 are outstanding as of December 31, 2004.2006. 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
| | | Shares | | Price Range Per Share | |
2006 | | | | | | | |
| Granted | | | 14,600 | | $ | 29.86 - | | $ | 29.86 | |
| Expired or canceled | | | 10,729 | | | 14.60 - | | | 29.86 | |
| Exercised | | | 324,548 | | | 6.50 - | | | 25.59 | |
| Total outstanding at December 31 | | | 227,944 | | | 6.50 - | | | 29.86 | |
| Total exercisable at December 31 | | | 191,010 | | | 6.50 - | | | 25.59 | |
| | | | | | | | | | | |
2005 | | | | | | | | | | |
| Granted | | | 27,900 | | $ | 21.68 - | | $ | 21.68 | |
| Expired or canceled | | | 27,672 | | | 9.13 - | | | 25.59 | |
| Exercised | | | 207,133 | | | 6.50 - | | | 25.59 | |
| Total outstanding at December 31 | | | 548,621 | | | 6.50 - | | | 25.59 | |
| Total exercisable at December 31 | | | 491,070 | | | 6.50 - | | | 25.59 | |
| | | | | | | | | | | |
2004 | | | | | | | | | | |
| 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 | |
For the years ended December 31,
2004, 20032006, 2005 and
2002,2004, the Company reduced current income taxes payable and increased additional paid-in capital by
(in
thousands)$2,450, $936 and $446,
$1,109 and $354, respectively, for the income tax benefit attributable to sale by optionees of common stock received upon the exercise of stock options.
F-23
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 89 - Options (continued)
- ----------------------------
Stock-Based Compensation
- ------------------------
The
As described in Note 1, effective January 1, 2006, the Company hasadopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, using the modified prospective method. This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors. In 2006, the Company recognized $140 in compensation cost related to adoption of the statement. Prior to December 31, 2005, the Company accounted for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, and had adopted the disclosure-only provisions of SFAS No. 123, "AccountingAccounting for Stock-Based Compensation". Accordingly, no compensation cost was recognized in the financial statements prior to 2006, as described in Note 1.
all options granted under those plans had exercise prices equal to or greater than the market value of the underlying common stock on the date of grant.
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
---- ---- ----
Expected dividend yield 0.7% - -
Expected stock price volatility 39.0% 40.5% 41.7%
Risk-free interest rate (weighted average) 3.7% 3.5% 4.3%
Expected life of options 6.2 years 5.9 years 5.2 years
| | | Years ended December 31, |
| | | 2006 | | 2005 | | 2004 |
| | | | | | | |
| Expected dividend amount per quarter/annual yield | | $0.2521 | | 2.9% | | 0.7% |
| Expected stock price volatility | | 28.1% | | 39.7% | | 39.0% |
| Risk-free interest rate (weighted average) | | 5.0% | | 4.1% | | 3.7% |
| Expected life of options | | 5.3 years | | 5.1 years | | 6.2 years |
The per-share weighted average fair value of options granted during 2006, 2005 and 2004 2003is $7.29, $6.88 and 2002 is $10.07, $8.89 and $6.52, respectively.
The following table summarizes information about stock options outstanding at December 31,
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 - 7.25 276,052 3.71 $ 6.83 276,052 $ 6.83
9.125 - 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 - 25.59 755,526 4.84 $ 13.24 554,727 $ 10.04
=============== ======= ==== ===== ======= =====
F-24
2006:
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price |
| | | | | | | | | | | |
| $ 6.50-15.01 | | 68,650 | | 3.08 | | $ 9.40 | | 68,650 | | $ 9.40 |
| 17.71-24.02 | | 70,032 | | 7.28 | | 20.50 | | 46,498 | | 20.95 |
| 25.59-29.86 | | 89,262 | | 7.42 | | 26.23 | | 75,862 | | 25.59 |
| | | | | | | | | | | |
| $ 6.50-29.86 | | 227,944 | | 6.07 | | $ 19.40 | | 191,010 | | $ 18.64 |
Note 910 - Geographic Sales Information
- -------------------------------------
The Company had sales in the following geographic areas (in thousands):
United States Europeareas:
| | | United States | | Europe | | Other | |
| | | | | | | | |
| 2006 | | $ | 21,363 | | $ | 3,888 | | $ | 3,502 | |
| 2005 | | | 21,301 | | | 3,501 | | | 2,891 | |
| 2004 | | | 20,452 | | | 3,636 | | | 2,392 | |
UTAH MEDICAL PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 11 - Revenues by Product Category
The Company had revenues in the following product categories:
Product Category | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Obstetrics | | $ | 9,371 | | $ | 9,774 | | $ | 10,918 | |
| Gynecology/Electrosurgery/Urology | | | 6,106 | | | 5,397 | | | 5,142 | |
| Neonatal | | | 7,073 | | | 6,475 | | | 4,134 | |
| Blood Pressure Monitoring and Accessories | | | 6,203 | | | 6,046 | | | 6,292 | |
Note 12 - Other ------------- ------ -----Operating Income
In January 2004, $ 20,452 $ 3,639 $ 2,394
2003 21,266 3,376 2,495the Company received a payment of $30,944 in damages and interest resulting from a 2002 21,626 3,337 2,398
District Federal Court judgment and ensuing post judgment settlement relating to Tyco/Kendall•LTP ’s patent infringement. The Company recognized other operating income from that payment of $6,060 in first quarter 2004 and $23,992 in fourth quarter 2003.
Note 1013 - 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'sCompany’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'sCompany’s technology.
Note 1114 - Employee Benefit Plan
- -------------------------------
The Company has a contributory 401(k) savings plan for employees, who are at least 21 years of age, work 301,000 hours or more each week,a year, and have a minimum of one year of service with the Company. The Company'sCompany’s contribution is determined annually by the board of directors. Company contributions were approximately (in
thousands)$91, $92 $95 and $94$92 for the years ended December 31, 2006, 2005 and 2004, 2003 and
2002, respectively.
Note 1215 - Fair Value Financial Instruments
- ------------------------------------------
None of the
Company'sCompany’s financial instruments, which are current assets and liabilities that could be readily traded, are held for trading 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,
2004,2006, 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 Items
- -----------------------------
In fourth quarter 2004, the Company recognized extraordinary non-operating
expense of (in thousands) $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 a 2002 District Federal Court judgment
relating to the Company's patent infringement litigation against
Tyco/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.
Note 1416 - Recent Accounting Pronouncements
- ------------------------------------------
In December 2004,June 2006, the Financial Accounting Standards Board (FASB) issued FASB issued SFAS 123 (revised 2004), "AccountingInterpretation No. 48, “Accounting for Stock
Based Compensation."Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This statement supersedes APB Opinion No.clarifies the accounting for uncertainty in income tax positions. The provisions of FIN 48 will be effective for UTMD starting in First Quarter 2007, with the cumulative effect of the change, if material, recorded as an adjustment to opening retained earnings. Management is currently evaluating the impact of FIN 48 on the consolidated financial statements.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
UTMD Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934 Rule 13a-15(e). UTMD’s Board of Directors, operating through its audit committee, provides oversight to its financial reporting process.
During 2006, UTMD evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, UTMD’s Chief Executive Officer and Principal Financial Officer concluded that, as of December 31, 2006, its disclosure controls and procedures were effective.
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, 2006. 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 25 "Accounting
for Stock Issuedand 26 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" and are incorporated herein by reference.
Changes in Internal Control Over Financial Reporting.
There have been no changes in UTMD’s internal control over financial reporting that materially affected, or were reasonably likely to Employees." This revisedmaterially affect, the Company’s internal control over financial reporting during the fourth quarter of the fiscal year ended December 31, 2006, and there were no significant deficiencies or material weaknesses.
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information from the definitive proxy statement establishes standardsof the registrant for the accounting2007 annual meeting of transactions in which an entity exchangesshareholders under the captions,
| · | “PROPOSAL NO. 1. ELECTION OF DIRECTORS: General,” and “Directors and Nominees,” |
| · | “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN PERSONS,” and |
| · | “EXECUTIVE OFFICER COMPENSATION: 2006 Director Compensation,” |
is incorporated herein by reference.
UTMD adopted a Code of Ethics for its equity
instruments for goods and services,executive officers, including the grantChief Executive Officer and outside directors, in October 2003. The Code of stock optionsEthics, 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 employees and directors. post on its website any waivers of or amendments to its Code of Ethics.
ITEM 11 - EXECUTIVE COMPENSATION
The statement is effective for periods beginning after
June 15, 2005, and will requireinformation from the Company to recognize compensation cost based
on the grant date fair valuedefinitive proxy statement of the equity instruments it awards. The Company
currently accountsregistrant for those instrumentsthe 2007 annual meeting of shareholders under the recognition and measurement
principles of APB Opinion 25, includingcaptions,
| · | “EXECUTIVE OFFICER COMPENSATION,” |
| · | COMPENSATION DISCUSSION AND ANALYSIS,” and |
| · | BOARD OF DIRECTORS AND OTHER BOARD COMMITTEE REPORTS: Compensation and Option Committee Interlocks and Insider Participation,” specifically excluding the “Report of the Compensation Committee” |
is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information from the disclosure-only provisionsdefinitive proxy statement of the original SFAS 123. Accordingly, no compensation costregistrant for the 2007 annual meeting of shareholders under the captions,
| · | “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN PERSONS” and |
| · | “DISCLOSURE RESPECTING THE COMPANY’S EQUITY COMPENSATION PLANS” |
is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information from issuing equity
instrumentsthe definitive proxy statement of the registrant for the 2007 annual meeting of shareholders under the captions,
| · | “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” |
| · | “BOARD OF DIRECTORS AND OTHER BOARD COMMITTEE REPORTS: Director Independence” |
is incorporated herein by reference.
The information from the definitive proxy statement of the registrant for the 2007 annual meeting of shareholders in the first paragraph under the caption, “Report of the Audit Committee” is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The information from the definitive proxy statement of the registrant for the 2007 annual meeting of shareholders under the caption “Independent Public Accountants” is incorporated herein by reference.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this report or incorporated herein by reference. |
(See Table of Contents to Item 8, above.)
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.
Exhibit # | | SEC Reference # | | Title of Document | | Location |
| 1 | | 3 | | Articles of Restatement of the Articles of Incorporation | | Incorporated by Reference (1) |
| 2 | | 3 | | Articles of Correction to the Restated Articles of Incorporation | | Incorporated by Reference (1) |
| 3 | | 3 | | Bylaws | | Incorporated by Reference (2) |
| 4 | | 4 | | Rights Agreement dated as of July 30, 2004, between Utah Medical Products, Inc., and Registrar and Transfer Company | | Incorporated by Reference (3) |
| 5 | | 4 | | Designation of Rights, Privileges, and Preferences of Series “A” Preferred Stock | | Incorporated by Reference (2) |
| 6 | | 10 | | Employment Agreement dated December 21, 1992 with Kevin L. Cornwell* | | Incorporated by Reference (4) |
| 7 | | 10 | | Amendment, effective May 15, 1998, to Employment Agreement dated December 21, 1992 with Kevin L. Cornwell* | | Incorporated by Reference (4) |
| 8 | | 10 | | Utah Medical Products, Inc., 2003 Employees’ and Directors’ Incentive Plan* | | Incorporated by Reference (5) |
| 9 | | 10 | | Loan Agreement, dated 3 July, 2002 between Utah Medical Products, Inc and U.S. Bank National Association | | Incorporated by Reference (6) |
| 10 | | 10 | | Revolving Promissory Note, dated July 3, 2002 by Utah Medical Products, Inc. to U.S. Bank National Association | | Incorporated by Reference (6) |
| 11 | | 10 | | Second Amendment to Loan Agreement, dated 30 August 2004 between Utah Medical Products, Inc. and U.S. Bank National Association | | Incorporated by Reference (7) |
| 12 | | 10 | | Third Amendment to Loan Agreement, dated December 6, 2005 between Utah Medical Products, Inc. and U.S. Bank National Association | | Incorporated by Reference (8) |
| 13 | | 10 | | Amended and Restated Revolving Promissory Note, dated December 6, 2005 by Utah Medical Products, Inc. to U.S. Bank National Association | | Incorporated by Reference (8) |
| 14 | | 10 | | Loan Agreement, signed 6-December-2005 between Utah Medical Products Limited and Bank of Ireland | | Incorporated by Reference (8) |
| 15 | | 10 | | Fourth Amendment to Loan Agreement, dated 31 May 2006 between Utah Medical Products, Inc. and U.S. Bank National Association | | Incorporated by Reference (9) |
Exhibit # | | SEC Reference # | | Title of Document | | Location |
| 16 | | 10 | | Summary of Officer and Director Compensation | | This Filing |
| 17 | | 21 | | Subsidiaries of Utah Medical Products, Inc. | | Incorporated by Reference (10) |
| 18 | | 23 | | Consent of Jones Simkins, P.C., Company’s independent auditors for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 | | This Filing |
| 19 | | 31 | | Certification of CEO pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | This Filing |
| 20 | | 31 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | This Filing |
| 21 | | 32 | | Certification of CEO pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | This Filing |
| 22 | | 32 | | Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | This Filing |
* Management contract of compensatory plan or arrangement required to be filed pursuant to Item 14(c).
| (1) | Incorporated by reference from the Company’s annual report on form 10-K filed with the Commission for the year ended December 31, 2004. |
| (2) | Incorporated by reference from the Company’s registration statement on form S-8 filed with the Commission effective February 10, 1995. |
| (3) | Incorporated by reference from the Company’s report on form 8-K filed with the Commission on October 1, 2004. |
| (4) | Incorporated by reference from the Company’s annual report on form 10-K filed with the Commission for the year ended December 31, 2003. |
| (5) | Incorporated by reference from the Company’s annual report on form 10-K filed with the Commission for the year ended December 31, 2002. |
| (6) | Incorporated by reference from the Company’s quarterly report on form 10-Q filed with the Commission for the quarter ended June 30, 2002. |
| (7) | Incorporated by reference from the Company’s quarterly report on form 10-Q filed with the Commission for the quarter ended September 30, 2004. |
| (8) | Incorporated by reference from the Company’s report on form 8-K filed with the Commission on December 12, 2005. |
| (9) | Incorporated by reference from the Company’s report on form 8-K filed with the Commission on June 5, 2006. |
| (10) | Incorporated by reference from the Company’s annual report on form 10-K filed with the Commission for the year ended December 31, 1999. |
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 15th day of March, 2007.
UTAH MEDICAL PRODUCTS, INC.
| By: | /s/ Kevin L. Cornwell |
| Kevin L. Cornwell |
| Chief Executive Officer |
| |
| |
| By: | /s/ Paul O. Richins |
| Paul O. Richins |
| Principal Financial and Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been recognizedsigned below by the following persons on behalf of the registrant and in the Company's financial statements. The
Company estimates that the required adoptioncapacities indicated on this 15th day of SFAS 123 (R) in third quarter
2005 will have a negative impact on its consolidated financial statements.
Please see note 1 for an estimate of the impact this statement would have had on
the Company's net income for the periods covered by this report.
F-26March, 2007.
| By: | (new director in 2007 - did not sign) |
| James H. Beeson, 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 |