SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995. Commission File No. 0-11178
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UTAH MEDICAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Utah 87-0342734
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7043 South 300 West
Midvale, UT 84047
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(Address of principal executive offices)
Registrant's telephone number: (801) 566-1200
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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(Common Stock, $.01 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and; (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996, based on NASDAQ/NMS closing price:$145,910,115.
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The number of shares outstanding of the registrant's common stock as of March
15, 1996: 9,727,341.
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DOCUMENTS INCORPORATED BY REFERENCE
List herein the documents incorporated by reference: The Company's definitive
proxy statement for the Annual Meeting of Shareholders is incorporated by
reference into Part III, Items 10, 11, 12, and 13 of this Form 10-K.
PART I.
ITEM I - BUSINESS.
Utah Medical Products, Inc. ("UTMD" or "the Company") is in the business of
producing cost-effective devices for the health care industry which are
predominantly proprietary, disposable and for hospital use. Success depends on
1) recognizing needs of clinicians and patients, 2) rapidly designing economic
solutions which gain regulatory approval, 3) reliably producing products that
meet those clinical needs, and then 4) selling through:
a) UTMD's own direct channels into markets where the Company enjoys an
established reputation and has a critical mass of sales and support
resources, or
b) establishing relationships with other medical companies that have the
proper resources to effectively introduce and support the Company's
products.
UTMD's success in rapidly producing solutions comes from its proven ability to
integrate a number of engineering and technical disciplines in electronics,
software, mechanical packaging, instrumentation, optics and materials. The
resulting proprietary products represent incremental, but significant,
improvements over existing clinical techniques. 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 health care.
Historically, UTMD has marketed a broad range of medical devices used in the
critical care areas and the labor and delivery department in the hospital, as
well as products sold to outpatient clinics and physician's offices.
The skill of applying solutions to recognized needs results from an excellent
core of practicing clinicians who feed ideas to the Company and key employees
who are both clinical applications savvy and development engineering adept.
The Company's critical care products include devices used for invasive
monitoring of patient blood pressure; the administration of intravenous fluids,
drugs and anesthetics; and oxygen therapy. Obstetrics products include
catheters and electrodes used to monitor intrauterine pressure and fetal heart
rate during labor, and a device which clamps, cuts, and collects blood from the
umbilical cord. Gynecology products include a minimally-invasive surgery system
for removing precancerous tissue from the cervix and lower genital tract, a
system for conservatively treating urinary incontinence, and a tool used in
laparoscopic procedures to manipulate the uterus.
Critical care products are sold in the U.S. domestic market primarily through
other medical device companies, and to a lesser degree by UTMD's own direct
sales representatives. Ob/Gyn products are sold in the U.S. primarily by UTMD's
own direct sales representatives, and through a network of specialty
distributors. Internationally, products are sold through other medical device
companies and through separate country-by-country medical products distributors.
Negative factors that may adversely impact future performance include managed
care reforms that may limit clinicians' discretion in spending on certain
products or procedures, innovative new products introduced by other companies
that displace UTMD's products, regulatory approval delays, changes in the
Company's relationships with its distribution partners, and loss of key
personnel.
The Company was formed as a Utah corporation in 1978 and went public in 1982.
The Company's offices are located at 7043 South 300 West, Midvale, Utah 84047.
The corporate telephone number is (801) 566-1200.
PRODUCTS
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Obstetrics Market:
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Fetal Monitoring.
About 60% of births are considered "high risk" due to lack of prenatal care,
among other factors. In many of these births, labor may become complicated and
does not progress normally. The obstetrician must assess progression of labor
to be able to intervene with drug therapy, infusion of a solution to augment
amniotic fluid, or ultimately if necessary, Caesarean section; or be prepared
for complications following childbirth. In addition to products already
offered, the Company intends to continue to develop and introduce tools that
enhance fetal monitoring techniques, a core area of focus.
To assist the physician in assessing fetal well being, changes in fetal heart
rate (FHR) in conjunction with trends in intrauterine pressure exerted on the
fetus are often electronically monitored. UTMD's intrauterine pressure catheter
product line provides for clinician choices from a traditional fluid-filled
system to INTRAN(R) PLUS, the state-of-the-art sensor-tipped system. In
addition, adjunct standard FHR electrodes and chart paper are offered by UTMD to
complete a package of fetal monitoring supplies.
- IUP-075 and other custom catheter kits utilize a saline-filled catheter,
connected to a separate reusable or disposable transducer, that is placed
within the uterine cavity. This product package, utilizing double lumen
catheters, was the traditional mode of intrauterine monitoring prior to the
introduction of INTRAN. An intrauterine pressure waveform is generated
through transmission of a signal to the external pressure transducer.
- Introduced in 1987, INTRAN I was the first intrauterine pressure catheter
that placed the pressure sensor at the source within the uterine cavity.
This design eliminated the complicated setup of fluid-filled systems and
provided more accurate pressure waveforms. INTRAN I was discontinued in
1995 in favor of the more preferred INTRAN PLUS, which is also covered
under UTMD's original INTRAN patent.
- INTRAN PLUS was introduced in 1991 and has replaced INTRAN I as the state-
of-the-art sensor-tipped IUP catheter. The INTRAN PLUS catheter combines
the transducer tip concept of INTRAN I with a refined tip design. A
re-zero feature allows the clinician to verify the accuracy of the
generated pressure waveform. The dedicated amnio lumen provides immediate
access to the amniotic fluid environment which may be essential in the
diagnosis and intervention of certain fetal conditions.
Other Obstetrics Tools.
CORDGUARD(R) is a unique product released for marketing in 1995 which unifies
the multiple steps of clamping the neonate's cord close to the umbilicus,
severing the cord without splattering blood, drawing a clean blood sample for
diagnostic or therapeutic purposes, and assisting in the removal of the
placenta. Neonatal blood is generally hard to safely and cleanly obtain, and is
gaining in perceived value to clinicians. UTMD has and will continue to commit
substantial resources to the area of umbilical cord management.
Gynecology Market:
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LETZ(TM) System: FINESSE(R) Generator, Disposable Loop Electrodes and Other
Supplies.
The LETZ System is a complete line of products and supplies used to treat
cervical intraepithelial neoplasia (CIN) and other lower genital tract lesions
related to human papilloma virus (HPV) infections. This procedure of using
electrosurgical excision with hemostasis has rapidly replaced cold knife
scalpel, laser and cryotherapy procedures because it is economical, safe,
effective, quick and easy to perform, has fewer potential side effects, and
requires little physician training. In contrast to laser and cryotherapy, LETZ
provides an important tissue specimen for a pathological assessment. In
addition, the procedure may be performed by using only local anesthesia in the
physician's office, eliminating the time and expense of hospital or surgical
center admittance. In 1991 the Company introduced an entire line of products
necessary to perform this electrosurgical procedure including the Prendiville
disposable loop, the FINESSE electrosurgical generator and other miscellaneous
components. The FINESSE electrosurgical generator is the only generator on the
market that contains an integral smoke evacuator. The smoke evacuator is
required to filter smoke and vapors which contain potentially hazardous
particulate material produced during electrosurgery. The disposable loop, the
electrode used to excise the tissue specimen, is a pencil-like tube with a thin
tungsten wire loop attached. The loop is available in varying sizes and
includes a Safe-T-Gauge(R) that can be positioned so the physician can more
accurately colposcopically monitor the amount of tissue being excised.
In 1995, UTMD received FDA clearance to market its electrosurgical system in
general surgery applications. In addition, UTMD received FDA clearance to
market FILTRESSE(TM), a newly developed stand-alone surgical smoke filtration
system which combines high filtration efficiency, low cost and convenient use.
The Company will continue to develop and introduce specialty tools for specific
electrosurgical procedures.
LIBERTY(TM) System.
LIBERTY, a device for the conservative treatment and effective control of
urinary incontinence in women was also released for marketing by the FDA in
1995. LIBERTY consists of a battery operated stimulator unit and an
intravaginal electrode probe. This physiotherapy technique, which can be done
in the privacy of home, involves passive strengthening of the periurethral
muscles. Pulsed, low voltage, high frequency current is applied primarily to
the pudendal nerve causing the pelvic area muscles to contract, leading to
better muscle tone. Because electrical stimulation has no known side effects,
Liberty provides women suffering from mild to moderate incontinence an
effective, low risk alternative to more traumatic treatments such as surgery and
drug therapy.
Tools for Gynecologic Laparoscopy.
LUMIN(TM) is a proprietary tool developed by UTMD for reliably and safely
manipulating the uterus in gynecological laparoscopic procedures. The product
was released for marketing by the FDA in 1995. LUMIN combines the strength,
range of motion and versatility of the higher end reusable instruments with the
lower cost and cleanliness of the cheaper disposable instruments presently on
the market, while at the same time reducing the number of tools needed to move
and secure the uterus.
Neonatal Critical Care Market:
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DISPOSA-HOOD.
The DISPOSA-HOOD is an infant oxygen hood that is used in infant intensive care
to administer oxygen to neonates. The Disposa-Hood, which is placed over the
infant's head, incorporates a round diffusor connection specifically designed to
disperse the incoming gases along the inner surfaces of the hood, rather than
allowing them to blow directly on the infant's head. The design allows more
precise FIO2 (fractional inspired oxygen) control, minimizes convective heat
loss from the head and provides optimum flows for elimination of CO2 (carbon
dioxide) by ventilation. The DISPOSA-HOOD is also designed to prevent
cross-contamination, to allow axial rotation of the infant's head without
contact with the DISPOSA-HOOD and to aid in the maintenance of the neutral
thermal and humidity conditions that are necessary in the care of premature
infants.
Critical Care Market:
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Blood Pressure Monitoring Products.
DELTRAN(R) Disposable Transducer.
A transducer converts one form of energy to another. In pressure monitoring,
it is used to convert physiological (mechanical) pressure into an electrical
signal that can be displayed on electronic monitoring equipment. In medical
applications, transducers had previously been reusable, fragile, subject to
declining accuracy with repeated use and had a cost of about $1,000. The
development of integrated circuit technology and guided laser technology led to
the introduction of the first disposable transducer in the medical market
approximately eleven years ago.
The Company has developed and is now distributing its disposable transducer as
a stand-alone product, and as a component in pressure monitoring kits, through
its direct representatives and independent distributors, as well as to other
medical companies, in the U.S. and internationally.
Although several other medical companies manufacture disposable pressure
transducers ("DPTs"), the Company believes that the DELTRAN DPT which it has
developed is the state-of-the-art model in terms of reliability and ease of use.
Recently, UTMD has qualified an automated assembly line which will
substantially lower DELTRAN manufacturing costs.
Other Products and Components.
The Company sells products specifically designed for other medical companies
which incorporate UTMD's proprietary technologies. In addition, UTMD sells
plastic molded parts to a number of medical companies, including its
competitors. The Company believes that this practice has not affected its
competitive position and extends the benefit that shareholders realize from
UTMD's manufacturing capabilities and technologies.
BAXTER HEALTHCARE CORPORATION AGREEMENTS.
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In December 1987, the Company first entered into a purchase and distribution
agreement with Baxter Healthcare Corporation for UTMD's line of invasive
disposable blood pressure transducers used in hospitals. In January, 1995 new
Summit and Deltran Purchase and Distribution Agreements were executed. These
new agreements superseded the previous agreements. The new agreements assure
Baxter a continued reliable supply of DELTRAN II (name branded for Baxter as
UNIFLOW) through the year 2000, provided they purchase certain minimum
quantities, and SUMMIT, an exclusive design for Baxter, through June 1998,
subject to certain maximum amounts and other terms of purchase. The agreements
are exclusive only with respect to distribution of DELTRAN II in Japan, and with
respect to the SUMMIT product worldwide.
DELTRAN IV, UTMD's automated version of DELTRAN/UNIFLOW, is not covered under
the existing agreements. Sales of other critical care components to Baxter,
including stopcocks, flush devices, cables, and miscellaneous molded parts,
which are not covered by a formal purchase agreement, accounted for
approximately $1.1 million of the total $15 million in 1995 sales to Baxter.
Total sales to Baxter represented about 36% of UTMD's sales in 1995. Despite
the significant revenues, gross profits generated by sales of DPTs to Baxter
represented less than 15% of UTMD's gross profits in 1995.
In mid-1994, Baxter introduced its own internally assembled DPT product to the
marketplace in direct competition with DELTRAN/UNIFLOW. (Baxter and UTMD have
agreed to phase out the SUMMIT product independent of availability of any other
products.) Although UTMD's 1995 DELTRAN/UNIFLOW sales to Baxter appeared
unaffected by the availability of the new Baxter DPT product offering, UTMD
believes it remains Baxter's longer term objective to convert as many of its
customers as possible to its own assembled product. Recently in March 1996,
Baxter indicated in its latest forecasts, required on a quarterly basis per
agreement, that its DELTRAN/UNIFLOW demand for the remainder of 1996 would be
much lower than previously forecasted and as actually shipped in 1995. Although
difficult to predict exactly what will occur relative to Baxter's timing of
conversion of products, or success of conversion efforts relative to end user
preferences, Baxter's recent abrupt action, combined with its apparent lack of
interest in DELTRAN IV, increases UTMD's uncertainty about the reliability of
Baxter's forecasts. Given the broad clinical acceptance and use of
DELTRAN/UNIFLOW, UTMD intends to investigate other distribution means,
especially in light of the lower cost of DELTRAN IV. Even though UTMD believes
its DELTRAN products have excellent continued market potential, given UTMD's
concentration of Baxter revenues, Baxter's recent unilateral and seemingly
illogical actions create a significant negative short term factor for UTMD's
business.
MARKETING.
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UTMD competes in the marketplace on the basis of its proprietary value-added
technologies and cost effective solutions. Its future success will depend upon
its ability to innovate and introduce new products into specialized market
niches consistent with cost control pressures under a changing health care
environment. Speed is a critical success factor in that future performance
depends on UTMD's ability to innovate, develop, test and commercialize new
products faster than other medical device companies who possess significantly
more resources than UTMD. With new products that are unique, the Company must
be prepared for extensive user training and support.
The Company currently competes within four distinct product/market arenas, each
with differing competitive circumstances from the other:
1) Critical Care/Blood Pressure Monitoring.
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This is a large, commodity-oriented intensive care/anesthesia monitoring
market dominated by two major U.S. suppliers who bundle disposable transducers
and accessories with venous and arterial catheters. The products used in
monitoring human vital signs have features that are practically
undifferentiated among the major competitors. Consequently, hospital
purchasing decisions tend to be based on price and delivery. The risk of lack
of a significant distribution partner for this product line, such as Baxter,
represents a negative factor that may adversely impact the future. UTMD's
sales of its blood pressure monitoring products through other than Baxter
distribution means, although significantly lower in revenues, have historically
generated approximately the same magnitude of gross profit dollars. UTMD's
end-user sales through its distribution partners including Baxter, independent
U.S. and international distributors and limited U.S. direct sales team
represent about one-third of the total annual worldwide end-user market of
approximately $115 million.
2) Obstetrics/Fetal Monitoring.
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UTMD markets its intrauterine pressure catheters ("IUPC") and its fetal
heart rate electrodes to hospital labor and delivery departments. Almost
exclusively limited to the United States where electronic monitoring is
accepted practice, the potential annual market for existing fetal monitoring
supplies exceeds $35 million.
The Company's IUPC sales control over 60% of total IUPC unit sales with a
mixture of traditional "fluid-filled" catheters together with sensor-tipped
catheters, where three other suppliers compete. The differentiating features of
UTMD's INTRAN PLUS IUPC, educational programs, and breadth of line (which
includes both types of IUPCs), have helped UTMD secure more than a 90% share of
the sensor tipped segment, which represents about 60% of total IUPC units used.
Because UTMD's IUPC customers are part of U.S. hospitals which are experiencing
consolidation and group purchasing pressures, a negative factor which may
adversely affect future IUPC sales is the possibility of a new IUPC supplier
that could bundle a viable but inferior and cheaper IUPC with broad product
lines as part of a group supplies contract.
The hospital labor and delivery department will continue to offer an excellent
opportunity where UTMD's established dominant position in fetal monitoring
allows receptiveness for evaluating new obstetrics product concepts. An
excellent example is CORDGUARD, the device that clamps, cuts, and collects blood
from the umbilical cord. CORDGUARD is being marketed and sold through UTMD's
existing sales resources to labor and delivery hospital customers, leveraging
current resources where INTRAN has a well-accepted market position. Blood
samples are routinely collected in about 50% of births in the U.S. now, and are
expected to increase with the greater emphasis being placed on the collection of
neonatal blood for both diagnostic and therapeutic purposes. There are no known
competitors with products that possess CORDGUARD's proprietary features.
Hospital budgetary constraints represent the most significant obstacle to
CORDGUARD's initial acceptance. As with any new product that is unique, the
ultimate acceptance of the product in the marketplace is subject to many
customer preference variables that could result in actual sales performance
materially different from current Company projections.
3) Gynecological Electrosurgery.
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Since 1991, the office and outpatient market for the electrosurgical
cervical loop excision treatment has attracted over ten competitors offering
either electrosurgery generators or disposable loop electrodes, or both. The
current worldwide annual market exceeds $20 million.
UTMD has continued to utilize its direct sales organization to promote
educational and clinician support programs. Consequentially, UTMD improved its
market share as gynecologists became informed about the advantages of the better
equipment and disposables offered by UTMD. The Company believes that it has
established superior cutting and hemostasis capabilities in its FINESSE
generators, and an improved safety and "quality tissue specimen" provided by its
patented disposable loop line.
The Company believes that similar surgical procedures will gain wide
acceptance in a number of other specialized areas, including dermatology and
family practice, and plans to develop and introduce products for these areas
based on its electrosurgery expertise. The ultimate adoption of new specialized
products is uncertain because they require a high level of user education and
require purchasers to work against the trend of standardized general-purpose
tool acquisitions. In addition, sales may be limited by the Company's lack of
access to important distribution channels.
4) Conservative Incontinence Therapy.
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Urinary incontinence is an under diagnosed and under reported but prevalent
condition in women, especially physically active ones over the age of forty. In
the United States, at least ten million women suffer from time to time from some
form of urinary incontinence: stress, urge or mixed.
Clinical studies have shown that chances are good that the problem can be
improved or cured by strengthening and toning the pelvic floor muscles,
especially in women with mild to moderate stress incontinence. The use of
electrical stimulation to help strengthen muscles is an approach that is
scientifically well-understood and is an area of engineering expertise at UTMD.
Planned adjunct therapy devices and diagnostic tools will become important to
developing a system of tools for cost-effective urinary incontinence treatment.
The aging of the population and increased interest in more conservative and
non-surgical therapeutic approaches to solving health problems are two important
U.S. trends which will help drive patient adoption of UTMD's new product,
LIBERTY. UTMD believes that its recognition with gynecologists as an innovator
of high quality and cost-effective devices like its "LETZ(TM)" product line will
aid in the market acceptance of this approach. Market acceptance may be limited
by a number of negative factors including the fact that the electrostimulation
therapy approach is not a "quick fix" and requires patient discipline to
continue a treatment regimen over an extended time span, as well as the fact
that the approach may require a greater time commitment with less revenue
dollars than alternative surgical approaches for gynecologists prescribing it.
DISTRIBUTION.
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Another important success factor in a changing health care industry is
"access" to customers. In particular, the U.S. hospital supplier environment
has been consolidating as a result of group purchasing decisions and product
bundling by large suppliers with broad product lines. The number of channels and
length of time required in evaluating new products for use in hospitals has
grown dramatically in recent years. A potential risk to future performance is
that as UTMD introduces its new products, it may find itself limited to its
current distribution channels or unable to establish viable relationships with
other medical companies who have adequate access to users.
Historically, UTMD has sold its products, especially those relating to critical
care, through independent distributors and other medical companies in both
domestic and international markets. However, since 1991 the Company has
developed a more focused direct sales organization in the United States with
specialized distributors and its own directly employed sales force. The network
of specialty distributors is employed to concentrate on select market
applications for UTMD products in geographic territories where they can provide
proper customer training and support.
In March 1996, the U.S. direct sales force consisted of 20 territory
representatives and managers. Especially through the use of closely-controlled
clinical education programs, the direct sales force positions UTMD to gain
market leadership with its value-added products within certain niche market
applications in obstetrics and gynecological procedures which are trending
toward outpatient clinics and physician offices.
The Company also sells products into commodity markets (see Baxter Agreements
discussion on pages 4-5), or for applications which do not generate enough
business to justify a direct selling effort, to other medical companies.
Additionally, the Company sells component parts to medical companies for use in
their product lines. This effort is simply an optimal utilization of
manufacturing resources that are needed for UTMD's main businesses and does not
affect the Company's marketing programs.
The Company sells its products internationally through distributors or through
OEM (other medical manufacturers) relationships.
RESEARCH AND NEW PRODUCT DEVELOPMENT.
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New product development is a key to UTMD's growth plans. UTMD's current new
product development projects are in three areas of focus: 1) obstetrics/ fetal
monitoring, 2) female incontinence, and 3) specialized electrosurgical
procedures. In terms of R&D output, UTMD has filed eleven new patent
applications in the last three years. In the medical device industry, FDA
premarketing approval submissions are one indicator of new product development
activities for a given company. In that regard, in the last two years, thirteen
FDA premarketing approval submissions have been completed compared to one
submission in the three prior years.
Because of UTMD's reputation as a successful innovator, its financial strength,
and its established clinician user base, it enjoys a substantial flow of new
product ideas. Senior management comprises a steering committee which
continuously screens ideas and investigates new product opportunities. 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 steering committee feasibility screening.
For internal development purposes, upon steering committee approval, projects
are assigned to a project manager who assembles an interdisciplinary, cross-
functional development team. The team's objective is to have a clinically
proven, manufacturable, and FDA released product ready for marketing by a
specific date. Approximately twelve projects, on the average, depending on the
level of resources required, are underway at UTMD at any given time. More than
50% of assigned projects do not succeed in attaining a product which meets all
of the Company's criteria, which includes in particular: a product that is
highly reliable, easy to use, cost-effective, safe, useful and differentiated
from the competition.
Once a product is developed, tooled, fully tested and cleared for marketing by
the FDA, there remains a reasonable probability it cannot be successfully
marketed for any number of reasons, not the least of which is being beaten to
the market by a competitor with a better solution or not having access to users
because of limitations in marketing and distribution resources.
During 1995, the Company spent $1,789,167 on new product development, which was
4.3% of sales. Included in these expenses were amounts paid to outside entities
for activities required for the conduct of clinical evaluations. During 1994
and 1993, new product development expenses were $1,528,476 (3.9% of sales) and
$1,229,155 (3.3% of sales), respectively. Expenditures for R&D projects are
expected to continue at similar rates, limited more by the Company's ability to
process new ideas, as well as organize and integrate the speciality skills
necessary to develop innovative products, than by the availability of funds or
new product ideas.
EMPLOYEES.
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At December 31, 1995, the Company had 379 employees. The Company's continued
success will depend to a large extent upon its ability to retain its skilled
employees. No assurances can be given that the Company will be able to retain
or attract such employees in the future, although management is committed to
providing an attractive environment in which creative and high achieving people
want to work.
To the best of the Company's knowledge, none of the Company's officers or
directors is bound by restrictive covenants from prior employers. All employees
sign a standard form confidentiality agreement as a condition of employment.
None of the Company's employees is represented by labor unions or other
collective bargaining groups. All employees participate in performance-based
bonus programs.
PATENTS AND TECHNOLOGY LICENSES.
- - -------------------------------
The Company owns twenty-nine unexpired patents and is the licensee of certain
other technology. Sixteen of the Company's patents apply in Critical Care
markets, and thirteen in OB/GYN/Neonatal Care markets. In addition, the Company
has applied for other patents. There can be no assurance, however, that patents
will be issued with respect to the pending applications or that the issued
patents can be successfully defended.
The ability of the Company to differentiate itself is enhanced by the
protection afforded by its patents, but the Company does not feel that its
business success is significantly dependent on any one or more of its patents.
In any case, UTMD believes that patents are of less significance in its industry
than such factors as innovative skills, technological experience, excellent
marketing programs and the management ability of its personnel. The Company
owns certain proprietary information and obtains a Confidentiality Agreement
from its technical and sales employees, key management and consultants.
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 1995, royalty expenses were $108,731.
Also as a matter of policy, UTMD licenses its proprietary technology to others
in circumstances where that licensing does not directly compete with UTMD's own
marketing direction. During 1995, the Company received $652,894 in royalty
income, compared to $650,992 in 1994, and $628,515 in 1993. This income remains
a material portion of UTMD's earnings and therefore UTMD's future performance
also depends on the performance of other companies who license its technology.
The Company has historically vigorously and successfully defended its
proprietary intangible assets in an industry where patent infringement lawsuits
are frequent. No patent infringement lawsuits are currently pending.
GOVERNMENT REGULATION.
- - ---------------------
The Company's products are subject to regulation by the U.S. Food & Drug
Administration ("FDA"), as well as other regulatory bodies globally. The FDA
has authority to regulate the marketing, manufacturing, labeling, packaging and
distribution of medical products. In addition, requirements exist under other
federal laws and under state, local and foreign statutes that may apply to the
manufacturing and marketing of the Company's products. The Medical Device
Amendments of 1976 (the "Amendments") significantly extended the jurisdiction of
the FDA to regulate medical devices. Until the adoption of the Amendments,
medical devices were subject only to general labeling and purity requirements.
The Amendments established three classifications of medical devices, Class I,
Class II, and Class III.
All manufacturers of medical devices must register with the FDA and, with their
initial registration, list all medical devices produced by them. This listing
must be updated annually. In addition, prior to commercial distribution of
devices for human use, the manufacturer must file a notice with the FDA, setting
forth certain information about the device, including the classification into
which the manufacturer believes it falls.
Devices which are classified in Class I are subject only to the general
controls concerning adulteration, misbranding, good manufacturing practices,
record keeping and reporting requirements. Devices classified in Class II must,
in addition, comply with performance standards promulgated by the FDA. The
Company believes all of its current products are Class I or Class II products
and that the Company is in full compliance with all applicable performance
standards as well as good manufacturing practices, record keeping and reporting.
In 1994, UTMD received certification of its quality system under the ISO
9001/EN 46001 standards ("ISO" stands for "International Organization of
Standardization"). EN 46001 is the European Community's effort to harmonize
different national regulatory requirements for the development, sale, and
manufacture of medical products. Because the ISO standards are in continuous
modification, UTMD remains on a perpetual periodic audit schedule by its
independent notified body in order to stay abreast of international regulatory
standards. In 1995, UTMD received formal product certification allowing the use
of the CE Mark (demonstrates proof of compliance with the European Community's
product standards) for its blood pressure monitoring kits, electrosurgical
generators and disposable loop electrodes, representing virtually all of its
current product sales overseas. UTMD intends to continue to expand its ability
to use the CE Mark in all of its product lines.
SOURCES AND AVAILABILITY OF RAW MATERIALS.
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Most of the component parts which the Company purchases from various vendors
are readily available from a number of sources. Alternative sourcing of various
components is continually underway. Vendors are qualified by Corporate Quality
Assurance. The Company has a vendor quality monitoring program that routinely
checks all incoming material. UTMD recognizes outstanding performance in vendor
quality and service through annual awards.
EXPORTS.
- - -------
Revenues from foreign customers in 1995 were about $10,343,000 (25% of total
sales), as compared to $10,757,000 (27% of total sales) in 1994, and $8,112,000
(22% of total sales) in 1993. Critical care products represented 96% of
international sales in 1995, compared to 97% in 1994 and 96% in 1993.
UTMD has developed distinct tactics for each of its European markets in the
form of pricing, distribution and new product introduction. 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.
UTMD sees the international marketplace as one of the cornerstones of its
growth strategy. During 1995, UTMD broke ground for a new manufacturing
facility in Athlone, Ireland. The facility, which is planned to be operational
in the third quarter of 1996, will offer a number of advantages: 1) from a
marketing point of view, faster response to European Union customers, including
a better understanding of customized needs, less costly distribution and duty-
free access to over 350 million patients; 2) from a regulatory point of view,
faster new product introductions; and 3) from a manufacturing point of view,
reduced dependence on one manufacturing site and increased capacity at existing
Utah facilities.
BACKLOG.
- - -------
Being a marketer of primarily disposable products, the nature of UTMD's
business necessitates being very responsive to customer orders, and delivering
products quickly. Thus an objective of UTMD is to minimize its shippable
backlog. Backlog shippable in less than 60 days, including blanket orders from
Baxter, as of January 1, 1996 was approximately $2.6 million compared to $1.8
million as of January 1, 1995. Backlog excluding all Baxter orders was
approximately $0.4 million and $1.0 million on January 1, 1996 and January 1,
1995, respectively.
SEASONAL ASPECTS.
- - ----------------
The Company's business is generally not affected by seasonal factors.
PRODUCT LIABILITY RISK MANAGEMENT.
- - ---------------------------------
No product liability lawsuits have been filed against the Company for any of
its products in four years, despite substantially higher usage rates over that
time. The risk of product liability lawsuits is a negative factor in UTMD's
business because UTMD's products are frequently used in inherently life
threatening procedures to help physicians manage higher risk patients. Although
UTMD's products are proven to be extremely safe over millions of uses, positive
outcomes cannot always occur in the procedures where UTMD's products are used.
In litigious cultures (like that in the U.S.) frequently driven by attorneys
looking for windfalls, patients may look for scapegoats. In any lawsuit against
a company where an individual plaintiff has a permanent physical injury, a
small probability of a large award always exists whether or not a causal
relationship exists. UTMD reserves funds against its current performance on an
ongoing basis to provide for its future defense should any lawsuits be filed.
No product liability lawsuits are currently pending.
SIGNIFICANT CUSTOMER.
- - --------------------
Baxter Healthcare is the Company's most significant customer, representing 36%
and 39% of total revenues in 1995 and 1994, respectively. Revenues of
$14,996,000 in 1995 and $15,299,000 in 1994 were made up primarily of disposable
pressure transducers for blood pressure monitoring, and accessories. Gross
margins in this segment are significantly less than other segments of UTMD's
business. UTMD expects that Baxter's share of its business will continue to
decline due to lower sales to Baxter and higher growth rates in other UTMD
segments.
ITEM 2 - PROPERTIES.
Office and Manufacturing Facilities.
The Company's current operations are located in one 100,000 square foot
facility in Midvale, Utah, a suburb of Salt Lake City. UTMD owns its property
and facilities, with the exception of a long-term lease on one section of its
Midvale parking lot. In addition, the Company owns a building in Lehi, Utah
which previously housed its molding operations and is currently being leased to
an unrelated party.
A new 70,000 square foot facility is under construction in Athlone, Ireland
which is intended to eventually support marketing, manufacturing and product
development for all product lines sold in European markets. The facility will
operate as a wholly-owned subsidiary under the name Utah Medical Products Ltd.
UTMD is a vertically-integrated manufacturing company. Capabilities include a
machine shop for mold-making and building assembly tools and fixtures; plastics-
forming including thermoplastic forming, injection molding and extrusion; sensor
production; assembly of mechanical, electrical and electronic components;
testing; and advanced packaging in clean room conditions. Facilities also
include a well-equipped R&D lab and administrative offices.
ITEM 3 - LEGAL PROCEEDINGS.
The Company may be a party from time to time in ordinary routine litigation
incidental to its business. The outcomes of lawsuits which are currently
pending will not have a materially adverse effect on UTMD's financial condition
or results of operations.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise during the fourth quarter of the fiscal year covered by
this report.
[Remainder of Page Intentionally Left Blank]
PART II.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Registrant's common stock (symbol: UTMD) is traded on the National Market
System of the National Association of Securities Dealers Automated Quotation
System (NASDAQ -NMS). The following table sets forth the high and low sales
price information as reported by NASDAQ for the periods indicated:
1995 1994
High Low High Low
---- --- ---- ---
1st Quarter $11.00 $ 8.50 $ 8.25 $ 6.875
2nd Quarter 13.625 9.50 8.00 6.875
3rd Quarter 17.50 11.625 10.00 6.375
4th Quarter 21.375 13.375 9.75 7.875
Stockholders:
The approximate number of beneficial stockholders of the Registrant's
common stock as of March 10, 1996 was 10,000.
Dividends.
In January 1994, the board of directors suspended UTMD's cash dividends in
favor of continued stock repurchases, following the payment of dividends in
1993. Dividends were not paid prior to 1993. No dividends were paid on UTMD
common stock in 1994 or 1995.
[Remainder of Page Intentionally Left Blank]
ITEM 6 - SELECTED FINANCIAL DATA.
Year Ended December 31
----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net Sales $42,038,082 $39,644,684 $36,999,059 $36,129,459 $29,777,395
Net Income 8,353,738 7,109,360 7,012,285 6,869,720 5,448,046
Earnings Per
Common Share
Assuming Full
Dilution .82 .68 .60 .57 .46
Total Assets 33,330,379 27,365,183 28,344,113 27,969,840 21,379,147
Long-term Debt None None None None None
Cash Dividends
Per Common Share None None $.06 None None
Quarterly Data for 1995
-----------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $9,754,041 $10,711,974 $10,715,736 $10,856,330
Gross Margin 4,371,363 5,005,019 5,015,850 5,096,811
Net Income 1,820,517 2,090,422 2,160,299 2,282,498
Earnings Per Common Share
Assuming Full Dilution .18 .21 .21 .23
Quarterly Data for 1994
-----------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales $9,357,530 $10,110,800 $10,018,705 $10,157,649
Gross Margin 4,173,043 4,511,565 4,428,671 4,552,767
Net Income 1,653,346 1,794,599 1,847,895 1,813,521
Earnings Per
Common Share
Assuming Full
Dilution .15 .17 .18 .18
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following comments should be read in conjunction with accompanying
consolidated financial statements.
Productivity of Assets and Working Capital.
a) Assets.
UTMD maintained total asset turns (ratio of sales to total assets) in 1995
consistent with 1994, despite an increase in cash (and investments) of $6.1
million, resulting from profitable operations. Consequently, non-cash assets
were more productive in generating revenues than the previous year. By
reinvesting cash from profitable operations in the development or acquisition of
new products and expanded manufacturing capabilities, UTMD will strive to
maintain total asset productivity consistent with the 1995 turn rate.
Net (after accumulated depreciation) property, plant and equipment assets
(PP&E) decreased in 1995 after subtracting the $825,000 initial investment made
in Ireland real estate and architectural planning assets. PP&E asset turns
(excluding new Ireland assets not yet placed in service) were 5.2, an excellent
ratio for a vertically-integrated manufacturing company. Total PP&E asset turns
were 4.7 and will continue to decline in the near term as the investment in
Ireland continues, and until the facility becomes fully operational. 1996 will
only be a partial year of operation for the new Ireland facility.
Inventory turns improved in 1995 due to better materials management, faster
manufacturing cycle times and conservative inventory valuations. Average
inventory balances in 1995 declined $466,000, and year-ending inventory balances
declined $746,000 from 1994. The year-ending accounts receivable (A/R) balance
grew a modest $84,000 in 1995, allowing an improvement in days in receivables to
54, based on fourth quarter 1995 shipments' volume, and meeting management's
objective of maintaining A/R in the 50-55 days target range. At the end of
1995, aged A/R over 90 days from invoice date were down to less than 1% of total
accounts receivable from the prior year's balance of less than 4% of total
receivables.
In dollar value, working capital increased about $5.3 million in 1995,
primarily because of the increase in cash. Accounts receivable were up only
1.3% despite the 6% increase in sales. Inventories were down substantially.
Current liabilities were up slightly, due to increased year-end accruals of
commissions, bonuses and other short term obligations as a result of the higher
sales activity in 1995 relative to the previous year.
The cash (and investments) increase in 1995 improved UTMD's current ratio to an
exceptionally strong 6.4. Through its excellent profitability, the Company will
continue to internally finance its non-cash working capital growth, as well as
fixed asset increases, that are needed to support new sales growth. In 1996,
operations should continue to generate after-tax cash at a rate in excess of
$700,000 per month.
b) Liabilities.
UTMD has no long term debt obligations. Current liabilities are growing in
conjunction with the increase in expenses associated with higher sales. The
total debt ratio (which is made up almost entirely of current liabilities)
declined to less than 13%.
Results of Operations.
a) Revenues.
1995 revenues were up 6.0% from 1994. On a quarter-to-previous-year's quarter
basis, 1995 revenues were up, respectively, 4.2%, 5.9%, 7.0% and 6.9%.
UTMD divides revenues into three product-line categories: 1) critical care,
which is comprised primarily of components used in invasive blood pressure
monitoring, but also includes components for other types of pressure monitoring,
as well as disposable respiratory products used in hospitals; 2) obstetrics,
which is comprised mainly of devices for monitoring intrauterine pressure during
labor and delivery, although to a lesser extent electrodes for fetal heart rate
monitoring as well as other labor and delivery supplies, and a new product which
unifies, and improves clinician safety in, the multiple step procedure of
cutting, clamping and drawing blood samples from the umbilical cord immediately
following childbirth; and 3) gynecology, which is comprised of an
electrosurgery system used in a procedure called LETZ(R), tools used in other
minimally invasive surgical procedures including diagnostic laparoscopies, and a
device for the conservative treatment of urinary incontinence. In these three
areas, UTMD's primary revenue contributors generally : 1) are the accepted
standard of care, 2) enjoy a number one or number two market share, and 3)
have important product features protected by patents.
In 1996, UTMD will look to expand sales of its new products CORDGUARD(R),
LIBERTY and LUMIN which were launched in 1995, as well as introduce other
products in its areas of focus including fetal monitoring, electrosurgery and
incontinence therapy.
Critical care revenues represented 54.3% of total 1995 sales, and declined 3.2%
from 1994. In the U.S., critical care blood pressure monitoring is a mature
business dominated by two large suppliers, Baxter and Abbott. About a third of
the blood pressure monitoring market is for disposable pressure transducers
("DPT") and accessories, and the other two-thirds is for catheters. UTMD
participates only in the DPT and accessories niche. Overseas, the market is
much more fragmented with DPT's still growing in acceptance. Baxter purchased
2.7 million DPT's from UTMD in 1995. UTMD's Baxter OEM revenues (all of which
are included in UTMD's critical care category) represented 66% of critical care
revenues (or 36% of total revenues), and declined by 2% in 1995 over 1994.
Sales of critical care products in 1995 were $22,827,753 compared to $23,559,239
in 1994 and $22,131,891 in 1993. Revenues from Baxter in 1995 were $14,996,246
compared to $15,299,369 in 1994 and $14,842,300 in 1993. In 1995 and 1994,
Baxter revenues included no marketing rights, compared to $393,000 included in
1993 revenues.
The obstetrics revenue category grew 20.8% in 1995 and represented 38.6% of
total sales. Market acceptance for sensor-tipped electronic intrauterine
pressure (IUP) monitoring dominated by INTRAN(R) continues to expand, and sales
of CORDGUARD began in December. Sales of obstetrics products in 1995 were
$16,228,061 compared to $13,429,690 in 1994 and $11,872,830 in 1993.
Beginning in 1995 the third category, gynecology products, includes LIBERTY, a
system for conservatively treating urinary incontinence, and LUMIN, a unique
tool used in laparoscopic procedures to manipulate the uterus, in addition to
UTMD's product line of electrosurgery equipment and disposable electrodes
required to perform a cervical neoplasia excision procedure called LETZ.
Gynecology revenues grew 12.3% in 1995, and represented 7.1% of total revenues.
Gynecology product sales in 1995 were $2,982,268 compared to $2,655,755 in 1994
and $2,994,338 in 1993. UTMD's past successes with its gynecology products
resulted from providing physician training along with the equipment and tools
designed for specific procedures. Other applications for UTMD's electrosurgery
capabilities offer additional future business opportunities. Effective marketing
of the new products launched in 1995 represent significant challenges for UTMD's
marketing resources, and will require innovative distribution approaches.
UTMD divides its sales channels into "direct" and "OEM" channels. "Direct
sales" are sales of UTMD's products by its own employed sales representatives,
by independent commissioned representatives, or by stocking distributors in a
particular geographic region. "OEM sales" are sales of UTMD products by other
medical device manufacturers either as a component of a kit, or as a stand-alone
product into markets not served by UTMD's own direct sales resources. In 1995,
direct sales represented about 58% of global sales compared to about 52% in the
previous two years. In the U.S., 1995 direct sales represented 68% of sales
compared to 64% in 1994 and 61% in 1993.
Dividing global sales into the two channels of direct sales and OEM sales for
the respective product categories of 1) critical care products, 2) obstetrics
products and 3) gynecology products, yields the following split: direct sales
represented 23%, 100% and 96%, respectively, in 1995 compared to 20%, 100%, and
97% in 1994 and 20%, 100%, and 100% in 1993.
1995 foreign sales were $10,343,192 compared to $10,756,552 in 1994 and
$8,112,470 in 1993. Practically all international sales have been critical care
products, for which sales the Company has relied heavily on the efforts of other
medical device companies (OEM sales channel). Critical care products
represented 96% of international sales in 1995 compared to 97% in 1994 and 96%
in 1993. Sales through Baxter represented 58% of international sales in 1995
compared to 56% in 1994 and 62% in 1993. Sales through other (than Baxter) OEM
companies represented 16% of total international sales in 1995 compared to 23%
in 1994 and 18% in 1993.
UTMD believes it has substantial sales potential for its existing products in
international markets, and therefore plans to continue to commit its resources
to international business expansion.
b) Gross profit.
Gross profit margins (profit after subtracting costs of manufacturing products
from revenues) in 1995 were 46.4% compared to 44.6% in 1994 and 44.5% in 1993.
The 1995 improvement in average gross profit margin was achieved because of a
19% increase in sales of UTMD's Ob/Gyn products, combined with a 25% decrease in
sales of UTMD's least profitable product, the Baxter Summit DPT. The Company
expects these trends to accelerate in 1996. UTMD has improved its gross margins
as a percentage of sales every year for the last ten years. In recent years,
the improvement has come from improved manufacturing efficiencies and increased
direct sales through UTMD's own employed representatives in favor of
distributors. Because of anticipated faster sales growth in the obstetrics and
gynecology product lines which have higher margins relative to UTMD's other
products, and because of declining business with Baxter, the Company foresees
continued gross margin improvements.
c) Operating Profit.
Operating profits, or income from operations, are the profits achieved after
subtracting operating expenses from gross profits.
Operating expenses are subdivided into sales, general and administrative (SG&A)
expenses and research and development (R&D) expenses. UTMD further divides SG&A
into the two categories of sales and marketing (S&M) expenses and general and
administrative (G&A) expenses. In 1995, operating profits increased 16.5% to
$11,693,377 from $10,041,372 in 1994, and compared to $8,917,904 in 1993.
Operating expenses declined to 18.5% of sales in 1995 compared to 19.2% in 1994
and 20.4% in 1993.
The reason for the 1995 improvement in operating expenses as a percentage of
sales was the fact that SG&A expenses declined from 15.4% of 1994 revenues to
14.3% of 1995 revenues. The G&A expenses portion declined from $2.6 million in
1994 to $2.4 million in 1995 due to the Company's internal cost control
programs, and continued tight management of legal costs. In 1996 G&A expenses
as a percentage of sales are expected to increase as a result of starting up new
Ireland operations.
UTMD's S&M expenses pertain primarily to the "direct sales" portion of its
business (see previous page). Global direct sales increased 16.9% in 1995 while
S&M expenses increased only 3.7%, producing financial leverage in the use of S&M
resources. During 1995, the Company shut down its independent sales office in
Holland, anticipating integrating the direct international sales and sales
support effort into its new Ireland operations in 1996. Because of anticipated
1996 sales growth coming mainly from direct sales, and anticipating continued
declining OEM sales through Baxter, 1996 S&M expenses as a percentage of sales
are expected to increase.
1995 R&D expenses were 4.3% of sales compared to 3.9% and 3.3% in 1994 and
1993, respectively. R&D expenses increased 17% over 1994, which had increased
24% over 1993. As a measure of its product development activity, UTMD made
eleven new product approval 510(k) premarketing submissions to the FDA in 1994
and 1995, in contrast to only one in the previous three years. The Company
employs its R&D resources not only to internally develop its own new product
ideas, but also, through joint development agreements, licensing of technology,
acquisitions and other arrangements, to enhance and complete to
commercialization projects initiated by others. Growth of R&D expenses as a
percentage of sales will not continue in 1996 as UTMD expects to realize the
benefit of its recent investment in R&D in the form of new product sales.
d) Non-operating income.
Non-operating income for UTMD includes principally royalties from licensing
UTMD's technology to other companies, interest and capital gains from investing
the Company's cash, and gains/losses from the sale of other assets.
Non-operating income increased $243,413 in 1995 from 1994. The increase was due
to increased investment income from higher average cash balances in 1995.
Royalties remained about the same as the prior year. Non-operating income in
1993 was substantially higher than either 1994 or 1995 because of two major one
time items in 1993: 1) sale of the PARAGRAPH product line to Vital Signs, Inc.
for a net gain of about $387,000, and 2) about $237,000 in capital gains
realized from shifting cash investments from longer-term to shorter-term
securities. Assuming 1996 interest rates remain about the same as 1995, and
given that no extraordinary investment opportunities arise that are presently
unknown, 1996 investment income on cash balances should be about the same as
1995 since planned investments in new facilities, equipment and tooling,
intangible assets, and share repurchases will be funded from cash generated from
1996 operations. Royalties received vary from period to period depending on the
desire and/or success of other companies in selling products licensed by UTMD.
Royalties in 1996 should remain about the same as 1995, except for an
extraordinary payment in the first quarter related to the use of UTMD's pressure
monitoring technology.
e) Earnings before income taxes.
Earnings before income taxes (EBIT) result from adding UTMD's non-operating
income to its operating profits. In 1995, EBIT, as a percentage of sales, were
30.6% compared to 27.6% and 28.7% in 1994 and 1993, respectively. Gross margin
improvements, lower operating expenses as a percentage of sales, and higher non-
operating income as a percentage of sales all contributed to the improved EBIT
ratio.
f) Net income and earnings per share.
Net (after-tax) income is EBIT less income taxes. UTMD's net income ranks in
the top tier of all U.S. publicly-traded companies at 20%, 18% and 19% of
revenues for 1995, 1994 and 1993, respectively.
Shareholder value is improved by increasing EPS. EPS is net income divided by
the number of shares of stock outstanding (fully-diluted to include stock
options awarded which have exercise prices below the current market value).
Future EPS can be increased by investing current net income to increase future
net profits through expanded marketable new product offerings and profitable
business operations, or also by repurchasing stock from the marketplace, thereby
reducing the number of outstanding shares.
Return on shareholders' equity (ROE) is the portion of net income retained by
UTMD to internally finance its EPS growth, divided by average accumulated
shareholders' equity during the period. The ROE ratio determines how fast the
Company can grow without any external financing. For example, a 30% ROE would
support 30% growth in revenues. Achieving growth in revenues and EPS without
diluting shareholder interests maximizes shareholders' value. ROE in 1995 was
almost 32%, and has averaged over 30% for the last 8 years. It is management's
objective to retain ROE in excess of the 25% per annum EPS growth target.
External equity financing would only be considered if an exceptional business
growth opportunity presents itself that would allow long term increased EPS at
the same time that the number of shares are also expanded.
After income taxes, 1995 net income was $8,353,738, a new record for the
Company, compared to $7,109,360 in 1994 and $7,012,285 in 1993. The effective
income tax rate in 1995 was 35.0% compared to 35.1% in 1994 and 34.0% in 1993.
Year to year fluctuations in the tax rate have resulted from: 1) the use of a
foreign sales corporation, 2) differing balances in tax-exempt securities
investments, and 3) differing numbers of exercised employee options which
result in a tax benefit to the Company.
Fully diluted 1995 EPS were up 21% to $.82 compared to $.68 in 1994. 1994 EPS
were up 13% from $.60 in 1993. Year ending 1995 weighted average number of
common shares assuming full dilution (the number used to calculate fully-diluted
EPS) were 10,172,329 shares compared to 10,453,583 and 11,686,035 in 1994 and
1993, respectively. Actual outstanding common shares as of December 31, 1995
were 9,790,937.
Primary-diluted 1995 EPS were $.83 compared to $.68 in 1994 and $.60 in 1993.
The difference in primary-diluted versus fully-diluted EPS occurred as a result
of the rapid increase in market price per share of UTMD's stock in 1995, ending
at a price of $19.8125 per share, a new year-end high in the history of the
Company, and an increase of 133% from the 1994 ending price of $8.50 per share.
In contrast, the Dow Jones Industrial Average increased 33%, the S&P 500 Index
increased 34%, the NASDAQ Composite Index increased 40%, and the MDDI Index of
medical device companies increased 51% in 1995.
Cash Flows and Capital Resources.
Cash (and investment) balances were $13.2 million at the end of 1995, an
increase of $6.1 million from December 31, 1994, primarily due to accumulation
of cash from profitable operations.
Cash provided by operating activities, including adjustments for depreciation
and other non-cash operating expenses, along with changes in working capital,
totaled $11,108,155 in 1995, up from $8,831,152 in 1994, and $7,445,027 in 1993.
Depreciation and amortization in 1995 increased by about $462,000 to more than
$1.7 million, due to recent investments in facilities and improved manufacturing
capabilities, as well as amortization of acquired patents and licensing rights.
Cash of $2,075,000 was used for capital expenditures in property and equipment.
$62,000 was used for the purchase of intangible assets, principally new patent
filings. Remaining investing activities were the purchases and sales of
investments which reduced cash by a net $2,406,000 in 1995.
Capital expenditures that occurred during 1995 will help the Company maintain
its competitive position and provide the cost-effectiveness needed to support
growth in new markets. Projects included: i) the first $825,000 investment,
principally in land, for the new Ireland manufacturing facility, ii) the
completion of Phase I of assembly automation of DELTRAN(R), the Company's DPT
product which enjoys a dominant worldwide market share, in the amount of
$567,000 in addition to amounts previously invested in 1994, iii) enhancements
to the computer system, new in 1994, of about $101,000, which has begun to
enhance UTMD's ability to responsively communicate with customers, provide
timely and accurate manufacturing information, and streamline distribution
capabilities, and iv) about $582,000 to maintain and continuously upgrade pre-
existing facilities, equipment and tooling. In 1996, capital expenditures for
property and equipment are planned in the following areas: 1) completion of the
70,000 square foot facility shell and first phase 25,000 square foot fit-out of
the Ireland manufacturing facility, 2) continued automation of key assembly
operations, 3) investment in tooling and equipment for manufacturing new
products, and 4) continued maintenance and upgrading of existing assets.
1995 financing activities used cash of $3,080,000, compared to $8,393,000 in
1994, and $7,258,000 in 1993. Stock repurchases continued to comprise by far
the largest use of cash from all categories. After paying out $694,193 during
1993 for cash dividends to shareholders, in January 1994 the board of directors
discontinued the dividend in favor of continued stock repurchases. The Company
repurchased its own common stock during 1995 in the amount of $4,154,000,
compared to $8,532,000 and $7,165,000 in 1994 and 1993, respectively. In the
three years of 1993 through 1995, UTMD has invested $19,851,000 in repurchasing
2,349,109 of its common shares. In 1995, UTMD received $1,074,000 from the
issuance of 164,422 shares of stock due to exercises of employee options. In
the three years of 1993 through 1995, the Company has issued 291,431 new shares
previously awarded under option plans, for which it has received $1,814,000.
UTMD did not enter into any long term debt agreements in 1995.
Management believes that current cash balances plus future income from
operations will provide the liquidity needed to finance growth plans. In
addition to the capital expenditures outlined above, UTMD plans to use cash in
1996 for continued share repurchases and for selective infusions of
technological, marketing or product manufacturing rights to broaden the
Company's product offerings.
Management's Outlook.
The trends in UTMD's business which became more apparent to outside investors
during 1995, namely, rapid growth in Ob/Gyn product sales through direct sales
channels, and decline in blood pressure monitoring component sales through
Baxter and other OEMs, should both accelerate in 1996. As a result, management
expects 1996 total sales will grow modestly or may remain about the same,
depending the impact of lower sales to Baxter, while gross profit margins, net
profits and EPS should continue to grow, similar to the performance demonstrated
in 1995.
Despite the Baxter negative sales trend, with the soundness of UTMD's market
position in critical care applications for disposable pressure transducers,
management believes its critical care product offerings will remain an important
contributor to the Company's overall profitability, especially internationally
with the start-up of a new manufacturing facility in Ireland. Revenues from
fetal monitoring (FM) should continue to grow at a good rate, especially if
UTMD's product enhancements and clinical outcomes programs successfully identify
important driving influences for the use of proprietary FM products. The
addition of new products, such as CORDGUARD, using existing sales resources
will provide significant distribution leverage.
UTMD's growing number of gynecology practice tools will leverage its sales
opportunities to physicians outside of the hospital. For example, LIBERTY,
which addresses a massively prevalent and under diagnosed disease state in
women, is just a beginning in a potentially broad incontinence product line
family. In addition, the Company's competence in electrosurgery should lead to
new market opportunities in other clinical areas where a specialized approach
will provide excellent benefits.
Clearly, the global healthcare market's recognition, adoption and ultimate
purchase at a reasonable price of UTMD's new Ob/Gyn product solutions are the
most important factors in management's growth projections.
UTMD will continue to position itself in specialized high value-added market
niches and license its product ideas in recognized commodity product/markets to
larger marketing companies. The value of UTMD's technology to other medical
device companies should continue to enhance shareholder returns.
A number of the forward looking factors discussed in this filing are subject to
a high degree of uncertainty, particularly in light of the Company's high growth
objectives and a rapidly changing healthcare environment. Investors are
encouraged to consider all of these factors in that actual results may differ
materially from those projected by management.
Accounting Policy Changes
- - -------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 encourages, but does
not require, companies to adopt the fair value method defined by this standard
for fiscal years beginning after December 15, 1995. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", (APB No. 25), but
must, in future years, disclose in a note to the financial statements proforma
net income and earnings per share as if SFAS No. 123 had been applied. The
Company has determined it will not adopt the fair value method, and therefore
will continue to account for stock-based compensation using the intrinsic value
method prescribed by APB No. 25.
Effective January 1, 1994 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, the Company's
investments are classified as available-for-sale which results in an adjustment
to stockholders' equity for unrealized gains and losses.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to financial statements and financial statement schedule at page
F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information from the definitive proxy statement of the registrant under the
caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: General," "Directors and
Nominees," "Executive Officers," and "Compliance with Exchange Act
Requirements," is incorporated herein by reference, expressly excluding the
material set forth under the subcaptions "Report of the Compensation and Option
Committee" and "Stock Performance Chart."
ITEM 11 - EXECUTIVE COMPENSATION.
The information from the definitive proxy statement of the registrant under the
caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Executive Compensation,"
"Compensation and Option Committee Interlocks and Insider Participation,"
"Employment Agreements, Termination of Employment, and Change in Control," and
"Director's Compensation" is incorporated herein by reference, expressly
excluding the material set forth under the subcaptions "Report of the
Compensation and Option Committee" and "Stock Performance Chart."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information from the definitive proxy statement of the registrant under the
caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Security Ownership of
Management and Certain Persons" is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV.
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report or incorporated
herein by reference.
1. Financial Statements.
(See Index to Financial Statements and Supplemental Schedule at page F1.)
2. Supplemental Schedule.
(See Index to Financial Statements and Supplemental Schedule at page F1.)
3. Exhibits.
SEC
SEC
Ref-
erence
No. No. Title of Document Location
- - --- --- ----------------- --------
1 3 Articles of Restatement of the Articles of Incorporated by
Incorporation Reference(1)
2 3 Bylaws Incorporated by
Reference(1)
3 4 Rights Agreement dated as of October 28, 1994, Incorporated by
between Utah Medical Products, Inc., and Atlas Reference(1)
Stock Transfer Corporation
4 4 Designation of Rights, Privileges, and Incorporated by
Preferences of Series "A" Preferred Stock Reference(1)
5 10 Deltran II (Uniflow) exclusivity Agreement for Incorporated by
Baxter Limited Japan, dated April 27, 1990 Reference(2)
6 10 Employment Agreement dated December 21, 1992, Incorporated by
with Kevin L. Cornwell* Reference(2)
7 10 Utah Medical Products, Inc., 1986 Incentive Incorporated by
Stock Option Plan* Reference(2)
8 10 Letter dated August 31, 1992 to David D. Chase Incorporated by
respecting stock option Reference(1)
9 10 Asset Purchase Agreement with OB Tech, Inc., Incorporated by
dated January 4, 1994 Reference(3)
10 10 Utah Medical Products, Inc., 1994 Employee Incorporated by
Incentive Stock Option Plan* Reference(1)
11 10 Utah Medical Products, Inc., 1993 Directors' Incorporated by
Stock Option Plan Reference(1)
12 10 Utah Medical Products, Inc., Performance Option Incorporated by
Plan* Reference(1)
13 10 Deltran Purchase and Distribution Agreement, Incorporated by
effective January 1, 1995 Reference(4)
14 10 Summit Purchase and Distribution Agreement, Incorporated by
effective January 1, 1995 Reference(4)
15 10 Amendment to Asset Purchase Agreement This Filing
effective February 8, 1996
16 21 Subsidiaries of Utah Medical Products, Inc. This Filing
17 23 Consent of Deloitte & Touche LLP, Company's This Filing
independent auditors
18 27 Financial Data Schedule This Filing
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
(1) Incorporated by reference from the Company's registration statement on
form S-8 filed with the Commission effective February 10, 1995.
(2) Incorporated by reference from the Company's annual report on form 10-K
filed with the Commission for the year ended December 31, 1992.
(3) Incorporated by reference from the Company's annual report on form 10-K
filed with the Commission for the year ended December 31, 1993.
(4) Incorporated by reference from the Company's annual report on form 10-K
filed with the Commission for the year ended December 31, 1994.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned this 28th day of March, 1996.
UTAH MEDICAL PRODUCTS, INC.
By:/s/ Kevin L. Cornwell
---------------------
Kevin L. Cornwell
President and CEO
By:/s/ Kevin L. Cornwell
---------------------
Kevin L. Cornwell
Secretary and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 28th day of March, 1996.
By:/s/ Perry L. Lane
-----------------------
Perry L. Lane, Director
By: /s/ Stephen W. Bennett
-----------------------
Stephen W. Bennett, Director
By:/s/ David D. Chase
-----------------------
David D. Chase, Director
By:/s/ Kevin L. Cornwell
-----------------------
Kevin L. Cornwell, Director
By:/s/ Ernst G. Hoyer
-----------------------
Ernst G. Hoyer, Director
By: /s/ Lori A. Sessions
-----------------------
Lori A. Sessions, Director
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-2
Consolidated Balance Sheets,December 31,
1995 and 1994 F-3 - F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1994, and 1993 F-5
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1995, 1994, and 1993 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994, and 1993 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-16
FINANCIAL STATEMENT SCHEDULE:
Financial Statement Schedule for the Years Ended
December 31, 1995, 1994, and 1993:
Schedule II - Valuation and Qualifying Accounts F-17
Financial statement schedules other than those listed above are omitted because
of the absence of conditions under which they are required or because the
information is shown in the financial statements.
INDEPENDENT AUDITORS' REPORT
Utah Medical Products, Inc.:
We have audited the accompanying balance sheets of Utah Medical Products, Inc.
and subsidiary as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the preceding index to financial statements and
financial statement schedule. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Utah Medical Products, Inc. and subsidiary
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ Deloitte & Touche LLP
January 24, 1996
(February 8, 1996 as to Note 10)
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
CURRENT ASSETS:
Cash $5,064,913 $1,579,121
Investments (cost: 1995, $8,121,001 and
1994, $5,735,475) Notes 1 and 2) 8,173,500 5,572,048
Accounts receivable:
Trade (less allowance for doubtful
accounts: 1995 $83,021 and 1994 $77,662) 6,473,810 6,389,357
Accrued interest and other 221,662 213,030
Inventories (Notes 1 and 3) 3,277,982 4,023,939
Prepaid expenses and other current assets 244,675 113,173
Deferred income taxes (Notes 1 and 5) 372,899 390,941
---------- ----------
Total current assets 23,829,441 18,281,609
----------- -----------
PROPERTY AND EQUIPMENT (Note 1):
Land 1,113,478 678,447
Building and improvements 3,458,829 3,421,642
Furniture and equipment 7,281,403 6,356,447
Multi-cavity molds and dies 1,587,058 1,417,298
Construction-in-progress 1,456,837 1,135,707
---------- ----------
Total 14,897,605 13,009,541
Less accumulated depreciation and
amortization (6,031,246) (4,872,293)
----------- -----------
Property and equipment - net 8,866,359 8,137,248
----------- -----------
OTHER ASSETS - Intangible assets (less
accumulated amortization: 1995, $443,561 and
1994, $102,078) (Note 1) 634,579 946,326
----------- -----------
TOTAL $33,330,379 $27,365,183
=========== ===========
(Continued)
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
CURRENT LIABILITIES:
Accounts payable $1,783,840 $1,821,302
Accrued expenses:
Payroll and payroll taxes 1,197,692 1,000,946
Reserve for litigation expenses 314,619 315,003
Income taxes payable (Notes 1 and 5) 105,024 7,074
Other 220,750 180,514
Deferred revenue (Notes 1 and 7) 85,600 85,600
----------- ----------
Total current liabilities 3,707,525 3,410,439
DEFERRED INCOME TAXES (Notes 1 and 5) 245,289 256,220
DEFERRED REVENUE (Notes 1 and 7) 173,208 258,204
---------- -----------
Total liabilities 4,126,022 3,924,863
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 7,
and 10)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock - $.01 par value;
authorized - 5,000,000 shares; no shares
issued or outstanding
Common stock - $.01 par value; authorized
50,000,000 shares; issued - 9,790,937
shares in 1995 and 9,993,559 shares in
1994 97,909 99,935
Unrealized gain (loss) on investments
available-for-sale,net of tax (Notes 1
and 2) 32,707 (101,815)
Retained earnings 29,073,741 23,442,200
----------- ----------
Stockholders' equity - net 29,204,357 23,440,320
----------- -----------
TOTAL $33,330,379 $27,365,183
----------- -----------
See notes to consolidated financial
statements. (Concluded)
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
NET SALES (Notes 7 and 9) $42,038,082 $39,644,684 $36,999,059
COST OF SALES (Note 7) 22,549,039 21,978,638 20,528,218
---------- ---------- ----------
GROSS MARGIN 19,489,043 17,666,046 16,470,841
---------- ---------- ----------
EXPENSES:
Selling, general, and
administrative 6,006,499 6,096,198 6,323,782
Research and development 1,789,167 1,528,476 1,229,155
----------- ----------- -----------
Total 7,795,666 7,624,674 7,552,937
----------- ----------- -----------
INCOME FROM OPERATIONS 11,693,377 10,041,372 8,917,904
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Dividend and interest income 584,960 352,406 462,324
Royalty income 652,894 650,992 628,515
Other (79,326) (88,283) 617,359
---------- ---------- -----------
Total 1,158,528 915,115 1,708,198
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 12,851,905 10,956,487 10,626,102
INCOME TAX EXPENSE (Notes 1 & 5) 4,498,167 3,847,127 3,613,817
----------- ----------- -----------
NET INCOME $ 8,353,738 $7,109,360 $ 7,012,285
=========== ========== ===========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE (Notes 1 & 6) $ .83 $ .68 $ .60
=========== ========== ===========
EARNINGS PER COMMON SHARE
ASSUMING
FULL DILUTION (Notes 1 and 6) $ .82 $ .68 $ .60
=========== ========== ===========
See notes to consolidated
financial statements.
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Unrealized
Gain
(Loss)
on Invest-
ments
Available
Additional -for-Sale,
Common Stock Paid-in Net
(Note 6) Capital of Retained
Shares Par (Note 6) Tax (Note Earnings
Value 2)
BALANCE, JANUARY 1, 1993 11,848,647 $118,486 $4,399,867 $20,393,281
Net income
7,012,285
Cash dividend paid ($.06
per share) (694,193)
Shares issued upon
exercise of employee
stock options for cash
(Note 6) 71,450 715 412,993
Shares issued upon
exercise of employee
purchase rights (Note
6) 32,404 324 187,276
Tax benefit attributable
to appreciation of
common stock related to
stock options and pur-
chase rights (Note 6) 148,317
Common stock purchased
and retired
(847,265) (8,473) (5,148,453) (2,008,449)
--------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31, 1993 11,105,236 111,052 None 24,702,924
Net income 7,109,360
Shares issued upon
exercise of employee
stock options for cash
(Note 6) 19,785 198 74,416
Shares issued upon exer-
cise of employee pur-
chase rights (Note 6) 3,338 33 64,242
Change in unrealized
gain (loss) on
investments available-
for-sale (Note 2) (101,815)
Tax benefit attributable
to appreciation of
common stock related to
stock options and
purchase rights (Note
6) 11,761
Common stock purchased
and retired
(1,134,800) (11,348) (11,761) (8,508,742)
----------- ------- --------- --------- -----------
BALANCE, DECEMBER 31, 1994 9,993,559 99,935 None (101,815) 23,442,200
Net income
8,353,738
Shares issued upon
exercise of employee
stock options for cash
(Note 6) 124,840 1,248 811,179
Shares issued upon
exercise of employee
purchase rights (Note
6) 39,668 397 260,736
Change in unrealized
gain (loss) on
investments available-
for-sale (Note 2) 134,522
Tax benefit attributable
to appreciation of
common stock related to
stock options
and purchase rights
(Note 6) 355,779
Common stock purchased
and retired
(367,130) (3,671) (355,779) (3,794,112)
--------- ------- --------- -------- -----------
BALANCE, DECEMBER 31, 1995 9,790,937 $97,909 None $32,707 $29,073,741
=========== ======= =========== ======= ===========
See notes to consolidated financial
statements.
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,353,738 $7,109,360 $7,012,285
---------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,714,906 1,252,666 1,015,328
Provision for (recovery of)
losses on accounts receivable 5,359 30,266 (13,562)
Loss on disposal of assets 24,563 41,064 6,360
Deferred income taxes (74,293) (79,369) 269,027
Tax benefit attributable to
exercise and disposition of
incentive stock options and
stock purchase rights 355,779 11,761 148,317
Changes in operating assets and
liabilities:
Accounts receivable -
trade (89,813) (502,373) (751,936)
Accrued interest and other
receivables (8,632) 8,537 6,226
Inventories 745,957 186,399 (1,125)
Prepaid expenses (131,502) 333,933 (410,348)
Accounts payable (37,462) 353,873 232,721
Accrued expenses 334,551 170,631 410,334
Deferred revenue (84,996) (85,596) (478,600)
-------- -------- ---------
Total adjustments 2,754,417 1,721,792 432,742
--------- --------- -------
Net cash provided by
operating activities 11,108,155 8,831,152 7,445,027
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (2,074,745) (1,821,030) (1,500,411)
Intangible assets (62,144) (521,751) (62,102)
Purchases of investments (6,888,832) (3,506,743) (14,977,720)
Proceeds from sale of:
Investments 4,483,010 6,150,586 15,539,306
Property and equipment 350 9,145 41,220
---------- ---------- -----------
Net cash provided by (used
in) investing activities (4,542,361) 310,207 (959,707)
----------- ------- ---------
(Continued)
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (694,193)
Proceeds from issuance of common
stock $ 1,073,560 $ 138,889 601,308
Common stock purchased and retired (4,153,562) (8,531,851) (7,165,375)
----------- ----------- ------------
Net cash used in financing
activities (3,080,002) (8,392,962) (7,258,260)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 3,485,792 748,397 (772,940)
CASH AT BEGINNING OF YEAR 1,579,121 830,724 1,603,664
----------- ---------- ------------
CASH AT END OF YEAR $ 5,064,913 $ 1,579,121 $ 830,724
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for income taxes $ 4,156,894 $ 3,831,487 $ 3,311,230
See notes to consolidated financial
statements. (Concluded)
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Utah Medical Products, Inc. and its wholly owned subsidiary, Utah Medical
Products Ltd., (the Company) are in the business of producing cost-effective
devices for the health care industry. The Company's broad range of products
includes those used in critical care areas and the labor and delivery
department of hospitals, as well as outpatient clinics and physician's
offices. Products are sold in both domestic U.S. and international markets.
The accounting policies of the Company conform to generally accepted
accounting principles (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities and reported amounts of revenues and expenses. Actual amounts
could differ from these estimates.
The following is a summary of the more significant of the Company's
accounting policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
those of the Company and its subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENTS - Investments consist of mutual funds, bonds, and equities.
Effective January 1, 1994 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, the
Company's investments are classified as available-for-sale which results in
an adjustment to stockholders' equity for unrealized gains and losses (see
Note 2).
INVENTORIES - Finished products, work-in-process, and raw materials and
supplies inventories are stated at the lower of cost (computed on a
first-in, first-out method) or market (see Note 3).
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method
over estimated useful lives as follows:
Building and improvements 30-40 years
Furniture and equipment 3-10 years
Multi-cavity molds and dies 5 years
INTANGIBLE ASSETS - Costs associated with the acquisition of patents,
trademarks, goodwill, and license rights are capitalized and amortized using
the straight-line method over periods ranging from 5 to 17 years.
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, whereby deferred taxes are computed under the
liability method (see Note 5).
DEFERRED REVENUE - Amounts received in advance from customers for the sale
of product rights and price reductions are recognized as revenue as the
related products are sold considering the future marketability of the
products.
EARNINGS PER SHARE - Earnings per share are based on the following weighted
average number of shares outstanding:
1995 1994 1993
Weighted average number of common
common and ccommon equivalent
shares 10,042,430 10,436,094 11,686,035
Weighted average number of common
shares assuming full dilution 10,172,329 10,453,583 11,686,035
The computation of earnings per common and common equivalent share is based
on the weighted average number of shares outstanding during each year plus
the common stock equivalent which would arise from the exercise of stock
options and warrants outstanding using the treasury stock method and the
average market price per share during the year.
The computation of earnings per common share assuming full dilution is based
on the weighted average number of shares outstanding during the year plus
the common stock equivalents which would arise from the exercise of stock
options and warrants outstanding using the treasury stock method and the
market price per share at the end of the year.
STATEMENTS OF CASH FLOWS - For purposes of the consolidated statements of
cash flows, the Company considers cash on deposit and short-term investments
with original maturities of three months or less to be cash and cash
equivalents.
FOREIGN OPERATIONS - Included in the Company's consolidated balance sheet at
December 31, 1995 are the assets of its manufacturing facility under
construction in Ireland totaling approximately $825,000.
2. INVESTMENTS
The amortized cost and estimated market values of investment securities as
of December 31, 1995 were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Municipal bonds $5,646,994 $13,620 $(961) $5,659,653
Taxable bonds 1,499,844 466 1,500,310
Equities and other 974,163 7,634 (28,260) 1,013,537
----------- ----------- ----------- -----------
Total $8,121,001 $81,720 $29,221) $8,173,500
========== ======= ======== ==========
The amortized cost and estimated market value of investments at December 31,
1994 were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Municipal bonds $ 3,696,268 $ (50,365) $ 3,645,903
Equities and other 2,039,207 $ 5,391 (118,453) 1,926,145
----------- ---------- ----------- -----------
Total $ 5,735,475 $ 5,391 $ (168,818) $ 5,572,048
=========== ========== =========== ===========
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
Due in one year or less $ 6,242,557 $6,248,957
Due after one year through five years 904,281 911,006
----------- ----------
Total $ 7,146,838 $ 7,159,963
=========== ===========
During the years ended December 31, 1995 and 1994, there were $4,483,010 and
$6,150,586, respectively, in proceeds from the sale of investment securities
resulting in gross realized losses of $8,328 and $33,602, respectively, and
gross realized gains of $59,187 and $3,785, respectively, computed based on
the specific identification method.
The net unrealized gain (loss) on investment securities available-for-sale
included in stockholders' equity for the years ended December 31, 1995 and
1994 is $32,707 and $(101,815), respectively, which are net of the deferred
tax asset (liability) of $(19,792) and $61,612, respectively (see Note 5).
3. INVENTORIES
Inventories at December 31, 1995 and 1994 consisted of the following:
1995 1994
Finished products $ 872,419 $ 789,924
Work-in-process 687,746 822,102
Raw materials 1,717,817 2,411,913
---------- ----------
Total $3,277,982 $4,023,939
========== ==========
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company has an operating lease agreement for land
adjoining the Company's facilities for a term of forty years commencing on
September 1, 1991 at a basic rent of $32,400 each year for the first five
years. Subsequent to the fifth lease year, the basic rental will be
adjusted for published changes in a price index. Rent expense under the
operating lease agreement was $32,400 for each of the years ended December
31, 1995, 1994, and 1993.
Future minimum lease payments under the operating lease obligation as of
December 31, 1995 were as follows:
Year ending December 31:
1996 $ 32,400
1997 32,400
1998 32,400
1999 32,400
2000 32,400
Thereafter 993,600
-----------
Total minimum lease payments $ 1,155,600
===========
LITIGATION - The Company is involved in lawsuits which are an expected
consequence of its operations and in the ordinary course of business. The
Company believes that pending litigation will not have a materially adverse
effect on its financial condition or results of operations.
5. INCOME TAXES
Deferred tax assets and liabilities as of December 31, 1995 and 1994
consisted of the following temporary differences:
1995 1994
LONG- LONG-
ASSETS CURRENT TERM CURRENT TERM
Inventory write-downs not
currently deductible
for tax purposes $102,038 $42,151
Allowance for doubtful
accounts not deductible
for tax purposes until
written off 31,382 29,278
Accrued liabilities not
deductible for tax
purposes until paid 226,915 225,630
Deferred revenue
previously recognized
for tax purposes 32,356 $ 65,473 32,270 $ 97,344
Unrealized loss on
investments available
for-sale 61,612
Other 65,026 58,714
------- --------- ------- ---------
Total 392,691 130,499 390,941 156,058
LIABILITIES
Unrealized gain on
investments available
for-sale (19,792)
Accelerated depreciation
and amortization for
tax purposes (375,788) (412,278)
-------- --------- ------- ---------
Deferred income taxes - $372,899 $(245,289) $390,941 $(256,220)
net -------- ---------- -------- ----------
The components of income tax expense for the years ended December 31, 1995,
1994, and 1993 were as follows:
1995 1994 1993
Current $4,572,460 $3,926,496 $3,344,790
Deferred (74,293) (79,369) 269,027
---------- ---------- ----------
Total $4,498,167 $3,847,127 $3,613,817
========== ========== ==========
Income tax expense differed from amounts computed by applying the statutory
Federal rate to pretax income as follows:
1995 1994 1993
Computed Federal income tax
expense at the statutory
rate of 34% $4,369,648 $3,725,206 $3,612,874
Non-taxable investment income (124,604) (94,266) (132,835)
State income taxes 642,638 561,967 324,142
Foreign sales corporation (228,760) (251,262) (134,386)
Other (160,755) (94,518) (55,978)
---------- --------- ----------
Total $4,498,167 $3,847,127 $3,613,817
========== ========== ==========
6. STOCKHOLDERS' EQUITY
OPTIONS - The Company has stock option plans which provide for the grant of
stock options to eligible employees, directors, and other individuals to
purchase up to 4,722,500 shares of common stock at a price not less than
fair market value (110% of fair market value for shareholders owning more
than 10% of the outstanding common shares) on the date of grant. All
options granted under the plans may be exercised from between one 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
1995 SHARES PER SHARE
Granted 200,000 $9.50 - $10.63
Expired or cancelled 39,517 6.58 - 10.00
Exercised 124,840 6.33 - 10.00
Outstanding at December 31 586,319 7.25 - 11.33
Exercisable 198,500 7.25 - 11.33
1994
Granted 325,000 $ 7.25 - $10.00
Expired or cancelled 73,836 6.58 - 10.00
Exercised 19,785 5.25 - 6.58
Outstanding at December 31 550,676 6.33 - 11.33
Exercisable 184,605 6.33 - 11.33
1993
Granted 208,000 $10.00 - $11.33
Expired or cancelled 240,650 6.58 - 15.00
Exercised 71,450 1.50 - 6.58
Outstanding at December 31 319,297 5.25 - 11.33
Exercisable 179,998 5.25 - 10.00
PURCHASE RIGHTS - The Company adopted an Employees' Stock Purchase Program
in December 1990 whereby employees of record on December 21, 1990 were
granted rights to purchase a maximum of 120,000 shares of common stock at
the grant date market value of $6.58. These purchase rights were exercised
or expired prior to December 21, 1995.
Changes in stock purchase rights were as follows:
PRICE RANGE
SHARES PER SHARE
1995
Granted None
Expired or cancelled 1,054 $6.58
Exercised 39,668 6.58
Outstanding at December 31 None
Exercisable None
1994
Granted None
Expired or cancelled 1,945 $6.58
Exercised 3,338 6.58
Outstanding at December 31 40,722 6.58
Exercisable 40,722 6.58
1993
Granted None
Expired or cancelled 1,293 $2.67 - 6.58
Exercised 32,404 2.67 - 6.58
Outstanding at December 31 46,005 6.58
Exercisable 46,005 6.58
For the years ended December 31, 1995, 1994, and 1993, the Company reduced
current income taxes payable and increased additional paid-in capital by
$355,779, $11,761, and $148,317, respectively, for the income tax benefit
attributable to appreciation of common stock related to stock options and
purchase rights.
ACCOUNTING STANDARD - In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which
defines a fair value based method of accounting for stock based employee
compensation plans. Under SFAS No. 123, companies are encouraged, but are
not required, to adopt the fair value method for fiscal years beginning
after December 15, 1995 for all employee awards granted after the beginning
of such year. Companies are permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, (APB No. 25), but must, in future years,
disclose in a note to the financial statements proforma net income and
earnings per share as if SFAS No. 123 had been applied. The Company has
determined it will not adopt the fair value method and therefore will
continue to account for stock-based compensation under APB No. 25.
7. PRODUCT SALE AND PURCHASE COMMITMENTS
The Company has exclusive and nonexclusive agreements to sell certain
products to Baxter Healthcare Corporation (Baxter) under license agreements
and had sales to Baxter of approximately $14,996,000, $15,299,000, and
$14,449,000 during the years ended December 31, 1995, 1994, and 1993,
respectively. In addition, the Company recognized income from prepaid
license fees (which are included in net sales) of approximately $393,000
during the year ended December 31, 1993.
The Company has license agreements with other unrelated companies
(Licensees) to provide exclusive and non-exclusive rights to purchase,
market, distribute, or manufacture the Company's products. The Company
received royalties and license fees, some of which were received in advance
and have been deferred and amortized over the terms of the respective
agreements.
The Company has license agreements for the rights to develop and market
certain products owned by unrelated parties. Under the terms of such
agreements, the Company is required to pay royalties ranging from 1.5% to
5.0% of sales over the terms of the agreements.
8. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings plan for employees who work 30
hours or more each week, who are at least 21 years of age, and have a
minimum of one year of service with the Company. The Company's contribution
is determined annually by the Board of Directors and was approximately
$57,200, $52,100, and $36,300 for the years ended December 31, 1995, 1994,
and 1993, respectively.
9. EXPORT SALES
Sales to customers in foreign countries were approximately $10,343,000,
$10,757,000, and $8,112,000 for the years ended December 31, 1995, 1994, and
1993, respectively.
10.ACQUISITIONS
In January 1994, the Company acquired substantially all of the tangible and
intangible assets of OB Tech, Inc. (OB Tech), developer of the CordguardTM
disposable umbilical blood sampling system, for $500,000 cash, a market
acceptance payment to be made when the product is verifiably accepted in the
market place, and up to three additional payments to OB Tech contingent upon
the product achieving certain annual revenue thresholds. On February 8,
1996, the agreement was amended to $250,000 for the market acceptance
payment and $250,000 each for the three contingent payments. In addition,
the Company will pay a royalty on products sold that are covered by the OB
Tech patent. In conjunction with this purchase, the Company recorded in its
financial statements the fair value of assets acquired (principally patents
and a trademark) in exchange for cash paid of $500,000.
* * * * * *
SCHEDULE
II
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
BALANCE ADDITIONS
AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
ACCUMULATED AMORTIZATION OF
INTANGIBLE ASSETS:
1995 $102,078 $342,333 $ 850 $443,561
======== ======== ======== ========
1994 $ 55,208 $ 46,870 $102,078
======== ======== ======== ========
1993 $ 48,735 $ 9,733 $ 3,260(1) $ 55,208
======== ======== ======== ========
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1995 $ 77,662 $ (5,359)(3) $ 83,021
======== ======== ======== =========
1994 $ 47,396 $ 32,665 $ 2,399 $ 77,662
======== ======== ======== =========
1993 $197,420 $ 150,024(2) $ 47,396
======== ======== ========= =========
ALLOWANCE FOR SALES RETURNS:
1995 $ 24,545 $ 24,545
======== ======== ======== =========
1994 $ 12,545 $ 12,000 $ 24,545
======== ======== ======== =========
1993 $122,886 $ 110,341(2) $ 12,545
======== ======== ========= =========
(1) Deduction relates to patents sold.
(2) Deductions represent accounts written off against the allowance.
(3) Amount represents recoveries which increased the allowance
EXHIBIT INDEX
-------------
SEC
Ref-
erence
No. No. Title of Document Location
- - --- --- ----------------- --------
15 10 Amendment to Asset Purchase Agreement, Filed in
effective February 8, 1996 Electronic
Format
16 21 Subsidiaries of Utah Medical Filed in
Products, Inc. Electronic
Format
17 23 Consent of Deloitte & Touche LLP, Filed in
Company's independent auditors Electronic
Format
18 27 Financial Data Schedule Filed in
Electronic
Format