for Solutions - Utah Medical Products, Inc.
Transcription
for Solutions - Utah Medical Products, Inc.
U T A H M e d i c a l P r o d u c t s , I n c . I n n o v a t i o n & R e l i a b i l i t y for Solutions i n S p e c i a l i z e d C a r e 1999 Annual Report 1999 Annual U T A H M e d i c a l P r o d u c t s , I n c . Utah Medical Products, Inc. (UTMD), with particular interest in healthcare for women and their babies, develops, manufactures, assembles and markets a broad range of disposable and reusable specialty medical devices designed for better health outcomes for patients and their care-providers. 40 20 30 15 20 10 10 5 90 91 92 93 94 95 96 97 98 99 90 91 92 93 94 95 96 97 98 99 NET SALES in millions of dollars GROSS PROFITS in millions of dollars 12 8 1.00 9 6 .75 6 4 .50 3 2 .25 90 91 92 93 94 95 96 97 98 99 90 91 92 93 94 95 96 97 98 99 OPERATING PROFITS in millions of dollars NET PROFITS in millions of dollars 90 91 92 93 94 95 96 97 98 99 EARNINGS PER SHARE in dollars Report F i n a n c i a l H i g h l i g h t s Five-year Summar y of Operations (In thousands, except per share data) 1999 1998 1997 1996 1995 $ 29,444 $ 27,677 $ 24,272 $ 38,673 $ 42,038 Net income 5,468 4,858 4,322 8,754 8,354 Total assets 27,756 31,968 31,459 28,916 33,330 5,934 3,093 5,563 – – 18,789 26,017 22,635 24,383 29,204 Net sales Long-term debt Stockholders’ equity Earnings per common share (diluted) $ Cash dividends per share .76 $ .59 $ .51 $ .93 $ .83 None None None None None 7,197 8,273 8,495 9,452 10,042 Weighted average common shares (diluted) Quarterly Income Statement Summaries (In thousands, except per share data) Net Sales Gross Margin Net Income Earnings Per Share $ 7,539 $ 4,135 $ 1,433 $ .22 Third Quarter 7,568 4,104 1,487 .22 Second Quarter 7,320 3,870 1,349 .18 First Quarter 7,018 3,687 1,200 .15 $ 7,366 $ 3,846 $ 1,282 $ .16 Third Quarter 7,150 3,720 1,290 .16 Second Quarter 6,786 3,420 1,127 .14 First Quarter 6,375 3,188 1,159 .14 $ 6,979 $ 3,549 $ 1,233 $ .15 Third Quarter 7,019 3,679 1,153 .14 Second Quarter 5,101 2,671 895 .10 First Quarter 5,173 2,708 1,040 .12 1999 Fourth Quarter 1998 Fourth Quarter 1 1997 Fourth Quarter 1 9 9 9 Kevin L. Cornwell, Chairman and CEO T o O u r S t o c k h o l d e r s Utah Medical Products, Inc. (UTMD) concluded an exceptional year in 1999. All functional areas of the Company performed very well. The high points of UTMD’s 1999 financial performance were a 25% increase in operating profits and a 29% increase in earnings per share. Please refer to the charts and summary data on the preceding pages for an overview of UTMD’s historical performance. Sales A ctivity 2 Overall, 1999 sales increased 6% to $29.4 million. International sales rose 17%, including a 28% expansion of UTMD’s specialty Ob/Gyn and neonatal product sales. U.S. domestic direct sales increased $1.2 million, up 6% from 1998, but not up to our 10% growth target. Sales results in 1999 reinforced the fact that day-to-day execution of the Company’s market strategy by its direct sales force is key to UTMD’s success. For most of our direct sales force, their extraordinary energy, inquisitiveness and willingness to get involved in the clinical aspects of what our products can accomplish for physicians, nurses and their patients, brought them and the Company success. Clearly, a small focused company with good solutions for its clinician customers’ needs can very effectively compete in a consolidating medical device marketplace. Had the lowest performing sales representatives achieved like the top 80%, domestic direct sales would have grown by more than our targeted 10%. To improve performance in 2000, we are emphasizing training and management support of our representatives, including detailed sales activity tracking. Profit Margins and Cash Flow The average gross profit margin (GPM) for 1999 was 53.6%, a new UTMD record. By contrast, we achieved a 46.4% GPM in our peak sales year, 1995, when total sales included $15 million in OEM sales to Baxter. Profits from 1999 operations were 28.1% of sales including goodwill amortization expense of $569,000, about 2% of sales, associated with 1997 and 1998 acquisitions. If UTMD had used “pooling of interest” accounting, its operating profit margin would have been 30%. Employees in all three UTMD facility locations deserve to be extremely proud of their 1999 performance. Although the amortization of goodwill, like depreciation of property and equipment, affects reported income, it does not negatively impact cash flow. UTMD’s 1999 pre-tax and pre-interest cash flow yielded $11 million, or 38% of revenues. This cash flow is a powerful financial engine for growth without diluting shareholders’ interest. In 1999, the cash flow was used to substantially enhance shareholder value by retiring 20% of the shares outstanding. Marketing Initiatives and New Products UTMD’s well-accepted obstetrical product line represented 62% of domestic direct sales in 1999. During the year, we reinforced our market presence with targeted initiatives that help clinicians understand UTMD’s value in reducing the risk of complications and negative surprises. To improve customer access to UTMD’s products, in the fall of 1999 we signed an intrauterine pressure catheter (IUPC) sole source supply agreement with Novation, LLC, which represents about 25% of U.S. hospitals. However, we quickly learned that having a significant administrative contract didn’t enhance UTMD’s marketing approach. In UTMD’s case, contracts ironically lower barriers to competition instead of raising them, because a customer buying from a contract will not take time to understand the important clinical advantages of UTMD’s solutions. Many hospital administrators tend to limit their purchase consideration just to price, which represents immediate out-of-pocket cost. They are not able, or cannot take time, to consider all of the components of “total delivered cost” associated with the products that their hospitals employ to achieve an optimal clinical outcome. Total delivered cost includes (in addition to price): utilization management, which is the frequency of use required to achieve a certain outcome; longer term costs such as additional care associated with higher likelihoods of complications or unwanted side effects; and environmental/overhead costs such as training, monitoring results and administration. The value of the Novation contract experience for UTMD was the realization of our sales force that they are uniquely positioned to help our customers understand how the use of UTMD’s solutions allows minimum total delivered cost. In last year’s Annual Report, we featured the Fowler EndoCurette being developed in cooperation with Mayo Clinic. Because of the time delay of clinical trials required to satisfy premarketing regulatory requirements, we could not introduce the product in 1999. We believe the concept has exciting potential, but the proof of efficacy and timing of market release remain unpredictable. After more than five years, we have terminated our internal research and development efforts of a fetal pH monitoring system. However, the patented concept remains promising enough that UTMD is seeking a partner to jointly develop this potentially revolutionary system. In 1999, enhancement to the newly acquired Gesco neonatal product line consumed a large part of our development engineering resources. A separate update, including a description of product enhancements in our neonatal product line, is included later in this report. Acquisitions, as well as licensing and distribution arrangements, remain attractive ways for UTMD to introduce new products in its marketing focus. This is particularly true when our active internal development efforts can significantly augment the products’ clinical value, and we gain a proprietary advantage through patents. UTMD continues to defend its patents through on-going litigation. We believe our claims are meritorious and are encouraged by legal events. Outlook As shown by its financial success, UTMD continues to demonstrate that clinicians, particularly in the areas of our specialty Ob/Gyn and NICU focus, understand and appreciate the value they receive from the use of our products. UTMD will continue to develop new products and improve existing products, while expanding sales of our current product portfolio. In 2000, we will focus on the selling process, including more effective use of Internet technology, to demonstrate how UTMD can help its customers obtain the optimal clinical outcomes they desire. We also plan to substantially improve the knowledge and communication skills of our sales representatives so they can effectively provide the evidence our customers need to make their medical device purchase decisions. I would like to express our gratitude for the recognition of our customers of UTMD’s contribution to women’s and children’s health. I would like to thank our employees, vendors and other business partners for their diligent efforts in contributing to the Company’s success. Thank you, as a shareholder, for your belief in our programs and recognition of UTMD’s value as a publicly-traded company. Kevin L. Cornwell Chairman and CEO 3 P Obstetrics Labor & Deliver y Gynecology Electrosurger y Urology r o d u c t H i g h l i g h t s Products Description Business Intran Plus Transducer-tipped IUP/amnioinfusion catheters Delivery management IUP-075 Fluid-filled IUPs tools for monitoring Electrodes & FM Accessories Fetal heart rate scalp electrodes, fetal monitor chart paper, monitor cables, toco belts fetal and maternal well- CMI-Vacuum Assisted Delivery Systems Pumps and specialty cups Arom-Cot, Muc-X Amniotomy finger cots, meconium aspirators Cordguard Umbilical cord management tools Finesse Electrosurgical generators Tools for gynecological Filtresse Surgical smoke handlers and filters office/clinic practices, Electrosurgical Tools Specialty loop, ball, needle and suction/irrigation/coagulation electrodes including LETZ, Epitome Electrosurgical scalpel Accessories Disposable pens and dispersive pads Fowler EndoCurette Endometrial tissue sampling device Lumin & Other Tools Uterine manipulation tool, speculums, retractors, forceps excision and incision Liberty Electrical stimulation device for urinary incontinence tools; conservative Pathfinder Endoscopic irrigation device and tools urinary incontinence being, for minimizing complications and for ease in performing delivery procedures endometrium sampling, diagnostic laparoscopy, and other MIS procedures; specialty therapy; urology tools Neonatal Intensive Care 4 Blood Pressure Monitoring / Misc. Disposa-Hood Disposable infant oxygen hoods Devices for gaining Umbili-Cath Umbilical vessel/artery catheters vascular access, Per-Q-Cath 2 French PICC administering vital Nutri-Cath Enteral feeding tubes fluids, maintaining a Uri-Cath Urinary drainage system neutral thermal Hemo-Nate Blood filtration system environment, and Myelo-Nate Spinal fluid sampling device other specialized tools Pala-Nate Oral protection appliance used in the care of Dialy-Nate Pre-assembled peritoneal dialysis system critically-ill infants Thora-Cath Chest drainage catheter Deltran-Plus Needleless blood pressure monitoring kits Deltran, Deltran-Plus Disposable pressure transducers, needleless arterial blood collection system Deltran Accessories Monitor cables, calibration device and organizers Components Stopcocks, flush devices, high pressure tubing and caps Subcontract Molding & Other OEM Products Erectile dysfunction pumps and other products Specialized tools for invasively monitoring blood pressure on a continuous basis with disposable pressure transducer systems Developing and commercializing proprietary products that cost-effectively solve clinical needs is fundamental to Utah Medical Products, Inc.’s strategy for growth. Customers Distribution Competition Hospital L&D departments Direct sales force; independent Tyco/Kendall distributors internationally ANSI/Quest Medical Medex Clinical Innovations GE Medical/Marquette/Corometrics Prism Enterprises Gynecological practices/clinics, outpatient Direct sales force; independent Tyco/U.S. Surgical/Valleylab clinics, hospitals, specialty centers distributors internationally Cooper Surgical Ellman Dermatologists, otolaryngologists, plastic, ConMed thoracic and vascular surgeons, urologists J&J and urogynecologists MegaDyne Milex Hospital NICUs Direct sales force; independent Tyco/Kendall distributors internationally NeoCare Becton Dickinson/Luther Vygon HDC Hospital ORs and ICUs; Direct sales force; other medical Abbott other medical device companies companies including: Medisize, B. Braun, Baxter Cardiovascular Group Biosensors International, Pulsion and Becton Dickinson/Spectramed Howmedical Hollenstein; international Argon distributors; independent manufacturers’ Medex representatives 5 U TMD focuses on improving care for mothers and their babies. In the neonatal intensive care unit (NICU), we provide neonatal critical care products that support a “developmentally-friendly” objective. In labor and delivery (L&D), we mitigate risk of injury, both to patients and to clinicians. The result of our efforts is to increase the likelihood of positive outcomes and decrease unwanted surprises. UTMD is not just selling better products than the competition. We sell proprietary /differentiated solutions that allow higher quality care through more effective clinical procedures at a lower total cost with less complications. Our distinctive solution-selling approach requires a deliberate progression. First, we target clinical customers (not hospital administrators) and /or clinical situations to those most likely to understand, willing to investigate alternatives and gain value from UTMD’s ideas. We seek people who feel directly responsible and care deeply for their patients’ welfares. From the formal targeting process, we develop a specific activity plan for a sales representative, which we monitor and adjust as needed. Next, UTMD’s sales representative engages the customer in a discussion of needs, challenges and desired outcomes, listening carefully to what the clinician communicates. Then the sales representative, in conjunction with UTMD marketing and sales team input, focuses where a particular product’s use will create a specific, valuable result for the customer. As a final step, the sales representative provides the clinician 6 with the evidence needed to support UTMD’s claims that enable a transfer of confidence to the customer. Additional steps may be required in hospitals where multiple decision-makers are involved along with administrators. This process has resulted in a high success rate where we execute it properly. The key element in the approach is the knowledge, mental agility, energy and communication skills of the sales representative. u t a h P r m e d i c a l o o p t i m a l v p r o d u c t s , i d c l i n i c a l i i n c . n g s o l u t i o n s I n 1999, UTMD enhanced its reputation for providing clinical solutions to challenges in hospital areas that are considered separate and highly special. Specialty neonatal products sales grew 100% relative to the prior year and comprised 13% of total sales. The Gesco neonatal products acquired from C. R. Bard in July 1998 were primarily responsible for the sales improvement. In 1999, UTMD successfully modified and augmented the Gesco product line in a number of important ways. Because of improved care, the size of critically-ill premature babies in the NICUs has become smaller. In 1999, UTMD introduced smaller diameter versions of two important silicone catheter products, Nutri-Cath ® and Uri-Cath.™ Both incorporate the features and capabilities designed into their larger counterparts including special tip configurations, insertion depth markings and luer-hubs. Both are designed for longer-term placement, avoiding the highly irritating and potentially harmful side effects associated with repeated removals and replacements of shorter indwelling /intermittent-use products. The diameter of the new catheters is slightly larger than the diameter of the wire of a standard paper clip. UTMD recognized that a new patented polyurethane material called Tecoflex® offers many of the flexibility and biocompatibility advantages of silicone after insertion, but also provides the greater rigidity of polyurethane preferred by many clinicians for ease of insertion. As a result, the Company expanded its umbilical artery /vein catheter product line to include not only its market-leading silicone catheters, but also three different 8 diameters of both single lumen and double lumen Tecoflex polyurethane catheters. UTMD is the only medical device company that provides both material options to clinicians. u t a h I m m e d i c a l p r p r o d u c t s , o v d e v e l o p m e n t a l i i n c . n c a r e g For many years, UTMD has been known as a creative leader in the development of disposable pressure transducer systems for invasive blood pressure monitoring. In 1999, we developed a special configuration for the NICU featuring needleless blood sampling. The important distinguishing characteristic of the fully closed system is its ability to limit the critically-ill neonate’s blood loss to only the sample itself while assuring an uncontaminated blood sample. Several Gesco products included latex rubber. To avoid the use of this potential allergen, UTMD replaced the latex components, achieving its objective of “Latex Free” Gesco neonatal products. UTMD designed a smaller version of its Myelo-Nate™ lumbar puncture kit used to sample cerebral spinal fluid (CSF) of the most critically-ill newborns. The needle diameter is about the width of four stacked pieces of 25% bond paper. This tiny needle with a short bevel displaces dura mater rather than cutting it, providing the physician with excellent tactile sensitivity and clear visualization through the device while maintaining proper CSF 10 flow rates into the sample collection vial. UTMD expects to improve its existing neonatal products and add new, differentiated products to the armamentarium that can help minimize stressful, irritating and disruptive impacts to critically-ill NICU patients. We expect neonatal products to continue to lead sales growth in 2000. u t a h E n m e d i c a l h a p r o d u c t p r o d u c t s , n c i p o r t f o l i o i n c . n g B y the end of 1999, the results of Ireland operations had justified UTMD’s initial optimism as the foundation for its international operations. Relative to 1998, sales and production were up 23% as European customers, in particular, took advantage of reduced transportation costs, elimination of customs and duties and the convenience of paying in European currencies and placing purchase orders. UTMD’s 1999 Ireland operations produced 61% of UTMD’s total international shipments. Built in 1996, UTMD’s 77,000 square foot Athlone facility was designed specifically to manufacture and package medical devices. Pressurized clean rooms provide a well-controlled assembly environment. The plant layout assures efficient, controlled material flows, while automated packaging operations perform to exact dimensions. The operations of this subsidiary, Utah Medical Products Ltd., are ISO9001/EN46001 certified, and all products bear the CE mark. The facility also meets U.S. FDA Quality Standards. After three years of operation, manufacturing operations are performed by highly skilled and trained operators. Although the Republic of Ireland has achieved a “full employment” economy, production personnel turnover has remained extremely low by U.S. standards, leveraging the efficiency and quality of operations. The transfer of expertise from the U.S. to Ireland was accomplished through extensive efforts by UTMD employees on both sides of the Atlantic. A continuous exchange of ideas through close communications regarding manufacturing requirements has been a key to our success. 12 With the existing Athlone plant substantially below its capacity, UTMD looks forward to continuing operating leverage as it expands sales and production in Ireland. u t a h E x m e d i c a l p a i n t e r n a t i o n a l p r o d u c t s , n s a l e s i n c . d i n g a n d p r o d u c t i o n Responsibilities for Financial Reporting Management is responsible for the consolidated financial statements and other financial information contained in this Annual Report. products used in healthcare including claims resulting from the The financial statements have been prepared in accordance with improper use of devices and other product liability claims, defense generally accepted accounting principles considered to fairly present of the Company’s intellectual property, productive use of assets in the Company’s financial position, results of operations and cash flows. generating revenues, management of working capital including The financial statements include some amounts that are based on inventory levels required to meet delivery commitments at a minimum management’s best estimates and judgement. cost, and timely collection of accounts receivable. This report contains certain forward-looking statements and Additional risk factors that may affect non-operating income information relating to the Company that are based on the beliefs of include the continuing viability of the Company’s technology license management as well as assumptions made by and information currently agreements, actual cash and investment balances, asset dispositions, and available to management. When used in this document, the words acquisition activities that may require unusual funding. “anticipate,” “believe,” “project,” “estimate,” “expect,” “intend” and similar The Company’s system of internal controls is designed to provide expressions, as they relate to the Company or its management, are reasonable assurance as to the protection of assets against loss from intended to identify forward-looking statements. Such statements unauthorized use or disposition, and the reliability of financial records reflect the current view of the Company respecting future events and for preparing financial statements and maintaining accountability are subject to certain risks, uncertainties, and assumptions, including of assets. The Company’s business ethics policy is the cornerstone the risks and uncertainties noted below. Although the Company has of its internal control system. This policy sets forth management’s attempted to identify important factors that could cause the actual commitment to conduct business worldwide with the highest ethical results to differ materially, there may be other factors that cause the standards. The business ethics policy also requires that the documents forward statement not to come true as anticipated, believed, projected, supporting all transactions clearly describe their true nature and that all expected, or intended. Should one or more of these risks or uncertain- transactions be properly reported and classified in the financial records. ties materialize, or should underlying assumptions prove incorrect, The financial statements have been audited by the Company’s actual results may differ materially from those described herein as independent accountants. The purpose of their audit is to indepen- anticipated, believed, projected, estimated, expected, or intended. dently express an opinion on the fairness of management’s presentation, Risk factors that may impact the Company’s revenues include the 14 well as cash flows, include risks inherent to companies manufacturing in all material respects, of the Company’s financial position, results market acceptance of competitive products, obsolescence caused by of operations and cash flows. In connection with their audit, they new technologies, the possible introduction by competitors of new study and evaluate the internal accounting controls to the extent they products that claim to have many of the advantages of UTMD’s prod- deem necessary. ucts at lower prices, the timing and market acceptance of UTMD’s own The adequacy of the Company’s accounting controls and the new product introductions, UTMD’s ability to efficiently manufacture accounting principles employed in financial reporting are under the its products, including the reliability of suppliers, success in gaining general oversight of the Audit Committee of the Board of Directors. access to important global distribution channels, budgetary constraints, This Committee also has responsibility for employing the independent the timing of regulatory approvals for newly introduced products, accountants. No member of this Committee is an employee of third party reimbursement, and other factors set forth in the Company’s the Company. The independent accountants meet with the Audit Securities and Exchange Commission filings, including UTMD’s 10-K Committee, with and without management present, to discuss for the year ended December 31, 1999. accounting, auditing and financial reporting matters. Risk factors, in addition to the risks outlined in the previous paragraph, that may impact the Company’s assets and liabilities, as Kevin L. Cornwell Corporate Secretary u t a h m e d i c a l p r o d u c t s , F i n a n c i a l i n c . S e c t i o n Utah Medical Products, Inc. and Subsidiaries Consolidated Balance Sheet (In thousands) December 31, 1999 1998 Assets Current assets: Cash 647 $ 1,367 Accounts receivable, net (note 2) $ 4,077 4,531 Inventories (note 2) 3,190 4,048 Prepaid expenses and other current assets 165 151 Deferred income taxes (note 6) 459 446 8,538 10,543 11,013 12,489 8,205 8,936 $ 27,756 $ 31,968 $ $ Total current assets Property and equipment, net (note 3) Other assets, net (note 2) Total Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued expenses (note 2) Deferred revenue Total current liabilities Notes payable (note 4) Deferred income taxes (note 6) Total liabilities Commitments and contingencies (notes 5 and 10) 544 525 2,117 1,886 – 2 2,661 2,413 5,934 3,098 372 440 8,967 5,951 – – – – Stockholders’ equity: Preferred stock $.01 par value; authorized 5,000 shares; no shares issued or outstanding Common stock $.01 par value; authorized 50,000 shares; issued 6,453 shares in 1999 and 8,046 shares in 1998 16 64 80 Cumulative foreign currency translation adjustment (1,250) Retained earnings 19,975 26,446 18,789 26,017 $ 27,756 $ 31,968 Total stockholders’ equity Total S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s. (509) Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Productivity of Assets and Working Capital 36 1.7 15 5.2 33 1.5 13.5 4.6 30 1.3 12 4.0 27 1.1 10.5 3.4 24 0.9 9 2.8 21 0.7 7.5 2.2 0.5 6 Total UTMD asset turns (ratio of sales to total assets) improved again in 1999 because sales increased while average total assets decreased from the prior year. Year-ending total assets were lower because current assets declined as a result of significantly reducing levels of cash, inventory and receivables; net fixed assets declined as a result of depreciation which exceeded replacement; and net intangible assets declined because amortization of goodwill and intellectual property exceeded new acquisitions. 1999 year-end net intangible assets represent 30% of total assets. Excluding the possibility of new intangible assets from 2000 acquisitions, total asset productivity should continue to improve in 2000 because sales are projected to grow while working capital remains about the same and net property, plant and equipment (PP&E) assets decline 18 95 as depreciation exceeds the rate of new purchases. 96 97 98 ■ ■ TOTAL A SSETS ($ million) 1999 net (after accumulated depreciation) PP&E in Utah and Oregon decreased $0.6 million, while in Ireland decreased $0.9 million. 1.6 95 99 96 97 98 ■ AVERAGE TURNS (number of times) 99 ■ NET AVERAGE PP&E TURNS ($ million) (number of times) Consolidated PP&E asset turns improved to 2.7 based on year-ending balances. Productivity of PP&E in 2000 should continue to increase since 5.3 6.3 5.0 5.6 4.7 4.9 4.4 4.2 4.1 3.5 3.8 2.8 7 60 6 55 5 50 4 45 sales are expected to increase, and net PP&E decrease, as consolidated new capital expenditures are expected to be less than one-half of 2000 depreciation. Inventory turns increased in 1999 due to higher sales together with 21% lower inventory at year-end. Lower inventory balances resulted from UTMD using inventories previously obtained in its 1998 Gesco acquisition and continuing to improve its MRP processes. Management expects to be able to achieve its objective of 4.0 inventory turns in 2000 because sales should continue to increase without the need for a similar increase in inventories. The 1999 year-ending accounts receivable (A/R) balances declined 10% despite higher sales activity for the year. Calculated days in receivables improved to 49, based on 4Q 1999 3.5 2.1 95 shipments’ activity. Aged A/R over 90 days from invoice date decreased 96 97 98 ■ to about 3% of total accounts receivable at year end from 9% at the end of 1998. The decrease in the older receivables balance is due mainly to 95 ■ AVERAGE INVENTORY ($ million) 40 3 99 96 97 98 ■ AVERAGE TURNS (number of times) 99 ■ YEAR-END A/R ($ million) A/R AGING DAYS (4th quarter base) resolving the delinquency of one distributor in the Far East. The working capital decline of $2.3 million in 1999 was the result of 22.5 6.5 20.0 capital growth that is needed to support growth in 2000 sales activity. Liabilities the significant reduction in current assets coupled with a modest increase in current liabilities associated with higher business activity. Through its 10 32 6 9 29 17.5 5.5 8 26 15.0 5 7 23 12.5 4.5 6 20 10.0 4 5 17 3.5 4 14 3 3 excellent profitability, UTMD expects to internally finance any working At the end of 1999, UTMD’s total debt ratio increased to 32% of total assets from 19% at the end of 1998. In addition to current liabilities associated with current production and sales activity, UTMD has a few lease obligations (see note 5) and an unsecured line-of-credit. The balance of the revolving line-of-credit increased by $2.8 million in 1999 7.5 because UTMD used its financing facility to aggressively retire about 20% of its outstanding shares at a total cost of $12.1 million. In 2000, if no new significant acquisitions or repurchases of shares are made, the remaining revolving line-of-credit balance can be eliminated. 5 95 96 ■ YEAR-END WORKING C APITAL ($ million) 97 98 99 ■ TOTAL CURRENT RATIO 11 95 96 ■ TOTAL LIABILITIES ($ million) 97 98 99 ■ TOTAL DEBT RATIO (% of assets) 17 Utah Medical Products, Inc. and Subsidiaries Consolidated Statement of Income (In thousands, except per share amounts) Years ended December 31, 1999 1998 1997 $ 29,444 $ 27,677 $ 24,272 13,648 13,503 11,666 Gross margin 15,796 14,174 12,606 Selling, general, and administrative 6,795 6,605 6,089 719 946 958 8,282 6,623 5,559 34 58 85 Net sales (notes 9 and 10) Cost of sales (note 10) Expenses: Research and development Income from operations Other income (expense): Dividend and interest income Royalty income 529 678 732 Interest expense (296) (310) (250) 474 649 8,545 7,523 6,775 (3,077) (2,665) (2,453) Other, net (4) Income before income tax expense Income tax expense (note 6) Net income $ 5,468 $ 4,858 $ 4,322 Earnings per common share (basic) (notes 7 and 8) $ .76 $ .59 $ .51 Earnings per common share (diluted) (notes 7 and 8) $ .76 $ .59 $ .51 Other comprehensive income—foreign currency translation net of taxes of $(252), $50 and $(297) Total comprehensive income 489 98 $ 4,979 $ 4,956 (577) $ 3,745 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s. Management’s 18 Discussion and Analysis, Revenues Annual consolidated revenues were up 6% in 1999. UTMD divides its sales channels in the U.S. into “direct sales” which continued pressure monitoring (BPM) products were up 14% relative to the prior year. Ob/Gyn and neonatal product sales were 23% of 1999 foreign sales, are sales to end user customers through UTMD’s direct sales force, compared to 21% in 1998 and 15% in 1997. Foreign sales of Ob/Gyn independent commissioned sales reps, and specialty distributors, and and neonatal products increased 29% and totaled $1.3 million for 1999. “OEM sales” which are sales to other medical device companies where Ireland operations shipped 61% of foreign sales in 1999, compared to products are resold as part of a component of a kit or a repackaged 62% in 1998 and 39% in 1997. stand-alone product. In 1999, U.S. direct sales represented 74% of UTMD divides its sales into four product-line categories: 1) obstet- global consolidated sales compared to 74% in 1998 and 68% in 1997. rics, 2) gynecology/electrosurgery/urology, 3) neonatal, and 4) blood In the U.S. only, direct sales represented 91% of 1999 sales compared pressure monitoring/accessories/other. The description of products to 89% in 1998 and 86% in 1997. As a percentage of total U.S. sales, included in each of the four areas can be found in the “Product High- OEM sales represented 9% of 1999 sales, compared to 11% in 1998 lights” table on pages 4 and 5 of this Annual Report. In these four and 14% in 1997. U.S. OEM sales excluding sales to Baxter declined categories, UTMD’s primary revenue contributors generally enjoy a 3% in 1999. dominant market share and typically have important product features Foreign sales in 1999 were 19% of global consolidated sales compared to 17% in 1998 and 21% in 1997. Foreign sales of blood protected by patents. Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis, Sales in the obstetrics product category decreased 5% in 1999 and 8 represented 47% of total sales. Obstetrics sales (in thousands) were 7 ■ 1ST QUARTER $13,926 in 1999, compared to $14,635 in 1998 and $11,823 in 1997. ■ 2ND QUARTER ■ 3RD QUARTER continued Direct sales of the market-leading IUP catheter, Intran® Plus, declined 6 ■ 4TH QUARTER 3% under active competition from cheaper, less clinically-effective 5 products. Sales of vacuum-assisted delivery systems (VADS) decreased 14% in 1999, due apparently to a decline in utilization by U.S. hospitals. 4 97 98 UTMD believes that using VADS remains the trained physician’s 99 best choice in most operative deliveries, and will increase educational QUARTERLY SALES in millions of dollars programs in 2000. Gynecology/electrosurgery/urology product sales grew 7% in 1999, and represented 15% of total revenues. Gyn/ES/Uro sales (in thousands) were $4,454 in 1999, compared to $4,174 in 1998 and U.S. SALES BY SALES CHANNEL $3,859 in 1997. Several products contributed to sales growth, including ■ OEM SALES 14% 86% 11% ■ DIRECT SALES 89% 9% 91% Epitome ®, Liberty ®, Pathfinder ™, and C-LETZ contoured electrodes. UTMD looks to continue to develop and market specialized electrosurgical electrodes and other urological devices in 2000. Marketing this group of products requires multiple sales call points and extensive clinical training and familiarization time with users, among other 1997 1998 1999 challenges, resulting in continued low adoption growth rates. Neonatal sales include the neonatal product line of Gesco International acquired in July 1998. Compared to 1998, UTMD’s 1999 neonatal product sales grew 100%. Neonatal product sales (in thousands) were $3,807 in 1999, compared to $1,899 in 1998 and ■ BPM 30 $708 in 1997. UTMD expects the neonatal product line to continue ■ NEONATAL to be a significant contributor to its growth in 2000. ■ GYNECOLOGY ■ OBSTETRICS BPM and accessories sales represented 25% of consolidated 1999 20 sales, the same portion as the prior year. Sales of BPM products in 25% 13% 15% 47% 1999 (in thousands) were $7,258, compared to $6,970 in 1998 and $7,882 in 1997. Although a mature product line, UTMD continues 10 to enjoy a stable and significant demand for its well-regarded BPM products, particularly overseas. 0 97 98 99 GLOBAL SALES BY PRODUCT LINE 1999 REVENUE BY PRODUCT LINE in millions of dollars percent of sales 19 PRODUCT LINE SALES BY SALES CHANNEL ■ OEM SALES ■ BPM 6 61% ■ NEONATAL ■ GYNECOLOGY 39% ■ DIRECT SALES 41% 59% BPM & ACC PRODUCTS ■ OBSTETRICS 1999 sales 4 77% 3% 10% 10% united states 2% 2 98% international 100% OBSTETRICS, GYNECOLOGY AND NEONATAL PRODUCTS 1999 sales 0 97 98 99 united states FOREIGN SALES BY PRODUCT LINE 1999 FOREIGN REVENUE BY PRODUCT LINE in millions of dollars percent of sales international Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis, Gross Profit The average gross profit margin (GPM), the surplus remaining after subtracting costs of manufacturing products from net revenues, in 1999 was 53.6% compared to 51.2% in 1998 and 51.9% in 1997. Gross continued previous year. At the end of 1999, UTMD terminated an exclusive third party distributor relationship for the states of Hawaii and Alaska, representing 1% of domestic direct sales. R&D expenses in 1999 were 2.4% of sales compared to 3.4% of margins improved successively each quarter in 1999, led by product sales in 1998, and 3.9% in 1997. The mid-year termination of internal design improvements, better materials management and better utiliza- efforts committed to UTMD’s novel fetal pH monitoring project was tion of overhead costs. Looking forward to 2000, offsetting influences responsible for the decline in spending. Other 1999 projects included are expected to result in GPM of about 54%. Expected favorable the continuing development of the Fowler Endocurette, enhancements influences include continued growth in sales volume without a similar to the Gesco neonatal product line, and improvements to UTMD’s increase in overhead expenses, a larger percentage of total sales from established products. The improvements in materials and configuration higher margin products and a continued emphasis on reengineering of components was evident in UTMD’s improved GPMs. At UTMD products to reduce costs. Unfavorable influences are expected to be R&D resources are kept involved in the support of manufacturing continued competitive pressure on pricing and higher wage rates for processes, as UTMD finds it makes long-term sense to keep its most employees. UTMD management believes that consistently achieving technical people involved with products throughout their life cycles. an average GPM above 50% is necessary to successfully support In 2000, UTMD’s R&D expenses to sales ratio is expected to remain the significant sales and marketing, research and development, and consistent with 1999. administrative expenses associated with a growth company in a highly complex and competitive marketplace. Non- operating Income Operating Profit UTMD’s technology to other companies, but also interest and capital Non-operating income includes primarily royalties from licensing Operating profit, or income from operations, is the surplus remaining gains from investing the Company’s cash offset by interest expenses after subtracting operating expenses from gross profits. Operating and bank fees on the revolving line-of-credit, and gains or losses from expenses are subdivided into sales, general and administrative expenses the sale of assets. Non-operating income (in thousands) in 1999 was (SG&A) and research and development expenses (R&D). UTMD $263, compared to $900 in 1998 and $1,216 in 1997. There were further divides SG&A into the two categories of sales and marketing expenses (S&M) and general and administrative expenses (G&A). Despite only a 6% increase in 1999 total sales, operating profits (in thousands) increased 25% to $8,282 from $6,623 in 1998 and 52 $5,559 in 1997. Total operating expenses were 25.5% of sales in 1999 compared to 27.3% of sales in 1998, and 29.0% in 1997, demonstrating 48 the operating leverage achievable when sales continue to grow. SG&A expenses in 1999 decreased to 23.1% of revenues from 44 23.9% of 1998 revenues, although in dollar terms SG&A expenses increased to $6.8 million in 1999 from $6.6 million in 1998. The G&A 40 expenses portion increased to $3.0 million in 1999 from $2.7 million in 20 1998, due to increased expenses from amortization of goodwill (GWA) 36 90 91 92 associated with the mid-1998 Gesco acquisition. GWA (in thousands) 93 94 95 96 97 98 99 GROSS PROFIT MARGINS percent of sales in 1999 was $569 compared to $433 in 1998, and $148 in 1997. Looking forward, GWA in 2000 will also be $569, without additional OPERATING EXPENSES acquisitions in 2000. Since the result of the acquisitions were ■ S&M additional new marketable products for UTMD, the GWA expenses can be regarded as surrogate R&D expenses captured in G&A. ■ G&A 8 32 7 28 customer support of UTMD’s products. Although sales and GPMs 6 24 improve when sales are made through directly employed sales represen- 5 20 tatives in lieu of independent distributors or OEM customers, S&M 4 16 operating expenses increase as an offset. Global sales in 1999 increased 3 12 6% while S&M expenses declined 3%, improving the productivity of 2 8 S&M resources. The majority of UTMD’s S&M expenses pertain to 1 4 the U.S. “direct sales” portion of its business. In 2000, UTMD’s S&M 0 S&M expenses are the costs of promoting, selling and providing expenses to sales ratio is expected to remain consistent with the ■ R&D 0 97 98 99 in millions of dollars 97 98 99 percent of sales Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis, continued unusual payments received in 1998 and 1997 for the use of UTMD’s respectively. Actual outstanding common shares as of December 31, pressure monitoring technology, which are subject to a confidentiality 1999 were 6,453. Future EPS can be increased by investing current agreement, which were nonrecurring in 1999. Royalties received in net income to increase future net profits through expanded product 1999 (in thousands) were $149 less than in the prior year. In 1997, offerings and profitable business operations, or by repurchasing there was also a one-time $200 gain (in thousands) from the sale of a stock, thereby reducing the number of outstanding shares. UTMD small real estate property no longer used by the Company. Interest believes that shareholder value is improved primarily by consistently expenses and bank fees (in thousands) associated with the line of increasing EPS. credit were $307 in 1999, $318 in 1998 and $255 in 1997. Assuming Although UTMD’s EPS increased 29% in 1999, the price of its no change in current interest rates and no new borrowing to finance an stock increased only 3%. In contrast, the Dow Jones Industrial Average extraordinary capital requirement, 2000 net non-operating income increased 25%, the S&P 500 Index increased 20%, the NASDAQ (in thousands) is expected to be about $300. Royalties received vary Composite Index increased 86%, while the MDDI Index of medical from period to period depending on the desire and/or success of other device companies decreased 11%. The low trading volume of micro companies in selling products licensed by UTMD, and the remaining cap companies continued to cause a disparity in relative values, and the life of the patents. medical device industry, as a sector, was out of favor compared with Earnings before income taxes (EBT) result from adding UTMD’s the rest of the stock market in 1999. The ValueLine Index, a widely non-operating income to its operating profits. 1999 EBT, as a percent- accepted indicator of broader market values, declined 1%. Percentage age of sales, was 29.0% compared to 27.2% and 27.9% in 1998 and institutional ownership of UTMD at the end of 1999, at about 24%, 1997, respectively. These profit margins are extremely high when was much lower than average institutional ownership of the S&P 500 compared with UTMD’s peers in the medical device industry, or other at about 60%. industries. The resulting profit dollars are equivalent to profits generated Return on shareholders’ equity (ROE) is the portion of net by well-performing companies with twice or more the sales of UTMD. income retained by UTMD to internally finance its growth, divided EBT in 1999 were up 14% relative to 1998 even though sales were up by average accumulated shareholders’ equity during the period. This only 6% and non-operating income was down 71%, because operating ratio determines how fast the Company can afford to grow without income in 1999 increased 25%. UTMD expects that it can continue its adding external financing that would dilute shareholder interests. For excellent overall profit performance in 2000. example, a 20% ROE will financially support 20% growth in revenues. In UTMD’s opinion, achieving growth in revenues and EPS without Net Income, EPS and ROE Net income is EBT minus income taxes. UTMD’s net income diluting shareholder interests maximizes shareholders’ value. ROE in 1999 was 24% and has averaged 30% for the last thirteen years. expressed as a percentage of sales ranks in the top tier of all U.S. publicly-traded companies at 19%, 18% and 18% for 1999, 1998 and 1997, respectively. Net income in 1999 was up 13%. After income taxes, 1999 net income (in thousands) was $5,468, compared to 30 40 $4,858 in 1998 and $4,322 in 1997. The effective income tax rate in 1999 was 36.0% compared to 35.4% in 1998 and 36.2% in 1997. 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 invest- 21 30 ments, 3) amount of exercised employee options which result in a tax 20 benefit to the Company, 4) differences in distribution of state income taxes, 5) differences in profitability of the Ireland subsidiary which is taxed at a 10% rate on manufactured products, 6) changes in the 20 amount of non-deductible goodwill expense resulting from an acquisition, and 7) other factors such as R&D tax credits and actual litigation costs versus accrued expenses. The amortization of goodwill associated with the 1997 Columbia Medical, Inc. acquisition is not tax deductible. 10 10 Earnings per share (EPS) is net income divided by the number of shares of stock outstanding (diluted to take effect for stock options awarded which have exercise prices below the current market value). Diluted 1999 EPS were up 29% to $.76 compared to $.59 in 1998, and $.51 in 1997. 1999-ending weighted average number of diluted common shares (the number used to calculate diluted EPS) (in thousands) were 7,197 compared to 8,273 and 8,495 shares in 1998 and 1997, 0 0 95 96 97 98 99 YEAR-END INSTITUTIONAL OWNERSHIP percent of total ownership 95 96 97 98 RETURN ON EQUITY percent 99 Utah Medical Products, Inc. and Subsidiaries Consolidated Statement of Cash Flows (In thousands) Years ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (Recovery of) provision for losses on accounts receivable (Gain) loss on disposal of assets Deferred income taxes Tax benefit attributable to exercise of stock options (Increase) decrease in: Accounts receivable Accrued interest, grant claims, and other receivables Inventories Prepaid expenses and other current assets Increase (decrease) in: Accounts payable Accrued expenses Deferred revenue $ Cash flows from financing activities: Proceeds from issuance of common stock Common stock purchased and retired Increase (decrease) in note payable Cash at end of year Supplemental disclosures of cash flow information: 1998 1997 $ 2,972 $ 2,197 $ 2,307 $ $ $ 250 During the year ended December 31, 1998, the Company purchased assets from Gesco International, Inc. The Company paid cash, and recorded net assets from the acquisition as follows: Inventory Property and equipment Intangibles Net cash investment $ 1,515 (35) (278) 195 27 1 404 903 (14) 55 68 2,317 (43) 514 562 (268) 11 21 221 (2) (328) 45 (84) (1,010) (441) (136) (1,134) (454) (112) 1,577 9 (7,300) (685) (4,962) (7,414) 98 (12,058) 2,840 58 (1,686) (2,470) 227 (5,391) 5,563 (9,120) (4,098) $ 310 2,058 22 438 52 5 (480) (306) – – 12 (4,188) Net (decrease) increase in cash Cash at beginning of year 296 $ 4,322 (684) (2) – – 1 – Net cash (used in) provided by financing activities Interest $ 4,858 4,978 Effect of exchange rate changes on cash Cash paid during the year for: Income taxes 5,468 9,463 Net cash used in investing activities 1999 1997 9,101 Cash flows from investing activities: Capital expenditures for: Property and equipment Intangible assets Purchases of investments Proceeds from sale and maturities of investments Proceeds from sale of property and equipment Net cash paid in acquisition Years ended December 31, 1998 2,192 (16) (1) (81) 5 Net cash provided by operating activities 22 1999 635 48 3,505 $ 4,188 13 (51) (720) 1,367 416 951 (2,088) 3,039 647 $ 1,367 $ 951 During the year ended December 31, 1997: • The Company sold property in exchange for a receivable of $340. • The Company purchased all of the outstanding common stock of Columbia Medical, Inc. (Columbia) in a purchase transaction. The Company paid cash for the common stock and recorded net assets from the acquisition as follows: Cash Accounts receivable Inventory Prepaids and other Deferred income taxes Property and equipment, net Intangibles Accounts payable Accrued expenses Total cash paid Less cash received Net cash investment S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s. 399 (16) $ 860 478 805 27 28 1,062 5,225 (94) (231) 8,160 (860) $ 7,300 Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis, Cash Flows and Capital Resources EBITDA (EBT, adjusted for non-cash depreciation and amortization continued equipment and tooling in good working order. In addition to the capital expenditures, UTMD plans to use cash in 2000 for selective infusions expenses, asset dispositions, and interest expense and bank fees of technological, marketing or product manufacturing rights to broaden associated with the line-of-credit) is a good measure of UTMD’s ability the Company’s product offerings, for continued share repurchases when to generate cash. 1999 EBITDA was $11.0 million, or as a ratio of the price of the stock remains extremely undervalued, and, if available sales, 38%. EBITDA has averaged 36% of sales over the last five years. for a reasonable price, acquisitions that strategically fit UTMD’s The extraordinarily strong cash generation performance resulted from business and are accretive to performance. UTMD plans to use any a combination of excellent operating earnings, a substantial non-cash cash not needed for the above pursuits during the remainder of 2000 charge to earnings from amortization of goodwill and receipt of to reduce the line-of-credit balance. However, the revolving credit line payments for the use of UTMD’s technology. Because of EBITDA will continue to be used for liquidity when the timing of acquisitions performance in 1999, UTMD was able to purchase $0.7 million in new or repurchases of stock require a large amount of cash in a short property and equipment to maintain its facilities, equipment and tooling period of time. in good working order and repurchase $12.1 million worth (about 20%) of its shares, while only increasing its bank revolving line-of-credit balance by $2.8 million. Cash (and equivalent) balances were $0.7 million at the end of 1999. UTMD effectively maintains zero-balance “sweep” cash accounts that minimize the line-of-credit balance, except for amounts held to 16 meet operating requirements in Ireland and separate physical reserves set aside for litigation expenses and other contractual commitments where cash has been committed. Net cash provided by operating activities, including adjustments for 12 depreciation and other non-cash operating expenses, along with changes in working capital, totaled (in thousands) $9,101 in 1999, compared to $9,463 in 1998 and $4,978 in 1997. Financing activities in 1999 provided additional cash (in thousands) 8 of $2,840 through the bank line-of-credit. A total of 1,606,375 shares of stock were repurchased at an average cost, including commissions, of $7.51/share, using (in thousands) $12,058 in cash. UTMD received (in 4 thousands) $98 in cash from the sale of 13,950 shares of stock through employee option exercises at an average price of $7.00 per share. Management believes that future income from operations and effective management of working capital will provide the liquidity needed to finance growth plans. Planned 2000 capital expenditures, expected to be consistent in magnitude with 1999, will keep facilities, 0 95 96 97 98 99 EBITDA in millions of dollars 23 Utah Medical Products, Inc. and Subsidiaries Consolidated Statement of Stockholders’ Equity Ye a r s e n d e d D e c e m b e r 3 1 , 1 9 9 9 , 1 9 9 8 a n d 1 9 9 7 (In thousands) Common Stock Balance Januar y 1, 1997 Shares Amount 8,786 $ 88 29 – Additional Paid-in Capital $ Unrealized Gain on Investments Available-forSale, Net of Tax – $ 59 – 227 – – – Cumulative Foreign Currency Translation Adjustments $ Retained Earnings Total 217 $ 24,019 $ 24,383 – – 227 – – (59) Shares issued upon exercise of employee stock options for cash Change in unrealized gain on investments available-for-sale (59) Tax benefit attributable to appreciation of stock options Common stock purchased and retired – (510) – 27 – – (5) (254) – – Foreign currency translation adjustment – – – – Net income – – – – 8,305 83 – – 8 – 58 – – Balance, December 31, 1997 (874) – (657) – (5,132) – 27 (5,391) (874) 4,322 4,322 23,209 22,635 – 58 Shares issued upon exercise of employee stock options for cash Tax benefit attributable to appreciation of stock options Common stock purchased and retired – (267) – 4 – – (3) (62) – – – (1,621) 4 (1,686) Foreign currency translation adjustment – – – – 148 – 148 Net income – – – – – 4,858 4,858 8,046 80 – – 26,446 26,017 13 – 98 – – – 98 – – 5 – – – 5 Balance, December 31, 1998 (509) Shares issued upon exercise of employee stock options for cash Tax benefit attributable to appreciation of stock options Common stock purchased and retired 24 (1,606) (16) (103) – Foreign currency translation adjustment – – – – Net income – – – – 6,453 $ 64 Balance, December 31, 1999 S e e a c c o m p a n y i n g n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s. $ – $ – – (741) – $ (1,250) (11,939) – 12,058) (741) 5,468 5,468 $ 19,975 $ 18,789 Utah Medical Products, Inc. and Subsidiaries Management’s Discussion and Analysis, Management’s Outlook Internally generated cash flow directly impacts shareholder value continued Internationally, where UTMD must depend on the knowledge, focus, relationships and energy of independent distributors, manage- to the extent it can be used to accelerate growth in the business, fund ment will continue to closely monitor performance and actively recruit attractive acquisitions, or be returned to investors through dividends needed new business partners. In 2000, UTMD expects its Ireland or share repurchases. Therefore, most financial analysts agree that subsidiary, which shipped 61% of all foreign sales in 1999, to continue a company’s value is not based on historical sales or earnings but rather its important contribution to overall performance. the certainty of its future cash flow. History should be interesting In 1999, UTMD implemented a Y2K plan to identify and solve to investors where it can provide insight into what might happen in potential Y2K problems. UTMD experienced no material adverse the future. consequences from the “Year 2000 (Y2K) Problem,” having taken all In 1999, UTMD again demonstrated a high cash flow performance appropriate actions to be prepared. The costs associated with the by achieving EBITDA in excess of 37% of sales. In 1998 and 1997, efforts were absorbed in 1999 and earlier results. The Company has EBITDA was 36% and 35% of sales, respectively. Over the last three- determined that all of the products it sells are Y2K compliant. None year period, UTMD’s cash flow funded three significant achievements: of UTMD’s products use or process dates in any form. a net (after option exercises) repurchase of 2.4 million of its shares at UTMD’s 1999 ending share price of $6.75 was 8.8 times EPS of an average cost of $8.03 per share including commissions and other 76¢, which were up 29%. In other words, UTMD’s year-end price to repurchase costs; two significant acquisitions costing $11.5 million earnings ratio (PER) was 8.8. The 29% trailing twelve months (TTM) which accounted for 22% of total sales in 1999; and R&D spending of EPS growth rate is more than three times the year-end PER expressed $2.6 million or about 3% of sales. as a percent. As a value indicator, the ratio of 1999 return on average In 2000, management expects to be able to extend UTMD’s shareholder equity (ROE) to PER equals 2.7 times, the highest in excellent EBITDA performance for another year. In a competitive UTMD’s history. For reference, the 1995 ending ROE/PER ratio was marketplace, UTMD has built and continues to successfully defend 1.3 times, while the TTM EPS growth rate of 21% was less than one a dominant market franchise in the most special areas of hospitals times the year-ending PER. (UTMD’s 1995 ending share price was caring for mothers and their babies, with innovative and highly 24 times EPS of 82¢.) These ratio comparisons suggest that from either effective products. a “growth” or a “value” perspective, UTMD’s stock may represent an UTMD’s direct U.S. sales team continues to evolve into a key uncommon “buy” opportunity. resource for achieving UTMD’s objectives to help clarify clinician needs, responsively provide excellent solutions for those needs, and assure timely support for clinical customers’ use of UTMD’s solutions. To be successful in its programs, UTMD must provide clinicians with the information they need to make important judgments about using certain products in obtaining optimal clinical outcomes, which include minimizing risk of complications. UTMD must also be able to provide support for physicians to explain those needs to hospital administrators who are primarily focused on reducing current operating costs. Where UTMD has a proprietary advantage, it must actively defend its patents from infringers and continue to develop new products representing a quantum improvement in care. UTMD remains encouraged that the federal judicial process will allow a favorable resolution of its two ongoing Intran IUPC patent infringement lawsuits. The substantial legal costs of the litigation continue to be absorbed in G&A expenses. The Company’s gynecology practice tools are intended to leverage UTMD’s reputation with physicians outside the hospital. The niche markets for which UTMD’s gynecology/electrosurgery/urology products are targeted have proven to require many and varied marketing initiatives. They require individual user training together with evidence of improved outcomes. Sales of newer products are growing slowly and consistently. UTMD will continue to patiently investigate economic ways to increase the rate of adoption of its newer products. 25 Utah Medical Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements Ye a r s e n d e d D e c e m b e r 3 1 , 1 9 9 9 , 1 9 9 8 a n d 1 9 9 7 1. Summar y of Significant A ccounting Policies Intangible Assets — Costs associated with the acquisition of Organization — Utah Medical Products, Inc. and its wholly patents, trademarks, goodwill, license rights, and non-compete owned subsidiaries, principally Utah Medical Products Ltd., which agreements are capitalized and amortized using the straight-line operates a manufacturing facility in Ireland, and Columbia Medical, method over periods ranging from 5 to 17 years. Inc. (the Company) are in the business of producing cost-effective devices for the healthcare industry. The Company’s broad range of products includes those used in critical care areas and the labor and delivery departments of hospitals, as well as outpatient clinics and physician’s offices. Products are sold in both domestic U.S. and international markets. Deferred Revenue — Amounts received in advance from customers for the sale of product rights and price reductions are recognized as revenue as the related products are sold considering the future marketability of the products. Income Taxes — The Company accounts for income taxes under Basis of Presentation — Effective July 1, 1997, the Company acquired Columbia Medical, Inc. (Columbia) in a purchase transaction. Operations of Columbia have been included in the consolidated operations since the date of purchase. SFAS No. 109, “Accounting for Income Taxes,” whereby deferred taxes are computed under the asset and liability method. Earnings per Share — The computation of basic earnings per common share is based on the weighted average number of shares Principles of Consolidation — The consolidated financial statements include those of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated outstanding during each year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus the common stock equivalents which would arise in consolidation. from the exercise of stock options and warrants outstanding using Cash and Cash Equivalents — For purposes of the consolidated the treasury stock method and the average market price per share statement of cash flows, the Company considers cash on deposit and during the year. short-term investments with original maturities of three months or Translation of Foreign Currencies — Assets and liabilities of the less to be cash and cash equivalents. Company’s foreign subsidiary are translated into U.S. dollars at the Grant Claims Receivable — Grant claims receivable consists of applicable exchange rates at year-end. Income and expense items amounts due from the Industrial Development Agency (Ireland) are translated at the average rate of exchange during the year. under capital and employment grant agreements for the construc- Net gains or losses resulting from the translation of the Company’s tion and operation of the Company’s Ireland manufacturing facility. assets and liabilities are reflected as a separate component of stockholders’ equity. Inventories — Finished products, work-in-process, and raw materials and supplies inventories are stated at the lower of cost Concentration of Credit Risk — Financial instruments which (computed on a first-in, first-out method) or market (see note 2). potentially subject the Company to concentration of credit risk 26 consist primarily of trade receivables. In the normal course of Property and Equipment — Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line and units-of-production methods over estimated useful lives as follows: Building and improvements Furniture, equipment, and tooling business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management’s 30-40 years 3-10 years expectations. The Company’s customer base consists primarily of healthcare providers. Although the Company is directly affected by the well-being of the medical industry, management does not believe significant credit risk exists at December 31, 1999. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Utah Medical Products, Inc. and Subsidiaries Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with generally 3. Property and Equipment Property and equipment consists of the following (in thousands): accepted accounting principles requires management to make December 31, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Land 1999 1998 967 $ 1,024 $ Buildings and improvements Furniture, equipment, and tooling 7,549 7,998 13,300 13,018 161 164 21,977 22,204 Construction-in-progress Reclassifications — Certain changes to the presentation of the 1998 and 1997 consolidated financial statements have been made to conform with the 1999 presentation. Accumulated depreciation and amortization $ (10,964) (9,715) $ 11,013 2. Detail of Certain Balance Sheet A ccounts Included in the Company’s consolidated balance sheet are the December 31, assets of its manufacturing facilities in Utah, Oregon and Ireland. 1999 1998 $ 4,074 $ 4,134 51 49 5 416 Property and equipment, by location are as follows (in thousands): Accounts receivable (in thousands): Trade receivables Grant claim receivables Accrued interest and other doubtful accounts (53) $ 4,077 (68) $ 4,531 Inventories (in thousands): $ Work-in-process 846 $ 1,041 962 771 1,382 2,236 $ 3,190 $ 4,048 $ 621 Oregon $ – Ireland $ 346 $ Total 967 improvements 3,817 32 3,700 7,549 11,309 1,253 738 13,300 161 – – 161 15,908 1,285 4,784 21,977 Furniture, equipment, and tooling Total Accumulated depreciation and amortization (9,648) (717) (599) (10,964) Property and Other assets (in thousands): $ 8,533 $ 8,533 1,744 1,743 Patents License rights 293 293 Trademarks 224 223 75 75 10,869 10,867 Non-compete agreements Accumulated amortization (2,664) $ 8,205 (1,931) $ 8,936 equipment, net $ 956 $ $ 6,260 $ 568 $ 4,185 $ 11,013 December 31, 1998 Utah Land $ 621 Oregon $ – Ireland $ 403 $ 27 Total 1,024 Building and improvements 3,656 32 4,310 7,998 11,090 1,092 836 13,018 157 7 – 164 15,524 1,131 5,549 22,204 Furniture, equipment, and tooling Accrued expenses (in thousands): Payroll and payroll taxes Land Construction-in-progress Raw materials Goodwill December 31, 1999 Utah Building and Less allowance for Finished products $ 12,489 847 Construction-in-progress Reserve for litigation costs 477 542 Total Other 684 497 Accumulated $ 2,117 $ 1,886 depreciation and amortization (8,817) (397) (501) (9,715) Property and equipment, net $ 6,707 $ 734 $ 5,048 $ 12,489 Utah Medical Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued Litigation — The Company is involved in lawsuits which are an 4. Notes Payable The Company has a bank line-of-credit agreement which allows expected consequence of its operations and in the ordinary course the Company to borrow a maximum amount (in thousands) of of business. The Company believes that pending litigation will not $12,500 at an interest rate equal to the bank’s LIBOR rate plus have a materially adverse effect on its financial condition or results 1.45%, or .8% below the bank’s prime rate. The line-of-credit of operations. matures on March 25, 2001, is unsecured and had an outstanding balance of (in thousands) $5,934 and $3,093 at December 31, 1999 and 1998, respectively. 6. Income Taxes Deferred tax assets (liabilities) consist of the following temporary In addition, at December 31, 1998 the Company had certain differences (in thousands): other long-term obligations which required monthly payments and December 31, were secured by equipment. The balance at December 31, 1998 1999 was (in thousands) $5. Current Operating Leases — The Company has an operating lease agreement for land adjoining the Company’s U.S. facilities for a term of forty years commencing on September 1, 1991. On September 1, 1996 and subsequent to each fifth lease year, the and unicap accounts and reserves The Company also leases certain buildings under noncancelable Depreciation and amortization operating lease agreements was approximately (in thousands) Earnings from subsidiary $103, $116 and $75 for the years ended December 31, 1999, Deferred income taxes, net 1998 and 1997, respectively. Future minimum lease payments under the operating lease obligations as of December 31, 1999 were as follows (in thousands): 61 2001 35 2002 35 2003 35 2004 35 Thereafter Total minimum lease payments 930 $ 1,131 $ – $ 95 $ – 18 – 26 250 – 278 – 38 – 47 – – – (210) – (246) – (162) – (194) $ 459 $ (372) $ 446 $ (440) The components of income tax expense are as follows (in thousands): Years ended December 31, Amounts $ $ 153 Accrued liabilities Other operating leases. Rent expense charged to operations under these 28 Long-term Allowance for doubtful basic rental is adjusted for published changes in a price index. 2000 Current Inventory write-down 5. Commitments and Contingencies Year ending December 31: 1998 Long-term Current Deferred Total 1999 1998 1997 $ 3,158 $ 2,613 $ 2,285 52 168 $ 2,665 $ 2,453 (81) $ 3,077 Income tax expense differed from amounts computed by applying the statutory federal rate to pretax income as follows (in thousands): Product Liability — The Company is self-insured for product Years ended December 31, liability risk. 1999 1998 1997 Federal income tax expense $ 2,905 $ 2,558 $ 2,303 State income taxes at the statutory rate 427 376 309 Foreign sales corporation (75) (76) (85) (180) (193) (74) Other Total $ 3,077 $ 2,665 $ 2,453 Utah Medical Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, continued 7. Stockholders’ Equity Stock-Based Compensation — The Company has adopted the Options — The Company has stock option plans which authorize disclosure-only provisions of Statement of Financial Accounting the grant of stock options to eligible employees, directors, and Standards (SFAS) No. 123, “Accounting for Stock-Based Compensa- other individuals to purchase up to an aggregate 4,700,000 shares tion.” Accordingly, no compensation cost has been recognized in the of common stock. All options granted under the plans may be financial statements. Had compensation cost for the Company’s exercised between six months and ten years following the stock option plans been determined based on the fair value at the date of grant. The plans are intended to advance the interest of grant date for awards starting in 1995 consistent with the provisions the Company by attracting and ensuring retention of competent of SFAS No. 123, the Company’s net earnings and earnings per share directors, employees, and executive personnel, and to provide would have been reduced to the pro forma amounts indicated below incentives to those individuals to devote their utmost efforts to the (in thousands, except per share amounts): advancement of the Company. Years ended December 31, Changes in stock options were as follows: Shares Price Range Per Share 1999 267,000 Expired or canceled 147,174 6.50 – 14.25 13,950 6.75 – 7.25 Total outstanding at December 31 Total exercisable at December 31 $ 6.50 – $ 7.75 Net income as reported $ 5,468 $ 4,858 $ 4,322 Net income pro forma $ 4,888 $ 4,382 $ 3,933 $ .76 $ .59 $ .51 $ .68 $ .53 $ .46 assuming dilution as reported Earnings per share 6.50 – 14.25 assuming dilution 665,533 6.50 – 14.25 pro forma Granted 267,500 Expired or canceled 155,067 6.75 – 14.25 8,000 7.25 – 7.25 Total outstanding at December 31 992,781 6.75 – 14.25 Total exercisable at December 31 478,902 6.75 – 14.25 $ 6.75 – $ 8.06 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Years ended December 31, 1999 Expected dividend yield 1997 Granted 454,700 Expired or canceled 229,452 6.75 – 14.25 29,500 7.25 – 10.00 Exercised 1997 1,098,657 1998 Exercised 1998 Earnings per share Granted Exercised 1999 $ 6.75 – $ 11.50 $ – 1998 $ – 1997 $ – Expected stock price volatility 47.5% 49.9% 47.6% Risk-free interest rate Total outstanding at December 31 888,348 6.75 – 14.25 (weighted average) Total exercisable at December 31 355,971 7.25 – 14.25 Expected life of options 4.7% 5.4% 6.3% 3.5 years 3.8 years 3.8 years 29 For the years ended December 31, 1999, 1998 and 1997, the Company reduced current income taxes payable and increased additional paid-in capital by (in thousands) $5, $5 and $27, respectively, for the income tax benefit attributable to appreciation of common stock related to stock options. The per-share weighted average fair value of options granted during 1999, 1998 and 1997 is $2.56, $3.20 and $4.10, respectively. Utah Medical Products, Inc. and Subsidiaries Notes to Consolidated Financial Statements, The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding Range of Exercise Prices Options Exercisable Weighted Average Remaining Weighted Contractual Average Number Life Exercise Outstanding (Years) Price Number Exercisable Weighted Average Exercise Price $ 6.50 – 8.00 663,363 7.61 $ 6.97 307,235 $ 7.10 9.50 – 14.25 435,294 5.98 11.72 358,893 11.59 $ 6.50 – 14.25 1,098,657 6.97 $ 8.85 666,128 $ 9.52 continued 10. Product Sale and Purchase Commitments The Company has license agreements for the rights to develop and market certain products owned by unrelated parties. Under the terms of such agreements, the Company is required to pay royalties ranging from 1.5% to 5% of sales, and in one case certain payments to the developer contingent upon the product achieving certain annual revenue thresholds. The Company has license agreements with unrelated companies to provide exclusive and nonexclusive rights to purchase, market, distribute, or manufacture the Company’s products, from which the Company receives royalties and license fees. 11. Employee Benefit Plan 8. Earnings Per Share The Company has a contributory 401(k) savings plan for Financial accounting standards require companies to present employees who work 30 hours or more each week, who are at least basic and diluted earnings per share (EPS) along with additional 21 years of age, and have a minimum of one year of service with the informational disclosures. Information related to EPS is as follows Company. The Company’s contribution is determined annually by (in thousands, except per share amounts): the Board of Directors and was approximately (in thousands) $87, $63 and $54 for the years ended December 31, 1999, 1998 and Years ended December 31, 1999 1998 1997 1997, respectively. Basic EPS: 12. Fair Value of Financial Instruments Net income available to common stockholders $ 5,468 $ 4,858 $ 4,322 Weighted average common shares Net income per share None of the Company’s financial instruments are held for trading purposes. The Company estimates that the fair value of all financial 7,187 $ .76 8,269 $ .59 8,444 $ .51 instruments at December 31, 1999, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market Diluted EPS: information and appropriate valuation methodologies. Considerable Net income available to common stockholders $ 5,468 $ 4,858 $ 4,322 7,197 8,273 8,495 develop the estimates of fair value, and, accordingly, the estimates Weighted average common shares Net income per share judgement is necessarily required in interpreting market data to $ .76 $ .59 $ .51 are not necessarily indicative of the amounts that the Company could realize in a current market exchange. 30 13. Recent A ccounting Pronouncements 9. Geographic Sales Information In June 1999, the FASB issued SFAS No. 137, “Accounting for The Company had sales in the following geographic areas Derivative Instruments and Hedging Activities—Deferral of the (in thousands): Effective Date of FASB Statement No. 133.” SFAS 133 establishes Year United States Other 1999 $ 23,894 $ 5,550 requires recognition of all derivatives as assets or liabilities in 1998 $ 22,945 $ 4,732 the statement of financial position and measurement of those 1997 $ 19,053 $ 5,219 accounting and reporting standards for derivative instruments and instruments at fair value. SFAS 133 is now effective for fiscal years beginning after June 15, 2000. The Company believes that the adoption of SFAS 133 will not have any material effect on the financial statements of the Company. Independent Auditors’ Report To the Board of Directors and Stockholders of Utah Medical Products, Inc. We have audited the consolidated balance sheet of Utah Medical Products, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended December 31, 1999, 1998 and 1997. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Utah Medical Products, Inc. as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. 31 S a l t L a k e C i t y, U t a h January 14, 2000 Corporate Information Board of Directors Officers Investor Information Kevin L. Cornwell Kevin L. Cornwell CORPORATE HEADQUARTERS Chairman and CEO President and Secretary Utah Medical Products, Inc. 7043 South 300 West Midvale, Utah 84047 Stephen W. Bennett, M.D., Dr. P.H. Paul O. Richins Retired Senior Health Care Analyst G. T. Management Ltd. Vice President and Chief Administrative Officer FOREIGN OPERATIONS Utah Medical Products Ltd. Garrycastle Industrial Estate Athlone, County Westmeath Ireland Ernst G. Hoyer Greg A. LeClaire General Manager Petersen Precision Engineering Co. Controller and Assistant Treasurer U.S. SUBSIDIARY Columbia Medical, Inc. Redmond, Oregon Barbara A. Payne, Ph.D. John G. Robert Consultant Vice President, Sales TRANSFER AGENT Registrar and Transfer Company 10 Commerce Street Cranford, New Jersey 07016 Paul O. Richins George Daetz Chief Administrative Officer Vice President, Sales AUDITORS Tanner + Co. Salt Lake City, Utah Russell Brennan Keane Athlone, Ireland CORPORATE COUNSEL Kruse, Landa & Maycock Salt Lake City, Utah Arthur Cox, Solicitors Dublin, Ireland 32 TM Corporate Stock The Company’s common stock began trading on the Nasdaq Stock Market (symbol: UTMD) on March 8, 2000. It previously traded on the New York Stock Exchange (symbol: UM). The following table sets forth the high and low sales price information as reported by NYSE for the periods indicated. 1999 1998 High Low High Low First Quarter 7 1/4 5 9/16 8 1/4 6 9/16 Second Quarter 7 15/16 5 13/16 8 7/8 6 13/16 Third Quarter 8 3/16 6 13/16 7 5/8 5 Fourth Quarter 7 3/8 6 1/8 7 1/4 5 For shareholder information contact: Paul Richins, (801) 566-1200 Company news on call: 1-800-758-5804, access #891175 Web site: www.utahmed.com e-mail: [email protected] Utah Medical Products Inc. 7043 South 300 West Midvale, Utah 84047 www.utahmed.com e-mail: info @ utahmed.com