-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIx38ZnDi25tzqa8gQZrU5T/1fxI29VkJDBAPo+id+1tx7GEDsEZHEjFd1eKm8Xo jvkO0JB3kkkcEnf3ZswqFg== 0000914233-98-000022.txt : 19980401 0000914233-98-000022.hdr.sgml : 19980401 ACCESSION NUMBER: 0000914233-98-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTAH MEDICAL PRODUCTS INC CENTRAL INDEX KEY: 0000706698 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 870342734 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12575 FILM NUMBER: 98580156 BUSINESS ADDRESS: STREET 1: 7043 S 300 WEST CITY: MIDVALE STATE: UT ZIP: 84047 BUSINESS PHONE: 8015661200 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997. Commission File No. 1-12575 UTAH MEDICAL PRODUCTS, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Utah 87-0342734 ------------------------------ ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7043 South 300 West Midvale, UT 84047 -------------------------------------- (Address of principal executive offices) Registrant's telephone number: (801) 566-1200 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each Exchange on which Registered Common Stock, $.01 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and; (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 6, 1998, based on NYSE closing price: $58,135,252. The number of shares outstanding of the registrant's common stock as of March 6, 1998: 8,305,036. 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. ("UM" or "the Company") is in the business of producing cost-effective devices for the health care industry which are predominantly proprietary, disposable and for hospital use. Success depends on 1) recognizing needs of clinicians and patients, 2) rapidly designing economical solutions which gain regulatory approval, 3) reliably producing products that meet those clinical needs, and then 4) selling through: a) UM's own direct channels into markets where the Company enjoys an established reputation and has a critical mass of sales and support resources, or b) establishing relationships with other medical companies that have the proper resources to effectively introduce and support the Company's products. UM's success in rapidly producing solutions comes from its proven ability to integrate a number of engineering and technical disciplines in electronics, software, mechanical packaging, instrumentation, optics and materials. The resulting proprietary products represent incremental, but significant improvements over existing clinical techniques. UM's experience is that, in the case of labor-saving devices, the improvement in cost-effectiveness of clinical procedures also leads to an improvement in overall health care. Historically, UM 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. UM's products are sold in the U.S. domestic market primarily through the Company's own direct sales representatives but also through independent manufacturers' representatives, specialty distributors and other medical device companies. Internationally, products are sold through other medical device companies and through independent medical products distributors. UM now has representation in all major global markets with approximately 60 international distributors. Negative factors that may adversely impact future performance include managed care reforms or hospital group buying decisions that may limit physicians' ability to direct spending on certain products or procedures, innovative new products introduced by other companies that displace UM's products, regulatory approval delays, changes in the Company's relationships with its distribution partners, and loss of key personnel. UM was formed as a Utah corporation in 1978. In 1995, Utah Medical Products Ltd., a wholly-owned subsidiary located in Ireland, was formed to establish an international manufacturing capability. In July, 1997, UM purchased Columbia Medical, Inc. (CMI), a Redmond, Oregon company specializing in manufacturing and marketing vacuum-assisted obstetrical delivery systems. UM publicly raised equity capital only one time in 1982. After trading on the NASDAQ for 14 years, UM's stock was listed on the NYSE on December 26, 1996 in conjunction with start of operations in Ireland. The Company's corporate offices are located at 7043 South 300 West, Midvale, Utah 84047 USA. The corporate telephone number is (801) 566-1200. European operations are located at Garrycastle Industrial Estate, Athlone, County Westmeath, Ireland. The telephone number in Ireland is (902) 73932. CMI's mailing address is P.O. Box 1530, Redmond, Oregon 97756. The phone number in Oregon is (541) 548-7738. PRODUCTS Obstetrics Market: Fetal Monitoring. About 60% of births are considered "higher risk" due to lack of prenatal care, among other factors. In many of these births, labor may become complicated and does not progress normally. The obstetrician must assess progression of labor to be able to intervene with drug therapy, infuse a solution to augment amniotic fluid, or ultimately if necessary, perform a Caesarean section procedure, and be prepared for complications following childbirth. 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 are often electronically monitored. UM's intrauterine pressure catheter product line provides for clinician choices from a traditional fluid-filled system to INTRANR PLUS, the state-of-the-art transducer-tipped system. In addition, adjunct FHR electrodes, leg plates, belly bands and chart paper are offered by UM to complete a package of fetal monitoring supplies. UM's intrauterine catheters include: IUP-075 and UM's other custom catheter kits utilize a saline-filled catheter that is placed within the uterine cavity, connected to a separate external reusable or disposable transducer. This product package, utilizing double lumen catheters, was the traditional mode of intrauterine monitoring prior to the introduction of INTRAN. An intrauterine pressure waveform is generated through transmission of a signal to the external pressure transducer. Introduced in 1987, INTRAN 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 preferred INTRAN PLUS, which is also covered under UM's original INTRAN patent. INTRAN PLUS was introduced in 1991. The INTRAN PLUS catheter combines the transducer tip concept of INTRAN I with a refined tip design, a re-zero feature that allows the clinician to verify the reference of the monitor, and a dedicated amnio lumen which provides immediate access to the amniotic fluid environment which may be essential in the diagnosis and intervention of certain fetal conditions. In 1996, an enhancement which allows physicians to observe amniotic fluid in a closed system was added to INTRAN PLUS. In 1997, UM introduced several new versions designed to address user preferences in tip size and zero switch location. Other Obstetrical Tools. UM's purchase of CMI brought the Soft Touch , Tender TouchR and Velvet TouchR lines of disposable and reusable vacuum-assisted operative delivery systems into UM's family of obstetric products. Operative vaginal deliveries provide knowledgeable physicians with an alternative to C-section intervention. Although there are risks associated with vaginal operative deliveries which represent about 15% of all U.S. hospital births, the procedures are generally regarded as safer for the mother, and at least as safe for the fetus, as abdominal (cesarean) delivery in comparable clinical situations. In operative vaginal deliveries, either forceps or a vacuum-assisted extraction system are used to deliver a baby. UM estimates that vacuum-assisted extraction, now the preferred approach, is presently used for about 8-10% of all U.S. births, and has the potential to continue to improve on its share versus forceps. Vacuum extraction may also be used to assist in C-section deliveries. CORDGUARD is a unique product which unifies the multiple steps of clamping the neonate's cord close to the umbilicus, severing the cord without splattering blood, drawing a clean blood sample for diagnostic or therapeutic purposes, and assisting in the removal of the placenta. CORDGUARD's sharpless, closed system reduces the risk of exposure, and consequently reduces the high cost of hospital exposure treatment practices when both OSHA and CDC guidelines are properly implemented. In addition, neonatal blood is generally hard to obtain safely and cleanly, while at the same time it is gaining in perceived diagnostic value to clinicians. Gynecology /Urology /ES Market: LETZR System: FINESSE Generator; Disposable Loop, Ball, and Needle Electrodes; FILTRESSE Evacuator; Other Specialty 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 widely 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 (freezing of tissue), 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. The Company's full line of products necessary to perform the LETZ electrosurgical procedure include 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 that can be positioned so the physician can colposcopically monitor the amount of tissue being excised more accurately. UM has FDA clearance to market its electrosurgical system in general surgery applications, including dermatology. FILTRESSE, a stand-alone surgical smoke filtration system which combines high filtration efficiency, low cost and convenient use was introduced in 1997. The Company will continue to develop and introduce specialty tools for specific electrosurgical procedures. EPITOME, introduced in 1996, is a unique electrosurgical scalpel which delivers precise performance in incision and excision, where minimization of thermal tissue injury is necessary to ensure accurate histological analysis, limited morbidity and post-surgical pain, and cosmetically superior results. A bendable version of EPITOME with a smaller active electrode is being introduced in early 1998. Designed to significantly reduce the chance of tissue burns due to inadvertent electrode contact and where a smaller, bent scalpel is preferable, this new bendable EPITOME should be of particular value to thoracic surgeons in harvesting the internal mammary artery during coronary artery bypass surgery, as well as in tonsillectomies, among other possible uses. LIBERTY System. LIBERTY, a device for the conservative treatment and effective control of urinary incontinence in women, was released for marketing by the FDA in 1995. LIBERTY consists of a battery operated stimulator unit and an intravaginal electrode probe. This physiotherapy technique, which can be done in the privacy of the home, involves passive strengthening of the periurethral muscles. Pulsed, low voltage, high frequency current is applied primarily to the pudendal nerve causing the pelvic area muscles to contract, leading to better muscle tone. Because electrical stimulation has no known adverse side effects, Liberty provides women suffering from mild to moderate incontinence an effective, lower cost and lower risk alternative to more traumatic treatments such as surgery and drug therapy. In 1997, UM's simplified and lower cost version of Liberty, intended for home use by patients, replaced UM's prior version, renamed Liberty Ultra, as the device of choice for most patients. LIBERTY Ultra is still of interest to physicians who wish to have a full range of waveform options for office use. In addition to its electrostimulation product line, UM intends to add other products that address various aspects of the very prevalent and diverse incontinence conditions including a rectal probe, and a model of LIBERTY that combines its current features with biofeedback therapy that helps the patient measure muscle tone. Beginning in 1998, UM has agreed to market the U- Control Home Trainer, a biofeedback device developed by Thought Technology, Ltd, which the Company believes will be a complementary product to Liberty. In 1998, UM intends to significantly expand its LIBERTY marketing efforts to help establish the belief in patients and doctors that LIBERTY is the easiest-to-use, most cost effective incontinence treatment available. The Company also has begun to market LIBERTY to urologists and physical therapists in the U.S. through specialty distributors. PATHFINDER , is an endoscopic irrigation device that allows a surgeon to precisely irrigate with the same hand that controls the endoscope, eliminating the need for a separate assistant to irrigate without visualization. PATHFINDER was acquired in the purchase of CMI. Tools for Gynecologic Laparoscopy. LUMINR is a proprietary tool developed by UM for reliably and safely manipulating the uterus in gynecological laparoscopic procedures. The product was released for marketing by the FDA in 1995. LUMIN combines the strength, range of motion and versatility of the higher end reusable instruments with the lower cost and cleanliness of the cheaper disposable instruments presently on the market, while at the same time reducing the number of tools needed to move and secure the uterus. The EPITOME scalpel is another UM proprietary tool that can be useful in laparoscopic procedures. Neonatal Critical Care Market: DISPOSA-HOOD . The DISPOSA-HOOD is an infant oxygen hood that is used in infant intensive care to administer oxygen to neonates in a neutral thermal environment critical to maintaining proper physiologic responses. 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 temperature and humidity conditions that are necessary in the proper respiratory care of premature infants. Critical Care Market: Blood Pressure Monitoring Products. DeltranR 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 is 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 disposable transducers in the medical market approximately fourteen years ago. UM 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 developed sets the standard in terms of reliability and ease of use. UM has qualified an automated assembly line which allows UM to effectively compete with the largest suppliers on the basis of low manufacturing costs. In early 1998, UM will begin marketing a new version called DELTRAN PLUS which UM believes provides the easiest and least risky blood sampling capability currently available. Other Products and Components. The Company sells products specifically designed for other medical companies which incorporate UM's proprietary technologies. In addition, UM sells plastic molded parts to a number of medical and non-medical companies, including competitors. UM believes that this practice has not affected its competitive position, and extends the benefit that shareholders realize from UM's manufacturing capabilities and technologies. MARKETING. UM competes in the marketplace on the basis of its proprietary value-added technologies and cost effective solutions. Its future success will depend upon its ability to innovate and introduce new products into specialized market niches consistent with cost control pressures under a changing health care environment. Speed is a critical success factor in that future performance depends on UM's ability to innovate, develop, test and commercialize new products faster than other medical device companies who possess significantly more resources than UM. With new products that are unique, the Company must be prepared for extensive user training and support. The Company currently competes within three distinct product/market arenas, each with differing competitive circumstances from the other: 1) Obstetrics. a) Fetal monitoring. UM markets its intrauterine pressure catheters ("IUPCs"), fetal heart rate electrodes and other monitoring supplies including electrical cables, external pressure sensing TOCO belts, leg plates and chart paper, to hospital labor and delivery departments. Almost exclusively limited to the United States where electronic monitoring is accepted practice, the available annual market for UM's full line of fetal monitoring supplies exceeds $35 million. The Company's IUPC sales control over 45% of total IUPC unit sales with a mixture of traditional "fluid-filled" catheters together with sensor-tipped catheters, where five other suppliers compete. The proven reliability of UM's INTRAN PLUS IUPC system, educational programs, and breadth of line, have helped UM secure more than a 75% share of the sensor tipped segment, which represents about 60% of total IUPC units used. Because UM'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 would be the acceptance 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. UM believes its patents are an important barrier to competition, and is currently involved with infringement litigation against two competitors. b) Vacuum-assisted operative delivery systems. UM's vacuum-assisted operative delivery systems, including both disposable and reusable extraction cups and a proprietary hand pump, are marketed through the same channels as fetal monitoring supplies. UM's vacuum-assisted operative delivery systems, formerly manufactured and marketed under the Columbia Medical, Inc. name, control about 50% of the market for these devices. Although vacuum extraction historically has enjoyed even greater acceptance internationally than in the U.S., CMI did not have significant sales of these products outside the U.S. UM believes its established international distribution channels can spur additional growth. c) Other Ob products. Umbilical cord management is a clinical need that has not been successfully addressed to date with UM's proprietary concept called CordguardR, or with any other product. Blood samples are routinely collected in about 50% of births in the U.S. now, and collections are expected to increase with the greater emphasis being placed on using neonatal blood for both diagnostic and therapeutic purposes. Cordguard is a totally closed system, designed to conveniently and safely clamp next to the umbilicus, sever the cord, and draw a clean cord blood sample in a single unified procedure. In 1998, UM will continue to work on improving its Cordguard product design and marketing programs. Also in 1998, UM has agreed to sell the Umbilicup product designed and manufactured by MKMI as an alternative cord blood collection device. The Umbilicup II device is designed to harvest larger quantities of cord blood. As part of the CMI purchase in 1997, UM acquired two other devices used routinely by obstericians, Amnicot, a device used to assist in the rupture of maternal membranes, and MUC-X, a neonatal meconium suction device. The hospital labor and delivery department will continue to offer an excellent opportunity where UM's established position in fetal monitoring allows receptiveness for evaluating new obstetrical product concepts. An excellent example is UM's fetal pH device, designed to provide a continuous measure of fetal scalp tissue pH, which is in the final stages of product development. 2) Gynecology/Urology/Electrosurgery. a) LETZ. 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. UM continues to have a leading market position through utilizing a direct sales organization to promote educational and clinician support programs. The Company believes that its products demonstrate superior cutting and hemostasis capabilities by its FINESSE generators, and an improved safety and "quality tissue specimen" by its patented disposable loop line. The current worldwide annual market exceeds $20 million. In 1998, UM will introduce other proprietary electrodes which provide significant advantages for excision of certain types of CIN. b) Other electrosurgery products. In addition to other applications for UM's LETZ electrosurgery system, UM has exploited its understanding of electrosurgery to develop the EPITOME scalpel. The major uses of EPITOME are most likely to be in non-gynecologic specialities such as otolaryngology, plastic and thoracic surgery where precise incisions and closely controlled excisions in highly vascular regions, with minimal thermal side effects, are important, along with the desire to minimize time in the surgical theatre. In areas such as these where UM does not have an established market presence, development of new product sales may be slow. c) Other surgical uses of LETZ equipment and supplies. The Company believes that similar surgical procedures will gain in 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 the products require a high level of user education and require purchasers to work against the trend of standardized general-purpose tool acquisitions. Sales may be limited by UM's lack of access to important distribution channels. d) Endoscopic procedures. Several of UM's products have utility in rapidly evolving endoscopic operative techniques. Examples are Pathfinder, a bulb irrigation device used to improve visualization at the surgical site; LUMIN, a disposable instrument to precisely position and retain the uterus during endoscopic procedures; and Epitome, a unique electrosurgical scalpel that allows very rapid and precise incisions with minimal thermal side effects. Because of the fragmentation of the markets and channels for distribution of these products, as well as UM's limited resources, methods of reaching users will continue to be primarily opportunistically driven. e) Incontinence therapy. Urinary incontinence is an under diagnosed and under reported but prevalent condition in women, especially physically active women 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 UM. 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 Liberty and other conservative accessory products. 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 treatment may require a greater time commitment with less revenue dollars than alternative surgical approaches for gynecologists prescribing it. f) Urology. In addition to UM's female urinary incontinence products and Pathfinder, of which the most prevalent use to date has been in removal of calculi in biliary and urinary tracts, UM manufactures the pumps used by several other medical companies selling vacuum erection devices for male erectile dysfunction. In this last area, UM depends on the marketing strengths of its OEM customers. 3) Critical Care/Blood Pressure Monitoring. This is a large, commodity-oriented intensive care/anesthesia monitoring market dominated by two major U.S. suppliers which 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 loss of Baxter as a dominant distribution partner at the end of 1996 represented a negative factor that adversely impacted 1997 performance. UM's strongest market position now is outside the U.S. where markets are more fragmented. UM's sales through distribution partners excluding Baxter, independent U.S. and international distributors and its limited U.S. direct sales team represented about 4% of the total annual worldwide end-user market in 1997. The worldwide market at end- user price for DPT and accessories exceeds $150 million. DISTRIBUTION. Another important success factor in a changing health care industry is "access" to customers. In particular, the U.S. hospital supplier environment has been consolidating as a result of group purchasing decisions and product bundling by large suppliers with diverse product lines. The number of channels and length of time required in evaluating new products for use in hospitals has grown dramatically in recent years. As a potential negative factor to future performance, as UM introduces new products, it may find itself limited with its current distribution channels, or unable to establish viable relationships with other medical companies who have adequate access to users. Historically, UM has sold its products, especially those relating to critical care, through independent distributors and other medical companies in both domestic and international markets. However, since 1991, the Company has developed a more focused direct sales organization in the United States with specialized distributors and its own directly employed sales force. The network of direct representatives and specialty distributors is employed to concentrate on select market applications for UM products and to provide proper customer training and support. In March 1998, the U.S. direct sales force consisted of 25 territory representatives and sales managers. Through the use of closely-controlled clinical education programs, the direct sales force positions UM to gain market leadership with its value-added products. UM's products serve niche market applications in obstetrics and gynecological procedures which are trending toward outpatient clinics and physician offices. Just three years ago, independent distributors in the U.S. represented more than half of UM's domestic Ob/Gyn business. In 1998, UM expects that U.S. distributors will represent less than 10% of its domestic business. The Company also sells products into commodity markets, or for applications which do not generate enough business to justify a direct selling effort, directly to other medical companies. Additionally, the Company sells component parts to medical companies for use in their product lines. This effort is simply an optimal utilization of manufacturing resources that are needed for UM's main businesses and does not affect the Company's marketing programs. Internationally, the Company sells its products through distributors or through OEM (other medical manufacturers) relationships. RESEARCH AND NEW PRODUCT DEVELOPMENT. New product development is a key to UM's growth plans. UM's current new product development projects are in three areas of focus: 1) obstetrics/ fetal monitoring, 2) female incontinence management, and 3) specialized procedures for the assessment and treatment of cervical/uterine disease. In terms of R&D output, UM has acquired or filed 18 new patent applications in the last five years. In the medical device industry, FDA premarketing approval submissions are an indicator of new product development activities for a given company. In that regard, in the last five years, 21 FDA premarketing approval submissions have been completed. Because of UM's reputation as a successful innovator, its financial strength and its established clinician user base, it enjoys a substantial flow of new product ideas. Internal development, joint development, product acquisitions, and licensing arrangements are all included as viable options in the investigation of opportunities. Only a small percentage of ideas survive feasibility screening. For internal development purposes, projects are assigned to a project manager who assembles an interdisciplinary, cross-functional development team. The team's objective is to have a clinically proven, manufacturable, and FDA released product ready for marketing by a specific date. Approximately twelve projects on the average, depending on the level of resources required, are underway at UM at any given time. More than 50% of assigned projects do not succeed in attaining a product which meets all of the Company's criteria. In particular, this includes a product that is highly reliable, easy to use, cost-effective, safe, useful and differentiated from the competition. Once a product is developed, tooled, fully tested and cleared for marketing by the FDA, there remains a reasonable probability it cannot be successfully marketed for any number of reasons, not the least of which is being beaten to the market by a competitor with a better solution, or not having access to users because of limitations in marketing and distribution resources. During 1997, the Company spent $958,166 on new product development, which was 4.0% of sales. Included in these expenses were amounts paid to outside entities for activities required for the conduct of clinical evaluations. During 1996 and 1995, new product development expenses were $1,387,088 (3.6% of sales) and $1,789,167 (4.3% of sales), respectively. Expenditures for R&D projects are expected to continue at approximately 4% of sales, 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. At December 31, 1997, the Company had 290 employees, 42 of which are located in Oregon, and 32 in Ireland. 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 that limit their ability to contribute to UM's programs. All professional employees sign a confidentiality and non-compete agreement as a condition of employment. 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 forty-five unexpired patents and patents pending, and is the licensee of certain other technology. There can be no assurance, however, that patents will be issued with respect to the pending applications or that the issued patents can be successfully defended. The ability of the Company to achieve critical mass in the marketplace depends in large part on the protection afforded by its patents. In cases where competitors introduce products that may infringe on UM's technology, the Company has an obligation to its shareholders to defend its intangible property. Although the cost of patent litigation reduces the Company's current performance, a successful defense of a core market franchise as represented by INTRAN, for example, represents many orders of magnitude of return in shareholder value. In addition, UM's practice of aggressively pursuing those who infringe its patents tends to discourage others from unfairly using UM's innovation. Patent infringement lawsuits are currently pending against two companies whom UM believes have infringed its INTRAN patents. Because of the Company's reliance on certain proprietary information, it obtains a confidentiality and non-compete agreement from its technical and sales employees, key management and consultants. As a matter of policy, UM has acquired and will continue to acquire the use of technology from third parties that can be synergistically combined with UM proprietary product ideas. During 1997, royalty expenses were $64,970. Royalties are included in cost of goods sold. Also as a matter of policy, UM licenses its proprietary technology to others in circumstances where that licensing does not directly compete with UM's own marketing direction. During 1997, the Company received $732,267 in royalty income, compared to $703,352 in 1996, and $652,894 in 1995. This income remains a material portion of UM's earnings and therefore UM's future performance also depends on the performance of other companies who license its technology. GOVERNMENT REGULATION. The Company's products are subject to regulation by the U.S. Food & Drug Administration ("FDA"), as well as other regulatory bodies globally. The FDA has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of medical products in the U.S. In addition, requirements exist under other federal laws and under state, local and foreign statutes that may apply to the manufacturing and marketing of the Company's products. 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 present products are Class I or Class II products and that the Company is in full compliance with all applicable performance standards as well as good manufacturing practices, record keeping and reporting. In 1994, UM received certification of its quality system under the ISO 9001/EN 46001 standards ("ISO" stands for "International Organization of Standardization"). EN 46001 is the European Community's effort to harmonize different national regulatory requirements for the development, sale, and manufacture of medical products. Because the ISO standards are in perpetual modification, UM remains on a continuous periodic audit schedule by its independent notified body in order to stay abreast of international regulatory standards. In early 1997, UM received ISO 9001/EN 46001 certification for its Ireland facility. UM has now received formal product certification allowing the use of the CE Mark (demonstrates proof of compliance with the European Community's product standards) for its blood pressure monitoring kits, electrosurgical generators, disposable loop and blade electrodes, and intrauterine catheters, representing most of its current product sales internationally. As of early 1998, UM is seeking additional CE Mark authorization on products with about $250,000 in international sales in 1997. SOURCES AND AVAILABILITY OF RAW MATERIALS. Most of the component parts which the Company purchases from various vendors are readily available from a number of sources. Alternate sourcing of various components is continually underway. Vendors are qualified by Corporate Quality Assurance. The Company has a vendor quality monitoring program that routinely checks all incoming material. EXPORTS. Revenues from foreign customers in 1997 were about $5,218,000 (21% of total sales), as compared to $9,739,000 (25% of total sales) in 1996, and $10,343,000 (25% of total sales) in 1995. Critical care products represented 85% of international sales in 1997, compared to 91% in 1996 and 96% in 1995. Non- Baxter international sales were about $5,010,000 in 1997 compared to $4,805,000 in 1996 and $4,315,000 in 1995. UM sees the international marketplace as one of the cornerstones of its growth strategy. UM is keenly aware that not only are international markets different from the U.S. market, but also that each country has its own set of driving influences that affects the dynamics of the nature of care given and medical devices used. In 1996, UM completed a new manufacturing facility in Athlone, Ireland. The facility offers a number of advantages: 1) from a marketing point of view, faster response to European Union customers, including a better understanding of customized needs, less costly distribution and duty- free access to over 350 million patients; 2) from a regulatory point of view, faster new product introductions; and 3) from a manufacturing point of view, reduced dependence on one manufacturing site and increased capacity at existing U.S. facilities. BACKLOG. As a marketer of primarily disposable products, the nature of UM's business necessitates being very responsive to customer orders and delivering products quickly. Thus an objective of UM is to minimize its shippable backlog. Backlog shippable in less than 60 days as of January 1, 1998, was approximately $0.6 million compared to $0.5 million as of January 1, 1997. SEASONAL ASPECTS. The Company's business is generally not affected by seasonal factors. PRODUCT LIABILITY RISK MANAGEMENT. No product liability lawsuits involving a significant injury have been filed against the Company for any of its products in the past six years, despite the substantially higher product usage rates over that time. The risk of product liability lawsuits is a negative factor in UM's business because UM's products are frequently used in inherently life threatening procedures to help physicians manage higher risk patients. Although UM's products are proven to be safe and efficacious over millions of uses, positive outcomes cannot always occur in the procedures where UM's products are used. In litigious cultures (such as 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. UM is self-insured for product liability risk and reserves funds against its current performance on an ongoing basis to provide for its future defense should any lawsuits be filed. FORWARD LOOKING INFORMATION This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by, and information currently available to, management. When used in this document, the words "anticipate," "believe," "project," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company respecting future events and are subject to certain risks, uncertainties, and assumptions, including the risks and uncertainties noted throughout the document. Although the Company has attempted to identify important factors that could cause the actual results to differ materially, there may be other factors that cause the forward statement not to come true as anticipated, believed, projected, expected, or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, projected, estimated, expected, or intended. General risk factors that may impact the Company's revenues include the market acceptance of competitive products, obsolescence caused by new technologies, the possible introduction by competitors of new products that claim to have many of the advantages of UM's products at lower prices, the timing and market acceptance of UM's own new product introductions, UM's ability to efficiently manufacture its products, including the reliability of suppliers, success in gaining access to important global distribution channels, budgetary constraints, the timing of regulatory approvals for newly introduced products, and third party reimbursement. Risk factors, in addition to the risks outlined in the previous paragraph and elsewhere in this report that may impact the Company's assets and liabilities, as well as cash flows, include risks inherent to companies manufacturing products used in health care including claims resulting from the improper use of devices and other product liability claims, defense of the Company's intellectual property, productive use of assets in generating revenues, management of working capital including inventory levels required to meet delivery commitments at a minimum cost, and timely collection of accounts receivable. Additional risk factors that may affect non-operating income include the continuing viability of the Company's technology license agreements, actual cash and investment balances, asset dispositions, and acquisition activities that may require external funding. ITEM 2 - PROPERTIES. Office and Manufacturing Facilities. The Company's current operations are located in one 100,000 square foot facility in Midvale, Utah, a suburb of Salt Lake City, a 20,000 square foot facility in Redmond, Oregon, and a 77,000 square foot facility in Athlone, Ireland. UM owns its property and facilities in Utah and Ireland, with the exception of a long-term lease on one section of its Midvale parking lot. The Oregon facilities are leased. The Ireland facility operates as a wholly-owned subsidiary under the name Utah Medical Products Ltd. The Company recently sold a building it previously owned in Lehi, Utah to an unrelated party. UM is a vertically-integrated manufacturing company. Capabilities include a machine shop for mold-making and building assembly tools and fixtures; plastics-forming including thermoplastic forming, injection molding and extrusion; sensor production; assembly of mechanical, electrical and electronic components; testing; and advanced packaging in clean room conditions. Facilities also include a well-equipped R&D lab, communications and information systems networked internationally, and administrative offices. ITEM 3 - LEGAL PROCEEDINGS. The Company may be a party from time to time in ordinary routine litigation incidental to its business. The outcomes of lawsuits which are currently pending are not projected to have a materially adverse effect on UM's financial condition or results of operations. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. PART II. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information. UM's common stock began trading on the New York Stock Exchange (symbol: UM) on December 26, 1996. It previously traded on the National Market System of the National Association of Securities Dealers Automated Quotation System (symbol UTMD). The following table sets forth the high and low sales price information as reported by NASDAQ and NYSE for the periods indicated: 1997 1996 ------------------ -------------------- High Low High Low 1st Quarter $ 13 $ 10 $ 23-1/2 $ 13 2nd Quarter 11-1/2 6 18 11-1/2 3rd Quarter 10-1/2 7 13 11 4th Quarter 9 6 1/2 14-1/2 11-1/2 Stockholders. The approximate number of beneficial stockholders of UM's common stock as of March 6, 1998 was 7,000. Dividends. The Company does not currently intend to pay cash dividends on its common stock in the foreseeable future. It is the present intention of the Company to use earnings to finance future growth, for selective infusions of technological, marketing or product manufacturing rights to broaden the Company's product offerings, and for continued share repurchases when the price of the stock remains extremely undervalued. ITEM 6 - SELECTED FINANCIAL DATA. Year Ended December 31 ------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Net Sales $24,271,640 $38,672,632 $42,038,082 $39,644,684 $36,999,059 Net Income 4,321,704 8,753,891 8,353,738 7,109,360 7,012,285 Diluted Earnings Per Share .51 .93 .83 .68 .60 Total Assets 31,459,236 28,915,685 33,330,379 27,365,183 28,344,113 Long-term Debt 5,562,933 None None None None Cash Dividends Per Common Share None None None None $.06 Quarterly Data for 1997 ------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales $5,173,394 $5,100,577 $7,018,810 $6,978,859 Gross Profit 2,707,600 2,671,207 3,678,705 3,548,921 Net Income 1,039,985 895,385 1,152,849 1,233,485 Earnings Per Share - Diluted .12 .10 .14 .15 Quarterly Data for 1996 ------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter Net Sales $9,967,590 $10,089,176 $9,993,639 $8,622,227 Gross Profit 4,595,059 5,005,227 4,989,655 4,533,439 Net Income 2,483,535 2,170,856 2,190,399 1,909,101 Earnings Per Share - Diluted .25 .23 .24 .21 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following comments should be read in conjunction with accompanying financial statements. Productivity of Assets and Working Capital. a) Assets. UM's 1997 year ending total assets increased by $2.5 million relative to the end of 1996 as a result of the mid-year acquisition of Columbia Medical, Inc (CMI). Year ending assets attributable to CMI were about $7.1 million including working capital, net (after accumulated depreciation) property and equipment, and net (after accumulated amortization) intangible assets of about $1.0 million, $1.0 million and $5.1 million, respectively. UM's total asset turns (ratio of sales to total assets) declined in 1997 because average total assets declined only 3%, while sales decreased 37%, both relative to 1996. Total asset productivity is important as a factor to help maintain return on shareholders' equity (ROE) at levels which will finance significant future growth. 1997 total asset turns of 0.8 were below management's targeted long term turn rate of 1.4. Although total 1997 year ending net property, plant and equipment assets (PP&E) remained about the same as at year-end 1996, PP&E in Utah and Ireland decreased $0.4 million and $0.6 million, respectively, to offset the $1.0 million increase by the CMI acquisition. The decreases resulted from the fact that in Utah depreciation of assets already in service exceeded purchases of new or replacement PP&E assets, and in Ireland from currency translation adjustments decreasing the U.S. dollar value of those assets. Since UM has in place the physical plant to support significant growth without major capital investment, the trend of depreciation exceeding new PP&E purchases should continue in 1998 for the businesses in which UM currently participates. Working capital declined by $1.6 million because of the changes in UM's business, including the CMI acquisition, but UM's current ratio improved to 4.4. Cash and investments declined $3.5 million as a result of tying UM's daily cash receipts and disbursements directly into its line of credit, in order to minimize the credit line balance. Inventories increased by $1.0 million, about two-thirds of which came from the CMI acquisition. The remaining inventory increase was significant in light of the substantial decrease in business activity. After the termination of the Baxter agreement, UM honored longer term purchase commitments with its vendors and sought to smooth the decline in its workforce. As a result, 1997 year ending average inventory turns declined to 2.2 times. In 1998, the Company plans to reduce its inventories substantially while increasing sales activity. 1997 year-ending accounts receivable (A/R) balances increased $0.3 million relative to the end of 1996, and, at an average aging of 54 days based on 4Q 1997 shipment activity, remained within management's aging target. A/R over 90 days from invoice date were less than 1% of total A/R. As UM continues to increase the share of its business invoiced directly to end users, particularly hospitals, in contrast to distributors or OEM's, maintaining A/R at current aging levels will become increasingly difficult. In 1998, the planned reduction in inventory by itself should be sufficient to finance the increase in A/R resulting from increased sales activity. b) Liabilities. Current liabilities (C/L) at year end 1997 were down 41% from the prior year end, excluding the reserve for litigation expenses. This reflects 19% lower sales activity in 4Q 1997 relative to 4Q 1996, and also lower raw material purchasing activity at the end of 1997 as a result of inventory reduction programs. The litigation reserve is an accumulated accrual against the Company's income performance, anticipating the costs of future product liability lawsuits, patent infringement litigation and other litigation that is an inherent consequence of doing business in our society. The reserve increased $0.1 million in 1997 because UM accrued that much more against its 1997 performance than it experienced in actual litigation expenses. Management believes that the current accrual rate plus the $762,000 reserve balance will be sufficient to fund known pending or planned litigation. UM established a credit line in the form of a long-term revolving promissory note with its bank on April 4, 1997. Under the note, the Company may borrow up to $10 million at a floating interest rate tied to LIBOR or the Prime Rate at UM's election. Amounts borrowed under the note are unsecured. The note terminates on March 25, 1999. At March 6, 1998, the balance on the note is about $4.6 million at a current interest rate of approximately 7.13% per annum. Other than the credit line, UM has no long term debt obligations. UM's total debt ratio (including both current and long-term liabilities as a percentage of total assets) at the end of 1997 was 28%. Results of Operations. a) Revenues. In 1997 as a whole, revenues were down 37% from 1996. The decline in business with Baxter represented 68% of the decline. In the first half (1H) of 1997, sales were down 49% relative to the 1H 1996. For the 2H 1997, sales were down 25% from the 2H 1996. The decline in Baxter revenues represented 85% of the 2H decline. UM divides revenues into three categories: 1) obstetrics, comprised of a full line of equipment and supplies used in hospitals' labor & delivery departments for fetal monitoring, operative vacuum delivery, umbilical cord management, and meconium aspiration, as well as other needs; 2) gynecology /urology /electrosurgery (ES) equipment and tools used especially for a gynecologic electrosurgical procedure called LETZR, but also other electrosurgical procedures including endoscopic procedures, and other non- gynecological procedures such as tonsillectomies by otolaryngologists, abdominal reconstructions and breast reductions by plastic surgeons, mammary artery grafts by thoracic surgeons, nevus excision by dermatologists, and tumor excisions by all surgeons; other tools used in other minimally invasive surgical procedures including diagnostic laparoscopies; urinary incontinence management devices; and urology pumps; and 3) disposable components used in critical care applications, especially invasive blood pressure and ICP monitoring, but also disposable respiratory products. Revenues from contract molding are also included in this "critical care" revenue category. UM achieves critical marketing mass through innovation in developing and commercializing proprietary products that become the most recognized cost- effective solution for certain clinical needs. UM's primary revenue contributors generally enjoy a dominant market share and have important product features protected by patents. In obstetrics, the Company owns eight fetal monitoring patents with two others pending, five vacuum extraction patents and four umbilical cord management patents. In gynecology /urology /ES, the Company owns four patents with four others pending. In critical care applications, the Company owns 14 patents, several of which are licensed to other medical companies. Sales of obstetrics products in 1997 were $11,823,000 compared to $15,802,000 in 1996, and $16,228,000 in 1995. In 1997, obstetrics product revenues declined $4.0 million relative to 1996 due to two competitors taking a lower pricing strategy against INTRAN, with new products UM believes are infringing the Company's patents. In 1H 1997, the INTRAN sales decline was amplified by depletion of inventory by terminated distributors and UM repurchases of distributor inventory. In 1997, sales of INTRAN represented 85% of obstetrics sales, compared to 98% in 1996. In the 2H 1997, due to the acquisition of CMI, sales of INTRAN represented 77% of obstetrics sales. Also, beginning in 3Q 1997, UM introduced several versions of INTRAN PLUS designed to address user preferences in tip size, zero switch location and amniotic fluid visualization. Obstetrics product sales in 2H 1997 were $7.4 million, compared to $4.4 million in 1H 1997. As a percentage of total UM sales, obstetrics product revenues represented 49% in 1997 compared to 41% in 1996. Gynecology /urology /ES product sales were $3,859,000 in 1997 compared to $3,534,000 in 1996 and $2,982,000 in 1995. Several new products aided the growth in 1997 including Epitome, a unique ES scalpel, Liberty, a conservative therapy for female urinary incontinence, Pathfinder Plus , an irrigation device for endoscopic procedures, and CMI's urology pumps. In 1997, this category of revenues represented 16% of total UM sales compared to 9% in 1996. In contrast to UM's other two product categories, a number of the products in this category are designed for use in physicians' offices or outpatient clinics, and therefore represent important diversification for UM's business. Critical care revenues were $8,589,000 in 1997 compared to $19,337,000 in 1996 and $22,828,000 in 1995. Included in this category are transducers and other components used in blood pressure monitoring sold to Baxter, which sales in 1997 were $1,286,000 compared to $11,132,000 in 1996 and $14,996,000 in 1995. The decline in sales to Baxter represented 92% of the decline from 1996 critical care sales, and 96% of the decline from 1995 critical care sales. The silver lining in this cloud is the fact that UM no longer has one customer that represents more than 37% of its total sales. Sales to Baxter, still the largest UM customer, represented 5% of UM's total sales in 1997. Because of UM's automated assembly capabilities, and established overseas customer base, management expects to be able to sustain a reasonable base of business for its critical care products that will continue to contribute to UM's profitability. UM divides its distribution channels into "direct" and "OEM" channels. "Direct sales" are sales of UM's products by its own employed sales representatives, by independent commissioned representatives, or by stocking distributors in a particular geographic region. Increasing direct sales are an indication of the Company's ability to build its own marketing franchise. "OEM sales" are sales of UM products by other medical device manufacturers either as a component of a kit, or as a repackaged stand-alone product into markets not served by UM's own direct sales resources. In 1997, global direct sales represented about 80% of total sales compared to about 63% in 1996, and 58% in 1995. In the U.S., direct sales represented 86% of sales in 1997 compared to 73% in 1996 and 68% in 1995. By product line category, dividing global sales into the two distribution channels of direct and OEM, yields the following: 1) obstetrics; 98% direct and 2% OEM in 1997, and 100% direct in both 1996 and 1995; 2) gynecology /urology /ES; 90% direct and 10% OEM in 1997, 95% direct and 5% OEM in 1996; and 96% direct and 4% OEM in 1995; and 3) critical care; 52% direct and 48% OEM in 1997, 27% direct and 73% OEM in 1996; and 23% direct and 77% OEM in 1995. Sales to Baxter are part of critical care OEM sales. Previous years' foreign sales included a substantial portion to Baxter divisions overseas. Including Baxter sales, foreign sales were $5,218,000 in 1997, compared to $9,739,000 in 1996 and $10,343,000 in 1995. Excluding Baxter sales, foreign sales were $5,009,000 in 1997, compared to $4,804,000 in 1996 and $4,315,000 in 1995. Foreign sales comprised 22% of total non-Baxter sales in 1997, compared to 17% in 1996 and 15% in 1995. Excluding sales to Baxter, critical care products represented 84% of foreign sales in 1997 compared to 83% in 1996 and 92% in 1995. In 1998, UM sales should increase due to having the benefit of CMI sales for the entire year compared to one half year in 1997. UM intends to continue marketing programs to expand sales of its newer products Epitome, Liberty, Cordguard, and Filtresse, as well as introduce other Ob/Gyn niche products currently in development and, if affordable, acquire synergistic products from other companies. UM continues to believe it has substantial sales potential for its existing products in international markets, and therefore plans to continue to commit resources for international business expansion. b) Gross profits. Gross profit margins (profit after subtracting costs of manufacturing products from revenues) in 1997 were 51.9% compared to 49.4% in 1996 and 46.4% in 1995. The 1997 improvement in average gross profit margin was achieved from changes in the product mix and distribution mix. In terms of product mix, sales of UM's Ob/Gyn products increased to 65% of total sales in 1997 from 50% of total sales in 1996, and 46% of sales in 1995. In terms of distribution mix, sales in the U.S. by the Company's directly employed representatives increased to about 81% of total domestic direct sales in 1997, compared to 58% in 1996 and about 50% in 1995. The distribution mix change is a result of terminating stocking distributors, and replacing them with employed sales representatives. Average selling prices increase because fewer products are sold to distributors at a discount, and therefore gross margins increase as long as manufacturing costs do not increase in the same proportion. Working against gross margin improvements in 1997 was the fact that manufacturing overhead (manufacturing costs excluding the costs of direct materials and direct labor, e.g. depreciation of PP&E, utilities, engineering, QA and supervision) were not reduced in proportion to the decline in sales. If UM had reduced manufacturing overhead costs in proportion to its decline in sales, that is, had 1997 manufacturing overhead expenses as a percentage of sales remained at 1995 and 1996 levels, average gross margins for 1997 would have been 56%. UM has improved its gross margins as a percentage of sales every year for the last twelve years. Additional gross margin improvements can be achieved if UM can increase sales activity to better absorb its overhead expenses. On the other hand, management expects continued competitive pressure for its established products that may reduce average selling prices and therefore put additional pressure on gross margins in 1998. c) Operating Profits. Operating profits, or income from operations, are the profits achieved after subtracting operating expenses from gross profits. Operating profits in 1997 were $5,559,000 compared to $11,809,000 in 1996 and $11,693,000 in 1995. Even though 1997 gross margins were up as a percentage of sales, operating profits were down 53% (compared to sales down 37%). UM did not decrease operating expenses in proportion to the sales decline in 1997 because of management's belief that certain spending levels were necessary to increase revenues in future years. Although 1997 expenses in dollars decreased by $0.3 million relative to 1996 and by $0.7 million relative to 1995, operating expenses increased to 29.0 % as a percentage of revenues in 1997 compared to 18.9% of revenues in 1996 and 18.5% of revenues in 1995. Operating expenses are subdivided into sales, general and administrative expenses (SG&A) and research and development expenses (R&D). UM further divides SG&A into the two categories of sales and marketing expenses (S&M) and general and administrative expenses (G&A). SG&A expenses in 1997 increased to 25.1% of revenues compared to 15.3% in 1996 and 14.3% in 1995. There were three primary causes for the substantial increase in SG&A expenses as a percentage of sales: 1) a substantial increase in the proportion of UM's business that is direct versus OEM, combined with the distribution mix change from distributors to directly-employed representatives in UM's direct portion of its business; 2) amortization of goodwill associated with the July CMI acquisition, and 3) spreading relatively fixed expenses over fewer revenue dollars, for example, spending on new product marketing programs, outside legal and accounting fees, and costs associated with being a publicly- traded company, among others. Because of the first two fundamental changes to UM's business expenses, management expects future SG&A expenses as a percentage of sales to remain closer to the 1997 rate than the earlier 1996 and 1995 rates, even as sales volume increases. UM's S&M expenses are driven primarily by the direct sales portion of its business. Although UM desires to increase its OEM customers, particularly for its blood pressure monitoring products and other products which serve markets that are outside UM's sales focus, management expects that the direct portion of UM's business will grow faster than the OEM portion, which represented about 20% of total sales in 1997. The distribution mix changes that had a positive impact on gross margins in 1997 had a negative effect on selling expenses. In 1997, UM increased its direct sales force headcount by 20%. Management believes that achieving closer contact with end-users of its specialty products, as well as having closer control of how its sales resources spend limited time, are key elements to implementing its value-added niche marketing strategies. In 1998, UM has terminated an additional distributor, which should yield sales to stocking distributors as a percentage of total direct U.S. sales less than 10% in 1998. Although G&A expenses declined $0.1 million in 1997 relative to 1996, they did so under greater requirements. Included in the G&A expenses were amortization of goodwill related to the CMI acquisition of $148,300, plus other G&A expenses in Ireland and Oregon of $0.4 million that were not present in 1996. In 1998, UM plans to hold its G&A dollar expenses in Utah and Ireland consistent with 1997, but the addition of G&A expenses related to CMI for a whole year added together with amortization of goodwill at an annual rate of about $340,000 will result in G&A expenses as a percentage of sales approximately the same in 1998 as in 1997. R&D expenses were 3.9% of sales in 1997 compared to 3.6% of sales in 1996 and 4.3% of sales in 1995. UM's consistent investment of about 4% of annual sales in R&D has yielded twenty-one 510(k) premarketing submissions to the FDA over the last five years, a reasonable indicator of new product development efforts. In 1997, UM submitted four new 510(k) applications to the FDA. In addition, UM has filed or acquired twenty product patent applications over the last five years, including nine in 1997. The Company employs specialist 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. For example, UM began working in cooperation with Mayo Clinic in May 1997 to develop and commercialize an advanced endometrial tissue sampling approach designed by R. Stuart Fowler, M.D., Mayo Clinic, Scottsdale, Arizona. UM expects to maintain its commitment to R&D in 1998 consistent with the past as a percentage of sales. d) Non-operating income. Non-operating income includes royalties from licensing UM's technology to other companies, interest and capital gains from investing the Company's cash (offset by interest on UM's debt obligations), and gains or losses from the sale of assets. Non-operating income of $1.2 million made a substantial contribution to 1997 performance. Non-operating income in 1997 represented about 18% of pretax income, compared to 13% in 1996 and 9% in 1995. Non-operating income in 1997 was about $0.6 million less than 1996 because of an extraordinary payment in 1996 relating to the use of UM's technology. Non-operating income in 1997 was slightly higher than in 1995. Items in 1997 which were different from recent prior years included interest expense of $250,000 from UM's use of a credit line to finance the purchase of CMI, and a $196,000 gain from the sale of a small property in Lehi, Utah. Royalties from other medical device companies continue to constitute a majority of the non-operating income. Royalties received vary from year to year depending on the interest in UM's patents and/or success of other companies in selling licensed product concepts. Barring new technology licensing or other extraordinary transactions, UM's management estimates that non-operating income in 1998 will be lower than in 1997, due primarily to continued interest expense on debt balances and no anticipated sales of property similar to 1997. e) Earnings before income taxes. Earnings before income taxes (EBT) result from adding UM's non-operating income to its operating profits. EBT, as a percentage of sales, were 27.9% in 1997 compared to 35.3% and 30.6% in 1996 and 1995, respectively. Despite much lower sales volume, UM was able to maintain very high before tax profitability when compared with other publicly- traded companies' performance. Continued gross margin improvements, tight controls on operating expenses and excellent non-operating income were the keys. Except for the extraordinary year of 1996, UM's historical best year of profitability, the Company achieved profitability consistent with previous years in terms of earnings before taxes as a percentage of sales in the range of 28- 30%. f) Net income. Net income is EBT minus income taxes. UM's effective income tax rate was 36.2% in 1997 compared to 35.8% in 1996 and 35.0% in 1995. UM's effective rate includes federal and state income taxes in the U.S., as well as taxes overseas. The increased tax rate in 1997 reflects the non- deductibility of goodwill for tax purposes associated with the CMI acquisition, a difference in the distribution of state taxes, a smaller amount of non- operating income coming from tax-exempt securities, and other fluctuations associated with the use of a foreign sales corporation and R&D tax credits. The Ireland operation did not generate enough profits at a lower income tax rate to help reduce the overall effective rate in 1997. Net income of $4.3 million in 1997 on $24.3 million in sales ranks in the top profitability tier of U.S. publicly-traded companies. UM generates profits equivalent in magnitude to profitable companies three times its size in revenues. Net income in 1997 was $4,322,000, compared to $8,754,000 in 1996 and $8,354,000 in 1995. Although an unfavorable comparison, the two years of 1996 and 1995 were by far the most profitable in UM's history, together representing one-half of the cumulative profits generated over UM's prior 16 years of business. As further perspective, in the four years of 1993-1996, UM generated $31.2 million in net profits in comparison to $20.3 million generated in the fourteen years of 1979-1992. Management believes net profits will grow in 1998. g) Earnings per share (EPS). 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 EPS for 1997 were $.51 compared to $.93 for 1996 and $.82 for 1995. Ending weighted average common shares in 1997 assuming dilution (the number used to calculate diluted EPS) were 8,495,415 compared to 9,451,581 and 10,042,430 shares in 1996 and 1995, respectively. Actual outstanding common shares as of December 31, 1997 were 8,305,036. The dilution calculation added about 51,000 shares to basic shares outstanding in 1997, compared to about 181,000 in 1996 and 190,000 in 1995. h) Return on shareholders' equity (ROE). ROE is the portion of net income retained by UM to internally finance its growth, divided by average accumulated shareholders' equity during the period. This ratio determines how fast the Company can afford to grow without external financing that would dilute shareholder interests. For example, a 30% ROE will support 30% growth in revenues. ROE in 1997 at 18% was below management's target of 25%. The primary factor that lowered ROE in 1997 was the low number of asset turns, that is, the level of sales activity relative to total assets was too low. Including 1997, ROE has averaged 30% over the last twelve years. Cash Flows and Capital Resources. a) Cash flows. EBDIT (EBT, adjusted for non-cash depreciation and amortization expenses, asset write-offs, and interest expense) are the measure of UM's ability to generate cash. 1997 EBDIT were $8.3 million, or as a ratio of sales, 34%. EBDIT has averaged 34% of sales over the last five years. Generating cash at a rate of one-third of sales provides UM with a powerful financial engine for growth. The Company obtained additional cash in 1997 through the use of its credit line, which as of the end of the year, provided an additional $5.6 million in cash to facilitate the timing of the CMI acquisition. Cash (and equivalent) balances were $1.0 million at the end of 1997, a decrease of $3.5 million from December 31, 1996. The two major uses of cash in 1997 were the CMI acquisition which used about $7.3 million in cash after consolidating with CMI's cash accounts, and repurchases of UM's stock in the amount of $5.4 million. The $7.3 million for CMI was used for acquiring about $1.0 million in non-cash working capital (inventories and receivables less payables), $1.1 million in PP&E (primarily molds and molding presses), and $5.2 million in intangible assets (goodwill, acquisition fees, and patents). Net working capital changes excluding CMI used $1.2 million, primarily as a reduction in current liabilities. b) Capital expenditures. In addition to the $1.1 million in P&E purchased as part of the CMI acquisition, UM also spent another $35,000 in Oregon to make communications and computer equipment compatible with Utah. UM expended $777,000 in Utah and $407,000 in Ireland during 1997 for P&E, including improvements and capitalized repairs to facilities, new and replacement furniture, manufacturing equipment and tooling required to sustain operations, as well as additional communications and computer equipment. UM realized $9,000 from the sale or disposal of P&E assets in 1997. For reference, depreciation expense of P&E in 1997 for CMI, Utah and Ireland was $121,000, $1,010,000, and $170,000, respectively. In addition to the $5.2 million in intangible assets (including goodwill) purchased as part of the CMI acquisition, UM expended $0.4 million on the acquisition of patents and trademarks for potential new products. For reference, amortization expense of intangibles in 1997 for CMI and for Utah was $160,000 and $54,000, respectively. Excluding the possibility of additional acquisitions of new products, technology or marketing rights, UM plans for capital expenditures in 1998 to be less than current depreciation rates. c) Financing activities. Financing activities in 1997 netted a cash increase of $399,000 compared to using cash of $13,982,000 in 1996 and $3,080,000 in 1995. The Company repurchased its own common stock during 1997 in the amount of $5,390,000, compared to $14,583,000 in 1996 and $4,154,000 in 1995. Offsetting the 1997 repurchases, UM received $227,000 from the issuance of 29,500 shares of stock due to exercises of employee options. On April 4, 1997, UM signed a long-term revolving promissory note with its bank under which the Company can borrow up to $10,000,000 at a floating interest rate tied to LIBOR or the Prime Rate, at UM's election. Amounts borrowed under the note are unsecured and are due March 25, 1999. The note provided $5,563,000 at year end 1997. Management believes that future income from operations and effective management of its working capital assets will provide the liquidity needed to finance its internal growth plans. In addition to capital expenditures supporting operations, UM plans to use cash during the remainder of 1998 to reduce existing debt incurred in the acquisition of CMI. Additionally, the credit line may be used for liquidity for selective infusions of technological, marketing or product manufacturing rights or additional acquisitions to broaden the Company's product offerings. Management's Outlook. Although UM's established business from prior years dramatically contracted in 1997, management is looking forward to 1998 with renewed optimism. The Baxter DPT business has gone away. The full financial impact of the change was realized as expected in 1997. On a positive note, UM no longer has a huge dependence on one customer. The balance of UM's critical care product sales appear stable, particularly overseas where DPT sales increased by 6% in 1997 compared to 1996. In 1998, UM will continue to recruit and support OEM marketing partners in the U.S. with the knowledge it can leverage its ability to cost effectively produce the commodity blood pressure monitoring DPTs and other components without additional capital investments. The more important loss in 1997 business, in terms of potential impact on long term success, resulted from the change in the competitive landscape with respect to UM's core obstetrical IUP product, INTRAN. Performance in 2H 1997 demonstrated that Intran sales volume lost has been essentially replaced with synergistic obstetrics products via the acquisition of CMI. With the help of the CMI acquisition, UM now offers the most complete line of supplies needed in labor & delivery departments of hospitals. In prior years, Intran sales represented more than 80% of UM's Ob/Gyn sales, representing a very high level of dependence on one product. After the CMI acquisition, Intran represented less than 60% of UM's Ob/Gyn sales even though IUPC sales in 2H 1997 were 30% higher than 1H 1997. UM's direct U.S. sales team demonstrated its ability to communicate the value of reliability in 2H 1997 by successfully stopping further erosion of Intran's dominant IUPC market share by cheaper competing products. Knowledgeable physicians do not wish to increase their risk of a negative surprise in an inherently risky birthing procedure in order to save a few dollars. Ironically, experience has shown a higher cost from increased multiple insertions of new catheters of the cheaper products may result when readings appear inaccurate. In 1998, the sales team will continue to aggressively reinforce the superiority of the clinical benefits of UM's Intran Plus, augmented by several new versions designed to address differences introduced by new competitors. UM believes these competitors are infringing its patents as alleged in pending litigation being pursued by UM to protect its patented technology. The Intran options allow physician choices of tip size, zero button location and amniotic fluid visualization. In addition, UM expects greater activity in 1998 toward resolving UM's claims of patent infringement against low priced competitors. If the Federal Courts support UM's position, the outcome will be significant monetary awards for UM. UM's IUPC patents have about eight years of life remaining. UM believes that the next generation of fetal monitoring should help physicians more clearly identify a sustained trend of decreasing fetal tissue pH indicating an increased risk of metabolic acidosis, the persistent physiologic condition most indicative of a fetus in trouble. The corollary would be allowing a physician to recognize transitory respiratory low pH, or non- decreasing pH in conjunction with a non-reassuring FHR pattern, thereby allowing labor to continue without an unnecessary C-section. The clinical elegance of the UM fetal pH measurement system in development adds a more timely fetal pH assessment into the same probe that currently measures fetal heart rate, the current standard of electronic fetal monitoring. The optical chemistry between tissue and the probe is patented. In 1998, UM will accelerate investment in this key project in order to overcome the remaining technical challenges, and begin human clinical trails to establish the safety and efficacy of the system. The niche markets for which UM's gynecology /urology /electrosurgery products are targeted have proven to require many and varied marketing initiatives. In many cases, they require individual user training together with clear evidence of improved outcomes. Although 1997 sales of UM's new products Liberty and Epitome increased by over 50% relative to 1996, growth in dollar terms remained modest. In 1998, UM will continue to look for ways to increase the rate of adoption of its newer products, and for additional specific Ob/Gyn clinical needs where innovations can become the most recognized cost-effective solution. The Fowler Endocurette for uterine biopsies is an example of such a device. UM plans to begin marketing the Endocurette during 1998 after receiving FDA premarketing concurrence. UM will continue to maintain a long-term perspective and seek to strengthen its disease management focus with Ob/Gyn physicians who it believes are ultimately responsible for their patients' well- being. Year 2000 Compliance With respect to the potential impact of the turn of the century date change, UM has reviewed the processing routines used in all its electronic products for any potential faults and has determined that all products are "Century Date Independent." The date change at the beginning of the year 2000 will have no effect on the use or operation of UM's products. The software that UM uses internally to control its business operations along with some equipment is not currently fully year 2000 compliant. The Company intends to have such software and equipment year 2000 compliant by late 1999, and does not anticipate any interruptions to its business operations. It is expected that costs associated with addressing this issue will not be material to UM's business, operations or financial condition. Accounting Policy Changes The Company has, during 1997, adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Accordingly, these statements, including historical information, present basic EPS and diluted EPS, instead of primary and fully diluted EPS as previously required. Note 9 of the Notes to Consolidated Financial Statements presents further information regarding SFAS No. 128. The Company, during 1996, adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized in the financial statements. Note 8 of the Notes to Consolidated Financial Statements presents net income and earnings per share as if the fair value provisions of SFAS No. 123 had been applied. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See index to financial statements and financial statement schedule at page F-1. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On November 18, 1997, UM determined not to engage Deloitte & Touche LLP, Salt Lake City, Utah ("D&T SLC") as the Company's principal accountant to audit and report on the Company's financial statements for the year ended December 31, 1997. Significantly increased fees (bid at least 50% higher than for the previous year, despite UM's decreased business activity) is the reason for the change. The report of D&T SLC on UM's financial statements consisting of consolidated balance sheets as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996, did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting principles. In connection with the Company's two most recent fiscal year audits and any subsequent interim period preceding the dismissal of D&T SLC, there were no disagreements with D&T SLC or reportable events on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreement in connection with its report. In connection with its audit of UM's 1996 financial statements, D&T SLC noted no matters involving the internal control structure and its operations that they considered to be material weaknesses. On November 18, 1997, UM engaged Tanner + Co., Salt Lake City, Utah as independent accountant and auditor to report on UM's financial statements for the year ended December 31, 1997. No consultations occurred between UM and Tanner + Co. during the two most recent fiscal years and any subsequent interim period prior to Tanner + Co.' s appointment regarding either (i) the application of accounting principles to a specific completed or contemplated transaction, the type of audit opinion that might be rendered on UM's financial statements, or other information provided that was considered by the Company in reaching a decision as to an accounting, auditing, or financial reporting issue, or (ii) any matter that was the subject of disagreement or a reportable event requiring disclosure under Item 304(a)(1)(v) of Regulation S-K. PART III. ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information from the definitive proxy statement of the registrant under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: General," "Directors and Nominees," "Executive Officers," and "Compliance with Exchange Act Requirements," is incorporated herein by reference, expressly excluding the material set forth under the subcaptions "Report of the Compensation and Option Committee" and "Stock Performance Chart." ITEM 11 - EXECUTIVE COMPENSATION. The information from the definitive proxy statement of the registrant under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Executive Compensation," "Compensation and Option Committee Interlocks and Insider Participation," "Employment Agreements, Termination of Employment, and Change in Control," and "Director's Compensation" is incorporated herein by reference, expressly excluding the material set forth under the subcaptions "Report of the Compensation and Option Committee" and "Stock Performance Chart." ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information from the definitive proxy statement of the registrant under the caption, "PROPOSAL NO. 1. ELECTION OF DIRECTORS: Security Ownership of Management and Certain Persons" is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV. ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report or incorporated herein by reference. 1. Financial Statements. (See Index to Consolidated Financial Statements at page F-1.) 2. Supplemental Schedule. Financial Statement Schedules are omitted because they are inapplicable or the required information is otherwise included in the accompanying Financial Statements and the notes thereto. 3. Exhibits. SEC Exhibit Reference Number Number Title of Document Location - ------- -------- ------------------------------------------ --------------- 1 2 Stock Purchase Agreement, dated as of July Incorporated by 20, 1997 between Utah Medical Products, Reference(1) Inc., and Columbia Medical & Surgical, Inc. Articles of Incorporation and Bylaws 2 3 Articles of Restatement of the Articles of Incorporated by Incorporation Reference(2) 3 3 Bylaws Incorporated by Reference (2) 4 4 Rights Agreement dated as of October 28, Incorporatedby 1994, between Utah Medical Products, Inc., Reference (2) and Registrar and Transfer Company 5 4 Designation of Rights, Privileges, and Incorporated by Preferences of Series "A" Preferred Stock 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 Utah Medical Products, Inc., 1994 Employee Incorporated by Incentive Stock Option Plan* Reference (2) 9 10 Utah Medical Products, Inc., 1993 Directors' Incorporated by Stock Option Plan* Reference (2) 10 10 Utah Medical Products, Inc., Performance Incorporated by Option Plan* Reference (2) 11 10 Revolving Loan Agreement, dated April 4, This Filing 1997 between Utah Medical Products, Inc. and First Security Bank, N.A. 12 21 Subsidiaries of Utah Medical Products, Inc. This Filing 13 23 Consent of Tanner + Co., Company's This Filing independent auditors for the year ending December 31, 1997 14 23 Consent of Deloitte & Touche LLP, Company's This Filing independent auditors for the years ending December 31, 1996 and December 31, 1995 15 27 Financial Data Schedule This Filing * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). (1) Incorporated by reference from the Company's current report on form 8-K/A dated August 7, 1997. (2) Incorporated by reference from the Company's registration statement on form S-8 filed with the Commission effective February 10, 1995. (3) Incorporated by reference from the Company's annual report on form 10-K filed with the Commission for the year ended December 31, 1992. (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned this 24th day of March, 1998. UTAH MEDICAL PRODUCTS, INC. By /s/ Kevin L. Cornwell Chairman and CEO By /s/ Kevin L. Cornwell Secretary and CFO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 24th day of March, 1998. By /s/ Stephen W. Bennett, Director By: /s/ Kevin L. Cornwell, Director By: /s/ Ernst G. Hoyer, Director By: /s/ Perry L. Lane, Director By: /s/ Barbara A. Payne, Director UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements - -------------------------------------------------------------------------------- Page Report of Tanner + Co. F-2 Report of Deloitte & Touche LLP F-3 Consolidated balance sheet F-4 Consolidated statement of income F-5 Consolidated statement of stockholders' equity F-6 Consolidated statement of cash flows F-8 Notes to consolidated financial statements F-10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-1 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES 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, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Utah Medical Products, Inc. at December 31, 1996 and for the two years then ended, were audited by other auditors whose report dated January 24, 1997 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Utah Medical Products, Inc. as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. TANNER+Co. Salt Lake City, Utah January 16, 1998 F-2 INDEPENDENT AUDITORS' REPORT Utah Medical Products, Inc.: We have audited the accompanying consolidated balance sheet of Utah Medical Products, Inc. and subsidiary as of December 31, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Utah Medical Products, Inc. and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche Salt Lake City, Utah January 24, 1997 F-3 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, - --------------------------------------------------------------------------------
Assets 1997 1996 ------ ---------------------------- Current assets: Cash $ 951,084 $3,038,956 Investments available for sale (note 3) - 1,458,543 Accounts receivable, net (note 2) 4,653,805 5,010,842 Inventories (note 2) 5,792,058 4,750,442 Prepaid expenses and other current assets 107,203 91,273 Deferred income taxes (note 7) 548,230 595,639 ---------------------------- Total current assets 12,052,380 14,945,695 Property and equipment, net (note 4) 13,340,105 13,367,597 Other assets, net (note 2) 6,066,751 602,393 ---------------------------- Total $31,459,236 $28,915,685 ============================ - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 843,199 $1,885,743 Accrued expenses (note 2) 1,840,357 2,054,096 Deferred revenue (note 10) 85,600 135,600 ---------------------------- Total current liabilities 2,769,156 4,075,439 Note payable (note 5) 5,562,933 - Deferred income taxes (note 7) 489,989 369,759 Deferred revenue (note 10) 1,774 87,492 ---------------------------- Total liabilities 8,823,852 4,532,690 ---------------------------- Commitments and contingencies (note 6) - - Stockholders' Equity: 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 8,305,036 shares in 1997 and 8,785,736 shares in 1996 83,050 87,857 Unrealized gain on investments available-for- sale, net of tax - 58,494 Cumulative foreign currency translation adjustments (656,345) 217,444 Retained earnings 23,208,679 24,019,200 ---------------------------- Total stockholders' equity 22,635,384 24,382,995 ---------------------------- Total $31,459,236 $28,915,685 ---------------------------- See accompanying notes to financial statements. F-4 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statement of Income Years Ended December 31, - --------------------------------------------------------------------------------
1997 1996 1995 ---------------------------------------------- Net sales (notes 10 and 12) $24,271,640 $38,672,632 $42,038,082 Cost of sales (note 10) 11,665,207 19,549,252 22,549,039 ---------------------------------------------- Gross margin 12,606,433 19,123,380 19,489,043 Expenses: Selling, general, and administrative 6,089,244 5,926,897 6,006,499 Research and development 958,166 1,387,088 1,789,167 ---------------------------------------------- Income from operations 5,559,023 11,809,395 11,693,377 Other income (expense): Dividend and interest income 85,081 453,918 584,960 Royalty income 732,267 703,352 652,894 Interest expense (249,852) - - Other, net 648,373 677,067 (79,326) ---------------------------------------------- Income before income tax expense 6,774,892 13,643,732 12,851,905 Income tax expense (note 7) (2,453,188) (4,889,841) (4,498,167) ---------------------------------------------- Net income $4,321,704 $8,753,891 $8,353,738 ---------------------------------------------- Earnings per common share (basic) (notes 8 and 9) $.51 $.93 $.83 ---------------------------------------------- Earnings per common share (diluted) (notes 8 and 9) $.51 $.93 $.82 ----------------------------------------------
- -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-5 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years Ended December 31, 1997, 1996, 1995 - -------------------------------------------------------------------------------- Unrealized Gain (loss) on Cumulative Investments Foreign Additional Available-for- currency Common Stock Pain-In Sale, Net of Translation Retained ------------------------ Shares Amount Capital Tax Adjustments Earnings ----------------------------------------------------------------------- Balance, January 1, 1995 9,993,559 $99,935 $ - ($101,815) $ - $23,442,200 Shares issued upon exercise of employee stock options for cash 124,840 1,248 - - - 811,179 Shares issued upon exercise of employee purchase rights 39,668 397 - - - 260,736 Change in unrealized gain (loss) on investments available-for-sale - - - 134,522 - - Tax benefit attributable to appreciation of common stock related to stock options and purchase rights - - 355,779 - - - Common stock purchased and retired (367,130) (3,671) (355,779) - - (3,794,112) Net income - - - - - 8,353,738 ----------------------------------------------------------------------- Balance, December 31, 1995 9,790,937 97,909 - 32,707 - 29,073,741 Shares issued upon exercise of employee stock options for cash 68,599 686 - - - 600,967 Change in unrealized gain (loss) on investments available-for-sale - - - 25,787 - - Foreign currency translation adjustments - - - - 217,444 - Tax benefit attributable to appreciation of common stock related to stock options and purchase rights - - 163,164 - - - Common stock purchased and retired (1,073,800) (10,738) (163,164) - - (14,409,399)
- -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-6 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Continued - -------------------------------------------------------------------------------- Unrealized Gain (loss) on Cumulative Investments Foreign Additional Available-for- currency Common Stock Pain-In Sale, Net of Translation Retained ------------------------ Shares Amount Capital Tax Adjustments Earnings ----------------------------------------------------------------------- Net income - - - - - 8,753,891 ----------------------------------------------------------------------- Balance, December 31, 1996 8,785,736 87,857 - 58,494 217,444 24,019,200 Shares issued upon exercise of employee stock options for cash 29,500 295 - - - 226,330 Change in unrealized gain (loss) on investments available-for-sale - - - (58,494) - - Tax benefit attributable to appreciation of common stock related to stock options and purchase rights - - 26,767 - - - Common stock purchased and retired (510,200) (5,102) (26,767) - - (5,358,555) Foreign currency translation adjustments - - - - (873,789) - Net income - - - - - 4,321,704 ----------------------------------------------------------------------- Balance, December 31, 1997 8,305,036 $83,050 $ - $ - ($656,345) $23,208,679 =======================================================================
- -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-7 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------ Cash flows from operating activities: Net income $4,321,704 $8,753,891 $8,353,738 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,515,153 1,377,051 1,714,906 Provision for (recovery of) losses on accounts receivable (35,409) (935) 5,359 (Gain) loss on disposal of assets (278,360) 412,224 24,563 Deferred income taxes 195,552 (113,854) (74,293) Tax benefit attributable to exercise and disposition of incentive stock options and stock purchase rights 26,767 163,164 355,779 (Increase) decrease in: Accounts receivable 544,542 2,669,888 (89,813) Accrued interest, grant claims, and other receivables 665,650 (984,323) (8,632) Inventories (237,299) (1,472,460) 745,957 Prepaid expenses and other current assets 11,512 106,083 (131,502) Increase (decrease) in: Accounts payable (1,136,230) 101,903 (37,462) Accrued expenses (445,298) 216,011 334,551 Deferred revenue (135,716) (35,716) (84,996) ------------------------------------------ Net cash provided by operating activities 5,012,568 11,192,927 11,108,155 ------------------------------------------ Cash flows from investing activities: Capital expenditures for: Property and equipment (1,219,408) (5,639,548) (2,074,745) Intangible assets (454,153) (320,018) (62,144) Purchases of investments (112,200) (3,315,186) (6,888,832) Proceeds from sale and maturities of investments 1,577,238 10,015,766 4,483,010 Proceeds from sale of property and equipment 8,510 21,750 350 Net cash paid in acquisition (7,299,561) - - ------------------------------------------ Net cash (used in) provided by investing activities: (7,499,574) 762,764 (4,542,361) ------------------------------------------ Cash flows from financing activities: Proceeds from issuance of common stock 226,625 601,653 1,073,560 Common stock purchased and retired (5,390,424) (14,583,301) (4,153,562) Increase in note payable 5,562,933 - - ------------------------------------------ Net cash provided by (used in) financing activities 399,134 (13,981,648) (3,080,002) ------------------------------------------
- -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-8 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flow Continued - -------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ Net (decrease) increase in cash (2,087,872) (2,025,957) 3,485,792 Cash at beginning of year 3,038,956 5,064,913 1,579,121 ------------------------------------------ Cash at end of year $951,084 $3,038,956 $5,064,913 ========================================== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $2,306,515 $5,111,183 $4,156,894 ========================================== Interest $249,852 $ - $ - ==========================================
Supplemental schedule for non-cash investing and financing activities: During 1997, the Company sold property in exchange for a receivable of $340,000. During 1997, the Company purchased all of the outstanding common stock of Columbia Medical, Inc. (Columbia) in a purchase transaction. The Company paid cash of $8,159,829 for the common stock and recorded net assets from the acquisition as follows: Cash $860,268 Accounts receivable 477,746 Inventory 804,317 Prepaids and other 27,442 Deferred income taxes 27,913 Property and equipment, net 1,061,896 Intangibles 5,225,492 Accounts payable (93,686) Accrued expenses (231,559) --------------- Total cash paid 8,159,829 Less cash received (860,268) --------------- Net cash investment $(7,299,561) =============== - -------------------------------------------------------------------------------- See accompanying notes to financial statements. F-9 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996, and 1995 - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Organization Utah Medical Products, Inc. and its wholly owned subsidiaries, Utah Medical Products Ltd. which operates a manufacturing facility in Ireland, and Columbia Medical, Inc. (the Company) are in the business of producing cost-effective devices for the health care industry. The Company's broad range of products includes those used in critical care areas and the labor and delivery departments of hospitals, as well as outpatient clinics and physician's offices. Products are sold in both domestic U.S. and International markets. Basis of Presentation Effective july 1, 1997, the Company acquired Columbia Medical, Inc. (Columbia) in a purchase transaction. Operations of Columbia have been included in the consolidated operations since the date of purchase. A pro forma conensed income statement for the year ended December 31, 1997 as though the purchase had taken place effective January 1, 1997 has not been presented as the amounts are immaterial to the operations of the Company. Principles of Consolidation The consolidated financial statements include those of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain changes to the presentation of the 1996 and 1995 consolidated financial statements have been made to conform with the 1997 presentation. Investments Available-For-Sale Investments consist of mutual funds, bonds, and equities. The Company complies with 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 3). Realized gains and losses are determined by the specific identification method. Grant Claims Receivable Grant claims receivable consists of amounts due from the Industrial Development Agency (Ireland) under capital and employment grant agreements for the construction and operation of the Company's Ireland manufacturing facility. Inventories Finished products, work-in-process, and raw materials and supplies inventories are stated at the lower of cost (computed on a first-in, first-out method) or market (see Note 2). - -------------------------------------------------------------------------------- F-10 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Continued Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line and units-of-production methods over estimated useful lives as follows: Building and improvements 30-40 years Furniture, equipment, and tooling 3-10 years Intangible Assets Costs associated with the acquisition of patents, trademarks, goodwill, license rights, and a non-compete agreement, 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 7). 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 The computation of basic earnings per common share is based on the weighted average number of shares outstanding during each year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the year. Statement of Cash Flow For purposes of the consolidated 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. - -------------------------------------------------------------------------------- F-11 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Continued Translation of Foreign Currencies Assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at the applicable exchange rates at year-end. Income and expense items are translated at the average rate of exchange during the year. Net gains or losses resulting from the translation of the Company's assets and liabilities are reflected as a separate component of stockholders' equity. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. The Company's customer base consists primarily of health care providers. Although the Company is directly affected by the well-being of the medical industry, management does not believe significant credit risk exists at December 31, 1997. 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 account and believes it is not exposed to any significant credit risk on cash and cash equivalents. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - -------------------------------------------------------------------------------- F-12 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 2. Detail of Certain Balance Sheet Accounts December 31, ------------------------------------ 1997 1996 ------------------------------------ Accounts receivable: Trade receivables $3,820,147 $3,886,943 Grant claim receivables 337,023 961,408 Accrued interest and other 543,312 244,577 Less allowance for doubtful accounts (46,677) (82,086) ------------------------------------ $4,653,805 $5,010,842 =================================== Inventories: Finished products $1,231,584 $1,000,438 Work-in-process 1,204,873 1,010,086 Raw materials 3,355,601 2,739,918 ----------------------------------- $5,792,058 $4,750,442 =================================== Other assets: Goodwill $5,029,613 $1,000 Patents 1,497,781 897,516 License rights 293,151 293,151 Trademarks 220,591 220,898 Non-compete agrement 50,000 - ----------------------------------- 7,091,136 1,412,565 Accumulated amorization (1,024,385) (810,172) ------------------------------------ $6,066,751 $602,393 ==================================== Accrued expenses: Payroll and payroll taxes $777,773 $1,132,309 Reserve for litigation costs 761,556 649,840 Other 301,028 271,947 ----------------------------------- $1,840,357 $2,054,096 =================================== - -------------------------------------------------------------------------------- F-13 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 3. Investments The amortized cost and estimated market values of investment securities as of December 31, 1996 were as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Losses Value ---------------------------------------------------------- Municipal bonds $521,040 $ - ($411) $520,629 Equities and other 843,633 104,286 (10,005) 937,914 ---------------------------------------------------------- Total $1,364,673 $104,286 ($10,416) $1,458,543 ========================================================== During the years ended December 31, 1997, 1996, and 1995, there were $1,577,238, $10,015,766 and $4,483,010, respectively, in proceeds from the sale of investment securities resulting in gross realized losses of $17,581, $28,476, and $8,328, respectively, and gross realized gains of $119,940, $15,341, and $59,187, respectively. The net unrealized gain on investment securities available-for-sale included in stockholders' equity for the years ended December 31, 1997, 1996, and 1995 is $-0-, $58,494, and $32,707, respectively, which are net of the deferred tax liability of $-0-, $35,376, and $19,792, respectively. - ------------------------------------------------------------------------------- F-14 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 4. Property and Equipment Property and equipment consists of the following: December 31, ------------------------------------ 1997 1996 ------------------------------------ Land $1,008,598 $1,126,662 Buildings and improvements 7,818,257 8,288,750 Furniture, equipment, and tooling 12,162,583 10,066,608 Construction-in-progress 562,641 900,622 ------------------------------------ 21,552,079 20,382,642 Accumulated depreciation and amortization (8,211,974) (7,015,045) ------------------------------------ $13,340,105 $13,367,597 ==================================== Included in the Company's consolidated balance sheets are the assets of its manufacturing facilities in Oregon and Ireland. Property and equipment, by location are as follows: December 31, 1997 ----------------------------------------------------- Utah Oregon Ireland Total ----------------------------------------------------- Land $ 621,250 $ - $ 387,348 $1,008,598 Building and improvements 3,637,111 32,261 4,148,885 7,818,257 Furniture, equipment, and tooling 10,286,976 1,083,147 792,460 12,162,583 Construction-in-progress 561,549 1,092 - 562,641 ----------------------------------------------------- Total 15,106,886 1,116,500 5,328,693 21,552,079 Accumulated depreciation and amortization (7,802,719) (120,596) (288,659) (8,211,974) ----------------------------------------------------- Property and equipment, net $7,304,167 $995,904 $5,040,034 $13,340,105 ===================================================== - -------------------------------------------------------------------------------- F-15 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 4. Property and Equipment Continued December 31, 1996 ----------------------------------------------- U.S. Ireland Total ----------------------------------------------- Land $678,447 $448,215 $1,126,662 Building and improvements 3,551,139 4,737,611 8,288,750 Furniture, equipment, and tooling 9,735,395 331,213 10,066,608 Construction-in-progress 662,514 238,108 900,622 ----------------------------------------------- Total 14,627,495 5,755,147 20,382,642 Accumulated depreciation and amortization (6,896,623) (118,422) (7,015,045) ----------------------------------------------- Property and equipment, net $7,730,872 $5,636,725 $13,367,597 =============================================== 5. Note Payable The Company has a bank line-of-credit agreement which allows the Company to borrow a maximum amount of $10,000,000 at an interest rate equal to the bank's LIBOR rate plus 1.45% or .8% below the bank's prime rate. The line-of-credit matures on March 25, 1999, is unsecured and had an outstanding balance of $5,562,933 at December 31, 1997. 6. Commitments and Contingencies Operating Leases The Company has an operating lease agreement for land adjoining the Company's U.S. facilities for a term of forty years commencing on September 1, 1991. On September 1, 1996 and subsequent to each fifth lease year, the basic rental is adjusted for published changes in a price index. The Company also leases certain buildings under noncancelable operating leases. Rent expense charged to operations under these operating lease agreements was approximately $75,000, $33,000 and $32,000 for the years ended December 31, 1997, 1996, and 1995, respectively. - ------------------------------------------------------------------------------- F-16 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 6. Commitments and Contingencies Continued Future minimum lease payments under the operating lease obligations as of December 31, 1997 were as follows: Year ending December 31: Amounts ----------------- 1998 $115,836 1999 68,607 2000 34,874 2001 34,874 2002 34,874 Thereafter 999,723 ----------------- Total minimum lease payments $1,288,788 ================= Product Liability The Company is self-insured for product liability risk. Litigation The Company is involved in lawsuits which are an expected consequence of its operations and in the ordinary course of business. The Company believes that pending litigation will not have a materially adverse effect on its financial condition or results of operations. - -------------------------------------------------------------------------------- F-17 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 7. Income Taxes Deferred tax assets (liabilities) consist of the following temporary differences: December 31, ---------------------------------------- 1997 1996 ---------------------------------------- Current Long-term Current Long-term ---------------------------------------- Assets Inventory write-down $103,376 $ - $199,477 $ - Allowance for doubtful accounts 17,737 - 30,946 - Accrued liabilities 393,914 - 349,471 - Deferred revenue 33,203 - 51,121 32,941 Other - - - 9,732 ---------------------------------------- Total 548,230 - 631,015 42,673 Liabilities Unrealized gain on investments available- for-sale - (382,552) (35,376) - Depreciation and amortization (412,432) Earnings from subsidiary - (107,437) - - ---------------------------------------- Deferred income taxes, net $548,230 ($489,989) $595,639 ($369,759) ======================================== The components of income tax expense are as follows: Years Ended December 31, ----------------------------------------------- 1997 1996 1995 ----------------------------------------------- Current $2,285,549 $5,003,695 $4,572,460 Deferred 167,639 (113,854) (74,293) ----------------------------------------------- Total $2,453,188 $4,889,841 $4,498,167 =============================================== - -------------------------------------------------------------------------------- F-18 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 7. Income Taxes Continued Income tax expense differed from amounts computed by applying the statutory Federal rate to pretax income as follows: Years Ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ Federal income tax expense at the statutory rate $2,303,463 $4,638,869 $4,369,648 Non-taxable investment income (7,422) (76,512) (124,604) State income taxes 309,205 718,724 642,638 Foreign sales corporation (85,000) (223,376) (228,760) Other (67,058) (167,864) (160,755) ------------------------------------------ Total $2,453,188 $4,889,841 $4,498,167 ========================================== 8. Stockholders' Equity Options The Company has stock option plans which authorize the grant of stock options to eligible employees, directors, and other individuals to purchase up to an aggregate 4,722,500 shares of common stock. All options granted under the plans may be exercised between six months and ten years following the date of grant. The plans are intended to advance the interest of the Company by attracting and ensuring retention of competent directors, employees, and executive personnel, and to provide incentives to those individuals to devote their utmost efforts to the advancement of the Company. - -------------------------------------------------------------------------------- F-19 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 8. Stockholders' Equity Continued Changes in stock options were as follows: Price Range Shares Per Share -------------------------------------- 1997 Granted 454,700 $6.75 - $11.50 Expired or canceled 229,452 6.75 - 14.25 Exercised 29,500 7.25 - 10.00 Total outstanding at December 31 888,348 6.75 - 14.25 Total exercisable at December 31 355,971 7.25 - 14.25 1996 Granted 451,500 $14.25 - $20.50 Expired or canceled 276,620 7.25 - 20.50 Exercised 68,599 7.25 - 11.33 Total outstanding at December 31 692,600 7.25 - 14.25 Total exercisable at December 31 295,996 7.25 - 11.33 1995 Granted 200,000 $9.50 - $10.63 Expired or canceled 39,517 6.58 - 10.00 Exercised 124,840 6.33 - 10.00 Total outstanding at December 31 586,319 7.25 - 11.33 Total exercisable at December 31 198,500 7.25 - 11.33 For the years ended December 31, 1997, 1996, and 1995, the Company reduced current income taxes payable and increased additional paid-in capital by $26,767, $163,164, and $355,779, respectively, for the income tax benefit attributable to appreciation of common stock related to stock options and purchase rights. - -------------------------------------------------------------------------------- F-20 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 8. Stockholders' Equity Continued Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized in the financial statements. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: December 31, ----------------------------------- 1997 1996 ----------------------------------- Net income as reported $4,321,704 $8,753,891 Net income pro forma $3,933,455 $8,580,509 Earnings per share assuming full dilution as reported $.51 $.93 Earnings per share assuming full dilution pro forma $.46 $.91 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: December 31, ----------------------------------- 1997 1996 ----------------------------------- Expected dividend yield $ - $ - Expected stock price volatility 47.6% 48.7% Risk-free interest rate (weighted average) 6.27% 6.57% Expected life of options 3.8 years 3.6 years =================================== The per-share weighted average fair value of options granted during 1997 and 1996 is $4.10 and $4.67, respectively. - -------------------------------------------------------------------------------- F-21 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 8. Stockholders' Equity Continued The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable ------------------------------------------------------------------ Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Average Exercisable Average Exercise at Life Exercise at Exercise Prices 12/31/97 (Years) Price 12/31/97 Price - -------------------------------------------------------------------------------- $6.75 - 8.00 330,349 8.71 $ 7.13 148,136 7.28 9.50 - 14.25 557,999 8.08 11.69 207,835 10.89 - -------------------------------------------------------------------------------- $6.75 - 14.25 888,348 8.40 $ 9.99 355,971 $ 9.39 ================================================================================ 9. Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS as previously required. The new standard also requires additional informational disclosures, and makes certain modifications to the previously applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997, and requires restatement of EPS for all prior periods reported. During the year ended December 31, 1997, the Company adopted this standard. - -------------------------------------------------------------------------------- F-22 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 9. Earnings Per Share Continued Earnings per share information in accordance with SFAS 128 is as follows: Year Ended December 31, 1997 ----------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------------------------------------------- Net income $4,321,704 Less preferred stock dividends - ---------------- Basic EPS Income available to common stockholders 4,321,704 8,444,036 $.51 -------------- Effect of Dilutive Securities Stock options - 51,379 --------------------------------- Diluted EPS Income available to common stockholders plus assumed conversions $4,321,704 8,495,415 $.51 =============================================== Year Ended December 31, 1996 ----------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------------------------------------------- Net income $8,753,891 Less preferred stock dividends - ---------------- Basic EPS Income available to common stockholders 8,753,891 9,270,861 $.94 -------------- Effect of Dilutive Securities Stock options - 180,720 --------------------------------- Diluted EPS Income available to common stockholders plus assumed conversions $8,753,891 9,451,581 $.93 =============================================== - -------------------------------------------------------------------------------- F-23 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 9. Earnings Per Share Continued Year Ended December 31, 1995 ----------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------------------------------------------- Net income $8,353,738 Less preferred stock dividends - ---------------- Basic EPS Income available to common stockholders 8,353,738 9,852,559 $.85 -------------- Effect of Dilutive Securities Stock options - 189,871 --------------------------------- Diluted EPS Income available to common stockholders plus assumed conversions $8,353,738 10,042,430 $.83 =============================================== 10. Product Sale and Purchase Commitments The Company had exclusive and nonexclusive agreements to sell certain products to Baxter Healthcare Corporation (Baxter) under license agreements and had sales to Baxter of approximately $1,286,000, $11,132,000, and $14,996,000 during the years ended December 31, 1997, 1996, and 1995, respectively. The Company has license agreements with other unrelated companies to provide exclusive and nonexclusive 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, and in one case certain payments to the developer contingent upon the product achieving certain annual revenue thresholds. - ------------------------------------------------------------------------------- F-24 UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Continued - -------------------------------------------------------------------------------- 11. 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 $54,100, $78,800, and $57,200, for the years ended December 31, 1997, 1996, and 1995, respectively. 12. Export Sales Sales to customers in foreign countries were approximately $5,218,000, $9,739,000, and $10,343,000 for the years ended December 31, 1997, 1996, and 1995, respectively. 13. Fair Value of Financial Instruments None of the Company's financial instruments are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 1997, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. 14. Recently Issued Accounting Statements In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires entities presenting a complete set of financial statements to include details of comprehensive income that arise in the reporting period. Comprehensive income consists of net income or loss for the current period and other comprehensive income, which consists of revenue, expenses, gains, and losses that bypass the income statement and are reported directly in a separate component of equity. This statement is effective for fiscal years beginning after December 15, 1997, and requires restatement of prior period financial statements presented for comparative purposes. - -------------------------------------------------------------------------------- F-25 EX-10 2 REVOLVING LOAN AGREEMENT THIS REVOLVING LOAN AGREEMENT (the "Agreement"), dated as of the 4th day of April, 1997, is entered between UTAH MEDICAL PRODUCTS, INC., a Utah corporation (the "Borrower"), and FIRST SECURITY BANK, N.A. ("First Security") Recitals Borrower has requested that First Security make an unsecured revolving line of credit available to Borrower in the maximum principal amount of $10,000,000.00 (the "Loan"), and First Security is willing to make the Loan available to Borrower, on the terms and subject to the conditions set forth in this Agreement. Agreement In consideration of the foregoing, the benefits to be derived by the parties under this Agreement and other good and valuable consideration, the parties hereby agree as follows: SECTION 1. AMOUNT AND TERMS OF THE LOAN. 1.1 The maximum principal amount of the Loan shall be $10,000,000.00. 1.2 The Loan shall be a revolving loan (with the right of Borrower to repay principal and to reborrow up to the maximum principal amount of the Loan so long as no default exists under this Agreement or any of the related Loan Documentation). 1.3 The Loan shall be evidenced by a Revolving Promissory Note, dated of even date herewith, executed by Borrower and payable to First Security in the maximum principal amount of $10,000,000.00, as amended from time to time (the "Note"). 1.4 Interest on the unpaid balances outstanding will be calculated as follows: (a) Unless Borrower notifies First Security that Borrower desires all or any portion of the advances hereunder to bear interest at the "Prime Based Rate" in accordance with subsection (b) below, all amounts outstanding under the Loan shall bear interest at the floating per annum rate (the "Eurodollar Rate"), subject to daily change, equal to 1.45% (145 basis points) above First Security's "Daily LIBOR. For purposes of this Agreement, First Security's "Daily LIBOR" shall mean the thirty-day London Interbank Offered Rate determined by First Security to be accepted by the British Bankers Association and published daily in the United States of America by Dow Jones Telerate (or such other similar source as may be selected by First Security). First Security's Daily LIBOR approximates (but is not necessarily identical to) the thirty-day LIBOR published daily in the "Money Rates" section of The Wall Street Journal. Balances under the Loan that bear interest at a Eurodollar Rate are hereinafter referred to as "Eurodollar Rate Balances. First Security may make loans bearing interest above, at or below the applicable Eurodollar Rate, said rate not necessarily being the best or lowest rate of interest charged by First Security to its customers, and First Security may make loans based on other rates as well. The Eurodollar Rate may change from time to time, and the interest payable on Eurodollar Rate Balances will continue to fluctuate at the same increment above First Security's Daily LIBOR as stated above. The Eurodollar Rate will not, however, change more often that each day. With respect to Eurodollar Rate Balances, any changes in the interest rate shall become effective, without prior notice, on the date on which First Security's Daily LIBOR changes. First Security will tell Borrower the current Eurodollar Rate upon Borrower's request. Subject to the provisions of subsection (c) below, any balances under the Loan with respect to which Borrower has not affirmatively requested the Prime Based Rate in accordance with this subsection shall bear interest at the Eurodollar Rate in accordance with this subsection (a). (b) Borrower shall have the right, by written notice to First Security (or by telephonic notice followed within 24 hours by written confirmation), to elect to have all or any portion of the balances under the Loan bear interest at the floating per annum rate (the "Prime Based Rate"), subject to daily change, equal to 0.8% (80 basis points) below First Security's "Prime Rate. "Prime Rate" shall mean First Security's announced per annum rate of interest used as a reference point from which the cost of credit to customers may be calculated, and is subject to change from time to time. First Security may make loans bearing interest above, at or below the Prime Rate, said rate not necessarily being the best or lowest rate of interest charged by First Security to its customers. The Prime Rate may change from time to time, and the interest payable on balances under the Loan that bear interest at the Prime Based Rate ("Prime Rate Balances") will continue to fluctuate at the same increment below the Prime Rate as stated above. With respect to Prime Rate Balances, any changes in the interest rate shall become effective, without prior notice, on the date on which the Prime Rate of First Security changes. (c) Borrower may elect at any time and from time to time to convert Prime Rate Balances (or any portion thereof) to Eurodollar Rate Balances, or to convert Eurodollar Rate Balances (or any portion thereof) to Prime Rate Balances. Each such election shall be made by Borrower giving First Security written notice (or by telephonic notice followed within 24 hours by written confirmation) at least one business day before the conversion is to become effective. Unless First Security receives such a conversion notice from Borrower, all Eurodollar Rate Balances shall continue to bear interest at the fluctuating Eurodollar Rate and all Prime Rate Balances shall continue to bear interest at the fluctuating Prime Based Rate. (d) Notwithstanding the foregoing, upon any default under this Agreement or under any of the other Loan Documentation, the rate of interest per annum on all balances hereunder (including both Prime Rate Balances and Eurodollar Rate Balances) shall be two percent (2%) above the Prime Rate per annum from and after such default; provided further, however, that if First Security shall waive in writing or allow a cure of such default, the interest rate shall revert to the applicable non-default rate from and after such waiver or completion of cure (whichever is sooner). 1.5 The Loan shall be repaid to First Security as set forth in this Agreement and the Note. All payments received by First Security shall be applied as follows: first, toward the satisfaction of attorneys' fees and costs incidental thereto and to advances made and costs and expenses incurred by First Security or its agents to enforce Borrower's Obligations hereunder and under the Loan Documentation or to preserve any collateral securing the Obligations; second, toward the reduction of any and all accrued and unpaid interest, including uncollected late charges; and third, toward the reduction of unpaid principal. 1.6 First Security shall provide periodic accountings to Borrower of all payments, collections, applications and borrowings. Borrower shall promptly examine such accountings and shall after learning of any discrepancy, immediately notify First Security of any discrepancies. Fifteen days after the rendering of such accountings, in the absence of patent demonstrable error, the same shall be deemed to be conclusive as between First Security and Borrower. 1.7 In addition to other charges, fees and payments payable under this Agreement or in connection with the Loan provided hereby, Borrower shall pay First Security a commitment fee equal to the greater of: (a) $6,250 minus any interest received by First Security from Borrower during the quarterly period just ended, or (b) 13/100s of one percent (thirteen basis points) per annum times the average daily difference, if any, between $10,000,000.00 and the average daily principal balance outstanding under the Loan during the applicable quarterly period, using a 360 day year. The commitment fee shall be payable quarterly, in arrears, on the 25th day of each March, June, September and December during the term of the Loan; provided that in the event the Loan expires or is terminated for any reason prior to the end of any such quarterly period, Borrower shall pay First Security the pro rata portion of the commitment fee attributable to such shorter period prior to the termination date. 1.8 In addition to this Agreement and the Note, the term "Loan Documentation" shall include all other instruments, notices, certificates, guaranties and other documents required by First Security as a condition to or in connection with the Loan, whether heretofore, now or hereafter executed, together with all amendments thereto. 1.9 Any of Kevin L. Cornwell, Paul Richins or Lori A. Sessions is authorized on behalf of Borrower to make a written or oral request to First Security to advance funds under this Agreement. First Security is under no obligation to verify the identity of any person representing to be any of the aforementioned representatives of Borrower. Any advance made pursuant to said written or oral request is irrebuttably presumed to be made for Borrower's benefit. 1.10 The obligations, indebtedness, covenants and liabilities of Borrower set forth or contemplated in the Loan Documentation shall be referred to as the "Obligations," including without limitation any indebtedness resulting from any overdraft on any account with First Security (provided that nothing herein shall be a commitment by First Security to honor overdrafts). 1.11 Borrower may during the term of the Loan prepay the outstanding principal amount of the Loan, in whole or in part, without premium or penalty. SECTION 2. GUARANTY. 2.1 As a material inducement and condition to First Security making the Loan available to Borrower, Utah Medical Products Ltd., a Bermuda corporation ("Guarantor") which is a wholly owned subsidiary of Borrower, shall guaranty the Obligations of Borrower in connection with the Loan, by executing a Continuing and Unconditional Guaranty in favor of First Security (the "Guaranty"). SECTION 3. CONDITIONS. 3.1 First Security shall not be required to advance funds under this Agreement unless First Security shall have received from Borrower the following: (a) Current financial statements in such form as First Security may require; (b) The fully executed Loan Documentation (including without limitation the Note and the Guaranty); and (c) Such other documentation and information as First Security or its counsel may request given the circumstances and terms of the Loan. 3.2 First Security shall not be required to make any advance under the Loan if a default or an event of default under the Loan Documentation exists or if an event has occurred that with the passage of time or the giving of notice or both would constitute such a default or event of default. SECTION 4. REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce First Security to make the Loan, Borrower warrants and represents as follows: (1) Borrower has full power, authority and capacity to incur the indebtedness described herein and to execute the Loan Documentation. (2) The execution and performance of the Loan Documentation will not violate any applicable law, regulation, order, judgment or decree, partnership agreement, article of incorporation, bylaw, indenture, contract or agreement that purports to be binding on the Borrower or its assets, and will not result in the creation of any encumbrance on the assets of Borrower except as contemplated by the Loan Documentation. (3) Any financial statements of Borrower heretofore delivered to First Security are true and correct in all respects. The most recent statements given to First Security accurately represent the current financial condition of Borrower, and, since the date of such statements, the business, properties, assets and liabilities of Borrower have not been adversely affected or changed in any material way. (4) All written representations previously made and information previously given by Borrower or Borrower's agents to First Security or its agents remain true and correct. (5) Borrower is not in default under any indebtedness, lease, contract, license, undertaking or other agreement which will affect the ability of Borrower to perform under any of the Loan Documentation. (6) There are no existing actions, suits or proceedings pending or threatened against Borrower or relating to the business, properties or assets of Borrower that may have a material adverse effect upon the financial condition, the business, or the assets of Borrower, and no judgment, order or decree has been rendered which has not been discharged, satisfied or complied with other than those disclosed to First Security in writing. (7) Borrower has filed all federal and state income tax returns which are required to be filed (except returns for which extensions have been properly filed) and has paid all taxes, assessments and governmental charges or levies imposed upon Borrower or upon Borrower's income or profits, or upon any property belonging to Borrower, to the extent that such taxes and assessments have become due (except such taxes and assessments that are being contested in good faith by appropriate proceedings diligently prosecuted and that have been disclosed to First Security in writing). (8) Borrower has good title to its assets, including the properties and assets reflected in the most recent statements given to First Security, free and clear of all liens and encumbrances. SECTION 5. COVENANTS OF BORROWER. 5.1 Borrower shall promptly furnish First Security, during the term of the Loan, copies of such tax returns and financial reports and statements as requested by First Security, all prepared in a manner and form and at such times as are acceptable to First Security. Without limiting the generality of the foregoing, Borrower shall provide the following items to First Security within the time periods indicated: (i) Copies of Borrower's quarterly reports to the SEC on form 10-Q shall be provided promptly upon filing with the SEC but in no event Later than 50 days after the end of the quarter for which the report is required; (ii) copies of Borrower's annual reports to the SEC on form 10-K shall be provided promptly upon filing with the SEC but in no event later than 95 days after the end of the fiscal year for which the report is required; (iii) copies of Borrower's annual reports to shareholders shall be provided promptly upon mailing to the shareholders but in no event later than 95 days after the end of the fiscal year for which the report is prepared; (iv) quarterly compliance certificates shall be provided within 50 days after the end of each quarter, in a form acceptable to First Security, certifying Borrower's continuing compliance with the covenants, representations and warranties contained in the Loan Documentation; and (v) copies of Guarantor's annual financial statements shall be provided promptly after being prepared but in no event later than 95 days after the end of the fiscal year for which said statements are prepared. 5.2 Borrower shall promptly give notice to First Security of (a) the occurrence of any default or event of default under any of the Loan Documentation; (b) any litigation, proceedings or event that may have an adverse effect upon the financial condition, the business or the assets of Borrower; and (c) any adverse change in the financial condition of Borrower. 5.3 Borrower shall: (a) duly observe and conform to all requirements of any governmental authorities relative to the conduct of Borrower's business or to Borrower's properties or assets; and (b) pay all obligations and liabilities when due, including without limitation all taxes, assessments and governmental charges or levies imposed upon Borrower or upon Borrower's income or profits, or upon any property belonging to Borrower, and maintain appropriate reserves for the accrual of the same in accordance with generally accepted accounting principles. 5.4 Borrower shall permit First Security or its agents to inspect the assets and financial records of Borrower and to discuss the affairs, finances and assets of Borrower with Borrower's officers, all at such reasonable times and as often as First Security may reasonably request. 5.5 Borrower shall not create or suffer to exist any lien or encumbrance on any of Borrower's assets. Borrower shall notify First Security in writing immediately upon receipt of notice of the imposition of any lien, levy, attachment or execution on any of its assets. Borrower shall cause such liens or other process not permitted by this Section to be satisfied immediately. First Security may discharge such unpermitted liens and encumbrances, and any such amounts shall become part of the Obligations, shall be repaid to First Security on demand, and shall accrue interest as set forth in the Note. 5.6 Borrower shall not transfer, sell, pledge or otherwise dispose of or convey any right, title or interest in or to any material portion of its assets other than in the ordinary course of Borrower's business, without the prior written consent of First Security. 5.7 Borrower shall not incur any interest bearing debt other than the Obligations hereunder, other obligations owed to First Security, or overdrafts related to demand deposit accounts maintained in Ireland. 5.8 Borrower shall maintain at all times minimum annual earnings before taxes of at least $8,000,000.00, measured quarterly on a rolling four-quarter basis and calculated in accordance with generally accepted accounting principles consistently applied. 5.9 Borrower shall maintain at all times a minimum tangible net worth of at least $17,000,000.00, calculated as Borrower's book net worth minus intangible assets and calculated in accordance with generally accepted accounting principles consistently applied. 5.10 Borrower shall maintain at all times minimum cash and investments (as currently defined in Borrower's annual report to shareholders) of at least $2,500,000.00. SECTION 6. DEFAULT AND REMEDIES. 6.1 The occurrence of any of the following shall constitute an event of default under this Agreement and the other Loan Documentation: (a) Failure to pay any principal, interest or other monetary indebtedness under the Obligations within ten (10) days after the due date therefor; (b) Any representation or warranty made by Borrower or Guarantor in the Loan Documentation or in connection with any borrowing hereunder, or in any certificate, financial statement or other statement furnished by Borrower or Guarantor pursuant hereto is untrue in any respect at the time when made; (c) Failure of Borrower or Guarantor to observe or perform any of the other covenants or agreements contained in the Loan Documentation within fifteen (15) days after written notice of such failure has been given to Borrower or Guarantor (as applicable) by First Security; (d) Any material provisions of the Loan Documentation shall for any reason cease to be in full force and effect; (e) Borrower or Guarantor shall default on (i) any other obligation owed to First Security, or (ii) any obligation owed to another lender if the outstanding amount of such obligation to such other lender exceeds $1,000,000.00; (f) Filing by or against Borrower or Guarantor of a petition in bankruptcy or for any other relief under the Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, or any action by Borrower or Guarantor indicating Borrower's or Guarantor's consent to, approval of, or acquiescence in, any such petition or proceeding; the application by Borrower or Guarantor, or the consent or acquiescence of Borrower or Guarantor to the appointment of a receiver or trustee for Borrower or Guarantor or for all or a substantial part of Borrower's or Guarantor's property; the making by Borrower or Guarantor of an assignment for the benefit of creditors under state law; or the admission of Borrower or Guarantor in writing of its inability to pay its debts as they mature; (g) The involuntary appointment of a receiver or trustee for Borrower or Guarantor or for all or a substantial part of Borrower's or Guarantor's property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of Borrower or Guarantor; (h) All or any substantial part of the property of Borrower or Guarantor shall be sold, assigned, transferred, or shall be condemned, seized or otherwise appropriated, or custody or control of such property shall be assumed by any governmental agency or any court of competent jurisdiction at the instance of any governmental agency; or (i) The occurrence of any adverse change in the financial condition of Borrower or Guarantor deemed material by First Security. 6.2 If any of the events set forth in Section 6.1 occurs: (a) First Security may (i) terminate any obligation to make further advances under the Loan; (ii) declare the entire Obligations outstanding hereunder to be immediately due and payable, whereupon the principal amount of the outstanding Loan, together with accrued interest thereon, shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Note to the contrary notwithstanding; and/or (iii) proceed to enforce any of its remedies under the Loan Documentation, including this Agreement. (b) Borrower hereby waives any right to require First Security to proceed against any collateral for the Obligations. Borrower waives the right to require First Security to pursue any other remedy for the benefit of Borrower and agrees that First Security may proceed against Borrower for the amount of the Obligations owed by Borrower to First Security without taking any action against any other party and without selling or otherwise proceeding against or applying any collateral. Borrower authorizes First Security, at its option, to apply toward the payment of the Obligations all balances of any deposit account or other account in the name of Borrower held by First Security. (c) No remedy given to First Security in the Loan Documentation is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given under the Loan Documentation or now or hereafter existing at law or in equity or by statute. 6.3 Borrower agrees to cooperate with First Security in effectuating First security's rights notwithstanding any unanticipated inability of Borrower to pay the Loan or otherwise perform the Obligations. SECTION 7. MISCELLANEOUS. 7.1 Time is of the essence of this Agreement. No advance under the Loan shall constitute a waiver of any of the conditions of First Security's obligation to make further advances, nor, in the event Borrower is unable to satisfy any such condition, shall any such waiver have the effect of precluding First Security from thereafter declaring such inability to be an event of default under this Agreement. No failure or delay on the part of First Security in exercising any right, power or privilege hereunder or under the Loan Documentation shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The consent or approval by First Security to or of any act by Borrower requiring further consent or approval shall not be deemed to waive or render unnecessary the consent or approval to or of any subsequent act. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 7.2 Borrower shall pay all attorney's fees, paralegal fees, costs, taxes and other expenses incurred by First Security in the enforcement of its rights hereunder and the other Loan Documentation, whether any default is ultimately cured or First Security is obligated to pursue its remedies hereunder, including such expenses incurred before legal action, during the pendency of any such legal action, during the enforcement of First Security's rights in any bankruptcy or insolvency proceedings, and continuing to all such expenses in connection with any appeal to higher courts arising out of matters associated herewith. Until so paid, all such fees, costs, and expenses shall constitute part of the obligations of Borrower and shall accrue interest at the default rate set forth in the Note. 7.3 Borrower hereby agrees to indemnify and hold harmless First Security, its directors, officers, employees and agents from any and all liabilities, expenses, costs, charges, damages, demands, claims, lawsuits and assessments, including attorneys' fees and expenses, arising out of this Agreement or the other Loan Documentation or in connection therewith, unless arising from First Security's gross negligence or willful misconduct. 7.4 In addition to this Agreement and the other Loan Documentation, this finance transaction may include written documentation such as resolutions, waivers, notices, acknowledgments, statements, closing or escrow instructions, loan purpose statements, and other documents that First Security may customarily use in such transactions. Such additional documents are incorporated herein by reference. The Loan Documentation and other documents to which this Section refers, as applicable, express, embody and supersede any previous understandings, agreements or promises (whether oral or written) with respect to this finance transaction, and said documents represent the final expression of the agreement between First Security and Borrower, the terms and conditions of which cannot hereafter be contradicted by any oral understanding not reduced to writing and identified above. This Section shall govern in the event it is inconsistent with any similar provision in any other Loan Documentation. 7.5 Any notice required by any Loan Documentation will be deemed effective if personally delivered to the party to which notice is being given, or, in the alternative, on the date such notice is sent by confirmed facsimile transmission or is placed, first class mail, in the U.S. Mail addressed to the party to which notice is being given, at such address as is set forth below. In the event another agreement constituting part of the Loan Documentation sets forth a notice procedure, such procedure shall govern for purposes of that document and thus supersede the terms of this Section if inconsistent. 7.6 All representations and warranties made in this Agreement and the Note and in any certificates delivered pursuant hereto and thereto shall survive the execution and delivery of this Agreement and the making of the Loan hereunder and shall survive payment of the Loan. This Agreement shall be binding upon and inure to the benefit of Borrower and First Security and their respective heirs, devisees, personal representatives, successors and assigns, except that the Borrower may not assign or transfer its rights hereunder without the prior written consent of First Security. It is understood that First Security may sell the Loan and its interests under the Loan Documentation without the need for Borrower's consent and may procure other lenders to participate in the Loan, and First Security may issue participation certificates to such other lenders. 7.7 Borrower agrees to execute any other documentation and provide such other information and documentation as First Security may reasonably require. Any provision of this Agreement or any other constituents of the Loan Documentation, which may be found to be invalid, shall be deemed separable and shall not invalidate the remainder of the provisions. No third party shall, under any circumstances, be deemed to be a beneficiary under the Loan Documentation or any condition set forth therein. Nothing in the Loan Documentation shall create a partnership or joint venture between First Security and Borrower. 7.8 This Agreement may be signed in any number of counterparts, each of which shall be deemed an original, and such counterparts together shall constitute one and the same instrument. This Agreement and the other Loan Documentation shall be governed by, and construed and interpreted in accordance with, the laws of the State of Utah. If Borrower is not resident of the State of Utah, Borrower hereby consents to the jurisdiction of the courts of the State of Utah and the federal courts located within the State of Utah (as selected by First Security) to enforce this Agreement and the other Loan Documentation. Executed as of the date first written above. BORROWER: UTAH MEDICAL PRODUCTS, INC. By: /s/ Kevin L. Cornwell Its: Chairman & CEO Address: 7043 South 300 West Midvale, Utah 84047 FAX: (801) 566-2062 FIRST SECURITY: FIRST SECURITY BANK, N.A. By: /s/ Steven M. Kohler Its: Vice President Address: 15 East 100 South, 2nd Floor Salt Lake City, Utah 84111 Attention: Steven M. Kohler FAX: (801) 246-5532 EX-21 3 SUBSIDIARIES OF UTAH MEDICAL PRODUCTS, INC.: Jurisdiction Name of Incorporation Business Name Utah Medical Products Ltd. Bermuda Utah Medical Products, Inc. Columbia Medical Oregon Columbia Medical, Inc. & Surgical, Inc. EX-23 4 INDEPENDENT AUDITORS' CONSENT Utah Medical Products, Inc. We consent to the incorporation by reference in Registration Statement Nos. 33-24781, 33-44100, 33-89394, and 33-89434 of Utah Medical Products, Inc. on Forms S-8 of our report dated January 24, 1998, appearing in this Annual Report on Form 10-K of Utah Medical Products, Inc. for the year ended December 31, 1997. /s/ Tanner + Co. Salt Lake City, Utah March 27, 1998 EX-23 5 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33- 24781, 33-44100, 33-89394, and 33-89434 of Utah Medical Products, Inc. on Forms S-8 of our report dated January 24, 1997, appearing in the Annual Report on Form 10-K of Utah Medical Products, Inc. for the year ended December 31, 1997. /s/ DELOITTE & TOUCHE LLP Salt Lake City, Utah March 25, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1997, AND STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 951,084 0 3,820,147 (46,677) 5,792,058 12,052,380 21,552,079 (8,211,974) 31,459,236 2,769,156 5,562,933 83,050 0 0 22,552,334 31,459,236 24,271,640 24,271,640 11,665,207 7,047,410 (1,467,715) 0 251,846 6,774,892 2,453,188 4,321,704 0 0 0 4,321,704 0.51 0.51
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