item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1994 1995 consolidated statements income three years ended december 31 1995 consolidated statements shareholders equity three years ended december 31 1995 consolidated statements cash flows three years ended december 31 1995 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k none independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries december 31 1994 1995 related consolidated statements income shareholders equity cash flows three years period ended december 31 1995 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1994 1995 results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles deloitte touche llp los angeles california february 20 1996 consolidated balance sheets dollars thousands see accompanying notes consolidated financial statements consolidated statements income thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders equity dollars thousands see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product approval united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends considered reliable indicators future financial performance concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral net income per share net income per share computed using weightedaverage number common shares common share equivalents outstanding period common share equivalents represent dilutive effect outstanding stock options notes consolidated financial statements cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1994 1995 9300000 12600000 shortterm commercial paper carrying value cash equivalents approximates fair value inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired arose result purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairments would recognized operating results permanent diminution value occur foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase forward dollar contracts hedge firm commitments acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses contracts offset gains losses transactions hedged foreign exchange contracts varying maturities generally exceed one year december 31 1994 1995 company approximately 10000000 15000000 foreign exchange contracts outstanding carrying value differ significantly fair value notes consolidated financial statements research development research development costs expensed incurred income taxes deferred income taxes represent tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes note 2 business acquistion september 1 1995 company acquired 56 equity interest dpc medlab produtos medico hospitalares ltda companys brazilian distributor note 3 inventories major categories summarized follows note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis three five years salestype operating leases summarized follows notes consolidated financial statements note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute companys products countries companys ownership interest follows portugal 40 italy 45 sweden 50 company joint venture formed purpose marketing manufacturing companys immunodiagnostic test kits japan joint venture nippon dpc corporation owned equally company dainippon ink chemicals incorporated funded capital contributed debt guaranteed dainippon ink chemicals incorporated technology company following represents condensed financial information companys investments nonconsolidated affiliated companies results operations company sales nonconsolidated affiliates 11460000 1993 12119000 1994 18504000 1995 including sales one affiliate italy 6207000 1993 6005000 1994 10034000 1995 included companys accounts receivable trade receivables nonconsolidated affiliates 3376000 december 31 1994 6016000 december 31 1995 company received dividends 1993 1994 1916000 872000 italian affiliate companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 1995 11628000 deferred taxes provided undistributed earnings amounts intended reinvested note 6 pension profit sharing plans company money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 1341000 1993 1469000 1994 1883000 1995 company profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year contribution 1993 contribution profit sharing plan 479000 1994 391000 1995 notes consolidated financial statements note 7 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows included net deferred income taxes shown consolidated balance sheets 1994 1995 deferred tax assets 4723000 6832000 deferred tax liabilities 63000 181000 december 31 1995 dpc cirrushad net operating loss carryforwards federal state income tax purposes approximately 5018000 9463000 expiring varying dates 2001 utilization federal net operating losses subject annual limitations approximately 2000000 federal state income tax asset related dpc cirrus net operating losses recorded accompanying consolidated financial statements reflects companys belief basis available evidence dpc cirrus net operating loss carry forwards realized notes consolidated financial statements reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows income tax benefit 1995 related exercise early disposition certain stock options reduced income taxes currently payable 5604000 credited directly shareholders equity note 8 commitments contingent liabilities company entered noncancelable operating lease portion los angeles manufacturing facility partnership comprised two officersshareholders company four children also shareholders one officer director agreement extends december 31 1997 fiveyear renewal option approximately 818000 1993 1994 849000 1995 paid facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2000 fiveyear renewal option current average annual rental approximately 172000 future minimum lease commitments december 31 1995 leases follows rental expense operating leases approximated 1379000 1993 1340000 1994 1527000 1995 company supply contract vendor chemical compounds key components immulite system several years vendor involved multiple legal proceedings domestically internationally another company challenged vendors patent rights compounds technology pursuant settlement agreement company right ten years purchase chemical compounds currently use part agreement company guaranty vendors minimum payment obligations company amount 1000000 1995 1996 600000 next eight years amounts disbursed 1995 guaranty notes consolidated financial statements note 9 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable installments may exercised cumulative basis time expiration options expire later ten years date grant five years respect optionees 10 shareholders following table summarizes option activity plans november 1993 board directors approved offer optionees cancel certain options exercise prices ranged 2450 4000 per share replace options purchase common stock exercise price 2000 per share price less fair market value companys common stock date grant pursuant offer 626600 shares common stock cancelled replaced options purchase 463350 shares common stock november 1985 company granted chief executive officer nonqualified 10year stock option 500000 shares 750 per share fair market value date grant option exercised 1995 103320 shares outstanding common stock received company consideration exercise options 509800 shares december 31 1995 company nonqualified options outstanding 70000 shares separate agreements exercise prices 1250 3075 per share pursuant plans separate agreements 1144327 shares common stock reserved issuance upon exercise options 385562 shares exercisable december 31 1995 notes consolidated financial statements note 10 segment information company manufactures sells medical diagnostic kits related instrumentation kits instruments sold hospitals medical centers clinics physicians clinical laboratories companys operating locations include united states europe united kingdom germany spain netherlands belgium luxembourg rest world australia china brazil september 1 1995 companys operations identifiable assets geographical area follows notes consolidated financial statements companys export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years december 31 1994 1995 summarized follows dollars thousands except per share data signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation sigi ziering march 25 1996 sigi ziering chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 6 32 bylaws amended 6 41 stock certificate 4 101 1981 employee stock option plan amended 2 102 retirement benefits agreement sigi ziering 3 103 form indemnification agreement officers directors 1 104 1990 stock option plan 5 105 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 5 106 consulting agreement sidney aroesty dated december 14 1994 7 107 description consulting arrangement dr james watson 7 108 description consulting arrangement frederick frank 11 computation net income per share 21 subsidiaries registrant 23 independent auditors consent 27 financial data schedule edgar filing management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 5 incorporated reference registrants annual report form 10k year ended december 31 1990 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 7 incorporated reference registrants annual report form 10k year ended december 31 1994item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1995 1996 consolidated statements income three years ended december 31 1996 consolidated statements shareholders equity three years ended december 31 1996 consolidated statements cash flows three years ended december 31 1996 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k none independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries december 31 1995 1996 related consolidated statements income shareholders equity cash flows three years period ended december 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1995 1996 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles deloitte touche llp los angeles california february 19 1997 consolidated balance sheets dollars thousands see accompanying notes consolidated financial statements consolidated statements income thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders equity dollars thousands see accompanying notes consolidated financial statements consolidated statements cash flows dollars thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends considered reliable indicators future financial performance basis presentation recently adopted financial accounting standard requires review longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss recognized sum future cash flows less carrying amount asset adoption standard year ended december 31 1996 material effect companys financial statements concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral notes consolidated financial statements net income per share net income per share computed using weightedaverage number common shares common share equivalents outstanding period common share equivalents represent dilutive effect outstanding stock options cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1995 1996 12600000 5300000 shortterm commercial paper carrying value cash equivalents approximates fair value inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired arose result purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairments would recognized operating results permanent diminution value occur foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year notes consolidated financial statements foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase forward dollar contracts hedge firm commitments acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses contracts offset gains losses transactions hedged foreign exchange contracts varying maturities generally exceed one year december 31 1995 1996 company approximately 15000000 7000000 foreign exchange contracts outstanding carrying value differ significantly fair value research development research development costs expensed incurred income taxes deferred income taxes represent tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes note 2 business acquistions september 1 1995 company acquired 56 equity interest dpc medlab produtos medico hospitalares ltda companys brazilian distributor march 1 1996 company acquired 50 equity interest dpcn tsakiris sa companys greek distributor note 3 inventories major categories summarized follows notes consolidated financial statements note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis three five years salestype operating leases summarized follows note 5 investment affiliated companies company equity interests four nonconsolidated foreign affiliates distribute companys products countries companys ownership interest follows portugal 40 italy 45 sweden 50 greece 50 company joint venture formed purpose marketing manufacturing companys immunodiagnostic test kits japan joint venture nippon dpc corporation owned equally company dainippon ink chemicals incorporated funded capital contributed debt guaranteed dainippon ink chemicals incorporated technology company following represents condensed financial information companys investments nonconsolidated affiliated companies results operations notes consolidated financial statements company sales nonconsolidated affiliates 12119000 1994 18504000 1995 21409000 1996 including sales one affiliate italy 6005000 1994 10034000 1995 11251000 1996 included companys accounts receivable trade receivables nonconsolidated affiliates 6016000 december 31 1995 11078000 december 31 1996 company received dividends 1994 872000 italian affiliate companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 1996 13474000 deferred taxes provided undistributed earnings amounts intended reinvested note 6 pension profit sharing plans company money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 1469000 1994 1883000 1995 2202000 1996 company profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year contribution profit sharing plan 479000 1994 391000 1995 contribution 1996 note 7 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows notes consolidated financial statements included net deferred income taxes shown consolidated balance sheets 1995 1996 deferred tax assets 6832000 6646000 deferred tax liabilities 181000 211000 december 31 1996 dpc cirrus net operating loss carryforwards federal state income tax purposes approximately 3433000 4288000 expiring varying dates 2001 utilization federal net operating losses subject annual limitations approximately 2000000 federal state income tax asset related dpc cirrus net operating losses recorded accompanying consolidated financial statements reflects companys belief basis available evidence dpc cirrus net operating loss carry forwards realized reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows income tax benefit 1994 1995 1996 related exercise early disposition certain stock options reduced income taxes currently payable 38000 5604000 294000 credited directly shareholders equity note 8 commitments contingent liabilities company entered noncancelable operating lease portion los angeles manufacturing facility partnership comprised two officersshareholders company four children also shareholders one officer director agreement extends december 31 1997 fiveyear renewal option approximately 818000 1994 849000 1995 879000 1996 paid facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2002 fiveyear renewal option future minimum lease commitments december 31 1995 leases follows rental expense operating leases approximated 1340000 1994 1527000 1995 1783000 1996 notes payable includes borrowing 3788000 55 interest companys german subsidiary due semiannual installments march 2006 collateralized certain buildings facility notes consolidated financial statements also included notes payable working capital borrowing 217000 12 interest companys china subsidiary collateralized building facility company supply contract vendor chemical compounds key components immulite system several years vendor involved multiple legal proceedings domestically internationally another company challenged vendors patent rights compounds technology pursuant 1995 settlement agreement company right ten years purchase chemical compounds currently use part agreement company guaranty vendors minimum payment obligations company amount 1000000 1995 1996 600000 next eight years amounts disbursed 1995 1996 guaranty note 9 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable one year installments 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant five years respect optionees 10 shareholders following table summarizes option activity plans november 1985 company granted chief executive officer nonqualified 10year stock option 500000 shares 750 per share fair market value date grant option exercised 1995 103320 shares outstanding common stock received company consideration exercise options 509800 shares 1995 options 152000 shares granted weighted average price 3473 1996 options 104500 shares granted weighted average price 3336 notes consolidated financial statements december 31 1996 company nonqualified option outstanding 50000 shares separate agreement exercise price 3075 per share pursuant plans separate agreement 1071254 shares common stock reserved issuance upon exercise options 429453 shares exercisable december 31 1996 company adopted disclosureonly provisions accounting standard accounting stockbased compensation accordingly compensation expense recognized 1995 1996 stock option grants fair value options granted 1995 1996 date grant estimated 1339 1995 1035 1996 using blackscholes optionpricing model following assumptions dividend yield 16 volatility 227 riskfree interest rates 57 69 forfeiture rate 164 expected life 3 10 years proforma compensation expense affect net income per share 1995 1996 notes consolidated financial statements note 10 segment information company manufactures sells medical diagnostic kits related instrumentation kits instruments sold hospitals medical centers clinics physicians clinical laboratories companys operating locations include united states europe united kingdom germany czech republic poland spain netherlands belgium luxembourg finland rest world australia china brazil companys operations identifiable assets geographical area follows notes consolidated financial statements companys export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years december 31 1995 1996 summarized follows thousands except per share data signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation sigi ziering march 24 1997 sigi ziering chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 file 19957 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 file 19957 5 incorporated reference registrants annual report form 10k year ended december 31 1990 file 19957 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 file 19957 7 incorporated reference registrants annual report form 10k year ended december 31 1994 file 19957 8 incorporated reference registrants annual report form 10k year ended december 31 1995 file 19957item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1996 1997 consolidated statements income three years ended december 31 1997 consolidated statements shareholders equity three years ended december 31 1997 consolidated statements cash flows three years ended december 31 1997 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k none independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries company december 31 1996 1997 related consolidated statements income shareholders equity cash flows three years period ended december 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1996 1997 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles deloitte touche llp los angeles california february 18 1998 consolidated balance sheets dollars thousands see accompanying notes consolidated financial statements consolidated statements income thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral fair value companys financial instruments approximates cost due short term nature case notes payable notes interest rates competitive would available company current market environment notes consolidated financial statements cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1996 1997 5300000 14500000 shortterm commercial paper inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease company reviews longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss recognized future cash flows less carrying amount asset investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired arose result purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairments would recognized operating results permanent diminution value occur foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange translation adjustments accumulated separate component shareholders equity notes consolidated financial statements foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase forward dollar contracts hedge firm commitments acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses contracts offset gains losses transactions hedged foreign exchange contracts varying maturities generally exceed one year december 31 1996 1997 company approximately 7000000 8950000 foreign exchange contracts outstanding carrying value differ significantly fair value research development research development costs expensed incurred income taxes deferred income taxes represent tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes note 2 business acquisitions september 1 1995 company acquired 56 equity interest dpc medlab produtos medico hospitalares ltda companys brazilian distributor march 1 1996 company acquired 50 equity interest dpcn tsakiris sa companys greek distributor april 1 1997 company acquired 100 interest dpc france sas companys french distributor immulite product line note 3 inventories major categories summarized follows notes consolidated financial statements note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis estimated life three five years salestype operating leases summarized follows note 5 investment affiliated companies company equity interests four nonconsolidated foreign affiliates distribute companys products countries companys ownership interest follows portugal 40 italy 45 sweden 50 greece 50 company joint venture formed purpose marketing manufacturing companys immunodiagnostic test kits japan joint venture nippon dpc corporation owned equally company dainippon ink chemicals incorporated funded capital contributed debt guaranteed dainippon ink chemicals incorporated technology company following represents condensed financial information companys investments nonconsolidated affiliated companies results operations notes consolidated financial statements company sales nonconsolidated affiliates 18504000 1995 21409000 1996 21993000 1997 including sales one affiliate italy 10034000 1995 11251000 1996 11352000 1997 included companys accounts receivable trade receivables nonconsolidated affiliates 11078000 december 31 1996 7124000 december 31 1997 company received dividends 1997 1078000 italian affiliate companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 1997 10804000 additional income taxes payable earnings foreign affiliates remitted would substantially offset us tax credits foreign taxes paid note 6 notes payable notes payable consist borrowings certain companys foreign subsidiaries payable subsidiaries local currency notes summarized follows aggregate future maturities longterm debt outstanding december 31 1997 3461000 1998 2722000 1999 1933000 2000 1296000 2001 4861000 2002 1274000 thereafter interest expense 16000 1995 225000 1996 797000 1997 note 7 pension profit sharing plans company money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 1883000 1995 2202000 1996 2365000 1997 company profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year contribution profit sharing plan 391000 1995 contribution 1996 1997 notes consolidated financial statements note 8 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows included net deferred income taxes shown consolidated balance sheets 1997 1996 deferred income tax assets 4814000 6646000 deferred income tax liabilities 69000 211000 december 31 1997 dpc cirrus net operating loss carry forwards federal state income tax purposes approximately 1733000 756000 expiring varying dates 2001 utilization federal net operating losses subject annual limitations approximately 1600000 federal state income tax asset related dpc cirrus net operating losses recorded accompanying consolidated financial statements reflects companys belief basis available evidence dpc cirrus net operating loss carry forwards realized notes consolidated financial statements reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows income tax benefit 1997 1996 1995 related exercise early disposition certain stock options reduced income taxes currently payable 150000 294000 5604000 credited directly shareholders equity note 9 commitments contingent liabilities company exercised option noncancelable operating lease portion los angeles manufacturing facility partnership comprised two officersshareholders company four children also shareholders one officer director agreement extends december 31 2002 approximately 849000 1995 879000 1996 879000 1997 paid facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2002 fiveyear renewal option future minimum lease commitments december 31 1997 leases follows rental expense operating leases approximated 1527000 1995 1783000 1996 2187000 1997 company supply contract vendor chemical compounds key components immulite system company agreed guaranty vendors minimum payment obligations another company amount 1000000 1995 1996 600000 next eight years amounts disbursed 1995 1996 1997 guaranty notes consolidated financial statements note 10 earnings per share december 31 1997 company adopted statement financial accounting standard 128 sfas earnings per share sfas 128 replaces presentation earnings per share eps presentation basic eps based upon weightedaverage number common shares period also requires dual presentation basic diluted eps companies complex capital structures defined eps current prior periods presented conformity provisions sfas 128 following table reconciliation weightedaverage shares used computation basic diluted eps income statement periods presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations note 11 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable one year installments 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant accordance statement financial accounting standards 123 accounting stockbased compensation sfas 123 effective january 1 1996 fair value option grants estimated date grant using blackscholes optionpricing model proforma footnote purposes following assumptions used grants years dividend yield 16 riskfree interest rate 57 69 expected option life 3 10 years expected volatility assumed 227 1995 1996 386 1997 forfeiture rate assumed 164 1995 1996 5 1997 notes consolidated financial statements following table summarizes information stock options outstanding december 31 1997 december 31 1997 company nonqualified option outstanding 50000 shares separate agreement exercise price 3075 per share november 1985 company granted chief executive officer nonqualified 10year stock option 500000 shares 750 per share fair market value date grant option exercised 1995 103320 shares outstanding common stock received company consideration exercise options 509800 shares pursuant plans separate agreement 1916040 shares common stock reserved issuance upon exercise options notes consolidated financial statements permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans fair value method accounting applied companys stock option plans taxeffected impact would follows proforma impact takes account options granted since january 1 1995 likely increase future years additional options granted amortized ratably vesting period note 12 segment information company manufactures sells medical diagnostic kits related instrumentation kits instruments sold hospitals medical centers clinics physicians clinical laboratories companys operating locations include united states europe united kingdom germany czech republic poland spain netherlands belgium luxembourg finland france rest world australia china brazil uruguay venezuela companys operations identifiable assets geographical area follows notes consolidated financial statements companys export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years december 31 1996 1997 summarized follows thousands except per share data signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation sigi ziering march 17 1998 sigi ziering chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 6 32 bylaws amended 6 41 stock certificate 4 101 1981 employee stock option plan amended 2 102 retirement benefits agreement sigi ziering 3 103 form indemnification agreement officers directors 1 104 1990 stock option plan 5 105 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 5 106 consulting agreement sidney aroesty dated december 14 1994 7 107 description consulting arrangement dr james watson 7 108 description consulting arrangement frederick frank 8 109 1997 stock option plan 9 21 subsidiaries registrant 23 independent auditors consent 27 financial data schedule edgar filing management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 file 19957 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 file 19957 5 incorporated reference registrants annual report form 10k year ended december 31 1990 file 19957 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 file 19957 7 incorporated reference registrants annual report form 10k year ended december 31 1994 file 19957 8 incorporated reference registrants annual report form 10k year ended december 31 1995 file 19957 9 incorporated reference registrants annual report form 10k year ended december 31 1996 file 19957item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1997 1998 consolidated statements income three years ended december 31 1998 consolidated statements shareholders equity three years ended december 31 1998 consolidated statements cash flows three years ended december 31 1998 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k none independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries company december 31 1997 1998 related consolidated statements income shareholders equity cash flows three years period ended december 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1997 1998 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles deloitte touche llp los angeles california february 18 1999 consolidated balance sheets dollars thousands see accompanying notes consolidated financial statements consolidated statements income thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders equity dollars thousands see accompanying notes consolidated financial statements consolidated statements cash flows dollars thousands see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral fair value companys financial instruments approximates cost due short term nature case notes payable notes interest rates competitive would available company current market environment cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1997 1998 14500000 12500000 shortterm commercial paper inventories stated lower cost determined firstin firstout basis market notes consolidated financial statements property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease company reviews longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss recognized future cash flows less carrying amount asset investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired arose result purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairments would recognized operating results permanent diminution value occur foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange translation adjustments accumulated separate component shareholders equity foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase forward dollar contracts hedge firm commitments acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses contracts offset gains losses transactions hedged foreign exchange contracts varying maturities generally exceed one year december 31 1997 1998 company approximately 8950000 19900000 foreign exchange contracts outstanding carrying value differ significantly fair value revenue recognition company recognizes sales instruments kits upon shipment customer service contract revenue recognized related contract life research development research development costs expensed incurred notes consolidated financial statements income taxes deferred income taxes represent tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes prospective accounting pronouncements june 1998 financial accounting standards board issued statement financial standards sfas 133 accounting derivative instruments hedging activities statement establishes requirements recording reporting derivative financial instruments including hedging transactions effective financial statements issued periods june 15 1999 company process evaluating impact result implementing sfas 133 note 2 business acquisitions march 1 1996 company acquired 50 equity interest dp c n tsakiris sa companys greek distributor april 1 1997 company acquired 100 interest dpc france sas companys french distributor immulite product line january 1 1998 company acquired 100 interest diagnostic products dpc norway companys norwegian distributor july 1 1998 companys brazilian distributor acquired majority interest dpc medlab centroamerica sa companys distributor costa rica honduras el salvador guatemala panama note 3 inventories major categories summarized follows dollars thousands note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis estimated life three five years notes consolidated financial statements salestype operating leases summarized follows dollars thousands note 5 investment affiliated companies company equity interests four nonconsolidated foreign affiliates distribute companys products countries companys ownership interest follows portugal 40 italy 45 sweden 50 greece 50 company joint venture formed purpose marketing manufacturing companys immunodiagnostic test kits japan joint venture nippon dpc corporation owned equally company dainippon ink chemicals incorporated funded capital contributed debt guaranteed dainippon ink chemicals incorporated technology company following represents condensed financial information companys investments nonconsolidated affiliated companies joint venture japan results operations dollars thousands company sales nonconsolidated affiliates 21409000 1996 21993000 1997 22318000 1998 including sales one affiliate italy 11251000 1996 11352000 1997 11889000 1998 included companys accounts receivable trade receivables nonconsolidated affiliates 7124000 december 31 1997 5766000 december 31 1998 companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 1998 12523000 additional income taxes payable earnings foreign affiliates remitted would substantially offset us tax credits foreign taxes paid notes consolidated financial statements note 6 notes payable notes payable consist borrowings certain companys foreign subsidiaries payable subsidiaries local currency notes summarized follows dollars thousands aggregate future maturities longterm debt outstanding december 31 1998 6260000 1999 2761000 2000 1952000 2001 1849000 2002 1802000 2003 6554000 thereafter interest expense 225000 1996 797000 1997 1824000 1998 note 7 pension profit sharing plans company defined contribution money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 2202000 1996 2365000 1997 2484000 1998 company defined contribution profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year contributions 1996 1997 1998 notes consolidated financial statements note 8 income taxes provision income taxes summarized follows dollars thousands temporary differences comprising net deferred taxes shown consolidated balance sheets follows dollars thousands included net deferred income taxes shown consolidated balance sheets 1998 1997 deferred income tax assets 5348000 4814000 deferred income tax liabilities 38000 69000 reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows dollars thousands notes consolidated financial statements income tax benefit 1998 1997 1996 related exercise early disposition certain stock options reduced income taxes currently payable 300000 150000 294000 credited directly shareholders equity note 9 commitments contingent liabilities company noncancelable operating lease portion los angeles manufacturing facility partnership comprised two officersshareholders company four children also shareholders one officer director agreement extends december 31 2002 approximately 879000 1996 879000 1997 966000 1998 paid facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2002 fiveyear renewal option future minimum lease commitments december 31 1998 leases follows dollars thousands rental expense operating leases approximated 1783000 1996 2187000 1997 2673000 1998 company supply contract vendor chemical compounds key components immulite system company agreed guaranty vendors minimum payment obligations another company annual amount 600000 2004 note 10 earnings per share earnings per share eps presented accordance provisions statement financial accounting standards sfas 128 earnings per share following table reconciliation weightedaverage shares used computation basic diluted eps income statements presented herein shares thousands net income presented consolidated income statement used numerator epscalculation basic diluted computations notes consolidated financial statements note 11 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable one year installments 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant accordance statement financial accounting standards 123 accounting stockbased compensation sfas 123 effective january 1 1996 fair value option grants estimated date grant using blackscholes optionpricing model proforma footnote purposes following assumptions used grants years dividend yield 16 riskfree interest rate 44 59 expected option life 3 10 years expected volatility assumed 227 1996 386 1997 369 1998 forfeiture rate assumed 164 1996 5 1997 1998 notes consolidated financial statements following table summarizes information stock options outstanding december 31 1998 december 31 1998 company nonqualified option outstanding 50000 shares separate agreement exercise price 3075 per share pursuant plans separate agreement 1722190 shares common stock reserved issuance upon exercise options permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans fair value method accounting applied companys stock option plans taxeffected impact would follows dollars thousands except per share data proforma impact takes account options granted since january 1 1995 likely increase future years additional options granted amortized ratably vesting period note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 disclosures segments enterprise related information kits required run instruments utilize similar technology instrument manufacturing processes company manufacturers instruments kits principally facilities united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama notes consolidated financial statements company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed companys chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows dollars thousands december 31 1998 dollars thousands notes consolidated financial statements dollars thousands dollars thousands notes consolidated financial statements companys export sales unaffiliated customers summarized follows dollars thousands supplementary financial data unaudited quarterly financial information years december 31 1997 1998 summarized follows thousands except per share data signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation sigi ziering march 23 1999 sigi ziering chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 file 19957 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 file 19957 5 incorporated reference registrants annual report form 10k year ended december 31 1990 file 19957 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 file 19957 7 incorporated reference registrants annual report form 10k year ended december 31 1996 file 19957item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1998 1999 consolidated statements income three years ended december 31 1999 consolidated statements shareholders equity three years ended december 31 1999 consolidated statements cash flows three years ended december 31 1999 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k company filed form 8k date event reported december 17 1999 december 27 1999 reported item 5 events independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries company december 31 1998 1999 related consolidated statements income shareholders equity cash flows three years period ended december 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1998 1999 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states america deloitte touche llp los angeles california february 17 2000 consolidated balance sheets see accompanying notes consolidated financial statements consolidated statements income see accompanying notes consolidated financial statements consolidated statements shareholders equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation dpc company majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral fair value companys financial instruments approximates cost due short term nature case notes payable notes interest rates competitive would available company current market environment cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1998 1999 12500000 7600000 respectively shortterm commercial paper inventories stated lower cost determined firstin firstout basis market notes consolidated financial statements property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease company reviews longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated value carrying value related asset recognized future cash flows less carrying amount asset investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired represents difference investment cost underlying fair value assets purchased arose result purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairment would recognized permanent diminution value determined occurred foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange translation adjustments accumulated separate component shareholders equity foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase forward dollar contracts hedge firm anticipated commitments acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses contracts offset gains losses transactions hedged foreign exchange contracts varying maturities generally exceed one year december 31 1998 1999 company approximately 19900000 5000000 foreign exchange contracts outstanding carrying value differ significantly fair value revenue recognition company recognizes sales instruments kits upon shipment customer unless equipment rented leased case revenue recognized life rental lease agreement service contract revenue recognized related contract life research development research development costs expensed incurred notes consolidated financial statements income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory tax rate prospective accounting pronouncements june 1998 financial accounting standards board issued statement financial standards sfas 133 accounting derivative instruments hedging activities statement amended sfas 137 establishes requirements recording reporting derivative financial instruments including hedging transactions adopted company january 1 2001 company process evaluating impact result implementing sfas 133 reclassifications minority interest accompanying 1998 1997 consolidated statements income reclassified conform 1999 classifications previously minority interest included general administrative expenses effect separately stating minority interest decrease general administrative expenses 370000 574000 years ended december 31 1998 1997 respectively note 2 business acquisitions april 1 1997 company acquired 100 interest dpc france sas companys french distributor immulite product line january 1 1998 company acquired 100 interest diagnostic products dpc norway companys norwegian distributor july 1 1998 companys brazilian distributor acquired majority interest dpc medlab centroamerica sa companys distributor costa rica honduras el salvador guatemala panama january 1 1999 company acquired additional 50 interest dpc skafte ab sweden january 1 1999 company owns 100 dpc skafte ab note 3 inventories major categories summarized follows note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis estimated lives range three five years notes consolidated financial statements salestype operating leases summarized follows note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute companys products countries companys ownership interest follows portugal 40 italy 45 greece 50 company formed joint venture purpose marketing manufacturing companys immunodiagnostic test kits japan joint venture nippon dpc corporation owned equally company dainippon ink chemicals incorporated dic operated capital contributed debt guaranteed dainippon ink chemicals incorporated technology company dic subsequently decided sell assets joint venture third party company continue distribute products japan third party purchaser iatron laboratories inc following represents condensed financial information companys investments nonconsolidated affiliated companies joint venture japan results operations information presented includes 50 owned dpc skafte ab sweden years ended december 31 1997 1998 1999 dpc skafte ab 100 owned consolidated therefore included nonconsolidated affiliated companies company sales nonconsolidated affiliates 21993000 1997 22318000 1998 27885000 1999 including sales one affiliate italy 11352000 1997 11889000 1998 16858000 1999 included companys accounts receivable trade receivables nonconsolidated affiliates 5766000 december 31 1998 6032000 december 31 1999 notes consolidated financial statements companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 1999 10751000 anticipated additional income taxes payable earnings undistributed foreign affiliates would substantially offset us tax credits foreign taxes paid note 6 notes payable notes payable consist borrowings certain companys foreign subsidiaries payable subsidiaries local currency notes summarized follows aggregate future maturities longterm debt outstanding december 31 1999 5593000 2000 1935000 2001 1884000 2002 1860000 2003 1626000 2004 2858000 thereafter interest expense 797000 1997 1824000 1998 1068000 1999 company also line credit amount 20 million matures may 2000 borrowings outstanding december 31 1999 1998 1997 line note 7 employee benefit plans company defined contribution money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 2365000 1997 2484000 1998 2989000 1999 company defined contribution profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year contributions 1997 1998 1999 january 1 2000 company merged assets pension plan profit sharing plan terms conditions merged plan comparable existing plans except employees may also make contributions plan provisions section 401 k internal revenue code notes consolidated financial statements note 8 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows notes consolidated financial statements income tax benefit 1999 1998 1997 related exercise early disposition certain stock options reduced income taxes currently payable 87000 300000 150000 credited directly shareholders equity note 9 commitments contingent liabilities company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement extends december 31 2002 approximately 879000 1997 966000 1998 966000 1999 paid company facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2002 fiveyear renewal option future minimum lease commitments december 31 1999 leases follows rental expense operating leases approximated 2187000 1997 2673000 1998 3107000 1999 company supply contract vendor chemical compounds key components immulite system company agreed guaranty vendors minimum payment obligations another company annual amount 600000 2004 note 10 earnings per share earnings per share eps presented accordance provisions sfas 128 earnings per share following table reconciliation weightedaverage shares used computation basic diluted eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations notes consolidated financial statements note 11 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable one year installments 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant accordance sfas 123 accounting stockbased compensation effective january 1 1996 fair value option grants estimated date grant using blackscholes optionpricing model pro forma footnote purposes following assumptions used grants years dividend yield 17 riskfree interest rate 44 59 expected option life 3 10 years expected volatility assumed 386 1997 369 1998 271 1999 forfeiture rate assumed 5 1997 1998 1999 notes consolidated financial statements following table summarizes information stock options outstanding december 31 1999 pursuant plans 1701750 shares common stock reserved issuance upon exercise options permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans fair value method accounting applied companys stock option plans taxeffected impact would follows proforma impact takes account options granted subsequent january 1 1995 likely increase future years additional options granted amortized ratably vesting period note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 disclosures segments enterprise related information kits required run instruments utilize similar technology instrument manufacturing processes company manufacturers instruments kits principally facilities united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france estonia sweden australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama notes consolidated financial statements company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed companys chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows notes consolidated financial statements notes consolidated financial statements companys export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 1998 1999 summarized follows signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation sigi ziering march 29 2000 sigi ziering chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 file 19957 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 file 19957 5 incorporated reference registrants annual report form 10k year ended december 31 1990 file 19957 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 file 19957 7 incorporated reference registrants quarterly report form 10q quarter ended september 30 1999 file 19957item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors report consolidated balance sheets december 31 1999 2000 consolidated statements income three years ended december 31 2000 consolidated statements shareholders equity three years ended december 31 2000 consolidated statements cash flows three years ended december 31 2000 notes consolidated financial statements 2 supplementary financial data 3 exhibits see exhibit index appears signature page report b reports form 8k none filed fourth quarter 2000 independent auditors report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries company december 31 1999 2000 related consolidated statements income shareholders equity cash flows three years period ended december 31 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 1999 2000 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america deloitte touche llp los angeles california february 16 2001 consolidated balance sheets dollars thousands see accompanying notes consolidated financial statements consolidated statements income thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principals consolidation consolidated financial statements include accounts diagnostic products corporation dpc company majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method minority interest represents 44 companys brazilian subsidiary owned factors may affect future results companys future operating results dependent ability research develop manufacture market innovative products meet customers needs inherent process number risks company must successfully manage order achieve favorable operating results companys products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material companys operations financial position portion companys research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company purchases certain chemical compounds key components immulite system pursuant agreements effective february 9 1995 lumigen inc tropix inc company right ten years purchase certain specified chemical compounds lumigen certain circumstances tropix sole suppliers chemical compounds tropix also agreed supply company certain chemical compounds use veterinary kits ten years upon expiration ten year supply agreement company believes either use alternate technology enter new supply arrangement although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments companys financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables companys cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers financial condition generally require collateral fair value companys financial instruments approximates cost due short term nature case notes payable notes interest rates competitive would available company current market environment cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 1999 2000 7600000 14700000 respectively shortterm commercial paper notes consolidated financial statements inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease company reviews longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus companys equity undistributed net income since acquisition less amortization excess cost net assets acquired excess cost net assets acquired excess cost net assets acquired represents difference cost underlying fair value assets purchased relates purchase certain companys foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairment would recognized permanent diminution value determined occurred foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange translation adjustments accumulated separate component shareholders equity foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered companys european subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company engage speculation companys foreign exchange contracts subject company exchange rate movement risk gains losses transactions hedged offset losses gains contracts foreign exchange contracts varying maturities generally exceed one year december 31 1999 2000 company foreign exchange contracts outstanding buy equivalent approximately 5000000 3750000 carrying value differ significantly fair value revenue recognition company recognizes sales instruments kits upon shipment customer unless equipment rented leased case revenue recognized life rental lease agreement service contract revenue recognized related contract life research development research development costs expensed incurred notes consolidated financial statements income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory tax rate new accounting pronouncements june 1998 financial accounting standards board fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 133 sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value company adopted sfas 133 january 1 2001 initial adoption sfas 133 material effect companys consolidated financial statements results operations december 1999 securities exchange commission sec issued staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 amended summarizes certain secs views applying generally accepted accounting principles revenue recognition financial statements sab 101 material effect companys consolidated financial statements revenue recognition policies note 2 business acquisitions january 1 1998 company acquired 100 interest diagnostic products dpc norway companys norwegian distributor july 1 1998 companys brazilian distributor acquired majority interest dpc medlab centroamerica sa companys distributor costa rica honduras el salvador guatemala panama january 1 1999 company acquired additional 50 interest dpc skafte ab sweden january 1 1999 company owns 100 dpc skafte ab note 3 inventories major categories summarized follows note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years operating leases cost equipment amortized straightline basis estimated lives range three five years notes consolidated financial statements salestype operating leases summarized follows note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute companys products respective countries companys ownership interest follows portugal 40 italy 45 greece 50 following represents condensed financial information companys investments nonconsolidated affiliated companies joint venture japan inactive since april 1 2000 results operations information presented includes 50 owned dpc skafte ab sweden year ended december 31 1998 1999 2000 dpc skafte ab 100 owned consolidated therefore included nonconsolidated affiliated companies company sales nonconsolidated affiliates 22318000 1998 27885000 1999 24864000 2000 including sales one affiliate italy 11889000 1998 16858000 1999 18453000 2000 included companys accounts receivable trade receivables nonconsolidated affiliates 6032000 december 31 1999 2251000 december 31 2000 notes consolidated financial statements companys cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 2000 12362000 anticipated additional income taxes payable earnings foreign affiliates distributed would substantially offset us tax credits foreign taxes paid note 6 notes payable notes payable consist borrowings certain companys foreign subsidiaries guaranteed dpc payable subsidiaries local currency notes summarized follows aggregate future maturities longterm debt outstanding december 31 2000 5477000 2001 2542000 2002 2552000 2003 2383000 2004 1798000 2005 805000 thereafter interest expense 1824000 1998 1068000 1999 1011000 2000 company also line credit bank may borrow 20 million matures may 2001 standby letters credit line credit totaled 386000 2000000 december 31 2000 1998 respectively standby letters credit outstanding december 31 1999 borrowings outstanding december 31 2000 1999 1998 line credit note 7 employee benefit plans company defined contribution money purchase pension plan covering substantially us employees 21 years age contributions pension plan made annually amount equal 10 compensation participants year contributions pension plan 2484000 1998 2989000 1999 3864000 2000 company defined contribution profit sharing plan covering substantially us employees 21 years age contributions profit sharing plan year made discretion board directors company excess 15 compensation participants year company contributed 773000 profit sharing plan 2000 contributions 1999 1998 january 1 2000 company merged assets pension plan profit sharing plan terms conditions merged plan comparable existing plans except employees may also make contributions plan provisions section 401k internal revenue code company contributed 431000 401k employer matches 2000 notes consolidated financial statements note 8 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows notes consolidated financial statements income tax benefit 2000 1999 1998 related exercise early disposition certain stock options reduced income taxes currently payable 1219000 87000 300000 respectively credited directly shareholders equity note 9 commitments contingent liabilities company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement extends december 31 2002 approximately 966000 1998 966000 1999 966000 2000 paid company facility lease agreement dpc cirrus entered noncancelable operating lease randolph new jersey manufacturing facility agreement extends november 30 2002 fiveyear renewal option future minimum lease commitments december 31 2000 follows aggregate rental expense operating leases approximated 2673000 1998 3107000 1999 4429000 2000 company supply contract vendor chemical compounds key components immulite system company agreed guaranty vendors minimum payment obligations another company annual amount 600000 2004 note 10 earnings per share following table reconciliation weightedaverage shares used computation basic diluted eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations notes consolidated financial statements note 11 stock option plans companys stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant accordance sfas 123 accounting stockbased compensation effective january 1 1996 fair value option grants estimated date grant using blackscholes optionpricing model proforma footnote purposes following assumptions used grants years dividend yield 10 17 riskfree interest rate 44 66 expected option life 3 10 years expected volatility assumed 369 1998 271 1999 301 2000 forfeiture rate assumed 5 1998 1999 2000 notes consolidated financial statements following table summarizes information stock options outstanding december 31 2000 pursuant plans 1364690 shares common stock reserved issuance upon exercise options addition 1000000 share increase number shares reserved issuance plans subject shareholder approval 2001 annual meeting shareholders permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans fair value method accounting applied companys stock option plans taxeffected impact would follows proforma impact takes account options granted subsequent january 1 1995 likely increase future years additional options granted amortized ratably vesting period note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 disclosures segments enterprise related information kits required run instruments utilize similar technology instrument manufacturing processes company manufacturers instruments kits principally facilities united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france estonia sweden australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama notes consolidated financial statements company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed companys chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows notes consolidated financial statements notes consolidated financial statements companys export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 1999 2000 summarized follows signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 6 32 bylaws amended 6 41 stock certificate 4 101 1981 employee stock option plan amended 2 102 retirement benefits agreement sigi ziering 3 103 form indemnification agreement officers directors 1 104 1990 stock option plan amended 7 105 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 5 106 1997 stock option plan amended 7 21 subsidiaries registrant 23 independent auditors consent management contracts compensation plans arrangements 1 incorporated reference registrants quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrants quarterly report form 10q quarter ended june 30 1991 file 19957 3 incorporated reference registrants registration statement form s1 file 277287 filed may 3 1982 4 incorporated reference registrants annual report form 10k year ended december 31 1988 file 19957 5 incorporated reference registrants annual report form 10k year ended december 31 1990 file 19957 6 incorporated reference registrants quarterly report 10q quarter ended june 30 1992 file 19957 7 incorporated reference registrants quarterly report form 10q quarter ended september 30 1999 file 19957item 14 controls procedures based evaluation company’s disclosure controls procedures date within 90 days prior filing report chief executive officer chief financial officer company concluded disclosure controls procedures effective provide reasonable assurance material information relating company consolidated subsidiaries made known others within entities since date evaluation significant changes internal controls factors could significantly affect internal controls including corrective action regard significant deficiencies material weaknesses fourth quarter fiscal year 2002 company discovered internally chinese subsidiary made payments certain customers china may violated foreign us law including foreign corrupt practices act company stopped payments immediately board directors conducted independent investigation nature payments involvement company personnel whether similar situations existed company’s foreign operations based results investigation audit committee concluded senior management company implicated payments apparent similar issues respect company’s foreign operations company’s disclosure committee conducted comprehensive review company’s internal controls procedures relate issues additional policies procedures implemented ensure compliance applicable laws item 15item 14 principal accountant fees services information contained second third paragraphs section entitled “the company’s auditors audit fees” company’s proxy statement 2005 annual meeting shareholders filed sec may 2 2005 hereby incorporated herein reference proxy statement filed may 2 2005 information required item included amendment form 10k filed may 2 2005 part iv item 15item 14 principal accountant fees services information contained second third paragraphs section entitled “the company’s auditors audit fees” company’s proxy statement 2006 annual meeting shareholders filed sec may 1 2006 hereby incorporated herein reference part iv item 15item 14 principal accountant fees services information contained second third paragraphs section entitled “the company’s auditors audit fees” company’s proxy statement 2004 annual shareholders meeting hereby incorporated herein reference part iv item 15item 14 exhibits financial statement schedules reports form 8k independent auditors’ report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries “company” december 31 2001 2000 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2001 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america deloitte touche llp los angeles california february 22 2002 consolidated balance sheets see accompanying notes consolidated financial statements consolidated statements income see accompanying notes consolidated financial statements consolidated statements shareholders’ equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principals consolidation consolidated financial statements include accounts diagnostic products corporation “dpc” “company” majorityowned subsidiaries elimination intercompany accounts transactions investments nonmajorityowned companies accounted company using equity method minority interest represents 44 brazilian subsidiary owned factors may affect future results company’s future operating results dependent ability research develop manufacture successfully market innovative products meet customers’ needs inherent process number risks company must successfully manage order achieve favorable operating results company’s business affected government regulations united states abroad generally regulations effect inhibiting growth rate immunodiagnostic industry company’s products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration company’s products marketed without regulatory clearance many foreign countries certain countries brazil australia japan european union review procedures operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material company’s operations financial position portion company’s research development activities corporate headquarters manufacturing operations located near major earthquake faults ultimate impact company unknown operating results could materially affected event major earthquake company partially insured losses interruptions caused earthquakes preparation financial statements conformity generally accepted accounting principles united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company purchases certain chemical compounds key components immulite system lumigen inc tropix inc sole suppliers chemical compounds pursuant agreements expire 2005 tropix also supplies company certain chemical compounds use veterinary kits upon termination supply agreements company required enter new supply agreements use alternate technologies assurance company able obtain alternate technology obtainable technology performance characteristics able obtain technology lumigentropix others favorable terms company owns 8 interest lumigen inc accounts interest using equity method although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables company’s cash equivalents short term high quality commercial paper concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers’ financial condition generally require collateral fair value company’s financial instruments approximates cost due short term nature case notes payable notes interest rates competitive would available company current market environment notes consolidated financial statements cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents december 31 2000 december 31 2001 company 26395000 31834000 cash equivalents included cash equivalents december 31 2000 2001 14700000 19900000 respectively shortterm highquality commercial paper inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term lease company reviews longlived assets certain identifiable intangibles impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset investments affiliated companies investments affiliated companies principally represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus company’s equity undistributed net income since acquisition additionally company owns 8 interest lumigen inc accounts interest using equity method excess cost net assets acquired excess cost net assets acquired represents difference cost underlying fair value assets purchased relates purchase certain company’s foreign distributors excess cost net assets acquired amortized 20 years using straightline method company periodically reviews excess cost net assets acquired assess recoverability impairment would recognized permanent diminution value determined occurred effective january 1 2002 amortization goodwill cease see “new accounting pronouncements” foreign currency translation assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts weighted average rate effect year foreign exchange translation adjustments accumulated separate component shareholders’ equity foreign exchange instruments june 1998 financial accounting standards board “fasb” issued statement financial accounting standards 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value company adopted sfas 133 january 1 2001 initial adoption sfas 133 material effect company’s consolidated financial statements results operations company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered company’s european subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company enter speculative foreign exchange contracts company’s foreign exchange contracts subject company exchange rate movement risk notes consolidated financial statements gains losses transactions hedged offset losses gains contracts foreign exchange contracts outstanding buy us dollars equivalent approximately 5000000 500000 december 31 2000 2001 respectively carrying value contracts differ significantly fair value revenue recognition company recognizes sales instruments kits upon shipment customer unless equipment rented leased case revenue recognized life rental lease agreement see note 4 service contract revenue recognized related contract life research development research development costs expensed incurred years ended december 31 1999 2000 2001 company incurred research development expenses 24550000 26464000 31447000 respectively income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory tax rate valuation allowances established deferred tax assets likely realized new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards “sfas” 141 “business combinations” sfas 142 “goodwill intangible assets” sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill including goodwill recorded business combinations occurring prior june 30 2001 cease upon adoption statement addition standard includes provisions reclassification certain existing recognized intangibles goodwill reassessment useful lives existing recognized intangibles reclassification certain intangibles previously reported goodwill identification reporting units purposes assessing potential future impairments goodwill sfas nos 141 142 goodwill intangibles initially assessed impairment upon adoption statements subsequent assessments required annually reason suspect values diminished impaired corresponding writedowns recognized necessary company required implement sfas 141 july 1 2001 determined impact statement material consolidated financial position results operations company required implement sfas 142 january 1 2002 adopted annual goodwill amortization approximately 13 million cease furthermore transitional impairment test required within six months adoption sfas 142 company completed transition impairment test therefore determined impact statement consolidated financial position results operations third quarter 2001 financial accounting standards board issued sfas 143 “accounting asset retirement obligations” sfas 144 “accounting impairment disposal longlived assets” new standards clarify supersede existing guidance reporting accounting asset impairments asset retirements sfas 143 effective company beginning january 1 2003 sfas 144 effective company beginning january 1 2002 company still process evaluating impact sfas 143 consolidated financial position results operations adoption sfas 144 material company’s consolidated financial position results operations stock split share per share amounts consolidated financial statements adjusted 2for1 stock split occurring june 1 2001 notes consolidated financial statements reclassifications certain amounts reclassified 2000 balance sheet conform 2001 presentation note 2 business acquisitions january 1 1999 company acquired 50 interest dpc skafte ab sweden already december 31 2001 company’s brazilian distributor acquired 100 interest laboratory testing company brazil operating name medlab productos diagnosticos ltda upfront payment 2035000 additional consideration may paid based 2002 2003 results acquired company previously owned company’s brazilian distributor’s minority shareholder note 3 inventories major categories summarized follows note 4 salestype operating leases company places immulite instruments customers salestype operating leases periods generally three five years salestype leases recorded revenue receivable inception lease amount present value future minimum lease payments received lease term operating leases cost equipment amortized straightline basis estimated lives range three five years net investment salestype operating leases included salestype operating leases accompanying consolidated balance sheets salestype operating leases summarized follows future minimum lease payments received lease agreements december 31 2001 follows notes consolidated financial statements note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute company’s products respective countries company’s ownership interest follows portugal 45 italy 45 greece 50 following represents condensed financial information company’s investments nonconsolidated affiliated companies joint venture japan inactive since april 1 2000 results operations company sales nonconsolidated affiliates 27030000 2001 24893000 2000 27885000 1999 including sales one affiliate italy 20124000 2001 18453000 2000 16858000 1999 notes consolidated financial statements company’s cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 2001 13601000 anticipated additional us income taxes payable earnings foreign affiliates distributed would substantially offset us tax credits foreign taxes paid note 6 notes payable notes payable consist borrowings certain company’s foreign subsidiaries guaranteed dpc payable subsidiaries’ local currency notes summarized follows aggregate future maturities longterm debt outstanding december 31 2001 5189000 2002 3373000 2003 3226000 2004 2373000 2005 2853000 2006 interest expense 1068000 1999 1011000 2000 1269000 2001 company also line credit us bank may borrow 20 million matures may 2002 standby letters credit line credit totaled 386000 december 31 2000 2001 standby letters credit outstanding december 31 1999 borrowings outstanding december 31 2001 2000 1999 line credit note 7 employee benefit plans company defined contribution employee benefit plan diagnostic products corporation retirement plan “plan” covering substantially us employees 21 years age plan offers three primary benefits employees money purchase pension profit sharing plan effective january 1 2000 salary deferral plan provisions section 401k internal revenue code contributions money purchase pension made annually amount equal 10 compensation participants year contributions related pension benefit 4544000 2001 3864000 2000 2989000 1999 contributions related profit sharing component year made discretion board directors company cannot exceed 15 compensation participants year company contributed 1384000 profit sharing component 2001 773000 2000 contributions 1999 contributions 401k salary deferral option employee percentage increments employee’s salary exceed maximum allowable federal law company matches contributions rate 50 percent first 1000 compensation contributed employee company contributed 401k employer matches 461000 2001 431000 2000 notes consolidated financial statements note 8 income taxes provision income taxes summarized follows temporary differences comprising net deferred taxes shown consolidated balance sheets follows valuation allowance established certain state credit carry forwards company believes utilized reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows notes consolidated financial statements income tax benefit 2001 2000 1999 related exercise early disposition certain stock options reduced income taxes currently payable 3566000 1219000 87000 respectively credited directly shareholders’ equity note 9 commitments contingent liabilities company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement extends december 31 2002 company paid approximately 966000 1999 2000 2001 facility lease agreement future minimum lease commitments december 31 2001 follows aggregate rental expense operating leases approximated 3107000 1999 4429000 2000 4302000 2001 company supply contract vendor chemical compounds key components immulite system company agreed guarantee vendor’s minimum payment obligations another company annual amount 600000 2004 note 10 earnings per share following table reconciliation weightedaverage shares used computation basic diluted eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations notes consolidated financial statements note 11 stock option plans company’s stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options generally become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant accordance sfas 123 “accounting stockbased compensation” effective january 1 1996 fair value option grants estimated date grant using blackscholes optionpricing model proforma footnote purposes following assumptions used grants years dividend yield 10 17 riskfree interest rate 44 66 expected option life 3 10 years expected volatility assumed 271 1999 301 2000 360 2001 forfeiture rate assumed 5 1999 2000 2001 notes consolidated financial statements following table summarizes information stock options outstanding december 31 2001 pursuant plans 2492018 shares common stock reserved issuance upon exercise options addition company 1722800 options available future grant permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans fair value method accounting applied company’s stock option plans taxeffected impact would follows proforma impact takes account options granted subsequent january 1 1995 likely increase future years additional options granted amortized ratably vesting period note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 “disclosures segments enterprise related information” kits required run instruments utilize similar technology instrument manufacturing processes company manufactures instruments kits principally facilities located united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france estonia sweden australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama notes consolidated financial statements company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed company’s chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows dpc biermann includes company’s operations germany czech republic poland dpc medlab includes company’s operations brazil uruguay venezuela costa rica panama notes consolidated financial statements notes consolidated financial statements company’s export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 2001 2000 summarized follows signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation michael ziering michael ziering president chief executive officer chairman board principal executive officer director march 27 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 2 32 bylaws amended 6 41 stock certificate 4 101 retirement benefits agreement sigi ziering 3 102 form indemnification agreement officers directors 1 103 1990 stock option plan amended 7 104 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 5 105 1997 stock option plan amended 8 subsidiaries registrant independent auditors’ consent item 7 managements discussion analysis financial condition results operations companys sales increased 26 1995 160 million following 18 increase 1994 126 million notwithstanding severe restrictions placed worldwide health care expenditures company reported doubledigit 1995 1994 sales increases principally result increased worldwide acceptance fully automated random access immulite system company doubled number immulite systems placed 1995 compared total placed prior two years shipments immulite reagents doubled 1995 compared 1994 immulite system expected continue account greatest amount growth companys product lines foreseeable future although ria kits continue generate profitable sales product line matured worldwide basis experiencing slow decline sales growth immulite products 1994 1995 future expected partially offset declines ria sales 1995 approximately 79 companys sales nonus compared 76 1994 75 1993 europe companys principal foreign market accounting 55 total sales compared 54 1994 53 1993 periods us dollar weakening effect translation financial statements consolidated foreign affiliates higher sales costs net income weaker us dollar 1995 compared 1994 resulted higher reported sales approximately 5 higher reported net income 3 weaker us dollar 1994 compared 1993 resulted less 1 translation effect sales net income 1995 1994 cost sales percentage sales 44 compared 40 1993 1995 1994 cost sales percentages higher due higher cost sales immulite instruments compared reagents instrument sales percentage total sales continue increase unlikely gross margin ever fully return historical levels achieved company primarily reagent manufacturer selling expense percentage sales 18 1995 19 1994 1993 dollar amount continues increase primarily result continual expansion marketing sales effort especially immulite system research development expenditures percentage sales 10 1995 11 1994 12 1993 dollar amount expenditures increased support immulite system general administrative expenses percentage sales 9 1995 11 1994 12 1993 included general administrative expenses amortization excess cost net assets acquired equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian affiliate whose 1995 net income substantially lower 1994 previous years profitability italy adversely influenced combination 1 reduced sales caused current serious economic problems reductions health care cost reimbursements 2 impact substantial weakening italian currency relation us dollar 1993 investment income consists interest income companys cash equivalents companys effective tax rate includes federal state foreign taxes 1995 rate 26 compares 26 1994 29 1993 lower rate 1995 1994 result higher income levels generated lower tax rate jurisdictions increased utilization foreign tax credits additionally 1995 company determined would realize benefit available state net operating loss carryforwards resulting reversal previously established valuation allowance company adequate working capital sources capital carry current business meet existing capital requirements cash flow operating activities 185 million 1995 185 million 1994 10 million 1993 cash flow used plant equipment additions renovations 81 million 1995 45 million 1994 76 million 1993 cash flow used salestype operating leases 64 million 1995 4 million 1994 37 million 1993 1994 first quarter 1995 company paid cash dividend 10 per share commencing second quarter 1995 quarterly dividend increased 12 per share 1994 company repurchased 190800 shares common stock open market cost 3728000 1993 company repurchased 93000 shares common stock open market cost 1689000 company required adopt new accounting standards future 1996 company required adopt statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed company anticipates sfas 121 material impact companys financial statements addition 1996 company required adopt sfas 123 accounting stockbased compensation primary impact standard relate certain disclosure companys stock option plan company continue account employee stock options accounting principles board opinion 25 item 8item 7 managements discussion analysis financial condition results operations companys sales increased 11 1996 177 million following 26 increase 1995 160 million notwithstanding continuing severe restrictions placed worldwide health care expenditures company reported doubledigit 1996 1995 sales increases principally result increased worldwide acceptance fully automated random access immulite system 1996 company shipped approximately 800 immulite units bringing cummulative total shipped 2400 units immulite system expected continue account greatest amount growth companys product lines foreseeable future immulitereagents instruments accounted approximately 50 total sales 1996 company introduced next generation immulite 2000 system 1996 expects product contribute sales second half 1997 although ria kits continue generate profitable sales product line matured worldwide basis experiencing slow decline sales growth immulite products 1995 1996 future expected partially offset declines ria sales 1996 approximately 80 companys sales nonus compared 79 1995 76 1994 europe companys principal foreign market accounting 51 total sales compared 55 1995 54 1994 company also expanding growing markets south america eastern europe far east periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income stronger us dollar 1996 compared 1995 resulted lower reported sales net income approximately 1 weaker us dollar 1995 compared 1994 resulted higher reported 1995 sales 5 higher net income 3 1996 cost sales percentage sales 43 compared 44 1995 1994 lower margin instrument sales percentage sales continue increase unlikely gross margins return historical levels achieved company primarily reagent manufacturer selling expense percentage sales 20 1996 18 1995 19 1994 major component increase due inclusion brazilian distributor acquired september 1 1995 1996 four months 1995 period remainder increased costs result continued expansion marketing sales effort immulite product line preparation launch immulite 2000 1997 research development expenditures percentage sales 10 1996 1995 11 1994 dollar amount expenditures increased support immulite systems general administrative expenses percentage sales 11 1996 9 1995 11 1994 major component increase due inclusion brazilian distributor acquired september 1 1995 1996 four months 1995 period included general administrative expenses amortization excess cost net assets acquired 1994 888000 1995 920000 1996 984000 1995 1996 minority interest 1995 246000 1996 513000 equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian affiliate whose 1996 net income higher 1995 profitability previous years italy adversely influenced reduced sales caused serious economic problems reductions health care cost reimbursements investment income consists interest income companys cash equivalents interest equipment contracts companys effective tax rate includes federal state foreign taxes 1996 rate 28 compares 26 1995 1994 lower rate 1995 1994 results principally benefit state net operating loss carryforwards dpc cirrus foreign tax credits respectively company adequate working capital sources capital including unused 10 million unsecured line credit carry current business meet existing capital requirements cash flow operating activities 187 million 1996 236 million 1995 207 million 1994 cash flow used plant equipment additions renovations 8 million 1996 81 million 1995 45 million 1994 cash flow used salestype operating leases 119 million 1996 115 million 1995 62 million 1994 first quarter 1995 company paid cash dividend 10 per share commencing second quarter 1995 quarterly dividend increased 12 per share 1994 company repurchased 190800 shares common stock open market cost 3728000 item 8item 7 managements discussion analysis financial condition results operations companys sales increased 5 1997 186 million compared sales 177 million 1996 increased 11 1995 sales immulite instruments assays principal factor sales growth last three years 1997 sales immulite instruments assays represented 60 1997 sales compared 50 sales 1996 unit sales immulite test kits grew 34 1997 december 31 1997 1996 1995 company shipped cumulative basis approximately 3200 2400 1600 immulite instruments sales increases partially offset expected continuing decline sales ria kits decreased 50 sales 1995 approximately 30 sales 1997 foreign sales percentage total sales 80 1997 1996 79 1995 europe companys principal foreign market representing 48 51 55 sales respective years due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income based comparative exchange rates immediately preceding year translation adjustments resulted approximately 5 decrease 1997 sales 1 decrease 1996 sales 5 increase 1995 sales due relatively weaker us dollar 1995 compared 1994 due intense competition companys foreign distributors unable increase prices offset negative effect strong us dollar sales growth 1997 also restrained due delays release next generation immulite instrument immulite 2000 originally expected released second quarter 1997 immulite 2000 released first quarter 1998 company expects ship approximately 400 immulite 2000 systems 1998 addition approximately 500 original immulite units cost sales increased 8 1997 9 1996 percentage sales remained relatively constant last three years representing 44 43 44 sales 1997 1996 1995 1997 cost sales negatively impacted delay release immulite 2000 addition change product mix primarily higher margin ria kits lower margin immulite instruments threeyear period reduced gross margins compared prior years result anticipated increase instrument sales declining ria sales 1998 company expects gross margins range 51 54 1998 assuming changes value us dollar selling expense percentage sales 20 18 1997 1996 1995 expenditures increased 7 1997 20 1996 primarily support expansion immulite product line launch immulite 2000 major component increase 1996 inclusion brazilian distributor acquired september 1 1995 1996 four months 1995 research development expenditures increased 11 1997 10 1996 compared prior year percentage sales research development expenditures 11 1997 10 1996 9 1995 dollar amount expenditures increased support continuing development new immulite instruments expansion immulite assay menu general administrative expenses increased 20 1997 29 1996 prior year representing 12 11 9 sales 1997 1996 1995 increase 1997 primarily due currency exchange transaction losses 17 million startup costs associated establishing distribution subsidiary france major component increase 1996 inclusion brazilian distributor acquired september 1 1995 1996 four months 1995 included general administrative expenses amortization excess cost net assets acquired 1997 984000 1996 984000 1995 920000 minority interest 1997 574000 1996 513000 1995 246000 equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian distributor amount decreased 15 1997 1996 primarily due reduced net income italian distributor due strong dollar amount increased 14 1996 1995 primarily due higher net income italian distributor depressed prior years due economic problems italy reductions health care cost reimbursements net interest income represents excess interest income interest equipment contracts interest expense net interest income 1997 decreased 54 1996 19 1996 1995 due increased borrowings periods companys effective tax rate includes federal state foreign taxes effective tax rate increased 1997 29 1996 28 1995 26 1996 1995 company recognized tax benefits related utilization foreign state net operating losses substantially reduced 1997 company expects 1998 effective tax rate increase 31 net income decreased 205 1997 18248 million 10 sales 22947 million 13 sales 1996 due effects strong us dollar costs expenses grew faster rate sales delay release immulite 2000 net income negatively impacted 25 million increase costs expenses associated launch immulite 2000 offset immulite 2000 sales 15 million startup costs operating losses associated establishing distributor subsidiary france company expects release immulite 2000 downward trend earnings start reverse subsequent quarters 1998 net income decreased 57 1996 compared 1995 due increased selling general administrative expenses company adequate working capital sources capital including unused 20 million unsecured line credit carry current business meet existing capital requirements standby letters credit outstanding line credit totaled 3125000 december 31 1997 cash flow operating activities 287 million 1997 187 million 1996 236 million 1995 additions property plant equipment 1997 increased 25 million 105 million compared 8 million 1996 1995 primarily due expansion companys german subsidiary strong us dollar 1997 effect reducing cash 4 million 1997 compared increase 246000 1996 15 million 1995 company material commitments capital expenditures 1998 companys foreign consolidated subsidiaries outstanding bank loans 155 million december 31 1997 4 million december 31 1996 terms loans described note 6 notes consolidated financial statements company pays quarterly cash dividend 10 per share first quarter 1995 12 per share thereafter company conducted review computer systems identify areas could affected year 2000 issue developing implementation plan resolve issue company presently believes modification existing software converting new software year 2000 problem pose significant operational problems anticipated material financial position results operations given year forward looking statements except historical information contained herein report contains forward looking statements identified words estimate project anticipate expect intend believe hope similar expressions could cause actual results differ materially risks uncertainties include degree customer demand companys products customer acceptance immulite 2000 new products companys ability keep abreast technological innovations risks inherent development release new products competitive pressures currency risks based relative strength weakness us dollar health care regulation cost containment measures political economic instability certain foreign markets item 7aitem 7 managements discussion analysis financial condition results operations forward looking statements except historical information contained herein report following discussion particular contain forward looking statements identified words estimate project anticipate plan expect intend believe hope similar expressions based upon managements current expectations speak date made forward looking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forward looking statements risks uncertainties include degree customer demand companys products customer acceptance immulite 2000 new products companys ability keep abreast technological innovations risks inherent development release new products delays unforeseen costs technical difficulties competitive pressures currency risks based relative strength weakness us dollar health care regulation cost containment measures year 2000 issues political economic instability certain foreign markets results operations companys sales increased 6 1998 1966 million compared sales 1863 million 1997 5 increase 1996 sales 1998 sales immulite products instruments reagents 1239 million 24 increase 1997 sales immulite products represented 63 1998 sales 54 1997 sales 46 1996 sales 1998 sales companys original immulite instrument immulite one related reagents 1097 million 12 increase 1997 sales immulite one reagents 20 877 million instrument sales 16 183 million reflecting stage life cycle first generation immulite one instrument introduced 1993 next generation immulite 2000 instrument became commercially available march 1998 sales 142 million 1998 sales dpc products including allergy reagents increased 23 187 million 1998 compared 152 million 1997 company believes sales growth 1997 1998 restrained due delays release immulite 2000 longer originally expected sales process instrument immulite 2000 longer sales process immulite one four six months compared average 60 days due higher sales price prospective customers waiting compare immulite 2000 competitive systems yet released company also experienced longer time delay instrument placement rampup reagent sales december 31 1998 1997 1996 company shipped cumulative basis approximately 4000 3200 2400 immulite instruments respectively installed base instruments expanding test kit menu expected support continued growth coming years sales companys mature ria products declined approximately 13 1998 represented 22 1998 sales compared 26 1997 sales 33 1996 sales trend expected continue company also experienced significant decrease sales nondpc products consolidated international affiliates 217 million 1997 114 million 1998 due discontinuation nondpc oem products previously sold affiliates sales brazil accounted approximately 11 total sales 1998 increase 22 1997 result devaluation brazilian currency january 1999 companys products currently 50 expensive brazil prior devaluation result company expects devaluation slow companys rapid sales expansion country limit earnings contribution brazil economy adjusts new currency exchange ratios sales asia represented less 10 total sales 1998 declined approximately 7 compared 1997 due economic instability region foreign sales percentage total sales approximately 80 1998 1997 1996 europe companys principal foreign market represented 46 48 51 sales 1998 1997 1996 respectively due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income based comparative exchange rates immediately preceding year translation adjustments due strong us dollar less 1 negative impact 1998 sales compared 5 negative impact 1997 sales 1 negative impact 1996 sales due intense competition companys foreign distributors unable increase prices offset negative effect us dollar strong cost sales remained stable approximately 44 sales 1998 1997 43 sales 1996 total operating expenses selling rd ga percentage sales decreased slightly 43 1997 42 1998 reflecting end prelaunch expenses immulite 2000 modest operating leverage expenses represented 40 sales 1996 increase 1997 1996 related development marketing immulite line currency exchange transaction losses 1997 startup costs french distributor included general administrative expenses amortization excess cost net assets acquired minority interest equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian distributor amount decreased 7 1998 15 1997 primarily due reduced earnings italian distributor net interest income represents excess interest income interest equipment contracts interest expense net interest income declined 52 1998 54 1997 due increased borrowings companys effective tax rate 28 1998 29 1997 28 1996 includes federal state foreign taxes net income 1998 10 sales increased 11 1997 10 sales due lower operating expenses percentage sales less negative impact foreign currency transaction translation adjustments net income 1997 decreased 20 1996 net income 13 sales due effects strong us dollar costs expenses related launch immulite 2000 startup costs operating losses associated french distributor liquidity company adequate working capital sources capital carry current business meet existing capital requirements net cash flow operating activities 332 million 1998 287 million 1997 187 million 1996 additions property plant equipment 1998 112 million compared 105 million 1997 8 million 1996 increase 1997 due expansion german affiliate cash used placement immulite systems salestype operating leases periods generally three five years increased 44 116 million 1997 167 million 1998 reflecting increased placements immulite instruments late 1998 company acquired land netherlands commenced construction 28600 square foot building replace existing properties total cost land building estimated 24 million occupancy scheduled april 1 1999 company expects purchase land new jersey 1999 cost approximately 28 million company plans construct 80000 square foot manufacturing facility property next several years cost approximately 5 million company material commitments capital expenditures 1999 company 20 million unsecured line credit borrowings outstanding december 31 1998 1997 1996 standby letters credit line credit totaled 3125000 december 31 1997 2045000 december 31 1998 company notes payable consisting bank borrowings companys foreign consolidated subsidiaries payable local currency guaranteed us parent company 212 million december 31 1998 compared 155 million december 31 1997 4 million december 31 1996 terms loans described note 6 notes consolidated financial statements companys foreign operations particularly time operations brazil subject risks currency devaluations associated political economic instability company paid quarterly cash dividend 12 per share since 1995 october 14 1998 company announced plan could repurchase 1 million shares common stock time open market transactions december 31 1998 company repurchased 208288 shares cost 4304000 company utilized existing cash finance purchases euro conversion company significant sales european countries participating countries began converting common legal currency euro january 1 1999 transition period january 1 1999 january 1 2002 public private parties may pay goods services using either euro local currency transition period conversion rates computed directly one local currency another instead local currencies converted first euro denomination second local currency company early stages assessing potential impact euro conversion business operations company created price list products participating country based euro facilitate purchases euro local currency company also reviewing information business systems european affiliates determine modifications necessary process orders euro currency due existence many unknown variables early stage time possible company predict precise implications euro conversion operations year 2000 company program address year 2000 readiness information business systems program halfway completed company tested critical systems performed routine testing work stations work stations require corrective software identified companys goal subject timely software manufacturer support complete remediation efforts july 1999 costs incurred date expected incurred future related evaluation remediation efforts material independent year 2000 issue last 16 months company engaged ongoing program upgrade information systems company instituted comprehensive vendorsupplier compliance verification program assure company uninterrupted supply goods services materials company requested compliance verification vendorssuppliers require compliance verification deemed critical significant operations company presently believes modifications existing software year 2000 issue pose significant operational problems company affiliates however modifications completed timely company affiliates significant third parties company business communications power providers year 2000 issue could material impact operations company maintains business continuity plans major sites deal potential business interruptions could occur result power communications failures company also program determine whether instrumentation products year 2000 compliant companys website contains regularly updated product compliance status page customers access obtain information regarding compliance status dpc products company also providing customer support customer satisfaction services customers regarding year 2000 issues immulite 2000 instrument company began shipping march 1998 year 2000 compliant company determined immulite one instrument year 2000 compliant informed fda software used immulite one twodigit year field must changed fourdigit field part routine ongoing software development company developing software immulite one year 2000 compliant companys goal able offer customers software hardware upgrades make products compliant june 30 1999 relatively older products compliant upgraded due obsolescence costs incurred date expected incurred upgrade products material company currently expects able bring systems products year 2000 compliance timely basis company encounters unforeseen problems delays could subject legal claims without merit increased warranty costs customer dissatisfaction could result material adverse effect companys business financial condition results operations item 7aitem 7 managements discussion analysis financial condition results operations forward looking statements except historical information contained herein report following discussion particular contain forward looking statements identified words estimate project anticipate plan expect intend believe hope similar expressions based upon managements current expectations speak date made forward looking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forward looking statements risks uncertainties include degree customer demand companys products customer acceptance immulite 2000 new products companys ability keep abreast technological innovations risks inherent development release new products delays unforeseen costs technical difficulties competitive pressures currency risks based relative strength weakness us dollar health care regulation cost containment measures year 2000 issues political economic instability certain foreign markets results operations companys sales increased 10 1999 2162 million compared sales 1966 million 1998 6 increase 1997 sales 1999 sales immulite products instruments reagents 1507 million 22 increase 1998 sales immulite products represented 70 1999 sales 63 1998 sales 54 1997 sales 1999 sales companys original immulite instrument immulite one related reagents service 1134 million 3 increase 1998 sales immulite one reagents 4 908 million instrument sales 4 177 million next generation immulite 2000 instrument became commercially available march 1998 sales including reagents 373 million 1999 163 increase 1998 sales 142 million immulite 2000 longer sales process immulite one due higher sales price company also experienced longer time delay instrument placement rampup reagent sales december 31 1999 1998 1997 company shipped cumulative basis approximately 4900 4000 3100 immulite instruments respectively installed base instruments expanding test kit menu expected support continued growth coming years sales companys mature ria products declined approximately 11 1999 represented 17 1999 sales compared 22 1998 sales 26 1997 sales trend expected continue sales dpc products including allergy reagents decreased 5 177 million 1999 compared 187 million 1998 company also experienced decrease sales nondpc products consolidated international affiliates 114 million 1998 99 million 1999 due discontinuation nondpc oem products previously sold affiliates anticipated sale nondpc products continue decline sales brazil accounted approximately 11 total sales 1999 1998 1997 result devaluation brazilian currency january 1999 company raised prices local currency making products expensive brazil prior devaluation however date significant impact unit sales foreign customers percentage total sales approximately 80 1999 1998 1997 europe companys principal foreign market represented 47 46 48 sales 1999 1998 1997 respectively sales germany decreased 315 million 1999 344 million 1998 388 million 1997 due part reduction nondpc product sales changes reimbursment policies german government medical testing due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income based comparative exchange rates immediately preceding year translation adjustments due strong us dollar 9 negative impact 1999 sales 7 related relative currency movement brazil 1998 1 negative impact sales 1997 5 negative impact sales due intense competition companys foreign distributors generally unable increase prices offset negative effect us dollar strong cost sales remained stable approximately 45 sales 1999 1998 1997 total operating expenses selling research development general administration percentage sales remained fairly stable approximately 42 1999 1998 1997 however selling expense marginally declined research development remained consistent percent sales reflecting companys continuing commitment product development equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 13 1999 relative 1998 decreased 7 1998 relative 1997 primarily due fluctuations earnings italian distributor net interest income represents excess interest income interest equipment contracts interest expense amounts income expense net interest income increased 34 1999 due decreased borrowings declined 52 1998 1997 due increased borrowings 1998 companys effective tax rate 31 1999 28 1998 29 1997 includes federal state foreign taxes net income 1999 9 sales increased 1 1998 due increased contribution unconsolidated affilitates increases income net income 1998 10 sales increased 11 1997 10 sales due lower operating expenses percentage sales less negative impact foreign currency transaction translation adjustments liquidity company adequate working capital sources capital carry current business meet existing capital requirements net cash flow operating activities 280 million 1999 329 million 1998 285 million 1997 additions property plant equipment 1999 90 million compared 112 million 1998 105 million 1997 cash used placement immulite systems salestype operating leases periods generally three five years increased 44 116 million 1997 167 million 1998 reflecting increase type immulite placements decreased 151 million 1999 reflecting decrease type immulite placements late 1998 company acquired land netherlands commenced construction 27500 square foot building replace existing properties total cost land building 24 million company expects purchase land new jersey 2000 cost approximately 28 million company plans construct 88000 square foot manufacturing facility property next several years cost approximately 76 million company material commitments capital expenditures 2000 company 20 million unsecured line credit borrowings outstanding december 31 1999 1998 1997 standby letters credit line credit totaled 3100000 december 31 1997 2000000 december 31 1998 standby letters credit outstanding december 31 1999 company notes payable consisting bank borrowings companys foreign consolidated subsidiaries payable local currency guaranteed us parent company 158 million december 31 1999 compared 212 million december 31 1998 155 million december 31 1997 terms loans described item 7aitem 7 managements discussion analysis financial condition results operations forward looking statements except historical information contained herein report following discussion particular contain forwardlooking statements identified words estimate project anticipate plan expect intend believe hope similar expressions based upon managements current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements risks uncertainties include degree customer demand companys products customer acceptance immulite 2000 new products companys ability keep abreast technological innovations risks inherent development release new products delays unforeseen costs technical difficulties competitive pressures currency risks based relative strength weakness us dollar health care regulation cost containment measures political economic instability certain foreign markets results operations companys sales increased 15 2000 2479 million compared sales 2162 million 1999 10 increase 1998 sales 2000 sales immulite products instruments reagents 1931 million 28 increase 1999 sales immulite products 1507 million 22 increase 1998 sales immulite products represented 78 2000 sales 70 1999 sales 63 1998 sales 2000 sales companys original immulite instrument immulite one related reagents service 1230 million 8 increase 1999 sales immulite one reagents increased 6 964 million instrument sales 11 196 million immulite 2000 instrument became commercially available march 1998 sales including reagents 701 million 2000 88 increase 1999 sales 373 million immulite 2000 longer sales process immulite one due higher sales price company also experienced longer time delay instrument placement rampup reagent sales december 31 2000 1999 1998 company shipped cumulative basis approximately 5900 4900 4000 immulite instruments respectively installed base instruments expanding test kit menu expected support continued growth coming years sales companys mature ria products declined approximately 11 2000 represented 14 2000 sales compared 17 1999 sales 22 1998 sales trend expected continue sales dpc products including allergy reagents decreased 21 139 million 2000 compared 177 million 1999 company also experienced decrease sales nondpc products consolidated international affiliates 100 million 1999 71 million 2000 due discontinuation nondpc oem products previously sold affiliates anticipated sale nondpc products continue decline domestic sales 2000 increased 27 1999 reflecting part companys success larger customers purchasing organizations sales brazil accounted approximately 11 total sales 2000 1999 1998 result devaluation brazilian currency january 1999 company raised prices local currency making products expensive brazil prior devaluation however todate significant impact unit sales foreign customers percentage total sales approximately 76 79 80 2000 1999 1998 europe companys principal foreign market represented 44 47 46 sales 2000 1999 1998 respectively sales germany decreased 301 million 2000 315 million 1999 344 million 1998 due part reduction nondpc product sales changes reimbursement policies german government medical testing addition deutsche mark weakened relative us dollar contributed decline due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income based comparative exchange rates immediately preceding year translation adjustments due strong us dollar 5 negative impact 2000 sales 1999 9 negative impact sales due intense competition companys foreign distributors generally unable increase prices offset negative effect us dollar strong cost sales remained stable approximately 45 sales 2000 1999 1998 total operating expenses selling research development general administration percentage sales fell 39 2000 42 1999 1998 although categories increased annually absolute dollars support increased levels sales equity income affiliates represents companys share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 24 2000 relative 1999 13 1999 relative 1998 primarily due increased earnings italian distributor net interest income represents excess interest income interest equipment contracts interest expense amounts income expense net interest income increased 666000 2000 443000 1999 331000 1998 companys effective tax rate 30 2000 1999 28 1998 includes federal state foreign taxes minority interest represents 44 interest companys brazilian distributor held third party increases amount reflect increases profitability brazilian distributor net income 2000 increased 38 1999 primarily due increases sales greater percentage increases operating expenses net income 1999 increased 1 1998 due increases operating income offset increases tax rate minority interest liquidity company adequate working capital sources capital carry current business meet existing capital requirements net cash flows operating activities 393 million 2000 280 million 1999 329 million 1998 additions property plant equipment 2000 96 million compared 90 million 1999 112 million 1998 cash used placement immulite systems salestype operating leases periods generally three five years decreased 167 million 1998 151 million 1999 reflecting decrease type immulite placements increase 180 million 2000 reflecting increase type immulite placements late 1998 company acquired land netherlands commenced construction 27500 square foot building replace existing properties total cost land building 24 million 2000 company purchased land new jersey cost approximately 28 million company constructing 85000 square foot manufacturing facility property estimated cost approximately 12 million company replacing computer system los angeles certain european affiliates cost approximately 3 million 2000 company material commitments capital expenditures 2001 company 20 million unsecured line credit standby letters credit line credit totaled 386000 2000000 december 31 2000 1998 respectively standby letters credit outstanding december 31 1999 borrowings outstanding december 31 2000 1999 1998 line credit company notes payable consisting bank borrowings companys foreign consolidated subsidiaries payable local currency guaranteed us parent company 156 million december 31 2000 compared 158 million december 31 1999 212 million december 31 1998 terms loans described item 7aitem 7 management’s discussion analysis financial condition results operations forward looking statements certain risks except historical information contained herein report following discussion particular contain forwardlooking statements identified words “estimate” “project” “anticipate” “plan” “expect” “intend” “believe” “hope” similar expressions based upon management’s current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements risks uncertainties include ability successfully market new existing products ability keep abreast technological innovations successfully incorporate new products current dependence sole suppliers key chemical components immulite assays risks inherent development release new products delays unforeseen costs technical difficulties regulatory approvals competitive pressures including technological advances patents obtained competitors environmental risks related substances regulated various federal state international laws currency risks based relative strength weakness us dollar domestic foreign governmental health care regulation cost containment measures political economic instability certain foreign markets including trade restrictions changes accounting standards promulgated financial accounting standards board securities exchange commission american institute certified public accountants effects governmental actions relating chinese subsidiary’s payments results operations sales company’s sales increased 15 2002 3241 million compared sales 2831 million 2001 14 increase 2000 sales 2476 million 2002 sales immulite products instruments reagents 2768 million 20 increase 2001 sales immulite products 2304 million 19 increase 2000 sales immulite products represented 85 2002 sales 81 2001 sales 78 2000 sales 2002 sales company’s original immulite instrument immulite one related reagents service 1159 million 5 decrease 2001 sales immulite one reagents decreased 3 962 million instrument service sales 12 197 million 2001 sales immulite product line decreased 1 1213 million decrease immulite sales result immulites replaced immulite 2000s new immulite replacements going lower reagent volume environments lower number instruments sold immulite 2000 instrument sales including reagents 1609 million 2002 47 increase 2001 sales 1091 million sales immulite 2000 reagents increased 55 1293 million instrument sales service increased 24 316 million 2001 sales immulite 2000 product line increased 56 2002 previous year growth dpc’s business driven primarily ongoing demand immulite 2000 fourth quarter 2002 company began shipping updated version immulite one demand original immulite continues strong company believes remains important complement higher throughput stateoftheart immulite 2000 immulite 2000 longer sales process immulite one due higher sales price company also experienced longer time delay instrument placement rampup reagent sales immulite 2000 december 31 2002 2001 2000 company shipped cumulative basis approximately 8000 7000 5900 immulite instruments respectively installed base instruments expanding test kit menu expected support continued growth coming years sales company’s mature ria isotopic products 299 million 2002 12 338 million 2001 sales 2001 increased slightly 2000 expected sales levels decline future sales dpc products decreased 14 104 million 2002 compared 121 million 2001 sales negatively impacted 2002 due september 2001 introduction broad spectrum allergy assays immulite 2000 taken sales away company’s microplatebased allergy system company also experienced slight increase sales nondpc products consolidated international affiliates 70 million 2002 69 million 2001 anticipated sales nondpc products decline future domestic sales increased 16 2002 2001 33 2001 2000 reflecting part company’s continued success larger customers purchasing organizations indirect distribution smaller doctor’s office laboratories foreign sales including us export sales nonconsolidated foreign subsidiaries sales consolidated subsidiaries percentage total sales approximately 72 2002 2001 76 2000 europe company’s principal foreign market represented 40 41 44 sales 2002 2001 2000 respectively sales germany increased 22 406 million 2002 333 million 2001 301 million 2000 reflecting success immulite 2000 product line sales brazil region includes certain central south american countries accounted approximately 9 total sales 290 million 2002 compared 296 million 2001 295 million 2000 although sales rose local currency sales flat 2002 declined 2001 dollars due devaluation brazilian real relative dollar fallen less 21 2000 351 end 2002 company intends continue increase prices time brazil may able fully compensate continuing significant devaluations date company’s unit sales brazil continued increase line company’s overall sales increase due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income periods dollar weakening impact reverse based comparative exchange rates immediately preceding year translation adjustments due strong us dollar 6 negative impact 2001 sales 5 negative impact 2000 sales 2002 dollar weakened relative euro net negative impact real currency effect slight positive impact company’s hedging strategy 2002 reduced positive impact strong euro latter part year company’s results reflect benefits strong euro second half 2003 due intense competition company’s foreign distributors generally unable increase prices offset negative effect us dollar strong fourth quarter fiscal year 2002 company discovered internally chinese subsidiary made payments certain customers china may violated foreign us law including foreign corrupt practices act company stopped payments immediately board directors conducted independent investigation nature payments involvement company personnel whether similar situations existed company’s foreign operations based results investigation audit committee concluded senior management company implicated payments apparent similar issues respect company’s foreign operations company’s disclosure committee conducted comprehensive review company’s foreign operations internal control procedures relate issues additional policies procedures implemented ensure compliance applicable laws 2002 company’s chinese subsidiary revenues 9 million less 3 company’s total sales depending chinese issues resolved company’s sales china could significantly impacted cost sales gross margin improved slightly 575 2002 574 2001 555 2000 improvement gross margin due part shift product mix toward immulite reagents shift customer mix toward domestic end users increased manufacturing efficiencies although company expects mix trends continue also experiencing competitive pricing pressures may negatively impact gross margins products manufactured united states sold dollars therefore weakening dollar could improve gross margins strengthening dollar could weaken gross margins 2002 also negatively impacted devaluation brazilian real effects fully overcome price increases region 2003 company relocate brazilian distribution center result reduced tariffs improved gross margins region operating expenses total operating expenses selling research development general administrative percentage sales fell 37 2002 38 2001 39 2000 although categories increased annually absolute dollars support increased levels sales general administrative expenses 2002 included 15 million costs incurred yearend 2002 relating investigation chinese payments estimated penalties andor fines company may incur resolve issues relating matter equity income affiliates represents company’s share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 88 2001 relative 2000 16 2002 relative 2001 primarily due increased earnings italian distributor 2001 2002 equity income affiliates included 500000 permanent benefit 400000 benefit respectively due change italian tax laws net interest income expense represents excess interest income interest earned equipment contracts relating immulite placements interest expense amounts income expense net interest income expense 1220000 2002 versus expense 7000 2001 2002 amount included approximately 500000 foreign exchange losses versus approximately 600000 2001 addition company experienced 400000 increase local tariffs brazil 2000 amount 666000 income included among things gain 482000 sale product line gain 215000 sale building foreign exchange losses 500000 income taxes minority interest company’s effective tax rate 31 2002 2001 30 2000 includes federal state foreign taxes fourth quarter 2002 company’s tax provision includes accrual 14 million relating possible nondeductibility payments china company expects effective tax rate lower 2003 minority interest represents 44 interest company’s brazilian distributor held third party increases decreases amount reflect increases decreases profitability brazilian distributor net income 2002 net income 473 million 160 per diluted share increased 21 2001 net income 390 million 132 per diluted share 38 increase 2000 net income increases primarily due increases sales gross profit greater percentage increases operating expenses excluding nonrecurring tax accrual 14 million 15 million general administrative expense discussed net income 2002 would increased 27 2001 497 million 168 per diluted share critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates assumptions include limited allowance bad debts allowance slow moving obsolete inventories useful lives selected depreciating property plant equipment valuation allowances deferred income taxes estimates used recoverability longlived assets management believes methodology utilizes determine amounts results reporting reasonable estimates differences estimates actual results usually minor included consolidated financial statements management soon known liquidity capital resources company adequate working capital sources capital carry current business meet existing capital requirements december 31 2002 december 31 2001 company 54284000 31834000 cash equivalents respectively included cash equivalents december 31 2002 2001 425000000 19900000 respectively shortterm highquality commercial paper net cash flows operating activities 690 million 2002 consisting 756 million provided net income adjusted depreciation amortization noncash items included net income less 66 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 111 million increase inventories 46 million increase accounts receivable partially offset 83 million increase accrued liabilities net cash flows operating activities 617 million 2001 417 2000 net cash flows 2001 consisted 637 million provided net income adjusted depreciation amortization noncash items included net income less 20 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 86 million increase accounts receivable 36 million increase inventories 32 million decrease accounts payable partially offset 55 million increase income taxes payable cash flows used investing activities consist principally additions property plant equipment increases sales type operating leases immulite instrument units additions property plant equipment 2002 125 million compared 273 million 2001 96 million 2000 included 2001 approximately 90 million completion new manufacturing facility new jersey approximately 40 million related implementation new computer system los angeles cash used placement immulite systems salestype operating leases rentals periods generally three five years increased 314 million 2002 280 million 2001 reflecting higher number immulite 2000 instruments placed operating leases rather sold 2000 cash used sales operating type leases rentals 180 million 2000 company purchased land new jersey 2001 constructed 89000 square foot building total cost 148 million company moved new manufacturing facility december 2001 company implemented new computer system los angeles february 2002 capitalized cost approximately 48 million anticipated computer systems united kingdom new jersey converted next several years first quarter 2003 company purchased 170000 sq ft building los angeles approximately 22 million cash building fitted next four quarters initial occupancy anticipated early 2004 anticipated cost fitting building 70 90 million company 20 million unsecured line credit standby letters credit line credit totaled 386000 december 31 2001 2000 standby letters credit outstanding december 31 2002 borrowings outstanding december 31 2002 2001 2000 line credit company notes payable consisting bank borrowings company’s foreign consolidated subsidiaries payable local currency guaranteed us parent company 197 million december 31 2002 compared 170 million december 31 2001 156 million december 31 2000 terms loans described “item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements except historical information contained herein report following discussion particular contain forwardlooking statements identified words “estimate” “project” “anticipate” “plan” “expect” “intend” “believe” “hope” similar expressions based upon management’s current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements risks uncertainties include company’s ability successfully market new existing products company’s ability keep abreast technological innovations successfully incorporate new products company’s current dependence sole suppliers key chemical components immulite assays company’s ability address resolve issues relating fda’s application integrity policy timely basis company’s ability new tests reviewed approved fda risks inherent development release new products delays unforeseen costs technical difficulties regulatory approvals competitive pressures including technological advances patents obtained competitors environmental risks related substances regulated various federal state international laws currency risks based relative strength weakness us dollar domestic foreign governmental health care regulation cost containment measures political economic instability certain foreign markets changes accounting standards promulgated financial accounting standards board securities exchange commission public company accounting oversight board american institute certified public accountants effects governmental actions relating certain payments company’s chinese subsidiary overview dpc develops manufactures automated diagnostic test systems related reagent test kits used hospital reference physicians’ office laboratories throughout world company’s principal product line immulite fully automated computerdriven modular system uses specialized proprietary software provide rapid accurate test results reduce customer’s labor reagent costs immunoassay tests provide critical information useful physicians diagnosis monitoring management prevention various diseases dpc manufactures immunodiagnostic test kits also called “reagents” “assays” using several different technologies assay formats immulite instruments closed systems meaning perform manufacturers’ tests accordingly major factor successful marketing systems ability offer broad menu assays addition almost 100 immulite assays company sells broad range tests based technologies performed manually using customer’s laboratory equipment radioimmunoassay ria enzyme immunoassay eia tests addition breadth menu major competitive factors immulite instruments include timetoresults quickly instrument performs test ease use overall cost effectiveness competitive factors rapid technological developments characterize industry company devotes approximately 10 annual revenues research development activities expensed incurred company’s products sold throughout world directly affiliated independent distributors historically foreign sales including us export sales nonconsolidated subsidiaries independent distributors sales consolidated subsidiaries accounted 70 revenues although since 1998 domestic sales growth outpaced foreign sales growth company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also places instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale salestype lease company enters various types lease arrangements customers generally provide terms three five years periodic rental payments revenue leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer soft placement subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments come back company end rental lease period instruments generally amortized straightline basis five years maintenance costs expensed incurred company also enters service contracts customers recognizes service revenue related contract life related costs expensed incurred two important indicators used management evaluate financial performance instrument shipments reagent utilization number immulite instruments company reports shipped period net instruments come back company due end related lease rental period connection tradein purchase new model historically company rarely experienced sales returns therefore allowance provided company refurbishes seeks place instruments come back company reduced prices different methods instruments placed total instrument sales vary period based relative mix placement methods sales necessarily direct correlation number instruments shipped period important measure penetration immulite reagent sales average amount reagent sales sold per instrument shipped referred “reagent utilization” takes number weeks months instrument shipped become fully functional regard reagent utilization time takes customer become familiar operation instrument tests customer run instrument company calculates reagent utilization fiscal period dividing immulite reagent sales period total number instruments shipped end previous fiscal period results operations summary financial data dollars thousands except per share data sales company’s sales increased 16 2004 4432 million compared sales 3814 million 2003 18 increase 2002 sales 3241 million 2004 sales immulite products instruments reagents 4048 million 20 increase 2003 sales immulite products 3380 million 22 increase 2002 sales immulite products represented 91 2004 sales 89 2003 sales 85 2002 sales various categories immulite product sales 2004 2003 2002 shown following chart immulite product line sales dollars millions company shipped total 977 immulite systems 2004 including 714 immulite 2000 2500 systems 263 immulite 1000 systems total base immulite systems shipped grew 10010 including 3658 immulite 2000 2500 systems installed base instruments expanding test kit menu expected support continued growth coming years 2003 company shipped total 880 immulite systems including 553 immulite 2000 systems 2002 company shipped total 1083 systems including 625 immulite 2000 systems 2004 previous year growth dpc’s business driven primarily ongoing demand immulite 2000 immulite 2500 immulite 2500 launched june 2004 reduces time takes get result tests importantly tests used emergency rooms aid diagnosis cardiac conditions reason although 2500 higher price 2000 2500 may erode sales 2000 however two instruments otherwise similar company continue market 2000 significant group customers faster test results critical large reference laboratories immulite 2000 2500 longer sales process immulite due higher sales price company also experienced longer time delay instrument placement rampup reagent sales immulite 2000 2500 compared immulite included immulite 20002500 equipment sales revenue relating company’s sample management system sms samplehandling device attached immulite 20002500 increase instrument service revenue 2004 part due increased number immulite 20002500’s placed increased number instruments service fourth quarter 2002 company began shipping immulite 1000 updated version immulite one together “immulite” number immulites shipped declined last two years due larger customers’ preference immulite 20002500 even though immulite instrument sales service declined demand immulite continues strong company believes remains important complement higher throughput stateoftheart immulite 2000 2500 number immulite instruments shipped may continue decline refurbished systems included total count units shipped become available price lower new instruments increase reagent sales part due larger installed base instruments well weakness us dollar reagent utilization immulite 20002500 fell 17937 fourth quarter 2004 18537 fourth quarter 2003 fourth quarter 2002 reagent utilization immulite 2000 16480 decrease 2004 part caused 800000 decrease sale homocysteine kits fact company release new assays immulite 2000 2004 time takes significant number instruments placed last year become fully utilized mix instruments going high volume environments increase 2003 part related larger test menu strength euro relative dollar reagent utilization immulite fell 4426 fourth quarter 2004 4497 2003 4191 2002 although utilization immulite increased 2003 expected utilization decline future instruments placed lower volume environments sales company’s mature ria isotopic products 241 million 2004 10 267 million 2003 sales 2003 decreased 11 2002 expected sales levels decline future customers move automated methods testing require radioactive agents sales dpc products declined 62 million 2004 106 million 2003 2002 sales dpc products 104 million sales dpc products 2003 fell due introduction allergy testing immulite 2000 took sales away company’s microplatebased allergy tests company decided cease production microplatebased allergy tests end 2003 resulting reduced amount sales 2004 third quarter 2003 company sold pathodx product line although company agreed continue manufacturing products revenue products declined significantly 2004 company’s sales manufacturers’ products increased 79 million 2004 61 million 2003 decrease sales 2002 70 million company announced fourth quarter 2004 would begin distributing clinical chemistry equipment kone manufacturer clinical chemistry automation instrumentation selected markets may increase sales manufacturers’ products future domestic sales increased 18 2004 2003 20 2003 2002 reflecting part company’s continued success larger customers purchasing organizations indirect distribution smaller doctor’s office laboratories domestic sales percentage total sales approximately 29 2004 2003 28 2002 foreign sales including us export sales nonconsolidated foreign subsidiaries sales consolidated subsidiaries percentage total sales approximately 71 2004 2003 72 sales 2002 europe company’s principal foreign market represented 45 46 44 total sales 2004 2003 2002 respectively sales company’s german subsidiary includes czech republic poland increased 106 581 million 2004 525 million 2003 406 million 2002 reflecting success immulite 2000 product line sales brazil region includes certain central south american countries accounted approximately 9 total sales 397 million 2004 compared 319 million 2003 290 million 2002 past brazilian real volatile relative us dollar exchange rate reals us dollar 271 end 2004 291 end 2003 351 end 2002 company generally able increase prices experienced significant devaluations real however able fully offset currency effects due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income periods dollar weakening impact reverse company’s greatest exposure euro brazilian real based comparison exchange rates immediately preceding year 2002 dollar weakened relative euro net negative impact real currency effect slight positive impact 2003 dollar weakened relative euro real net effect positive impact 7 sales 2004 dollar weakened relative euro real effect positive impact 5 sales due intense competition company’s foreign distributors generally unable increase prices offset negative effect us dollar strong fourth quarter fiscal year 2002 company discovered internally certain senior managers employees chinese subsidiary made certain improper payments may violated foreign us laws beginning early 1990s chinese subsidiary made cash payments provided kind benefits hospital laboratory customers chinese subsidiary employees customers certain customers state owned enterprises payments may purpose may effect causing customers purchase products chinese subsidiary payments benefits may violated us foreign corrupt practices act well certain domestic chinese laws addition deduction payments benefits subsidiary tax returns may improper chinese tax law resulting underpayments chinese taxes independent investigation company’s audit committee concluded current members company’s senior management knew involved provision payments benefits company made changes management chinese subsidiary including replacement senior managers involved implemented procedures controls address issues promote compliance applicable laws company voluntarily disclosed payment issues securities exchange commission sec department justice doj first quarter 2003 cooperating fully agencies investigations since time company’s discussions sec doj fairly advanced stages include proposals company pay aggregate approximately 48 million agencies consisting 20 million fines approximately 28 million disgorgement profits related interest charges proposals discussed also include changes company’s compliance programs independent monitoring reporting programs 36 months entry cease desist order either deferred prosecution agreement plea company’s chinese subsidiary settlement recommended staff sec would subject approval commission deferred prosecution plea agreement would subject court approval fourth quarter 2002 company accrued 15 million actual estimated costs resolve matter third quarter 2004 company accrued additional 10 million based revised estimates costs paid us government resolve matter fourth quarter 2004 company accrued additional 24 million including 750000 interest based proposed settlements sec doj december 31 2004 48 million remained accrual addition company recorded charge 14 million 2002 fourth quarter tax provision related nondeductibility payments china third quarter 2003 company recorded additional charge 09 million income tax provision chinese taxrelated matters legal expenses relating matter approximately 884000 1712000 incurred charged general administrative expense years ended december 31 2003 2004 respectively anticipated legal fees issues related china decrease 2005 termination improper payments china may continue significant adverse effect future operations china termination could negatively influence significant number chinese subsidiary’s customers’ decisions whether continue business subsidiary year ended december 31 2004 chinese subsidiary sales 82 million versus sales 98 million 2003 february 2004 company informed us food drug administration fda based inspectional findings included data integrity procedural issues related solely company’s application immulite chagas test company subject fda’s application integrity policy “aip” see “item 1 business government regulation” fda suspended review applications submitted company review future applications fda determines company resolved issues although studies support future applications conducted aip address aip issues company audited third party whose report submitted fda company also developed implemented corrective action plan submitted fda company requested fda take action necessary remove aip may include inspection fda company hopes aip issues resolved fda next months fda’s application aip dpc restrict dpc introducing new tests outside united states however company’s inability introduce new tests united states pendency aip may negative impact future sales profits company’s brazilian subsidiary participant along various companies number lawsuits brazilian government claiming unlawful taxation historically companies involved suits limited success taxes turned company also purchased unused tax credits approximately 10 million unrelated company however due uncertainty related company’s ability use credits tax liabilities fully reserved cost credits court cases typically take many years decided company estimates likely loss outcome based merits individual cases advice outside counsel december 31 2004 company accrued amounts believes pay suit involves majority disputed taxes case sales taxes courts rule company actions would create additional liability 10 million cost sales gross margins generally affected product mix regents vs instruments customer mix foreign vs domestic movement foreign currencies gross margin 2004 decreased 564 569 2003 decrease due part 14 million dollar payment homocysteine license cover customers’ historical purchases company’s homocysteine tests 10 million unabsorbed costs related immulite 2500 manufacturing issues new jersey temporarily affected production immulite 2500 fourth quarter approximately 10 million inventory writedowns related part discontinued products particular microplate allergy line gross margin decreased 569 2003 575 2002 decrease due part increase manufacturingrelated costs services los angeles decreases sales volume production instruments new jersey price decreases immulite 2000 anticipation release immulite 2500 decreases china gross margins positively impacted weakening dollar products manufactured united states sold dollars therefore weakening dollar could improve gross margins strengthening dollar could weaken gross margins 2003 company relocated brazilian distribution center recife sao paulo resulted reduced tariffs improved gross margins region operating expenses total operating expenses selling research development general administrative percentage sales 385 2004 366 2003 373 2002 categories increased annually absolute dollars support increased levels sales general administrative expenses 2002 included 15 million costs incurred yearend 2002 relating investigation chinese payments estimated payments andor fines company may incur resolve issues relating matter included general administrative expense 2003 approximately 884000 legal expenses related issues china 2004 general administrative expenses included 26 million estimated payments sec doj resolving matter 2004 company also incurred 17 million legal expenses related issues china see item 3 legal proceedings note 8 notes consolidated financial statements discussion chinese subsidiary matter 2004 general administrative expenses also included 20 million related implementation sarbanesoxley section 404 approximately 500000 related leasehold writedowns los angeles manufacturing facility reconfigured strong euro 2002 2003 2004 also contributed higher selling general administrative expenses years effective july 1 2003 company sold pathodx product line manual tests remel inc 49 million company continue manufacture products remel period two years sale period company assist remel developing expertise take manufacturing process company paid 44 million closing remaining 500000 withheld manufacturing process transitioned third quarter 2003 company recognized gain 42 million included component operating income equity income affiliates represents company’s share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 39 2004 relative 2003 58 2003 relative 2002 primarily due increased earnings italian distributor 2002 equity income affiliates included 400000 permanent benefit due change italian tax laws net interest income expense represent excess interest income interest expense amounts income expense net interest income 417000 2004 827000 2003 versus expense 1220000 2002 2004 amount included 750000 accrued interest expense related estimated settlement amounts related company’s chinese subsidiary well 319000 foreign currency transaction gains 2003 amount included approximately 12 million foreign exchange gains versus 500000 foreign exchange losses 2002 addition 2003 company experienced 433000 increase local tariffs brazil income taxes minority interest company’s effective tax rate 29 2004 30 2003 31 2002 includes federal state foreign taxes fourth quarter 2002 company’s tax provision includes accrual 14 million relating possible nondeductibility payments china company routinely involved federal state income tax audits company regularly evaluates potential tax exposures establishes accrual amounts probable paid company believes adequately provided potential tax exposure minority interest represents 44 interest company’s brazilian subsidiary held third party increases decreases amount reflect increases decreases profitability brazilian distributor net income 2004 net income 617 million 206 per diluted share slightly less 2003 net income 618 million 208 per diluted share due increases cost sales operating expenses discussed 2003 net income increased 31 2002 net income 473 million 160 per diluted share primarily due increases sales principally immulite product line gross profit greater percentage increases operating expenses 42 million gain sale pathodx product line 010 per share tax positive impact 2003 diluted earnings per share critical accounting policies estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period management bases estimates assumptions applicable historical experience various factors believes reasonable circumstances results form basis making judgments carrying values assets liabilities allowance bad debts credit granted customers unsecured basis company records allowance doubtful accounts time revenue recognized based assessment business environment customers’ financial condition historical collection experience accounts receivable aging customer disputes circumstances arise significant event occurs comes attention management bankruptcy filing customer allowance reviewed adequacy adjusted reflect change estimated amount received customer company’s aging receivables balances deteriorate company would record additional provisions doubtful accounts allowance obsolete slowmoving inventories stated lower cost determined firstin firstout basis market company regularly evaluates inventory obsolescence records provision inventory costs estimated recoverable normal course business company’s inventories become obsolete slow moving company would record additional provisions obsolete inventories property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 3 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease company’s estimate useful life property plant equipment changes company may use different life record depreciation amortization company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets goodwill intangible assets goodwill results primarily company’s purchase certain foreign distributors goodwill tested impairment reporting unit level least annually whenever events circumstances indicate goodwill might impaired evaluation requires reporting unit underlying goodwill measured fair value less carrying value unit second test must performed second test current fair value reporting unit allocated assets liabilities unit including amount “implied” goodwill implied goodwill less net carrying amount goodwill difference becomes amount impairment must recorded year 2004 annual review result goodwill impairment company intangible assets consist purchased technology licenses technology licenses amortized straightline basis life patented technology licenses weighted average amortization period 13 years purchases 2004 2003 deferred income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized company deferred income tax assets state net operating loss carryforwards state research development tax credits loss carryforwards credits expire accordance provisions applicable tax laws beginning years 2005 2011 company maintains valuation allowance entire net operating loss research development tax credit carryforwards utilization losses credits likely recovered revenue recognition company’s revenue recognition policies included “item 7 management’s discussion analysis financial condition results operations overview” changes underlying terms company’s various revenue arrangements could result changes revenue recognition policies additionally changes company’s sales returns experience could result need sales return allowance contingencies company involved various legal matters uncertainty relative outcome including involving company’s chinese brazilian subsidiaries provide potential exposure company established accruals unfavorable rulings management believes adequate addition company routinely involved federal state income tax audits provided potential tax exposures company maintains allowance tax contingencies management believes adequate liquidity capital resources company adequate working capital sources capital carry current business meet existing capital requirements december 31 2004 december 31 2003 company 80425000 69843000 cash equivalents respectively included cash equivalents december 31 2004 2003 30827000 3500000 respectively shortterm highquality commercial paper net cash flows operating activities 694 million 2004 consisting 1102 million provided net income 617 million adjusted depreciation amortization 436 million noncash items 49 million included net income less 408 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 347 million increase inventories includes 304 million placed instruments 112 million increase accounts receivable result company’s increased sales less 103 million provided increases accrued liabilities included 34 million accruals related company’s chinese subsidiary net cash flows operating activities 667 million 2003 376 million 2002 net cash flows 2003 consisted 936 million provided net income 618 million adjusted depreciation amortization 355 million less noncash items 37 million included net income less 269 million used changes operating assets liabilities significant element net cash used operating assets liabilities 284 million increase inventories includes 218 million placed instruments partially offset 55 million increase accrued liabilities net cash flows 2002 consisted 776 million provided net income 473 million adjusted depreciation amortization 347 million less noncash items 44 million included net income less 400 million used changes operating assets liabilities significant element net cash used operating assets liabilities 425 million increase inventories includes 314 million placed instruments partially offset 87 million increase accrued liabilities cash flows used investing activities consist principally additions property plant equipment additions property plant equipment 2004 503 million compared 420 million 2003 125 million 2002 included 2004 217 million fit company’s new building los angeles 86 million construction fit company’s new building united kingdom included 2003 approximately 238 million purchase fit company’s new building los angeles approximately 32 million construction new building wales 800000 implementation erp system wales 10 million manufacturing equipment new jersey 2004 company began expansion new jersey facility 70000 square feet 160000 square feet project completed 2005 estimated cost 70 million company implemented new computer system los angeles february 2002 capitalized cost approximately 48 million united kingdom 2003 capitalized cost approximately 1 million anticipated conversion computer systems new jersey completed 2005 cost approximately 12 million company 20 million unsecured line credit wells fargo bank borrowings outstanding december 31 2004 2003 2002 line credit line credit matures july 2005 time company expects enter similar borrowing agreement company notes payable consisting bank borrowings company’s foreign consolidated subsidiaries payable local currency guaranteed us parent company 130 million december 31 2004 compared 194 million december 31 2003 terms loans described “item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements except historical information contained herein following discussion contains forwardlooking statements identified words “estimate” “project” “anticipate” “plan” “expect” “intend” “believe” “hope” similar expressions based upon management’s current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements including risks described item 1a risk factors overview dpc develops manufactures automated diagnostic test systems related reagent test kits used hospital reference physicians’ office laboratories throughout world company’s principal product line immulite fully automated computerdriven modular system uses specialized proprietary software provide rapid accurate test results reduce customer’s labor reagent costs immunoassay tests provide critical information useful physicians diagnosis monitoring management prevention various diseases dpc manufactures immunodiagnostic test kits also called “reagents” “assays” using several different technologies assay formats immulite instruments closed systems meaning perform manufacturers’ tests accordingly major factor successful marketing systems ability offer broad menu assays addition almost 100 immulite assays company sells broad range tests based technologies performed manually using customer’s laboratory equipment radioimmunoassay ria tests addition breadth menu major competitive factors immulite instruments include timetoresults quickly instrument performs test ease use overall cost effectiveness competitive factors rapid technological developments characterize industry company devotes approximately 10 annual revenues research development activities expensed incurred company’s products sold throughout world directly affiliated independent distributors historically foreign sales including us export sales nonconsolidated subsidiaries independent distributors sales consolidated subsidiaries accounted 70 revenues although since 1998 domestic sales growth outpaced foreign sales growth company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also places instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale salestype lease company enters various types lease arrangements customers generally provide terms three five years periodic rental payments revenue leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer soft placement subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments come back company end rental lease period instruments generally amortized straightline basis five years maintenance costs expensed incurred company also enters service contracts customers recognizes service revenue related contract life related costs expensed incurred two important indicators used management evaluate financial performance instrument shipments reagent utilization number immulite instruments company reports shipped period net instruments come back company due end related lease rental period connection tradein purchase new model historically company rarely experienced sales returns therefore allowance provided company refurbishes seeks place instruments come back company reduced prices different methods instruments placed total instrument sales vary period based relative mix placement methods sales necessarily direct correlation number instruments shipped period important measure penetration immulite reagent sales average amount reagent sales sold per instrument shipped referred “reagent utilization” takes number weeks months instrument shipped become fully functional regard reagent utilization time takes customer become familiar operation instrument tests customer run instrument company calculates reagent utilization fiscal period dividing immulite reagent sales period total number instruments shipped end previous fiscal period results operations summary financial data sales company’s sales increased 8 2005 4811 million compared sales 4468 million 2004 16 increase 2003 sales 3849 million sales immulite products instruments reagents 2005 4404 million 9 increase 2004 sales immulite products 4048 million 20 increase 2003 sales immulite products represented 92 2005 sales 91 2004 sales 88 2003 sales various categories immulite product sales 2005 2004 2003 shown following chart immulite product line sales immulite instrument sales 2005 grew slower pace 2004 due part reduction number instruments purchased company’s italian affiliate company shipped total 917 immulite systems 2005 including 627 immulite 2000 2500 systems 290 immulite 1000 systems total base immulite systems shipped grew 10927 including 4285 immulite 2000 2500 systems installed base instruments expanding test kit menu expected support continued growth coming years 2004 company shipped total 977 immulite systems including 714 immulite 2000 2500 systems 2003 company shipped total 880 systems including 553 immulite 2000 systems 2005 previous year growth dpc’s business driven primarily ongoing demand immulite 2000 immulite 2500 immulite 2500 launched june 2004 reduces time takes get result tests importantly tests used emergency rooms aid diagnosis cardiac conditions reason although 2500 higher price 2000 2500 may erode sales 2000 however two instruments otherwise similar company continue market 2000 significant group customers faster test results critical large reference laboratories immulite 2000 2500 longer sales process immulite due higher sales price company also experienced longer time delay instrument placement rampup reagent sales immulite 2000 2500 compared immulite included immulite 20002500 equipment sales revenue relating company’s sample management system sms samplehandling device attached immulite 20002500 increase instrument service revenue 2004 2003 part due increased number immulite 20002500’s placed increased number instruments service fourth quarter 2002 company began shipping immulite 1000 updated version immulite one together “immulite” number immulites shipped declined last two years due larger customers’ preference immulite 20002500 even though immulite sales declined demand immulite continues strong company believes remains important complement higher throughput stateoftheart immulite 2000 2500 number immulite instruments shipped may continue decline refurbished systems included total count units shipped become available price lower new instruments increase immulite 20002500 reagent sales part due larger installed base instruments reagent utilization immulite 20002500 fell 17134 fourth quarter 2005 17937 fourth quarter 2004 fourth quarter 2003 reagent utilization immulite 2000 18537 decrease 2005 part caused lack new kit introductions first three quarters 2005 mix instruments going high volume environments fact immulite 2500 generally uses fewer reagents 2000 reasons decrease 2004 similar 2005 included 800000 decrease sale homocysteine kits reagent utilization immulite fell 3824 fourth quarter 2005 4426 2004 4497 2003 expected utilization immulite decline future instruments placed lower volume environments sales company’s mature ria isotopic products 214 million 2005 11 241 million 2004 sales 2004 decreased 10 2003 expected sales levels decline future customers move automated methods testing require radioactive agents sales dpc products declined 44 million 2005 62 million 2004 2003 sales dpc products 106 million sales dpc products 2004 fell due introduction allergy testing immulite 2000 took sales away company’s microplatebased allergy tests company decided cease production microplatebased allergy tests end 2003 resulting reduced amount sales 2004 third quarter 2003 company sold pathodx product line company continued manufacturing products middle 2005 revenue products declined significantly 2004 ceased company’s sales manufacturers’ products increased 149 million 2005 116 million 2004 97 million 2003 company announced fourth quarter 2004 would begin distributing clinical chemistry equipment thermo electron corporation tec manufacturer clinical chemistry automation instrumentation selected markets contributed increase 2005 increase sales manufacturers’ products future category also includes freight expenses billed customers approximately 35 million years presented domestic sales increased 12 2005 2004 18 2004 2003 reflecting part company’s continued success larger customers purchasing organizations indirect distribution smaller doctor’s office laboratories domestic sales percentage total sales approximately 30 2005 29 2004 2003 foreign sales including us export sales nonconsolidated foreign affiliates sales consolidated subsidiaries percentage total sales approximately 70 2005 71 sales 2004 2003 europe company’s principal foreign market represented 40 45 46 total sales 2005 2004 2003 respectively sales company’s german subsidiary includes czech republic poland increased 53 615 million 2005 584 million 2004 528 million 2003 reflecting success immulite 2000 product line sales brazil region includes certain central south american countries accounted approximately 11 total sales 542 million 2005 compared 397 million 2004 319 million 2003 past brazilian real volatile relative us dollar exchange rate reals us dollar 231 end 2005 271 end 2004 291 end 2003 although real strengthened relative dollar past years might weaken significantly future company generally able increase prices experienced significant devaluations real however able fully offset currency effects due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income periods dollar weakening impact reverse company’s greatest exposure euro brazilian real based comparison exchange rates immediately preceding year 2003 dollar weakened relative euro real net effect positive impact 7 sales 2004 dollar weakened relative euro real effect positive impact 5 sales 2005 dollar strengthened relative euro weakened relative real net effect positive impact 2 sales due intense competition company’s foreign distributors generally unable increase prices offset negative effect us dollar strong fourth quarter fiscal year 2002 company discovered internally certain senior managers employees chinese subsidiary made certain improper payments may violated foreign us laws addition deduction payments benefits subsidiary tax returns may improper chinese tax law resulting underpayments chinese taxes independent investigation company’s audit committee concluded current members company’s senior management knew involved provision payments benefits company made changes management chinese subsidiary including replacement senior managers involved implemented procedures controls address issues promote compliance applicable laws company voluntarily disclosed payment issues securities exchange commission sec department justice doj first quarter 2003 cooperated fully agencies investigations company resolved issues sec doj second quarter 2005 company paid aggregate approximately 48 million agencies consisting 20 million fines approximately 28 million disgorgement profits related interest charges company accrued 15 million 2002 additional 34 million 2004 respect settlement costs company’s chinese subsidiary pled guilty violations united states foreign corrupt practices act “fcpa” agreed take certain actions including engaging independent monitor fcpa compliance activities china sec issued cease desist order company agreed take certain actions including engaging independent monitor fcpa compliance program company recorded charges income tax provision related nondeductibility improper payments china chinese taxrelated matters 14 million 2002 09 million 2003 termination improper payments china may continue significant adverse effect future operations china termination could negatively influence significant number chinese subsidiary’s customers’ decisions whether continue business subsidiary result actions chinese authorities 2005 chinese subsidiary sales 60 million versus sales 82 million 2004 february 2004 company informed us food drug administration “fda” based inspectional findings included data integrity procedural issues related solely company’s application immulite chagas test company subject fda’s application integrity policy “aip” fda suspended review applications submitted company would review future applications fda determined company resolved issues september 6 2005 company informed fda suspension lifted longer subject aip late july 2004 company served subpoena requiring produce federal grand jury central district california documents relating trading company’s securities exercise options officers directors employees company december 30 2003 april 1 2004 subpoena also seeks documents relating fda’s review company’s diagnostic test detect chagas audits reviews fda 2000 present relating company’s products finally subpoena seeks personnel file former company employee company cooperating united states attorney sec regarding matters independent committee board directors conducted investigation trading issues presented findings conclusions united states attorney sec management believes ultimate resolution matter material financial impact company’s brazilian subsidiary participant along various companies number lawsuits brazilian government claiming unlawful taxation historically companies involved suits limited success taxes overturned company also purchased unused tax credits approximately 10 million unrelated company however due uncertainty related company’s ability use credits tax liabilities fully reserved cost credits court cases typically take many years decided company estimates likely loss outcome based merits individual cases advice outside counsel december 31 2005 company accrued amounts believes pay suit involves majority disputed taxes case sales taxes courts rule company actions would create additional liability 10 million march 2005 company’s brazilian subsidiary informed brazilian government believed company’s brazilian subsidiary owed additional tariffs due change brazilian company made product classification company believes prevail case however courts rule would create additional liability approximately 500000 cost sales gross margins generally affected product mix regents vs instruments customer mix foreign vs domestic movement foreign currencies gross margin 2005 increased 558 552 2004 increase part due increase reagent sales higher gross margin percentage total sales increase sales mix toward higher margin us customers away foreign distributor sales gross margin 2004 decreased 552 558 2003 decrease due part 14 million dollar payment homocysteine license cover customers’ historical purchases company’s homocysteine tests 10 million unabsorbed costs related immulite 2500 manufacturing issues new jersey temporarily affected production immulite 2500 fourth quarter approximately 10 million inventory writedowns related part discontinued products particular microplate allergy line operating expenses total operating expenses selling research development general administrative percentage sales 359 2005 356 2004 331 2003 categories increased annually absolute dollars support increased levels sales research development expenses increased 101 sales 2004 108 sales 2005 due primarily 17 million expense related joint instrument development project thermo electron corporation additional expenses expected incurred development project instrument released included general administrative expense 2003 approximately 884000 legal expenses related issues china 2004 general administrative expenses included 26 million estimated payments sec doj resolving matter 2004 company also incurred 17 million legal expenses related issues china 2004 general administrative expenses also included 20 million related implementation sarbanesoxley section 404 approximately 500000 related leasehold writedowns los angeles manufacturing facility reconfigured 2005 general administrative expenses included 14 million legal transaction related fees discussions longer active strong euro also contributed higher selling general administrative expenses 2003 2004 effective july 1 2003 company sold pathodx product line manual tests remel inc 49 million company continued manufacture products remel middle 2005 company paid 44 million closing remaining amount approximately 500000 manufacturing process transitioned third quarters 2003 2005 company recognized gains related sale 42 million 343000 respectively included components operating income equity income affiliates represents company’s share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 16 2005 relative 2004 39 2004 relative 2003 primarily due increased earnings italian distributor net interest income expense represent excess interest income interest expense amounts income expense net interest income 21 million 2005 450000 2004 860000 2003 increase 2005 primarily related increase invested cash increases interest rates 2004 amount included 750000 accrued interest expense related estimated settlement amounts related company’s chinese subsidiary well 319000 foreign currency transaction gains 2003 amount included approximately 12 million foreign exchange gains addition 2003 company experienced 433000 increase local tariffs brazil income taxes minority interest company’s effective tax rate 29 2005 2004 30 2003 includes federal state foreign taxes company routinely involved federal state income tax audits company regularly evaluates potential tax exposures establishes accrual amounts probable paid company believes adequately provided potential tax exposure minority interest represents 44 interest company’s brazilian subsidiary held third party increases decreases amount reflect increases decreases profitability brazilian distributor net income 2005 net income 672 million 223 per diluted share 9 increase 2004 increase sales gross margin offset increase operating expenses 2004 net income 617 million 206 per diluted share slightly less 2003 net income 618 million 208 per diluted share due increases cost sales operating expenses discussed 42 million gain sale pathodx product line 010 per share tax positive impact 2003 diluted earnings per share net income 2006 adversely impacted stock based compensation expense recognized result adoption sfas 123r discussed “new accounting pronouncementssfas 123r” critical accounting policies estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period management bases estimates assumptions applicable historical experience various factors believes reasonable circumstances results form basis making judgments carrying values assets liabilities allowance bad debts credit granted customers unsecured basis company records allowance doubtful accounts time revenue recognized based assessment business environment customers’ financial condition historical collection experience accounts receivable aging customer disputes circumstances arise significant event occurs comes attention management bankruptcy filing customer allowance reviewed adequacy adjusted reflect change estimated amount received customer company’s aging receivables balances deteriorate company would record additional provisions doubtful accounts allowance obsolete slowmoving inventories stated lower cost determined firstin firstout basis market company regularly evaluates inventory obsolescence records provision inventory costs estimated recoverable normal course business company’s inventories become obsolete slow moving company would record additional provisions obsolete inventories property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 1 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease company’s estimate useful life property plant equipment changes company may use different life record depreciation amortization company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets goodwill intangible assets goodwill results primarily company’s purchase certain foreign distributors goodwill tested impairment reporting unit level least annually whenever events circumstances indicate goodwill might impaired evaluation requires reporting unit underlying goodwill measured fair value less carrying value unit second test must performed second test current fair value reporting unit allocated assets liabilities unit including amount “implied” goodwill implied goodwill less net carrying amount goodwill difference becomes amount impairment must recorded year 2005 annual review result goodwill impairment company intangible assets consist purchased technology licenses technology licenses amortized straightline basis life patented technology company purchased technology licenses 2005 technology licenses weighted average amortization period 13 years purchases 2004 2003 deferred income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized company deferred income tax assets state net operating loss carryforwards state research development tax credits loss carryforwards credits expire accordance provisions applicable tax laws beginning years 2005 2011 company maintains valuation allowance substantially net operating loss carryforwards state research development tax credit carryforwards likely recovered revenue recognition company’s revenue recognition policies included “item 7 management’s discussion analysis financial condition results operations overview” changes underlying terms company’s various revenue arrangements could result changes revenue recognition policies additionally changes company’s sales returns experience could result need sales return allowance contingencies company involved various legal matters uncertainty relative outcome including involving company’s chinese brazilian subsidiaries provide potential exposure company established accruals unfavorable rulings management believes adequate addition company routinely involved federal state income tax audits provided potential tax exposures company maintains allowance tax contingencies management believes adequate liquidity capital resources company adequate working capital sources capital carry current business meet existing capital requirements december 31 2005 december 31 2004 company 112913000 80425000 cash equivalents respectively included cash equivalents december 31 2005 2004 73941000 3082700 respectively shortterm highquality commercial paper 2005 net cash flows operating activities 797 million consisting 1222 million provided net income 672 million adjusted amortization depreciation 509 million noncash items 41 million included net income less 425 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 2005 increase 370 million inventories includes 325 million placed instruments 87 million increase accounts receivable resulted company’s increase sales less 82 million provided increase accounts payable net cash flows operating activities 696 million 2004 consisting 1103 million provided net income 617 million adjusted depreciation amortization 436 million noncash items 50 million included net income less 407 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 2004 347 million increase inventories includes 304 million placed instruments 126 million increase accounts receivable resulted company’s increased sales less 86 million provided increases accrued liabilities included 34 million accruals related company’s chinese subsidiary net cash flows operating activities 636 million 2003 net cash flows 2003 consisted 936 million provided net income 618 million adjusted depreciation amortization 355 million less noncash items 37 million included net income less 300 million used changes operating assets liabilities significant element net cash used operating assets liabilities 2003 284 million increase inventories includes 218 million placed instruments cash flows used investing activities consist principally additions property plant equipment additions property plant equipment 2005 319 million compared 503 million 2004 420 million 2003 included 2005 93 million expansion company’s new jersey manufacturing facility included 2004 217 million fit company’s new building los angeles 86 million construction fit company’s new building united kingdom included 2003 approximately 238 million purchase fit company’s new building los angeles approximately 32 million construction new building wales 800000 implementation erp system wales 10 million manufacturing equipment new jersey company implemented new computer system united kingdom 2003 capitalized cost approximately 1 million company implementing similar system new jersey manufacturing facility expended 17 million end 2005 anticipated conversion completed 2006 cost approximately 26 million company 20 million unsecured line credit wells fargo bank borrowings outstanding december 31 2005 2004 2003 line credit line credit matures july 2007 company notes payable consisting bank borrowings company’s foreign consolidated subsidiaries payable local currency guaranteed us parent company 116 million december 31 2005 compared 154 million december 31 2004 terms loans described “item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements except historical information contained herein report following discussion particular contain forwardlooking statements identified words “estimate” “project” “anticipate” “plan” “expect” “intend” “believe” “hope” similar expressions based upon management’s current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements risks uncertainties include • company’s ability successfully market new existing products • company’s ability keep abreast technological innovations successfully incorporate new products • company’s dependence sole supplier key chemical components immulite assays • company’s ability address resolve issues relating fda’s application integrity policy • company’s ability new tests reviewed approved fda • risks inherent development release new products delays unforeseen costs technical difficulties regulatory approvals • competitive pressures including technological advances patents obtained competitors • environmental risks related substances regulated various federal state international laws • currency risks based relative strength weakness us dollar • domestic foreign governmental health care regulation cost containment measures • political economic instability certain foreign markets • changes accounting standards promulgated financial accounting standards board securities exchange commission american institute certified public accountants • effects governmental actions relating certain payments company’s chinese subsidiary overview dpc develops manufactures automated diagnostic test systems related reagent test kits used hospital reference physicians’ office laboratories throughout world company’s principal product line immulite fully automated computerdriven modular system uses specialized proprietary software provide rapid accurate test results reduce customer’s labor reagent costs immunoassay tests provide critical information useful physicians diagnosis monitoring management prevention various diseases dpc manufactures 400 immunodiagnostic test kits also called “reagents” “assays” using several different technologies assay formats immulite instruments closed systems meaning perform manufacturers’ tests accordingly major factor successful marketing systems ability offer broad menu assays addition immulite assays company sells broad range tests based technologies performed manually using customer’s laboratory equipment radioimmunoassay ria enzyme immunoassay eia tests addition breadth menu major competitive factors immulite instruments include timetoresults quickly instrument performs test ease use overall cost effectiveness competitive factors rapid technological developments characterize industry company devotes approximately 10 annual revenues research development activities expensed incurred company’s products sold throughout world directly affiliated independent distributors historically foreign sales including us export sales nonconsolidated subsidiaries independent distributors sales consolidated subsidiaries accounted 70 revenues although recent years domestic sales growth outpaced foreign sales growth company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also sells instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale capital lease company enters various types operating lease arrangements customers generally provide terms three five years periodic rental payments revenue types leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer “soft placement” subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments generally amortized straightline basis five years maintenance costs expensed incurred company also enters service contracts customers recognizes service revenue related contract life related costs expensed incurred two important indicators used management evaluate financial performance instrument shipments reagent utilization number immulite instruments company reports shipped period net returned instruments returns end lease rental tradeins purchase new model company refurbishes seeks place returned instruments reduced prices different methods instruments placed total instrument sales vary period based relative mix placement methods sales necessarily direct correlation number instruments shipped period important measure penetration immulite reagent sales average amount reagent sales sold per instrument shipped takes number weeks months instrument shipped become fully functional regard reagent utilization company calculates average reagent utilization fiscal period dividing immulite reagent sales period total number instruments shipped end previous fiscal period results operations summary financial data sales company’s sales increased 18 2003 3814 million compared sales 3241 million 2002 15 increase 2001 sales 2831 million 2003 sales immulite products instruments reagents 3380 million 22 increase 2002 sales immulite products 2768 million 20 increase 2001 sales immulite products represented 89 2003 sales 85 2002 sales 81 2001 sales various categories immulite product sales 2003 2002 2001 shown following chart immulite product line company shipped total 880 immulite systems 2003 including 553 immulite 2000 systems 327 immulite one 1000 systems total base immulite systems shipped grew 9033 including 2944 immulite 2000 systems 2002 company shipped total 1083 immulite systems including 625 immulite 2000 systems 2001 company shipped total 1115 systems including 651 immulite 2000 systems twelve percent 12 decrease immulite 2000 shipments 2003 compared 2002 due larger base immulite 2000’s market reduced incremental penetration company’s target markets addition placement immulite 2000 systems may adversely impacted company’s announcement third quarter 2003 intention begin shipment immulite 2500 first quarter 2004 immulite 2000 longer sales process immulite due higher sales price immulite 2000 experiences longer time delay instrument placement rampup reagent sales company expects experience similar sales cycle reagent rampup cycle immulite 2500 immulite 2000 immulite 2500 reduce time takes get result certain tests importantly tests emergency rooms aid diagnosis cardiac conditions sold higher price immulite 2000 sales 2500 may erode sales 2000 2003 number immulite systems shipped declined 29 2002 due larger customers’ preference immulite 2000 however company believes immulite sales continue strong immulite offers important alternative smaller laboratories need higher throughput stateoftheart immulite 2000 decline dollar amount immulite instrument sales 2003 compared 2002 reflected reduced number instruments shipped price decreases immulite 2000 anticipation release immulite 2500 soft placements instruments minimum reagent usage commitments reflected reagent sales decline immulite instrument sales 2003 compared 2002 offset strong increases immulite reagent sales especially immulite 2000 reagents reagent utilization immulite 2000 increased 18537 fourth quarter 2003 16480 fourth quarter 2002 reagent utilization immulite instrument also increased 4497 fourth quarter 2003 4191 fourth quarter 2002 increased reagent utilization immulite 2000 2003 part result larger test menu included new hepatitis b tests strength euro relative dollar although immulite reagent utilization increased fourth quarter 2003 company expects average utilization instrument decline high volume immulite installations replaced immulite 2000 immulite 2500 instruments new immulite placements go lower volume environments 2002 reagent utilization immulite 2000 increased reaching 16480 fourth quarter versus 15666 2001 reagent utilization immulite decreased 4191 4776 2001 part due high use immulites replaced immulite 2000s incremental immulite shipments going lower volume users december 31 2003 2002 2001 company shipped cumulative basis approximately 9000 8000 7000 immulite instruments respectively installed base instruments expanding test kit menu new products immulite 2500 expected support continued growth coming years sales company’s mature ria isotopic products 267 million 2003 11 299 million 2002 sales 2002 decreased 12 2001 expected sales levels continue decline future sales dpc products increased slightly 106 million 2003 compared 104 million 2002 sales dpc products decreased 14 121 million 2001 sales dpc products 2002 fell due introduction allergy testing immulite 2000 took sales away company’s microplatebased allergy tests decrease offset increased sales allergy assays immulite 2000 company decided cease production microplatebased allergy tests end 2003 microplate allergy sales 54 million sales drop significantly 2004 inventories depleted company’s sales manufactured products decreased 61 million 70 million 2002 sales 2002 increased slightly 2001 sales 69 million domestic sales increased 20 2003 2002 16 2002 2001 reflecting part company’s continued success larger customers purchasing organizations indirect distribution smaller doctor’s office laboratories hepatitis b assay also strong sales domestically foreign sales including us export sales nonconsolidated foreign subsidiaries sales consolidated subsidiaries percentage total sales approximately 71 2003 72 sales 2002 2001 europe company’s principal foreign market represented 41 40 41 sales 2003 2002 2001 respectively sales company’s german subsidiary includes czech republic poland increased 29 525 million 2003 406 million 2002 333 million 2001 reflecting success immulite 2000 product line sales brazil region includes certain central south american countries accounted approximately 8 total sales 319 million 2003 compared 290 million 2002 296 million 2001 past years brazilian real volatile relative dollar exchange rate reals dollar 291 end 2003 351 end 2002 201 end 2001 company generally able increase prices experienced significant devaluations real however able fully offset currency effects due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income periods dollar weakening impact reverse based comparative exchange rates immediately preceding year 2002 dollar weakened relative euro net negative impact real currency effect slight positive impact company’s hedging strategy 2002 reduced positive impact strong euro latter part year profit 2003 dollar weakened relative euro average strengthened slightly relative real effect positive impact 7 sales company’s hedging strategy reduced positive impact strong euro profit due intense competition company’s foreign distributors generally unable increase prices offset negative effect us dollar strong fourth quarter fiscal year 2002 company discovered internally chinese subsidiary made certain improper payments may violated foreign us laws independent investigation audit committee concluded senior management company involved apparent similar issues respect company’s foreign operations company implemented additional policies procedures promote compliance applicable laws company cooperating sec united states justice department review matter termination improper payments china may significant adverse effect sales china year ended december 31 2002 chinese subsidiary revenues approximately 90 million less 3 total sales year ended december 31 2003 chinese subsidiary sales 98 million fourth quarter 2002 company accrued 15 million actual estimated costs resolve matter december 31 2003 14 million remains accrual consists principally estimated penalties andor fines company may incur resolve matter addition company recorded charge 14 million 2002 fourth quarter tax provision related possible nondeductibility payments china third quarter 2003 company recorded additional charge 09 million income tax provision chinese taxrelated matters additional legal expenses approximately 884000 incurred charged general administrative expense year ended december 31 2003 december 31 2003 14 million included accrued liabilities accompanying consolidated balance sheet related accrual costs estimated penalties andor fines february 2004 company informed fda based inspectional findings included data integrity procedural issues company subject fda’s application integrity policy fda suspended review applications submitted company defer review future applications fda determines company resolved issues resolution process consists developing implementing corrective action plan audited third party reviewed fda company believes 12 months reasonable time actions take place time company restricted fda regard introducing new tests outside united states however company’s inability introduce new tests united states pending resolution matter may negative impact future sales profits cost sales gross margin decreased 569 2003 575 2002 decrease due increase manufacturingrelated service costs los angeles decrease sales volume production instruments new jersey price decreases immulite 2000 anticipation release immulite 2500 lower gross margins china gross margins positively impacted weakening dollar products manufactured united states dollarbased however large percentage products sold company owned international distributors sell products local currencies periods weakening dollar sales measured dollars increase resulting higher gross margins conversely strengthening dollar generally results lower gross margins gross margin 2002 improved slightly 574 2001 improvement due part shift product mix toward immulite reagents shift customer mix toward domestic users margins 2002 negatively impacted devaluation brazilian real effects fully overcome price increases 2003 company relocated brazilian distribution center resulted reduced tariffs improved gross margins region operating expenses total operating expenses selling research development general administrative percentage sales fell 366 2003 373 2002 381 2001 although categories increased annually absolute dollars support increased levels sales general administrative expenses 2002 included 15 million costs incurred relating investigation chinese payments estimated penalties andor fines company may incur resolve issues relating matter included general administrative expense 2003 approximately 884000 legal expenses related issues china see note 9 notes consolidated financial statements discussion chinese subsidiary matter strong euro 2002 2003 also contributed higher selling general administrative expenses years effective july 1 2003 company sold pathodx product line manual tests remel inc 49 million company continue manufacture products remel period two years period company assist remel developing expertise take manufacturing process company paid 44 million closing remaining 500000 withheld manufacturing process transitioned third quarter 2003 company recognized gain 42 million included component operating income equity income affiliates represents company’s share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 58 2003 relative 2002 16 2002 relative 2001 primarily due increased earnings italian distributor 2001 2002 equity income affiliates included 500000 400000 respectively due reduction income tax provision italian distributor resulting change italian tax laws net interest income expense represent excess interest income interest earned equipment contracts relating immulite placements interest expense amounts income expense net interest income 827000 2003 versus expense 1220000 2002 expense 7000 2001 2003 amount included approximately 12 million foreign exchange gains versus 500000 foreign exchange losses 2002 approximately 600000 losses 2001 income taxes minority interest company’s effective tax rate 30 2003 31 2002 2001 includes federal state foreign taxes fourth quarter 2002 company’s tax income provision includes accrual 14 million relating possible nondeductibility payments china company expects effective income tax rate slightly higher 2004 2003 minority interest represents 44 interest company’s brazilian distributor held third party increases decreases amount reflect increases decreases profitability brazilian distributor net income 2003 net income 618 million 208 per diluted share increased 31 2002 net income 473 million 160 per diluted share 21 increase 2001 net income included 2003 results gain 42 million operating income sale pathodx product line positive impact net income 010 per share balance increase primarily due increases sales greater percentage increases operating expenses critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates assumptions include limited allowance bad debts allowance slow moving obsolete inventories useful lives selected depreciating property plant equipment valuation allowances deferred income taxes estimates used recoverability longlived assets management bases estimates assumptions historical experience various factors believes reasonable circumstances results form basis making judgments carrying values assets liabilities management believe estimates involve assumptions matters highly uncertain different reasonable estimates changes accounting estimates reasonably likely occur would material impact financial statements extent material differences management’s estimates actual results future results operations affected however management’s experience differences estimates actual results immaterial appropriate adjustments consolidated financial statements made soon differences become known liquidity capital resources company adequate working capital sources capital carry current business meet existing capital requirements december 31 2003 december 31 2002 company 69843000 54284000 cash equivalents respectively included cash equivalents december 31 2003 2002 35000000 42500000 respectively shortterm highquality commercial paper net cash flows operating activities company’s principal source funds finance working capital shareholder dividends capital expenditures 2003 company recognized 42 million gain sale pathodx product line net cash flows operating activities 884 million 2003 consisting 947 million provided net income adjusted depreciation amortization noncash items included net income less 20 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 2003 73 million increase inventories 21 million increase accounts receivable significant elements net cash provided decrease accrued liabilities 59 million decrease income taxes payable 49 million net cash flows operating activities 690 million 2002 617 million 2001 net cash flows 2002 consisted 756 million provided net income adjusted depreciation amortization noncash items included net income less 66 million used changes operating assets liabilities significant elements net cash used operating assets liabilities 46 million increase accounts receivable 111 million increase inventories partially offset 83 million increase accrued liabilities cash flows used investing activities consist principally additions property plant equipment increases sales type operating leases immulite instrument units additions property plant equipment 2003 420 million compared 125 million 2002 273 million 2001 included 2003 approximately 238 million purchase fit company’s new building los angeles approximately 32 million construction new building wales euro dpc 800000 implementation new computer system united kingdom 10 million manufacturing equipment new jersey included 2001 amounts approximately 90 million completion new manufacturing facility new jersey approximately 40 million related implementation new computer system los angeles cash used placement immulite systems salestype operating leases rentals periods generally three five years decreased 218 million 2003 314 million 2002 reflecting lower number immulite 2000 instruments placed operating leases 2002 cash used placement immulite systems salestype operating leases rentals increased 314 million 280 million 2001 reflecting greater number immulite 2000 instruments placed operating leases rather sold 2001 company constructed 88000 square foot building new jersey total cost 148 million company moved new manufacturing facility december 2001 company implemented new computer system los angeles february 2002 capitalized cost approximately 48 million united kingdom 2003 capitalized cost approximately 10 million anticipated computer systems new jersey converted 2004 first quarter 2003 company purchased 170000 sq ft building los angeles approximately 22 million cash building fitted 2004 initial occupancy anticipated third quarter 2004 anticipated cost fitting building 150 200 million 2003 company began construction additional 30000 square foot building wales manufacturing facility anticipated building completed second quarter 2004 total cost approximately 90 million company 20 million unsecured line credit used borrowing standby letters credit borrowings standby letters credit outstanding december 31 2003 2002 company notes payable consisting bank borrowings company’s foreign consolidated subsidiaries payable local currency guaranteed us parent company 194 million december 31 2003 compared 197 million december 31 2002 terms loans described “item 7aitem 7 management’s discussion analysis financial condition results operations forward looking statements certain risks except historical information contained herein report following discussion particular contain forwardlooking statements identified words “estimate” “project” “anticipate” “plan” “expect” “intend” “believe” “hope” similar expressions based upon management’s current expectations speak date made forwardlooking statements subject risks uncertainties factors could cause actual results differ materially results anticipated forwardlooking statements risks uncertainties include • company’s ability successfully market new existing products • company’s ability keep abreast technological innovations successfully incorporate new products • company’s current dependence sole suppliers key chemical components immulite assays • risks inherent development release new products delays unforeseen costs technical difficulties regulatory approvals • competitive pressures including technological advances patents obtained competitors • currency risks based relative strength weakness us dollar • domestic foreign governmental health care regulation cost containment measures • political economic instability certain foreign markets results operations sales company’s sales increased 14 2001 2834 million compared sales 2479 million 2000 15 increase 1999 sales 1883 million 2001 sales immulite products instruments reagents 2307 million 20 increase 2000 sales immulite products 1931 million 28 increase 1999 sales immulite products represented 81 2001 sales 78 2000 sales 70 1999 sales 2001 sales company’s original immulite instrument immulite one related reagents service 1213 million 1 decrease 2000 sales immulite one reagents increased 3 989 million instrument service sales 16 224 million 2000 sales immulite product line increased 8 1230 million immulite 2000 instrument became commercially available march 1998 sales including reagents 1094 million 2001 56 increase 2000 sales 701 million sales immulite 2000 reagents increased 76 839 million instrument sales service increased 13 255 million 2000 sales immulite 2000 product line increased 88 immulite 2000 longer sales process immulite one due higher sales price company also experienced longer time delay instrument placement rampup reagent sales immulite 2000 2001 previous year growth dpc’s business driven primarily ongoing demand immulite 2000 fourth quarter sales immulite 2000 test kits exceeded first time immulite demand original immulite continues strong however company believes remains important complement higher throughput stateoftheart immulite 2000 december 31 2001 2000 1999 company shipped cumulative basis approximately 7000 5900 4900 immulite instruments respectively installed base instruments expanding test kit menu expected support continued growth coming years sales company’s mature ria isotopic products sales 338 million 2001 slightly 337 million 2000 sales 2000 declined 11 1999 expected sales levels decline future sales dpc products including allergy reagents decreased 13 121 million 2001 compared 139 million 2000 sales may negatively impacted 2002 due september 2001 introduction broad spectrum allergy assays immulite 2000 company also experienced decrease sales nondpc products consolidated international affiliates 71 million 2000 69 million 2001 anticipated sale nondpc products continue decline domestic sales 2001 increased 33 2000 reflecting part company’s success larger customers purchasing organizations foreign sales including us export sales nonconsolidated foreign subsidiaries sales consolidated subsidiaries percentage total sales approximately 72 76 79 2001 2000 1999 europe company’s principal foreign market represented 41 44 47 sales 2001 2000 1999 respectively sales germany increased 333 million 2001 301 million 2000 315 million 1999 reflecting success immulite 2000 product line united kingdom italy china also experienced strong sales increases 2001 sales brazil accounted approximately 11 total sales 2001 2000 1999 result devaluation brazilian currency january 1999 company raised prices local currency making products expensive brazil prior devaluation however todate significant impact unit sales due significance foreign sales company subject currency risks based relative strength weakness us dollar periods us dollar strengthening effect translation financial statements consolidated foreign affiliates lower sales net income based comparative exchange rates immediately preceding year translation adjustments due strong us dollar 6 negative impact 2001 sales 2000 5 negative impact sales 9 negative impact 1999 due intense competition company’s foreign distributors generally unable increase prices offset negative effect us dollar strong cost sales gross margin improved approximately 57 sales 2001 approximately 55 2000 1999 due part shift product mix toward immulite reagents shift customer mix toward domestic end users increased manufacturing efficiencies although company expects mix trends continue also experiencing competitive pricing pressures may negatively impact gross margins operating expenses total operating expenses selling research development general administrative percentage sales fell 38 2001 39 2000 42 1999 although categories increased annually absolute dollars support increased levels sales equity income affiliates represents company’s share earnings nonconsolidated affiliates principally 45owned italian distributor amount increased 88 2001 relative 2000 24 2000 relative 1999 primarily due increased earnings italian distributor also 2001 equity income affiliates included onetime 500000 permanent tax benefit due change italian tax laws net interest income represents excess interest income interest earned equipment contracts relating immulite placements interest expense amounts income expense net interest income expense 7000 2001 versus income 666000 2000 amount included among things gain 482000 sale product line gain 215000 sale building foreign exchange losses 500000 1999 net interest income 443000 income taxes minority interest company’s effective tax rate 31 2001 30 2000 1999 includes federal state foreign taxes minority interest represents 44 interest company’s brazilian distributor held third party increases decreases amount reflect increases decreases profitability brazilian distributor net income 2001 increased 38 2000 primarily due increases sales gross profit greater percentage increases operating expenses critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates assumptions include limited allowance bad debts allowance slow moving obsolete inventories useful lives selected depreciating property plant equipment valuation allowances deferred income taxes estimates used recoverability longlived assets accruals insurance management believes methodology utilizes determine amounts results reporting reasonable estimates differences estimates actual results usually minor included consolidated financial statements management soon known liquidity capital resources company adequate working capital sources capital carry current business meet existing capital requirements december 31 2000 december 31 2001 company 26395000 31834000 cash equivalents included cash equivalents december 31 2000 2001 14700000 19900000 respectively shortterm highquality commercial paper net cash flows operating activities 617 million 2001 417 million 2000 281 million 1999 additions property plant equipment 2001 273 million compared 96 million 2000 90 million 1999 included 2001 9 million completion new manufacturing facility new jersey 4 million related implementation new computer system los angeles cash used placement immulite systems salestype operating leases rentals periods generally three five years increased 280 million 2001 180 million 2000 reflecting higher number immulite 2000 instruments placed operating lease rather sold 1999 cash used sales operating type leases rentals 150 million 2000 company purchased land new jersey 2001 constructed 89000 square foot building total cost 148 million company moved new manufacturing facility december 2001 company implemented new computer system los angeles february 2002 capitalized cost approximately 48 million anticipated computer systems united kingdom new jersey converted next several years company material commitments capital expenditures 2002 company 20 million unsecured line credit standby letters credit line credit totaled 386000 december 31 2001 2000 standby letters credit outstanding december 31 1999 borrowings outstanding december 31 2001 2000 1999 line credit company notes payable consisting bank borrowings company’s foreign consolidated subsidiaries payable local currency guaranteed us parent company 170 million december 31 2001 compared 156 million december 31 2000 158 million december 31 1999 terms loans described “item 7a nannanitem 7a quantitative qualitative disclosures market risk applicable item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 1998 company 12500000 invested securities yielding average annual return 523 average maturity investments less one month additionally company debt obligations foreign subsidiaries fixed interest rates mature various dates substantially companys debt obligations denominated european currencies table presents principal cash flows related interest rates fiscal year maturity notes payable information december 31 1998 dollars thousands foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk companys policies permit active trading speculation derivative financial instruments companys policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion companys primary mar ket risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pound sterling distributors turn foreign currency risk related product purchases many companys owned distributors purchase forward currency contracts offset currency exposures related purchase commitments table provides information december 31 1998 concerning companys forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates fair value currency contracts outstanding foreign currency exchange contracts outstanding december 31 1998 item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 1999 company 7600000 invested securities yielded average annual return 560 average maturity investments less one month additionally company debt obligations foreign subsidiaries fixed interest rates mature various dates substantially companys debt obligations denominated european currencies table presents principal cash flows related interest rates fiscal year maturity notes payable information december 31 1999 us dollars thousands foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk companys policies permit active trading speculation derivative financial instruments companys policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion companys primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many companys owned distributors purchase forward currency contracts offset currency exposures related purchase commitments table provides information december 31 1999 concerning companys forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates fair value currency contracts outstanding foreign currency exchange contracts outstanding december 31 1999 item 8nanitem 7a “note 6 notes payable” notes consolidated financial statements new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards “sfas” 141 “business combinations” sfas 142 “goodwill intangible assets” sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 changes accounting goodwill amortization method impairmentonly approach amortization goodwill ceased upon adoption statement addition standard includes provisions reclassification certain existing recognized intangibles goodwill reassessment useful lives existing recognized intangibles reclassification certain intangibles previously reported goodwill identification reporting units purposes assessing potential future impairments goodwill sfas 142 goodwill intangibles initially assessed impairment upon adoption statements subsequent assessments required annually reason suspect values diminished impaired corresponding writedowns recognized necessary connection adoption sfas 142 company evaluated intangibles including goodwill determined reclassification balances necessary accordingly company’s intangibles consist solely goodwill generated connection purchase certain international distributors effective january 1 2002 company adopted sfas 142 accordingly amortization goodwill ceased effective january 2002 would 282000 fourth quarter 1117000 year ended december 31 2002 nonamortization provisions sfas 142 adopted pro forma net income quarter ended december 31 2001 nonamortization provisions sfas 142 applied period would 11619000 39 per diluted share versus 11337000 38 per diluted share actually reported pro forma net income year 2001 would 40146000 136 per diluted share versus 39029000 132 per diluted share actually reported pro forma net income year ended december 31 2000 nonamortization provisions sfas 142 applied period would 29318000 aftertax basis 104 per diluted share versus 28250000 100 per diluted share actually reported required sfas 142 company completed annual impairment testing believe impairment goodwill necessary june 2001 financial accounting standards board issued sfas 143 “accounting asset retirement obligations” company believe impact sfas 143 material company’s consolidated position results operations august 2001 financial accounting standards board issued sfas 144 “accounting impairment disposal longlived assets” statement addresses financial accounting reporting impairment disposal longlived assets statement supersedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” accounting reporting provisions accounting principles board opinion 30 “reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” disposal segment business company adopted sfas 144 effective january 1 2002 adoption standard material impact company’s consolidated financial position results operations april 2002 financial accounting standards board issued sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” sfas 145 rescinds amends effective immediately several existing authoritative pronouncements make various technical corrections clarifying meanings describe applicability changed conditions july 2002 financial accounting standards board issued sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 applied prospectively exit disposal activities initiated december 31 2002 company believe sfas nos 145 146 material impact consolidated financial position results operations november 2002 financial accounting standards board issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation fasb statements 5 57 107 rescission fasb interpretation 34 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 interpretation addresses disclosures made guarantor interim annual financial statements obligations guarantees also clarifies requirements related recognition liability guarantor inception guarantee obligations guarantor undertaken issuing guarantee company believe fasb interpretation 45 material impact consolidated financial statements company currently provide third party guarantees december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results december 31 2002 company adopted amended disclosure requirements sfas 148 euro conversion company significant sales european countries “participating countries” converted common legal currency “euro” january 1 2002 conversion euro eliminated currency exchange risk among participating countries company sells products participating countries affiliated nonaffiliated distributors determine sales prices respective territories use single currency participating countries may affect variable pricing various european markets price transparency nevertheless market factors local taxes customer preferences product assortment may reduce need price equalization euro conversion material impact company’s business item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 2002 company 42500000 invested securities yielded average annual return approximately 110 average maturity investments less one month additionally company debt obligations foreign subsidiaries mature various dates substantially company’s debt obligations denominated european currencies table presents principal cash flows translated us dollars related interest rates fiscal year maturity notes payable information december 31 2002 us dollars thousands foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk company’s policies permit active trading speculation derivative financial instruments company’s policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion company’s primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many companyowned distributors purchase forward currency contracts offset currency exposures related purchase commitments table provides information december 31 2002 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2002 item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 2004 company 30827000 invested securities yielded average annual return approximately 247 average maturity investments less one month december 31 2003 company 35000000 invested securities yielded average annual return approximately 085 average maturity investments less one month additionally company debt obligations foreign subsidiaries mature various dates substantially company’s debt obligations denominated european currencies tables presents principal cash flows translated us dollars year end spot rates related interest rates fiscal year maturity notes payable information december 31 2004 us dollars thousands notes payable information december 31 2003 us dollars thousands foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk company’s policies permit active trading speculation derivative financial instruments company’s policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion company’s primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many companyowned distributors purchase forward currency contracts offset currency exposures related purchase commitments following tables provide information december 31 2004 2003 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2004 foreign currency exchange contracts outstanding december 31 2003 item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 2005 company 73941000 invested securities yielded average annual return approximately 29 average maturity investments less one month december 31 2004 company 30827000 invested securities yielded average annual return approximately 247 average maturity investments less one month additionally company debt obligations foreign subsidiaries mature various dates tables presents principal cash flows translated us dollars yearend spot rates related interest rates year maturity notes payable information december 31 2005 notes payable information december 31 2004 foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk company’s policies permit active trading speculation derivative financial instruments company’s policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion company’s primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many companyowned distributors purchase forward currency contracts offset currency exposures related purchase commitments company hedges outstanding december 31 2005 following tables provide information december 31 2004 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2004 addition company’s nonconsolidated affiliates unrealized gains foreign exchange contracts december 31 2005 58000 19000 net income tax effect 8000 related cash flow hedges included company’s accumulated comprehensive income loss item 8item 7a “note 6 notes payable” notes consolidated financial statements dollars thousands new accounting pronouncements 2001 financial accounting standards board issued statement financial accounting standards “sfas” 143 “accounting asset retirement obligations” impact sfas 143 effective years began june 15 2002 company adopted sfas 143 january 1 2003 adoption standard material impact company’s consolidated financial position results operations july 2002 financial accounting standards board issued sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 applied prospectively exit disposal activities initiated december 31 2002 adoption sfas 146 material impact company’s consolidated financial position results operations november 2002 financial accounting standards board issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation fasb statements 5 57 107 rescission fasb interpretation 34 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 interpretation addresses disclosures made guarantor interim annual financial statements obligations guarantees also clarifies requirements related recognition liability guarantor inception guarantee obligations guarantor undertaken issuing guarantee adoption fasb interpretation 45 material impact company’s consolidated financial position results operations company currently provide third party guarantees december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results company adopted amended disclosure requirements sfas 148 company continue account stockbased compensation employees directors using intrinsic value method proscribed apb 25 related interpretations january 2003 fasb issued fasb interpretation “fin” 46 “consolidation variable interest entities” “fin 46” december 2003 fin 46 replaced fasb interpretation 46r “consolidation variable interest entities” fin 46r clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46r requires enterprise consolidate variable interest entity enterprise absorb majority entity’s expected losses entitled receive majority entity’s expected residual returns fin 46r effective entities evaluated fin 46r consolidation later end first reporting period ends march 15 2004 management believe adoption fin 46r material impact company’s financial position results operations april 30 2003 financial accounting standards board issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 new guidance amends sfas 133 decisions made part derivatives implementation group “dig” process effectively required amendments sfas 133 decisions made connection fasb projects dealing financial instruments connection implementation issues raised relation application definition derivative characteristics derivative contains financing components addition clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption standard impact company’s consolidated financial statements may 2003 financial accounting standards board issued sfas 150 “accounting financial instruments characteristics liabilities equities” sfas 150 establishes standards regarding manner issuer classifies measures certain types financial instruments characteristics liabilities equity pursuant sfas 150 freestanding financial instruments ie entered separately entity’s financial instruments equity transactions legally detachable separately exercisable must classified liabilities cases assets addition sfas 150 requires financial instruments containing obligations repurchase issuing entity’s equity shares certain circumstances obligations settled delivery issuer’s shares classified liabilities certain provisions sfas 150 indefinitely deferred however statement generally effective financial instruments entered modified may 31 2003 instruments beginning first interim period beginning june 15 2003 company currently financial instruments impacted sfas 150 adoption sfas 150 material impact company’s financial position results operations item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 2003 company 35000000 invested securities yielded average annual return approximately 085 december 31 2002 company 42500000 invested securities yielded average annual return approximately 110 average maturity investments less one month additionally company debt obligations foreign subsidiaries mature various dates substantially company’s debt obligations denominated european currencies following table presents principal cash flows translated us dollars related interest rates fiscal year maturity notes payable information december 31 2003 us dollars thousands notes payable information december 31 2002 us dollars thousands foreign currency risk company enters foreign currency contracts order manage reduce foreign currency market risk company’s policies permit active trading speculation derivative financial instruments company’s policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion company’s primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many companyowned distributors purchase forward currency contracts offset currency exposures related purchase commitments designated forecasted transactions following table provides information december 31 2003 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2003 following table provides information december 31 2002 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2002 item 8item 7a quantitative qualitative disclosures market risk company exposed certain market risks arising transactions normal course business principally risk associated interest rate foreign currency fluctuations interest rate risk company periodically invests excess cash shortterm highquality commercial paper december 31 2001 company 19900000 invested securities yielded average annual return approximately 155 average maturity investments less one month additionally company debt obligations foreign subsidiaries primarily fixed interest rates mature various dates substantially company’s debt obligations denominated european currencies table presents principal cash flows related interest rates fiscal year maturity notes payable information december 31 2001 us dollars thousands foreign currency risk company may periodically enter foreign currency contracts order manage reduce foreign currency market risk company’s policies permit active trading speculation derivative financial instruments company’s policy hedge major foreign currency cash exposures foreign exchange forward contracts company enters contracts major financial institutions minimizes risk credit loss discussion company’s primary market risk exposures management exposures presented company generates revenues costs fluctuate changes foreign currency exchange rates transactions denominated currencies local currency company manufactures products principally united states united kingdom sells product distributors many owned company throughout world products sold united states denominated us dollars products sold united kingdom denominated pounds sterling distributors turn foreign currency risk related product purchases many company’s owned distributors purchase forward currency contracts offset currency exposures related purchase commitments table provides information december 31 2001 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2001 item 8 item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 15 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 15 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 15 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 15 listing consolidated financial statements supplementary data filed report item 9item 8 financial statements supplementary data see item 14 listing consolidated financial statements supplementary data filed report item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k documents filed part report b reports form 8k none filed fourth quarter 2002 independent auditors’ report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries “company” december 31 2002 2001 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2002 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill intangible assets conform statement financial accounting standards 142 “goodwill intangible assets” deloitte touche llp los angeles california february 21 2003 consolidated balance sheets see accompanying notes consolidated financial statements consolidated statements income see accompanying notes consolidated financial statements consolidated statements shareholders’ equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries together referred herein “dpc” “company” elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method minority interest represents 44 company’s brazilian subsidiary owned company factors may affect future results company’s future operating results dependent ability research develop manufacture market innovative products meet customers’ needs inherent process number risks company must successfully manage order achieve favorable operating results company’s products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material company’s operations financial position preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company purchases certain chemical compounds key components immulite system lumigen inc tropix inc sole suppliers chemical compounds pursuant agreements terminate 2005 tropix also supplies company certain chemical compounds use veterinary kits upon termination supply agreements company required enter new supply agreements use alternate technologies obtainable technology must performance characteristics technology currently use company owns 8 interest lumigen inc accounts interest using equity method although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance financial instruments company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables company’s cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers’ financial condition generally require collateral fair value company’s financial instruments approximates cost due shortterm nature case notes payable notes interest rates competitive would available company current market environment cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 2002 2001 42500000 19900000 respectively shortterm highquality commercial paper notes consolidated financial statements inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus company’s equity undistributed net income since acquisition goodwill represents difference cost underlying fair value assets purchased relates purchase certain company’s foreign distributors goodwill amortized 20 years using straightline method prior 2002 company periodically reviewed goodwill assess recoverability impairment would recognized permanent diminution value determined occurred effective january 1 2002 amortization goodwill ceased carrying value subjected annual impairment test see “new accounting pronouncements” foreign currency translation functional currency foreign subsidiaries generally local currency assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts translated weighted average rate effect year foreign exchange translation adjustments included component comprehensive income accumulated separate component shareholders’ equity gains losses resulting foreign currency transactions included income transaction losses approximately 493000 575000 518000 included income years ended december 31 2002 2001 2000 respectively foreign exchange instruments june 1998 financial accounting standards board “fasb” issued statement financial accounting standards 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value company adopted sfas 133 january 1 2001 initial adoption sfas 133 material effect company’s consolidated financial position results operations company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered company’s european subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company engage speculative transactions company’s foreign exchange contracts subject company exchange rate risk gains losses transactions hedged offset losses gains contracts company outstanding foreign exchange contracts buy us dollars equivalent approximately 14650000 500000 december 31 2002 notes consolidated financial statements 2001 respectively carrying value contracts december 31 2001 differ significantly fair value revenue recognition company recognizes sales instruments kits upon shipment customer unless equipment subject operating lease case revenue recognized term lease agreement see note 4 service contract revenue recognized related contract life research development research development costs expensed incurred stock options stock options issued company accounted accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” permitted sfas 123 “accounting stockbased compensation” company follows disclosure requirements sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results fair value method accounting applied company’s stock option plans taxeffected impact would follows income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized new accounting pronouncements june 2001 financial accounting standards board issued statement financial accounting standards “sfas” 141 “business combinations” sfas 142 “goodwill intangible assets” sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 changes accounting goodwill amortization method impairmentonly notes consolidated financial statements approach amortization goodwill ceased upon adoption statement january 1 2002 addition standard includes provisions reclassification certain existing recognized intangibles goodwill reassessment useful lives existing recognized intangibles reclassification certain intangibles previously reported goodwill identification reporting units purposes assessing potential future impairments goodwill sfas 142 goodwill intangibles initially assessed impairment upon adoption statement subsequent assessments required annually reason suspect values diminished impaired corresponding writedowns recognized necessary connection adoption sfas 142 company evaluated intangibles including goodwill determined reclassification balances necessary accordingly company’s intangibles consist solely goodwill generated connection purchase certain international distributors effective january 1 2002 company adopted sfas 142 accordingly amortization goodwill ceased effective january 2002 would 282000 fourth quarter 1117000 year ended december 31 2002 nonamortization provisions sfas 142 adopted pro forma net income quarter ended december 31 2001 nonamortization provisions sfas 142 applied period would 11619000 aftertax basis 39 per diluted share versus 11337000 38 per diluted share actually reported pro forma net income year 2001 would 40146000 136 per diluted share versus 39029000 132 per diluted share actually reported pro forma net income year ended december 31 2000 nonamortization provisions sfas 142 applied period would 29318000 aftertax basis 104 per diluted share versus 28250000 100 per diluted share actually reported required sfas 142 company completed annual impairment testing believe goodwill impaired june 2001 financial accounting standards board issued sfas 143 “accounting asset retirement obligations” company believe impact sfas 143 material company’s consolidated financial position results operations august 2001 financial accounting standards board issued sfas 144 “accounting impairment disposal longlived assets” statement addresses financial accounting reporting impairment disposal longlived assets statement supersedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” accounting reporting provisions accounting principles board opinion 30 “reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” disposal segment business company adopted sfas 144 effective january 12002 adoption standard material impact company’s consolidated financial position results operations april 2002 financial accounting standards board issued sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” sfas 145 rescinds amends effective immediately several existing authoritative pronouncements make various technical corrections clarifying meanings describe applicability changed conditions july 2002 financial accounting standards board issued sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 applied prospectively exit disposal activities initiated december 31 2002 company believe sfas nos 145 146 material impact consolidated financial position results operations november 2002 financial accounting standards board issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation fasb statements 5 57 107 rescission fasb interpretation 34 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 interpretation addresses disclosures made guarantor interim annual financial statements obligations guarantees also clarifies requirements related recognition liability guarantor inception guarantee obligations guarantor undertaken issuing guarantee company believe fasb interpretation 45 material impact consolidated financial statements company currently provide third party guarantees notes consolidated financial statements december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results december 31 2002 company adopted amended disclosure requirements sfas 148 reclassifications certain amounts reclassified 2000 2001 conform 2002 presentation note 2 business acquisitions december 31 2001 company’s brazilian subsidiary acquired 100 interest laboratory testing company brazil medlab productos diagnosticos ltda 2035000 company previously owned company’s brazilian subsidiary’s minority shareholder january 22 2002 company’s brazilian subsidiary acquired 51 interest dpc medlab bolivia ltda acquisitions material company’s financial position results operations note 3 inventories major categories summarized follows note 4 salestype operating leases addition outright sales company places immulite instruments customers salestype operating leases periods generally three five years salestype leases recorded revenue receivable inception lease amount equal present value future minimum lease payments received lease term operating leases cost equipment amortized straightline basis estimated lives range three five years salestype operating leases comprised receivable salestype leases cost equipment net depreciation subject operating leases salestype operating leases summarized follows notes consolidated financial statements note 4 salestype operating leases cont future minimum lease payments received lease agreements december 31 2002 follows note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute company’s products respective countries company’s ownership interest follows portugal 45 italy 45 greece 50 following represents condensed financial information company’s investments nonconsolidated affiliated companies results operations company sales nonconsolidated affiliates 30804000 2002 27030000 2001 24893000 2000 including sales italy 23306000 2002 20124000 2001 18453000 2000 company’s cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 2002 15557000 anticipated additional income taxes payable earnings foreign affiliates distributed would substantially offset us tax credits foreign taxes paid notes consolidated financial statements note 6 notes payable notes payable consist borrowings certain company’s foreign subsidiaries guaranteed dpc payable subsidiaries’ local currency notes translated us dollars summarized follows aggregate future maturities longterm debt outstanding december 31 2002 6714000 2003 4398000 2004 3422000 2005 2104000 2006 3089000 2007 company also line credit bank may borrow 20 million matures may 2003 standby letters credit line credit totaled 386000 december 31 2001 standby letters credit outstanding december 31 2002 borrowings outstanding december 31 2002 2001 2000 line credit note 7 employee benefit plans company defined contribution money purchase pension plan diagnostic products corporation retirement plan “plan” covering substantially us employees 21 years age plan offers three primary benefits employees money purchase pension profitsharing plan salary deferral plan provisions section 401k internal revenue code contributions money purchase pension made annually amount equal 10 compensation participants year contributions related pension benefit 5201000 2002 4544000 2001 3864000 2000 contributions related profitsharing component year made discretion board directors company cannot exceed 15 compensation participants year company contributed 1001000 profitsharing component 2002 1384000 2001 773000 2000 contributions 401k salary deferral option employee percentage increments employee’s salary exceed maximum allowable federal law company matches contributions rate 50 percent first 1000 compensation contributed employee company contributed 401k employer matches 489000 2002 461000 2001 431000 2000 notes consolidated financial statements note 8 income taxes income taxes summarized follows provision income taxes summarized follows provision income taxes year ended december 31 2002 excludes income tax benefit approximately 2078000 related exchange losses permanently invested notes foreign subsidiaries benefit recorded loss accumulated comprehensive loss accompanying consolidated balance sheet amounts prior years immaterial temporary differences comprising net deferred taxes shown consolidated balance sheets follows notes consolidated financial statements reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows note 9 commitments contingent liabilities fourth quarter year ended december 31 2002 company discovered internally chinese subsidiary made payments certain customers china may violated foreign us laws including foreign corrupt practices act company stopped payments immediately audit committee conducted independent investigation nature payments involvement company personnel whether similar situations existed company’s foreign operations based results investigation audit committee concluded senior management company implicated payments apparent similar issues respect company’s foreign operations company implemented additional policies procedures ensure compliance applicable laws year ended december 31 2002 company’s chinese subsidiary revenues approximately 90 million less 3 company’s total sales depending matter resolved company’s sales china could significantly impacted connection matter company accrued 15 million costs incurred december 31 2002 estimated penalties andor fines company may incur resolve matter addition company recorded charge 14 million fourth quarter tax provision related possible nondeductibility payments china company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement extends december 31 2004 company paid approximately 966000 2000 2001 2002 facility lease agreement future minimum lease commitments december 31 2002 follows aggregate rental expense operating leases approximated 4429000 2000 4302000 2001 4965000 2002 notes consolidated financial statements note 10 earnings per share following table reconciliation weightedaverage shares used computation basic diluted eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations stock options purchase 256000 shares common stock 2002 outstanding included computation diluted earnings per common share option price greater average market price common shares options outstanding 2001 2000 notes consolidated financial statements note 11 stock option plans company’s stock option plans incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options generally become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant notes consolidated financial statements following table summarizes information stock options outstanding december 31 2002 pursuant plans 2391809 shares common stock reserved issuance upon exercise outstanding options addition company 1559600 options available future grant permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans options granted exercise price equal market value underlying common stock date grant fair value method accounting applied company’s stock option plans taxeffected impact would follows notes consolidated financial statements note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 “disclosures segments enterprise related information” kits required run instruments utilize similar technology instrument manufacturing processes company manufactures instruments kits principally facilities located united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france estonia sweden australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed company’s chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows notes consolidated financial statements notes consolidated financial statements company’s export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 2002 2001 summarized follows signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation michael ziering michael ziering president chief executive officer chairman board principal executive officer director march 28 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certification michael ziering certify 1 reviewed annual report form 10k diagnostic products corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses dated march 28 2003 michael ziering michael ziering chief executive officer certification james l brill certify 1 reviewed annual report form 10k diagnostic products corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses dated march 28 2003 james l brill james l brill chief financial officer exhibit index 31 amended restated articles incorporation 2 32 bylaws 41 stock certificate 3 101 form indemnification agreement officers directors 1 102 1990 stock option plan amended 5 103 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 4 second addendum dated april 1 2002 7 104 1997 stock option plan amended 6 subsidiaries registrant independent auditors’ consent 991 officers’ certification management contracts compensation plans arrangements 1 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 1988 file 19957 2 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2001 file 19957 3 incorporated reference registrant’s annual report form 10k year ended december 31 1988 file 19957 4 incorporated reference registrant’s annual report form 10k year ended december 31 1990 file 19957 5 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 1999 file 19957 6 incorporated reference registrant’s registration statement form s8 file 33360690 filed may 11 2001 7 incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2002 file 19957item 15 exhibits financial statement schedules documents filed part report 1 financial statements report independent registered public accounting firm consolidated balance sheets december 31 2004 2003 consolidated statements income three years period ended december 31 2004 consolidated statements shareholders’ equity three years period ended december 31 2004 consolidated statements cash flows three years period ended december 31 2004 notes consolidated financial statements 2 financial statement schedulesnone 3 exhibits see “exhibit index” appears signature page report independent registered public accounting firm board directors shareholders diagnostic products corporation los angeles california audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries “company” december 31 2004 2003 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2004 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 16 2005 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp los angeles california march 16 2005 consolidated balance sheets dollars thousands except share data see accompanying notes consolidated financial statements consolidated income statements amounts thousands except per share data see accompanying notes consolidated financial statements consolidated statements shareholders’ equity amounts thousands except share per share data see accompanying notes consolidated financial statements consolidated statement cash flows dollars thousands see accompanying notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries together referred herein “dpc” “company” elimination significant intercompany balances transactions consolidated accounts include 100 assets liabilities majorityowned subsidiaries minority interest represents 44 company’s brazilian subsidiary owned company equity method used account investments affiliates exert significant influence generally 20 50 percent ownership interest company also uses equity method account 10 interest lumigen inc ability exert significant influence result representation lumigen’s board directors purchases lumigen significant lumigen factors may affect future results company’s future operating results dependent ability research develop manufacture market innovative products meet customers’ needs inherent process number risks company must successfully manage order achieve favorable operating results company’s products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration fda february 2004 fda’s application integrity policy applied company whereby fda review new tests approval related issues fda resolved operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material company’s operations financial position company purchases certain chemical compounds key components immulite system lumigen inc sole supplier chemical compounds related patents expire 2017 company’s business could materially adversely affected lumigen inc unable meet company’s supply requirements event company would required enter new supply agreements use alternate technologies obtainable technology must performance characteristics technology currently use although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance patents may granted others future could inhibit company’s expansion entry certain areas require pay royalty fees rapid technological developments immunodiagnostic industry concurrent extensive patent coverage rapid rate issuance new patents certain company’s products may involve controversy concerning infringement existing patents may issued future risks uncertainties include company’s ability successfully market new existing products company’s ability keep abreast technological innovations successfully incorporate new products company’s dependence sole supplier key chemical components immulite assays company’s ability address resolve issues relating fda’s application integrity policy company’s ability new tests reviewed approved fda effects government actions relating certain payments company’s chinese subsidiary use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could ultimately differ estimates financial instruments fair value company’s financial instruments approximates cost due shortterm nature case notes payable notes interest rates competitive would available company current market environment company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables company’s cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers’ financial condition generally require collateral cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 2004 2003 30827000 35000000 respectively shortterm highquality commercial paper accounts receivable allowance doubtful accounts credit granted customers unsecured basis company records allowance doubtful accounts time revenue recognized based assessment business environment customers’ financial condition historical collection experience accounts receivable aging customer disputes circumstances arise significant event occurs comes attention management bankruptcy filing customer allowance reviewed adequacy adjusted reflect change estimated amount received customer inventories stated lower cost determined firstin firstout basis market company regularly evaluates inventory obsolescence records provision inventory costs estimated recoverable normal course business property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 3 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease property plant equipment consists following dollars thousands construction progress december 31 2004 primarily represents construction fit expansion building new jersey construction progress december 31 2003 primarily represents purchase fit new building los angeles placed service september 2004 construction fit new building united kingdom placed service december 2004 accordance statement financial accounting standards 34 “capitalization interest costs” company capitalized interest costs associated projects included part historical cost building improvements capitalized interest costs 957000 2004 none 2003 2002 company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets goodwill intangible assets goodwill results primarily company’s purchase certain foreign distributors goodwill tested impairment reporting unit level least annually whenever events circumstances indicate goodwill might impaired evaluation requires reporting unit underlying goodwill measured fair value less carrying value unit second test must performed second test current fair value reporting unit allocated assets liabilities unit including amount “implied” goodwill implied goodwill less net carrying amount goodwill difference becomes amount impairment must recorded year company’s annual reviews result goodwill impairment company intangible assets december 31 2004 consist purchased technology licenses amount 7995000 net amortization 717000 intangible assets december 31 2003 consist purchased technology license amount 4864000 net amortization 136000 technology licenses amortized straightline basis life patented technology licenses average amortization period 13 years purchases 2004 2003 amortization expense 581000 136000 2004 2003 respectively amortization expense next five years 695000 accrued liabilities accrued liabilities consists following dollars thousands foreign currency translation functional currency foreign subsidiaries generally local currency assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts translated weighted average rate effect year foreign exchange translation adjustments included component comprehensive income accumulated separate component shareholders’ equity gains losses resulting foreign currency transactions included income transaction gains approximately 318000 1158000 transaction losses approximately 493000 included income years ended december 31 2004 2003 2002 respectively foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered company’s foreign subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company engage speculative transactions company’s foreign exchange contracts subject company exchange rate risk gains losses transactions hedged offset losses gains contracts date company enters derivative contract management designates derivative hedge identified exposure fair value cash flow hedge qualifying highly effective cash flow hedges changes effective portion fair value derivative recorded comprehensive income total unrealized losses foreign exchange contracts december 31 2004 939000 500000 net income tax benefit 282000 related cash flow hedges included accumulated comprehensive income december 31 2003 total unrealized losses foreign exchange contracts 18 million 1164000 net income tax benefit 499000 related cash flow hedges included accumulated comprehensive income following tables provide information concerning company’s forward currency exchange contracts foreign currency exchange contracts outstanding december 31 2004 foreign currency exchange contracts outstanding december 31 2003 accumulated comprehensive income components accumulated comprehensive income december 31 follows dollars thousands revenue recognition company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer company believes shipment transfer title occurs time shipment terms revenue transactions customers appropriate time recognize revenue related reagent test kits instruments sold case persuasive evidence arrangement exists form purchase order invoice delivery occurred company’s shipping terms fob shipping point company’s price buyer fixed stated invoice collectibility reasonably assured result factors shipment transfer title occurs company fulfilled requirements sales agreement customer related revenue test kits sold instruments earned immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also places instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale salestype lease company enters various types lease arrangements customers generally provide terms three five years periodic rental payments revenue leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer soft placement subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments come back company end rental lease period instruments generally amortized straightline basis five years maintenance costs expensed incurred company also enters service contracts customers recognizes service revenue related contract life related costs expensed incurred historically company rarely experienced sales returns therefore allowance provided research development research development costs primarily include costs employee salaries utilities depreciation amortization expenses machinery equipment certain supplies incurred directly development new products research development costs expensed incurred stock options stock options issued company accounted accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” permitted sfas 123 “accounting stockbased compensation” company follows disclosure requirements sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans options granted exercise price equal market value underlying common stock date grant fair value method accounting applied company’s stock option plans taxeffected impact would follows amounts thousands except per share data weighted average assumptions pro forma disclosure income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized new accounting pronouncements january 2003 fasb issued fasb interpretation “fin” 46 “consolidation variable interest entities” “fin 46” december 2003 fin 46 replaced fasb interpretation 46r “consolidation variable interest entities” fin 46r clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinate financial support parties fin 46r requires enterprise consolidate variable interest entity enterprise absorb majority entity’s expected losses entitled receive majority entity’s expected residual returns fin 46r effective specialpurpose entities evaluated fin 46r consolidation december 31 2003 effective entities evaluated march 31 2004 adoption fin 46r material impact company’s financial position results operations december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 fasb 123r “shared based payment” fasb 123r require company expense sharebased payments including employee stock options based fair value company required adopt provisions fasb 123r effective beginning third quarter 2005 fasb 123r provides modified retroactive application company currently evaluating financial impact including available alternatives adoption 2004 fasb issued financial accounting standard “fas” 151 entitled inventory costs statement amends guidance arb 43 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage provisions statement shall effective inventory costs incurred fiscal years beginning june 15 2005 company currently evaluating impact adoption fas 151 financial position results operations december 2004 fasb issued fsp 1091 “application fasb statement 109 “accounting income taxes” tax deduction qualified production activities provided american jobs creation act 2004” fasb staff believes qualified production activities deduction provided american jobs creation act 2004 “the ajca” accounted special deduction accordance fasb statement 109 “fas 109” company process determining impact fsp 1091 ajca operations december 2004 fasb issued fsp 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” see discussion note 7 reclassifications certain amounts reclassified 2002 2003 conform 2004 presentation note 2 inventories major categories summarized follows note 3 instruments noncurrent asset account “instruments” accompanying balance sheet consists immulite instruments placed leased customers majority instruments placed customers instruments placed either reagent rental basis customer pays markup reagents charged instrument soft placement basis customer pay instrument agrees purchase minimum amount reagents company also leases instruments operatingtype leases sells instruments salestype leases salestype leases recorded revenue inception lease amount equal present value future minimum lease payments received lease term current portion receivables salestype leases included accounts receivable longterm portion receivables included instruments comprised following dollars thousands instrument rental revenue 8484000 2004 8072000 2003 5479000 2002 placed instruments subject operating leases generally depreciated five years future minimum lease payments receivable follows dollars thousands future minimum lease payments receivable operating leases include instruments placed reagent rental basis customer agrees pay markup reagents charged instrument instruments placed charge customer soft placement subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments note 4 investment affiliated companies company equity interests four nonconsolidated foreign affiliates company accounts interests using equity method affiliates distribute company’s products respective countries company’s ownership interest follows december 31 2004 portugal 475 italy 45 greece 50 croatia 50 2004 company increased equity interest portuguese affiliate 45 475 purchasing additional 25 outstanding shares 219000 company sales nonconsolidated foreign affiliates 32867000 2004 29931000 2003 30804000 2002 including sales italy 26916000 2004 27957000 2003 23306000 2002 company also 10 equity interest lumigen inc domestic affiliate company purchases chemical compounds lumigen company accounts interest using equity method company ability exert significant influence result representation lumigen’s board directors company’s purchases chemical compounds lumigen significant lumigen purchase chemical compounds lumigen included inventory cost sales material intercompany transactions eliminated following represents condensed financial information company’s investments non consolidated affiliated companies results operations dollars thousands note 5 notes payable notes payable consist borrowings certain company’s foreign subsidiaries guaranteed diagnostic products corporation payable subsidiaries’ local currency notes translated us dollars summarized follows dollars thousands aggregate future maturities debt outstanding december 31 2004 4145000 8283000 563000 2005 2006 2007 respectively company pledged certain assets principally buildings land equipment approximately 13 million borrowings december 31 2004 company also line credit bank may borrow 20 million matures july 2005 borrowings standby letters credit outstanding december 31 2004 2003 line credit note 6 employee benefit plans company defined contribution money purchase pension plan diagnostic products corporation retirement plan “plan” covering substantially us employees 21 years age plan offers three primary benefits employees money purchase pension profitsharing plan salary deferral plan provisions section 401k internal revenue code contributions money purchase pension made annually amount equal 10 compensation participants year contributions related pension benefit 6108000 2004 5935000 2003 5201000 2002 contributions related profitsharing component year made discretion board directors company cannot exceed 15 compensation participants year company made contributions profitsharing component 2004 contributing 900000 2003 1001000 2002 contributions 401k salary deferral option employee percentage increments employee’s salary exceed maximum allowable federal law company matches contributions rate 50 percent first 1000 compensation contributed employee company contributed 401k employer matches 572000 2004 516000 2003 489000 2002 note 7 income taxes income taxes summarized follows dollars thousands provision income taxes summarized follows dollars thousands current deferred income tax assets december 31 2004 include 282000 499000 december 31 2004 2003 respectively related income tax benefits unrealized losses forward exchange contracts included component comprehensive income temporary differences comprising net deferred taxes shown consolidated balance sheets follows dollars thousands state net operating loss carryforwards totaled 48036000 december 31 2004 32484000 december 31 2003 loss carryforwards expire accordance provisions applicable tax laws losses begin expire years 2008 2011 research development tax credits total 3043000 december 31 2004 3102000 december 31 2003 credits begin expire years 2005 2011 company maintains valuation allowance entire net operating loss research development tax credit carryforward utilization losses credits company believe recoverability likely reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows dollars thousands company routinely involved federal state income tax audits provide potential tax exposures company maintains allowance tax contingencies management believes adequate company’s cumulative equity undistributed earnings consolidated foreign subsidiaries december 31 2004 124387000 company’s cumulative equity undistributed earnings unconsolidated foreign affiliates december 31 2004 30369000 time practical calculate income taxes payable undistributed earnings unconsolidated foreign affiliates october 22 2004 american jobs creation act “ajca” signed law ajca includes deduction 85 certain foreign earnings repatriated defined ajca company may elect apply provision qualifying earnings repatriations either fiscal year 2004 fiscal year 2005 repatriation ajca must occur december 31 2005 december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004” provides guidance sfas 109 respect recording potential impact repatriation provisions ajca company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect ajca plan reinvestment repatriation foreign earnings purposes applying sfas 109 provision made united states federal state foreign taxes may result future remittances undistributed earnings foreign subsidiaries company currently reviewing provisions ajca time related range income tax effects cannot reasonably estimated whether dpc ultimately take advantage provision depends number factors including reviewing future congressional guidance making decision company expects complete evaluation later september 30 2005 note 8 commitments contingent liabilities fourth quarter fiscal year 2002 company discovered internally certain senior managers employees chinese subsidiary made certain improper payments may violated foreign us laws beginning early 1990s chinese subsidiary made cash payments provided kind benefits hospital laboratory customers chinese subsidiary employees customers certain customers state owned enterprises payments may purpose may effect causing customers purchase products chinese subsidiary payments benefits may violated us foreign corrupt practices act well certain domestic chinese laws addition deduction payments benefits subsidiary tax returns may improper chinese tax law resulting underpayments chinese taxes independent investigation company’s audit committee concluded current members company’s senior management knew involved provision payments benefits company made changes management chinese subsidiary including replacement senior managers involved implemented procedures controls address issues promote compliance applicable laws company voluntarily disclosed payment issues securities exchange commission sec department justice doj first quarter 2003 cooperating fully agencies investigations since time company’s discussions sec doj fairly advanced stages include proposals company pay aggregate approximately 48 million agencies consisting 20 million fines approximately 28 million disgorgement profits related interest charges proposals discussed also include changes company’s compliance programs independent monitoring reporting programs 36 months entry cease desist order either deferred prosecution agreement plea company’s chinese subsidiary settlement recommended staff sec would subject approval commission deferred prosecution plea agreement would subject court approval fourth quarter 2002 company accrued 15 million actual estimated costs resolve matter third quarter 2004 company accrued additional 10 million based revised estimates costs paid us government resolve matter fourth quarter 2004 company accrued additional 24 million including 750000 interest based proposed settlements sec doj december 31 2004 48 million remained accrual addition company recorded charge 14 million 2002 fourth quarter tax provision related nondeductibility payments china third quarter 2003 company recorded additional charge 09 million income tax provision chinese taxrelated matters legal expenses relating matter approximately 884000 1712000 incurred charged general administrative expense years ended december 31 2003 2004 respectively anticipated legal fees issues related china decrease 2005 termination improper payments china may continue significant adverse effect future operations china termination could negatively influence significant number chinese subsidiary’s customers’ decisions whether continue business subsidiary year ended december 31 2004 chinese subsidiary sales 82 million versus sales 98 million 2003 february 2004 company informed us food drug administration fda based inspectional findings included data integrity procedural issues related solely company’s application immulite chagas test company subject fda’s application integrity policy “aip” fda suspended review applications submitted company review future applications fda determines company resolved issues although studies support future applications conducted aip address aip issues company audited third party whose report submitted fda company also developed implemented corrective action plan submitted fda company requested fda take action necessary remove aip may include inspection fda company believes aip issues resolved fda hopes occur next months fda’s application aip dpc restrict dpc introducing new tests outside united states however company’s inability introduce new tests united states pendency aip may negative impact future sales profits late july 2004 company served subpoena requiring produce federal grand jury central district california documents relating trading company’s securities exercise options officers directors employees company december 30 2003 april 1 2004 subpoena also seeks documents relating fda’s review company’s diagnostic test detect chagas audits reviews fda 2000 present relating company’s products finally subpoena seeks personnel file former company employee company cooperating united states attorney sec regarding matters independent committee board directors conducted investigation trading issues presented findings conclusions united states attorney sec management believes ultimate resolution matter material financial impact company’s brazilian subsidiary participant along various companies number lawsuits brazilian government claiming unlawful taxation historically companies involved suits limited success taxes turned company also purchased unused tax credits approximately 10 million unrelated company however due uncertainty related company’s ability use credits tax liabilities fully reserved cost credits court cases typically take many years decided company estimates likely loss outcome based merits individual cases advice outside counsel december 31 2004 company accrued amounts believes pay suit involves majority disputed taxes case sales taxes courts rule company actions would create additional liability 10 million company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement monthtomonth basis new terms agreed upon company partnership company paid approximately 1035000 2004 2003 966000 2002 facility lease agreement future minimum lease commitments nonrelated party operating leases december 31 2004 follows dollars thousands aggregate rental expense operating leases approximated 4442000 2004 4405000 2003 4965000 2002 note 9 earnings per share following table reconciliation weightedaverage shares used computation basic diluted earnings per share eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations shares thousands stock options purchase 153984 shares common stock 2004 256260 shares common stock 2003 256000 shares 2002 outstanding included computation diluted earnings per common share option price greater average market price common shares note 10 stock option plans company’s stock option plans approved company’s shareholders incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options generally become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant following table provides stock option activity three years ended december 31 2004 following table summarizes information stock options outstanding december 31 2004 pursuant plans 2132992 shares common stock reserved issuance upon exercise outstanding options addition company 1184800 options available future grant note 11 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 “disclosures segments enterprise related information” kits required run instruments utilize similar technology instrument manufacturing processes company manufactures instruments kits principally facilities located united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland slovenia slovakia croatia spain netherlands belgium luxemburg sweden denmark norway finland latvia lithuania estonia france australia new zealand china brazil costa rica venezuela uruguay bolivia honduras guatemala panama company sells instruments immunodiagnostic test kits several product lines product line sales information follows dollars thousands company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed company’s chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements provided following tables items listed “other” represent geographic locations individually insignificant segment product line footnote dollars thousands dollars thousands dollars thousands company’s export sales unaffiliated customers summarized follows segment product line footnote dollars thousands supplementary financial data unaudited quarterly financial information years ended december 31 2004 2003 summarized follows dollars thousands except per share data 2004 fourth quarter items year ended december 31 2004 company recorded fourth quarter amounts 24 million 16 million general administrative expense 750000 interest expense reflect tentative settlement reached department justice securities exchange commission regarding company’s chinese subsidiary 14 million cost sales homocysteine license cover customer’s historical purchases company’s homocysteine tests 10 million inventory write downs related part discontinued products particular microplate allergy line signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation michael ziering chief executive officer march 16 2005 chairman board michael ziering principal executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 2 32 bylaws 9 41 stock certificate 3 101 form indemnification agreement officers directors 1 102 1990 stock option plan amended 5 103 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 4 second addendum dated april 1 2002 7 104 1997 stock option plan amended 6 form nonqualified incentive stock option agreements 8 105 first amendment settlement agreement effective october 1 2003 rights regarding immulite chemical compounds note portions exhibit omitted pursuant request confidential treatment 8 subsidiaries registrant report independent registered public accounting firm 311 certificate chief executive officer 312 certificate chief financial officer 321 section 906 officers’ certificationitem 15 exhibits financial statement schedules documents filed part report 1 financial statements report independent registered public accounting firm consolidated balance sheets december 31 2005 2004 consolidated statements income three years period ended december 31 2005 consolidated statements shareholders’ equity three years period ended december 31 2005 consolidated statements cash flows three years period ended december 31 2005 notes consolidated financial statements supplementary financial data 2 financial statement schedulesnone 3 exhibits see “exhibit index” appears signature page report independent registered public accounting firm board directors shareholders diagnostic products corporation los angeles california audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries “company” december 31 2005 2004 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2005 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 14 2006 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp los angeles california march 14 2006 consolidated balance sheets see accompanying notes consolidated financial statements consolidated income statements see accompanying notes consolidated financial statements consolidated statements shareholders’ equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries together referred herein “dpc” “company” elimination significant intercompany balances transactions consolidated accounts include 100 assets liabilities majorityowned subsidiaries minority interest represents 44 company’s brazilian subsidiary owned company equity method used account investments affiliates company exerts significant influence generally 20 50 percent ownership interest company also uses equity method account 10 interest lumigen inc “lumigen” ability exert significant influence result representation lumigen’s board directors purchases lumigen significant lumigen factors may affect future results company’s future operating results dependent ability research develop manufacture market innovative products meet customers’ needs inherent process number risks company must successfully manage order achieve favorable operating results company’s products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration fda february 2004 fda’s application integrity policy “aip” applied company whereby fda would review new tests approval related issues fda resolved september 6 2005 company informed fda suspension lifted longer subject aip operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material company’s operations financial position company purchases certain chemical compounds key components immulite system lumigen sole supplier chemical compounds related patents expire 2017 company’s business could materially adversely affected lumigen unable meet company’s supply requirements event company would required enter new supply agreements use alternate technologies obtainable technology must performance characteristics technology currently use although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance patents may granted others future could inhibit company’s expansion entry certain areas require pay royalty fees rapid technological developments immunodiagnostic industry concurrent extensive patent coverage rapid rate issuance new patents certain company’s products may involve controversy concerning infringement existing patents may issued future risks uncertainties include company’s ability successfully market new existing products company’s ability keep abreast technological innovations successfully incorporate new products company’s dependence sole supplier key chemical components immulite assays company’s ability new tests reviewed approved fda effects government actions relating certain payments company’s chinese subsidiary use estimates preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes actual results could ultimately differ estimates financial instruments fair value company’s financial instruments approximates cost due shortterm nature case notes payable notes interest rates competitive would available company current market environment company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables company’s cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers’ financial condition generally require collateral cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 2005 2004 73941000 30827000 respectively shortterm highquality commercial paper accounts receivable allowance doubtful accounts credit granted customers unsecured basis company records allowance doubtful accounts time revenue recognized based assessment business environment customers’ financial condition historical collection experience accounts receivable aging customer disputes circumstances arise significant event occurs comes attention management bankruptcy filing customer allowance reviewed adequacy adjusted reflect change estimated amount received customer inventories stated lower cost determined firstin firstout basis market company regularly evaluates inventory obsolescence records provision inventory costs estimated recoverable normal course business inventories major categories summarized follows inventory includes instruments returned result expiration leases tradeins upgraded instruments company refurbishes instruments satisfy minimum qualification requirements resells leases instruments inventory included 960000 525000 570000 return instruments december 31 2005 2004 2003 respectively property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 1 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease property plant equipment consists following construction progress december 31 2005 primarily represents costs new operating system developed company’s new jersey subsidiary molds process manufactured equipment process installed use operations construction progress december 31 2004 primarily represents construction fit expansion building new jersey accordance statement financial accounting standards 34 “capitalization interest costs” company capitalized interest costs associated long term construction projects included part historical cost assets capitalized interest costs 280000 2005 957000 2004 none 2003 company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets consist following technology licenses amortized straightline basis life patented technology company entered new technology licenses 2005 technology licenses average amortization period 13 years licenses entered 2004 2003 amortization expense 902000 581000 136000 2005 2004 2003 respectively amortization expense next five years estimated 700000 calculated using straightline method shorter estimated useful life period expiration patent goodwill results primarily company’s purchase certain foreign distributors goodwill tested impairment reporting unit level least annually whenever events circumstances indicate goodwill might impaired evaluation requires reporting unit underlying goodwill measured fair value less carrying value unit second test must performed second test current fair value reporting unit allocated assets liabilities unit including amount “implied” goodwill implied goodwill less net carrying amount goodwill difference becomes amount impairment must recorded year company’s annual reviews result goodwill impairment company years presented accrued liabilities accrued liabilities consist following amounts included “other” individually insignificant amounts foreign currency translation functional currency foreign subsidiaries generally local currency assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts translated weighted average rate effect year foreign exchange translation adjustments included component comprehensive income loss accumulated separate component shareholders’ equity gains losses resulting foreign currency transactions included income transaction gains approximately 72000 318000 1158000 included income years ended december 31 2005 2004 2003 respectively foreign exchange instruments company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered company’s foreign subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company engage speculative transactions company’s foreign exchange contracts subject company exchange rate risk gains losses transactions hedged offset losses gains contracts date company enters derivative contract management designates derivative hedge identified exposure fair value cash flow hedge qualifying highly effective cash flow hedges changes effective portion fair value derivative recorded comprehensive income loss changes value fair value hedges recorded earnings company hedges outstanding december 31 2005 total unrealized losses foreign exchange contracts december 31 2004 939000 500000 net income tax benefit 282000 related cash flow hedges included accumulated comprehensive income loss following tables provide information concerning company’s forward currency exchange contracts foreign currency exchange contracts outstanding december 31 2004 addition company’s nonconsolidated affiliates unrealized gains foreign exchange contracts december 31 2005 58000 19000 net income tax effect 8000 related cash flow hedges included company’s accumulated comprehensive income loss accumulated comprehensive income loss components accumulated comprehensive income loss follows revenue recognition company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer company believes shipment transfer title occurs time shipment terms revenue transactions customers appropriate time recognize revenue related reagent test kits instruments sold case persuasive evidence arrangement exists form purchase order invoice delivery occurred company’s shipping terms fob shipping point company’s price buyer fixed stated invoice collectibility reasonably assured result factors shipment transfer title occurs company fulfilled requirements sales agreement customer related revenue test kits sold instruments earned immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also places instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale salestype lease company enters various types lease arrangements customers generally provide terms three five years periodic rental payments revenue leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer soft placement subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments come back company end rental lease period instruments generally amortized straightline basis five years maintenance costs expensed incurred company also enters service contracts customers recognizes service revenue related contract life related costs expensed incurred historically company rarely experienced sales returns therefore allowance provided research development research development costs primarily include costs employee salaries utilities depreciation amortization expenses machinery equipment certain supplies incurred directly development new products research development costs expensed incurred stock options stock options issued company accounted accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” permitted sfas 123 “accounting stockbased compensation” company follows disclosure requirements sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results december 2004 fasb issued sfas 123 revised 2004 “sfas 123r” see “new accounting pronouncements” permitted sfas 123 company chose continue accounting stock options intrinsic value 2005 accordingly compensation expense recognized stock option compensation plans options granted exercise price equal market value underlying common stock date grant fair value method accounting applied company’s stock option plans taxeffected impact would follows weighted average assumptions pro forma disclosure income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized new accounting pronouncements sfas 154in may 2005 fasb issued sfas 154 “accounting changes error correctionsa replacement apb opinion 20 fasb statement 3” sfas 154 requires retrospective application prior periods’ financial statements changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change sfas 154 also requires retrospective application change accounting principle limited direct effects change indirect effects change accounting principle change nondiscretionary profitsharing payments resulting accounting change recognized period accounting change sfas 154 also requires change depreciation amortization depletion method longlived nonfinancial assets accounted change accounting estimate affected change accounting principle sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 early adoption permitted accounting changes corrections errors made fiscal years beginning date statement issued company believe significant effect financial statements fin 47in march 2005 fasb issued fin 47 “accounting conditional asset retirement obligations interpretation fasb statement 143 accounting asset retirement obligations” fin 47 clarifies sfas 143 requires accrual fair value legally required asset retirement obligations sufficient information exists reasonably estimate fair value adoption fin 47 significant effect company’s financial statements sfas 123rin december 2004 fasb issued sfas 123 revised 2004 “sfas 123r” “shared based payment” standard require company measure cost employee services received exchange award equity instruments based grantdate fair value award limited exceptions cost recognized vesting period company required adopt provisions sfas 123r effective january 1 2006 company intends use blackscholes model determine fair value sharebased payments stock options method used determining pro forma disclosures set forth “stock options” although actual expense 2006 thereafter depend number factors including number options granted company’s stock price related volatility assumptions used estimating fair value stock options time grant company anticipates use modified prospective method application sfas 123r modified prospective method compensation expense recognized beginning effective date based requirements sfas 123r sharebased payments granted effective date b based requirements sfas 123 awards granted employees prior effective date sfas 123r remain unvested effective date sfas 151in november 2004 fasb issued sfas 151 “inventory costs” statement amends guidance arb 43 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage provisions statement shall effective inventory costs incurred fiscal years beginning june 15 2005 company currently evaluating impact adoption sfas 151 financial position results operations reclassifications certain amounts reclassified 2004 2003 conform 2005 presentation included income statement reclassifications freight costs freight billed customers impact reclassifications follows increase sales 3646000 2004 3509000 2003 increase cost sales 6704000 2004 5679000 2003 decrease selling expenses 3025000 2004 2125000 2003 decrease general administrative expenses 12000 2003 increase income 33000 2004 2003 impact net income reclassifications periods presented note 2 instruments noncurrent asset account “instruments” accompanying balance sheet consists immulite instruments placed leased customers majority instruments placed customers instruments placed either reagent rental basis customer pays markup reagents charged instrument soft placement basis customer pay instrument agrees purchase minimum amount reagents company also leases instruments operatingtype leases sells instruments salestype leases salestype leases recorded revenue inception lease amount equal present value future minimum lease payments received lease term current portion receivables salestype leases included accounts receivable longterm portion receivables included instruments comprised following instrument rental revenue 9295000 2005 8484000 2004 8072000 2003 placed instruments subject operating leases generally depreciated five years future minimum lease payments receivable follows future minimum lease payments receivable operating leases include instruments placed reagent rental basis customer agrees pay markup reagents charged instrument instruments placed charge customer soft placement subject customer’s agreement purchase minimum amount reagents revenue reagent rentals soft placements recognized based reagent shipments note 3 investment affiliated companies company equity interests four nonconsolidated foreign affiliates company accounts interests using equity method affiliates distribute company’s products respective countries company’s ownership interest follows december 31 2005 portugal 475 italy 45 greece 50 croatia 50 2004 company increased equity interest portuguese affiliate 45 475 purchasing additional 25 outstanding shares 219000 company sales nonconsolidated foreign affiliates 24637000 2005 32867000 2004and 29931000 2003 including sales italy 18311000 2005 26916000 2004 27957000 2003 company also 10 equity interest lumigen inc domestic affiliate company purchases chemical compounds lumigen company accounts interest using equity method company ability exert significant influence result representation lumigen’s board directors company’s purchases chemical compounds lumigen significant lumigen purchase chemical compounds lumigen included inventory cost sales material intercompany transactions eliminated company received distributions nonconsolidated affiliates 4177000 2769000 938000 2005 2004 2003 respectively following represents condensed financial information company’s investments nonconsolidated affiliated companies results operations note 4 borrowings consist various debt arrangements company’s foreign subsidiaries guaranteed company payable subsidiaries’ local currency borrowings translated us dollars summarized follows december 31 2005 brazilian subsidiary credit agreements several lending institutions may borrow aggregate principal amount 80 million real 34 million december 31 2005 overdraft collateralized line credit facilities expire various times 2006 december 31 2005 2004 3046000 2368000 respectively outstanding credit facilities advances facilities generally repayable one three months aggregate future maturities debt outstanding december 31 2005 7124000 4434000 2006 2007 respectively company pledged certain assets principally buildings land equipment trade receivables substantially borrowings december 31 2005 company also line credit bank may borrow 20 million matures july 2007 borrowings standby letters credit outstanding december 31 2005 2004 line credit provisions line credit facility require company comply certain covenants include financial performance measures including net worth financial performance ratios december 31 2005 company compliance covenants note 5 employee benefit plans company defined contribution money purchase pension plan diagnostic products corporation retirement plan “plan” covering substantially us employees 21 years age plan offers three primary benefits employees money purchase pension profitsharing plan salary deferral plan provisions section 401k internal revenue code contributions money purchase pension made annually amount equal 10 compensation participants year contributions related pension benefit 6650000 2005 6108000 2004 5935000 2003 contributions related profitsharing component year made discretion board directors company cannot exceed 15 compensation participants year company made contributions related profit sharing component 2005 2004 contributing 900000 2003 contributions 401k salary deferral option employee percentage increments employee’s salary exceed maximum allowable federal law company matches contributions rate 50 percent first 1000 compensation contributed employee company contributed 401k employer matches 615000 2005 572000 2004 516000 2003 note 6 income taxes income taxes summarized follows provision income taxes summarized follows current deferred income tax assets include 8000 282000 december 31 2005 2004 respectively related income tax impact unrealized gains losses forward exchange contracts included component comprehensive income loss temporary differences comprising net deferred taxes shown consolidated balance sheets follows gross state foreign net operating loss carryforwards totaled 64384000 310000 respectively december 31 2005 gross net operating loss carryforwards completely composed state amounts totaled 48036000 december 31 2004 loss carryforwards expire accordance provisions applicable tax laws losses expire years 2008 2011 state research development tax credits expire years 2006 2012 company maintains valuation allowance substantially net operating loss carryforwards state research development tax credit carryforwards company believe recoverability likely reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows company routinely involved federal state income tax audits provide potential tax exposures company maintains allowance tax contingencies management believes adequate october 22 2004 american jobs creation act “ajca” signed law created onetime incentive us corporations repatriate undistributed foreign earnings providing 85 dividends received deduction approved company’s board directors december 2005 company repatriated approximately 46 million earnings previously considered indefinitely reinvested outside us fourth quarter 2005 fourth quarter 2005 company recorded income tax expense net available foreign tax credits 540000 associated repatriation notwithstanding repatriated earnings company intends continue reinvest earnings outside us foreseeable future therefore recognized us tax expense earnings december 31 2005 company approximately 115561000 cumulative equity undistributed earnings consolidated foreign subsidiaries time practical calculate income taxes payable company repatriate undistributed earnings consolidated foreign subsidiaries company’s cumulative equity undistributed earnings unconsolidated foreign affiliates december 31 2005 28408000 company believes would available foreign tax credits offset additional taxes associated distributing earnings note 7 commitments contingent liabilities fourth quarter fiscal year 2002 company discovered internally certain senior managers employees chinese subsidiary made certain improper payments may violated foreign us laws addition deduction payments benefits subsidiary tax returns may improper chinese tax law resulting underpayments chinese taxes independent investigation company’s audit committee concluded current members company’s senior management knew involved provision payments benefits company made changes management chinese subsidiary including replacement senior managers involved implemented procedures controls address issues promote compliance applicable laws company voluntarily disclosed payment issues securities exchange commission sec department justice doj first quarter 2003 cooperated fully agencies investigations company resolved issues sec doj second quarter 2005 company paid aggregate approximately 48 million agencies consisting 20 million fines approximately 28 million disgorgement profits related interest charges company accrued 15 million 2002 additional 34 million 2004 respect settlement costs company’s chinese subsidiary pled guilty violations united states foreign corrupt practices act “fcpa” agreed take certain actions including engaging independent monitor fcpa compliance activities china sec issued cease desist order company agreed take certain actions including engaging independent monitor fcpa compliance program company recorded charges income tax provision related nondeductibility improper payments china chinese taxrelated matters 14 million 2002 09 million 2003 termination improper payments china may continue significant adverse effect future operations china termination could negatively influence significant number chinese subsidiary’s customers’ decisions whether continue business subsidiary result actions chinese authorities 2005 chinese subsidiary sales 60 million versus sales 82 million 2004 february 2004 company informed us food drug administration “fda” based inspectional findings included data integrity procedural issues related solely company’s application immulite chagas test company subject fda’s application integrity policy “aip” fda suspended review applications submitted company would review future applications fda determined company resolved issues september 6 2005 company informed fda suspension lifted longer subject aip late july 2004 company served subpoena requiring produce federal grand jury central district california documents relating trading company’s securities exercise options officers directors employees company december 30 2003 april 1 2004 subpoena also seeks documents relating fda’s review company’s diagnostic test detect chagas audits reviews fda 2000 present relating company’s products finally subpoena seeks personnel file former company employee company cooperating united states attorney sec regarding matters independent committee board directors conducted investigation trading issues presented findings conclusions united states attorney sec management believes ultimate resolution matter material financial impact company’s brazilian subsidiary participant along various companies number lawsuits brazilian government claiming unlawful taxation historically companies involved suits limited success taxes turned company also purchased unused tax credits approximately 10 million unrelated company however due uncertainty related company’s ability use credits tax liabilities fully reserved cost credits court cases typically take many years decided company estimates likely loss outcome based merits individual cases advice outside counsel december 31 2005 company accrued amounts believes pay suit involves majority disputed taxes case sales taxes courts rule company actions would create additional liability 10 million march 2005 company’s brazilian subsidiary informed brazilian government believed company’s brazilian subsidiary owed additional tariffs due change brazilian company made product classification company believes prevail case however courts rule would create additional liability approximately 500000 december 22 2005 shareholder derivative action filed superior court county los angeles california case bc3455010 nicholas weil derivatively behalf company sidney aroesty robert ditullio fredrick frank kenneth merchant maxwell h salter james watson ira ziering michael ziering complaint alleges certain officers directors breached fiduciary duties company connection violations foreign corrupt practices act company’s wholly owned chinese subsidiary company’s alleged failure comply fda rules regulations governing clinical testing submission data complaint alleges certain officers directors violated california law selling company stock possession material nonpublic information plaintiff seeks recover benefit company amount damages sustained company result defendants’ alleged breaches fiduciary duty treble damages relating alleged insider trading profits reimbursement plaintiff’s attorney fees costs disbursements january 4 2006 action removed united states district court central district california case cv0600066ddp february 10 2006 second derivative action filed superior court county los angeles suit entitled city tamarac general employees’ pension trust fund city tamarac police officers’ pension trust fund v sidney aroesty robert di tullio frederick frank kenneth merchant maxwell h salter james watson john reith ira ziering michael ziering nominal defendant diagnostic products corporation case bc347385 complaint alleges claims breach fiduciary duties abuse control gross mismanagement corporate waste unjust enrichment certain officers directors company connection violations foreign corrupt practices act company’s wholly owned chinese subsidiary company’s alleged failure comply fda rules regulations governing clinical testing submission data plaintiff seeks recover benefit company compensatory damages punitive damages equitable relief reimbursement plaintiff’s attorneys’ fees costs disbursements company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company 2005 company exercised option extend lease december 31 2006 annual rent approximately 1087000 company paid approximately 1087000 2005 1035000 2004 2003 facility lease agreement future minimum lease commitments operating leases december 31 2005 follows aggregate rental expense operating leases approximated 7188000 2005 6940000 2004 5645000 2003 note 8 earnings per share following table reconciliation weightedaverage shares used computation basic diluted earnings per share eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations stock options purchase 89000 shares common stock 2005 172000 shares common stock 2004 256260 shares common stock 2003 outstanding included computation diluted earnings per common share option price greater average market price common shares note 9 stock option plans company’s stock option plans approved company’s shareholders incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options generally become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant following table provides stock option activity three years ended december 31 2005 following table summarizes information stock options outstanding december 31 2005 pursuant plans 2227542 shares common stock reserved issuance upon exercise outstanding options addition company 793199 options available future grant note 10 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 “disclosures segments enterprise related information” kits required run instruments utilize similar technology instrument manufacturing processes company manufactures instruments kits principally facilities located united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland slovenia slovakia croatia spain netherlands belgium luxemburg sweden denmark norway finland latvia lithuania estonia france australia new zealand china brazil costa rica venezuela uruguay bolivia honduras guatemala panama company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed company’s chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements provided following tables dpc bierman german group includes distributors located croatia czech republic poland slovakia slovenia dpc medlab brazilian group includes distributors located bolivia costa rica dominican republic guatemala panama uruguay venezuela items listed “other” represent geographic locations individually insignificant company’s export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 2005 2004 summarized follows certain amounts relating freight costs freight billed customers reclassified 2004 three quarters ended september 30 2005 conform december 31 2005 presentation impact reclassifications 2005 increase sales 828000 900000 915000 decrease gross profit 836000 940000 818000 quarters ended september 30 june 30 march 31 respectively impact 2004 increase sales 1000000 887000 904000 854000 decrease gross profit 935000 779000 726000 619000 quarters ended december 31 september 30 june 30 march 31 respectively impact net income reclassifications periods presented 2004 fourth quarter items year ended december 31 2004 company recorded fourth quarter amounts 24 million 16 million general administrative expense 750000 interest expense reflect tentative settlement reached department justice securities exchange commission regarding company’s chinese subsidiary 14 million cost sales homocysteine license cover customer’s historical purchases company’s homocysteine tests 10 million inventory write downs related part discontinued products particular microplate allergy line signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 2 32 bylaws 9 41 stock certificate 3 101 form indemnification agreement officers directors 1 102 1990 stock option plan amended 5 103 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 4 second addendum dated april 1 2002 7 104 1997 stock option plan amended 6 form nonqualified incentive stock option agreements 8 105 first amendment settlement agreement effective october 1 2003 rights regarding immulite chemical compounds note portions exhibit omitted pursuant request confidential treatment 8 106 standard industrial lease option exercise dated january 1 2005 5700 w 96th street partnership 10 107 compensation plan nonemployee directors 11 108 executive management incentive compensation plan 12 subsidiaries registrant consent independent registered public accounting firm 311 certificate chief executive officer 312 certificate chief financial officer 321 section 906 officers’ certificationitem 15 exhibits financial statement schedules reports form 8k documents filed part report 1 financial statements independent auditors’ report consolidated balance sheets december 31 2003 2002 consolidated statements income three years period ended december 31 2003 consolidated statements shareholders’ equity three years period ended december 31 2003 consolidated statements cash flows three years period ended december 31 2003 notes consolidated financial statements 2 supplementary financial data 3 exhibits see “exhibit index” appears signature page report b reports form 8k none filed fourth quarter 2003 independent auditors’ report board directors shareholders audited accompanying consolidated balance sheets diagnostic products corporation subsidiaries “company” december 31 2003 2002 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2003 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position diagnostic products corporation subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill intangible assets conform statement financial accounting standards 142 “goodwill intangible assets” deloitte touche llp los angeles california march 15 2004 consolidated balance sheets see accompanying notes consolidated financial statements consolidated statements income see accompanying notes consolidated financial statements consolidated statements shareholders’ equity see accompanying notes consolidated financial statements consolidated statements cash flows see accompanying notes consolidated financial statements notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts diagnostic products corporation majorityowned subsidiaries together referred herein “dpc” “company” elimination intercompany accounts transactions investments nonmajorityowned companies accounted using equity method minority interest represents 44 company’s brazilian subsidiary owned company factors may affect future results company’s future operating results dependent ability research develop manufacture market innovative products meet customers’ needs inherent process number risks company must successfully manage order achieve favorable operating results company’s products sold united states whether manufactured united states elsewhere require product clearance united states food drug administration february 2004 fda’s application integrity policy applied company whereby fda review new tests approval related issues fda resolved operations company involve use substances regulated various federal state international laws governing environment environmental costs presently material company’s operations financial position preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates company purchases certain chemical compounds key components immulite system lumigen inc sole supplier chemical compounds related patents expire company’s business could materially adversely affected lumigen inc unable meet company’s supply requirements event company would required enter new supply agreements use alternate technologies obtainable technology must performance characteristics technology currently use company owns 10 interest lumigen inc accounts interest using equity method although company believes products resources needed continuing success future revenue margin trends cannot reliably predicted may cause company adjust operations foregoing factors recent trends may reliable indicators future financial performance patents may granted others future could inhibit company’s expansion entry certain areas require pay royalty fees rapid technological developments immunodiagnostic industry concurrent extensive patent coverage rapid rate issuance new patents certain company’s products may involve controversy concerning infringement existing patents may issued future risks uncertainties include company’s ability successfully market new existing products company’s ability keep abreast technological innovations successfully incorporate new products company’s dependence sole supplier key chemical components immulite assays company’s ability address resolve issues relating fda’s application integrity policy company’s ability new tests reviewed approved fda financial instruments company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents trade receivables company’s cash equivalents high quality securities placed major banks concentrations credit risk respect receivables limited due large number customers dispersion across worldwide geographic areas company performs periodic credit evaluations customers’ financial condition generally require collateral fair value company’s financial instruments approximates cost due shortterm nature case notes payable notes interest rates competitive would available company current market environment notes consolidated financial statements cash equivalents company considers highly liquid investments purchased maturity three months less cash equivalents included cash equivalents december 31 2003 2002 35000000 42500000 respectively shortterm highquality commercial paper inventories stated lower cost determined firstin firstout basis market property plant equipment property plant equipment stated cost less accumulated depreciation amortization computed using straightline decliningbalance methods estimated useful lives 5 50 years related assets leasehold improvements amortized shorter estimated useful lives term related lease company reviews property plant equipment impairment whenever events changes circumstance indicate carrying amount asset may recoverable impairment loss measured difference estimated fair value carrying value related asset recognized future cash flows based undiscounted cash flows less carrying amount asset purposes estimating future cash flows possibly impaired assets company groups assets lowest level identifiable cash flows largely independent cash flows groups assets investments affiliated companies investments affiliated companies represent equity investments foreign distributors company owns 50 less equity interest investments stated cost plus advances plus company’s equity undistributed net income since acquisition goodwill intangibles goodwill results primarily company’s purchase certain foreign distributors january 1 2002 company adopted statement financial accounting standards “sfas” 142 “goodwill intangible assets” sfas 142 changed accounting goodwill amortization method impairment approach sfas 142 goodwill tested reporting unit level least annually whenever events circumstances indicate goodwill might impaired amortization goodwill including goodwill past business combinations ceased effective january 1 2002 pro forma net income year ended december 31 2001 nonamortization provisions sfas 142 applied period would 40146000 136 per diluted share versus 39029000 132 per diluted share actually reported required sfas 142 company completed annual goodwill impairment testing september 30 believe goodwill impaired prior 2002 goodwill amortized 20 years using straightline method intangible assets december 31 2003 consist purchased technology license amount 4857000 net accumulated amortization 143000 amortization expense next five years 181000 233000 293000 449000 535000 foreign currency translation functional currency foreign subsidiaries generally local currency assets liabilities foreign subsidiaries affiliates translated us dollars exchange rate prevailing balance sheet date income expense accounts translated weighted average rate effect year foreign exchange translation adjustments included component comprehensive income accumulated separate component shareholders’ equity income statement impact resulting foreign currency transactions gain approximately 1158000 year ended december 31 2003 losses 493000 575000 years ended december 31 2002 2001 respectively notes consolidated financial statements foreign exchange instruments june 1998 financial accounting standards board “fasb” issued statement financial accounting standards 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities requires entity recognize derivatives either assets liabilities balance sheet measure instruments fair value company adopted sfas 133 january 1 2001 initial adoption sfas 133 material effect company’s consolidated financial position results operations company hedges specific foreign currency exposures purchasing foreign exchange contracts foreign exchange contracts generally entered company’s european subsidiaries purchase foreign exchange contracts hedge firm anticipated commitments denominated functional currency acquire inventory resale company engage speculative transactions company’s foreign exchange contracts subject company exchange rate risk gains losses transactions hedged offset losses gains contracts date company enters derivative contract management designates derivative hedge identified exposure fair value cash flow hedge company outstanding foreign exchange contracts buy us dollars equivalent approximately 34150000 14650000 december 31 2003 2002 respectively company outstanding contracts buy united kingdom pounds equivalent approximately £425000 december 31 2003 transactions designated cash flow hedges qualifying highly effective cash flow hedges changes effective portion fair value derivative recorded comprehensive income year ended december 31 2003 loss approximately 1164000 related foreign exchange forward contracts included comprehensive income net income tax benefit 499000 amounts 2002 2001 significant foreign currency exchange contracts outstanding december 31 2003 notes consolidated financial statements following table provides information december 31 2002 concerning company’s forward currency exchange contracts related certain commitments subsidiaries denominated foreign currencies table presents contractual amount weightedaverage expiration date weightedaverage contract exchange rates values currency contracts outstanding foreign currency exchange contracts outstanding december 31 2002 revenue recognition company derives revenues two principal sources reagent test kit sales immulite instrument placements company recognizes sales test kits upon shipment transfer title customer immulite instruments placed customers many different types arrangements generally fall following categories sale lease reagent rental soft placement company sells instruments directly endusers third party leasing companies lease instruments endusers independent distributors resell instruments customers instrument sales represent smallest component placements recognized upon shipment transfer title company also sells instruments salestype leases recorded revenue upon shipment amount equal present value future minimum lease payments received lease term many instruments placed outright sale capital lease company also enters various types operating lease arrangements customers generally provide terms three five years periodic rental payments revenue types leases recognized pro rata basis term lease instrument placed reagent rental basis customer agrees pay markup reagents charged instrument company also places instruments charge customer “soft placement” subject customer’s agreement purchase minimum amount reagents reagent rentals soft placements revenue recognized based reagent shipments operating lease rental soft placements dpc continues instrument placed customer instruments generally amortized straightline basis five years maintenance costs expensed incurred company also notes consolidated financial statements enters service contracts customers recognizes service revenue related contract life related costs expensed incurred see note 4 summary sales type operating leases research development research development costs expensed incurred stock options stock options issued company accounted accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” permitted sfas 123 “accounting stockbased compensation” company follows disclosure requirements sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results fair value method accounting applied company’s stock option plans taxeffected impact would follows income taxes deferred income taxes represent income tax consequences future years differences income tax basis assets liabilities basis financial reporting purposes multiplied applicable statutory income tax rate valuation allowances established deferred income tax assets likely realized new accounting pronouncements 2001 financial accounting standards board issued statement financial accounting standards “sfas” 143 “accounting asset retirement obligations” impact sfas 143 effective years began june 15 2002 company adopted sfas 143 january 1 2003 adoption standard material impact company’s consolidated financial position results operations july 2002 financial accounting standards board issued sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 applied prospectively exit disposal activities initiated december 31 2002 adoption sfas 146 material impact company’s consolidated financial position results operations notes consolidated financial statements november 2002 financial accounting standards board issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation fasb statements 5 57 107 rescission fasb interpretation 34 initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 interpretation addresses disclosures made guarantor interim annual financial statements obligations guarantees also clarifies requirements related recognition liability guarantor inception guarantee obligations guarantor undertaken issuing guarantee adoption fasb interpretation 45 material impact company’s consolidated financial position results operations company currently provide third party guarantees december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results company adopted amended disclosure requirements sfas 148 company continue account stockbased compensation employees directors using intrinsic value method proscribed apb 25 related interpretations january 2003 fasb issued fasb interpretation “fin” 46 “consolidation variable interest entities” “fin 46” december 2003 fin 46 replaced fasb interpretation 46r “consolidation variable interest entities” fin 46r clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46r requires enterprise consolidate variable interest entity enterprise absorb majority entity’s expected losses entitled receive majority entity’s expected residual returns fin 46r effective entities evaluated fin 46r consolidation later end first reporting period ends march 15 2004 management believe adoption fin 46r material impact company’s financial position results operations april 30 2003 financial accounting standards board issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 new guidance amends sfas 133 decisions made part derivatives implementation group “dig” process effectively required amendments sfas 133 decisions made connection fasb projects dealing financial instruments connection implementation issues raised relation application definition derivative characteristics derivative contains financing components addition clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption standard impact company’s consolidated financial statements may 2003 financial accounting standards board issued sfas 150 “accounting financial instruments characteristics liabilities equities” sfas 150 establishes standards regarding manner issuer classifies measures certain types financial instruments characteristics liabilities equity pursuant sfas 150 freestanding financial instruments ie entered separately entity’s financial instruments equity transactions legally detachable separately exercisable must classified liabilities cases assets addition sfas 150 requires financial instruments containing obligations repurchase issuing entity’s equity shares certain circumstances obligations settled delivery issuer’s shares classified liabilities certain provisions sfas 150 indefinitely deferred however statement generally effective financial instruments entered modified may 31 2003 instruments beginning notes consolidated financial statements first interim period beginning june 15 2003 company currently financial instruments impacted sfas 150 adoption sfas 150 material impact companys financial position results operations reclassifications certain amounts reclassified 2001 conform 2002 2003 presentation note 2 business acquisitions december 31 2001 company’s brazilian subsidiary acquired 100 interest laboratory testing company brazil medlab productos diagnosticos ltda 2035000 company previously owned company’s brazilian subsidiary’s minority shareholder january 22 2002 company’s brazilian subsidiary acquired 51 interest dpc medlab bolivia ltda acquisitions material company’s financial position results operations note 3 inventories major categories summarized follows note 4 instruments noncurrent asset account “instruments” accompanying balance sheet consists immulite instruments placed leased customers majority placed customers instruments placed reagent rental basis customer pays markup reagents charged instrument soft placement basis customer pay instrument agrees purchase minimum amount reagents company also leases instruments operating type leases sells instruments salestype leases salestype leases recorded revenue inception lease amount equal present value future minimum lease payments received lease term instruments comprised following instrument rental revenue 80 million 54 million 2003 2002 respectively placed instruments subject operating leases generally depreciated five years notes consolidated financial statements note 5 investment affiliated companies company equity interests three nonconsolidated foreign affiliates distribute company’s products respective countries company’s ownership interest follows portugal 45 italy 45 greece 50 following represents condensed financial information company’s investments non consolidated affiliated companies results operations company sales nonconsolidated affiliates 29931000 2003 30804000 2002 27030000 2001 including sales italy 27957000 2003 23306000 2002 20124000 2001 company’s cumulative equity undistributed earnings nonconsolidated affiliated companies december 31 2003 21807000 anticipated additional income taxes payable earnings foreign affiliates distributed would substantially offset us tax credits foreign taxes paid note 6 notes payable notes payable consist borrowings certain company’s foreign subsidiaries guaranteed dpc payable subsidiaries’ local currency notes translated us dollars summarized follows notes consolidated financial statements aggregate future maturities longterm debt outstanding december 31 2003 9231000 2004 3508000 2005 2617000 2006 1589000 2007 2424000 2008 company also line credit bank may borrow 20 million july 2005 may also used standby letters credit borrowings standby letters credit outstanding december 31 2003 2002 note 7 employee benefit plans company defined contribution money purchase pension plan diagnostic products corporation retirement plan “plan” covering substantially us employees 21 years age plan offers three primary benefits employees money purchase pension profitsharing plan salary deferral plan provisions section 401k internal revenue code contributions money purchase pension plan made annually amount equal 10 compensation participants year contributions related pension benefit 5935000 2003 5201000 2002 4544000 2001 contributions related profitsharing component year made discretion board directors company cannot exceed 15 compensation participants year company contributed 900000 profitsharing component 2003 1001000 2002 1384000 2001 contributions 401k salary deferral option employee percentage increments employee’s salary exceed maximum allowable federal law company matches contributions rate 50 percent first 1000 compensation contributed employee company contributed 401k employer matches 516000 2003 489000 2002 461000 2001 note 8 income taxes income taxes summarized follows notes consolidated financial statements provision income taxes summarized follows current deferred income tax assets december 31 2003 include 499000 related income tax benefits unrealized losses forward exchange contracts component comprehensive income december 31 2003 2002 deferred income tax assets include nonconcurrent asset 2078000 related exchange losses permanently invested notes due foreign subsidiaries benefit recorded component comprehensive income accompanying consolidated balance sheet similar amounts recorded december 21 2001 temporary differences comprising net deferred taxes shown consolidated balance sheets follows notes consolidated financial statements reconciliation provision income taxes computed applying federal statutory tax rate income taxes actual provision income taxes follows foreign income subject tax federal statutory rate includes taxes approximately 962000 recorded third quarter 2003 1400000 recorded fourth quarter 2002 related certain tax matters china see note 9 valuation allowance provided 2001 related certain tax credits result change law valuation reversed 2003 note 9 commitments contingent liabilities fourth quarter fiscal year 2002 company discovered internally chinese subsidiary made certain improper payments may violated foreign us laws independent investigation audit committee concluded senior management company involved apparent similar issues respect company’s foreign operations company implemented additional policies procedures promote compliance applicable laws company cooperating sec united states justice department review matter termination improper payments china may significant adverse sales china year ended december 31 2002 company’s chinese subsidiary revenues approximately 90 million less 3 company’s total sales year ended december 31 2003 chinese subsidiary sales 98 million fourth quarter 2002 company accrued 15 million actual estimated costs resolve matter december 31 2003 14 million remains accrual consists principally estimated penalties andor fines company may incur resolve matter addition company recorded charge 14 million 2002 fourth quarter tax provision related possible nondeductibility payments china third quarter 2003 company recorded additional charge 09 million income tax provision chinese taxrelated matters additional legal expenses approximately 884000 incurred charged general administrative expense year ended december 31 2003 december 31 2003 14 million included accrued liabilities accompanying consolidated balance sheet related accrual costs estimated penalties andor fines february 2004 company informed fda based inspectional findings included data integrity procedural issues subject fda’s application integrity policy fda suspended review applications submitted company defer review future applications fda determines company resolved issues related matter resolution process consists developing implementing corrective action plan audited third party reviewed fda company believes 12 months reasonable time actions take place time company restricted fda regard introducing new tests outside united states however company’s inability introduce new tests united states period may negative impact future sales profits notes consolidated financial statements company noncancelable operating lease portion los angeles manufacturing facility partnership comprised persons executive officers directors andor shareholders company agreement extends december 31 2004 twoyear option renew company paid approximately 966000 2001 2002 1035000 2003 facility lease agreement future minimum lease commitments december 31 2003 follows aggregate rental expense operating leases approximated 4302000 2001 4965000 2002 4405000 2003 note 10 earnings per share following table reconciliation weightedaverage shares used computation basic diluted earnings per share eps income statements presented herein net income presented consolidated income statement used numerator eps calculation basic diluted computations stock options purchase 256260 shares common stock 2003 256000 shares 2002 outstanding included computation diluted eps option prices greater average market price common shares outstanding options dilutive 2001 note 11 stock option plans company’s stock option plans approved company’s shareholders incentive stock options may granted exercisable prices less 100 fair market value date grant 110 respect optionees 10 shareholders company additionally plans nonqualified stock options may granted exercisable prices less 85 fair market value date grant options generally become exercisable one year installments generally 3 9 years may exercised cumulative basis time expiration options expire later ten years date grant notes consolidated financial statements following table summarizes information stock options outstanding december 31 2003 pursuant plans 2254819 shares common stock reserved issuance upon exercise outstanding options addition company 1390000 options available future grant permitted sfas 123 company chosen continue accounting stock options intrinsic value accordingly compensation expense recognized stock option compensation plans options granted exercise price equal market value underlying common stock date grant fair value method accounting applied company’s stock option plans taxeffected impact would follows notes consolidated financial statements note 12 segment product line information company considers manufactured instruments medical immunodiagnostic test kits one operating segment defined sfas 131 “disclosures segments enterprise related information” company’s immulite systems “closed” utilize company’s test kits company manufactures instruments test kits principally facilities located united states united kingdom kits instruments sold hospitals medical centers clinics physicians clinical laboratories throughout world network distributors including consolidated distributors located united kingdom germany czech republic poland spain netherlands belgium luxembourg finland norway france estonia sweden australia china brazil uruguay venezuela costa rica honduras el salvador guatemala panama company sells instruments immunodiagnostic test kits several product lines product line sales information follows company organized managed geographic area transactions geographic segments accounted normal sales internal reporting management purposes intercompany amounts eliminated consolidation sales attributed geographic area based location instrument kit shipped customer information reviewed company’s chief operating decision maker significant geographic segments defined sfas 131 prepared basis consolidated financial statements follows notes consolidated financial statements 1 operating expenses exclude equity income affiliates 1 operating expenses exclude equity income affiliates notes consolidated financial statements 1 operating expenses exclude equity income affiliates company’s export sales unaffiliated customers summarized follows supplementary financial data unaudited quarterly financial information years ended december 31 2003 2002 summarized follows signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized diagnostic products corporation michael ziering michael ziering president chief executive officer chairman board principal executive officer director march 15 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index 31 amended restated articles incorporation 2 32 bylaws 8 41 stock certificate 3 101 form indemnification agreement officers directors 1 102 1990 stock option plan amended 5 103 standard industrial lease 5700 west 96th street general partnership dated february 18 1991 4 second addendum dated april 1 2002 7 104 1997 stock option plan amended 6 105 first amendment settlement agreement effective october 1 2003 rights regarding immulite chemical compounds note portions exhibit omitted pursuant request confidential treatment subsidiaries registrant independent auditors’ consent 311 certificate chief executive officer 312 certificate chief financial officer 321 section 906 officers’ certification management contracts compensation plans arrangementsnan