BALLARD MEDICAL PRODUCTS
ANNUAL REPORT
1995
ABOUT THE COMPANY
Ballard Medical Products ("Ballard") is a manufacturer
and marketer of specialized, niche medical products. Our
strategy for maintaining the Company's growth continues to
incorporate four directives:
- Developing innovative products through internal
research and development and through acquisitions.
- Maintaining the highest quality possible on
products.
- Increasing sales through a superior sales force,
through strategic accounts, and through expansion
in the international marketplace.
- Reducing costs through production efficiencies.
Ballard has three wholly-owned subsidiaries, MEDICAL
INNOVATIONS CORPORATION ("MIC"), BALLARD REAL ESTATE
HOLDINGS, INC. ("BREH"), and BALLARD INTERNATIONAL, INC.
("BI"). (As used in this report, the term "Company" refers
to Ballard Medical Products and its subsidiaries.)
The Company's headquarters and principal manufacturing
plant (276,000 square feet) are located in Draper, Utah.
MIC has manufacturing facilities in Milpitas, California and
Ventura, California.
Our products are sold in 32 countries, and the
customers purchasing our products include more than 11,578
hospitals and other medical care facilities worldwide. At
September 30, 1995, Ballard and its subsidiaries employed
over 872 people in 6 countries.
The Company's common stock is traded on the New York
Stock Exchange under the symbol BMP.
1995 IN REVIEW
Fiscal year 1995 was the best year in the Company's
history, so far. Our net sales for the year were
$81,762,142, compared to $65,062,801 for fiscal year 1994,
which represents a 25.7% increase for the year. Even more
impressive was our 38.2% growth in net income (before
cumulative effect of change in accounting principle), from
$14,777,145 in fiscal year 1994 to $20,415,191 in fiscal
year 1995. Earnings per share for the year were 73 cents,
up 33.7% over 54 cents for fiscal year 1994.
During fiscal year 1995, sales of MIC products
increased by 64.7% and international sales of all Company
products grew by 32.1%. We now have eight international
sales representatives and approximately 47 international
distributors and look to the international markets as an
important, exciting frontier for all of the Company's
products.
Acquisitions continue to be an important part of our
strategic plan. In May, 1995, we acquired (through MIC) the
assets and ongoing business of Cox Medical Enterprises, Inc.
("Cox"), a Ventura, California-based manufacturer of
disposable endoscopic devices, for $4 million. In the
Ventura, California facility, we now produce disposable
cleaning brushes, polypectomy snares, cytology brushes,
biopsy forceps, grasping forceps, retrieval baskets, and a
reposable accessory BASICS endoscopy system, all for use in
connection with the GI (gastroenterology tract) and
pulmonary endoscopy. See "New Products." The Cox product
line, in and of itself, was an excellent addition to the
Company's product families. Also, we are confident that
Cox's products will strengthen even further the Company's
position in the GI and pulmonary market, by enabling us to
offer a broader range of products to existing customers.
In July, 1995, Ballard signed an agreement with Neuro
Navigational Corporation ("NNC") to purchase preferred stock
representing 19.5 percent of NNC's capital stock and an
option to acquire all of the assets of NNC. The closing of
this purchase occurred November 14, 1995. The total
purchase price for the Stock was $2,000,000, and Ballard
paid $500,000 for the option. If the option is exercised,
the purchase price for the assets will be $9,500,000 (less
the $500,000 previously paid for the option) if the option
is exercised during the first 12 months, or two times net
sales of NNC (for the 12 full calendar months immediately
preceding the date of option exercise) if the option is
exercised during the remainder of the option term. The
option term runs from November 14, 1995 through November 13,
1997.
Located in Costa Mesa, California, NNC develops,
manufactures, and markets fiberoptics imaging technology and
disposable microtools designed for minimally invasive brain
surgery. NNC is also developing products for vascular
surgery. NNC's principal products are disposable micro-
endoscopes, designed to allow a surgeon to perform delicate
surgical procedures through small incisions rather than the
larger incisions associated with traditional brain surgery,
e.g., procedures such as: 1. the treatment of
hydrocephalus (water on the brain); 2. tumor removal and
biopsy; 3. cyst drainage; 4. hematoma evacuation; and 5.
aneurysm repair. These minimally invasive procedures offer
many advantages to patients, surgeons, hospitals, and health
care reimbursers, such as reduced trauma, faster recovery
for the patient, shorter operating time for the surgeon, and
reduced hospital stays and overall medical costs.
We believe that the endoscope expertise and fiberoptics
imaging technology of NNC will provide significant
opportunities for product improvement and expansion for
Ballard with our existing product lines. We also believe
that the purchase of shares in NNC is an investment in the
Company's future, diversifying our technology base, and
offering the potential for the Company to be a market leader
in the rapidly growing minimally invasive segment of
Neurosurgery and Vascular surgery. The purchase contract
provides that two nominees of Ballard will serve on the 5-
person Board of Directors of NNC throughout the option term.
During the option term, Ballard intends to monitor the
progress of NNC, in order to determine whether to exercise
its asset purchase option.
In October, 1995, the Company broke ground for an
additional manufacturing facility (approximately 104,000
square feet) to be located in the Idaho State University
Business and Research Park in Pocatello, Idaho. The plant
will be located on a 20-acre parcel of land granted to the
Company at no charge. The total cost of development and
construction of the Pocatello facility is estimated at $6.8
million. The weather in Pocatello this fall has been very
mild, and development of this project is proceeding on
schedule. We believe this expansion will assist in
accommodating our projected continuing growth. Construction
is scheduled to be completed in June, 1996.
With over $113 million in total assets, no long-term
debt, continuing product development, and an active
acquisition program, we are confident about the future.
NEW PRODUCTS
During fiscal year 1995, our new product acquisitions
and releases included the following:
The TRACH CARE MAC product is a unique tool which
allows clinicians to administer exogenous surfactants
directly to an infant's lung tissue. This product provides
added safety and convenience to critically ill neonates.
In July, 1995, the Company received FDA approval to
market a pediatric version of its EASI-LAV gastric lavage
system. This allows for the use of the device to treat
childhood poisoning, which is an important segment of the
market.
A pediatric version of the MIC TRANSGASTRIC JEJUNAL
TUBE was released in August, 1995. This unique feeding tube
allows for simultaneous gastric decompression and jejunal
feeding. The prior, adult version has shown strong growth
in the adult arena.
The successful MIC-KEY SKIN LEVEL GASTROSTOMY FEEDING
KIT received a "face lift" during 1995. The MIC-KEY skin
level feeding tube was redesigned to be more cosmetically
pleasing, and certain kit components were added to be more
user friendly. The MIC-KEY device continues to be the
gastrostomy tube of choice for the pediatric patient,
because of its unique aesthetic appearance and its ease of
insertion and removal.
The MIC-PEG (percutaneous endoscopic gastrostomy) 24-
french feeding tube was released in September, 1995. Larger
than our prior 20-french version, the 24-french PEG feeding
tube allows for greater formula flow rates and minimizes the
possibility of clogging, a common problem encountered with
smaller feeding tubes.
ENDOSCOPY PRODUCTS ACQUIRED FROM COX MEDICAL ENTERPRISES
The CB-X1/X2 disposable cleaning brush is a versatile
device that offers maximum channel scrubbing power and the
ability to scrub endoscope components.
The THERMAL OPTION disposable biopsy/coagulating
forceps is a unique dual-purpose device enabling
endoscopists to obtain precision cut tissue samples as well
as providing "on demand" coagulating capability for patient
safety and cost efficiency.
The disposable CYTOLOGY BRUSH incorporates a unique
barium loaded "cap" at the distal end of the brush that
enables an endoscopist to obtain "site specific" cytological
samples while maximizing cell retention.
The BASICS endoscopy system incorporates the benefits
of disposable and reusable instrumentation into a
"reposable" system of reusable handles with attachable
disposable patient-contact components, thus addressing the
issues of cross-contamination and cost-efficiency.
CONTINUING PRODUCTS
The Company's strong commitment to research and
development and product enhancements has enabled the Company
to continue to be a significant player in certain domestic
markets, such as the closed suctioning market and the
chronic enteral feeding market. In addition to the new
product releases described above, the Company continues to
sell the following principal products:
TRACH CARE
The TRACH CARE closed endotracheal suction catheter
system continues to be the Company's flagship product in the
intensive care/critical care arena. It enables patients
with endotracheal tubes, on ventilators, to have their
airways suctioned while maintaining ventilator support, thus
improving patient care. Further, this product reduces
infection risks due to its "closed" design, keeping both
users and the environment from contaminating the suction
catheter and from being contaminated.
The TRACH CARE system is available in sizes, from adult
to neonatal, as well as in several variations such as WET
PAK and DOUBLE LUMEN. This family of products also includes
a line of accessories used to complement TRACH CARE such as
METERED DOSE INHALER adapters, BALLARD UNIT DOSE, START KIT,
etc. These accessories are designed to allow the TRACH CARE
catheter to be used, among other things, as a drug delivery
system or to adapt it to specific patient needs.
The NEONATAL "Y" TRACH CARE catheter is an improved
suction catheter, engineered for use on sophisticated
neonatal ventilators. It provides a side stream catheter
approach, which not only gives greater patient flexibility,
but also couples closed suction with high frequency
oscillators, high frequency jet ventilators, and volume and
physiologic monitors.
The TRACH CARE DOUBLE SWIVEL ELBOW is a calibrated
closed suction catheter which has low dead space, provides
more patient comfort and flexibility, and gives the
clinician a better "feel" for the catheter inside the new
envelope material.
The SAFETY DRAIN closed drain provides clinicians with
a way to empty the ventilator circuit of condensate without
opening it. Users are thereby able to complete the closed
system started with the TRACH CARE catheter, thus providing
additional safety for both clinician and patient.
HMEs (heat and moisture exchangers) have been offered
by the Company since December, 1993. The HMEs (manufactured
for Ballard by Engstrom Medical AB) provide a means of
humidifying the patient's airways during ventilation and are
sold with our TRACH CARE catheter. In July, 1995, the
Company became Engstrom Medical's exclusive HME distributor
in the United States and Canada.
MIC PRODUCTS
The chronic enteral feeding market is experiencing
rapid growth due to the aging of the population. There is
also an emerging physician consensus that early post-
operative enteral support benefits the high risk surgical
patient by decreasing septic morbidity, maintaining
immunocompetence, and improving wound healing and recovery
time. MIC's full range of specialty feeding tubes firmly
places the Company in a position to take advantage of the
growing enteral feeding market.
The MIC GASTROSTOMY TUBE is the first tube specifically
designed for the gastrostomy procedure. The MIC GASTROSTOMY
TUBE can be placed by surgeons, gastroenterologists,
interventional radiologists and replaced by qualified
registered nurses at bedside in the hospital, and in home
care and alternate care settings. The unique design of the
MIC GASTROSTOMY TUBE becomes a problem solver for the
physician and other care givers. The MIC GASTROSTOMY TUBE
virtually eliminates inadvertent tube dislodgement, controls
gastric leakage, and is provided in several sizes and
versions, to accommodate a wide range of patient needs.
The MIC JEJUNAL TUBE is a large bore, easy-to-place
tube for direct jejunal feeding when bypassing the stomach
is indicated. The MIC JEJUNAL TUBE can be placed
surgically, endoscopically or under fluoroscopy.
The MIC JEJUNOSTOMY TUBE is a surgically placed tube
that accommodates liquid enteral formulas delivered into the
small intestine. Its design minimizes irritation and
increases patient comfort.
The MIC BOWEL MANAGEMENT KIT is designed to control
fecal incontinence, provide predictable bowel management,
and promote patient independence.
The MIC PEG (percutaneous endoscopic gastrostomy)
catheter line is a traction removable, enteral feeding
catheter. The MIC PEG's distinct advantage is that the
physician can remove the MIC PEG without a second endoscopic
procedure.
The MIC TRANSGASTRIC JEJUNAL TUBE allows for
simultaneous gastric decompression and jejunal feeding. The
TGJ TUBE is very easy to place. Its design minimizes
jejunal dislodgement and tube clogging experienced with
competitive tubes on the market. The TGJ TUBE is placed
surgically, endoscopically, or fluoroscopically.
FOAM CARE
FOAM CARE foamers and solutions are designed for use
throughout the hospital and are the Company's principal
product in the operating room. FOAM CARE is one of our
franchise products, affording us unique opportunities in the
operating room, and providing additional avenues for the
sale of MIC products. FOAM CARE foamers utilize a unique,
patented, foaming device that turns the soap solution into
rich foam lather.
FOAM CARE products provide users with cost savings when
compared to common liquid soaps. FOAM CARE products are
gentle on the hands and, in the operating room, are
complemented by our DOUBLE SCRUB brush, a soft-on-the-hands
surgical scrub brush.
OTHER
The EASI-LAV gastric lavage system is a closed gastric
lavage system. It is used to clean out the stomach in drug
overdose patients or those with gastric bleeding. It makes
the lavage process cleaner, faster and more effective while
providing additional clinician protection. This product is
used in the hospital emergency room and gastrointestinal
labs.
The CHAR FLO activated charcoal system is a unique
charcoal delivery system designed for use with our EASI-LAV
system in over-dose patients. It enables faster, more
accurate and environmentally clean charcoal delivery.
The SAFETY SHIELD mask is a surgical grade mask which
includes a plastic shield for eye protection. This
product's design provides users with complete facial splash
protection, while also providing excellent filtration
characteristics. It is available in various styles for use
everywhere in the hospital.
The BAL CATH catheter product is designed to obtain
bronchoalveolar lavage samples for use in the diagnosis of
nosocomial and opportunistic respiratory infections.
Because it is used without a bronchoscope, it is much more
cost effective for the hospital.
CAPITAL EXPENDITURES
During fiscal year 1995, the Company continued to make
strides toward automation of its manufacturing processes.
For example, in June, 1995, the Company installed an
automated materials handling system for its DOUBLE SCRUB
scrub brush products. This system feeds materials
automatically (by vacuum) into molding machines, thus
obviating the need for additional employees. The Company
estimates that this system alone will save us approximately
$90,000 per year.
In addition, the Company expanded its injection molding
capacity and added a new clean room to MIC's facility in
Milpitas, California. In its Draper facility, the Company
purchased six new molding machines, at a cost of
approximately $100,000 each, and a second saline vial
machine (four cavity), at a total acquisition and
refurbishing cost of approximately $350,000. The Company
also installed additional sprue pickers, conveyers, part
separators, and a new grinder in its Draper facility.
In addition to our plans to expand into Pocatello,
Idaho, we are also in the process of reviewing plans for the
construction of a new facility in Milpitas, California. We
intend to consolidate our Ventura, California operations,
along with MIC operations already located in Milpitas, into
this new facility to be constructed in fiscal year 1996.
FOREIGN OPERATIONS
The following table sets forth the dollar amount of
sales by the Company internationally during the last three
fiscal years. All sales shown are denominated in U.S.
dollars and all payments are received in U.S. dollars. No
foreign currency is received by the Company. The amount of
export sales to unaffiliated customers does not exceed 10%
of the Company's domestic consolidated net sales.
FISCAL YEAR INTERNATIONAL SALES
9/30/95 $6,172,904
9/30/94 $4,672,611
9/30/93 $3,825,172
COMMON STOCK
TRADING
The Company's common stock is traded on the New York
Stock Exchange ("NYSE"). The following table sets forth,
for the respective periods indicated, the high and low sales
prices for the Company's common stock, as reported and
summarized by the NYSE for fiscal years 1995 and 1994:
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1994
QUARTER HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 11 1/8 9 18 3/8 11 1/4
Second Quarter 12 7/8 10 1/8 15 1/4 12 1/2
Third Quarter 13 5/8 10 3/4 13 7/8 9 1/8
Fourth Quarter 17 1/2 12 5/8 11 1/8 8 1/2
</TABLE>
On November 21, 1995, the closing quotation for the
Company's Common Stock, as reported by the WALL STREET
JOURNAL, was 17 3/8 high and 17 low. As of November 21,
1995, there were approximately 12,167 holders of the
Company's Common Stock (based upon the number of record
holders and including individual participants in security
position listings).
DIVIDENDS
The Company has paid the following cash dividends
during the two most recent fiscal years:
DIVIDEND
RECORD DATE PAYMENT DATE PER SHARE
December 2, 1993 December 21, 1993 $.0497
December 12, 1994 December 28, 1994 .0600
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA (1)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Sales $81,762,142 $65,062,801 $64,849,837 $49,787,199 $38,297,843
Other
Income, Net 4,078,702 3,519,586 3,716,649 2,492,363 1,317,908
Net Income 20,415,191 16,180,377 18,540,009 13,464,291 7,824,274
Net Income
Per Common
Share (2) .73 .54 .68 .48 .30
Total
Assets 113,019,373 92,639,225 80,291,809 58,801,704 37,509,132
Cash
Dividends
Declared
Per
Share .0600 .0497 .0375 .0300 .0233
</TABLE>
(1) All per share income and dividend information has been
adjusted to give effect to stock splits which have
occurred. The consolidated financial data shown above
includes the accounts of Ballard Medical Products and
its wholly-owned subsidiaries, MIC, BI, and BREH, as
well as the accounts of Cox as of May 1, 1995, the date
of acquisition of its assets and ongoing business. The
consolidated financial data for 1993 includes the
accounts of MIC as of February 26, 1993, its date of
acquisition. The subsidiary accounts of BI and BREH
did not materially affect the consolidated financial
data shown above.
(2) Does not include the cumulative effect of a change in
1994 in accounting for income taxes.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
FISCAL YEAR 1995
QUARTERS ENDED: 9/30/95 6/30/95 3/31/95 12/31/94
<S> <C> <C> <C> <C>
Net Sales $21,868,032 $21,353,249 $20,030,632 $18,510,229
Gross Margin 14,830,345 14,283,404 13,408,645 12,291,352
Net Income 5,599,545 5,269,166 4,980,016 4,566,464
Net Income Per
Common Share 0.198 0.190 0.180 0.167
FISCAL YEAR 1994
QUARTERS ENDED: 9/30/94 6/30/94 3/31/94 12/31/93
Net Sales $12,534,754 $18,445,692 $18,047,000 $16,035,355
Gross Margin 7,099,945 12,626,642 12,898,597 11,186,038
Income Before
Cumulative
Effect of Change
in Accounting
for Income Taxes 1,287,145 4,338,014 4,860,000 4,291,986
Cumulative
Effect of Change
in Accounting
for Income Taxes 1,403,232
Net Income 1,287,145 4,338,014 4,860,000 5,695,218
Per Common Share:
Income Before
Cumulative
Effect of
Accounting
Change 0.047 0.160 0.178 0.158
Cumulative
Effect of
Accounting
Change 0.052
Net Income 0.047 0.160 0.178 0.210
</TABLE>
See additional analysis of net sales, margins, and net
income in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Ballard
Medical Products:
We have audited the accompanying consolidated balance
sheets of Ballard Medical Products and subsidiaries as of
September 30, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended
September 30, 1995. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of Ballard Medical Products and subsidiaries as of
September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years
in the period ended September 30, 1995 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated
financial statements, effective October 1, 1994 the Company
changed its method of accounting for investment securities
to conform with Statement of Financial Accounting Standards
No. 115. As discussed in Notes 1 and 4 to the consolidated
financial statements, the Company changed its method of
accounting for income taxes, effective October 1, 1993, to
conform with Statement of Financial Accounting Standards No.
109.
Deloitte & Touche LLP
November 9, 1995
(November 14, 1995, as to the fourth
and fifth paragraph of Note 8)
<TABLE>
<CAPTION>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS 1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 1) $27,329,371 $15,109,682
Investments (Notes 1 and 2) 18,357,304 16,330,685
Accounts receivable - trade
(less allowance for doubtful
accounts: 1995 - $125,000,
1994 - $200,000; and allowance
for sales returns: 1995 -
$500,000, 1994 - $200,000) 13,504,572 13,505,173
Royalties receivable 447,282 542,616
Other receivable 1,173,871 1,181,021
Inventories (Note 1):
Raw materials 3,784,222 3,231,757
Work-in-process 2,286,542 2,088,350
Finished goods 5,220,882 4,353,529
Deferred income taxes
(Notes 1 and 4) 593,313 407,405
Income tax refund receivable
(Notes 1 and 4) 2,103,570 3,001,385
Prepaid expenses 232,315 35,789
Total current assets 75,033,244 59,787,392
PROPERTY AND EQUIPMENT
(Notes 1 and 6):
Land 1,849,511 1,849,511
Buildings 11,886,512 11,912,302
Molds 2,539,615 2,044,983
Machinery and equipment 8,077,753 7,401,870
Vehicles 535,547 441,135
Furniture and fixtures 1,408,169 1,067,148
Leasehold improvements 246,735 71,118
Construction in progress 1,234,998 729,922
Total 27,778,840 25,517,989
Less accumulated depreciation (5,832,822) (4,514,129)
Property and equipment - net 21,946,018 21,003,860
INTANGIBLE ASSETS
(less accumulated amortization:
1995 - $2,657,776; 1994 -
$1,577,991) (Notes 1 and 8) 15,106,614 11,568,397
OTHER ASSETS (Note 8) 933,497 20,624
DEFERRED INCOME TAXES
(Notes 1 and 4) 258,952
TOTAL $113,019,373 $92,639,225
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,114,607 $228,749
Accrued liabilities:
Employee compensation 2,301,755 1,114,092
Royalties (Note 6) 344,712 370,579
Other 448,236 492,306
Total current liabilities 4,209,310 2,205,726
DEFERRED INCOME TAXES
(Notes 1 and 4) 223,757
Total liabilities 4,433,067 2,205,726
COMMITMENTS AND CONTINGENT
LIABILITIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY (Note 5):
Common stock - $.10 par value;
75,000,000 shares authorized;
issued and outstanding:
1995 - 26,561,287 shares,
1994 - 26,455,862 shares 2,656,129 2,645,586
Additional paid-in capital 29,213,647 28,291,261
Unrealized losses on investments -
net of tax (Notes 1 and 2) (142,728)
Retained earnings 76,859,258 59,496,652
Total stockholders' equity 108,586,306 90,433,499
TOTAL $113,019,373 $92,639,225
</TABLE>
See notes to consolidated financial statements.
<TABLE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
1995 1994 1993
<S> <C> <C> <C>
NET SALES
(Notes 1 and 9) $81,762,142 $65,062,801 $64,849,837
COST OF PRODUCTS SOLD 26,948,396 21,251,579 19,319,895
GROSS MARGIN 54,813,746 43,811,222 45,529,942
OPERATING EXPENSES:
Selling, general and
administrative
(Notes 6 and 7) 23,665,400 21,063,809 17,669,488
Research and development 2,177,117 1,638,475 1,345,052
Royalties (Note 6) 1,385,841 1,404,681 1,401,542
Total operating
expenses 27,228,358 24,106,965 20,416,082
OPERATING INCOME 27,585,388 19,704,257 25,113,860
OTHER INCOME:
Interest income 1,900,922 772,645 1,580,872
Royalty income 2,147,620 2,204,347 1,693,354
Other 30,160 542,594 442,423
Total other income 4,078,702 3,519,586 3,716,649
INCOME BEFORE
INCOME TAX EXPENSE 31,664,090 23,223,843 28,830,509
INCOME TAX EXPENSE
(Notes 1 and 4) 11,248,899 8,446,698 10,290,500
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 20,415,191 14,777,145 18,540,009
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE 1,403,232
(Notes 1 and 4)
NET INCOME $20,415,191 $16,180,377 $18,540,009
INCOME PER SHARE BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (Note 1):
Common and common
equivalent share $0.74 $0.55 $0.68
Common share assuming
full dilution $0.73 $0.54 $0.68
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE PER SHARE
(Note 1):
Common and common
equivalent share $0.05
Common share assuming
full dilution $0.05
NET INCOME PER SHARE
(Note 1):
Common and common
equivalent share $0.74 $0.60 $0.68
Common share assuming
full dilution $0.73 $0.59 $0.68
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
(Note 1):
Common and common
equivalent share 27,605,384 27,132,813 27,335,316
Common share assuming
full dilution 28,101,219 27,223,975 27,362,087
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
Unrealized
Additional Losses on
Common Paid-in Invest- Retained
Shares Amount Capital ments Earnings
<S> <C> <C> <C> <C> <C>
BALANCE
OCTOBER
1, 1992 25,825,640 $2,582,564 $19,996,082 $31,646,164
Net
Income 18,540,009
Cash
divi-
dends
paid
($.0375
per
share)
(Note 1) (980,187)
Common
stock
issued
from
exer-
cise of
stock
options
(Note 5) 592,607 59,261 2,108,645
Acqui-
sition
and
retire-
ment of
trea-
sury
stock
(Note 5) (303,997) (30,400) (290,830) (4,334,145)
Tax
benefit
attri-
butable
to
appre-
ciation
in value
of stock
issued
in con-
junc-
tion
with the
exer-
cise and
quali-
fying
dispo-
sitions
of
incen-
tive
stock
options 2,908,205
Other 261,093
BALANCE
SEPTEM-
BER 30,
1993 26,114,250 2,611,425 24,983,195 44,871,841
Net
income 16,180,377
Cash
divi
dends
paid
($.050
per
share) (1,314,485)
Common
stock
issued
from
exer-
cise
of stock
options
(Note 5) 361,612 36,161 1,511,520
Acqui-
sition
and
retire-
ment
of
trea-
sury
stock
(Note
5) (20,000) (2,000) (241,081)
Tax
benefit
attri-
butable
to
appre-
ciation
in value
of stock
issued
in con-
junc-
tion
with the
exer-
cise and
dis-
quali-
fying
dispo-
sitions
of
incen-
tive
stock
options 1,796,546
BALANCE
SEPTEM-
BER 30,
1994 26,455,862 2,645,586 28,291,261 59,496,652
Net
income 20,415,191
Cash
divi-
dends
paid
($.060
per
share) (1,587,600)
Common
stock
issued
from
exer-
cise
of stock
options
(Note 5) 205,425 20,543 432,869
Acqui-
sition
and
retire-
ment of
trea-
sury
stock
(Note 5) (100,000) (10,000) (1,464,985)
Tax
benefit
attri-
butable
to
appre-
ciation
in value
of
stock
issued
in con-
junc-
tion
with the
exer-
cise
and
dis-
qual-
ifying
dispo-
sitions
of
incen-
tive
stock
options 489,517
Unre-
alized
losses
on
invest-
ment
secur-
ities -
net of
tax
(Notes
1 and 2) $(142,728)
BALANCE
SEPTEM-
BER 30,
1995 26,561,287 $2,656,129 $29,213,647 $(142,728) $76,859,258
</TABLE>
<TABLE>
<CAPTION>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income $20,415,191 $16,180,377 $18,540,009
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Depreciation and
amortization 3,061,618 2,477,007 1,756,706
Loss on disposal
of property 7,044 110,479 108,752
Tax benefit from
disqualifying
dispositions of
incentive stock
options 489,517 1,796,546 2,908,205
Provision for
losses on
accounts
receivable -
trade and sales
returns 225,000 200,000 217,000
Cumulative effect
of change in
accounting
principle (Note 1) (1,403,232)
Deferred income
taxes 373,655 828,489 (146,552)
Changes in
operating assets
and liabilities-
net of effects
from purchase of
MIC in 1993 and
Cox in 1995 (Note
8):
Accounts
receivable -
trade 4,389 2,738,233 (8,372,887)
Royalties and
other receivables 102,484 (757,909) (341,571)
Inventories (1,374,419) (2,053,477) (2,782,180)
Income tax refund
receivable 897,815 929,232 1,714,055
Prepaid expenses (196,526) (430,813) (184,605)
Accounts payable 199,168 (1,579,876) 310,274
Accrued
liabilities 1,117,726 (3,695,745) 805,676
Total
adjustments 4,907,471 (841,066) (4,007,127)
Net cash
provided by
operating
activities 25,322,662 15,339,311 14,532,882
CASH FLOWS FROM
INVESTING
ACTIVITIES:
Capital
expenditures for
property and
equipment (2,769,625) (6,335,228) (3,998,999)
Proceeds from
sales of property
and equipment
45,250 5,899 21,110
Purchases of
investments (38,534,828) (29,744,216) (11,055,383)
Proceeds from
maturities of
investments 36,288,627 20,485,633 26,395,918
Purchase of
intangible assets (1,330,255) (245,685)
Purchases of
other assets (909,319)
Payments for
purchase of MIC
and Cox, net of
cash acquired (3,283,650) (500,000) (11,901,055)
Net cash used
in investing
activities (10,493,800) (16,333,597) (538,409)
CASH FLOWS FROM
FINANCING
ACTIVITIES:
Cash dividends
paid (1,587,600) (1,314,485) (980,187)
Proceeds from
issuance of
common stock and
exercise and
option 453,412 1,547,681 2,294,493
Purchase of
treasury stock (1,474,985) (243,081) (4,655,375)
Net cash used
in financing
activities (2,609,173) (9,885) (3,341,069)
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS 12,219,689 (1,004,171) 10,653,404
CASH AND CASH
EQUIVALENTS,
BEGINNING OF YEAR 15,109,682 16,113,853 5,460,449
CASH AND CASH
EQUIVALENTS, END
OF YEAR $27,329,371 $15,109,682 $16,113,853
SUPPLEMENTAL
DISCLOSURE OF
CASH FLOW
INFORMATION -
Cash paid during
the year for
income taxes $9,487,912 $7,571,800 $5,231,000
</TABLE>
See notes to consolidated financial statements.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
On May 2, 1995, the Company acquired substantially all
of the net assets of Cox Medical Enterprises, Inc. for
approximately $3,313,000 cash (see Note 8). In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired
(including goodwill) $4,000,000
Cash paid 3,313,310
Liabilities assumed $686,690
During the year ended September 30, 1995, the Company
in conjunction with its adoption of Financial Accounting
Standards No. 115 (see Note 1), wrote down its short-term
investments in total by $219,582. The effect of this
adjustment was a decrease in stockholders' equity in the
amount of $142,728 and an increase in current deferred
income taxes in the amount of $76,854.
During the years ended September 30, 1995, 1994, and
1993, the Company increased additional paid-in capital by
$489,517, $1,796,546, and $2,908,205, respectively, which
represents the tax benefit attributable to the compensation
received by employees from the exercise and disqualifying
dispositions of incentive stock options (see Note 5).
Effective February 26, 1993, the Company purchased all
of the outstanding capital stock of Medical Innovations
Corporation for approximately $12,464,000 cash (see Note 8).
In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired
(including goodwill) $14,558,483
Cash paid 12,464,228
Liabilities assumed $2,094,255
See notes to consolidated financial statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Ballard Medical Products ("Ballard") and
its subsidiaries develop, manufacture, and market medical
products.
BASIS OF PRESENTATION - The consolidated financial
statements include the accounts of Ballard and its wholly-
owned subsidiaries, Medical Innovations Corporation ("MIC")
(see Note 8), Ballard Real Estate Holdings ("BREH"), and
Ballard International, Inc. ("BI") (collectively, the
"Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
On April 21, 1992, the Company formed BREH by
purchasing 1,500,000 shares of BREH's common stock in
exchange for $1,600,000 cash. Substantially all of such
cash was used by BREH to purchase approximately 100 acres of
unimproved land adjacent to Ballard's principal
manufacturing facility.
On February 19, 1993, the Company formed BI by
purchasing 1,000 shares of BI's common stock for $1,000. BI
is a foreign sales corporation incorporated in the Virgin
Islands. BI's primary purpose is to conduct business for
the Company in foreign countries.
INVESTMENTS - Investments consist principally of time
certificates of deposit, tax free municipal bonds, and U.S.
treasury securities with maturity dates of 1 to 12 months.
Through September 30, 1994, investments were recorded at
cost which approximated fair market value. As of September
30, 1995, investments are recorded at fair market value (see
Note 2).
Effective October 1, 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 requires the classification of
investment securities as either held-to-maturity securities,
trading securities, or available-for-sale securities. Upon
adoption of SFAS 115, the Company reclassified all of its
investments as available-for-sale. The adoption of SFAS 115
had no material effect on the consolidated financial
statements.
INVENTORIES - Inventories are stated at the lower cost
(on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are
stated at cost. Depreciation is computed on the straight-
line method over the estimated useful lives of the related
assets.
INTANGIBLE ASSETS - Intangible assets include goodwill,
patent rights, and organizational costs which are stated at
cost and are being amortized using the straight-line method
over their estimated lives, which range from four to
seventeen years.
REVENUE RECOGNITION - Revenues are recognized when the
related product is shipped.
INCOME TAXES - Effective October 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 109 (the Statement), "Accounting for Income
Taxes." The Statement requires an asset and liability
approach for financial accounting and reporting for income
taxes. The cumulative effect in 1994 of the change in
accounting principle of $1,403,232 is reflected in the 1994
consolidated statement of operations. The adoption of the
Statement had no effect on the pre-tax income from
continuing operations. Prior to October 1, 1993, the
Company accounted for income taxes under Accounting
Principles Board Opinion No. 11.
INCOME PER SHARE - Income per share is computed on the
basis of the weighted average number of shares outstanding
plus the common stock equivalents which would arise from the
exercise of stock options. Such income per share amounts
are adjusted to give retroactive effect to the stock split
described in Note 5.
DIVIDENDS PER SHARE - Dividends per share are adjusted
retroactively to give effect to the stock split discussed in
Note 5.
STATEMENTS OF CASH FLOWS - For purposes of the
consolidated statements of cash flows, the Company considers
cash and interest bearing securities with original
maturities of less than three months to be cash equivalents.
RECLASSIFICATIONS - Certain reclassifications have been
made to the 1994 and 1993 consolidated financial statements
to conform to classifications adopted in 1995.
2. INVESTMENTS
Investments consist of the following at September 30,
1995 and 1994:
1995 1994
Time certificates
of deposit $3,901,262
U.S. Treasury
securities 293,045
Municipal bonds $18,357,304 12,136,378
Total
investments $18,357,304 $16,330,685
The amortized cost and fair value of investments at
September 30, 1995, which consisted of municipal bonds
classified as available-for-sale, is as follows:
Amortized cost $18,576,886
Gross unrealized gains None
Gross unrealized losses (219,582)
Fair value $18,357,304
As of September 30, 1995, all of the municipal bonds
had a contractual maturity of one year or less. During the
year ended September 30, 1995, there were no gross realized
gains or gross realized losses from sales of investments
classified as available for sale.
3. LINE OF CREDIT
At September 30, 1995, the Company had an unused,
unsecured line of credit with a bank totaling $4,000,000
which expires January 31, 1996. The line, if drawn upon,
bears interest at prime (8.75% at September 30, 1995). No
compensating cash balances are required. As of September
30, 1995 and during the year then ended, there were no
borrowings under the line of credit.
4. INCOME TAXES
As described in Note 1, the Company adopted Statement
of Financial Accounting Standards No. 109 during the year
ended September 30, 1994. The Company has recorded current
deferred tax assets and net long-term deferred tax assets
and (liabilities) at September 30, 1995 and 1994, as
follows:
<TABLE>
<CAPTION>
1995 1994
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred income tax
assets $593,313 $452,323 $407,405 $821,451
Deferred income tax
liabilities (676,080) (562,499)
Net $593,313 $(223,757) $407,405 $258,952
</TABLE>
Net deferred income tax assets and liabilities at
September 30, 1995 and 1994 consisted of the following
temporary differences and carryforward items:
<TABLE>
<CAPTION>
1995 1994
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred income tax
assets:
Allowance for
uncollectible
accounts receivable $47,513 $76,020
Allowance for
sales returns and
allowances 190,050 76,020
Allowance for 49,585
obsolete inventory
Accrued expenses 214,506 255,365
Accumulated
amortization $743
Unrealized losses on
investments 76,854
Net operating loss
carryforwards of
acquired subsidiaries 14,805 $341,097 709,482
Research and
development credits 111,226 111,226
593,313 452,323 407,405 821,451
Deferred income tax
liabilities -
differences between
tax basis and
financial reporting
basis of property and
equipment (676,080) (562,499)
Total $593,313 $(223,757) $407,405 $258,952
</TABLE>
The components of income tax expense (benefit) for the
years ended September 30, 1995, 1994, and 1993 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $9,425,942 $6,685,047 $9,132,420
State 1,449,302 933,162 1,304,632
10,875,244 7,618,209 10,437,052
Deferred:
Federal 323,859 727,007 (128,233)
State 49,796 101,482 (18,319)
373,655 828,489 (146,552)
Total $11,248,899 $8,446,698 $10,290,500
</TABLE>
Income tax expense differed from amounts computed by
applying the statutory Federal tax rate to pretax income as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed
federal tax
expense at
statutory rate $11,082,432 $8,128,345 $10,090,678
State income
tax expense,
net of federal
benefit 990,493 661,806 672,163
Environmental
tax 30,000 25,000 25,000
Tax exempt
income (624,750) (210,000) (408,800)
Foreign sales
corporation (121,756) (126,000) (61,750)
Amortization
of goodwill 316,969 278,773 160,919
Utilization of
acquired
operating loss
carryforwards (275,375)
Other (424,489) (311,226) 87,665
Total $11,248,899 $8,446,698 $10,290,500
</TABLE>
As a result of the Company's acquisitions (see Note 8),
the Company has net operating loss carryforwards for federal
income tax purposes of approximately $940,000, which can
only be used to offset future taxable income of acquired
subsidiaries as of September 30, 1995. The utilization of
the tax loss carryforwards is subject to certain limitations
and the carryforwards expire through the year 2007.
5. COMMON STOCK AND STOCK OPTIONS
A 4 for 3 stock split was approved for stockholders of
record on February 8, 1993. The effect of this stock split
is retroactively reflected in all share and per share
amounts in the accompanying consolidated financial statements.
During the years ended September 30, 1995, 1994, and
1993, the Company repurchased 100,000, 20,000, and 303,997
shares of its outstanding common stock for $1,474,985,
$243,081, and $4,655,375, respectively. In accordance with
Utah State law, this treasury stock was accounted for as
retired common stock.
The Company has adopted several incentive stock option
plans for key employees and reserved shares of common stock
totaling approximately 3,483,000 and 2,985,000 at September
30, 1995 and 1994, respectively, for issuance under the
plans. Options are granted at a price not less than the
fair market value on the date of grant, become exercisable
between one to two years following the date of grant, and
expire in ten years.
Changes in stock options are as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1995 Shares Price Range
Per Share
<S> <C> <C>
Granted 740,000 $9.38 - $14.25
Expired 101,666 $8.63 - $13.50
Exercised 205,425 $1.46 - $11.00
Outstanding at
September 30 3,331,162 $1.46 - $14.25
Exercisable 2,410,490 $1.46 - $14.25
1994
Granted 3,747,340 $8.63 - $16.50
Expired 2,582,256 $11.00 - $19.79
Exercised 361,612 $.67 - $11.00
Outstanding at
September 30 2,898,253 $1.46 - $13.50
Exercisable 766,486 $1.46 - $13.50
1993
Granted 367,533 $12.00 - $19.79
Expired 37,322 $11.00 - $19.79
Exercised 592,607 $.99 - $11.00
Outstanding at
September 30 2,094,781 $.67 - $22.22
Exercisable 1,944,136 $.67 - $22.22
</TABLE>
6. COMMITMENTS AND CONTINGENT LIABILITIES
MIC leases office and production facilities under long-
term operating lease agreements. Rent expense on the above
operating leases was approximately $187,000, $187,000, and
$108,800 for the years ended September 30, 1995, 1994, and
1993, respectively. The following represents MIC's future
commitments under such leases:
1996 $186,500
1997 140,000
Total $326,500
The Company has the option to extend the lease terms at
its discretion. As of September 30, 1995, the Company has
not exercised its option to extend the leases.
The Company has agreements with the inventors of
certain of its products which provide for the payment of
royalties ranging from 2% to 6.5% of defined net sales or a
fixed rate per unit sold of the related products.
During the year ended September 30, 1993, the Company
entered into an approximate $3,200,000 construction contract
to expand its production facilities. The construction on
the facilities was completed during the year ended September
30, 1995.
The Company is involved in certain litigation matters
in the normal course of business which, in the opinion of
management, will not result in any material adverse effects
on the Company.
In October, 1995, the Company began construction of an
additional manufacturing facility in Pocatello, Idaho. The
total anticipated cost of construction is estimated to be
$6,800,000. Construction of the facility is anticipated to
be completed in June, 1996.
7. PROFIT SHARING PLAN
In 1991, the Company's Board of Directors adopted the
Company's Employee Retirement and Savings Plan (the Plan)
under Section 401(k) of the Internal Revenue Code. The Plan
is designed to allow participating employees to accumulate
savings for retirement or other purposes. Under the Plan,
all employees, who have completed at least one year of
service and have reached age 21, are eligible to
participate. The Plan allows employees to make
contributions to the plan from salary reductions each year,
up to a maximum of 15% of a participant's annual
compensation. Under the Plan, the Company matches up to 4%
of a participant's contribution. The Company may, if it
desires, make additional contributions to the 401(k) Plan on
behalf of its employees. For the years ended September 30,
1995, 1994, and 1993, the Company expensed approximately
$545,000, $372,000, and $247,000, respectively, as matching
contributions to the Plan. Employees are always fully
vested in their own contributions and become fully vested in
any contributions made by the Company after six years of
service. Employees are allowed to direct the investment of
their Plan contributions within a group of designated
investment funds.
8. MERGERS AND ACQUISITIONS
Effective February 26, 1993, the Company acquired all
of the issued and outstanding common stock of MIC for
approximately $12,464,000 cash. The acquisition was
accounted for as a purchase. In conjunction with the
acquisition, the Company recorded goodwill of approximately
$11,823,000 which is being amortized on a straight-line
basis over 15 years. The accompanying consolidated
financial statements include MIC's net assets at their
estimated fair values at the date of acquisition and the
results of operations of MIC from the date of acquisition.
The proforma results of operations of the Company for
the year ended September 30, 1993 (assuming the acquisition
of MIC had occurred as of October 1, 1992) are as follows:
Revenues $67,395,567
Net income 18,335,511
Income per share:
Common and common
equivalent share $0.67
Common share assuming
full dilution $0.67
On May 2, 1995, the Company acquired substantially all
of the assets of Cox for a purchase price of $4,000,000
consisting of $3,313,310 in cash and the assumption of
liabilities in the amount of $6,86,690. Cox is a
manufacturer of disposable endoscopic devices. The
acquisition has been accounted for using the purchase method
of accounting and, as such, Cox's results of operations have
been included in the accompanying consolidated financial
statements from the date of acquisition. The cost of this
acquisition exceeded the estimated fair value of the
acquired net assets by $423,000 which is being amortized
over 10 years. Pro forma consolidated results of operations
of the Company for the years ended September 30, 1995, 1994,
and 1993 are not presented as the effect on the Company's
consolidated financial position is immaterial.
On July 17, 1995, the Company entered into an agreement
with Neuro Navigational Corporation (Neuro) under which the
Company acquired on November 14, 1995, 200,000 shares of
Neuro's preferred stock representing a 19.5% equity interest
in Neuro for $2,000,000. As of September 30, 1995, the
Company had made advances to Neuro in the amount of
$800,000. These advances are included in other assets in
the accompanying consolidated balance sheet as of September
30, 1995 and were subsequently credited towards the
$2,000,000 purchase price on November 14, 1995.
In addition, on November 14, 1995, the Company paid
Neuro $500,000 for an option to purchase all of the assets
of Neuro during the first 12 months of the option period for
$9,500,000. If the option is exercised during the remainder
of the option term, the purchase price will be equal to two
times the net sales of Neuro for the 12 months immediately
preceding the exercise of the option. In either event, the
$500,000 option price will be credited towards the purchase
price. The option term expires two years following the
closing date of the preferred stock purchase by the Company.
9. SALES
During the years ended September 30, 1995, 1994, and
1993, the Company had foreign export sales of approximately
$6,200,000, $4,700,000, and $3,800,000, respectively.
10. EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING
STANDARDS
In October, 1995, the Financial Accounting Standards
Board issued SFAS No. 123. "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a fair value based
method of accounting for an employee stock option. Fair
value of the stock option is determined considering factors
such as the exercise price, the expected life of the option,
the current price of the underlying stock and its
volatility, expected dividends on the stock, and the risk-
free interest rate for the expected term of the option.
Under the fair value based method, compensation cost is
measured at the grant date based on the fair value of the
award and is recognized over the service period. A company
may elect to adopt SFAS No. 123 or elect to continue
accounting for its stock option or similar equity awards
using the intrinsic method, where compensation cost is
measured at the date of grant based on the excess of the
market value of the underlying stock over the exercise
price. If a company elects not to adopt SFAS No. 123, then
it must provide pro forma disclosure of net income and
earnings per share, as if the fair value based method has
been applied.
SFAS No. 123 is effective for transactions entered into
for fiscal years that begin after December 15, 1995. Pro
forma disclosures for entities that elect to continue to
measure compensation cost under the old method must include
the effects of all awards granted in fiscal years that begin
after December 15, 1994. It is currently anticipated that
the Company will continue to account for stock-based
compensation plans under the intrinsic method and therefore,
SFAS No. 123 will have no effect on the Company's
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis of the Company's operations encompassing
the fiscal years ended September 30, 1995, 1994, and 1993,
should be considered in conjunction with the consolidated
balance sheets, statements of operations, and statements of
cash flows. All of the figures discussed herein have been
adjusted to reflect the purchase of the assets of Cox on May
1, 1995 and the purchase of MIC on February 26, 1993.
RESULTS OF OPERATIONS
SALES - For the year ended September 30, 1995,
consolidated net sales increased $16,699,341 or 25.7%, as
compared to fiscal year 1994. The solid growth of net sales
reflects the successful efforts of a more established, more
experienced sales force, as well as continued expansion and
market penetration of the TRACH CARE and MIC product lines,
both domestically as well as internationally. 1995
consolidated gross sales increased $19,989,929, an
impressive 29.4% increase over 1994 consolidated gross
sales, but increased pressures to reduce prices resulted in
an increase in price discounts and rebates from $2,927,064
in 1994 to $6,217,652 in 1995.
Domestic consolidated net sales totaled $75,589,238 for
the year ended September 30, 1995, compared with $60,390,190
for 1994, an increase of 25.2%. International consolidated
net sales totaled $6,172,904 for the year ended September
30, 1995, compared with $4,672,611 for 1994, an increase of
32.1%.
Near the end of the third quarter of fiscal year 1995,
pricing on several of the MIC products was increased by up
to 5%. Effective April 1, 1995, pricing on the Neonatal
products of the TRACH CARE line also increased by up to 5%.
No other price increases occurred during the year.
For the year ended September 30, 1994, consolidated net
sales totaled $65,062,801, a 3.3% increase of $212,964 over
consolidated net sales of $64,849,837 in 1993. While the
Company's 1994 consolidated gross sales increased $2,303,862
over 1993 consolidated gross sales, price discounts and
rebates also increased from $836,166 in 1993 to $2,927,064
in 1994, reflecting the increased pressures on the providers
of medical products to reduce prices. The basically flat
net sales between 1994 and 1993 also reflected some
distribution restructuring and a reduction in existing
dealer inventories. The Company also attributes the 1994
decline in net sales growth to the uncertainty of possible
Federal Health Care Reform mandates debated throughout most
of the fiscal year, delays in receiving FDA approvals for
certain of its new products, trends by hospitals toward
"Just in Time" inventory reductions, and increases in
hospital group purchasing alliances.
All sales of the Company and related receipts are in
U.S. dollars. Export sales to unaffiliated customers from
the Company's domestic operations did not exceed ten percent
(10%) of the Company's domestic consolidated net sales for
either of the years ended September 30, 1995 or 1994.
COST OF PRODUCTS SOLD - For the year ended September
30, 1995, consolidated cost of products sold totaled
$26,948,396, compared with $21,251,579 for fiscal year 1994,
an increase of 26.8% which is proportionate with the
increase in net sales over the same period. Gross margins
remained consistent between 1995 and 1994 with the margin as
a percent of net sales for 1995 of 67.0%, compared with
67.3% for fiscal year 1994. During the year the Company
continued to refine and automate its manufacturing
processes. In addition, the Company brought in-house
several previously out-sourced manufacturing operations and
expanded its injection molding capacity. Through these
efforts, the Company has achieved greater manufacturing
efficiencies and related cost savings to help offset the
ever-increasing costs of raw materials and labor.
For the year ended September 30, 1994, consolidated
cost of products sold totaled $21,251,579, an increase of
9.9% over consolidated cost of products sold in 1993. The
increase in costs was due to an unfavorable sales mix and to
rising costs of raw materials and labor, as well as to the
purchase of MIC, whose comparable costs were included in
1993 figures only from its acquisition date. Increased
costs were also attributed to start-up costs associated with
the significant expansion of both Ballard's and MIC's
manufacturing facilities.
OPERATING EXPENSES - Operating expenses consist of
selling, general, and administrative expenses, research and
development expenses, and royalties. Total consolidated
operating expenses for the year ended September 30, 1995
were $27,228,358, compared with $24,106,965 for fiscal year
1994, an increase of 12.9%. The increase is due principally
to increased selling costs resulting from the increased
level of sales, as well as to increased research and
development costs and general overall increases in operating
expenses over the prior year.
The primary increase in operating expenses occurred
with consolidated selling, general, and administrative
expenses. In fiscal year 1995, these expenses increased
$2,601,591, or 12.4%, over 1994. As a percentage of
consolidated net sales, consolidated selling, general, and
administrative expenses decreased 3.5%, from 32.4% in 1994
to 28.9% in 1995. Consolidated expenses related to research
and development and royalties, as a percentage of
consolidated net sales for fiscal year 1995, remained fairly
consistent with those in 1994.
Total consolidated operating expenses for the year
ended September 30, 1994 totaled $24,106,965, compared with
$20,416,082 for fiscal year 1993, an increase of 18.0%. The
increase was due principally to increased selling costs
resulting from the expansion of the sales force, as well as
to increased research and development costs and general
overall increases in operating expenses. Additional
increases were due to the purchase of MIC, whose comparable
costs were included in fiscal year 1993 starting from its
acquisition date.
OTHER INCOME - Other income consists principally of
interest income from short-term investments, royalty income
from the licensing of the TRACH CARE closed suction system,
and the netting of insignificant gains and losses from the
sale or retirement of property and equipment.
For the year ended September 30, 1995 consolidated
other income totaled $4,078,702, compared with $3,519,586
for fiscal year 1994. The increase is primarily due to
increased interest income earned from the Company's
investment of its excess cash reserves. Royalty income
remained consistent between the periods, at approximately
$2,200,000 for each of 1995 and 1994.
For the year ended September 30, 1994, consolidated
other income decreased to $3,519,586 compared with
$3,716,649 in fiscal 1993. During 1994 interest income
decreased approximately $800,000, resulting from decreased
cash and investment reserves (because of the 1993 cash
purchase of MIC), while royalty income increased
approximately $500,000 over 1993.
NET INCOME - Consolidated net income from operations
(before the cumulative effect of change in accounting
principle) for the year ended September 30, 1995 totaled
$20,415,191, an increase of $5,638,046, or 38.2%, over the
previous period. As a percent of net sales, net income for
the year ended September 30, 1995 was 25.0%, compared with
22.7% for the year ended September 30, 1994. The overall
increase in net income reflects the increase in net sales
and management's efforts to control the costs of products
and operations.
Consolidated net income from the Company's operations
(before the cumulative effect of change in accounting
principle) in fiscal year 1994 of $14,777,145 represented a
decrease of 20.3% from the consolidated net income of
$18,540,009 in fiscal year 1993. Despite the decrease,
income, as a percentage of net sales, for the year ended
September 30, 1994 was still strong at 22.7%. In addition
to the slower growth and price reductions previously
discussed above for 1994, the lower net income percentage
resulted in part from higher-than-expected backorders in
high margin products and increased overhead costs.
The cumulative effect of the change in accounting for
income taxes of $1,403,232 in 1994 represented a one-time
benefit (recorded as of October 1, 1993) from the adoption
of Financial Accounting Standards Board Statement No. 109.
INFLATION - Inflation can be expected to have an
effect on most of the Company's operating costs and
expenses. The extent to which inflationary cost increases
can be offset by price increases depends on competition and
other factors. The effect of inflation has been
insignificant during the periods reported herein.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Balance Sheet presents the Company's
financial position at the end of each of the last two years.
The statement lists the Company's assets and liabilities,
and the equity of its stockholders. Major changes in the
Company's financial position are summarized in the
Consolidated Statement of Cash Flows. This statement
summarizes the changes in the Company's cash and cash
equivalents balance for each of the last three years and
helps to show the relationship between operations (presented
in the Consolidated Statement of Operations) and liquidity
and financial resources (presented in the Consolidated
Balance Sheets).
Continued growth in cash and investments provides the
Company financial stability and flexibility to fund current
operations, acquisitions, future growth, and expansion, and
to continue its dividend payment policy. At September 30,
1995, cash and investments grew 45.3% to $45,686,675,
compared with $31,440,367 at September 30, 1994. The
Company's primary source of liquidity comes from cash
provided by operations. The net cash provided to the
Company by operations during the year ended September 30,
1995 grew 65.1% to $25,322,662, compared with $15,339,311
for the year ended September 30, 1994. During fiscal year
1995 the Company paid cash dividends totaling $1,587,600, an
increase of 20.8% over the prior year's payout of
$1,314,485.
At September 30, 1995, the Company's current assets
exceeded its current liabilities by $70,823,934, an increase
of 23.0% over the September 30, 1994 total of $57,581,666.
The Company's current ratio at September 30, 1995 was 17.8
to 1.0. In addition to its strong current ratio, the
Company does not have any long-term debt nor does it intend
to utilize debt to fund future expansion. The Company
maintains a $4,000,000 unsecured line of credit with its
bank but has not drawn on this line during either of the
years ended September 30, 1995 or 1994.
During the year ended September 30, 1995, the Company
made a decision to develop a new, additional manufacturing
facility in Pocatello, Idaho. See discussion of Pocatello
facility under "1995 in Review." Total development and
construction costs of the proposed facility are expected to
approximate $6.8 million. Also during the year, the
Company expanded it injection molding capacity, added a new
clean room to its Milpitas, California facility, and
continued its overall capital investment program to expand
and upgrade operations to meet the growing needs of present
and new business. Other than the Pocatello Facility
mentioned above, no other material commitments for capital
expenditures exist as of September 30, 1995.
Following the signing of the Company's July, 1995
agreement with NNC, the Company advanced $1,275,000
($800,000 of which was advanced in fiscal year 1995) to NNC
to fund NNC's operations pending the closing of the
Company's purchase of the 19.5% equity interest in NNC.
This sum was advanced as a secured loan, in bi-weekly draws
ranging between $50,000 and $100,000. The entire balance of
$1,275,000, plus accrued interest (at 10% per annum) of
$20,637, was paid back to the Company out of the $2.5
million purchase price paid by the Company at the November
14, 1995 closing. See discussion of NNC under "1995 in
Review."
Also during the year ended September 30, 1995, the
Company purchased and retired 100,000 shares of its
outstanding common stock for $1,474,985. A valuation
allowance has not been provided on deferred tax asset
balances due to the Company's projection of future taxable
income in excess of such tax assets.
GLOSSARY OF TECHNICAL AND MEDICAL TERMS
1. Bronchoalveolar lavage is a medical procedure for
obtaining samples from smaller airways in the lungs. A
catheter is wedged into the bronchus. Then a lavage
fluid is injected into the airways. A fluid sample is
withdrawn to determine whether infectious organisms are
present in the airways or air sacs.
2. Biopsy is a procedure to remove living tissue from the
body for diagnostic examination.
3. Catheter is a flexible tube that is inserted into the
body to deliver or remove fluid or act as a conduit to
pass other devices.
4. Closed suction catheter is a sleeved catheter used to
suction the endotracheal tube of a patient receiving
mechanical ventilation. The catheter keeps the patient
oxygenated because the ventilator is not disconnected
during the suctioning procedure.
5. Coagulate means to solidify or change from a fluid
state to a semisolid mass.
6. Cytology brush is a brush used to collect cell samples
from the gastrointestinal or pulmonary tract.
7. Endoscope is an instrument used in the examination of a
hollow space or cavity in the human body.
8. Endoscopic refers to a procedure performed by means of
an endoscope.
9. Endoscopy is an examination of organs accessible to
observation through an endoscope.
10. Endotracheal tube is a tube inserted into the patient's
upper airway allowing medical ventilatory support.
11. Enteral feeding catheter is a catheter used for the
delivery of nutritional liquids into the
gastrointestinal tract of the patient.
12. Exogenous means originating outside an organ or part.
13. Fluoroscopy is the use of a fluoroscope for medical
diagnosis or for testing various materials by roentgen
rays.
14. Gastric means pertaining to the stomach.
15. Gastrostomy is a surgical opening through the skin into
the stomach.
16. Jejunal means pertaining to the jejunum (part of the
small bowel).
17. Jejunostomy is a surgical opening through the skin into
the jejunum.
18. Nosocomial infection is an infection acquired while a
patient is in a hospital.
19. Percutaneous Endoscopic Gastrostomy (PEG) catheter is a
flexible tube inserted through the mouth, esophagus,
and stomach to the outside of the body with the aid of
an endoscope. Name refers to the placement procedure
and is a variation of a gastrostomy tube.
20. Polypectomy is a medical procedure for removal of
polyps (growths).
21. Septic means pertaining to pathogenic organisms or
their toxins, i.e., putrid, rotten or decayed.
22. A surfactant is an agent that lowers surface tension.
23. Transgastric pertains to a bypass of the stomach.
Transgastric tubes are placed through the skin and into
the stomach, with the distal tip terminating in the
jejunum, or elsewhere in the digestive system.
24. A ventilator is a life support device used to assist
breathing.
DIRECTORS
NAME TITLE
Dale H. Ballard Chairman of the Board, Chief
Executive Officer, and President of
Ballard Medical Products
John I. Bloomberg General Partner of J.I.B.
Associates, Bricoleur Partners,
Olympic Growth Fund, and Utah
Capital Corp., all private
investment companies
J. Dallas VanWagoner Practicing Physician, Clinical
Instructor at the University of
Utah School of Medicine
Robert V. Petersen Professor Emeritus of Pharmaceutics
at the University of Utah
E. Martin Chamberlain Vice President of Regulatory
Affairs and Corporate Secretary of
Ballard Medical Products
Dale H. Ballard, Jr. Owner of his own financial planning
business called Stratco
Paul W. Hess General Counsel of Ballard Medical
Products
OFFICERS
NAME TITLE
Dale H. Ballard President, Chief Executive Officer,
and Chairman of the Board.
Harold R. ("Butch") Executive Vice President and
Wolcott General Manager
E. Martin Chamberlain Vice President of Regulatory
Affairs and Corporate Secretary
Bradford D. Bell Vice President of Sales and
Marketing
Kenneth R. Sorenson Treasurer and Chief Financial
Officer
Paul W. Hess General Counsel
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Ballard Medical Products
12050 Lone Peak Parkway
Draper, Utah 84020
(801) 572-6800
(801) 572-6869
TRANSFER AGENT
First Security Bank
of Utah, N.A.
79 South Main
Salt Lake City, Utah 84111
CO-TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
ANNUAL MEETINGS
The Annual Meeting of Stockholders of Ballard Medical
Products will be held Monday, January 22, 1996, at the
Company's executive offices, 12050 Lone Peak Parkway,
Draper, Utah, beginning at 11:00 a.m., Mountain Standard
Time. Shareholders of record on November 21, 1995 are
entitled to notice of and to vote at the meeting. A notice
of meeting and proxy statement are enclosed with the Annual
Report.
FORM 10-K
Any shareholder who sends a written request to the
Company's Secretary, E. Martin Chamberlain, at Ballard
Medical Products, 12050 Lone Peak Parkway, Draper, Utah
84020, may obtain without charge a copy of the Company's
Form 10-K for fiscal year 1995, including the financial
statements and the financial schedules.
SHAREHOLDER/ANALYST INQUIRIES
Shareholders, analysts, and others seeking information
about the Company are encouraged to contact Kenneth R.
Sorenson, Chief Financial Officer, Ballard Medical Products,
12050 Lone Peak Parkway, Draper, Utah 84020, with any
questions or comments.
RESEARCH COVERAGE
The following firms currently provide research coverage
of Ballard Medical Products:
AG Edwards - St. Louis, Missouri
Barrett & Company - Providence, Rhode Island
Bear Stearns - New York, New York
Hanifen, Imhoff, Inc. - Denver, Colorado
Olde Discount - Detroit, Michigan
Piper Jaffray - Minneapolis, Minnesota
AUDITORS
Deloitte & Touche LLP
50 South Main Street, Suite 1800
Salt Lake City, Utah 84144
