As filed with the Securities and Exchange Commission
on August 14, 1997
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1997
(for quarterly period ended)
1-12318
Commission File Number
BALLARD MEDICAL PRODUCTS
(Exact name of registrant as specified in its charter)
UTAH
(State or other jurisdiction of incorporation or
organization)
87-0340144
(I.R.S. Employer Identification Number)
12050 LONE PEAK PARKWAY, DRAPER, UTAH 84020
(Address and zip code of principal executive offices)
(801) 572-6800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
The registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of stock, as of the latest practicable
date:
28,840,550 - all common, August 13, 1997
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
FORM 10-Q INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Unaudited Consolidated
Balance Sheets as of June 30, 1997
and September 30, 1996
Condensed Unaudited Consolidated
Statements of Operations for the
three and nine months ended June
30, 1997 and 1996
Condensed Unaudited Consolidated
Statements of Cash Flows for the
nine months ended June 30,
1997 and 1996
Notes to Condensed Unaudited
Consolidated Financial Statements
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Risk Factors
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
DEFINITIONS
As used herein, the following terms have the meanings
indicated:
GENERAL DEFINITIONS
1. "Ballard" refers to Ballard Medical Products.
2. "BI" refers to Ballard International, Inc., a
wholly-owned subsidiary of Ballard.
3. "BPC" refers to Ballard Purchase Corporation, a
wholly-owned subsidiary of Ballard.
4. "BREH" refers to Ballard Real Estate Holdings,
Inc., a wholly-owned subsidiary of Ballard.
5. "Cardiotronics" refers to Cardiotronics Systems,
Incorporated, a wholly-owned subsidiary.
6. The "Company" and the "Registrant" refer to
Ballard and its subsidiaries.
7. "FDA" refers to the United States Food and Drug
Administration.
8. "MIC" refers to Medical Innovations Corporation, a
wholly-owned subsidiary of Ballard.
9. "NNC" refers to Neuro Navigational Corporation, a
Delaware corporation.
10. "PEPCO" refers to Plastic Engineered Products
Company, a wholly-owned subsidiary of Ballard.
11. "PMP" refers to Ballard Medical Products Canada, a
wholly-owned subsidiary of Ballard, doing business
as Preferred Medical Products.
12. "R2" refers to R2 Medical Systems, Inc., a wholly-
owned subsidiary of Cardiotronics.
GLOSSARY OF TECHNICAL AND MEDICAL TERMS
CATHETER is a flexible tube that is inserted into the body
to deliver or remove fluid, retrieve blood, or act as a
conduit to pass other devices.
CLOSED SUCTION CATHETER is a sleeved catheter used with
endotracheal tubes, on patients receiving mechanical
ventilation, enabling the airways to be suctioned while
maintaining mechanical ventilatory support.
ENTERAL FEEDING CATHETER is a catheter used for the delivery
of nutritional liquids into the gastrointestinal tract of
the patient.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 6/30/97 9/30/96
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents $12,353,912 $14,164,103
Investments 25,358,142 26,662,598
Accounts receivable -
trade (net) 21,904,441 19,944,055
Royalties receivable 583,231 1,351,885
Other receivables 1,097,708 636,291
Inventories:
Raw materials 11,127,835 7,171,048
Work-in-progress 4,210,485 3,913,804
Finished goods 3,516,300 2,760,008
Deferred income taxes 1,198,270 1,057,303
Income tax refunds
receivable 1,498,396 3,274,000
Prepaid expenses 394,205 169,431
Total current assets 83,242,925 81,104,526
PROPERTY AND EQUIPMENT:
Land 3,032,322 3,944,701
Buildings 25,187,752 20,131,728
Molds 4,873,317 3,608,228
Machinery and equipment 11,988,586 9,192,269
Vehicles 756,750 1,039,175
Furniture and fixtures 3,404,049 2,081,200
Leasehold improvements 49,345 302,394
Construction-in-
progress 4,088,656 3,053,296
Total 53,380,777 43,352,991
Less accumulated
depreciation 9,864,456 8,058,401
Property and
equipment - net 43,516,321 35,294,590
INTANGIBLE ASSETS
Cost in excess
of purchase price -
net 32,839,809 15,644,651
Patents and other
intangibles - net 8,571,539 5,012,157
Total intangible
assets 41,411,348 20,656,808
OTHER ASSETS 5,270,614 5,409,164
TOTAL $173,441,208 $142,465,088
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 6/30/97 9/30/96
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,944,232 $2,273,674
Accrued liabilities:
Employee
compensation 2,994,880 2,783,635
Income taxes
payable 366,976
Royalties 273,498 326,492
Other 413,389 46,683
Total current
liabilities 5,992,975 5,430,484
DEFERRED INCOME TAXES 437,085 1,110,764
Total liabilities 6,430,060 6,541,248
STOCKHOLDERS' EQUITY:
Common stock 2,865,620 2,770,232
Additional paid-in
capital 50,517,654 38,935,892
Unrealized losses
on investments (167,627) (156,564)
Retained earnings 113,795,501 94,374,280
Total
Stockholders'
equity 167,011,148 135,923,840
TOTAL $173,441,208 $142,465,088
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
NET SALES $32,218,086 $26,845,811 $91,492,483 $76,323,948
COST OF PRODUCTS
SOLD 11,508,282 9,236,663 32,596,607 26,160,464
GROSS MARGIN 20,709,804 17,609,148 58,895,876 50,163,484
OPERATING EXPENSES:
Selling, general,
and administrative 9,646,477 7,158,920 25,247,350 21,200,343
Research and
development 680,152 736,581 2,065,820 2,121,260
Royalties 419,482 357,300 1,222,600 1,121,901
Total operating
expenses 10,746,111 8,252,801 28,535,770 24,443,504
OPERATING INCOME 9,963,693 9,356,347 30,360,106 25,719,980
OTHER INCOME - net 2,223,783 1,289,647 4,511,393 3,918,809
INCOME BEFORE INCOME
TAX EXPENSE 12,187,476 10,645,994 34,871,499 29,638,789
INCOME TAX EXPENSE 4,336,000 3,969,834 12,619,000 10,800,344
NET INCOME 7,851,476 6,676,160 22,252,499 18,838,445
INCOME PER SHARE:
Common and common
equivalent shares $0.268 $0.232 $0.763 $0.658
Common shares
assuming full
dilution $0.267 $0.232 $0.752 $0.650
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Common and common
equivalent shares 29,332,337 28,762,146 29,155,352 28,616,315
Common shares
assuming full
dilution 29,355,449 28,764,207 29,575,651 28,996,702
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
6/30/97 6/30/96
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES $19,453,386 $19,071,544
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (11,313,488) (8,359,172)
Payment for purchase of
subsidiary, net of cash
acquired (11,768,562) (1,216,382)
Capital expenditures for land (7,571) (2,158,456)
Proceeds from sale of land 3,265,700 511,429
Proceeds from sale of NNC
assets 963,961
Investment in and advances to
affiliates (7,359,994) (4,801,154)
Receipt of payment of advances
and interest 3,771,471 1,295,640
Purchases of investments (26,844,021) (21,537,122)
Purchases of intangible assets (763,072) (1,680,734)
Proceeds from sales
(purchases) of other assets 10,705 (50,000)
Proceeds from sales of
investments 28,139,084 14,336,653
Net cash used in investing
activities (21,905,787) (23,659,298)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of
options 11,677,150 6,037,754
Proceeds from stock 2,281
redemption
Cash dividends paid (2,827,205) (2,153,010)
Payment of debt of
purchased subsidiary (8,210,016)
Purchase of treasury stock (6,161,421)
Net cash provided by
(used in) financing
activities 642,210 (2,276,677)
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,810,191) (6,864,431)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 14,164,103 27,555,330
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,353,912 $20,690,899
</TABLE>
See notes to condensed unaudited consolidated financial
statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Nine Months Ended
6/30/97 6/30/96
Cash paid during the period
for taxes $6,266,178 $9,509,060
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1997 and 1996, the
Company increased additional paid-in capital by $3,696,032
and $3,782,308, respectively, which represents the tax
benefit attributable to the compensation received by
employees from the exercise and disqualifying disposition of
incentive stock options.
Effective December 20, 1996, the Company acquired by merger
all of the outstanding capital stock of Cardiotronics for
$12,167,549 cash and a short-term note of $461,855. In
conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired
(including goodwill) $24,116,686
Cash paid, net of cash acquired (11,768,562)
Liabilities assumed $12,348,124
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. The condensed unaudited consolidated financial
statements include the accounts of Ballard and all of
its subsidiaries, after elimination of all significant
intercompany transactions and accounts. In
management's opinion, the accompanying condensed
unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial
condition of Ballard and its subsidiaries as of June
30, 1997 and September 30, 1996, the results of its
operations for the three and nine months ended June 30,
1997 and 1996, and its cash flows for the nine months
ended June 30, 1997 and 1996.
2. The results of operations for the three and nine months
ended June 30, 1997 are not necessarily indicative of
the results to be expected for the full year ended
September 30, 1997.
3. The historical condensed unaudited consolidated
financial statements presented herein have been
restated to reflect the combination (treated as a
pooling of interests) with PEPCO on September 27, 1996.
4. In October 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which became effective for
the Company beginning October 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based
compensation arrangements with employees and encourages
(but does not require) compensation cost to be measured
based on the fair value of the equity instrument
awarded. Since the Company has decided to continue to
apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (as
permitted by SFAS No. 123), the appropriate required
disclosure of the effects of SFAS No. 123 will be
disclosed in the notes to the consolidated financial
statements in the Form 10-K for the fiscal year ending
September 30, 1997.
5. In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings per Share". This
standard establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128
simplifies the approach for computing earnings per
share previously found in Accounting Principles Board
("APB") Opinion No. 15. It replaces the presentation
of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted
EPS on the face of the income statement for all
entities with complex capital structures.
Under the new statement, basic EPS excludes dilution
and is computed by dividing income available to common
stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if
securities or other contracts to issue common stock
were exercised or converted into common stock. Diluted
EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997,
including interim periods with earlier application not
permitted. The computation of basic EPS under SFAS No.
128 would have resulted in net income per common share
of $.275 and $.779, respectively, for the quarter and
nine months ended June 30, 1997. Diluted EPS computed
under FASB No. 128 would have resulted in net income
per common share of $.268 and $.753, respectively, for
the quarter and nine months ended June 30, 1997.
6. On February 28, 1997, Ballard, acting through its
wholly-owned subsidiary, BPC, exercised its option to
purchase the assets of NNC, at a total purchase price
of $4,245,422. Immediately after the purchase, on
March 20, 1997, BPC sold certain of the assets it
acquired from NNC to an unrelated party for $961,459,
which approximated the purchased price of those assets.
The remaining assets and technology acquired from NNC
are being marketed for sale by BPC.
During the quarter ended June 30, 1997, management
determined that the remaining carrying value in its
investment in NNC was not entirely recoverable based
upon expected future cash flows from the sale of the
remaining assets and technology acquired from NNC.
Therefore, an impairment loss of approximately
$4,700,000 has been recognized during the quarter ended
June 30, 1997 and included in "Other Income - Net".
7. On April 29, 1997, the Company sold approximately 61
acres of BREH's real estate (located south of the
Company's Draper plant) for approximately $3,266,000
cash and a $3,974,000 note. The note provides, among
other things, for interest at 8.0%, for payment of all
accrued interest in one year and for payment in full of
all accrued interest and the entire principal balance
in two years. The note is secured by a first trust
deed against approximately 42 acres of the property
sold and certain related water shares.
BREH purchased this property in 1992 at a purchase
price of approximately $920,000. The recognized gain
from the sale of the land of approximately $6,320,000
has been included in "Other Income - Net".
8. During June and July, 1997, the Company completed the
move of the manufacturing operations of MIC, PEPCO, and
PMP. The operations of MIC have been consolidated into
the Company's Pocatello plant. The PEPCO and PMP
operations have been moved to the Draper, Utah
facility. Aggregate unaccrued costs incurred during
the quarter ended June 30, 1997 associated with these
moves approximated $492,000 and have been included in
"Other Income - Net".
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's 1996 Annual Report to Shareholders
contains management's discussion and analysis of the
financial condition at, and results of operations for, the
year ended September 30, 1996. The following discussion and
analysis describes material changes in the Company's
financial condition and position from September 30, 1996.
Trends of a material nature are discussed to the extent
known and considered relevant. The analysis of results of
operations compares the three and nine months ended June 30,
1997, respectively, with the corresponding periods of 1996.
This analysis should be considered in conjunction with the
condensed unaudited consolidated balance sheets, condensed
unaudited consolidated statements of operations, and
condensed unaudited consolidated statements of cash flows.
RESULTS OF OPERATIONS
OVERVIEW - The Company's net sales for the third
quarter and first nine months of fiscal year 1997 continued
at a record pace, with third quarter 1997 sales of
$32,218,086 compared with $26,845,811 in 1996 and year-to-
date 1997 sales of $91,492,483 compared with $76,323,948 in
1996. The consistent growth in net sales from period to
period reflects the Company's ability to maintain and expand
its market shares through strategic alliances with
distributors and large hospital buying groups, enhancements
within its existing product lines, acquisitions, and
emphasis on international sales.
The Company's after-tax earnings for the third quarter
and first nine months of fiscal year 1997 also continued
their record growth, with third quarter 1997 earnings of
$7,851,476 compared with $6,676,160 in 1996 and year-to-date
1997 earnings of $22,252,499 compared with $18,838,445 in
1996. Earnings reflect the Company's record sales of high
margin products, as well as its focused efforts directed at
controlling costs through advanced manufacturing processes,
efficient integration of acquired entities, and overhead
cost restraints. As a percentage of net sales, the
Company's profits have approximated 24.3% for each of the
periods presented in fiscal year 1997.
SALES - Net sales for the three months ended June 30,
1997 increased 20.0% to $32,218,086, compared with
$26,845,811 for the corresponding period of fiscal year
1996. Net sales for the nine months ended June 30, 1997
increased 19.9% to $91,492,483, compared with $76,323,948
for the corresponding period of fiscal year 1996.
The growth in net sales is principally due to continued
market penetration of the Company's MIC enteral feeding
catheters and disposable endoscopic devices, international
growth of all product lines, and substantial contributions
from newly acquired product lines such as Cardiotronics,
PEPCO and PMP. Net sales of the MIC product lines for the
three and nine months ended June 30, 1997 increased 31.4%
and 34.7%, respectively, over the corresponding periods of
fiscal year 1996. Net international sales for the three and
nine months ended June 30, 1997 increased 22.9% and 45.2%,
respectively, over the corresponding periods of fiscal year
1996. Since its acquisition on December 10, 1996,
Cardiotronics has contributed $5,214,412 in net sales.
No price increases occurred during the three or nine
months covered by this report; therefore, substantially all
of the increase in net sales is attributable primarily to an
increased volume of products sold. The Company entered into
several exclusive long-term contracts with large hospital
buying groups during the nine months covered by this report.
These contracts are expected to result in lower pricing on
the Trach Care product line but also in volume gains on
sales of higher margin products.
Substantially all sales of the Company and related
receipts were in U.S. dollars. Export sales to unaffiliated
customers from the Company's domestic operations did not
exceed 10% of the Company's domestic consolidated net sales.
COST OF PRODUCTS SOLD - Cost of products sold for the
three months ended June 30, 1997 was $11,508,282, compared
to $9,236,663 for the corresponding three months in fiscal
year 1996. Cost of products sold for the nine months ended
June 30, 1997 was $32,596,607, compared to $26,160,464 for
the corresponding nine months in fiscal year 1996. As a
percentage of net sales, cost of products sold for the three
and nine months ended June 30, 1997 was 35.7% and 35.6%,
respectively, compared with 34.4% and 34.3%, respectively,
for the three and nine months ended June 30, 1996.
The increased cost of products sold as a percentage of
net sales continues to reflect pricing pressures throughout
the health care sector, the addition through acquisition of
less efficient manufacturing facilities and lower margin
products, initial start-up costs associated with the
Company's new manufacturing facility in Idaho, and the
winding down of manufacturing operations in California, Ohio
and Canada in anticipation of the move of their operations
to the Company's facilities in Utah and Idaho. The Company
continues to refine and automate its manufacturing
processes, as well as expand its injection molding and
tubing extrusion capacity.
OPERATING EXPENSES - Operating expenses consist of
selling, general, and administrative expenses, research and
development expenses, and royalty expenses. Total operating
expenses for the three and nine months ended June 30, 1997
were $10,746,111 and $28,535,770, respectively, which
represents increases of 30.2% and 16.7%, respectively, over
the corresponding periods in fiscal year 1996. As a
percentage of net sales, operating expenses for the three
and nine months ended June 30, 1997 totaled 33.4% and 31.2%,
respectively, compared with 30.8% and 32.1%, respectively,
for the corresponding periods in fiscal year 1996.
The overall increase in total operating expenses is due
primarily to selling, general, and administrative expenses
which increased from $7,158,920 and $21,200,343,
respectively, in the three and nine months ended June 30,
1996 to $9,646,477 and $25,247,350, respectively, in the
three and nine months ended June 30, 1997. These increased
costs are attributable primarily to increased wages,
commissions, and other selling related costs associated with
the increased levels of sales, as well as additional
amortization expense associated with the cost of
acquisitions. As a percentage of net sales, selling,
general, and administrative expenses totaled 29.9% and
27.6%, respectively, for the three and nine months ended
June 30, 1997, compared with 26.7% and 27.8%, respectively,
for the corresponding periods in fiscal year 1996.
Research and development expenses and royalty expenses,
as a percentage of net sales, remained relatively consistent
between the periods presented.
OTHER INCOME - Other income generally consists of
interest income from investments and royalty income from the
licensing of the TRACH CARE closed suction system. For the
three and nine months ended June 30, 1997, other income
totaled $2,223,783 and $4,511,393, respectively, compared to
$1,289,647 and $3,918,809, respectively, for the
corresponding periods in fiscal year 1996. During the three
months ended June 30, 1997, the Company recognized an
approximate $6,320,000 gain from the sale of land, decreased
the carrying value of its investment in NNC by recognizing a
$4,700,000 impairment loss, and incurred additional
unaccrued plant relocation costs of approximately $492,000
associated with the move of the manufacturing operations of
MIC, PEPCO, and PMP. See additional explanations in the
"Notes to Condensed Unaudited Consolidated Financial
Statements."
NET INCOME - Net income after taxes for the three and
nine months ended June 30, 1997 increased 17.6% and 18.1%,
respectively, to $7,851,476 and $22,252,499, compared to
$6,676,160 and $18,838,445, respectively, for the
corresponding periods in fiscal year 1996. The increase in
net income reflects the growth in net sales, including
strong contributions and market-share gains from the MIC
product lines domestically and all international lines, and
also reflects the Company's successful efforts in
controlling overall operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1997 the Company's
operating activities provided $19,453,386 in cash and cash
equivalents, consistent with the $19,071,544 in cash and
cash equivalents provided during the corresponding period of
fiscal year 1996. At June 30, 1997, working capital totaled
$77,249,950 and the Company's current ratio was 13.9 to 1.0.
In addition, the Company had $37,712,054 in cash, cash
equivalents, and investments available-for-sale at June 30,
1997.
Significant uses of cash during the nine months ended
June 30, 1997 included approximately $11,769,000 for the
purchase of Cardiotronics, $8,210,000 to repay
Cardiotronics' outstanding loans, $11,313,000 in additions
to property and equipment, $7,360,000 in investment in and
advances to subsidiaries, and payment of $2,827,000 in cash
dividends.
In addition to its strong liquidity and overall
financial position, the Company does not have any long-term
debt nor does management intend to utilize debt to fund
future expansion. The Company maintains a $5,000,000
unsecured line of credit with its bank but has never drawn
on this line. Continued growth in cash, cash equivalents,
and investments provides the Company financial stability and
flexibility to fund current operations, an aggressive
acquisition program, future growth and internal expansion,
and its dividend payment policy.
No significant commitments for the purchase of
inventory or property or equipment existed as of June 30,
1997 except commitments for ongoing construction projects.
The Company is continuing its construction of a new 100,000
square-foot warehouse and distribution facility to the west
of Ballard's existing Draper, Utah plant, at a total cost of
approximately $4 million. Construction should be completed
by the end of the current fiscal year.
Land owned by the Company (approximately 6.5 acres) in
Fremont, California is under contract for sale.
RISK FACTORS
The Company is an FDA regulated business operating in
the rapidly changing health care industry. From time to
time the Company may report, through its press releases
and/or SEC filings, certain matters that could be
characterized as forward-looking statements subject to risks
and uncertainties that could cause actual results to differ
materially from those projected. Such risks and
uncertainties may include, among other things, the following
items. Certain of these risks and uncertainties are beyond
management's control.
COMPETITION. The medical device industry is
characterized by rapidly evolving technology and increased
competition. There are a number of companies that currently
offer, or are in the process of developing, products that
compete with products offered by the Company. Some of these
competitors have substantially greater capital resources,
research and development staffs and experience in the
medical device industry. These competitors may succeed in
developing technologies and products that are more effective
than those currently used or produced by the Company or that
would render some products offered by the Company obsolete
or noncompetitive. Competition based on price is becoming
an increasingly important factor in customer purchasing
patterns as a result of cost containment pressures on, and
consolidation in, the health care industry. Such
competition has exerted, and is likely to continue to exert,
downward pressure on the prices the Company is able to
charge for its products. The Company may not be able to
offset such downward price pressure through corresponding
cost reductions. Price reductions could have an adverse
impact on the business, results of operations or financial
condition of the Company.
INTELLECTUAL PROPERTY RIGHTS. From time to time, the
Company has received, and in the future may receive, notices
of claims with respect to possible infringement of the
intellectual property rights of others or notices of
challenges to the Company's intellectual property rights.
In some instances such notices have given rise to, or may in
the future give rise to, litigation. Any litigation
involving the intellectual property rights of the Company
may be resolved by means of a negotiated settlement or by
contesting the claim through the judicial process. There
can be no assurance that the business, results of operations
or the financial condition of the Company will not suffer an
adverse impact as a result of intellectual property claims
that may be commenced against the Company in the future.
The Company owns certain patents and proprietary information
acquired while developing its products or through
acquisitions, and the Company is the licensee of certain
other technology. As patents expire, more competing
products may be released into the marketplace by other
companies. The ability of the Company to continue to
compete effectively with other medical device companies may
be materially dependent upon the protection afforded by its
patents and the confidentiality of certain proprietary
information. There can be no assurance that patents will be
issued for products and product improvements recently
released into the marketplace or for products presently
being developed.
MANAGED CARE AND OTHER HEALTH CARE PROVIDER
ORGANIZATIONS. Managed care and other health care provider
organizations have grown substantially in terms of the
percentage of the population in the United States that
receives medical benefits through such organizations and in
terms of the influence and control that they are able to
exert over an increasingly large portion of the health care
industry. These organizations are continuing to consolidate
and grow, increasing the ability of these organizations to
influence the practices and pricing involved in the purchase
of medical devices, including the products sold by the
Company.
HEALTH CARE REFORM/PRICING PRESSURE. The health care
industry in the United States continues to experience
change. Health care reform proposals have been formulated
by members of Congress. In addition, state legislatures
periodically consider various health care reform proposals.
Federal, state and local government representatives will, in
all likelihood, continue to review and assess alternative
health care delivery systems and payment methodologies, and
ongoing public debate of these issues can be expected. Cost
containment initiatives, market pressures and proposed
changes in applicable laws and regulations may have a
dramatic effect on pricing or potential demand for medical
devices, the relative costs associated with doing business
and the amount of reimbursement by both government and
third-party payors. In particular, the industry is
experiencing market-driven reforms from forces within the
industry that are exerting pressure on health care companies
to reduce health care costs. These market-driven reforms
are resulting in industry-wide consolidation that is
expected to increase the downward pressure on product
margins, as larger buyer and supplier groups exert pricing
pressure on providers of medical devices and other health
care products. Both short-term and long-term cost
containment pressures, as well as the possibility of
regulatory reform, may have an adverse impact on the
Company's results of operations and financial condition.
The Company's products consist primarily of disposable
medical devices. Cost containment pressures on hospitals
are leading some facilities to use certain disposable
devices longer than they have been used in the past, even
longer than permitted by product labelling. This phenomenon
could result in a reduction in Company sales, because
extended use and device reuse mean fewer unit purchases.
GOVERNMENT REGULATION. There has been a trend in
recent years, both in the United States and outside the
United States, toward more stringent regulation of, and
enforcement of requirements applicable to, medical device
manufacturers. The continuing trend of more stringent
regulatory oversight in product clearance and enforcement
activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater
risk and greater expense. At the present time, there are no
meaningful indications that this trend will be discontinued
in the near-term or the long-term either in the United
States or abroad. The Company expects to continue to incur
additional operating expenses associated with its ongoing
regulatory compliance program, but the amount of these
incremental costs cannot be completely predicted and will
depend upon a variety of factors, including future changes
in statutes and regulations governing medical device
manufacturers. There can be no assurance that such
compliance requirements and quality assurance programs will
not have an adverse impact on the business, results of
operations or financial condition of the Company or that the
Company will not experience problems associated with FDA
regulatory compliance.
NEW PRODUCT INTRODUCTIONS. As the existing products of
the Company become more mature and its existing markets more
saturated, the importance of developing or acquiring new
products will increase. The development of any such
products will entail considerable time and expense,
including research and development costs and the time and
expense required to obtain necessary regulatory approvals,
which could adversely affect the business, results of
operations or financial condition of the Company. There can
be no assurance that such development activities will yield
products that can be commercialized profitably, or that any
product acquisition can be consummated on commercially
reasonable terms or at all. Any failure to acquire or
develop new products to supplement more mature products
could have an adverse impact on the business, results of
operations or financial condition of the Company.
TECHNOLOGICAL CHANGE. The medical technology as
utilized by the Company has been subject to rapid advances.
While the Company feels that it currently possesses the
technology necessary to carry on its business, its
commercial success will depend on its ability to remain
current with respect to such technological advances and to
retain experienced technical personnel. Furthermore, there
can be no assurance that other technological advances will
not render the Company's technology and certain products
uneconomical or obsolete.
PRODUCT LIABILITY EXPOSURE. Because its products are
intended to be used in health care settings on patients who
are physiologically unstable and may also be seriously or
critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the
Company's products have suffered serious injury or death,
which has led to product liability claims against the
Company. Some product liability claims have been inherited
by the Company through business acquisitions. The Company
does not believe that any of these claims, individually or
in the aggregate, will have a material adverse impact on its
business, results of operations or financial condition.
However, see Item 1. "Legal Proceedings." Furthermore, the
Company may, in the future, be subject to product liability
claims that could have such an adverse impact.
The Company maintains product liability coverage in
amounts that it deems sufficient for its business. However,
there can be no assurance that such coverage will ultimately
prove to be adequate, or that such coverage will continue to
remain available on acceptable terms or any terms at all.
ACQUISITIONS. In order to continue increasing sales
volume and profits, the Company relies heavily on a program
of acquiring business and new product lines from other
companies. There is always a significant risk that a given
acquisition by the Company will prove to be unsuccessful or
end up not contributing sufficiently to sales and profit
growth of the Company. There is also a risk that
undiscovered or contingent liabilities of an acquired
company could negatively impact the Company's financial
position or even the acquisition transaction itself. The
integration of any businesses that the Company might acquire
could require substantial management resources. The moving
of acquired product lines can also result in interruptions
in production and backorders. There can be no assurance
that any such integration will be accomplished without
having a short or potentially long-term adverse impact on
the business, results of operations or financial condition
of the Company or that the benefits expected from any such
integration will be fully realized.
LACK OF DIVIDENDS. Prior to January, 1990, no
dividends had been paid by the Company on its shares of
Common Stock. The Company has paid dividends since January,
1990. However, there can be no assurance that dividends
will be paid on shares in the future, particularly since the
Company prefers to reserve its cash and liquid assets for
growth and possible business acquisitions.
UNCERTAINTY OF FINANCIAL RESULTS AND CAPITAL NEEDS.
There may be substantial fluctuations in the Company's
results of operations because of the timing and recording of
revenues and market acceptance of existing Company products.
The ability of the Company to expand its manufacturing and
marketing operations cannot be predicted with certainty. If
revenues do not continue to increase as rapidly as they have
in the past few years, or if manufacturing, marketing, or
research and development are not successful or require more
money than is anticipated, the Company may have to scale
back product marketing, development and production efforts
and attempt to obtain external financing. There can be no
assurance that the Company would be able to obtain timely
external financing in the amounts required or that such
financing, if available, would be on terms advantageous to
the Company.
SUPPLY OF RAW MATERIALS. Certain of the Company's
products are dependent upon raw materials for which there
are single or few sources. So far, the Company has not had
any serious problems obtaining needed raw materials.
However, there can be no assurance that the Company will be
able to continue to depend on existing sources of certain
materials.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN
SALES. Because certain sales of products by the Company
outside the United States typically are denominated in local
currencies, the results of operations of the Company are
expected to continue to be affected by changes in exchange
rates between certain foreign currencies and the United
States Dollar. There can be no assurance that the Company
will not experience currency fluctuation effects in future
periods, which could have an adverse impact on its business,
results of operation or financial condition. The operations
and financial results of the Company also may be
significantly affected by other international factors,
including changes in governmental regulations or import and
export restrictions, and foreign economic and political
conditions generally.
The Company's ability to continue to sell products into
Europe is dependent to a large extent on its ability to
maintain the important ISO 9001/EN 4601 certification and
the CE marking of conformity. If the Company were to lose
such certifications, such loss would have a material,
adverse impact on international sales and profits.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price
of the Company's stock is, and is expected to continue to
be, subject to significant fluctuations in response to
variations in quarterly operating results, trends in the
health care industry in general and the medical device
industry in particular, and certain other factors beyond the
control of the Company. In addition, broad market
fluctuations, as well as general economic or political
conditions and initiatives, may adversely impact the market
price of the Company's stock, regardless of the Company's
operating performance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
R2 MEDICAL SYSTEMS, INC. AND CARDIOTRONICS SYSTEMS,
INC. v. KATECHO, INC., CARDIOVASCULAR GROUP OF OREGON,
INC., AND PADECO, INC.
R2 and Cardiotronics are plaintiffs in an ongoing
patent infringement lawsuit against Katecho, Inc.,
Cardiovascular Group of Oregon, Inc. and Padeco, Inc. filed
in the United States District Court for the Northern
District of Illinois Eastern Division as Case No. 94C3131.
Plaintiffs claim that defendants have infringed or caused to
be infringed certain patents held by R2 on heart monitoring
and resuscitation devices.
The parties continue to make preparations for the trial
of this case which is scheduled in November, 1997.
J. MICHAEL KRAMER V. R2 MEDICAL SYSTEMS, ET AL.
R2 is a co-defendant in this ongoing product liability
case filed in the Supreme Court of the State of New York,
County of Suffolk, as Case No. 01787/94. This case is still
in the discovery phase.
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
On or about March 18, 1997, the court dismissed Mr.
Heath's lawsuit with prejudice (which means that he cannot
refile the complaint in the United States District Court).
Mr. Heath has appealed the court's dismissal to the
United States Court of Appeals for the 7th Circuit. This
appeal is still pending.
OTHER LITIGATION
The Company is also a party to ordinary routine
litigation incidental to the Company's business.
ITEM 2. CHANGES IN SECURITIES
There are no changes in the rights of the holders of
common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no senior securities of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the Company's January, 1997 Annual Meeting of
Shareholders, no matters have been submitted to a vote of
the shareholders.
ITEM 5. OTHER INFORMATION
In June and July, 1997, the Company completed the move of
the manufacturing operations of MIC, PEPCO, and PMP. The
operations of MIC have been consolidated into the Company's
Pocatello plant. The PEPCO and PMP operations have been
moved to the Draper, Utah facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Statements concerning computation of income per
share are included in the financial information provided in
Item 1 of Part I and are incorporated by reference into this
Item 6 of Part II of this report.
(b) No reports on Form 8-K were filed during the
period covered by this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 8/14/97 Dale H. Ballard, President and
Principal Executive Officer
Date: 8/14/97 Kenneth R. Sorenson,
Treasurer and
Principal Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first,
second and third quarter 10-Qs and is qualified in its entirety by reference to
such 10-Qs.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 12,353,912 12,353,912
<SECURITIES> 25,358,142 25,358,142
<RECEIVABLES> 24,365,329 24,365,329
<ALLOWANCES> 2,460,888 2,460,888
<INVENTORY> 18,854,620 18,854,620
<CURRENT-ASSETS> 83,242,925 83,242,925
<PP&E> 53,380,777 53,380,777
<DEPRECIATION> 9,864,456 9,864,456
<TOTAL-ASSETS> 173,441,208 173,441,208
<CURRENT-LIABILITIES> 5,992,975 5,992,975
<BONDS> 0 0
0 0
0 0
<COMMON> 2,865,620 2,865,620
<OTHER-SE> 164,145,528 164,145,528
<TOTAL-LIABILITY-AND-EQUITY> 173,441,208 173,441,208
<SALES> 32,218,086 91,492,483
<TOTAL-REVENUES> 32,218,086 91,492,483
<CGS> 11,508,282 32,596,607
<TOTAL-COSTS> 22,254,393 61,132,377
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 12,187,476 34,871,499
<INCOME-TAX> 4,336,000 12,619,000
<INCOME-CONTINUING> 7,851,476 22,252,499
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,851,476 22,252,499
<EPS-PRIMARY> 0.268 0.763
<EPS-DILUTED> 0.267 0.752
</TABLE>
