As filed with the Securities and Exchange Commission
on February 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
DECEMBER 31, 1996
(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:
28,186,098 - all common, February 12, 1997.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
FORM 10-Q INDEX
Page
PART I FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Condensed Unaudited Consolidated
Balance Sheets as of December 31,
1996 and September 30, 1996 4
Condensed Unaudited Consolidated
Statements of Operations for the
three months ended December 31,
1996 and 1995 7
Condensed Unaudited Consolidated
Statements of Cash Flows for the
three months ended December 31,
1996 and 1995 8
Notes to Condensed Unaudited
Consolidated Financial Statements 10
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11
Risk Factors 13
PART II OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 21
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. "BREH" refers to Ballard Real Estate Holdings,
Inc., a wholly-owned subsidiary of Ballard.
4. "Cardiotronics" refers to Cardiotronics Systems,
Incorporated, a wholly-owned subsidiary of
Ballard.
5. The "Company" and the "Registrant" refer to
Ballard and its subsidiaries.
6. "MIC" refers to Medical Innovations Corporation, a
wholly-owned subsidiary of Ballard.
7. "MIST ASSIST" refers to Mist Assist, Inc., a
wholly-owned subsidiary of Ballard.
8. "PEPCO" refers to the Plastic Engineered Products
Company, a wholly-owned subsidiary of Ballard.
9. "PMP" refers to Ballard Medical Products (Canada)
Inc. dba Preferred Medical Products, a wholly-
owned subsidiary of Ballard.
10. "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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 12/31/96 9/30/96
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents $1,154,108 $14,164,103
Investments 23,779,425 26,662,598
Accounts receivable-
trade (net) 20,516,067 19,944,055
Royalties receivable 1,187,559 1,351,885
Other receivables 524,743 636,291
Inventories:
Raw materials 8,366,530 7,171,048
Work-in-progress 3,753,450 3,913,804
Finished goods 3,070,836 2,760,008
Deferred income
taxes 884,855 1,057,303
Income tax refund
receivable 3,274,000
Prepaid expenses 1,057,740 169,431
Total current
assets 64,295,313 81,104,526
PROPERTY AND EQUIPMENT:
Land 3,944,701 3,944,701
Buildings 20,206,780 20,131,728
Molds 3,748,248 3,608,228
Machinery and
equipment 10,023,634 9,192,269
Vehicles 1,039,544 1,039,175
Furniture and
fixtures 2,314,630 2,081,200
Leasehold
improvements 334,182 302,394
Construction-in-
progress 5,523,156 3,053,296
Total 47,134,875 43,352,991
Less accumulated
depreciation 9,125,695 8,058,401
Property and
equipment - net 38,009,180 35,294,590
INTANGIBLE ASSETS:
Cost in excess of
purchase price - net 33,793,987 15,644,651
Patents and other
intangibles - net 8,896,402 5,012,157
Total intangible
assets 42,690,389 20,656,808
OTHER ASSETS 6,438,980 5,409,164
TOTAL $151,433,862 $142,465,088
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 12/31/96 9/30/96
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $2,415,303 $2,273,674
Note payable 461,855
Accrued liabilities:
Employee
compensation 3,367,140 2,783,635
Income taxes payable 288,073
Royalties 352,372 326,492
Other 415,702 46,683
Total current
liabilities 7,300,445 5,430,484
DEFERRED INCOME TAXES 704,835 1,110,764
Total liabilities 8,005,280 6,541,248
STOCKHOLDERS' EQUITY:
Common stock 2,785,858 2,770,232
Additional
paid-in capital 40,886,932 38,935,892
Unrealized losses
on investments (144,041) (156,564)
Retained earnings 99,899,833 94,374,280
Total
stockholders'
equity 143,428,582 135,923,840
TOTAL $151,433,862 $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 Three Months
Ended Ended
12/31/96 12/31/95
<S> <C> <C>
NET SALES $28,460,524 $23,670,544
COST OF PRODUCTS SOLD 10,232,965 8,105,030
GROSS MARGIN 18,227,559 15,565,514
OPERATING EXPENSES:
Selling, general,
and administrative 7,314,699 6,658,111
Research and development 655,047 646,845
Royalties 392,997 357,301
Total operating expenses 8,362,743 7,662,257
OPERATING INCOME 9,864,816 7,903,257
OTHER INCOME - net 1,197,855 1,043,842
INCOME BEFORE INCOME
TAX EXPENSE 11,062,671 8,947,099
INCOME TAX EXPENSE 4,138,000 3,230,510
NET INCOME $6,924,671 $5,716,589
INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $0.239 $0.200
INCOME PER COMMON SHARE
ASSUMING FULL DILUTION $0.239 $0.200
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Common and common
equivalent shares 28,958,251 28,546,366
Common shares assuming
full dilution 28,959,331 28,634,367
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
12/31/96 12/31/95
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES $9,891,177 $5,832,604
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (2,910,134) (1,487,661)
Payment for purchase
of subsidiary,
net of cash acquired (11,768,562)
Investment in and advances
to affiliates (2,691,435) (2,724,815)
Purchases of investments (7,652,445) (5,730,676)
Purchases of intangible assets (188,809) (117,101)
Proceeds from maturities of
investments 10,555,818 5,004,073
Net cash used in
investing activities (14,655,567) (5,056,180)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of debt of
purchased subsidiary (8,210,016)
Proceeds from exercise
of options 1,359,870 2,311,559
Cash dividends paid (1,395,459)
Purchase of treasury stock (1,797,507)
Net cash (used in) provided
by financing activities (8,245,605) 514,052
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (13,009,995) 1,290,476
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 14,164,103 27,555,330
CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,154,108 $28,845,806
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Three Months Three Months
Ended Ended
12/31/96 12/31/95
Cash paid during the
period for taxes $5,000 None
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
On September 27, 1996, the Company entered into a business
combination with PEPCO wherein the Company acquired all of
the outstanding shares of PEPCO in exchange for 238,727
shares of the Company's common stock. This transaction has
been accounted for by the Company as a "pooling" and as
such, the Company's accompanying condensed unaudited
consolidated financial statements have been restated as if
this transaction had occurred on October 1, 1995.
Effective December 30, 1996, the Company acquired by merger
all of the outstanding capital stock of Cardiotronics for
$12,167,549 cash (see Note 4) 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
During the three months ended December 31, 1996 and 1995,
the Company increased additional paid-in capital by
$607,927, and $890,181, respectively, which represents the
tax benefit attributable to the compensation received by
employees from the exercise and disqualifying dispositions
of incentive stock options.
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
December 31, 1996 and September 30, 1996, the results
of operations for the three months ended December 31,
1996 and 1995, and the cash flows for the three months
ended December 31, 1996 and 1995.
2. The results of operations for the three months ended
December 31, 1996 are not necessarily indicative of the
results to be expected for the full year ended
September 30, 1997.
3. The 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. On December 10, 1996, Ballard, acting through its
wholly-owned subsidiary, Ballard Acquisition
Corporation ("BAC"), entered into a stock purchase
transaction for approximately 90.1% of the outstanding
capital stock of Cardiotronics, at a total purchase
price of $11,392,916. On December 30, 1996, BAC was
merged into Cardiotronics, with Cardiotronics as the
surviving entity. In conjunction with this merger, the
remaining 9.9% of the outstanding capital stock of
Cardiotronics was effectively acquired at a cost of
$1,236,488. See also "Item 6(b) "Reports on Form 8-K"
below.
The acquisition has been accounted for using the
purchase method of accounting and, as such,
Cardiotronics' results of operations have been included
in the accompanying condensed unaudited consolidated
financial statements from the date of acquisition. The
purchase price in this acquisition exceeded the cost of
the acquired net assets by approximately $18,478,000,
which is being amortized over 15 years as goodwill.
The pro forma results of operations of the Company for
the three months ended December 31, 1996 and 1995
(assuming the acquisition of Cardiotronics had occurred
as of October 1, 1996 and 1995) are as follows:
1996 1995
Revenues $29,712,750 $25,902,839
Net Income $5,740,739 $4,611,560
Income per share:
Common and common
equivalent shares $0.198 $0.161
Common shares
assuming full
dilution $0.198 $0.161
5. On December 4, 1996, the Company declared a semi-annual
cash dividend of $.05 per share to shareholders of
record as of December 16, 1996.
6. 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 year ending
September 30, 1997.
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 months ended December 31, 1996
with the corresponding period of 1995. 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
SALES - Net sales for the three months ended December
31, 1996 increased 20.2% to $28,460,524, compared with
$23,670,544 for the corresponding three-month period in
fiscal year 1996. In comparison, net sales for the three
months ended December 31, 1995 increased 24.1% over the
corresponding three-month period of fiscal year 1995.
Net sales have increased principally due to expanding
market penetration of the Company's MIC enteral feeding
catheters, expansion of the Company's international
operations, and successful integration of newly acquired
product lines. Net sales of MIC's catheters and related
product lines grew 38.5% to $7,225,398 during the first
quarter of fiscal year 1997, compared with net sales of
$5,215,516 for the corresponding first quarter of fiscal
year 1996. International net sales of all Company products
were $2,156,151 for the first quarter of fiscal year 1997, a
63.7% growth over net sales of $1,317,572 for the first
quarter of fiscal year 1996.
No price increases occurred during the three 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's net sales
continue to be impacted by price reduction pressures from
hospitals and large buying groups.
Generally, 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 percent of the Company's domestic consolidated net
sales.
COST OF PRODUCTS SOLD - Cost of products sold for the
three months ended December 31, 1996 was $10,232,965,
compared to $8,105,030 for the corresponding three months in
fiscal year 1996. As a percentage of net sales, cost of
products sold for the three months ended December 31, 1996
was 36.0%, compared to 34.2% for the three months ended
December 31, 1995.
The increased cost of products sold as a percentage of
net sales reflects initial start-up costs associated with
the Company's new manufacturing facility in Idaho, coupled
with the winding down of MIC's manufacturing operations in
California. Additional increases were caused by
acquisitions of new products with lower margins, the
addition through acquisition of less efficient manufacturing
facilities, and pricing pressures due to the market's focus
on cost restraints and competitive pricing. The Company
expects cost of products sold to remain fairly constant at
approximately 36.0% of net sales until all manufacturing
operations are consolidated into either Utah or Idaho.
OPERATING EXPENSES - Operating expenses consist of
selling, general, and administrative expenses, research and
development expenses, and royalty expenses. Total operating
expenses for the three months ended December 31, 1996 were
$8,362,743, which represents an increase of 9.1% over the
corresponding three months of fiscal year 1996. As a
percentage of net sales, operating expenses for the three
months ended December 31, 1996 totaled 29.4%, compared with
32.4% for the corresponding three months of fiscal year
1996.
The increase in total operating expenses between the
first three months of fiscal year 1997 over fiscal year 1996
is due primarily to selling, general, and administrative
expenses which increased from $6,658,111 in the quarter
ended December 31, 1995 to $7,314,699 in the quarter ended
December 31, 1996. These increased costs are attributable
primarily to increased wages, commissions, and other selling
costs associated with the increased levels of sales. As a
percentage of net sales, however, selling, general, and
administrative expenses decreased from 28.1% in the three
months ended December 31, 1995 to 25.7% in the three months
ended December 31, 1996. These percentage decreases during
fiscal year 1997 reflect the Company's and especially the
salesforce's efforts to control these variable selling
expenses.
Research and development expenses and royalty expenses,
as a percentage of net sales, remained relatively consistent
between the periods, approximating 2.3% and 1.4%,
respectively, for the three months ended December 31, 1996.
OTHER INCOME - Other income consists principally of
interest income from investments and royalty income from the
licensing of the TRACH CARE closed suction system. For the
three months ended December 31, 1996, other income totaled
$1,197,855, compared to $1,043,842 for the three months
ended December 31, 1995. Both interest and royalty income
remained fairly consistent between the quarters,
approximating $550,000, and $630,000, respectively. As the
Company utilizes its cash reserves to acquire other
companies and technology, it is expected that interest
income will decrease.
NET INCOME - Net income after taxes for the three
months ended December 31, 1996 increased 21.1% to
$6,924,671, compared to $5,716,589 for the three months
ended December 31, 1995. As a percent of net sales, net
income after taxes for the three months ended December 31,
1996 was a strong 24.3%, consistent with the 24.2% reflected
for the three months ended December 31, 1995. The increase
in net income reflects the growth in net sales and continued
efforts to control production and operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 31, 1996 the
Company's operating activities provided $9,891,177 in cash
flows, compared with $5,832,604 in cash flows provided
during the three months ended December 31, 1995. At
December 31, 1996, working capital totaled $56,994,868,
compared with $75,674,042 at September 30, 1996, and its
current ratio was at 8.8 to 1.0. The Company had
$24,933,533 in cash, cash equivalents, and investments at
December 31, 1996, compared with $40,826,701 at September
30, 1996. Significant uses of cash during the three month
period ended December 31, 1996 included approximately
$12,167,000 for the purchase of Cardiotronics, $8,210,000 to
repay Cardiotronics' outstanding loans, $2,691,000 in
advances to subsidiaries to fund operations, and $2,910,000
in additions to property and equipment.
In addition to its strong liquidity and overall
financial position, the Company does not have any long-term
debt as of December 31, 1996, nor does management intend to
utilize debt to fund future expansion or operations. 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 expansion, and its dividend payment policy.
No significant commitments for the purchase of
inventory or property or equipment existed as of December
31, 1996, except commitments for ongoing construction
projects. The Company is continuing to "build out" and
complete its new Idaho facility, in preparation for
manufacturing operations to be moved there from MIC's and
Cardiotronics' California facilities (approximately $2.8
million still owed). In addition, the Company intends to
construct a new 100,000-square-foot warehouse and
distribution facility to the west of Ballard's existing
Draper, Utah plant, at a total manufacturing cost of
approximately $4 million.
Certain land owned by the Company is being marketed for
sale, including land (approximately 6.5 acres) in Fremont,
California and approximately 18 acres located to the South
of Ballard's Draper, Utah facility. The Draper parcel is
currently under option with an interested buyer.
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 that are 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, including with respect to
regulatory compliance in the development, manufacturing and
sale of medical products similar to those offered by the
Company. 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. Any failure to offset such pressure 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 its 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 is experiencing a period of
extensive change. Health care reform proposals have been
formulated by the current administration and 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 health care
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. 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 means 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. 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 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. 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 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.
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.
In December, 1996 a "Markman hearing" was held, where
the court received evidence on various issues of patent
claim construction in the case. On or about January 3,
1997, the court entered findings and an order based upon the
Markman hearing. In this order, among other things, the
court:
1. Reaffirmed the findings in favor of R2 on claim
construction previously made in the court's July 19, 1996
Memorandum Opinion and Order;
2. Rejected defendants' claims of equitable estoppel;
3. Found laches as to R2's claims against Katecho;
and
4. Ordered the parties to submit simultaneous briefs
on the issue of whether the finding of laches should also
apply to R2's claims against Padeco.
A jury trial has been scheduled for November 3-7, 1997.
The finding of laches means that any damages found at trial
to be recoverable by R2 against Katecho would be limited to
those accruing after the commencement of this lawsuit by R2.
On or about January 28, 1997 Katecho filed a Motion for
Interlocutory Appeal on the court's ruling as to claim
construction. This motion, if granted, would allow an
appeal to the Federal Circuit Court of Appeals on the claim
construction issues even before the jury trial takes place.
R2 is opposing this motion.
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. Plaintiff in this
case alleges, among other things, that defibrillation pads
manufactured by R2 were defective and seeks damages of $20
million. While this litigation has proceeded slowly and is
still in the discovery phase, the Company believes, after
consultation with its counsel, that it has valid defenses,
including the fact that apparently the electrodes alleged to
be defective were never used on the plaintiff, nor were such
electrodes ever recovered or documented to be manufactured
by R2. However, in view of the inherent uncertainties
surrounding this type of litigation, no assurance can be
given that R2 will prevail in this case. The Company is
unable to assess the likelihood of an adverse outcome or
estimate the amount of range, if any, of any possible loss.
An adverse judgment could have a material adverse effect on
the financial condition of the Company.
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
On or about December 30, 1994, R2 was sued in the U.S.
District Court, Northern District of Illinois, Eastern
Division. Health's complaint has been dismissed as being
legally insufficient, and he has been given until March 20,
1997 to file an amended complaint should he choose to do so.
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
The following information describes matters submitted
to a vote of the security holders:
(a) The 1997 Annual Meeting of Stockholders was held
January 27, 1997 at the principal executive offices of the
Company, 12050 Lone Peak Parkway, Draper, Utah.
(b) At the Annual Meeting of Stockholders, the
following persons were elected as Directors, constituting
all of the Directors of the Company, and also constituting
all of management's nominees in the Proxy Statement mailed
to stockholders and filed with the Securities and Exchange
Commission prior to the Annual Meeting of Stockholders:
Dale H. Ballard E. Martin Chamberlain, Jr.
John I. Bloomberg Dale H. Ballard, Jr.
J. Dallas VanWagoner Paul W. Hess
Robert V. Petersen
(c) It was proposed to the security holders to approve
the Company's adoption of the 1996 Incentive Stock Option
Plan. The Plan was approved by the following vote:
Affirmative votes cast 21,023,576
Negative votes cast 2,382,792
Abstaining votes 245,110
ITEM 5. OTHER INFORMATION
Set forth below is the text of a press release issued
jointly by the Company and Premier, Inc. on February 11,
1997:
"PREMIER AND BALLARD MEDICAL ANNOUNCE AGREEMENT
CHICAGO, IL - Premier, the nation's largest healthcare
alliance enterprise, and Ballard Medical Products, Draper,
Utah announce a sole-source, three-year agreement (with an
option to extend for two additional years) for Closed
Ventilation Suction products.
Part of Premier's group purchasing program, the agreement
features savings for Premier hospitals and system which
agree to buy 80 percent of the products covered in the
agreement. Pricing is effective April 1, 1997. Other details
were not disclosed.
Group purchasing of supplies, pharmaceuticals, and equipment
(carried out through affiliated Premier Purchasing Partners,
L.P.) is one of the major programs Premier operates to
support owners' and affiliates' efforts to hold down
healthcare costs, improve quality, and stay ahead of
advances in clinical knowledge, technology, and market
changes such as managed care.
Premier maintains major offices in Charlotte, N.C., Chicago,
Ill., San Diego, Calif., and Washington, D.C., to serve its
250 owners, the 700 hospitals and healthcare facilities they
operate, and approximately 1,100 other affiliated hospital
and healthcare organizations.
Ballard Medical Products is a manufacturer of unique
disposable products designed to protect healthcare workers
and reduce cost to patients and hospitals while maintaining
the highest standards of care. Ballard Medical's TRACH
CARE is a closed endotracheal suction catheter designed to
be used on all intubated patients. This system allows the
clinician to suction and remove secretions from patients
without disconnecting them from the ventilator. The
physiological and infection control benefits of the TRACH
CARE system are well established as Ballard's TRACH CARE
system is clinically proven to reduce nosocomial infections.
CONTACT: Laura Yandell, Premier Corporate Communications
704/679-5425
Chris Thomas, Director of Strategic Accounts
Ballard Medical Products 801/572-6800"
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) One Form 8-K was filed during the period covered
by this Form 10-Q:
Form 8-K filed December 23, 1996, reporting the
Company's acquisition on December 10, 1996 of 90.1% of the
outstanding shares of Common Stock of Cardiotronics. The
following financial statements were filed with the Form 8-K:
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The
following financial statements of Cardiotronics were
incorporated by reference into the Form 8-K:
Consolidated Statement of Operations for the Year Ended
December 31, 1995
Consolidated Balance Sheet at December 31, 1995
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1995
Consolidated Statement of Operations (unaudited) for
the Nine Months Ended September 30, 1996
Consolidated Balance Sheet (unaudited) at September 30,
1996
Consolidated Statement of Cash Flows (unaudited) for
the nine months ended September 30, 1996
PRO FORMA FINANCIAL INFORMATION. The following pro
forma financial statements (reflecting a pro forma
consolidation of Cardiotronics with the Company) were also
filed with the Form 8-K:
Ballard Medical Products and Subsidiaries Pro Forma
Condensed Consolidated Balance Sheets at September 30,
1996.
Ballard Medical Products and Subsidiaries Pro Forma
Condensed Consolidated Statement of Operations for the
Year Ended September 30, 1996.
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: 2/14/97 Dale H. Ballard, President
(Principal Executive Officer)
Date: 2/14/97 Kenneth R. Sorenson,
Treasurer
(Principal Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER PAGE NO.
27 Financial Data Schedule 22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
quarter 10-Q and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,154,108
<SECURITIES> 23,779,425
<RECEIVABLES> 21,962,484
<ALLOWANCES> 1,446,417
<INVENTORY> 15,190,816
<CURRENT-ASSETS> 64,295,313
<PP&E> 47,134,875
<DEPRECIATION> 9,125,695
<TOTAL-ASSETS> 151,433,862
<CURRENT-LIABILITIES> 7,300,445
<BONDS> 0
0
0
<COMMON> 2,785,858
<OTHER-SE> 140,642,724
<TOTAL-LIABILITY-AND-EQUITY> 151,433,862
<SALES> 28,460,524
<TOTAL-REVENUES> 28,460,524
<CGS> 10,232,965
<TOTAL-COSTS> 18,595,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,062,671
<INCOME-TAX> 4,138,000
<INCOME-CONTINUING> 6,924,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,924,671
<EPS-PRIMARY> 0.239
<EPS-DILUTED> 0.239
</TABLE>
