As filed with the Securities and Exchange Commission
on May 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
MARCH 31, 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:
28,522,710 - all common, May 12, 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 March 31,
1997 and September 30, 1996
Condensed Unaudited Consolidated
Statements of Operations for the
three and six months ended March
31, 1997 and 1996
Condensed Unaudited Consolidated
Statements of Cash Flows for the
six months ended March 31,
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. "MIC" refers to Medical Innovations Corporation, a
wholly-owned subsidiary of Ballard.
8. "NNC" refers to Neuro Navigational Corporation, a
Delaware corporation.
9. "PEPCO" refers to Plastic Engineered Products
Company, a wholly-owned subsidiary of Ballard.
10. "PMP" refers to Ballard Medical Products Canada, a
wholly-owned subsidiary of Ballard, doing business
as Preferred Medical Products.
11. "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 3/31/97 9/30/96
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents $13,238,075 $14,164,103
Investments 18,820,720 26,662,598
Accounts
receivable - trade (net) 23,258,333 19,944,055
Royalties receivable 840,678 1,351,885
Other receivables 513,968 636,291
Inventories:
Raw materials 10,434,183 7,171,048
Work-in-progress 3,777,999 3,913,804
Finished goods 3,601,267 2,760,008
Deferred income taxes 1,030,707 1,057,303
Income tax refunds
receivable 3,274,000
Prepaid expenses 694,696 169,431
Total current assets 76,210,626 81,104,526
PROPERTY AND EQUIPMENT:
Land 3,944,701 3,944,701
Buildings 20,202,656 20,131,728
Molds 3,847,369 3,608,228
Machinery and equipment 9,934,314 9,192,269
Vehicles 756,739 1,039,175
Furniture and fixtures 2,355,720 2,081,200
Leasehold improvements 335,339 302,394
Construction-in-
progress 9,192,515 3,053,296
Total 50,569,353 43,352,991
Less accumulated
depreciation 9,247,272 8,058,401
Property and
equipment net 41,322,081 35,294,590
INTANGIBLE ASSETS:
Cost in excess of
purchase price - net 33,159,811 15,644,651
Patents and other
intangibles - net 12,029,521 5,012,157
Total intangible
assets 45,189,332 20,656,808
OTHER ASSETS 2,776,169 5,409,164
TOTAL $165,498,208 $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 3/31/97 9/30/96
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $3,038,383 $2,273,674
Accrued liabilities:
Employee
compensation 3,184,245 1,985,135
Income taxes payable 565,281
Royalties 339,563 326,492
Other 388,644 845,183
Total current
liabilities 7,516,116 5,430,484
DEFERRED INCOME TAXES 437,085 1,110,764
Total liabilities 7,953,201 6,541,248
STOCKHOLDERS' EQUITY:
Common stock 2,839,916 2,770,232
Additional paid-in
capital 47,435,874 38,935,892
Unrealized losses on
investments (104,849) (156,564)
Retained earnings 107,374,066 94,374,280
Total
Stockholders'
equity 157,545,007 135,923,840
TOTAL $165,498,208 $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 Six Months Ended
3/31/97 3/31/96 3/31/97 3/31/96
<S> <C> <C> <C> <C>
NET SALES $30,813,873 $25,807,593 $59,274,397 $49,478,137
COST OF PRODUCTS
SOLD 10,855,360 8,818,771 21,088,325 16,923,801
GROSS MARGIN 19,958,513 16,988,822 38,186,072 32,554,336
OPERATING EXPENSES:
Selling, general,
and administrative 8,286,174 7,383,312 15,600,873 14,041,423
Research and
development 730,621 737,834 1,385,668 1,384,679
Royalties 410,121 407,300 803,118 764,601
Total operating
expenses 9,426,916 8,528,446 17,789,659 16,190,703
OPERATING INCOME 10,531,597 8,460,376 20,396,413 16,363,633
OTHER INCOME - Net 1,089,755 1,585,320 2,287,610 2,629,162
INCOME BEFORE INCOME
TAX EXPENSE 11,621,352 10,045,696 22,684,023 18,992,795
INCOME TAX EXPENSE 4,145,000 3,600,000 8,283,000 6,830,510
NET INCOME 7,476,352 6,445,696 14,401,023 12,162,285
INCOME PER SHARE:
Common and common
equivalent shares $0.256 $0.226 $0.495 $0.426
Common shares
assuming full
dilution $0.256 $0.225 $0.491 $0.424
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Common and common
equivalent shares 29,175,469 28,540,433 29,066,860 28,543,400
Common shares
assuming full
dilution 29,241,025 28,608,932 29,348,351 28,696,705
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
3/31/97 3/31/96
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES $17,073,679 $13,170,224
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (7,240,393) (3,758,482)
Payment for purchase of
subsidiary, net of cash
acquired (11,768,562)
Capital expenditures for land (2,158,456)
Proceeds from sale of land 511,429
Investment in and advances
to affiliates (2,994,872) (3,465,454)
Receipt of payment of
advances to affiliates 3,771,471 1,275,000
Purchases of investments (14,587,078) (11,761,758)
Purchases of intangible assets (3,614,639) (1,235,481)
Purchase of other assets (167,648)
Proceeds from sales of
investments 22,428,956 9,406,746
Net cash used in investing
activities (14,172,765) (11,186,456)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of
options 5,778,533 3,349,704
Cash dividends paid (1,395,459) (2,153,015)
Payment of debt of
purchased subsidiary (8,210,016)
Purchase of treasury stock (5,196,518)
Net cash used in financing
activities (3,826,942) (3,999,829)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (926,028) (2,016,061)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 14,164,103 27,555,330
CASH AND CASH EQUIVALENTS,
END OF PERIOD $13,238,075 $25,539,269
</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:
3/31/97 3/31/96
Cash paid during the period $2,125,000 $4,685,000
for taxes
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During the six months ended March 31, 1997 and 1996, the
Company increased additional paid-in capital by $2,793,342
and $1,585,703, 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 30, 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 March
31, 1997 and September 30, 1996, the results of its
operations for the three and six months ended March 31,
1997 and 1996, and its cash flows for the six months
ended March 31, 1997 and 1996.
2. The results of operations for the three and six months
ended March 31, 1997 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. 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.
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 $.265 and $.510, respectively, for the quarter and
six months ended March 31, 1997. Diluted EPS computed
under FASB No. 128 would have resulted in net income
per common share of $.257 and $.493, respectively, for
the quarter and six months ended March 31, 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. Subsequent to 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.
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 six months ended March 31,
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 second
quarter and first six months of fiscal year 1997 continued
at a consistent growth rate, increasing at 19.4% and 19.8%,
respectively, over the corresponding periods of fiscal year
1996. The continued growth in net sales from period to
period reflects the Company's ability to maintain and expand
its market shares through strategic long-term alliances with
distributors and large hospital buying groups, enhancements
within its existing product lines, synergistic acquisitions,
and emphasis internationally.
The Company's after-tax profits for the second quarter
and first six months of fiscal year 1997 also continued
their steady growth, increasing at rates of 16.0% and 18.4%,
respectively, over the corresponding periods of fiscal year
1996. As a percentage of net sales, the Company's profits
approximated 24.3% for each of the periods in fiscal year
1997. The increased and high level of profits reflects the
Company's focused efforts directed at advanced manufacturing
processes, efficient integration of acquired entities, and
overhead cost restraints.
SALES - Net sales for the three months ended March 31,
1997 increased 19.4% to $30,813,873, compared with
$25,807,593 for the corresponding period of fiscal year
1996. Net sales for the six months ended March 31, 1997
increased 19.8% to $59,274,397, compared with $49,478,137
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, 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 line for the three and six months ended March 31,
1997 increased 34.8% and 36.6%, respectively, over the
corresponding periods of fiscal year 1996. Net
international sales for the three and six months ended March
31, 1997 increased 45.4% and 52.3%, respectively, over the
corresponding periods of fiscal year 1996. Since its
acquisition on December 10, 1996, Cardiotronics has added
$2,702,162 of net sales, exceeding the Company's initial
projections.
No price increases occurred during the three or six
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 period 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 March 31, 1997 was $10,855,360, compared
to $8,818,771 for the corresponding three months in fiscal
year 1996. Cost of products sold for the six months ended
March 31, 1997 was $21,088,325, compared to $16,923,801 for
the corresponding six months in fiscal year 1996. As a
percentage of net sales, cost of products sold for the three
and six months ended March 31, 1997 was 35.2% and 35.6%,
respectively, compared with 34.2% for both the three and six
months ended March 31, 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
extrusion capacity. The Company expects the cost of
products sold to stabilize at approximately 36.0% of net
sales for the remainder of fiscal year 1997.
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 six months ended March 31, 1997
were $9,426,916 and $17,789,659, respectively, which
represents increases of 10.5% and 9.9%, respectively, over
the corresponding periods in fiscal year 1996. As a
percentage of net sales, operating expenses for the three
and six months ended March 31, 1997 totaled 30.6% and 30.0%,
respectively, compared with 33.0% and 32.7%, 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 $7,383,312 and $14,041,423,
respectively, in the three and six months ended March 31,
1996 to $8,286,174 and $15,600,873, respectively, in the
three and six months ended March 31, 1997. These increased
costs are attributable primarily to increased wages,
commissions, and other selling related costs associated with
the increased levels of sales. As a percentage of net
sales, selling, general, and administrative expenses
decreased, from 28.6% and 28.4%, respectively, for the three
and six months ended March 31, 1996, to 26.9% and 26.3%,
respectively, for the corresponding periods in fiscal year
1997. The decreases, as a percentage of net sales, reflect
the Company's successful efforts in controlling its variable
selling expenses.
Research and development expenses and royalty expenses,
as a percentage of net sales, remained relatively consistent
between the periods, approximating 2.4% and 1.3%,
respectively, for both the three and six months ended March
31, 1997, compared with 2.8% and 1.5%, respectively, for the
corresponding periods in fiscal year 1996.
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 six months ended March 31, 1997, other income
totaled $1,089,755 and $2,287,610, respectively, compared to
$1,585,320 and $2,629,162, respectively, for the
corresponding periods in fiscal year 1996. The decrease in
other income during the 1997 periods is due primarily to an
approximate $448,000 net gain from the sale of land which
occurred during fiscal year 1996.
NET INCOME - Net income after taxes for the three and
six months ended March 31, 1997 increased 16.0% and 18.4%,
respectively, to $7,476,352 and $14,401,023, compared to
$6,445,696 and $12,162,285, 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 and international lines, and also reflects the
Company's successful efforts in controlling overall
operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1997 the Company's
operating activities provided $17,073,679 in cash and cash
equivalents, compared with $13,170,224 in cash and cash
equivalents provided during the corresponding period of
fiscal year 1996. At March 31, 1997, working capital
totaled $68,694,510 and the Company's current ratio was 10.1
to 1.0. In addition, the Company had $32,058,795 in cash,
cash equivalents, and investments available-for-sale at
March 31, 1997.
Significant uses of cash during the six months ended
March 31, 1997 included approximately $11,769,000 for the
purchase of Cardiotronics, $8,210,000 to repay
Cardiotronics' outstanding loans, $7,240,000 in additions to
property and equipment, $3,615,000 in additions to
intangible assets, and $2,995,000 in investment in and
advances to subsidiaries.
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 March 31,
1997 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. In addition, the Company has
commenced 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.
Land owned by the Company (approximately 6.5 acres) in
Fremont, California is under contract for sale.
Approximately 61 acres of land located south of the
Company's Draper, Utah facility was sold on April 29, 1997
for approximately $7,240,000. See "ITEM 5. OTHER
INFORMATION".
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 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.
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.
Following the court's January 3, 1997 findings and
order, Katecho, Inc. filed a interlocutory appeal on the
court's ruling as to claim construction. This motion was
denied by the court.
The parties are now preparing for the trial 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).
The court found, among other things, that the plaintiff had
perpetrated a fraud on the court, in manipulating the
amounts of his actual income to induce the court to grant
him free legal counsel.
Mr. Heath has appealed the court's dismissal to the
United States Court of Appeals for the 7th Circuit.
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, 1996 Annual Meeting of
Shareholders, no matters have been submitted to a vote of
the shareholders.
ITEM 5. OTHER INFORMATION
On April 29, 1997, the Company sold approximately 61
acres of BREH's real estate (located south of the Company's
Draper plant and north of 12300 South and west of Lone Peak
Parkway), together with 61 shares of East Jordan Irrigation
Company, for a total selling price of $7,239,620, to Wasatch
Pacific, Inc. ("Wasatch"), a Utah real estate development
company. Wasatch paid approximately $3,180,700 (less
$85,000 which had already been paid in option payments) as a
downpayment and signed an 8% interest bearing Trust Deed
Note payable to BREH for $3,973,920 (the "Note"). The Note
provides, among other things, for payment of all accrued
interest in one year and for payment in full of all interest
and principal in two years. The Note is secured by a first
trust deed against approximately 42 acres of the property
sold and by a security interest in 42 of the water shares
sold. BREH purchased this property in 1992 at a purchase
price of approximately $915,000 ($15,000 per acre).
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: 5/14/97 Dale H. Ballard, President and
Principal Executive Officer
Date: 5/14/97 Kenneth R. Sorenson,
Treasurer and
Principal Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
and second quarter 10-Qs and is qualified in its entirety by reference to such
10-Qs.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-START> JAN-01-1997 0CT-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 13,238,075 13,238,075
<SECURITIES> 18,820,720 18,820,720
<RECEIVABLES> 24,966,655 24,966,655
<ALLOWANCES> 1,708,322 1,708,322
<INVENTORY> 17,813,449 17,813,449
<CURRENT-ASSETS> 76,210,626 76,210,626
<PP&E> 50,569,353 50,569,353
<DEPRECIATION> 9,247,272 9,247,272
<TOTAL-ASSETS> 165,498,208 165,498,208
<CURRENT-LIABILITIES> 7,516,116 7,516,116
<BONDS> 0 0
0 0
0 0
<COMMON> 2,839,916 2,839,916
<OTHER-SE> 154,705,091 154,705,091
<TOTAL-LIABILITY-AND-EQUITY> 165,498,208 165,498,208
<SALES> 30,813,873 59,274,397
<TOTAL-REVENUES> 30,813,873 59,274,397
<CGS> 10,855,360 21,088,325
<TOTAL-COSTS> 20,282,276 38,877,984
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 11,621,352 22,684,023
<INCOME-TAX> 4,145,000 8,283,000
<INCOME-CONTINUING> 7,476,352 14,401,023
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,476,352 14,401,023
<EPS-PRIMARY> 0.256 0.495
<EPS-DILUTED> 0.256 0.491
</TABLE>
