As filed with the Securities and Exchange Commission
on February 13, 1998
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, 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:
29,104,966 - all common, February 11, 1998.
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,
1997 and September 30, 1997 4
Condensed Unaudited Consolidated
Statements of Operations for the
three months ended December 31,
1997 and 1996 7
Condensed Unaudited Consolidated
Statements of Cash Flows for the
three months ended December 31,
1997 and 1996 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 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Index to Exhibits 19
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. "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
ASSETS 12/31/97 9/30/97
CURRENT ASSETS:
Cash and cash
equivalents $15,949,258 $21,143,908
Investments 36,586,932 26,628,312
Accounts receivable-
trade (net) 26,106,640 25,320,584
Royalties receivable 990,673 375,673
Other receivables 1,389,570 908,287
Inventories:
Raw materials 11,217,175 10,798,381
Work-in-progress 4,600,467 5,525,067
Finished goods 6,990,584 4,306,858
Deferred income
taxes 3,351,178 2,233,042
Income tax refund
receivable 1,960,391 1,830,946
Prepaid expenses 1,123,501 50,639
Total current
assets 110,266,369 99,121,697
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 28,921,843 28,922,203
Molds 4,891,734 4,891,734
Machinery and
equipment 11,046,702 10,969,531
Vehicles 812,863 785,440
Furniture and
fixtures 3,222,402 3,059,632
Leasehold
improvements 30,183 30,183
Construction-in-
progress 5,882,845 4,142,563
Total 55,682,437 53,675,151
Less accumulated
depreciation 11,556,400 10,582,953
Property and
equipment - net 44,126,037 43,092,198
INTANGIBLE ASSETS:
Cost in excess of
purchase price - net 27,989,463 28,557,783
Patents and other
intangibles - net 8,268,545 8,280,488
Total intangible
assets 36,258,008 36,838,271
DEFERRED INCOME TAXES 814,780 2,139,902
OTHER ASSETS 5,313,444 5,256,599
TOTAL $196,778,638 $186,448,667
See Notes to Condensed Unaudited Consolidated Financial
Statements.
LIABILITIES AND
STOCKHOLDERS' EQUITY 12/31/97 9/30/97
CURRENT LIABILITIES:
Accounts payable $2,809,136 $2,874,529
Accrued liabilities:
Employee
compensation 1,877,277 3,003,609
Income taxes payable 3,288,586
Royalties 373,965 432,617
Other 2,196,238 449,394
Total current
liabilities 10,545,202 6,760,149
STOCKHOLDERS' EQUITY:
Common stock 2,900,232 2,899,500
Additional
paid-in capital 55,752,885 55,039,439
Unrealized losses
on investments (186,881) (223,783)
Retained earnings 127,767,200 121,973,362
Total
stockholders'
equity 186,233,436 179,688,518
TOTAL $196,778,638 $186,448,667
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
12/31/97 12/31/96
NET SALES $34,152,424 $28,460,524
COST OF PRODUCTS SOLD 12,391,327 10,232,965
GROSS MARGIN 21,761,097 18,227,559
OPERATING EXPENSES:
Selling, general,
and administrative 8,635,001 7,314,699
Research and development 653,544 655,047
Royalties 435,589 392,997
Total operating expenses 9,724,134 8,362,743
OPERATING INCOME 12,036,963 9,864,816
OTHER INCOME - net 1,245,396 1,197,855
INCOME BEFORE INCOME
TAX EXPENSE 13,282,359 11,062,671
INCOME TAX EXPENSE 5,080,000 4,138,000
NET INCOME $8,202,359 $6,924,671
NET INCOME PER SHARE:
Basic $0.283 $0.249
Diluted $0.276 $0.240
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 29,007,757 27,818,310
Diluted 29,745,630 28,908,827
See Notes to Condensed Unaudited Consolidated Financial
Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
12/31/97 12/31/96
CASH FLOWS FROM OPERATING
ACTIVITIES $7,676,264 $9,891,177
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (2,007,286) (2,910,134)
Payment for purchase
of subsidiary,
net of cash acquired (11,768,562)
Investment in and advances
to affiliates (2,720) (2,691,435)
Purchases of investments (11,486,036) (7,652,445)
Purchases of intangible assets (295,471) (188,809)
Proceeds from maturities of
investments 1,337,751 10,555,818
Net cash used in
investing activities (12,453,762) (14,655,567)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise
of options 543,510 1,359,870
Cash dividends paid (1,395,459)
Purchase of treasury stock (960,662)
Payment of debt of purchased
subsidiary (8,210,016)
Net cash used in financing
activities (417,152) (8,245,605)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (5,194,650) (13,009,995)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 21,143,908 14,164,103
CASH AND CASH EQUIVALENTS,
END OF PERIOD $15,949,258 $1,154,108
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
12/31/97 12/31/96
Cash paid during the
period for taxes $1,297,000 $5,000
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During the three months ended December 31, 1997 and 1996,
the Company increased additional paid-in capital by
$174,418, and $607,927, 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, 1997 and September 30, 1997, the results
of operations for the three months ended December 31,
1997 and 1996, and the cash flows for the three months
ended December 31, 1997 and 1996.
2. The results of operations for the three months ended
December 31, 1997 are not necessarily indicative of the
results to be expected for the full year ended
September 30, 1998.
3. On December 4, 1997, the Company declared a semi-annual
cash dividend of $.05 per share, payable January 5,
1998 to shareholders of record as of December 16, 1997.
4. Effective October 1, 1995, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation . 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. The Company has elected to continue to apply
APB No. 25 (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, 1998.
5. In February, 1997, the FASB 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 APB
No. 15. It replaces the presentation of primary EPS
with a presentation of basic EPS
Under the new structure, 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.
SFAS No. 128 was adopted during its quarter ended
December 31, 1997. All prior-period EPS data presented
herein has been restated to conform with the provisions
of SFAS No. 128.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's 1997 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, 1997. The following discussion and
analysis describes material changes in the Company's
financial condition and position from September 30, 1997.
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, 1997
with the corresponding period 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
SALES - Net sales for the three months ended December
31, 1997 increased 20.0% to $34,152,424, compared with
$28,460,524 for the corresponding three-month period in
fiscal year 1997. In comparison, net sales for the three
months ended December 31, 1996 increased 20.2% over the
corresponding three-month period of fiscal year 1996.
Net sales increases are due to continued market
expansion of the MIC enteral feeding catheters, PMP pain
management products, and Cardiotronics line of stimulation
electrode products, as well as from the rapid growth of the
Company's international sales. Net sales of MIC's catheters
and related product lines grew 25.3% to $9,053,532 during
the first quarter of fiscal year 1998, compared with net
sales of $7,225,400 for the corresponding first quarter of
fiscal year 1997. Net sales of PMP products grew 72.4% to
$1,424,691, compared with $826,609 for the corresponding
prior period while net sales of Cardiotronics products
increased 355.3% to $2,381,518, compared with $523,015 for
the corresponding prior period (Cardiotronics was acquired
December 11, 1997). International net sales of all Company
products were $3,336,716 for the first quarter of fiscal
year 1998, a 54.8% growth over net sales of $2,156,151 for
the first quarter of fiscal year 1997.
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 prices
continue to be impacted by price reduction pressures from
hospitals and large group purchasing organizations.
Generally, 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, 1997 was $12,391,327,
compared to $10,232,965 for the corresponding three months
in fiscal year 1997. As a percentage of net sales, cost of
products sold for the three months ended December 31, 1997
was 36.3%, compared to 36.0% for the three months ended
December 31, 1996.
The increased cost of products sold reflects the impact
of acquired lower margin product lines, and increased labor
rates. The Company expects that future cost increases will
result from continued acquisitions of new products with
lower margins, the addition through acquisition of less
efficient manufacturing facilities, and pricing pressures
due to the health care market's focus on cost restraints and
competitive pricing.
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, 1997 were
$9,724,134, which represents an increase of 16.3% over the
corresponding three months of fiscal year 1997. As a
percentage of net sales, operating expenses for the three
months ended December 31, 1997 totaled 28.5%, compared with
29.4% for the corresponding three months of fiscal year
1996.
The increase in total operating expenses between the
first three months of fiscal year 1998 over fiscal year 1997
is due primarily to selling, general, and administrative
expenses which increased from $7,314,699 in the quarter
ended December 31, 1996 to $8,635,001 in the quarter ended
December 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, however, selling, general, and
administrative expenses decreased from 25.7% in the three
months ended December 31, 1996 to 25.3% in the three months
ended December 31, 1997. These percentage decreases during
the first quarter of fiscal year 1998 reflect the Company's,
and especially the sales force's efforts to control these
variable selling expenses.
Research and development expenses and royalty expenses,
as a percentage of net sales, slightly decreased in the
first quarter of fiscal year 1998, approximating 1.9% and
1.3%, respectively, compared with 2.3% and 1.4%,
respectively, for the first quarter of fiscal year 1997.
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, 1997, other income totaled
$1,245,396, compared to $1,197,855 for the three months
ended December 31, 1996. Interest income from short-term
investments increased from $546,558 for the first quarter in
fiscal year 1997 to $657,837 in the first quarter of fiscal
year 1998. Royalty income remained fairly consistent
between the quarters, approximating $625,000.
NET INCOME - Net income after taxes for the three
months ended December 31, 1997 increased 18.5% to
$8,202,359, compared to $6,924,671 for the three months
ended December 31, 1996. As a percent of net sales, net
income after taxes for the three months ended December 31,
1997 was 24.0%, consistent with the 24.3% reflected for the
three months ended December 31, 1996. The continued strong
profit levels reflect the growth in net sales and ongoing
efforts to control production and operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 31, 1997 the
Company's operating activities provided $7,676,264 in cash
flows, compared with $9,891,177 in cash flows provided
during the three months ended December 31, 1996. At
December 31, 1997, working capital totaled $99,721,167,
compared with $92,361,548 at September 30, 1997, and its
current ratio was at 10.5 to 1.0 at December 31, 1997,
compared with 14.7 to 1.0 at September 30, 1997. The
Company had $52,536,190 in cash, cash equivalents, and
short-term investments at December 31, 1997, compared with
$47,772,220 at September 30, 1997.
Significant uses of cash during the three-month period
ended December 31, 1997 included approximately $10,148,000
in net purchases of short-term investments, $2,007,000 in
additions to property and equipment, and $961,000 in
purchases by the Company of its own stock.
In addition to its strong liquidity and overall
financial position, the Company does not have any long-term
debt.
FORWARD-LOOKING STATEMENTS
From time to time the Company may report, through its
press releases, its Annual Report, and 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, economic, competitive, governmental,
technological, and other factors discussed in the Company's
filings with the SEC on Forms 10-K, 10-Q, and 8-K. Such
forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995.
RISK FACTORS
Forward-looking statements are, of course, 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 which 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.
YEAR 2000 ISSUES. The approaching Year 2000 could
result in challenges related to computer software,
manufacturing and communications equipment, accounting
records, and relationships with suppliers and customers.
Management of the Company is studying Year 2000 issues,
seeking to avoid such problems, but there can be no
assurance that such problems will not be encountered.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BALLARD MEDICAL PRODUCTS v. ALLEGIANCE HEALTHCARE
CORPORATION AND SORENSON CRITICAL CARE, INC.
On or about December 23, 1997, the Company commenced
patent infringement litigation against Allegiance Healthcare
Corporation ("Allegiance") and Sorenson Critical Care, Inc.
("Sorenson"), alleging, among other things, that certain
closed suction catheters being manufactured and sold by
Sorenson to Allegiance and resold by Allegiance under the
trademark TRACH EZE, infringe one or more patents held by
the Company. The Company's complaint includes causes of
action for direct infringement, inducement, contributory
inducement, and unjust enrichment.
Both defendants have filed answers denying the
Company's allegations, and both defendants have asserted
counterclaims against the Company, including claims for a
declaratory judgment of noninfringement, a declaratory
judgment of invalidity, a declaratory judgment of
unenforceability, attempted monopolization under the Sherman
Act and the Clayton Act, inequitable conduct before the
United States Patent and Trademark Office, patent misuse,
and unfair competition. The parties will now engage in
discussions regarding discovery, case management, and the
exchange of information.
R2 MEDICAL SYSTEMS, INC. AND CARDIOTRONICS SYSTEMS,
INC. v. KATECHO, INC., CARDIOVASCULAR GROUP OF OREGON,
INC., AND PADECO, INC.
R2 and Cardiotronics were plaintiffs in a 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. A jury trial was held
during the week of November 3, 1997. On November 10, 1997,
the jury returned a verdict finding that the Katecho device
does not infringe the patents of R2 and Cardiotronics. On
or about December 3, 1997, R2 filed a motion for a new trial
or in the alternative, for a judgment finding infringement.
The court subsequently denied this motion. The Company does
not intend to file an appeal.
J. MICHAEL KRAMER V. R2 MEDICAL SYSTEMS, INC., 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, and settlement discussions are being
pursued.
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 (including other product liability 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
The following information describes matters submitted
to a vote of the security holders:
(a) The 1998 Annual Meeting of Stockholders was held
January 26, 1998 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 1997 Incentive Stock Option
Plan. The Plan was approved by the following vote:
Affirmative votes cast 24,838,293
Negative votes cast 831,808
Abstaining votes 131,049
ITEM 5. OTHER INFORMATION
The Company has no information to report under this
item.
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: 2/13/98 Dale H. Ballard, President
(Principal Executive Officer)
Date: 2/13/98 Kenneth R. Sorenson,
Treasurer
(Principal Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER PAGE NO.
27 Financial Data Schedule 19
<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-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,949,258
<SECURITIES> 36,586,932
<RECEIVABLES> 26,106,640
<ALLOWANCES> 3,129,819
<INVENTORY> 22,808,226
<CURRENT-ASSETS> 110,266,369
<PP&E> 55,682,437
<DEPRECIATION> 11,556,400
<TOTAL-ASSETS> 196,778,638
<CURRENT-LIABILITIES> 10,545,202
<BONDS> 0
0
0
<COMMON> 2,900,232
<OTHER-SE> 183,333,204
<TOTAL-LIABILITY-AND-EQUITY> 196,778,638
<SALES> 34,152,424
<TOTAL-REVENUES> 34,152,424
<CGS> 12,391,327
<TOTAL-COSTS> 12,391,327
<OTHER-EXPENSES> 9,724,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,282,359
<INCOME-TAX> 5,080,000
<INCOME-CONTINUING> 8,202,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,202,359
<EPS-PRIMARY> 0.283
<EPS-DILUTED> 0.276
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