<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
for the fiscal year ended
September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 No.
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
Securities registered to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common
Par Value: $0.10 per share
[X] Yes Indicate by check mark whether the Registrant (1)
[ ] No has filed all reports required to be filed by Section 12
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.
1 <PAGE>
[ ] Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of 12/15/98:
$675,133,285
The number of shares outstanding of the registrant's class of common
stock, as of 12/15/98:
30,547,908
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference herein:
1. Annual Report to Shareholders for fiscal year ended
September 30, 1998: Incorporated into Parts I and II
hereof.
BALLARD MEDICAL PRODUCTS
Cross Reference Sheet Showing Location
in Annual Report or Proxy Statement
of Information Required by Certain Form 10-K Items
LOCATION IN
PRINTED
REFERENCE
FORM 10-K ITEMS MATERIALS
Part I
Item 1. Business Annual Report,
pp. 1-8
Item 2. Properties Annual Report,
pp. 3, 8
Part II.
Item 5. Market for Registrant's Common Annual Report p.
Equity and Related Stockholder 8
Matters
Item 6. Selected Consolidated Financial Annual Report,
Data pp. 9, 10
2 <PAGE>
Item 7. Management's Discussion and
Analysis of Financial Condition Annual Report,
and Results of Operations pp. 29-40
Item 8. Consolidated Financial
Statements and Supplementary Annual Report,
Data pp. 11-28
DEFINITIONS
As used herein, the following terms have the meanings
indicated:
1. "Annual Report" refers to the Company's Annual Report for
the fiscal year ended September 30, 1998, which is
attached as Exhibit 13 to this Form 10-K and which was
mailed to shareholders on or about December 30, 1998.
2. "Ballard" refers to Ballard Medical Products.
3. "BI" refers to Ballard International, Inc., 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, Inc., a
wholly owned subsidiary of Ballard.
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. "MIST ASSIST" refers to Mist Assist, Inc., a wholly owned
subsidiary of Ballard.
9. "PEPCO" refers to the Plastic Engineered Products Company,
a wholly owned subsidiary of Ballard.
10. "PMP" refers to Ballard Medical Products (Canada) Inc. dba
Preferred Medical Products, a wholly-owned subsidiary of
Ballard.
11. "R2" refers to R2 Medical Systems, Inc., a wholly owned
subsidiary of Cardiotronics.
12. "Tri-Med" refers to Tri-Med Specialties, Inc., a wholly
owned subsidiary of Ballard.
3 <PAGE>
PART I
ITEM 1. BUSINESS
The information required by this item is incorporated herein by
reference from the Company's Annual Report. In addition, the
following information is provided:
BUSINESS DEVELOPMENTS
KIMBERLY-CLARK CORPORATION MERGER
Effective December 23, 1998, the Company entered into a
definitive merger agreement with Kimberly-Clark Corporation
("Kimberly-Clark"). Under the terms of the merger agreement, each
stockholder of Ballard will receive $25 worth of Kimberly-Clark
common stock (which will be valued based upon the average closing
price of Kimberly-Clark stock over a period of ten trading days
ending five days prior to the date of closing) for each outstanding
share of Ballard common stock. The transaction was unanimously
approved by Ballard's Board of Directors. The transaction is
expected to close in March or April, 1999, subject to approval by
Ballard's stockholders, appropriate governmental approval and
customary conditions. It is expected that the merger will be tax-
free to Ballard's stockholders. In connection with the merger
agreement, Ballard granted Kimberly-Clark an option to acquire 19.9%
of Ballard's outstanding stock under certain circumstances. In
addition, under certain circumstances, Kimberly-Clark would be paid
a cash termination fee of $15,000,000 by Ballard.
SALES AND DISTRIBUTION
The United States continues to be the principal market for the
Company's products. The Company's 125-person sales force is
complemented by a distribution system comprised of specialty and
general line dealers.
Sales by the Company are generated in many areas within the
hospital, such as intensive care units, emergency services,
anesthesiology departments, oncology departments, pain clinics,
gastrointestinal and radiology procedure rooms, burn units,
respiratory therapy, bone marrow transplant units, general nursing
floors, and post-anesthesia care units, as well as the main hospital
operating room and outpatient/ satellite surgical centers. A second
important market for certain of the Company's products is the
alternate care market. Alternate care site sales continue to
improve as patients are moved into these locations at an increasing
rate.
The sale of the Company's TRACH CARE products is somewhat
seasonal, in that sales are better during the winter months when
there is a greater incidence of respiratory illness. Other product
sales are not subject to seasonal differences.
4 <PAGE>
INDUSTRY SEGMENTS
All products of the Company are deemed to be of the same class
and are sold in the same industry segment.
RAW MATERIALS
The Company does not face any serious supply shortage with
respect to raw materials used in the manufacture of its products.
Many of the Company's products are manufactured from various resins
and plastics. The Company purchases resins and plastics from a
number of different vendors. Resin availability is presently
adequate for the needs of the Company.
The Company's Chlorhexidinegluconate ("CHG") solutions used in
its FOAM CARE products are purchased from two different suppliers.
The 4% CHG is currently purchased from Xttrium Laboratories, Inc.,
and the 2% CHG is currently purchased from Huntington Laboratories,
Inc. The Company has written supply contracts with Xttrium and
Huntington. However, there can be no assurance that the Company
will be able to continue to have access to sufficient quantities of
these CHG materials. CHG is heavily regulated by the FDA.
The Company purchases significant amounts of paper products,
along with a number of different chemicals used in the manufacture
of other hand wash solutions sold as part of the Company's FOAM CARE
product line. There are many different suppliers of such chemicals
and paper products. Occasionally, paper product companies are in
short supply, but the Company has adjusted lead times and made other
adjustments so that this has not presented a serious problem. This
is not expected to present a serious problem in the future either.
The Company used to purchase substantial amounts of tubing from
outside sources. Now the Company extrudes most of its own tubing.
The Company also purchases different types of silicone
materials from various suppliers. Depending upon the specific type
of silicone involved, there are anywhere from a few to many sources.
Some manufacturers have scaled back their supply of silicone
materials which are implanted or placed in the human body for more
than thirty days, in part because of legal problems surrounding
silicone breast implants. So far, the Company has not had any
serious difficulty obtaining needed silicone materials.
There are many potential sources of balloon materials used by
the Company in the MIC enteral feeding product line, although the
Company currently purchases substantially all of such balloons from
one source.
There are multiple vendors of needles and syringes needed for
PMP products and foam needed for PEPCO products. The Company has
encountered supply problems regarding needles, which are purchased
from various vendors, including some international suppliers. Long
lead times (up to 18 weeks sometimes) are required for the ordering
of certain needles.
5 <PAGE>
PATENTS
The Company owns numerous patents and patent applications with
respect to its products and feels that these patents are important
to the Company's ability to compete effectively in the market place.
1. TRACH CARE - The Company owns 26 U.S. patents with respect
to its TRACH CARE family of products. The expiration dates on these
patents range from February, 2003 to April, 2015. The Company also
has several U.S. and foreign patents pending covering various TRACH
CARE improvements. There are also other pending U.S. and foreign
patents.
2. MIC - The MIC family of products (including products added
from the April, 1996 acquisition of the assets of Endovations, Inc.)
are protected by 32 U.S. patents owned by the Company, along with
various foreign patents. The U.S. patents expire between January,
1999 and November, 2014. The Company also has other U.S. and
foreign patents pending on MIC products, and is a licensee of
certain patented technology under license agreements.
3. FOAM CARE - The Company's FOAM CARE products are protected
by 11 U.S. patents either owned or licensed by the Company, along
with a number of foreign patents. The Company's U.S. patents expire
between July 2002 and August, 2011. The Company also has other U.S.
and foreign patents pending, covering its FOAM CARE technology.
4. EASI-LAV - The Company owns 6 U.S. patents with respect to
its EASI-LAV products, with expiration dates ranging from June, 2006
to July, 2014. There are also other pending U.S. and foreign
patents.
5. CARDIOTRONICS/R2 - The Company owns 14 U.S. patents with
respect to its Cardiotronics products with expiration dates ranging
from December, 2000 to October, 2016. There are other pending U.S.
and foreign patents.
6. TRI-MED - The Company licenses 2 patents with respect to
its Tri-Med products, which expire in June, 2005 and May, 2006.
TRADEMARKS
1. BALLARD - Although patents and registered trademarks do
not provide guaranteed protection, the Company believes that they
are important to its competitive position in the health care
marketplace. The Company's rights in a given trademark should last
indefinitely, so long as the Company continues to use the mark to
identify the particular product involved. Ballard owns numerous
trademarks, including without limitation the following which have
been registered in the U.S. Patent and Trademark Office:
REGISTRATION REGISTRATION REGISTERED
NUMBER DATE TRADEMARK
2,187,694 September 8, 1998 CODE BLUE EASI-TUBE
6 <PAGE>
REGISTRATION REGISTRATION REGISTERED
NUMBER DATE TRADEMARK
1,987,599 July 16, 1996 TRACH CARE MAC
1,970,481 April 23, 1996 MIST ASSIST
1,840,243 June 21, 1994 FOAM CARE
1,837,691 May 31, 1994 FLASH FOAM
1,818,717 February 1, 1994 CHAR-FLO
1,797,703 October 12, 1993 CODE BLUE EASI-LAV
1,793,553 September 21, 1993 BAL-CATH
1,757,543 March 9, 1993 DENTASWAB POLY-PLUS
1,753,765 February 23, 1993 BALLARD UNIT DOSE
1,690,024 June 2, 1992 ENDO-GUARD
1,662,948 October 29, 1991 PEPCO
1,655,483 September 3, 1991 EASI-LAV
1,608,110 July 31, 1990 TRACH CARE WET PAK
1,569,479 December 5, 1989 SAFETY DRAIN
1,509,875 October 25, 1988 DENTASWAB
1,500,402 August 16, 1988 READY CARE
1,491,006 June 7, 1988 SAFETY SHIELD KIT
1,403,724 August 5, 1986 ENDOCAINE
1,358,802 September 10, 1985 FOAM CARE
1,358,803 September 10, 1985 FOAM CARE (stylized)
1,338,744 June 4, 1985 BALLARD MEDICAL PRODUCTS
1,330,753 April 16, 1985 ENDO-GUARD with design
1,328,358 April 2, 1985 TRACH CARE
1,328,357 April 2, 1985 DOUBLE SCRUB
1,325,596 March 19, 1985 FOAM CARE DOUBLE SCRUB
1,286,773 July 24, 1984 XYLO-TOL
1,277,803 May 15, 1984 LAC-TOL
1,274,743 April 24, 1984 QUIK-PREP
1,225,871 February 1, 1983 R2
2. MIC - MIC has registered the following trademarks with the
United States Patent and Trademark Office, in addition to others
pending:
REGISTRATION REGISTRATION REGISTERED
NUMBER DATE TRADEMARK
2,187,626 September 8, 1998 MIC
2,145717 March 24, 1998 KEEN EDGE
2,036,645 February 11, 1997 BASICS
2,004,268 October 1, 1996 LARIAT
1,912,396 August 15, 1995 THERMAL OPTION
1,897,441 June 6, 1995 WE MAKE LIFE A LITTLE EASIER
1,853,026 September 6, 1994 CAN-OPT
1,746,978 January 19, 1993 SHUR-FORM
1,713,379 September 8, 1992 MIC-KEY
1,607,979 July 31, 1990 ENDOVATIONS
1,548,136 July 18, 1989 MEDICAL INNOVATIONS
CORPORATION (with Snakes)
1,512,575 November 15, 1988 SECUR-LOK
1,414,121 October 21, 1986 MIC (with Snakes)
7 <PAGE>
3. TRI-MED - Tri-Med has registered the following trademarks
with the United States Patent and Trademark Office, in addition to
others pending:
REGISTRATION REGISTRATION REGISTERED
NUMBER DATE TRADEMARK
2,147,638 March 31, 1998 QUICK-TAP
2,101,784 September 30, 1997 PYTEST
1,701,374 July 21, 1992 CLOTEST
The Company also maintains trademark registrations in various
foreign countries and has other trademark registrations pending.
MANUFACTURING BACKLOG
Generally, all sales of product by the Company include terms
requiring payment within thirty to forty-five days. Product is
typically not allowed to be returned unless defective or shipped in
error. As of November 17, 1998, the Company had back orders
(believed to be firm) of approximately $106,992, in contrast to
approximately $219,279 in back orders at the same time in 1997.
Back orders are generally filled within ten days. Most of these
back orders are custom kits.
COMPETITION
Each of the Company's products competes in major markets within
the health care industry. Many of the Company's competitors are
larger and more established in the market place than the Company,
and many competitors have larger research staffs, facilities, and
marketing forces. However, the aggressive marketing, consultative
sales force, and unique features of the Company's product lines
continue to be well received and are helping the Company maintain
and, in some cases, increase its portion of the market. The
Company's market share and competition vary from product to product.
The Company estimates there are approximately seven to ten competing
companies for its FOAM CARE products, three or four competitors for
its TRACH CARE products, four or five competitors for its
Cardiotronics product line, and eight to ten competitors for its
Tri-Med product line. Depending upon the specific product, there
are anywhere from no competitors to three or four competitors for
MIC products. Each year, there are an increasing number of
competitors for each of these product lines.
EMPLOYEES
The Company currently has 1336 full-time employees, 788 of whom
are hourly production employees including quality control, molding,
and liquid compounding. The total U.S. and foreign sales force now
numbers 125, split into a TRACH CARE/CARDIO/PMP sales force with 39
representatives, MIC/ENDOVATIONS/COX sales force with 48
representatives, and a PMP/FOAM CARE sales force with 26
8 <PAGE>
representatives, and 12 international sales representatives. In
addition, there are 16 full-time division and national sales
managers, 3 sales trainers, 10 marketing employees, and 3 strategic
accounts employees.
MANUFACTURING AND WORKING CAPITAL
All of Ballard's products are assembled, and many component
parts are manufactured, at the Company's premises, located in
Draper, Utah and Pocatello, Idaho, where Ballard has complete
facilities for the design and construction of the Company's own
tooling, prototype molds, and production molds. The Company's
CLOTEST product is manufactured at a facility in Perth, Australia,
and its PYTEST product is manufactured at its facility in
Charlottesville, Virginia. The Company uses plastic injection
molding and assembly techniques in the manufacture of many of its
products.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of design engineers, project
managers, and other employees for continuing research and
development of products. We are committed to constantly searching
for new products and for improvements to existing products, and we
are committed to allocating sufficient resources to meet these
important objectives. The following table sets forth the amounts
expended by the Company in the last three fiscal years for Company-
sponsored, in-house research and development activities:
9/30/98 9/30/97 9/30/96
Company-sponsored,
in-house research and
development expenses $2,866,929 $2,856,409 $3,184,151
ITEM 2. PROPERTIES
Information required by this item is incorporated herein by
reference from the Company's Annual Report. In addition, the
following information is provided:
The Company owns a 393,735 square-foot plant on approximately
25 acres of land in Draper, Utah. The Company also owns
approximately 31 acres of undeveloped land surrounding its facility
in Draper, Utah.
The Company recently completed construction of a laboratory at
its Draper, Utah facility to accommodate the move of the Company's
laboratory in Virginia (acquired through the Tri-Med acquisition).
The approximate construction costs of this laboratory was $360,000.
This space will also be used for the manufacturing of all H. pylori
diagnostic products (CLOtest and PYtest) acquired through the Tri-
Med acquisition.
The Company also owns a 208,000 square-foot plant on
approximately 25 acres of land in Pocatello, Idaho.
9 <PAGE>
Management estimates given the current product mix being
manufactured in its facilities, the existing Utah and Idaho plants
have a single-shift capacity as follows:
Plant Capacity
_____ ________
Draper, Utah $175-$200 million
Pocatello, Idaho $75 to $85 million
May 15, 1998 the Company entered into a Sublease on its former
Cardiotronics facility located at 5966 LaPlace Court, Carlsbad
California 92008. This sublease should cover the Company's
obligations under the lease on the Cardiotronics building through
the expiration of its lease.
The Company's lease on the Kansas City facility (acquired
through the Tri-Med acquisition) ended September 3, 1998. The
Company also has a small manufacturing facility in Perth, Australia
which it is leasing as a result of the Tri-Med acquisition. The
parties have verbally negotiated to end this lease on or about
January 15, 1999, at which time the Perth, Australia facility will
be closed.
In August, 1996, the Company acquired, indirectly through a
Canadian subsidiary, a 12,000 square foot building (on 1.5 acres of
land) in Thorold, Canada. The building has been leased by the
Company to a tenant.
ITEM 3. LEGAL PROCEEDINGS
BALLARD MEDICAL PRODUCTS V. ALLEGIANCE HEALTHCARE CORPORATION
AND SORENSON CRITICAL CARE, INC.
The parties to this case are in the final stages of discovery
(i.e., the exchange of information and documents, depositions,
etc.). Ballard's motion for preliminary injunction, filed in July,
1998, was denied by the court. A pretrial conference is tentatively
scheduled with the court in February, 1999.
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
On or about August 3, 1998, the United States Court of Appeals
for the 7th Circuit affirmed the District Court's dismissal of Mr.
Heath's lawsuit with prejudice. Subsequently, Mr. Heath filed a
petition for a writ of certiorari with the United States Supreme
Court. The parties are waiting to see whether the Supreme Court
will agree to hear an appeal of this matter.
OTHER LITIGATION
The Company is also a party to ordinary routine litigation
(including other product liability litigation) incidental to the
Company's business.
10 <PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September
30, 1998, no matters were submitted to a vote of shareholders.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Annual Report and other
written and oral statements made from time to time by the Company do
not relate strictly to historical or current facts. As such, they
are considered "forward-looking statements" which provide current
expectations or forecasts of future events. Such statements can be
identified by the use of terminology such as "anticipate,"
"believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words
or expressions. The Company's forward-looking statements generally
relate to its growth strategies, financial results, product
development and regulatory approval programs, and sales efforts.
One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and
uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed below. See
"Risk Factors." Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
The Company does not undertake to update any forward-looking
statement, but investors are advised to consult any further
disclosures by the Company on this subject in its filings with the
Securities and Exchange Commission, especially on Forms 10-K, 10-Q,
and 8-K (if any), in which the Company discusses in more detail
various important factors that could cause actual results to differ
from expected or historic results. The Company notes these factors
as permitted by the Private Securities Litigation Reform Act of
1995. It is not possible to foresee or identify all such factors.
As such, investors should not consider any list of such factors to
be an exhaustive statement of all risks, uncertainties or
potentially inaccurate assumptions.
RISK FACTORS
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, including the Company's flagship TRACH CARE closed suction
catheter. 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
11 <PAGE>
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, financial condition, or cash flows 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
12 <PAGE>
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
13 <PAGE>
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 maintains product liability coverage in the amount
of $5,000,000 through Medmarc, 4000 Legato Road, Suite 800, Fairfax,
Virginia. This is a claims made policy, with a deductible of
$10,000 per occurrence and $75,000 aggregate maximum per year. The
Company maintains excess liability coverage in the amount of
$10,000,000 through American International Group Specialty Lines,
Inc., 70 Pine Street, New York, New York. The Company deems this
coverage 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.
From time to time the Company issues its own common stock in
order to acquire other companies. Such increases in the number of
outstanding Company shares could have a dilutive effect on the
Company's earnings per share and on the Company's book value per
share depending upon several factors including: (1) the
profitability of the acquired company; (2) the number of shares of
Company common stock issued for the acquisition; and (3) whether the
transaction can be treated as a pooling of interests. The issuance
of Company common stock for material acquisitions could also result
14 <PAGE>
in large blocks of Company stock being held by new voting groups and
could therefore have an effect on the voting control of the Company.
The Company prefers whenever possible to use its stock, rather
than cash, to acquire other companies and intends to continue this
acquisition policy.
The Company continues to devote substantial management
resources to looking for additional companies and product lines to
acquire. At almost any given point in time, the Company is in the
process of a preliminary review of various potential target
companies, or involved in more comprehensive due diligence, or
involved in preliminary or final negotiations for the acquisition.
INTANGIBLES. As of September 30, 1998, $38,327,628 (17.2%) of
the Company's total assets consisted of intangible assets (cost in
excess of fair value of net assets acquired and patents and other
intangibles) net of amortization. $26,524,776 of these intangible
assets represent the difference between the purchase price paid by
the Company for various acquisitions, and the fair market value of
net assets purchased, net of amortization. The approximate amount
of amortization expense related to intangibles for fiscal year 1998
was $4,089,000, and this of course reduces net income. There can be
no assurance that assets, businesses, and product lines purchased
through acquisitions will retain their value. If such acquired
assets were to lose value, corresponding goodwill included in
intangibles may have to be written off all at once, resulting in a
possible significant charge to earnings and earnings per share. The
Company periodically reviews the carrying value of its intangible
assets based on current and anticipated undiscounted cash flows and
recognizes impairment when such cash flows will be less than the
carrying values.
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
15 <PAGE>
dependent upon raw materials for which there are few sources. So
far, the Company has not had any serious problems obtaining needed
raw 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.
For the fiscal year ending September 30, 1998, international
sales ($18,221,425) were 12.1% of net sales of the Company.
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. The Company is in the process of
addressing the Year 2000 Issue. See "2000 ISSUES."
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by Item 5 of this Part II is
incorporated herein by reference from the Company's Annual Report.
16 <PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by Item 6 of this Part II is
incorporated by reference from the Company's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 of this Part II is
incorporated herein by reference from the Company's Annual Report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets as of September 30,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1998 are incorporated herein by
reference from the Company's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements on accounting and financial
disclosure to be disclosed under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names of the Company's directors and their business
experience for at least the last five years are set forth below.
There is no arrangement or understanding between any director and
any other person pursuant to which the director was or is to be
selected as a director or nominee:
Name, Age, and Position Director
with the Company Since Principal Occupation
_______________________ ________ ____________________
Dale H. Ballard (76) 1978 President, Chief
President, Chief Executive Officer,
Executive Officer, Chairman of the Board
Chairman of the Board (1)
John I. Bloomberg (63) 1981 Managing General
Director Partner, private
investment companies (2)
J. Dallas VanWagoner 1984 Retired Physician (3)
(61) Director
Robert V. Petersen (72) 1986 Professor Emeritus of
Director Pharmaceutics,
University of Utah (4)
17 <PAGE>
Name, Age, and Position Director
with the Company Since Principal Occupation
_______________________ ________ ____________________
E. Martin Chamberlain 1988 Vice President of
(58), Vice President of Regulatory Affairs,
Regulatory Affairs, Secretary (5)
Secretary, Director
Dale H. Ballard, Jr. 1993 President of Stratco,
(51), Director a financial planning
and investment firm (6)
Paul W. Hess (44) 1993 General Counsel (7)
Director,
General Counsel
(1) Mr. Ballard has served as President, Chief Executive
Officer, and Chairman of the Board of Directors since the formation
of the Company in 1978. Mr. Ballard holds a Bachelor of Science
Degree in Pharmacy from the University of Utah.
(2) From July, 1981 to the present, Mr. Bloomberg has been a
General Partner of J.I.B. Associates, Bricoleur Partners, Olympic
Growth Fund, and Utah Capital Corp., private investment companies.
From 1963 to 1981, Mr. Bloomberg's positions included Senior Drug
Analyst at Kidder Peabody (1963-1965), Associate Director of
Research at CBWL-Hayden Stone, now a part of Shearson/Lehman
(1965-1972), Director of Research and Senior Vice President at
Ladenberg, Thalmann & Co. (1972-1976), Security Analyst at Alex
Brown and Sons (1976-1979), and a Limited Partner and Vice President
of Bear Stearns & Co. (1979-1981). Mr. Bloomberg graduated from
Amherst College with a B.A. in Chemistry and received an MBA in
Business Administration from Harvard Business School in 1962. He is
on the Board of Directors of the John Moran Eye Center, University
of Utah.
(3) Dr. VanWagoner received his B.S.E.E. degree from the
University of Utah in 1961, and M.S.E.E. in 1964. He graduated from
St. Louis University School of Medicine in 1970. He is a board
certified obstetrician and gynecologist and a member of the American
College of Obstetrics and Gynecology. Dr. VanWagoner has been a
clinical instructor with the University of Utah School of Medicine
and has assisted companies in the health care industry with numerous
research projects. He retired his private practice in November,
1996.
(4) Dr. Petersen received a B.S. (Honors) in Pharmacy from the
University of Utah in 1950, and a Ph.D. in Pharmaceutical Chemistry,
with minors in Organic Chemistry and Pharmacology, from the
University of Minnesota in 1955. Dr. Petersen has held various
academic positions with the University of Utah since 1957 and has
been a Professor of Pharmacy since 1967. He was Chairman of the
Department of Applied Pharmaceutical Sciences from 1965 to 1978 and
18 <PAGE>
Chairman of the Department of Pharmaceutics from 1978 to 1982. He
retired from the University of Utah July 1, 1992, and now serves as
a professor emeritus of pharmaceutics. Dr. Petersen has acted as a
consultant to various companies, including Albion Laboratories
(1964-1982), Deseret Pharmaceutical Company, Inc. (1970-1989),
Sorenco, Inc. (1978-present), Kolmar Laboratories (1983-1987),
Sorenson Development (1983-1989, and 1993 - present), Pacific
Chemicals of Seoul, Korea (1989-91), and Ciba-Geigy Corporation
(1989-91). He served as a member of the board of directors of the
American Foundation for Pharmaceutical Education from 1973 to 1975,
since 1980 has served as a member of the board of directors for the
Drug Standards Division of the United States Pharmacopeia - National
Formulary, and in 1990 was appointed to the board of directors of
the U.S.P. Committee of Revisions (1990-1995). Dr. Petersen is past
president of the American Association of Colleges of Pharmacy and
from 1972 to 1987 was the University of Utah College of Pharmacy's
liaison to the board of trustees of the Utah Pharmaceutical
Association.
(5) Dr. Chamberlain joined the Company in August, 1982, as a
project manager. He received his B.S. degree in Molecular and
Genetic Biology in 1967, his Master of Arts degree in Biological
Science with a minor in Chemistry in 1969, and his Doctorate in
Biology with Biochemistry as an allied field in 1973. Between 1974
and 1981, he held a faculty appointment with the University of Utah,
working with the Departments of Biology and the School of Medicine's
Department of Obstetrics and Gynecology, in biological and medical
research. Dr. Chamberlain became Vice President in October, 1993 in
addition to his appointment as Secretary of the Company in 1983. In
July, 1994 he became Vice President of Regulatory Affairs. He
served as Director of Quality Assurance for the Company from 1986 to
1994.
(6) Dale H. Ballard, Jr. is the son of Dale H. Ballard, the
Company's Chief Executive Officer. Dale Ballard, Jr. graduated from
Brigham Young University in 1970, with a Bachelor of Science Degree
in Business Management, with minors in Accounting and Economics.
From 1972 until April, 1992, he owned and operated Ballard
Construction Company, a closely-held corporation engaged principally
in the business of road and asphalt construction. From
approximately 1977 to April, 1992, Mr. Ballard also operated a
property management business called Empire Properties. Empire
Properties was a wholly-owned subsidiary of Ballard Construction
Company. In April, 1992, Mr. Ballard sold his construction and
landscaping businesses. Subsequently he formed a new financial
planning and investment company called Stratco.
(7) Paul W. Hess joined the Company as in-house counsel in
August, 1993. He had served as outside general corporate counsel
for the Company, through his former law firm Strong & Hanni, since
approximately 1985. In October, 1993, Mr. Hess was elected and
appointed by the Board of Directors as General Counsel. Mr. Hess
worked as an attorney for Strong & Hanni from 1981 until 1993. He
19 <PAGE>
received his B.S. degree in Accounting from Brigham Young University
in 1978 and his Juris Doctorate degree from the University of Utah
College of Law in 1981. Mr. Hess is also a Certified Public
Accountant.
EXECUTIVE OFFICERS
The President, Executive Vice President, Vice Presidents,
Secretary, Treasurer, and General Counsel of Ballard Medical
Products are elected annually at the regular meeting of the Board of
Directors following the Annual Meeting of Shareholders and serve at
the discretion of the Board of Directors. There is no arrangement
or understanding between any executive officer and any other person
pursuant to which he was or is to be selected as an officer. The
business background for at least the past five years of each
executive officer is as follows:
Name and Age Background
____________ __________
Dale H. Ballard (76) President, Chief Executive
Officer, Chairman of the Board (1)
Harold R. ("Butch") Executive Vice President,
Wolcott (52) General Manager (2)
E. Martin Chamberlain (58) Vice President of Regulatory
Affairs and Corporate Secretary (3)
Donald C. Eiring (49) Vice President of Sales for
Critical Care Division (4)
Dennis B. Cox (45) Vice President of Sales for
Interventional Division (5)
Clyde H. Baker (43) Vice President of Sales for
Primary Care Division (6)
Chris Thomas (39) Vice President of Corporate
Development (7)
R. Dennis Eyre (57) Vice President of Marketing for
Critical Care Division (8)
Bradford D. Bell (49) Vice President of International
Division (9)
Kenneth R. Sorenson (55) Treasurer and Chief Financial
Officer (10)
Paul W. Hess (44) General Counsel (11)
(1) See "Directors".
(2) Mr. Wolcott was appointed by the Board of Directors as
Executive Vice President of Ballard in June, 1994. He was hired by
20<PAGE>
the Company as General Manager in December, 1992. Prior to joining
Ballard, he was employed by Pilot Cardiovascular Systems, Inc. in
San Clemente, California, from April, 1991 until December, 1992,
where he worked initially as Vice President of Operations and later
as Chief Operating Officer. From April, 1990 to April, 1991, Mr.
Wolcott provided consulting services to various medical device
companies. From January, 1987 until April, 1990, Mr. Wolcott worked
for Catheter Technology Corporation of Salt Lake City, Utah, as Vice
President of Manufacturing.
(3) See "Directors".
(4) Mr. Eiring has been an employee of Ballard since April 27,
1992. He has served as Vice President of Sales for Critical Care
Division since July, 1998. From July, 1997 to July, 1998, he served
as National Sales Manager. Prior to July, 1998, Mr. Eiring was a
Division Manager over sales representatives. He started as a
Division Manager in the Ohio Division in October, 1993 and was
transferred to the Chicago Division in October, 1995.
(5) Mr. Cox joined Ballard in May, 1995 in connection with
Ballard's acquisition of Cox Medical Enterprises, Inc. In February,
1998, Mr. Cox was appointed Vice President of Sales for
Interventional Division. From May, 1995 to February, 1998, he
served as a Product Manager and Marketing Manager for endoscopy and
enteral feeding products of Ballard. From June, 1989 until May,
1995, Mr. Cox was Vice President of Cox Medical Enterprises, Inc.
(6) Mr. Baker joined Ballard and was appointed Vice President
of Sales for Ballard's Primary Care Division in December, 1998.
From June, 1997 to December, 1998 he was the Vice President of U.S.
Sales Cardiovascular Surgery, Baxter Cardiovascular Group, Baxter
Healthcare in Irvine, California. From June, 1994 to May, 1997 he
was the Senior Vice President of the Customer Satisfaction Group
(sales, marketing, new product development, regulatory, customer
service) of Research Medical, Inc. in Midvale, Utah.
(7) Mr. Thomas has been an employee of the Company since
October, 1988. He was appointed Vice President of Corporate
Development in February 12, 1998. From November, 1997 to February,
1998 he served as Executive Director of Strategic Accounts. From
November, 1995 to November, 1997 he served as Director of Strategic
Accounts. He served as National Accounts Manager from August, 1994
to November, 1995. Prior to that, he was a Division Manager over
sales representatives in the Mideast Division. Prior to August,
1991 he was a sales representative for Ballard.
(8) Mr. Eyre has served as Vice President of Marketing for
Critical Care Division since July, 1998. From February, 1998 to
July 1998, he was Vice President of the Critical Care Division. Mr.
Eyre joined the Company in 1995 as Director of International Sales.
He served in this role until becoming Vice President in February,
1998. For a period of nineteen years prior to joining the Company,
Mr. Eyre worked for Deseret Medical and its acquiror, Becton
Dickinson Vascular Access, as director of field sales.
21<PAGE>
(9) Mr. Bell was appointed Vice President of Sales and
Marketing on August 1, 1994. He served as Director of Marketing for
Ballard since October, 1991. Prior to coming to work for Ballard,
Mr. Bell worked for Bard Access Systems (formerly named Davol/Cath
Tech, Inc.), where he served as Director of Marketing from the fall
of 1988 until October, 1991.
(10) Mr. Sorenson joined the Company in July, 1985. He has
worked in the Company's Finance Department since joining the
Company. He became Treasurer of the Company in August, 1985. Mr.
Sorenson is a graduate of Brigham Young University in Accounting.
(11) See "Directors".
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers to file reports of
ownership and changes in ownership of the Company's Common Stock
with the Securities and Exchange Commission and the New York Stock
Exchange, and the Company is required to identify any of those
individuals who failed to file such reports on a timely basis. To
the best of the Company's knowledge, based upon a review of such
reports furnished to the Company and written representations that no
other reports were required, there were no late filings by the
Company's directors or executive officers in fiscal year 1998.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS
During the fiscal year ended September 30, 1998, each of the
members of the Board of Directors received $500 in cash compensation
for his services as a director. There is no standard agreement
pursuant to which the directors are compensated for their services.
EXECUTIVE OFFICERS
The following table sets forth the compensation paid or awarded
by the Company to the Company's Chief Executive Officer and all of
the Company's other executive officers who are considered "highly
compensated" under regulations promulgated by the Securities and
Exchange Commission, for each of the fiscal years ended September
30, 1998, 1997, and 1996:
SUMMARY COMPENSATION TABLES
ANNUAL COMPENSATION
OTHER
FISCAL ANNUAL
YEAR COMPEN-
NAME AND PRINCIPAL ENDED BONUS SATION
POSITION 9/30 SALARY ($) ($) ($)
Dale H. Ballard, 1998 250,000 40,767 (1)
President 1997 233,333 45,678 (1)
1996 200,000 40,595 (1)
22 <PAGE>
0THER
FISCAL ANNUAL
YEAR COMPEN-
NAME AND PRINCIPAL ENDED BONUS SATION
POSITION 9/30 SALARY ($) ($) ($)
Harold R. "Butch" 1998 149,667 43,631 (1)
Wolcott, Executive 1997 140,333 45,381 (1)
Vice President 1996 132,500 35,038 (1)
Donald C. Eiring, 1998 105,833 5,000 (1)
Vice President 1997 93,333 0 (1)
1996 105,529 0 (1)
Dennis B. Cox, 1998 124,167 0 (1)
Vice President 1997 125,000 0 (1)
1996 125,000 0 (1)
Chris Thomas, 1998 119,683 22,818 (1)
Vice President 1997 98,333 20,676 (1)
1996 84,167 15,000 (1)
R. Dennis Eyre, 1998 83,834 24,329 (1)
Vice President 1997 79,583 23,546 (1)
1996 75,000 16,332 (1)
Bradford D. Bell, 1998 133,333 1,056 (1)
Vice President 1997 134,167 40,969 (1)
1996 120,833 31,001 (1)
Kenneth R. 1998 97,333 28,001 (1)
Sorenson, Chief 1997 91,333 28,160 (1)
Financial Officer 1996 84,750 20,867 (1)
Paul W. Hess 1998 125,236 15,008 (1)
General Counsel 1997 111,769 21,481 (1)
1996 133,750 15,696 (1)
LONG-TERM COMPENSATION (2)
SECURITIES ALL OTHER
FISCAL UNDERLYING COMPEN-
NAME AND PRINCIPAL YEAR ENDED OPTIONS SATION
POSITION 9/30 GRANTED (#)(3) ($)(5)
Dale H. Ballard, 1998 (4) N/A (6) 0
President 1997 (4) N/A (6) 0
1996 (4) N/A (6) 0
Harold R. ("Butch") 1998 0 3,173
Wolcott, Executive 1997 8,000 5,852
Vice President 1996 6,000 6,225
Donald C. Eiring, 1998 0 4,258
Vice President 1997 5,000 3,909
1996 5,000 3,846
23<PAGE>
SECURITIES ALL OTHER
FISCAL UNDERLYING COMPEN-
NAME AND PRINCIPAL YEAR ENDED OPTIONS SATION
POSITION 9/30 GRANTED (#)(3) ($)(5)
Dennis B. Cox, 1998 0 4,758
Vice President 1997 2,000 5,208
1996 2,000 5,000
Chris Thomas, 1998 0 3,975
Vice President 1997 6,000 3,375
1996 4,000 4,567
R. Dennis Eyre, 1998 0 3,887
Vice President 1997 4,000 3,317
1996 3,000 750
Bradford D. Bell, 1998 0 5,108
Vice President 1997 5,000 5,592
1996 5,000 7,408
Kenneth R. 1998 0 4,162
Sorenson, 1997 5,000 3,185
Chief Financial 1996 5,000 5,669
Officer
Paul W. Hess, 1998 0 5,223
General Counsel 1997 4,000 5,024
1996 4,000 5,515
(1) The personal benefits and perquisites received by the
named executives were less than the reporting thresholds established
by the Securities and Exchange Commission (the lesser of $50,000 or
10% of the individual's cash compensation).
(2) The Company does not have benefit plans involving
Restricted Stock Awards, Stock Appreciation Rights (SARs), or Long-
Term Incentive Plans (LTIPs)
(3) There were no option grants to any executive officer
during the fiscal year ended September 30, 1998.
(4) No options have ever been granted to Mr. Ballard under any
of the Company's Incentive Stock Option Plans.
(5) These figures represent the Company's contributions to its
401(k) retirement plan for the benefit of the named executives.
Messrs. Eiring, Cox, Thomas, Bell, and Sorenson are 100% vested,
Messrs. Wolcott and Hess are 80% vested, and Mr. Eyre is 40% vested.
(6) Mr. Ballard is not a participant in the Company's 401(k)
plan.
24<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED SEPTEMBER 30, 1998
Number of
Shares Securities Value of
Acquired Underlying Unexercised
on Value Unexercised In-the-Money
Exercise Received Options at Year Options at
Name (#) ($) End (#) Year End ($) (1)
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
Dale H.
Ballard N/A N/A N/A N/A N/A N/A
Harold R.
("Butch")
Wolcott 6,767 82,050 14,000 0 20,500 0
E. Martin
Chamber-
lain 0 0 10,000 0 16,875 0
Donald C.
Eiring 3,000 33,562 8,000 0 10,000 0
Dennis B.
Cox 0 0 2,000 0 250 0
Chris
Thomas 4,000 32,000 6,000 0 750 0
R. Dennis
Eyre 0 0 4,000 0 500 0
Bradford
D. Bell 10,000 153,825 29,600 0 201,625 0
Kenneth
R.
Sorenson 0 0 15,000 0 63,125 0
Paul W.
Hess 0 0 8,000 0 13,500 0
(1) The fair market value (i.e., the closing price) of the
Company's common stock on September 30, 1998 ($20 per share) minus
the exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors functions as the Company's
Compensation Committee. The Board has no separate Compensation
Committee. The following Board members are also employees and
executive officers of the Company:
25<PAGE>
Dale H. Ballard, Chairman of the Board, CEO, and President
E. Martin Chamberlain, Vice President of Regulatory
Affairs and Secretary
Paul W. Hess, General Counsel
Dale H. Ballard, Jr., also a Board member, is the son of Dale H.
Ballard.
During the last completed fiscal year, any deliberations in
Board meetings regarding executive officer compensation were
participated in by all members of the Board.
STOCK OPTION COMMITTEE
The Company's incentive stock option plans (the "Plans") are
administered by two stock option committees. Stock Option Committee
A ("Committee A") is authorized to grant options only to employees
who are not also officers or directors of the Company. Stock Option
Committee B ("Committee B") is authorized to grant options only to
employees who are also officers or directors of the Company.
Committee B was originally formed in response to old Rule 16b-3
promulgated by the Securities and Exchange Commission ("SEC").
Section 16(b) enables an issuer (or one of its shareholders) to
bring suit to recover profits gained by an insider from short-swing
transactions. A transaction which meets the requirements of Rule
16b-3 is exempt from Section 16(b) of the Securities Exchange Act of
1934.
Rule 16b-3 was amended by the SEC, effective August 15, 1996.
Old Rule 16b-3 required, among other things, that option grants to
officers and directors, be made by the full Board of Directors (if
each member is a "disinterested person"), or by a committee of two
or more directors, each of whom is a "disinterested person". A
"disinterested person" is a director who is not, during the one year
prior to service as an administrator of the applicable Plan, or
during such service, granted or awarded options pursuant to any
Plan.
The August, 1996 amendment to Rule 16b-3, among other things,
eliminated the need to have a committee of "disinterested persons"
for such option grants to officers and directors. Nevertheless, in
an August, 1996 Special Meeting of the Company's Board of Directors,
the Board voted to continue the practice of administering the
Company's Plans through the existing Committee A and Committee B.
Each Committee must be comprised of two persons, both of whom
must be members of the Board of Directors. However, members of
Committee B must be "disinterested persons" as defined above.
Committee A is currently comprised of Dale H. Ballard (the President
of the Company) and E. Martin Chamberlain (a Vice President and the
Secretary of the Company). Committee B is currently comprised of
Dale H. Ballard and J. Dallas VanWagoner, M.D., both of whom are
26 <PAGE>
"disinterested persons". Dr. VanWagoner is not an employee or
officer of the Company.
NO EMPLOYMENT CONTRACTS
The Company has no written employment contract with any
executive officer. Like all but a very few of the Company's
employees, the executive officers are "at-will employees", meaning
either the employee or the Company can terminate the employment
relationship at any time for any reason or for no reason.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Board of Directors establishes and periodically reviews the
compensation of the Chief Executive Officer. Compensation of other
executive officers has been left to the judgment and discretion of
Dale H. Ballard, Chief Executive Officer. The Board has left such
other compensation to the discretion of the CEO because the
compensation levels of all such executive officers have historically
been reasonable in the judgment of the Board of Directors, and
because the Company has been successful under Mr. Ballard's
leadership and under this compensation system.
There is no specific relationship of corporate performance to
executive compensation. No formula or specific evaluation procedure
is followed. Rather, the compensation policy is subjective and
informal. However, compensation for executives is based generally
on the principles that compensation must (1) be competitive with
other quality companies in order to help motivate and retain the
talent needed to grow the Company's business; and (2) provide a
strong incentive for key personnel and sales representatives to
achieve the Company's goals.
The Company has a history of relying upon incentive stock
options as an important element of each executive's compensation
package. This program has generally enabled the Company to keep
salaries and bonuses at relatively modest levels. The Company's
successful sales and profit record suggests, we believe, that these
principles which form the basis for our compensation program have
delivered the desired results.
ELEMENTS OF EXECUTIVE COMPENSATION
It has been the Company's policy for many years that the
executive compensation program consists of base salary, bonuses,
insurance benefits, and stock options. In addition, the Company has
provided automobiles to its executive officers and certain other key
employees.
The Company's salary levels are determined by comparisons with
companies of similar size and complexity in the health care
27<PAGE>
industry. Salary increases are determined in view of the financial
performance of the Company, the individual performance of the
executive, and any promotions of, or increased responsibilities
assumed by, the executive. Bonuses are determined by the Chief
Executive Officer at the end of each fiscal year, based upon these
same factors. Bonuses are completely discretionary and are not
based upon any formula.
All employee stock options are granted pursuant to one of the
Company's incentive stock option plans. The Company makes incentive
stock option grants periodically at no less than 100% of the market
price on the effective date of the grant.
In addition to the above compensation, executive officers,
along with all employees of the Company, are eligible to participate
in the Company's 401(k) retirement plan. This plan is available to
all employees after they have been employed by the Company for at
least one year. The plan allows employees to make contributions to
the plan from salary reductions each year, up to an annual limit
which is generally 15% of a participant's annual compensation.
Under the 401(k) plan, the Company matches a participant's
contribution up to 4% of his or her salary. Employees are always
fully vested in their own contributions and become fully vested in
any contributions made by the Company after six years of service.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The compensation of Dale H. Ballard, Chairman of the Board and
Chief Executive Officer, consists of a base salary, typically an
annual bonus, insurance benefits, and the use of a vehicle. At no
time in the Company's history has Mr. Ballard received incentive
stock options under any incentive stock option plan. In addition,
Mr. Ballard is not a participant in the Company's 401(k) retirement
plan.
There is no specific relationship between the Company's
performance and Mr. Ballard's compensation. Again, only a
subjective, informal policy is followed. The Board of Directors
periodically reviews Mr. Ballard's base salary and bonus and
approves his compensation based on the Board's evaluation of his
performance, his length of service as Chief Executive Officer, and
competitive Chief Executive Officer pay information. Mr. Ballard
has historically determined his own salary and bonus. The Company
has enjoyed an overall strong performance, and Mr. Ballard has been
the Company's able Chief Executive Officer from the Company's
formation.
The Board feels that Mr. Ballard has been under compensated
over the years in view of his excellent performance as Chief
Executive Officer.
28 <PAGE>
SECTION 162(m) POLICY.
Under Section 162(m) of the Internal Revenue Code, no income
tax deduction is allowed to a publicly held corporation for
remuneration paid to certain executive officers (including the CEO)
to the extent that the amount of such remuneration with respect to
any given employee/executive officer for the taxable year exceeds
$1,000,000. The Board's current policy is that the Company will not
pay remuneration to any one employee during a given tax year which
would not be deductible by the Company because of the Section 162(m)
limits.
BOARD OF DIRECTORS
Dale H. Ballard, Chairman
John I. Bloomberg
J. Dallas VanWagoner
Robert V. Petersen
E. Martin Chamberlain
Dale H. Ballard, Jr.
Paul W. Hess
STOCK PERFORMANCE GRAPH
The following graph shows the yearly percentage change in
cumulative total shareholder return on the Company's Common Stock
during the preceding five fiscal years ended September 30, 1998,
compared with the Standard & Poor's 500 Stock Index and the
published Standard & Poor's Health Care (Medical Products and
Supplies) Industry Index. The comparison assumes $100 were invested
on September 30, 1993 in the Company's Common Stock, and in each of
the foregoing indices the comparison assumes reinvestment of
dividends.
WRITTEN DESCRIPTION OF THE STOCK PERFORMANCE GRAPH
FOR EDGAR FILING.
The graph line of each of these three securities is described
below:
BALLARD MEDICAL PRODUCTS. The graph shows that $100 invested
in Ballard Medical Products Common Stock on September 30, 1993 would
be worth the following values on the respective dates shown:
September 30, 1994 62
September 30, 1995 99
September 30, 1996 117
September 30, 1997 146
September 30, 1998 121
S&P 500. The graph shows that $100 invested in the S&P 500
Index on September 30, 1993 would be worth the following values on
the respective dates shown:
29 <PAGE>
September 30, 1994 104
September 30, 1995 135
September 30, 1996 162
September 30, 1997 227
September 30, 1998 248
S&P HEALTH CARE (MEDICAL PRODUCTS AND SUPPLIES). The graph
shows that $100 invested in the S&P Health Care (Medical Products
and Supplies) Index on September 30, 1993 would be worth the
following values on the respective dates shown:
September 30, 1994 128
September 30, 1995 207
September 30, 1996 249
September 30, 1997 307
September 30, 1998 371
ITEMS 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
So far as is known to management, as of September 30, 1998, the
following persons owned beneficially more than 5% of the outstanding
shares of the Company's Common Stock:
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OF BENEFICIAL OUTSTANDING COMMON
OWNER OWNERSHIP STOCK (1)
State Farm Mutual
Automobile
Insurance Company
One State Farm
Plaza,
Bloomington, IL
61710 (2) 2,264,502 7.14%
State of Wisconsin
Investment Board (3) 3,096,100 9.76%
121 East Wilson
St., P.O. Box
7842, Madison, WI
53207
FMR Corp. (4) 3,687,300 11.62%
82 Devonshire St.
Boston, MA 02109-
3614
(1) All percentages are calculated on the basis of outstanding
shares of common stock, plus shares (in the denominator) which could
be acquired within 60 days of September 30, 1998 by the exercise of
outstanding stock options.
30 <PAGE>
(2) The shares held by State Farm are owned as follows:
Shares
State Farm Balanced Fund 427,751
State Farm Growth Fund, Inc. 820,000
Mutual Automobile Insurance 1,016,751
_________
Total 2,264,502
(3) The shares held by the State of Wisconsin are owned as
follows:
Shares
Investment Board 1,484,600
Investment Board -
Variable Retirement Trust Fund 1,611,500
_________
Total 3,096,100
(4) The shares held by FMR Corporation are owned as follows:
Shares
Advisor Health Care Fund 31,100
FMR Corporation 557,500
Fidelity International Ltd. (Bermuda) 18,600
Fidelity Low Priced Stock Fund 2,668,600
Fidelity New Millennium Fund 77,200
Select Portfolios Biotechnology 334,300
_________
Total 3,687,300
31 <PAGE>
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 30, 1998, the
number of shares of Common Stock of the Company beneficially owned
by each of the Company's directors and executive officers, and by
all of the Company's directors and executive officers as a group:
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL OUTSTANDING
BENEFICIAL OWNER, OWNERSHIP COMMON STOCK
POSITION WITH COMPANY (SHARES) (4) (1)
Dale H. Ballard, President, Direct 0
CEO and Chairman of the (2) Indirect
Board 1,063,769
Exercisable
Options N/A
Total 1,063,769 3.35%
John I. Bloomberg, Director Direct 800
Indirect 0
Exercisable
Options N/A
Total 800 (3)
J. Dallas VanWagoner, M.D. Direct 2,700
Director Indirect 0
Exercisable
Options N/A
Total 2,700 (3)
Robert V. Petersen, Direct 676
Director Indirect 0
Exercisable
Options N/A
Total 676 (3)
E. Martin Chamberlain, Direct 0
Director, Vice President of Indirect 0
Regulatory Affairs, and Exercisable
Secretary Options 10,000
Total 10,000 (3)
Dale H. Ballard, Jr., Direct 46,534
Director Indirect 1,651
Exercisable
Options N/A
Total 48,185 (3)
32 <PAGE>
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL OUTSTANDING
BENEFICIAL OWNER, OWNERSHIP COMMON STOCK
POSITION WITH COMPANY (SHARES) (4) (1)
Paul W. Hess, Director, Direct 0
General Counsel Indirect 1,466
Exercisable
Options 8,000
Total 9,466 (3)
Harold R. ("Butch") Direct 0
Wolcott, Executive Vice Indirect 0
President and General Exercisable
Manager Options 14,000
Total 14,000 (3)
Donald C. Eiring, Direct 1,024
Vice President of Sales for Indirect 0
Critical Care Division Exercisable
Options 8,000 (3)
Total 9,024
Dennis B. Cox, Direct 0
Vice President of Sales for Indirect 0
Interventional Division Exercisable
Options 2,000
Total 2,000 (3)
Chris Thomas, Direct 0
Vice President of Sales for Indirect 0
Corporate Development Exerciseable
Options 6,000
Total 6,000 (3)
R. Dennis Eyre, Direct 0
Vice President of Marketing Indirect 0
for Critical Care Division Exercisable
Options 4,000
Total 4,000 (3)
Bradford D. Bell, Vice Direct 1,000
President of International Indirect 0
Sales Exercisable
Options 29,600
Total 30,600 (3)
Kenneth R. Sorenson, Direct 534
Treasurer Indirect 0
Exercisable
Options 15,000 (3)
Total 15,534
33 <PAGE>
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL OUTSTANDING
BENEFICIAL OWNER, OWNERSHIP COMMON STOCK
POSITION WITH COMPANY (SHARES) (4) (1)
All directors and executive Direct 53,268
officers as a group (15 Indirect
persons) 1,066,886
Exercisable
Options 96,600
Total 1,216,754 3.83%
(1) All percentages are calculated on the basis of outstanding
shares of common stock, plus shares which could be acquired, within
60 days of September 30, 1998, by the exercise of outstanding stock
options.
(2) These shares are owned as follows: Shares
Dale H. Ballard Family Living Trust 641,120
Alice B. Ballard Family Living Trust 422,289
Indirect ownership through
Ballard Family Properties, Ltd. 360
Total 1,063,769
(3) Percentage of shares owned does not exceed 1%.
(4) "Exercisable Options" listed indicate shares of common
stock which could be acquired by the exercise of incentive stock
options held by executive officers, exercisable within 60 days of
September 30, 1998.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF REPORT
1. CONSOLIDATED FINANCIAL
STATEMENTS
The following are included in the Annual Report incorporated by
reference into Parts I and II of this report:
Independent Auditor's Report, dated November 13, 1998;
34 <PAGE>
Consolidated Balance Sheets as of September 30, 1998 and
1997;
Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1997, and 1996;
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1998, 1997, and 1996;
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996;
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following are included in this report:
Independent Auditors' Report dated November 23, 1998;
Supplemental Schedule II - Valuation Accounts for the
Three Years Ended September 30, 1998;
Other schedules required by Rule 5.04 of Regulation S-X
are omitted because of the absence of the conditions under
which they are required or because the required
information is included in the consolidated financial
statements or related notes.
3. EXHIBITS
See "Ballard Medical Products Index to Exhibits" attached to
this report.
(b) REPORTS ON FORM 8-K
On March 10, 1998 and July 14, 1998 the Company filed Form 8-Ks
with regard to its acquisition of Tri-Med. The Company filed an
amended Form 8-K on July 20, 1998 to voluntarily restate its
financial statements to reflect the pooling of interests in its
acquisition of Tri-Med.
(c) EXHIBITS
See "Ballard Medical Products Index to Exhibits" attached to
this report.
(d) SEPARATE FINANCIAL STATEMENT
SCHEDULES
Not applicable.
35 <PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 30, 1998 BALLARD MEDICAL PRODUCTS
By: Dale H. Ballard,
President, Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Date: December 30, 1998 By: Dale H. Ballard
Director
Date: December 30, 1998 By: E. Martin Chamberlain
Director
Date: December 30, 1998 By: Dale H. Ballard, Jr.
Director
Date: December 30, 1998 By: Paul W. Hess
Director
Date: December 30, 1998 By: Kenneth R. Sorenson
Treasurer (Principal
Financial Officer)
36 <PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
To the Board of Directors and Stockholders of
Ballard Medical Products:
We consent to the incorporation by reference in Registration
Statement Nos. 33-23232, 33-34384, 33-43910, 33-50040, 333-18661,
and 333-59471 on Form S-3 and in Registration Statement Nos. 2-
90684, 2-94306, 33-0840, 33-17698, 33-25628, 33-36851, 33-41720, 33-
56302, 33-73194, 33-57735, 333-01941, 333-22827, and 333-59465 on
Form S-8 of Ballard Medical Products (the Company) of our report
dated November 23, 1998 (December 23, 1998 as to the second
paragraph of Note 11), appearing in this Annual Report on Form 10-K
of the Company for the year ended September 30, 1998.
Our audits of the financial statements referred to in our
aforementioned report also included the financial statement
schedules of the Company which are included in this Annual Report on
Form 10-K. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Salt Lake City, Utah
December 29, 1998
37 <PAGE>
SUPPLEMENTAL SCHEDULE II
BALLARD MEDICAL PRODUCTS
VALUATION ACCOUNTS
FOR THE THREE YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 1998
BALANCE AT ADDITION WRITE-OFFS BALANCE AT
BEGINNING TO AND END OF
OF YEAR ALLOWANCE DEDUCTIONS YEAR
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
1998 $858,000 $1,845,000 $(1,738,000) $965,000
1997 $192,000 $1,226,000 $(560,000) $858,000
1996 $125,000 $67,000 None $192,000
ALLOWANCE FOR
SALES RETURNS
AND REBATES:
1998 $1,660,000 None None $1,660,000
1997 $805,000 $965,000 ($110,000) $1,660,000
1996 $500,000 $305,000 None $805,000
ALLOWANCE FOR
INVENTORY
OBSOLESCENCE:
1998 $1,116,948 $None $(366,948) $750,000
1997 $652,917 $601,860 $(137,829) $1,116,948
1996 $130,453 $522,464 None $652,917
38 <PAGE>
BALLARD MEDICAL PRODUCTS
Index to Exhibits
EXHIBIT
NO. EXHIBIT DESCRIPTION SEQUENTIALLY NUMBERED PAGE
3.1 Restated Certificate Incorporated herein by
of Incorporation, reference to Exhibit 3.1 to
dated June 18, 1987 Form 10-K, filed December
29, 1989.
3.2 July 10, 1991 Incorporated herein by
Articles of reference to Exhibit 4.2 to
Amendment to the Registration Statement
Articles of on Form S-3, filed November
Incorporation 13, 1991, Registration No.
33-43910.
3.3 September 20, 1993 Incorporated herein by
Articles of reference to Exhibit 3.3 to
Amendment to Form 10-K filed December
Articles of 16, 1993.
Incorporation
3.4 Amended and Restated Incorporated herein by
Bylaws, dated reference to Exhibit 3.3 to
October 12, 1992 Form 10-K, filed December
24, 1992.
4.1 See Exhibits 3.1,
3.2, 3.3, 3.4, 10.1,
10.2, 10.3, 10.4,
10.5, 10.6, 10.7,
10.8 and 10.9
9 None
10.1 Material Contract: Incorporated herein by
1988 Incentive Stock reference to the
Option Plan Registration Statement on
Form S-8, filed November
18, 1988, Registration No.
33-25628.
39 <PAGE>
EXHIBIT
NO. EXHIBIT DESCRIPTION SEQUENTIALLY NUMBERED PAGE
10.2 Material Contract: Incorporated herein by
1990 Incentive Stock reference to the
Option Plan Registration Statement on
Form S-8, filed September
17, 1990, Registration No.
33-36851.
10.3 Material Contract: Incorporated herein by
1991 Incentive Stock reference to Exhibit 4.2 to
Option Plan Registration Statement on
Form S-8, filed July 10,
1991, Registration No. 33-
41720.
10.4 Material Contract: Incorporated herein by
1992 Incentive Stock reference to Exhibit 4.3 to
Option Plan Registration Statement on
Form S-8, filed with Post-
Effective Amendment No. 1
on April 9, 1993,
Registration No. 33-56302.
10.5 Material Contract: Incorporated herein by
Amended and Restated reference to Exhibit 4.5 to
1993 Incentive Stock Registration Statement on
Option Plan Form S-8, filed December
20, 1993, Registration No.
33-73194.
10.6 Material Contract: Incorporated herein by
1994 Incentive Stock reference to Exhibit 10.8
Option Plan to Form 10-K filed December
15, 1994.
10.7 Material Contract: Incorporated herein by
1995 Incentive Stock reference to Exhibit 10.9
Option Plan to Form 10-K filed December
8, 1995.
10.8 Material Contract: Incorporated herein by
1996 Incentive Stock reference to Exhibit 10.10
Option Plan to Form 10-K filed December
9, 1996.
10.9 Material Contract: Incorporated herein by
1997 Incentive Stock reference to Exhibit 10.9
Option Plan to Form 10-K filed December
15, 1997.
40 <PAGE>
EXHIBIT
NO. EXHIBIT DESCRIPTION SEQUENTIALLY NUMBERED PAGE
10.10 Material Contract: Incorporated herein by
Agreement of reference to Exhibit 19 to
Settlement dated Form 10-Q, filed May 15,
March 1, 1990, with 1990.
Smiths Industries
Medical Systems,
Inc. and Smiths
Industries PLC
10.11 Material Contract: Incorporated herein by
Agreement dated reference to Exhibit 10.21
effective October 1, to Form 10-K, filed
1993 between Ballard December 16, 1993.
Medical Products and
H. Earl Wright and
The Wright Foamer
Co.
10.12 Material Contract: Incorporated herein by
Stock Purchase reference to Exhibit 99.1
Agreement (with to Form 8-K, filed December
various "Sellers" 23, 1996.
named therein)
11 Computation of p. 43
Income Per Common
Share and Common
Equivalent Share
12 Not Applicable
13 Ballard Medical p. 44
Products 1998 Annual
Report for the year
ended September 30,
1998
16 Not Applicable
18 Not Applicable
21 Subsidiaries of p. 103
Ballard Medical
Products
22 Not Applicable
24 Not Applicable
25 Not Applicable
26 Not Applicable
41 <PAGE>
EXHIBIT
NO. EXHIBIT DESCRIPTION SEQUENTIALLY NUMBERED PAGE
27 Financial Data p. 105
Schedule
28 Not Applicable
42 <PAGE>
EXHIBIT 11
BALLARD MEDICAL PRODUCTS
COMPUTATION OF INCOME PER COMMON SHARE
AND COMMON SHARE - ASSUMING DILUTION
FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
Period Income
Cumulative Out- Average Net Per
Shares Standing Shares Income Share
Income
per
common
share -
basic:
1998 11,047,301,335 365 30,266,579 $32,013,520 $1.06
1997 10,738,074,430 365 29,419,382 31,262,739 $1.06
1996 10,258,531,225 365 28,105,565 25,909,521 $0.92
Income
per
common
share -
diluted:
1998 11,260,031,000 365 30,849,400 $32,013,520 $1.04
1997 11,056,029,215 365 30,290,491 31,262,739 $1.03
1996 10,816,966,625 365 29,635,525 25,909,521 0.87
43 <PAGE>
EXHIBIT 13
BALLARD MEDICAL PRODUCTS
ANNUAL REPORT
1998
CORPORATE PROFILE
Ballard Medical Products is an innovative medical technology
company, offering a range of specialized medical devices. Our
products are sold in 62 countries, and the customers purchasing our
products include more than 12,500 hospitals and other medical care
facilities worldwide.
Since going public in 1983, the Company has enjoyed a very
successful history of growth, as shown in the following chart:
Consolidated Net Sales
(Approx.)
______________________
1983 $100,000
1984 300,000
1885 2,200,000
1986 5,400,000
1987 9,600,000
1988 15,100,000
1989 20,600,000
1990 29,100,000
1991 38,300,000
1992 49,800,000
1993 69,600,000
1994 71,400,000
1995 90,000,000
1996 109,900,000
1997 132,700,000
1998 150,100,000
The chart below shows our net income growth over the last five
years:
Net Income
(Approx.)
__________
1994 $17,300,000
1995 21,900,000
1996 25,900,000
1997 31,300,000
1998 32,000,000
As used in this report, the term the "Company" refers to
Ballard Medical Products ("Ballard") and its subsidiaries: Medical
Innovations Corporation ("MIC"), Ballard Real Estate Holdings, Inc.
("BREH"), Ballard Purchase Corporation ("BPC"), Ballard
International, Inc. ("BI"), Mist Assist, Inc. ("Mist Assist"),
(Ballard Medical Products (Canada) Inc. dba Preferred Medical
Products ("PMP"), Plastic Engineered Products Company ("PEPCO"),
44 <PAGE>
Cardiotronics Systems, Inc. ("Cardiotronics"), and Tri-Med
Specialties, Inc. ("Tri-Med").
At September 30, 1998, the Company employed 1,398 people in 10
countries.
The Company's common stock is traded on the New York Stock
Exchange under the symbol BMP.
1998 IN REVIEW
Fiscal year 1998 was another record setting year for the
Company. The table below compares highlights of fiscal year 1998 to
1997 (see also "Consolidated Statements of Operations" and
"Consolidated Balance Sheets" herein):
1998 1997
____ ____
Net Sales $150,062,671 $132,743,037
Net Income $32,013,520 $31,262,739
Earnings Per Share $1.04 $1.03
International Sales $18,221,425 $12,289,986
Cash and Cash Equivalents $10,231,524 $21,624,043
Investments $60,327,337 $26,628,312
Total Current Assets $134,585,612 $100,936,673
Total Assets $222,688,188 $194,192,382
Current Liabilities $7,240,883 $12,950,419
Long Term Debt $0 $0
Stockholders' Equity $215,447,305 $181,241,963
Return on Equity 14.9% 17.2%
Return on Assets 14.4% 16.1%
Current Ratio 18.6 to 1 7.8 to 1
We continue to be very pleased with these results, particularly
in view of the increasing pricing and competitive pressures on many
of our products. We believe that in spite of world economic
problems in general, international markets still offer the Company
important growth opportunities.
45 <PAGE>
For the first time in the Company's history, net sales to
unaffiliated customers outside of the U.S.A. exceeded ten percent
(10%) of the Company's consolidated net sales. See "Notes to
Consolidated Financial Statements."
In February, 1998, the Company acquired Tri-Med with facilities
in Kansas City, Kansas; Charlottesville, Virginia; and Perth,
Australia. Tri-Med is a manufacturer of helicobacter pylori (H.
pylori) diagnostic products. Found in more than 60% of Americans
aged 60 and over, H. pylori has been linked to peptic ulcer disease
and may also be a causative factor in stomach cancer. The
international market for this test is even greater, especially in
third world countries where the incidence of H. pylori is
significant. The extremely pervasive H. pylori bacterium lives only
in the stomach lining, usually producing an inflammation and
weakening the natural protection against stomach acid. This may
then cause an ulcer; however, not all patients with H. pylori
infection progress to ulcer disease. If an ulcer is treated only
with medication to reduce the stomach acid, it may recur if H.
pylori is present. However, if the ulcer is treated also with an
antibiotic to eradicate the H. pylori, then the ulcer can be
permanently cured.
Although a number of tests are available for the diagnosis of
H. pylori infection, they are often invasive, expensive, time-
consuming, or only indicate exposure to H. pylori rather than
detecting active infection. Tri-Med's products are used to diagnose
this infection. See "Tri-Med Products."
This acquisition opens a new frontier of opportunity within the
call pattern of the Company's Interventional Division sales force
and gives us a greater opportunity to succeed in international
markets.
In March, 1998, we completed the monumental task of relocating
the duplicate manufacturing operations of Cardiotronics from
Carlsbad, California to our Pocatello, Idaho facility. In
September, 1998 we also relocated the Kansas City operations of Tri-
Med to Draper, Utah, so as to eliminate that duplicate facility. We
believe the consolidation of operations that the Company has
accomplished during the past two years will help the Company to
reduce manufacturing costs through increased efficiencies.
PRODUCTS
The Company's strong commitment to acquisitions, research and
development, and product enhancements has enabled the Company to
continue to succeed in certain domestic markets, such as the closed
suctioning market, the chronic enteral feeding market, the
endoscopic products market, the heart stimulation electrodes market,
and now in the H. pylori diagnosis market. The Company's TRACH CARE
closed suction catheter and MIC enteral feeding and endoscopic
products families are responsible for more than ten percent (10%) of
the Company's consolidated net sales, as shown in the table below:
46 <PAGE>
Net Sales of Principal Product Families
_______________________________________
1998 1997 1996
TRACH CARE $59,896,555 $57,381,810 $52,782,574
(% of total net sales) (39.9%) (43.2%) (48.0%)
MIC $39,140,249 $32,288,498 $24,235,195
(% of total net sales) (26.1%) (24.3%) (22.1%)
The Company's products are described below (for definitions of
various technical and medical terms, see "Glossary of Technical and
Medical Terms").
TRI-MED PRODUCTS
* The principal products of Tri-Med are: (1) CLOtest, a
rapid urease test for the detection of H. pylori, that can be used
in conjunction with Ballard s Thermal Option biopsy forceps, and (2)
PYtest, a breath test for the detection of H. pylori. CLOtest has
become the gold standard for the detection of urease activity.
The PYtest is a Carbon 14 noninvasive urea breath test, released by
Tri-Med in the spring of 1997.
Both the CLOtest and the PYtest products are inventions of
Barry J. Marshall, M.D., who was featured on a segment of ABC s
20/20." Dr. Marshall first established a causal link between the
H. pylori bacterium and peptic ulcer disease in the 1980s. Both the
CLOtest and PYtest products are covered by patents held by Dr.
Marshall and licensed to the Company.
ORCA
* ORCA is our newest oral care product which incorporates
all currently used tools in a single user friendly platform. ORCA
incorporates suction swabs, suction catheters, Yankhauer suction and
a soft toothbrush all capable of simultaneous vacuum and refreshing
minted rinse to finish each procedure. ORCA was introduced by
Ballard in September, 1998.
CARDIOTRONICS PRODUCTS
* The Cardiotronics products of Ballard consist of a full
line of stimulation electrodes and cables and other interface
systems used for external defibrillation and pacing. Cardiotronics
is the only manufacturer of multi-function stimulation electrodes
with pacing, defibrillation and continuous electrocardiogram ("ECG")
monitoring capabilities all in one electrode. Cardiotronics
pioneered the development of stimulation electrode products designed
for specific procedures and settings including: (a) multi-function
electrodes for the emergency room and critical care setting, (b)
radiolucent products for the catheterization lab and (c) sterile
electrodes for the operating room. Cardiotronics is the only
company that has developed a patented hydropolymer gel specifically
designed for stimulation electrode therapies. This unique
47 <PAGE>
hydropolymer gel is the lowest impedance gel available on the
market.
* Cardiotronics also offers a portfolio of cables and other
interface systems which allow the hospital customer to standardize
using Cardiotronics stimulation electrodes.
TRACH CARE PRODUCTS
* The TRACH CARE closed endotracheal suction catheter system
continues to be the Company's flagship product in the intensive
care/critical care arena. It enables patients with endotracheal
tubes, on ventilators, to have their airways suctioned while
maintaining ventilator support, thus improving patient care.
Further, this product reduces infection risks due to its "closed"
design, keeping both users and the environment from contaminating
the suction catheter and from being contaminated.
The TRACH CARE system is available in sizes, from adult to
neonatal, as well as in several variations such as Wet Pak and
Double Lumen. This family of products also includes a line of
accessories used to complement TRACH CARE such as Metered Dose
Inhaler adapters, BALLARD UNIT DOSE, Start Kit, etc. These
accessories are designed to allow the TRACH CARE catheter to be
used, among other things, as a drug delivery system or to adapt it
to specific patient needs.
* The Neonatal "Y" TRACH CARE catheter is an improved
suction catheter, engineered for use on sophisticated neonatal
ventilators. It provides a side stream catheter approach, which not
only gives greater patient flexibility, but also couples closed
suction with high frequency oscillators, high frequency jet
ventilators, and volume and physiologic monitors.
* The TRACH CARE Double Swivel Elbow is a calibrated closed
suction catheter which provides more patient comfort and
flexibility, and gives the clinician a better "feel" for the
catheter during the suction procedure.
* The SAFETY DRAIN closed drain provides clinicians with a
way to empty the ventilator circuit of condensate without opening
it. Users are thereby able to complete the closed system started
with the TRACH CARE catheter, thus providing additional safety for
both clinician and patient.
* Heat and Moisture Exchangers (HMEs) have been offered by
the Company since December, 1993. The HMEs (manufactured for
Ballard by Datex-Engstrom AB) provide a means of humidifying the
patient's airways during ventilation and are sold with our TRACH
CARE catheter. The Company is Datex-Engstrom's exclusive HME
distributor in the United States and Canada.
MIC PRODUCTS
The chronic enteral feeding market is experiencing rapid growth
due to the aging of the population. There is also an emerging
physician consensus that early post-operative enteral support
benefits the high risk surgical patient by decreasing septic
48 <PAGE>
morbidity, and improving wound healing and recovery time. MIC's
full range of specialty feeding tubes places the Company firmly in a
position to take advantage of the growing enteral feeding market.
* The MIC Gastrostomy Tube (G-tube) is the first tube
specifically designed for the gastrostomy procedure. The MIC
Gastrostomy Tube can be placed by surgeons, gastro-enterologists,
interventional radiologists and replaced by qualified registered
nurses at bedside in the hospital, and in home care and alternate
care settings. The unique design of the MIC Gastrostomy Tube
becomes a problem solver for the physician and other care givers.
The MIC Gastrostomy Tube virtually eliminates inadvertent tube
dislodgement, controls gastric leakage, and is provided in several
sizes and versions, to accommodate a wide range of patient needs.
* The successful MIC-KEY Skin Level Gastrostomy Feeding Kit
continues to be the gastrostomy tube of choice for the pediatric
patient, because of its unique aesthetic appearance and its ease of
insertion and removal.
* A pediatric version of the MIC Transgastric Jejunal Tube
allows for simultaneous gastric decompression and jejunal feeding.
The prior, adult version has shown strong growth in the adult arena.
* The MIC-PEG provides the gastroenterologist, surgical
endoscopist, and interventional radiologist, with the ability to
initially place a gastrostomy tube by minimally invasive technique.
The PEG is later replaced by a G-tube or MIC-KEY skin level
gastrostomy tube for long-term nutrition.
* The CB-X1/X2 disposable cleaning brush is a versatile
device that offers maximum channel scrubbing power and the ability
to scrub endoscope components.
* The patented THERMAL OPTION disposable biopsy forceps
features a scalpel-edged cutting surface enabling the endoscopist to
obtain precision-cut tissue samples as well as providing "on demand"
coagulating capability for greater patient safety and cost
efficiency.
* The disposable CAN-OPT needle-knife papillotome is an
endoscopic device used to open the ampulla in order to facilitate
entry into the bile duct for the detection of gallstones.
* The disposable CAN-OPT dual-lumen ERCP system consists of
a dual lumen catheter providing a completely separate channel for
the contrast medium and the guidewire. This allows simultaneous
injection of the contrast medium, while advancing the guidewire in
the biliary tree following cannulation for the detection of
gallstones.
* Our disposable cytology brush incorporates a unique
barium-loaded cap, which provides radiographic visualization and
maximum cell retention while minimizing cell sample contamination.
* The precurved TLC and DLC ERCP catheters allow for smooth,
atraumatic cannulation of the biliary tree. The TLC features a
triple lumen catheter configuration with separate wire guide and
49 <PAGE>
contract media injection channels plus a separate third inaccessible
channel with six radiopaque markers spaced 2 cm apart, which may be
used for the accurate measurement of biliary/pancreatic strictures.
* The TAXI guidewire features a Teflon-sheathed nitonol core
wire with silicone coating providing enhanced flexibility and kink
resistance, allowing access to the biliary tree. The highly pliable
radiopaque tip provides the endoscopist with radiographic
visualization while the fully insulated wire provides for
sphincterotomy with wire guide in place.
* The unique, precurved "wedge tip" multi-lumen papillotomes
provide unparalleled orientation combined with ease of cannulation
for greater procedural efficiency during ERCP.
* The Keen Edge Disposable Biopsy Forcep is an endoscopic
device used to obtain tissue samples from the gastrointestinal
system. This differs from our THERMAL OPTION coagulating/biopsy
forcep in that it is noncoagulating and allows us to provide a low-
end competitive product without sacrificing margins on the THERMAL
OPTION forceps.
* The Disposable Injection/Washing-Injection Needle is an
endoscopic accessory used to deliver fluid to specific sites in the
gastrointestinal system. Particular procedures are:
(a) Sclerotherapy - The injection of medication into the
varix to reduce or eliminate potential esophageal bleeds; especially
prevalent in alcoholics.
(b) Lesion Injection - Direct injection of a medication
into a lesion to promote healing within the GI tract.
(c) Hemostasis - Direct injection of a medication into a
lesion to promote healing within the GI tract.
(d) Tattooing - Injection of dye to specific sites prior
to a surgical resection of the GI tract.
(e) Saline Assisted Polypectomy - Injection of saline
into base of polyp to raise polyp off mucosal floor - reduces chance
of bowel perforation.
* The Disposable Irrigation Catheter is an endoscopic
accessory that delivers a concentrated stream of fluid to specific
sites, usually employed to remove adhesions or residual fecal
material from the colon to enhance visual examination of underlying
mucosa.
* The ENDO-GUARD Disposable Bite Block is an endoscopic
accessory placed between a patient's teeth to protect physician's
fingers, patient's teeth and endoscope, during gastroscopies, ERCP
procedures, or mechanical esophageal dilations.
FOAM CARE PRODUCTS
FOAM CARE foamers and solutions are designed for use throughout
the hospital and are the Company's principal product in the
50 <PAGE>
operating room. FOAM CARE is one of our franchise products. Its
foamers utilize a unique, patented, foaming device that turns the
soap solution into rich foam lather.
FOAM CARE products provide users with cost savings when
compared to common liquid soaps. FOAM CARE products are gentle on
the hands and, in the operating room, are complemented by our DOUBLE
SCRUB brush, a soft-on-the-hands surgical scrub brush.
PMP PRODUCTS
The Company offers a variety of pain management products,
described below:
* Single Shot Epidural Trays - Trays specifically designed
for steroid injections in chronic pain management clinics.
Specialty needles, and custom packaging reduce waste and lower
costs.
* Specialty Needles - Allow the physician to utilize the
smallest needles feasible in order to minimize pain and
complications such as spinal headache.
* Pediatric Trays and Mini-Kits - Allow the physician to
select special products specifically designed for the pediatric
population.
* Epidural Catheters, Trays and Mini-Kits - Provide a choice
of configuration to insure the most cost effective choices for the
physician based on patient needs.
OTHER PRODUCTS
* An array of sponge-tipped, oral swabs (DENTASWAB) which
allow for routine oral care in patients admitted to oncology,
critical care, surgery, and alternate care sites. The swabs are
used to clean and refreshen the mouth as well as to stimulate the
gums, oral mucosa and tongue. Proper oral care is a cornerstone to
preventing nosocomial pneumonia.
* The EASI-LAV gastric lavage system is a closed gastric
lavage system. It is used to clean out the stomach in drug overdose
patients or those with gastric bleeding. It makes the lavage
process cleaner, faster and more effective while providing
additional clinician protection. This product is used in the
hospital emergency room and gastrointestinal labs.
* The CHAR-FLO activated charcoal system is a unique
charcoal delivery system designed for use with our EASI-LAV system
in over-dose patients. It enables faster, more accurate and
environmentally clean charcoal delivery.
* The BAL Cath catheter product is designed to obtain
bronchoalveolar lavage samples for use in the diagnosis of
nosocomial and opportunistic respiratory infections. Because it is
used without a bronchoscope, it is much more cost effective for the
hospital.
51 <PAGE>
* The MIST ASSIST breathing exerciser (inspiratory flow
control device), which combines inspiratory breathing exercises,
medication delivery via inhalers or nebulizers, and expiratory
breathing exercises. This combination of therapies into one device
can provide significant cost savings to hospitals.
CAPITAL EXPENDITURES
In June, 1998, the Company completed construction of an office
complex addition (approximately 14,500 square feet) at its Draper,
Utah facility, at a total construction cost of approximately
$1,300,000. Various other remodelling projects (none of which were
individually material) were also completed during the fiscal year in
order to prepare portions of the Pocatello and Draper facilities for
acquired manufacturing operations to be relocated.
The Company continued to focus during the year on upgrading and
improving its manufacturing operations, including the acquisition
and assembly of additional automation assembly equipment, the
purchase of additional machines, the purchase and construction of
additional molds, etc.
COMMON STOCK
TRADING
The Company's common stock is traded on the New York Stock
Exchange ("NYSE"). The following table sets forth, for the
respective periods indicated, the high and low sales prices for the
Company's common stock, as reported and summarized by the NYSE for
fiscal years 1998 and 1997:
FISCAL YEAR 1998 FISCAL YEAR 1997
QUARTER HIGH LOW HIGH LOW
First Quarter 24 5/8 21 7/16 19 5/8 16 1/4
Second Quarter 27 3/8 22 21 1/4 17 7/8
Third Quarter 27 3/8 17 3/16 21 1/4 18 1/8
Fourth Quarter 20 7/8 17 15/16 25 19 9/16
On December 10, 1998, the closing quotation for the Company's
Common Stock, as reported by the WALL STREET JOURNAL, was 23 9/16
high and 22 13/16 low. As of December 10, 1998, there were
approximately 1,044 holders of the Company's common stock (based
upon the number of record holders and including individual
participants in security position listings).
DIVIDENDS
The Company has paid the following cash dividends during the
two most recent fiscal years:
52 <PAGE>
DIVIDEND
RECORD DATE PAYMENT DATE PER SHARE
December 16, 1996 January 3, 1997 $.05
June 16, 1997 July 3, 1997 $.05
December 16, 1997 January 5, 1998 $.05
June 16, 1998 July 3, 1998 $.05
The Company currently expects to continue to pay comparable
dividends in the future. However, there can be no assurance of
this.
FINANCIAL HIGHLIGHTS
SELECTED CONSOLIDATED FINANCIAL DATA (1)(2)
1998 1997 1996 1995 1994
Net
Sales $150,062,671 $132,743,037 $109,881,342 $90,041,201 $71,421,894
Other
Income
Net $5,878,172 $5,539,812 $5,309,380 $4,101,037 $3,518,832
Net
Income $32,013,520 $31,262,739 $25,909,521 $21,939,876 $17,254,823
Net
Income
Per
Common
Share-
Diluted $1.04 $1.03 $0.87 $0.75 $0.61
Total
Assets $222,688,188 $194,192,382 $144,164,584 $115,216,589 $94,361,714
Cash
Divi-
dends
Declared
Per
Share (4) $.11 $.11 $.11 $.10 $.07
53 <PAGE>
(1) The consolidated financial data shown above includes the
accounts of Ballard and its wholly-owned subsidiaries, MIC, BREH,
BI, PMP, BPC, Mist Assist, PEPCO, Cardiotronics and Tri-Med. The
accounts of Mist Assist, PMP and Cardiotronics are included as of
July 19, 1996, August 28, 1996, and December 10, 1996, respectively,
which reflect their respective acquisition dates.
(2) The combination of Ballard with PEPCO and Tri-Med were
accounted for as poolings of interests. The selected consolidated
financial data have been prepared as if Ballard, PEPCO, and Tri-Med
had been combined for all periods presented.
(3) Results include the benefit from a cumulative effect of a
change in accounting for income taxes in fiscal year 1994.
(4) Includes cash dividends paid by PEPCO and Tri-Med.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (1)(2)
(UNAUDITED)
FISCAL YEAR 1998
QUARTERS ENDED: 9/30/98 6/30/98 3/31/98 12/31/97
Net Sales $38,995,250 $38,249,804 $36,135,728 $36,681,889
Gross Margin 24,971,836 24,403,387 21,647,920 23,481,540
Net Income 9,113,694 8,845,647 5,543,174 8,511,005
Net Income Per
Common Share -
Diluted .30 .29 .18 .28
FISCAL YEAR 1997
QUARTERS ENDED: 9/30/97 6/30/97 3/31/97 12/31/96
Net Sales $36,111,363 $33,961,010 $32,517,823 $30,152,841
Gross Margin 23,617,232 21,684,191 21,117,431 19,296,755
Net Income 8,574,114 7,777,121 7,826,526 7,084,978
Net Income Per
Common Share -
Diluted .28 .26 .26 .24
(1) See additional analysis of net sales, margins, and net
income in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) See footnote explanations to "Selected Consolidated
Financial Data."
54 <PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Ballard Medical
Products:
We have audited the accompanying consolidated balance sheets of
Ballard Medical Products and subsidiaries as of September 30, 1998
and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits. The consolidated financial statements give retroactive
effect to the merger of Ballard Medical Products and Tri-Med
Specialties, Inc., which has been accounted for as a pooling of
interests as described in Note 8 to the consolidated financial
statements. We did not audit the balance sheets of Tri-Med
Specialties, Inc. as of September 30, 1997, or the related
statements of operations, stockholders' equity, and cash flows of
Tri-Med Specialties, Inc. for the year ended September 30, 1997,
which statements reflect total assets of $7,743,715 as of September
30, 1997, and total revenues of $7,435,859 for the year ended
September 30, 1997. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for Tri-Med Specialties, Inc. for
1997, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Ballard Medical Products and subsidiaries as of September 30, 1998
and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 1998
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Salt Lake City, Utah
November 23, 1998
(December 23, 1998
as to paragraph 2 of Note 11)
55 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $10,231,524 $21,624,043
Investments available for sale 60,327,337 26,628,312
Accounts receivable - trade
(less allowance for doubtful
accounts: 1998 - $965,000, 1997 -
$858,000 and allowance
for sales returns and
rebates: 1998 and 1997 - $1,660,000) 31,184,303 26,380,031
Royalties receivable 424,891 375,673
Note receivable 3,973,920
Other receivables 1,694,393 908,753
Inventories - net:
Raw materials 8,493,138 10,856,390
Work-in-process 3,726,160 5,527,765
Finished goods 11,034,393 4,507,579
Deferred income taxes 628,611 2,233,042
Income tax refund receivable 2,481,210 1,830,946
Prepaid expenses 385,732 64,139
___________ ___________
Total current assets 134,585,612 100,936,673
___________ ___________
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 31,355,161 28,922,203
Molds 5,703,400 4,891,734
Machinery and equipment 14,989,207 11,097,145
Vehicles 913,876 785,440
Furniture and fixtures 3,923,088 3,264,578
Leasehold improvements 49,507 116,850
Construction in process 4,415,848 4,142,563
___________ ___________
Total 62,223,952 54,094,378
56 <PAGE>
ASSETS 1998 1997
Less accumulated depreciation (14,167,300) (10,746,905)
___________ ___________
Property and equipment - net 48,056,652 43,347,473
___________ ___________
INTANGIBLE ASSETS:
Cost in excess of fair value of net
assets acquired (less accumulated
amortization: 1998 - $7,484,173;
1997 - $5,245,666) 26,524,776 29,443,283
Patents and other
intangibles (less accumulated
amortization: 1998 - $4,738,961; 11,802,852 13,068,452
1997 - $2,980,386) ___________ ___________
Total intangible assets 38,327,628 42,511,735
___________ ___________
DEFERRED INCOME TAXES 1,712,389 2,139,902
___________ ___________
OTHER ASSETS 5,907 5,256,599
___________ ___________
TOTAL $222,688,188 $194,192,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
Accounts payable $1,208,938 $3,216,908
Income taxes payable 1,243,450
Contract payable 3,975,000
Line of credit 1,425,000
Accrued liabilities:
Employee compensation 3,608,774 3,438,849
Royalties 589,021 432,617
Other 590,700 462,045
__________ __________
Total current liabilities 7,240,883 12,950,419
57 <PAGE>
ASSETS 1998 1997
COMMITMENTS AND CONTINGENT
LIABILITIES (Notes 6, 7, and 9)
STOCKHOLDERS' EQUITY:
Common stock - $.10 par value;
75,000,000 shares authorized;
issued and outstanding:
1998 - 30,423,733 shares;
1997 - 30,062,733 shares 3,042,373 3,006,273
Additional paid-in capital 61,158,851 54,942,666
Unrealized losses on investments
available for sale (107,480) (223,783)
Retained earnings 151,353,561 123,516,807
___________ ___________
Total stockholders' equity 215,447,305 181,241,963
___________ ___________
TOTAL $222,688,188 $194,192,382
=========== ===========
See notes to consolidated financial statements.
58 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
NET SALES $150,062,671 $132,743,037 $109,881,342
COST OF PRODUCTS SOLD 55,557,988 47,027,428 38,048,879
___________ ___________ ___________
GROSS MARGIN 94,504,683 85,715,609 71,832,463
___________ ___________ ___________
OPERATING EXPENSES:
Selling, general and
administrative 43,092,315 37,503,070 31,593,508
Research and development 2,866,929 2,856,409 3,184,151
Royalties 1,956,033 1,849,203 1,687,542
___________ ___________ ___________
Total operating
expenses 47,915,277 42,208,682 36,465,201
___________ ___________ ___________
OPERATING INCOME 46,589,406 43,506,927 35,367,262
___________ ___________ ___________
OTHER INCOME:
Interest income - net 2,609,864 2,129,276 1,917,925
Royalty income 2,095,000 2,465,840 2,400,000
Other - net 1,173,308 944,696 991,455
___________ ___________ ___________
Total other income -
net 5,878,172 5,539,812 5,309,380
___________ ___________ ___________
INCOME BEFORE
INCOME TAXES 52,467,578 49,046,739 40,676,642
INCOME TAX EXPENSE 20,454,058 17,784,000 14,767,121
____________ ___________ ___________
NET INCOME $32,013,520 $31,262,739 $25,909,521
=========== =========== ===========
NET INCOME PER
COMMON SHARE:
Basic $1.06 $1.06 $0.92
=========== =========== ===========
59 <PAGE>
1998 1997 1996
Diluted $1.04 $1.03 $0.87
=========== =========== ===========
COMMON SHARES:
Basic 30,266,579 29,419,382 28,105,565
=========== =========== ===========
Diluted 30,849,400 30,290,491 29,635,525
=========== =========== ===========
See notes to consolidated financial statements.
60 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
Unrealized
Gains/
(Losses) on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
___________ ___________ ___________ __________ ____________
BALANCE,
OCTOBER
1, 1995 27,867,747 $2,786,775 $29,113,001 ($142,728) $78,708,313
Net
income 25,909,521
Cash
dividends
paid (3,030,140)
Common
stock
issued
from
exercise
of stock
options 1,252,309 125,230 9,689,509
Acquisi-
tion and
retire-
ment of
treasury
stock (350,000) (35,000) (6,126,421)
61 <PAGE>
Unrealized
Gains/
(Losses) on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
___________ ___________ ___________ __________ ____________
Tax
benefit
attribut-
able to
apprecia-
tion in
value of
stock
issued
in con-
junction
with the
exercise
and
disqual-
ifying
disposi-
tions of
incentive
stock
options 36,609
Unre-
alized
losses on
invest-
ments
available
for sale-
net of
tax (13,836)
___________ ___________ __________ ___________ ____________
BALANCE,
SEPTEMBER
30,1996 28,770,056 2,877,005 38,839,119 (156,564) 95,461,273
Net
income 31,262,739
Cash
dividends
paid (3,207,205)
62 <PAGE>
Unrealized
Gains/
(Losses) on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
___________ ___________ ___________ __________ ____________
Common
stock
issued
from
exercise
of stock
options 1,292,677 129,268 11,129,231
Tax
benefit
attribut-
able to
apprecia-
tion in
value of
stock
issued
in con-
junction
with the
exercise
and
disqual-
ifying
disposi-
tions of
incentive
stock
options 4,974,316
Unre-
alized
losses on
invest-
ments
available
for sale-
net of
tax (67,219)
___________ ___________ ___________ __________ ____________
BALANCE,
SEPTEM-
BER 30,
1997 30,062,733 3,006,273 54,942,666 (223,783) 123,516,807
63 <PAGE>
Unrealized
Gains/
(Losses) on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
___________ ___________ ___________ __________ ____________
Net
income 32,013,520
Cash
dividends
paid (3,323,594)
Common
stock
issued
from
exercise
of stock
options 398,500 39,850 4,277,664
Acquisi-
tion and
retire-
ment of
treasury
stock (37,500) (3,750) (853,172)
Tax
benefit
attribut-
able to
apprecia-
tion in
value of
stock
issued
in con-
junction
with the
exercise
and
disqual-
ifying
disposi-
tions of
incentive
stock
options 1,938,521
64 <PAGE>
Unrealized
Gains/
(Losses) on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
___________ ___________ ___________ __________ ____________
Unre-
alized
gains on
invest-
ments
available
for sale-
net of
tax 116,303
_________ __________ ___________ __________ ____________
BALANCE,
SEPTEM-
BER 30,
1998 30,423,733 $3,042,373 $61,158,851 $(107,480) $151,353,561
========== ========== =========== ========== ============
See notes to consolidated financial statements.
65 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income $32,013,520 $31,262,739 $25,909,521
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Depreciation and
amortization 8,371,983 7,002,801 3,947,487
Gain on disposal
of property (76,423) (6,246,680) (446,320)
Gain on sale of
Neuro investment (1,135,813)
Write-down of
Neuro investment 4,900,000
Write-down of
intangible assets 1,019,610
Tax benefit from
disqualifying
dispositions of
incentive stock
options 1,938,521 4,974,316 39,609
Provision for
losses, sales
returns, and
rebates on
accounts
receivable - trade 1,845,000 2,191,000 372,000
Deferred income
taxes 2,031,944 (373,168) 442,122
Changes in
operating assets
and liabilities-
net of effects
from purchases of
subsidiaries:
Accounts
receivable -
trade (6,649,272) (7,454,819) (6,200,073)
66 <PAGE>
1998 1997 1996
Royalties and
other receivables (112,488) 712,078 (106,639)
Inventories (2,361,957) (5,829,249) (1,382,921)
Income tax refund
receivable (650,264) 1,443,054 (1,170,430)
Prepaid expenses (321,593) 250,872 102,417
Accounts payable (2,007,970) (643,857) 936,506
Income taxes
payable 1,243,450
Accrued
liabilities 354,984 (754,491) 243,121
___________ ___________ __________
Net cash
provided by
operating
activities 35,503,232 31,434,596 22,683,400
___________ __________ ___________
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital
expenditures for
property and
equipment (9,153,167) (14,515,895) (15,398,935)
Proceeds from
sales of property
and equipment 196,860 6,514,131 564,418
Purchases of
investments
available for sale (77,822,719) (46,959,814) (30,569,641)
Proceeds from
maturities of
investments
available for sale 44,280,703 46,902,342 22,231,406
Proceeds from
sale of Neuro
investment 1,797,273
Investment in
and advances to
affiliates (1,281,661) (4,462,625)
Purchases of
intangible assets (931,699) (714,952) (2,852,331)
Purchases of
other assets (109,938) (12,532)
67 <PAGE>
1998 1997 1996
Payments for
purchase of
subsidiaries,
net of cash
acquired (12,323,417) (5,618,432)
Investment in
notes receivable (34,134)
___________ ___________ ____________
Net cash used
in investing
activities (41,632,749) (22,523,338) (36,118,672)
___________ ___________ ___________
CASH FLOWS FROM
FINANCING
ACTIVITIES:
Cash dividends
paid (3,323,594) (3,207,205) (3,030,140)
Proceeds from
issuance of
common stock from
exercise of
options 4,317,514 11,258,499 9,814,739
Proceeds from
borrowings on
Tri-Med line of
credit 1,325,000 1,750,000
Proceeds from
Tri-Med notes
payable 12,651
Payments on
Tri-Med notes
payable (1,325,000)
Payments on
Tri-Med line of
credit (2,750,000) (325,000)
Payment on
Tri-Med contract
payable (2,650,000) (1,850,000)
Purchase of
treasury stock (856,922) (6,161,421)
Repayment of
long-term debt
assumed in
acquisitions (9,444,995) (517,754)
___________ ___________ ___________
68 <PAGE>
1998 1997 1996
Net cash
provided by
(used in)
financing
activities (5,263,002) (1,806,050) 105,424
__________ ___________ ___________
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS (11,392,519) 7,105,208 (13,329,848)
CASH AND CASH
EQUIVALENTS,
BEGINNING OF YEAR 21,624,043 14,518,835 27,848,683
__________ __________ __________
CASH AND CASH
EQUIVALENTS, END
OF YEAR $10,231,524 $21,624,043 $14,518,835
=========== ========== ==========
SUPPLEMENTAL
DISCLOSURE OF
CASH FLOW
INFORMATION -
Cash paid during
the year for
income taxes $17,172,117 $11,993,115 $15,458,820
__________ __________ __________
Cash paid during
the year for
interest $296,069 $16,435 None
__________ __________ ___________
See notes to consolidated financial statements.
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
During 1997, the Company recorded a write-down of its
investment in Neuro Navigational Corporation ("Neuro") totaling
approximately $4,900,000 as a result of the Company's assessment
that the carrying amount of the Neuro investment would not be
recoverable by the Company. During 1998, the Company sold its
investment in Neuro for cash of $1,797,273, net of selling expenses,
and a receivable of $450,000.
On February 25, 1998, the Company entered into a business
combination with Tri-Med Specialties, Inc. in exchange for 1,067,733
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 consolidated financial statements as of
September 30, 1998 and 1997 and for the three years in the period
69 <PAGE>
ended September 30, 1998 have been restated as if the transaction
had occurred on October 1, 1995 (see Note 8).
On July 2, 1997, Tri-Med acquired certain rights and licenses
of Delta West Pty. Limited for a note payable totaling $5,825,000
(see Note 8).
During 1997, the Company recorded a gain on the sale of a
parcel of land totaling approximately $6,300,000. The gain is
included in other income in the accompanying consolidated statement
of operations. In connection with the sale, the Company received
$3,265,700 in cash and a promissory note of $3,973,920. The note is
due in April 1999.
On December 10, 1996, the Company acquired all of the
outstanding capital stock of Cardiotronics Systems, Inc.
(Cardiotronics) in a purchase transaction for $12,722,404 in cash.
In conjunction with the merger, liabilities were assumed as follows:
Fair value of assets acquired
(including goodwill of $13,136,000) $25,070,528
Cash paid 12,722,404
___________
Liabilities assumed $12,348,124
===========
On September 27, 1996, the Company entered into a business
combination with Plastic Engineered Products Corporation 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 consolidated financial statements as of
September 30, 1996 and for the year ended September 30, 1996 were
restated as if this transaction had occurred on October 1, 1995.
In addition, during the year ended September 30, 1996, the
Company entered into three acquisition transactions accounted for as
purchases as follows (see Note 8):
* On April 19, 1996, the Company acquired substantially all
of the assets of Endovations, Inc. for approximately $1,220,000
cash. In conjunction with this purchase, the Company recorded
goodwill of approximately $400,000 and the fair value of assets
acquired approximated $820,000.
* On July 19, 1996, the Company purchased all of the
outstanding capital stock of Mist Assist, Inc. for approximately
$673,600 cash. In conjunction with the acquisition, liabilities
were assumed as follows:
70 <PAGE>
Fair value of assets acquired
(including goodwill of $680,000) $800,000
Cash paid 673,600
________
Liabilities assumed $126,400
========
* On August 28, 1996, the Company purchased all of the
outstanding capital stock of Preferred Medical Products for
approximately $3,600,000 cash (see Note 8). In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired
(including goodwill of $2,900,000) $4,320,970
Cash paid 3,604,440
_________
Liabilities assumed $716,530
=========
See notes to consolidated financial statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Ballard Medical Products (Ballard) and its
subsidiaries develop, manufacture, and market specialized medical
products.
BASIS OF PRESENTATION - The consolidated financial statements
include the accounts of Ballard and its wholly-owned subsidiaries,
Medical Innovations Corporation (MIC), Ballard Real Estate Holdings,
Inc. (BREH), Ballard Purchase Corporation (BPC), Ballard
International, Inc. (BI), Plastic Engineered Products Company
(PEPCO), Ballard Medical Products (Canada) Inc. dba Preferred
Medical Products (PMP), Mist Assist, Inc. (Mist Assist),
Cardiotronics Systems, Inc. (Cardiotronics), and Tri-Med
Specialties, Inc. (Tri-Med) (see Note 8) (collectively, the
Company). All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
71 <PAGE>
INVESTMENTS AVAILABLE FOR SALE - Investments available for sale
consist of tax-free municipal bonds. Investments are recorded at
fair market value. The Company classifies all of its investments as
available for sale.
INVENTORIES - Inventories are stated at the lower of cost (on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation is computed on the straight-line method over the
estimated useful lives as follows:
Buildings 30 to 40 years
Molds 5 years
Machinery and equipment 5 to 10 years
Vehicles 3 to 5 years
Furniture and fixtures 3 to 5 years
Leasehold improvements 3 to 5 years
INTANGIBLE ASSETS - Intangible assets include goodwill, patent
rights, and license costs which are stated at cost and are being
amortized using the straight-line method over their estimated lives,
which range from four to seventeen years.
REVENUE RECOGNITION - Revenues are recognized when the related
product is shipped. The Company records an allowance for estimated
sales returns and rebates.
INCOME TAXES - The Company utilizes an asset and liability
approach for financial accounting and reporting for income taxes.
Deferred income taxes are provided for temporary differences in the
bases of assets and liabilities as reported for financial statement
and income tax purposes.
STOCK-BASED COMPENSATION - The Company has elected to continue
to apply Accounting Principles Board (APB) Opinion 25 (as permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation"). The
appropriate required disclosure of the effects of SFAS No. 123 are
included in Note 5.
STATEMENTS OF CASH FLOWS - For purposes of the consolidated
statements of cash flows, the Company considers cash and interest
bearing securities with original maturities of less than three
months to be cash equivalents.
LONG-LIVED ASSETS - The Company evaluates the carrying value of
long-term assets including intangibles based on current and
anticipated undiscounted cash flows and recognizes impairment when
such cash flows will be less than the carrying values.
OTHER - Certain reclassifications have been made to the prior
years financial statements to conform to classifications adopted in
the current year.
72 <PAGE>
INCOME PER SHARE - Effective for the year ended September 30,
1998, the Company adopted SFAS No. 128, "Earnings Per Share," and
retroactively restated its earnings per share for 1997 and 1996, to
conform with the statement. Accordingly, net income per common
share is computed by both the basic method, which uses the weighted
average number of the Company's common shares outstanding and the
diluted method, which includes the dilutive common shares from stock
options, as calculated using the treasury stock method. The
difference between the Company's basic and diluted earnings per
share is attributable to stock options. The effect of stock options
was to increase the number of common shares by approximately
582,821, 871,109, and 1,529,960 during the years ended September 30,
1998, 1997, and 1996, respectively.
2. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale at September 30, 1998 and 1997
consist of tax-free municipal bonds.
The amortized cost and fair value of investments available for
sale at September 30, 1998 and 1997 is as follows:
1998 1997
Amortized cost $60,492,691 $26,972,594
Gross unrealized
gains 127,920 None
Gross unrealized
losses (293,274) (344,282)
___________ ___________
Fair value $60,327,337 $26,628,312
=========== ===========
As of September 30, 1998 and 1997, all municipal bonds had a
contractual maturity of one year or less. During the years ended
September 30, 1998, 1997, and 1996, there were no gross realized
gains or gross realized losses from sales of investments classified
as available for sale.
3. LINE OF CREDIT
At September 30, 1998, Ballard had an unsecured line of credit
with a bank totaling $5,000,000 which expires February 15, 1999.
The line, if drawn upon, bears interest at the bank's base rate
(8.25% at September 30, 1998). No compensating cash balances are
required. As of September 30, 1998 and during the year then ended,
there were no borrowings under the line of credit.
In July, 1997, Tri-Med (see Note 8) entered into two line of
credit agreements with a bank. The Company paid off the outstanding
balance on the credit agreements and both agreements were terminated
in February 1998.
73 <PAGE>
4. INCOME TAXES
The Company has recorded net deferred tax assets and
liabilities at September 30, 1998 and 1997 which consisted of the
following temporary differences and carryforward items:
1998 1997
Current Long-Term Current Long-Term
Deferred income
tax assets:
Allowance for
uncollectible
accounts
receivable $375,340 $320,513
Allowance for
sales returns
and rebates 645,740 664,785
Allowance
for obsolete
inventory 291,750 451,658
Accrued expenses 330,246 280,925
Unrealized
losses on
investments 57,874 120,498
Net operating
loss carry-
forwards of
acquired
subsidiaries 277,082 $3,221,517 394,663 $3,416,727
________ ___________ ________ __________
Total 1,978,032 3,221,517 2,233,042 3,416,727
Deferred income
tax liabilities:
Deferred gain on
installment sale (1,349,421)
Differences
between tax
basis and
financial
reporting basis
of property
and equipment (1,509,128) (1,276,825)
___________ _________ __________ __________
Net $628,611 $1,712,389 $2,233,042 $2,139,902
=========== ========== ========= =========
74 <PAGE>
The components of income tax expense (benefit) for the years
ended September 30, 1998, 1997, and 1996 are summarized as follows:
1998 1997 1996
Current:
Federal $15,580,657 $16,243,278 $12,421,679
State 2,841,457 1,913,890 1,903,320
__________ __________ __________
18,422,114 18,157,168 14,324,999
========== ========== ==========
Deferred:
Federal 1,718,534 (324,388) 402,473
State 313,410 (48,780) 39,649
_________ ___________ __________
2,031,944 (373,168) 442,122
_________ ___________ __________
Total $20,454,058 $17,784,000 $14,767,121
=========== =========== ==========
Income tax expense differed from amounts computed by applying
the statutory Federal tax rate to pretax income as follows:
1998 1997 1996
Computed Federal
income tax expense
at statutory rate
of 35% $18,363,652 $17,166,358 $14,236,825
State income tax
expense, net of
Federal benefit 2,737,518 1,590,940 1,317,054
Tax exempt income (637,874) (410,736) (553,876)
Foreign sales
corporation (692,501) (429,833) (236,250)
Amortization of
goodwill 788,331 642,986 335,763
Nontaxable income
from pooled
Subchapter S
corporation (166,673) (292,758) (107,269)
Other 61,605 (482,957) (225,126)
__________ ___________ ___________
Total $20,454,058 $17,784,000 $14,767,121
========== =========== ===========
75 <PAGE>
As a result of the Company's acquisitions (see Note 8), the
Company has net operating loss carryforwards for Federal income tax
purposes of approximately $8,990,000, which can only be used to
offset future taxable income of acquired subsidiaries. The
utilization of the tax loss carryforwards is subject to certain
limitations and the carryforwards expire at various dates through
the year 2011.
5. COMMON STOCK AND STOCK OPTIONS
During the years ended September 30, 1998 and 1996, the Company
repurchased 37,500 and 350,000 shares of its outstanding common
stock for $856,922 and $6,161,421, respectively. In accordance with
Utah State law, this treasury stock was accounted for as retired
common stock. The Company did not repurchase any shares of its
common stock during the year ended September 30, 1997.
The Company has adopted several incentive stock option plans
for salaried employees and reserved shares of common stock totaling
approximately 2,647,330, 2,380,780, and 2,926,400 at September 30,
1998, 1997, and 1996, respectively, for issuance under the plans.
Options are granted at a price not less than the fair market value
on the date of grant, become exercisable between one to two years
following the date of grant, and generally expire in seven years.
Changes in stock options are as follows for the years ended
September 30:
Weighted Average
1998 Shares Exercise Price
Outstanding at beginning
of year 2,019,651 $14.85
Granted 45,500 23.53
Exercised (398,500) 10.83
Forfeited (72,800) 19.97
_________ _____
Outstanding at end
of year 1,593,851 $15.82
========= =====
Options exercisable
at year end 1,339,776
=========
Weighted average
fair value of options
granted during year $7.65
==========
76 <PAGE>
Weighted Average
1997 Shares Exercise Price
Outstanding at beginning
of year 2,517,553 $10.06
Granted 856,475 19.71
Exercised (1,292,677) 8.71
Forfeited (61,700) 15.46
__________ _____
Outstanding at end of
year 2,019,651 $14.85
========= =====
Options exercisable at
year end 1,056,976
=========
Weighted average
fair value of
options granted
during year $9.24
==========
Weighted Average
1996 Shares Exercise Price
Outstanding at beginning
of year 3,331,162 $8.26
Granted 516,900 16.63
Exercised (1,252,309) 7.84
Forfeited (78,200) 12.32
__________ _____
Outstanding at
end of year 2,517,553 $12.32
========== =====
Options exercisable at
year end
1,799,351
=========
Weighted average fair
value of options granted
during year
$7.79
=========
77 <PAGE>
The following table summarizes information about stock options
outstanding at September 30, 1998:
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Out- Life Exercise Exer- Exercise
Prices standing (in years) Price cisable Price
$2.96-
$4.36 54,002 0.8 $3.66 54,002 $3.66
8.63-
12.88 456,974 3.2 9.53 456,974 9.53
13.50-
19.88 1,037,375 5.5 18.89 823,300 18.73
21.81-
25.25 45,500 6.3 23.39 5,500 22.07
______ _________ ____ ______ _________ _____
$2.96-
$25.25 1,593,851 4.7 $15.82 1,339,776 $15.00
====== ========= ==== ====== ========= ======
The Company accounts for stock options granted using APB
Opinion 25. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent
with SFAS No. 123, the Company's net income and net income per
common share would have changed to the pro forma amounts indicated
below:
1998 1997 1996
Net income:
As reported $32,013,520 $31,262,739 $25,909,521
Pro forma 29,588,871 26,230,287 24,574,540
Net income per
common share -
basic:
As reported $1.06 $1.06 $0.92
Pro forma 0.96 1.00 0.91
Net income per
common share -
diluted:
As reported $1.04 $1.03 $0.87
Pro forma 0.94 0.97 0.86
78 <PAGE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998, 1997
and 1996, dividend yield of 0.4%, .06%, and 0.5%, respectively;
expected volatility of 31%, 33%, and 33%, respectively; risk-free
interest rate of 5.39%, 6.18%, and 5.36%, respectively; and expected
lives of approximately 4 years, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office and production facilities and office
equipment under long-term operating lease agreements. Rent expense
on the above operating leases was approximately $464,000, $911,000,
and $753,000 for the years ended September 30, 1998, 1997, and 1996,
respectively. The following represents the Company's future
commitments under such leases:
Year ending
September 30 Gross Sublease Net
1999 $373,173 $206,923 $166,250
2000 204,193 114,708 89,485
2001 52,607 52,607
________ ________ ________
Total $629,973 $321,631 $308,342
======== ======== ========
The Company has agreements with the inventors of certain of its
products which provide for the payment of royalties ranging from 2%
to 6.5% of defined net sales or a fixed rate per unit sold of the
related products.
The Company is involved in certain litigation matters in the
normal course of business which, in the opinion of management, will
not result in any material adverse effects on the financial
position, results of operations, or net cash flows of the Company.
7. PROFIT SHARING PLAN
The Company sponsors an Employee Retirement and Savings Plan
(the Plan) under Section 401(k) of the Internal Revenue Code. The
Plan is designed to allow participating employees to accumulate
savings for retirement or other purposes. Under the Plan, all
employees, who have completed at least one year of service and have
reached age 21, are eligible to participate. The Plan allows
employees to make contributions to the plan from salary reductions
each year, up to a maximum of 15% of a participant's annual
compensation. Under the Plan, the Company matches up to 4% of a
participant's contribution. The Company may, if it desires, make
additional contributions to the 401(k) Plan on behalf of its
employees. For the years ended September 30, 1998, 1997, and 1996,
the Company expensed approximately $819,000, $757,000, and $621,000,
respectively, as matching contributions to the Plan. Employees are
always fully vested in their own contributions and become fully
vested in any contributions made by the Company after six years of
79 <PAGE>
service. Employees are allowed to direct the investment of their
Plan contributions within a group of designated investment funds.
8. BUSINESS COMBINATIONS
Effective February 25, 1998, Ballard issued 1,067,733 shares of its
common stock in exchange for all of the outstanding common stock of
Tri-Med, a medical devices manufacturing company incorporated in
1983 with operations in Kansas, Virginia, and Australia. The assets
and liabilities of Tri-med at the date of the combination were
approximately $8,276,000 and $6,321,000 respectively. Total net
sales and net income of Tri-Med from October 1, 1997 to the date of
combination were approximately $4,440,000 and $648,000. The
combination was accounted for as a pooling of interests. The
accompanying consolidated financial statements for 1997 and 1996
have been restated as if Ballard and Tri-Med had been combined as of
October 1, 1995, the beginning of the reporting period. There were
no intercompany transactions between Ballard and Tri-Med prior to
the date of merger. Concurrent with the acquisition, all
outstanding balances under the Tri-Med lines of credit (see Note 3)
were paid in full and such agreements were terminated. Net sales,
net income, and net income per share amounts of the previously
separate companies for the years ended September 30, 1997 and 1996
as previously reported and combined are as follows:
Ballard Tri-Med Combined
1997:
Net sales $125,307,178 $7,435,859 $132,743,037
Net income 30,426,287 836,452 31,262,739
Net income
per common
share:
Basic 1.07 N/A 1.06
Diluted 1.04 N/A 1.03
1996:
Net sales $103,525,263 $6,356,079 $109,881,342
Net income 25,603,039 306,482 25,909,521
Net income
per common
share:
Basic 0.95 N/A 0.92
Diluted 0.90 N/A 0.87
In July 1997, Tri-Med acquired the rights to license and distribute
the product CLOtest for $5,825,000 in exchange for a note payable to
Delta West Pty. Limited. Under the terms of this agreement, the
Company is required to pay royalties to the inventor of CLOtest as a
percentage of products sold. The royalty percentage varies based on
the level of sales. Substantially all of the purchase price was
allocated to trademarks, a covenant not to compete, and goodwill to
80 <PAGE>
be amortized using the straight-line method over 15 years. The
purchase price was allocated as follows:
Plant and equipment $60,800
Intellectual property other than trademarks 615,600
Trademarks 4,172,600
Covenant not to compete 76,000
All other assets and rights including goodwill 900,000
_________
Total $5,825,000
=========
Effective December 10, 1996, the Company acquired all of the
issued and outstanding capital stock of Cardiotronics for
$12,723,000 in cash and the assumption of liabilities totaling
$12,348,000. The acquisition is being accounted for using the
purchase method of accounting; as such, results of operations have
been included in the accompanying consolidated financial statements
from the date of acquisition. In conjunction with the acquisition,
the Company recorded goodwill of approximately $13,136,000, which is
being amortized over 15 years.
The unaudited pro forma results of operations of the Company for
the years ended September 30, 1997 and 1996 (assuming the acquisition of
Cardiotronics had occurred as of October 1, 1995) are as follows:
1997 1996
Net sales $133,971,074 $119,391,331
Net income 30,703,183 21,243,285
Net income
per common share:
Basic $1.04 $0.76
Diluted 1.01 0.72
On September 27, 1996, the Company issued 238,727 shares of its
common stock in exchange for all of the outstanding common stock of
PEPCO, a medical research and manufacturing company incorporated in
1987 and headquartered in Canal Fulton, Ohio. The assets and
liabilities of PEPCO at the date of combination were approximately
$684,000 and $88,000 respectively. The combination was accounted
for as a pooling of interests. The accompanying consolidated
financial statements have been prepared as if Ballard and PEPCO had
been combined for all periods presented.
On April 19, 1996, the Company acquired substantially all of
the assets of Endovations, Inc. (Endovations) for approximately
$1,220,000 in cash. The acquisition has been accounted for using
the purchase method of accounting; as such, Endovations' results of
operations have been included in the accompanying consolidated
financial statements from the date of acquisition. In conjunction
with this acquisition, the Company recorded goodwill of
81 <PAGE>
approximately $400,000, which is being amortized on a straight-line
basis over 15 years.
Effective July 19, 1996, the Company acquired all of the issued
and outstanding common stock of Mist Assist for approximately
$673,600 in cash and the assumption of liabilities totaling
approximately $126,400. The acquisition has been accounted for
using the purchase method of accounting; as such, results of
operations have been included in the accompanying consolidated
financial statements from the date of acquisition. In conjunction
with the acquisition, the Company recorded goodwill of approximately
$680,000, which is being amortized on a straight-line basis over 15
years.
During 1998, the Company recorded a write-down of its
investment in Mist Assist totaling approximately $681,000 as a
result of the Company's assessment that the carrying amount of the
investment in Mist Assist would not be recoverable by the Company.
The write-down is included in selling, general, and administrative
expenses in the accompanying consolidated statement of operations.
On August 28, 1996, the Company acquired all of the issued and
outstanding common stock of PMP for cash of approximately
$3,600,000. The acquisition has been accounted for using the
purchase method of accounting; as such, results of operations have
been included in the accompanying consolidated financial statements
from the date of acquisition. In conjunction with the acquisition,
the Company recorded goodwill of approximately $2,900,000, which is
being amortized on a straight-line basis over 15 years.
9. FOREIGN EXPORT SALES
The Company markets its products internationally through
dealers and distributors. All foreign export sales are denominated
in U.S. dollars. The following table summarizes approximate foreign
export sales by geographic areas:
1998 1997 1996
Europe $10,533,000 $7,544,000 $4,664,000
Asia Pacific 4,322,000 2,488,000 1,757,000
Other 3,366,000 2,258,000 1,451,000
__________ __________ _________
Total foreign
export sales $18,221,000 $12,290,000 $7,872,000
========== ========== =========
10. EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in
a full set of general-purpose financial statements. This statement
82 <PAGE>
requires that an enterprise (a) classify items of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The adoption of SFAS No. 130 may result in additional
disclosures regarding the Company's comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which redefines
how public business enterprises report information about operating
segments in annual financial statements. The statement also
establishes standards for related disclosures about products and
services, geographical areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The adoption of
SFAS No. 131 will result in additional disclosures regarding the
Company's segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which supersedes
SFAS No. 80, "Accounting for Futures Contracts," SFAS No. 105,
"Disclosure of Information about Financial Instruments with Off-
Balances-sheet Risk and Financial Instruments with Concentration of
Credit Risk," and SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," and
also amends certain aspects of other SFAS's previously issued. SFAS
No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value. SFAS
No. 133 is effective for the Company's financial statements for the
year ending September 30, 2000. The Company does not expect the
impact of SFAS No. 133 to be material in relation to its financial
statements.
11. SUBSEQUENT EVENTS
On November 23, 1998, the Company entered into severance
contracts with 24 employees. The contracts provide that upon
resignation or termination, the Company will pay severance
compensation in an amount equal to from one to three years of the
employee's annual base salary less applicable payroll taxes. The
contracts also provide that the Company will provide health
insurance coverage for a period of from one to three years after
resignation or termination and transfer to the employee all right,
title, and interest in a Company vehicle then being used by the
employee. The salary component of the contracts is estimated to
have a current aggregate value of approximately $4,000,000.
On December 23, 1998, the Company entered into an agreement and
plan of merger with Kimberly-Clark Corporation. The terms and
conditions of the merger are subject to satisfaction of certain
conditions including approval by the Company's shareholders.
83 <PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis of the Company's operations encompassing the
fiscal years ended September 30, 1998, 1997, and 1996 should be
considered in conjunction with the consolidated balance sheets,
statements of operations, and statements of cash flows. All of the
figures discussed herein have been adjusted to reflect the Company s
stock and asset purchases and combinations (see Notes to
Consolidated Financial Statements ).
Fiscal year 1998 was another record setting year for the
Company in terms of sales, income and the generation of cash flows,
as shown in the table below:
% Increase % Increase
Fiscal Over Fiscal Over
Year Fiscal Year Fiscal
1998 Year 1997 1997 Year 1996
Net sales $150,062,671 13.0% $132,743,037 20.8%
Net income $32,013,520 2.4% $31,262,739 20.7%
Net income
per share $1.04 0.5% $1.03 18.1%
Cash flows
from
operations $35,503,232 12.9% $31,434,596 38.6%
The continued growth in sales is the result of strategic
acquisitions, internal development of new products, broader product
offerings, acquisition of national contracts with group purchasing
organizations, rapid expansion in the international marketplace, and
the overall efforts of an outstanding sales force. Income and cash
flow growth continues as a result of high margins and manufacturing
expertise.
With a continued emphasis on growth through acquisitions, the
Company acquired Tri-Med (in a pooling of interests) in February,
1998. Tri-Med, with locations then in Kansas, Virginia and
Australia, is a manufacturer of medical devices for the detection of
H. pylori, a bacterium which causes peptic ulcer disease. Net sales
of Tri-Med during fiscal year 1998 were $11.1 million, an increase
of 49.2% over fiscal year 1997.
During fiscal year 1998 the Company focused its sales efforts
and internally reported based upon three separate business units:
(1) Critical Care, which includes the Trach Care, Easi-lav, oral
care, and Cardio families of products; (2) FOAM CARE and pain
management products; and (3) Interventional, which includes enteral
feeding, Tri-Med, and endoscopic products.
84 <PAGE>
RESULTS OF OPERATIONS
SALES - Consistent, solid growth from year to year continues to
result from the Company s ability to increase volume, both
internally and through acquisitions. For the most part, product
pricing stabilized during 1998 with only isolated increases. Slight
decreases in net sales and margins have resulted from lower priced
contracts with group purchasing organizations.
Interventional sales reflect the fastest growing segment, with
Tri-Med sales increasing 49.2% to $11,096,624, MIC (enteral feeding
devices) sales increasing 21.2% to $31,104,700 and endoscopic
product sales increasing 21.2% to $7,102,446.
Endoscopic and enteral feeding product sales have increased as
the Company has expanded the breadth of its product offerings. More
hospital doors are open to the Company as hospitals perceive the
Company's product line to allow "one stop shopping" for GI products.
The Company feels that its GI product offering rivals the best of
any of its competition.
The table below summarizes domestic sales versus international
sales as a percentage of total net sales:
Fiscal year ended September 30, 1998 1997 1996
Domestic 87.9% 90.7% 92.8%
International 12.1% 9.3% 7.2%
The table below summarizes international sales for the last
three fiscal years:
International Sales
Fiscal year 1998 $18,221,425
% Increase over 48.3%
fiscal year 1997
Fiscal year 1997 $12,289,986
% Increase over 56.1%
fiscal year 1996
The international market place continues to show great promise
for the Company. Increases in international sales during fiscal
year 1998 are the direct result of the Company s expansion of its
international dealer network. The Company expects international
sales to continue strong growth into the future, hampered only by
seesaw economic conditions in developing countries where the Company
is expanding.
COST OF PRODUCTS SOLD - The table below summarizes consolidated
cost of products sold for the last two fiscal years:
85 <PAGE>
Cost of
Products Sold
Cost of as % of
Products Sold Net Sales
Fiscal year 1998 $55,557,988 37.0%
% Increase over 18.1%
fiscal year 1997
Fiscal year 1997 $47,027,428 35.4%
% Increase over 23.6%
fiscal year 1996
The 18.1% increase in product costs during fiscal year 1998 includes
$1,094,480 in inventory obsolescence and overhead revaluation
charges recorded in the second quarter of fiscal 1998 associated
with the relocation of manufacturing operations of MIC,
Cardiotronics, PEPCO and PMP to Utah and Idaho. Additional cost
increases can be attributed to increased sales of lower margin
product lines and to increases in material and labor costs. Margins
will continue to be impacted by the health care industry's focus on
cost restraints, and on competitive pricing pressures.
During the 1998 fiscal year, the Company continued to integrate
the manufacturing processes of MIC, Cardiotronics, PEPCO, and PMP
into its two manufacturing sites in Utah and Idaho. Gross margins
will continue to be impacted by this integration process, the
objectives of which are more efficiencies in the manufacturing of
acquired products resulting in lower costs and more competitive
pricing structures. Continued pricing pressures, additional new
product acquisitions, and continued increases in labor and material
costs may continue to impact margins negatively into the future.
The following table summarizes sales by sales business unit
(see description above) as a percentage of total net sales:
Year ended September 30, 1998 1997 1996
Critical Care 55.5% 58.8% 60.8%
Foam Care/Pain Management 11.0% 11.3% 11.4%
Interventional 33.5% 29.9% 27.8%
The following table summarizes sales dollars by business unit
(in thousands):
Year ended September 30, 1998 1997 1996
Critical Care $83,379 $77,962 $66,757
Foam Care/Pain Management $16,448 $15,057 $12,533
Interventional $50,236 $39,724 $30,591
86 <PAGE>
Within Critical Care, sales of TRACH CARE related products
increased 4.4% to $59,896,555 for fiscal year 1998. Sales growth
continues to be weakened due to extended product usage by the
hospitals beyond recommended periods. The closed suction catheters
have a recommended usage period of 24 hours, but due to hospital
cost constraints, period usage is increasing to as much as 72 hours.
Growth within this segment was also impacted by a mild flu season,
as well as to reduced pricing from contracts with group purchasing
organizations.
Sales of Cardiotronics products increased 35.2% to $10,266,421
due, in part, to increased sales to retail customers and, also in
part, to increased sales to OEM customers. The Company does not
expect OEM sales to increase in fiscal year 1998. The Company now
better understands the manufacturing of these relatively new
products, resulting in decreased product costs and more
competitively priced products.
Sales of other miscellaneous products within the Critical Care
segment decreased 5.6% to $13,214,589. These decreases are the
result of continued pricing pressures from external competition.
Sales of the Company's pain management product line increased
37.6% to $5,468,651. This growth can be attributed to lower, more
competitive pricing resulting from the move of the products'
manufacturing to Draper.
FOAM CARE product sales decreased 0.9% to $10,979,582 in fiscal
year 1998. These decreases can be attributed to the products
generally not being included in national buying group contracts, and
competition from lower priced soap competitive products.
OPERATING EXPENSES - Operating expenses consist of selling,
general, and administrative expenses, research and development
expenses, and royalties. Total consolidated operating expenses for
the year ended September 30, 1998 were $47,915,277, compared with
$42,208,682 for fiscal year 1997 and $36,465,201 for fiscal year
1996. The following table is a summary of operating expenses by
category as a percentage of net sales:
Year ended September 30, 1998 1997 1996
Selling, general, and
administrative 28.7% 28.3% 28.8%
Research and development 1.9% 2.2% 2.9%
Royalties 1.3% 1.4% 1.5%
Selling, general, and administrative expenses increased
$5,589,245. Included in these charges in 1998 were $681,000 for
impairments to reduce the carrying value of intangible assets and
$1,293,000 for severance and related restructuring costs associated
with the closures of several duplicate manufacturing facilities.
These increases can also be attributed to increased sales volumes.
Consolidated expenses related to research and development and
royalties for fiscal years 1998, 1997, and 1996, remained relatively
consistent.
87 <PAGE>
OTHER INCOME - Other income generally consists of interest
income from short-term investments, royalty income from the
licensing of the TRACH CARE closed suction system, and the netting
of insignificant gains and losses from the sale or retirement of
property and equipment.
The table below summarizes other income in the last three
fiscal years:
Year ended September 30, 1998 1997 1996
Interest income $2,609,864 $2,129,276 $1,917,925
Royalty income 2,095,000 2,465,840 2,400,000
Other income 1,173,308 944,696 991,455
Increases to interest income are the result of increased cash
and investments generated from operations. Decreases in royalty
income reflects decreasing unit sales of closed suction catheters by
the Company's licensee. Included in other income for fiscal year
1998 are $1,135,813 in gains from the sale of Neuro (see
Supplemental Disclosures of Noncash Investing and Financing
Activities in the Consolidated Statements of Cash Flows).
NET INCOME - Consolidated net income from operations for the
year ended September 30, 1998 totaled $32,013,520, an increase of
2.4% over fiscal year 1997. The following table reflects net income
as a percentage of net sales for each of the reporting periods
shown:
Year ended September 30, 1998 1997 1996
Net Income 21.3% 23.6% 23.6%
INFLATION - Inflation can be expected to have an effect on
most of the Company's operating costs and expenses. The extent to
which inflationary cost increases can be offset by price increases
depends on competition and other factors. The effect of inflation
has been insignificant during the periods reported herein.
LIQUIDITY AND CAPITAL RESOURCES
Effective December 23, 1998, the Company entered into a
definitive merger agreement with Kimberly-Clark Corporation
("Kimberly-Clark"). Under the terms of the merger agreement, each
stockholder of Ballard would receive $25 worth of Kimberly-Clark
common stock (which would be valued at its average price over a ten
day period preceding the merger) for each outstanding share of
Ballard common stock. The transaction was unanimously approved by
Ballard's Board of Directors. The transaction is expected to close
in the second quarter of 1999, subject to approval by Ballard's
stockholders, appropriate governmental approval and customary
conditions. It is expected that the merger will be tax-free to
Ballard's stockholders. In connection with the merger agreement,
Ballard granted Kimberly-Clark an option to acquire 19.9% of
Ballard's outstanding stock under certain circumstances. In
88 <PAGE>
addition, under certain circumstances, Kimberly-Clark would be paid
a cash termination fee of $15,000,000 by Ballard.
The Consolidated Balance Sheets present the Company's financial
position at the end of each of the last two fiscal years. Each
statement lists the Company's assets and liabilities, and the equity
of its stockholders. Major changes in the Company's financial
position are summarized in the Consolidated Statement of Cash Flows.
This statement summarizes the changes in the Company's cash and cash
equivalents balance for each of the last three years and helps to
show the relationship between operations (presented in the
Consolidated Statement of Operations) and liquidity and financial
resources (presented in the Consolidated Balance Sheets).
The table below summarizes some key factors related to
liquidity:
For the fiscal year ended
September 30, 1998 1997
Cash provided from operating
activities $35,503,232 $31,434,596
Working capital 127,344,729 87,986,254
Available cash* 70,558,861 48,252,355
Current ratio 18.6 to 1 7.8 to 1
* Includes cash, cash equivalents, and investments available for
sale.
In addition to its strong liquid position, the Company does not
have any long-term debt nor does management intend to utilize debt
to fund future expansion. Ballard maintains a $5,000,000 unsecured
line of credit with its bank but has not drawn on this line during
either of the years ended September 30, 1998 or 1997.
Continued growth in cash and investments provides the Company
financial stability and flexibility to fund current operations, an
aggressive acquisitions program, future internal growth and
expansion, and the ability to continue its dividend payment policy.
During the year ended September 30, 1998, the Company completed
expansion of an office complex addition (approximately 14,500 square
feet) at its Draper, Utah facility, at a total construction cost of
approximately $1,300,000. Various other remodelling projects (none
of which was individually material) were also completed during the
fiscal year in order to prepare portions of the Pocatello and Draper
facilities for additional growth. During fiscal 1998, the Company
expended approximately $9,200,000 on capital assets, including the
expansion noted above.
During February 1997, the Company exercised its option to
purchase the assets of Neuro at a total purchase price $4,245,422.
In March, 1997, the Company sold certain of the assets it acquired
from Neuro to an unrelated party for $961,459, which approximated
the purchased price of those assets. In June, 1997 the Company
89 <PAGE>
determined that the remaining carrying value in its investment in
Neuro was not entirely recoverable and an impairment loss of
$4,900,000 was recorded against the book value of the investment. In
September, 1998, the Company sold the remaining assets and
technology acquired from Neuro, recognizing a gain of $1,135,813
which has been included in "Other Income."
A valuation allowance has not been provided on deferred tax
asset balances due to the Company's projection of future taxable
income in excess of such tax assets.
In addition to capital expenditures, other items which affected
cash flows during fiscal year 1998 included the net purchases of
investments available for sale of $33,542,016, the payment of
dividends of $3,323,594, the payment of debt of acquired
subsidiaries of $6,725,000, purchases of intangible assets of
$931,699, and the purchase of retired treasury stock for $856,922.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of potential problems with
computer systems or any equipment with computer chips that use dates
where the date has been stored as just two digits (e.g., 97 for
1997). On January 1, 2000, any clock or date recording mechanism,
including date sensitive software, which uses only two digits to
represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. The Company has also been advised that
some computer chips may not have the ability to function properly
when reading certain dates in calendar year 1999 (e.g., 9/9/99).
These computer problems could result in a system failure or
miscalculations causing disruption of operations, including among
other things, a temporary inability to process transactions, send
invoices, or engage in similar activities.
There are several elements of the Company's Year 2000
preparations:
1. INFORMATION TECHNOLOGY ("IT") SYSTEMS. The Company
determined some months ago that it is required to replace or convert
portions of its business application software (materials management,
resource planning, accounts payable, invoicing, accounts receivable,
general ledger, payroll, etc.) so that its computer systems will
properly recognize and utilize dates beyond December 31, 1999. The
Company began implementation of this conversion early in August,
1998, and completed the conversion process for remaining
applications during October, 1998.
Another aspect of the Company's IT systems is Electronic Data
Interchange ("EDI"). The Company shares information with a number
of outside parties (including certain customers and certain vendors)
via EDI. Earlier this year, the Company made all necessary
modifications so that its EDI capabilities are prepared for the year
2000.
2. NON-IT SYSTEMS. Non-IT systems include embedded
technology such as microcontrollers. The Company has determined
that it has approximately 85 to 95 pieces of equipment with such
embedded technology. The Company is in the process of requesting
90 <PAGE>
and receiving information from various equipment manufacturers to
determine whether repairs or replacements are needed. As to
approximately one-third of such machines so far, the Company has
either completed needed repairs or has received information
verifying that no repairs are needed. The Company plans to complete
assessment of Non-IT systems by the end of December, 1998, followed
by repairs of Non-IT systems by the end of May, 1999.
3. THIRD PARTIES. It is critical to the Company's readiness
for the Year 2000 that third parties with whom the Company deals are
also prepared. Such third parties include utility companies, banks
(and the Federal Reserve), distributors, suppliers, vendors,
customers, and shippers.
The Company is only in the early stages of assessing the Year
2000 readiness of such third parties. The Company is in the process
of sending surveys to third parties to certify their Year 2000
compliance.
The Company has retained an outside consultant to assist and
advise the Company through a comprehensive, step by step approach to
achieving Year 2000 readiness. The written plan to accomplish this
important goal outlines 450 tasks, of which the Company has
completed only 83. However, the Company is committed to completing
all 450 tasks and achieving Year 2000 readiness well in advance of
mid-1999.
The most likely worst case Year 2000 scenarios include a
possible inability: (1) to receive power required for operation of
the Company's facilities; (2) to access funds or make a payroll,
because of the Company's banking connections or the Federal Reserve
being unprepared; (3) to order and receive needed raw materials
because of a vendor's or the Company's own systems being non-Year
2000 compliant; (4) to receive, and fill, or ship customer orders
because of a customer's, shipper's, or the Company's own systems
being non-Year 2000 compliant; or (5) to meet production needs
because of the non-Year 2000 compliance of its own IT and/or non-IT
systems.
The Company has not yet started to develop contingency plans
for such worst-case scenarios. The Company intends to create such
contingency plans in the future only if any of such problems appear
to be a real possibility as the Year 2000 comes closer.
The Company will continue to utilize internal and external
resources to implement, reprogram, or replace and test software and
related assets affected by the Year 2000 Issue. The Company hopes
to complete the majority of its efforts in this area by early 1999
leaving adequate time to assess and correct any significant issues
that may materialize. The total cost of the Year 2000 project is
estimated at $300,000 to $435,000 and is being funded through
operating cash flows. The Company will be able to capitalize new
purchases of software and hardware portions of this cost. Thus far
the Company has spent approximately $25,000 on Year 2000
remediation.
The costs of the project and the timetable in which the Company
plans to complete the Year 2000 compliance requirements are based on
91 <PAGE>
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from these
plans. Specific factors which might cause such material differences
include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct
all relevant computer chip codes, and similar uncertainties.
The Company periodically updates its current Year 2000 status
on its website at www.bmed.com.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Annual Report and other
written and oral statements made from time to time by the Company do
not relate strictly to historical or current facts. As such, they
are considered "forward-looking statements" which provide current
expectations or forecasts of future events. Such statements can be
identified by the use of terminology such as "anticipate,"
"believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words
or expressions. The Company's forward-looking statements generally
relate to its growth strategies, financial results, product
development and regulatory approval programs, and sales efforts.
One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and
uncertainties, known and unknown, and may be affected by inaccurate
assumptions, including, among others, those discussed below. See
"Risk Factors." Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
The Company does not undertake to update any forward-looking
statement, but investors are advised to consult any further
disclosures by the Company on this subject in its filings with the
Securities and Exchange Commission, especially on Forms 10-K, 10-Q,
and 8-K (if any), in which the Company discusses in more detail
various important factors that could cause actual results to differ
from expected or historic results. The Company notes these factors
as permitted by the Private Securities Litigation Reform Act of
1995. It is not possible to foresee or identify all such factors.
As such, investors should not consider any list of such factors to
be an exhaustive statement of all risks, uncertainties or
potentially inaccurate assumptions.
RISK FACTORS
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, including the Company's flagship TRACH CARE closed suction
catheter. 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
92 <PAGE>
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, financial condition, or cash flows 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
93 <PAGE>
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.
94 <PAGE>
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 maintains product liability coverage in the amount
of $5,000,000 through Medmarc, 4000 Legato Road, Suite 800, Fairfax,
Virginia. This is a claims made policy, with a deductible of
$10,000 per occurrence and $75,000 aggregate maximum per year. The
Company maintains excess liability coverage in the amount of
$10,000,000 through American International Group Specialty Lines,
Inc., 70 Pine Street, New York, New York. The Company deems this
coverage 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.
From time to time the Company issues its own common stock in
order to acquire other companies. Such increases in the number of
outstanding Company shares could have a dilutive effect on the
Company's earnings per share and on the Company's book value per
share depending upon several factors including: (1) the
profitability of the acquired company; (2) the number of shares of
Company common stock issued for the acquisition; and (3) whether the
transaction can be treated as a pooling of interests. The issuance
of Company common stock for material acquisitions could also result
in large blocks of Company stock being held by new voting groups and
95 <PAGE>
could therefore have an effect on the voting control of the Company.
The Company prefers whenever possible to use its stock, rather
than cash, to acquire other companies and intends to continue this
acquisition policy.
The Company continues to devote substantial management
resources to looking for additional companies and product lines to
acquire. At almost any given point in time, the Company is in the
process of a preliminary review of various potential target
companies, or involved in more comprehensive due diligence, or
involved in preliminary or final negotiations for the acquisition.
INTANGIBLES. As of September 30, 1998, $38,327,628 (17.2%) of
the Company's total assets consisted of intangible assets (cost in
excess of fair value of net assets acquired and patents and other
intangibles) net of amortization. $26,524,776 of these intangible
assets represent the difference between the purchase price paid by
the Company for various acquisitions, and the fair market value of
net assets purchased, net of amortization. The approximate amount
of amortization expense related to intangibles for fiscal year 1998
was $4,089,000, and this of course reduces net income. There can be
no assurance that assets, businesses, and product lines purchased
through acquisitions will retain their value. If such acquired
assets were to lose value, corresponding goodwill included in
intangibles may have to be written off all at once, resulting in a
possible significant charge to earnings and earnings per share. The
Company periodically reviews the carrying value of its intangible
assets based on current and anticipated undiscounted cash flows and
recognizes impairment when such cash flows will be less than the
carrying values.
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 few sources. So
far, the Company has not had any serious problems obtaining needed
raw materials.
96 <PAGE>
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.
For the fiscal year ending September 30, 1998, international
sales ($18,221,425) were 12.1% of net sales of the Company.
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. The Company is in the process of
addressing the Year 2000 Issue. See "2000 ISSUES."
GLOSSARY OF TECHNICAL AND MEDICAL TERMS
1. Ampulla of Vater is the point at which the pancreatic duct and
common bile duct gains entry into the duodenum.
2. Biliary tree consists of the gallbladder, hepatic, cystic and
common bile ducts.
3. Bronchoalveolar lavage is a medical procedure for obtaining
samples from smaller airways in the lungs. A catheter is
wedged into the bronchus. Then a lavage fluid is injected into
the airways. A fluid sample is withdrawn to determine whether
infectious organisms are present in the airways or air sacs.
4. Biopsy is an excision of a small piece of living tissue for
microscopic examination.
5. Cannulate is to introduce a cannula through a passageway.
97 <PAGE>
6. Catheter is a flexible tube that is inserted into the body to
deliver or remove fluid or act as a conduit to pass other
devices.
7. Closed suction catheter is a sleeved catheter used to suction
the endotracheal tube of a patient receiving mechanical
ventilation. The catheter keeps the patient oxygenated because
the ventilator is not disconnected during the suctioning
procedure.
8. Coagulate means to solidify or change from a fluid state to a
semisolid mass.
9. Contrast medium in radiology is the use of a radiopaque
substance to provide a contrast in density between the tissue
or organ being filmed and the medium.
10. Cytology brush is a brush used to collect cell samples from the
gastrointestinal or pulmonary tract.
11. Endoscope is an instrument consisting of a tube and optical
system used in the examination of a hollow organ or cavity.
12. Endoscopic refers to a procedure performed by means of an
endoscope.
13. Endoscopist is a physician who utilizes an endoscope for
inspection of the gastrointestinal tract.
14. Endoscopy is an examination of organs or cavities by use of an
endoscope.
15. Endotracheal tube is a tube inserted into the patient's upper
airway allowing medical ventilatory support.
16. Enteral feeding catheter is a catheter used for the delivery of
nutritional liquids into the stomach of the patient.
17. ERCP is an endoscopic technique for fluoroscopic examination of
the biliary and/or pancreatic ducts.
18. Exogenous means originating outside an organ or part.
19. Fluoroscopy is the use of a fluoroscope for medical diagnosis
or for testing various materials by roentgen rays.
20. Gastric means pertaining to the stomach.
21. Gastrointestinal means pertaining to the stomach and intestine.
22. Gastrostomy is an examination of the stomach and abdominal
cavity by use of a gastroscope.
23. Helicobacter pylori, or H. pylori, is a bacterium which lives
only in the lining of the stomach and is one of the most common
chronic infections in humans.
98 <PAGE>
24. Jejunal means pertaining to the jejunum, the second portion of
the small intestine extending from the duodenum to the ileum.
25. Jejunostomy is a surgical creation of a permanent opening
through the skin into the jejunum.
26. Lesion is a circumscribed area of pathologically altered
tissue.
27. Mucosa is a mucus membrane or the moist tissue layer that lines
a hollow organ or body cavity.
28. Nebulizer is an apparatus for producing a fine spray or mist.
29. Nosocomial infection is an infection acquired while a patient
is in a hospital.
30. Papilla is a small, nipple-like protuberance or elevation.
31. Percutaneous Endoscopic Gastrostomy (PEG) catheter is a
flexible tube inserted through the mouth, esophagus, and
stomach to the outside of the body with the aid of an
endoscope. Name refers to the placement procedure and is a
variation of a gastrostomy tube.
32. Polyp means a tumor with a pedicle.
33. Polypectomy is a medical procedure for removal of polyps
(growths).
34. Resection means a partial excision of a bone or other
structure.
35. Septic means pertaining to pathogenic organisms or their
toxins, i.e., putrid, rotten or decayed.
36. Stenosed means constricted.
37. Stimulation electrodes are disposable, pre-gelled pads which
replace conventional defibrillation paddles or internal
transvenous pacing leads to allow convenient, hands-free,
noninvasive cardioshock and external pacing.
38. A surfactant is an agent that lowers surface tension.
39. Transgastric pertains to a bypass of the stomach. Transgastric
tubes are placed through the skin and into the stomach, with
the distal tip terminating in the jejunum, or elsewhere in the
digestive system.
40. Varix means an enlarged and tortuous vein or artery.
41. A ventilator is a life support device used to assist breathing.
99 <PAGE>
DIRECTORS
NAME TITLE
Dale H. Ballard Chairman of the Board, Chief Executive
Officer, and President of Ballard Medical
Products
John I. Bloomberg General Partner of J.I.B. Associates,
Bricoleur Partners, Olympic Growth Fund,
and Utah Capital Corp., all private
investment companies
J. Dallas VanWagoner Retired Physician
Robert V. Petersen Professor Emeritus of Pharmaceutics at the
University of Utah
E. Martin Chamberlain Vice President of Regulatory Affairs and
Corporate Secretary of Ballard Medical
Products
Dale H. Ballard, Jr. Owner of his own financial planning
business called Stratco
Paul W. Hess General Counsel of Ballard Medical Products
OFFICERS
NAME TITLE
Dale H. Ballard President, Chief Executive Officer, and
Chairman of the Board.
Harold R. ("Butch") Executive Vice President and
Wolcott General Manager
E. Martin Chamberlain Vice President of Regulatory Affairs and
Corporate Secretary
Donald C. Eiring Vice President of Sales for
Critical Care Division
Dennis B. Cox Vice President of Sales for
Interventional Division
Clyde H. Baker Vice President of Sales for Primary
Care Division
Chris Thomas Vice President of Corporate
Development
R. Dennis Eyre Vice President of Marketing for
Critical Care Division
100 <PAGE>
NAME TITLE
Bradford D. Bell Vice President of International
Division
Kenneth R. Sorenson Treasurer and Chief Financial Officer
Paul W. Hess General Counsel
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Ballard Medical Products
12050 Lone Peak Parkway
Draper, Utah 84020
Phone: (801) 572-6800
Fax: (801) 572-6869
Web site: www.bmed.com
TRANSFER AGENT
Zions First National Bank
P.O. Box 30880
One South Main
Salt Lake City, Utah 84130
ANNUAL MEETINGS
The Annual Meeting of Stockholders of Ballard Medical Products
has not yet been scheduled.
FORM 10-K
Any shareholder who sends a written request to the Company's
Secretary, E. Martin Chamberlain, at Ballard Medical Products, 12050
Lone Peak Parkway, Draper, Utah 84020, may obtain without charge a
copy of the Company's Form 10-K for fiscal year 1998, including the
financial statements and the financial schedules.
SHAREHOLDER/ANALYST INQUIRIES
Shareholders, analysts, and others seeking information about
the Company are encouraged to contact Kenneth R. Sorenson, Chief
Financial Officer, Ballard Medical Products, 12050 Lone Peak
Parkway, Draper, Utah 84020, with any questions or comments.
101 <PAGE>
RESEARCH COVERAGE
The following firms currently provide research coverage of
Ballard Medical Products:
Avalon Research Group - Providence, Rhode Island
AG Edwards - St. Louis, Missouri
Bear Stearns - New York, New York
Select Equity Group, Inc. - New York, New York
Southwest Securities - Dallas, Texas
Sutro & Co. - Los Angeles, California
Tucker Anthony - Boston, Massachusetts
Volpe, Brown, Whelan & Company - San Francisco,
California
AUDITORS
Deloitte & Touche LLP
50 South Main Street, Suite 1800
Salt Lake City, Utah 84144
102 <PAGE>
EXHIBIT 21
SUBSIDIARIES OF BALLARD MEDICAL PRODUCTS
JURISDICTION OF BUSINESS PARENT
SUBSIDIARY INCORPORATION NAME CORPORATION
1194127 Canada 1194127 691555
Ontario Inc. Ontario Inc. Ontario
Limited
691555 Ontario Canada Preferred Ballard
Limited Medical Medical
Products Products
(Canada)
Inc.
Ballard Virgin Ballard Ballard
International, Islands International, Medical
Inc. Inc. Products
Ballard Canada Ballard Ballard
Medical Medical Medical
Products Products Products
(Canada) (Canada)
Inc. Inc.
Ballard Utah Ballard Ballard
Purchase Purchase Medical
Corporation Cororation Products
Ballard Utah Ballard Ballard
Real Estate Real Estate Medical
Holdings, Inc. Holdings, Inc. Products
Cardiotronics Colorado Cardiotronics Ballard
Sytems, Inc. Systems, Inc. Medical
Products
Medical California Medical Ballard
Innovations Innovations Medical
Corporation Corporation Products
Mist Assist, Delaware Mist Assist, Ballard
Inc. Inc. Medical
Products
Plastic Ohio Plastic Ballard
Engineered Engineered Medical
Products Products Products
Company Company
103 <PAGE>
JURISDICTION OF BUSINESS PARENT
SUBSIDIARY INCORPORATION NAME CORPORATION
Preferred New York Preferred 691555
Medical Medical Ontario
Products, Inc. Products Limited
R2 Medical California R2 Medical Cardiotronics
Systems, Inc. Systems, Inc. Systems, Inc.
Tri-Med Kansas Tri-Med Ballard
Specialties, Specialties, Medical
Inc. Inc. Products
104 <PAGE>
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<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 10,231,524 10,231,524
<SECURITIES> 60,327,337 60,327,337
<RECEIVABLES> 31,184,303 31,184,303
<ALLOWANCES> 2,624,885 2,624,885
<INVENTORY> 23,253,691 23,253,691
<CURRENT-ASSETS> 134,585,612 134,585,612
<PP&E> 62,223,952 62,223,952
<DEPRECIATION> 14,167,300 14,167,300
<TOTAL-ASSETS> 222,688,188 222,688,188
<CURRENT-LIABILITIES> 7,240,883 7,240,883
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0 0
0 0
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<SALES> 150,062,671 38,995,250
<TOTAL-REVENUES> 150,062,671 38,995,250
<CGS> 55,557,988 14,023,414
<TOTAL-COSTS> 55,557,988 14,023,414
<OTHER-EXPENSES> 47,915,277 12,202,943
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 52,467,578 14,805,751
<INCOME-TAX> 20,454,058 5,692,057
<INCOME-CONTINUING> 32,013,520 9,113,694
<DISCONTINUED> 0 0
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<NET-INCOME> 32,013,520 9,113,694
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