<PAGE>
As filed with the Securities and Exchange Commission
on August 14, 1998
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1998
(for quarterly period ended)
1-12318
Commission File Number
BALLARD MEDICAL PRODUCTS
(Exact name of registrant as specified in its charter)
UTAH
(State or other jurisdiction of incorporation or
organization)
87-0340144
(I.R.S. Employer Identification Number)
12050 LONE PEAK PARKWAY, DRAPER, UTAH 84020
(Address and zip code of principal executive offices)
(801) 572-6800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:
30,452,566 - all common, August 13, 1998
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Condensed Unaudited Consolidated Balance
Sheets as of June 30, 1998 and September 30, 1997 4
Condensed Unaudited Consolidated Statements of
Operations for the three and nine months ended
June 30, 1998 and 1997 6
Condensed Unaudited Consolidated Statements of
Cash Flows for the nine months ended June 30,
1998 and 1997 7
Notes to Condensed Unaudited
Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Risk Factors 13
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote
of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Index to Exhibits 19
</TABLE>
<PAGE>
DEFINITIONS
As used herein, the following terms have the meanings indicated:
GENERAL DEFINITIONS
1. "Ballard" refers to Ballard Medical Products.
2. "BI" refers to Ballard International, Inc., a wholly-owned subsidiary
of Ballard.
3. "BPC" refers to Ballard Purchase Corporation, a wholly-owned
subsidiary of Ballard.
4. "BREH" refers to Ballard Real Estate Holdings, Inc., a wholly-owned
subsidiary of Ballard.
5. "Cardiotronics" refers to Cardiotronics Systems, Incorporated, a
wholly-owned subsidiary.
6. The "Company" and the "Registrant" refer to Ballard and its
subsidiaries.
7. "MIC" refers to Medical Innovations Corporation, a wholly-owned
subsidiary of Ballard.
8. "PMP" refers to Ballard Medical Products Canada, a wholly-owned
subsidiary of Ballard, doing business as Preferred Medical Products.
9. "R2" refers to R2 Medical Systems, Inc., a wholly-owned subsidiary of
Cardiotronics.
10. "Tri-Med" refers to Tri-Med Specialties, Inc., a wholly-owned
subsidiary of Ballard.
GLOSSARY OF TECHNICAL AND MEDICAL TERMS
CATHETER is a flexible tube that is inserted into the body to deliver or remove
fluid, retrieve blood, or act as a conduit to pass other devices.
CLOSED SUCTION CATHETER is a sleeved catheter used with endotracheal tubes, on
patients receiving mechanical ventilation, enabling the airways to be suctioned
while maintaining mechanical ventilatory support.
ENTERAL FEEDING CATHETER is a catheter used for the delivery of nutritional
liquids into the gastrointestinal tract of the patient.
HELICOBACTER PYLORI, or H. PYLORI, is a bacteria which lives only in the lining
of the stomach and is one of the most common chronic infections in humans.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 6/30/98 9/30/97
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents $ 8,791,985 $ 21,624,043
Investments 53,229,335 26,628,312
Accounts receivable -
trade (net) 28,239,699 26,380,031
Royalties receivable 568,225 375,673
Other receivables 1,016,350 908,753
Inventories:
Raw materials 12,836,279 10,856,390
Work-in-progress 5,890,452 5,527,765
Finished goods 5,816,822 4,507,579
Deferred income taxes 2,536,771 2,233,042
Income tax refunds
receivable 2,159,948 1,830,946
Prepaid expenses 949,855 64,139
------------ ------------
Total current assets 122,035,721 100,936,673
------------ ------------
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 28,922,466 28,922,203
Molds 4,636,183 4,891,734
Machinery and equipment 11,411,707 11,097,145
Vehicles 608,420 785,440
Furniture and fixtures 3,872,449 3,264,578
Leasehold improvements 133,897 116,850
Construction-in-
progress 9,074,668 4,142,563
------------ ------------
Total 59,533,655 54,094,378
Less accumulated
depreciation 13,304,703 10,746,905
------------ ------------
Property and
equipment - net 46,228,952 43,347,473
------------ ------------
INTANGIBLE ASSETS
Cost in excess
of purchase price -
net 27,143,134 29,443,283
Patents and other
intangibles - net 12,407,916 13,068,452
------------ ------------
Total intangible
assets 39,551,050 42,511,735
------------ ------------
DEFERRED TAXES RECEIVABLE 1,512,912 2,139,902
------------ ------------
OTHER ASSETS 5,167,219 5,256,599
------------ ------------
TOTAL $214,495,854 $194,192,382
------------ ------------
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial Statements.
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 6/30/98 9/30/97
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,406,533 $ 3,216,908
Line of credit 1,425,000
Contract payable 3,975,000
Accrued liabilities:
Employee
compensation 3,663,487 3,438,849
Royalties 508,177 432,617
Other 2,424,399 462,045
------------ ------------
Total current
liabilities 9,002,596 12,950,419
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 3,040,696 3,006,273
Additional paid-in
capital 60,598,436 54,942,666
Unrealized losses
on investments (282,003) (223,783)
Retained earnings 142,136,129 123,516,807
------------ ------------
Total
stockholders'
equity 205,493,258 181,241,963
------------ ------------
TOTAL $214,495,854 $194,192,382
============ ============
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial Statements.
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
NET SALES $38,249,804 $33,961,010 $111,067,421 $96,631,674
COST OF
PRODUCTS SOLD 13,846,417 12,276,819 41,534,574 34,533,297
---------- ---------- ---------- ----------
GROSS MARGIN 24,403,387 21,684,191 69,532,847 62,098,377
---------- ---------- ---------- ----------
OPERATING
EXPENSES:
Selling, general,
and administrative 9,942,027 10,639,735 30,144,233 27,835,198
Research and
development 684,084 706,811 2,147,296 2,151,883
Royalties 544,757 452,722 1,446,846 1,320,526
Nonrecurring
charges 1,973,959
---------- ---------- ---------- ----------
Total operating
expenses 11,170,868 11,799,268 35,712,334 31,307,607
---------- ---------- ---------- ----------
OPERATING INCOME 13,232,519 9,884,923 33,820,513 30,790,770
OTHER INCOME - net 1,416,128 2,228,198 3,841,313 4,516,855
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAX EXPENSE 14,648,647 12,113,121 37,661,826 35,307,625
INCOME TAX EXPENSE 5,803,000 4,336,000 14,762,000 12,619,000
---------- ---------- ---------- ----------
NET INCOME 8,845,647 7,777,121 22,899,826 22,688,625
========== ========== ========== ==========
INCOME PER SHARE:
Basic $0.291 $0.263 $0.758 $0.776
---------- ---------- ---------- ----------
Diluted $0.286 $0.256 $0.741 $0.752
---------- ---------- ---------- ----------
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Basic 30,385,817 29,613,053 30,216,985 29,251,673
========== ========== ========== ==========
Diluted 30,914,850 30,347,425 30,887,273 30,173,379
========== ========== ========== ==========
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial Statements.
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
6/30/98 6/30/97
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 25,446,029 $20,111,165
------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for property
and equipment (5,439,277) (11,337,153)
Proceeds from sale of land 3,265,700
Capital expenditures for land (7,571)
Payment for purchase of subsidiary,
net of cash acquired (11,768,562)
Proceeds from sale of NNC assets 963,961
Investment in and advances to
affiliates (4,844) (7,359,994)
Receipt of payment of advances
and interest 3,771,471
Purchases of investments (43,417,396) (26,844,021)
Purchases of intangible assets (660,309) (864,672)
Sales (purchases) of other assets 112,667 10,705
Proceeds from sales of investments 16,726,803 28,139,084
------------ -----------
Net cash used in investing
activities (32,682,356) (22,031,052)
------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of options 4,084,773 11,677,150
Proceeds from stock redemption 2,281
Cash dividends paid (3,427,360) (3,200,213)
Payment of debt of
acquired subsidiary (5,400,000) (8,210,016)
Purchase and retirement
of treasury stock (853,144)
------------ -----------
Net cash (used in) financing
activities (5,595,731) 269,202
NET DECREASE IN CASH
AND CASH EQUIVALENTS (12,832,058) (1,650,685)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 21,624,043 14,518,835
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,791,985 $12,868,150
============ ===========
</TABLE>
See Notes to Condensed Unaudited Consolidated Financial Statements.
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Nine Months Ended
6/30/98 6/30/97
Cash paid during the period
for taxes $10,690,646 $6,266,178
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1998 and 1997, the Company increased
additional paid-in capital by $1,902,171 and $3,696,032, respectively, which
represents the tax benefit attributable to the compensation received by
employees from the exercise and disqualifying dispositions of incentive stock
options.
See Notes to Condensed Unaudited Consolidated Financial Statements.
<PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed unaudited consolidated financial statements include the
accounts of Ballard and all of its subsidiaries, after elimination of all
significant intercompany transactions and accounts. In management's
opinion, the accompanying condensed unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial condition of Ballard
and its subsidiaries as of June 30, 1998 and September 30, 1997, the
results of its operations for the three and nine months ended June 30, 1998
and 1997, and its cash flows for the nine months ended June 30, 1998 and
1997.
2. The results of operations for the three and nine months ended June 30, 1998
are not necessarily indicative of the results to be expected for the full
year ended September 30, 1998.
3. 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 device manufacturing company with operations in Kansas, Virginia,
and Australia. The condensed unaudited consolidated financial statements
presented herein have been restated to reflect the combination (treated as
a pooling of interests) with Tri-Med as if the combination had occurred at
the beginning of the reporting period.
4. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". SFAS
No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and simplifies the approach for computing EPS previously
found in Accounting Principles Board ("APB") Opinion No. 15. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures.
SFAS No. 128 was adopted by the Company during its quarter ended December
31, 1997. All prior-period EPS data presented herein has been restated to
conform with the provisions of SFAS No. 128.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's 1997 Annual Report to Shareholders contains management's
discussion and analysis of the financial condition at, and results of operations
for, the year ended September 30, 1997. The following discussion and analysis
describes material changes in the Company's financial condition and position
from September 30, 1997. Trends of a material nature are discussed to the
extent known and considered relevant. The analysis of results of operations
compares the three and nine months ended June 30, 1998, respectively, with the
corresponding periods of 1997. This analysis should be considered in
conjunction with the condensed unaudited consolidated balance sheets,
condensed unaudited consolidated statements of operations, and condensed
unaudited consolidated statements of cash flows.
RESULTS OF OPERATIONS
OVERVIEW. The Company's net sales for the third quarter and first nine
months of fiscal year 1998 grew to record levels, with third quarter 1998 sales
of $38,249,804 compared with $33,961,010 in 1997 and year-to-date 1998 sales of
$111,067,421 compared with $96,631,674 in 1997. The continued growth in net
sales from period to period and over the past several years continues to reflect
the Company's ability to maintain and expand its market shares through strategic
long-term alliances with group purchasing organizations and distributors,
enhancements within its existing product lines, acquisitions, and emphasis on
international sales growth.
The Company's after-tax profits for the third quarter and first nine months
of fiscal year 1998 also continued to grow at record levels, with third quarter
1998 earnings of $8,845,647 compared with $7,777,121 in 1997 and year-to-date
1998 earnings of $22,899,826 compared with $22,688,625 in 1997.
The continued high level of earnings reflects the Company's efforts to sell
high margin products, as well as focusing on controlling costs. The Company has
been successful in its efforts to improve and integrate its manufacturing
processes and to integrate its acquired subsidiaries.
SALES. Net sales for the three months ended June 30, 1998 increased 12.6%
to $38,249,804. Net sales for the nine months ended June 30, 1998 increased
14.9% to $111,067,421.
The growth in net sales between periods is principally due to continued
increases in the Company's MIC enteral feeding catheters and related products,
which increased 24.6% and 23.4%, respectively, for the three and nine months
ended June 30, 1998, significant growth in the sales of Tri-Med's Helicobacter
Pylori diagnostic products, which grew over 62.8% for both the three and nine
months ended June 30, 1998, and to rapid growth in the Company's international
sales, which increased 92.3% and 59.6%, respectively in those periods.
No significant price increases occurred during the three or nine months
covered by this report; in fact, there were price decreases. Therefore,
substantially all of the increase in net sales is attributable primarily to an
increased volume of products sold. The Company continues to enter into and
renew long-term contracts with group purchasing organizations in order to
maintain its presence in the market. The Company's prices continue to be
impacted by price reduction pressures from hospitals and the impact of these
contracts with group purchasing organizations.
Substantially all sales of the Company and related receipts were in U.S.
dollars. International sales represent 11.3% of total Company sales.
<PAGE>
COST OF PRODUCTS SOLD. Cost of products sold for the three months ended
June 30, 1998 was $13,846,417, compared to $12,276,819 for the corresponding
three months in fiscal year 1997. Cost of products sold for the nine months
ended June 30, 1998 was $41,534,574, compared to $34,533,297 for the
corresponding nine months in fiscal year 1997. As a percentage of net sales,
cost of products sold for the three and nine months ended June 30, 1998 was
36.2% and 37.4%, respectively, compared with 36.1% and 35.7%, respectively, for
the three and nine months ended June 30, 1997.
The increased cost of products sold as a percentage of net sales reflects
the pricing pressures which exist throughout the health care sector, the
addition through acquisition of less efficient manufacturing facilities and
their lower-margin product lines, and the relocation of manufacturing operations
in California to the Company's facilities in Idaho. The Company continues to
refine and automate its manufacturing processes, especially those of their
acquired subsidiaries, as well as expand its injection molding and tubing
extrusion capacity. The Company expects further increases in costs of products
sold as a percentage of net sales resulting primarily from continued pricing
pressures from the health care market.
OPERATING EXPENSES. Operating expenses generally consist of selling,
general, and administrative expenses, research and development expenses, and
royalty expenses. Total operating expenses for the three and nine months ended
June 30, 1998 were $11,170,868 and $35,712,334, respectively, which represents a
decrease of 5.3% for the three months ended June 30, 1998 compared with 1997,
but an overall increase of 14.1% for the nine months ended June 30, 1998
compared with the corresponding period in fiscal year 1997. As a percentage of
net sales, operating expenses for the three and nine months ended June 30, 1998
totaled 29.2% and 32.2%, respectively, compared with 34.7% and 32.4%,
respectively, for the corresponding periods in fiscal year 1997.
The overall increase in total operating expenses for the nine months ended
June 30, 1998 is due primarily to selling, general, and administrative expenses
which increased from $27,835,198 to $30,144,233. These increased costs are
attributable primarily to increased overall wages, commissions, and other
selling related costs associated with the increased levels of sales, as well as
additional amortization expense associated with the cost of acquisitions. As a
percentage of net sales, overall selling, general, and administrative expenses
totaled 27.1% for the nine months ended June 30, 1998, a decrease when compared
to the 28.8% for the corresponding period in fiscal year 1997.
Research and development expenses and royalty expenses, as a percentage of
net sales, remained relatively consistent between the periods presented.
OTHER INCOME. Other income generally consists of interest income from
investments and royalty income from the licensing of the TRACH CARE closed
suction system. For the three and nine months ended June
<PAGE>
30, 1998, other income totaled $1,416,128 and $3,841,313, respectively, compared
to $2,228,198 and $4,516,855, respectively, for the corresponding periods in
fiscal year 1997.
NET INCOME. Net income after taxes for the three and nine months ended
June 30, 1998 increased 13.7% and .9%, respectively, to $8,845,647 and
$22,899,826, compared to $7,777,121 and $22,688,625, respectively, for the
corresponding periods in fiscal year 1997. The increase in net income reflects
the growth in net sales, including strong contributions and expanded product
offerings from the MIC and Tri-Med product lines domestically and all
international lines, and also reflects the Company's successful efforts in
controlling overall operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1998 the Company's operating activities
provided $25,446,029 in cash flows and an increase in short-term investments
available-for-sale of $26,601,023. At June 30, 1998, working capital was
$113,033,125, compared with $87,986,254 as of September 30, 1997, and the
Company's current ratio as of June 30, 1998 was 13.6 to 1.0. In addition, the
Company had $62,021,320 in cash, cash equivalents, and investments available-
for-sale at June 30, 1998.
Significant uses of cash during the nine months ended June 30, 1998
included approximately $26,691,000 in net purchases of short-term investments,
$5,439,000 in additions to property and equipment, $5,400,000 in repayment of
debt of an acquired subsidiary, and payment of $3,427,000 in cash dividends.
In addition to its strong liquidity and overall financial position, the
Company does not have any long-term debt nor does management intend to utilize
debt to fund future expansion. The Company maintains a $5,000,000 unsecured
line of credit with its bank but has never drawn on this line. Continued growth
in cash, cash equivalents, and investments provides the Company financial
stability and flexibility to fund current operations, an aggressive acquisition
program, future growth and internal expansion, and its dividend payment policy.
No significant commitments for the purchase of inventory or property or
equipment existed as of June 30, 1998, except commitments for ongoing
construction projects.
IMPACT OF THE YEAR 2000 ISSUE. 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.,
<PAGE>
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.
The Company has already determined that it would be required to replace or
modify portions of its business application software so that its computer
systems would properly utilize dates beyond December 31, 1999. However, if such
modifications and conversions are not made, or are not timely, the Year 2000
Issue could have a material impact on the operations of the Company.
The Company can give no guarantee that the systems of other companies on
which the Company's systems rely will be converted on time or that a failure to
convert by another company or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
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 expects 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 $500,000 to $600,000 and is being funded through
operating cash flows. The Company will be able to capitalize the portion of
this cost that relates to the acquisition of software and hardware.
The costs of the project and the timetable in which the Company plans to
complete the Year 2000 compliance requirements are based on 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.
<PAGE>
RISK FACTORS
From time to time the Company may report, through its press releases, its
Annual Report, and SEC filings, certain matters that could be characterized as
forward-looking statements subject to risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties may include, among other things, the factors discussed below.
Such forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995.
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 principal products. Some Company competitors have substantially
greater capital resources, research and development staffs and experience in the
medical device industry. These competitors may succeed in developing
technologies and products that are more effective than those currently used or
produced by the Company or that would render some products offered by the
Company obsolete or noncompetitive. Competition based on price is becoming an
increasingly important factor in customer purchasing patterns as a result of
cost containment pressures on, and consolidation in, the health care industry.
Such competition has exerted, and is likely to continue to exert, downward
pressure on the prices the Company is able to charge for its products. The
Company may not be able to offset such downward price pressure through
corresponding cost reductions. Price reductions could have an adverse impact on
the business, results of operations, cash flows, or financial condition of the
Company.
INTELLECTUAL PROPERTY RIGHTS. From time to time, the Company has received,
and in the future may receive, notices of claims with respect to possible
infringement of the intellectual property rights of others or notices of
challenges to the Company's intellectual property rights. In some instances
such notices have given rise to, or may in the future give rise to, litigation.
See "LEGAL PROCEEDINGS." 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, cash flows, 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 will
likely 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 is no assurance that
any given Company patent can withstand judicial scrutiny if its validity is
challenged.
From time to time the Company files patent applications related to products
or product improvements under development. However, there can be no assurance
that patents will be issued for such products and product improvements 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,
<PAGE>
increasing the ability of these organizations to influence the practices and
pricing involved in the purchase of medical devices, including the products sold
by the Company.
HEALTH CARE REFORM/PRICING PRESSURE. The health care industry in the
United States continues to experience change. Health care reform proposals have
been formulated by members of Congress. In addition, state legislatures
periodically consider various health care reform proposals. Federal, state and
local government representatives will, in all likelihood, continue to review and
assess alternative health care delivery systems and payment methodologies, and
ongoing public debate of these issues can be expected. Cost containment
initiatives, market pressures and proposed changes in applicable laws and
regulations may have a dramatic effect on pricing or potential demand for
medical devices, the relative costs associated with doing business and the
amount of reimbursement by both government and third-party payors. In
particular, the industry is experiencing market-driven reforms from forces
within the industry that are exerting pressure on health care companies to
reduce health care costs. These market-driven reforms are resulting in
industry-wide consolidation that is expected to increase the downward pressure
on product margins, as larger buyer and supplier groups exert pricing pressure
on providers of medical devices and other health care products. Both short-term
and long-term cost containment pressures, as well as the possibility of
regulatory reform, may have an adverse impact on the Company's results of
operations and financial condition. The Company's products consist primarily of
disposable medical devices. Cost containment pressures on hospitals are leading
some facilities to use certain disposable devices longer than they have been
used in the past, even longer than permitted by product labelling. This
phenomenon could result in a reduction in Company sales, because extended use
and device reuse mean fewer unit purchases.
GOVERNMENT REGULATION. There has been a trend in recent years, both in the
United States and outside the United States, toward more stringent regulation
of, and enforcement of requirements applicable to, medical device manufacturers.
The continuing trend of more stringent regulatory oversight in product clearance
and enforcement activities has caused medical device manufacturers to experience
longer approval cycles, more uncertainty, greater risk and greater expense. At
the present time, there are no meaningful indications that this trend will be
discontinued in the near-term or the long-term either in the United States or
abroad. The Company expects to continue to incur additional operating expenses
associated with its ongoing regulatory compliance program, but the amount of
these incremental costs cannot be completely predicted and will depend upon a
variety of factors, including future changes in statutes and regulations
governing medical device manufacturers. There can be no assurance that such
compliance requirements and quality assurance programs will not have an adverse
impact on the business, results of operations or financial condition of the
Company or that the Company will not experience problems associated with FDA
regulatory compliance.
<PAGE>
PRODUCT REIMBURSEMENT. Critical to the sale of the Company's products is
the ability of health care providers to be able to receive reimbursement from
insurance carriers for the products and services they deliver to patients. One
of the products received through the Company's February, 1998 acquisition of
Tri-Med is PYtest, a breath test product used in the diagnosis of H. Pylori.
Although the PYtest product has been well accepted and satisfactory
reimbursements are being paid in some geographical areas, there can be no
assurance that the Company will succeed in enabling health care providers to
receive reimbursement for breath testing and laboratory analyses associated with
the PYtest product all across the U.S.A. or in other parts of the world.
NEW PRODUCT INTRODUCTIONS. As the existing products of the Company become
more mature and its existing markets more saturated, the importance of
developing or acquiring new products will increase. The development of any such
products will entail considerable time and expense, including research and
development costs and the time and expense required to obtain necessary
regulatory approvals, which could adversely affect the business, results of
operations or financial condition of the Company. There can be no assurance
that such development activities will yield products that can be commercialized
profitably, or that any product acquisition can be consummated on commercially
reasonable terms or at all. Any failure to acquire or develop new products to
supplement more mature products could have an adverse impact on the business,
results of operations or financial condition of the Company.
TECHNOLOGICAL CHANGE. The medical technology as utilized by the Company
has been subject to rapid advances. While the Company feels that it currently
possesses the technology necessary to carry on its business, its commercial
success will depend on its ability to remain current with respect to such
technological advances and to retain experienced technical personnel.
Furthermore, there can be no assurance that other technological advances will
not render the Company's technology and certain products uneconomical or
obsolete.
PRODUCT LIABILITY EXPOSURE. Because its products are intended to be used
in health care settings on patients who are physiologically unstable and may
also be seriously or critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the Company's products have
suffered serious injury or death, which has led to product liability claims
against the Company. Some product liability claims have been inherited by the
Company through business acquisitions. The Company does not believe that any
pending, known claims, individually or in the aggregate, will have a material
adverse impact on its business, results of operations, cash flows, or financial
condition. However, the Company may, in the future, be subject to product
liability claims that could have such an adverse impact.
The Company maintains product liability coverage in amounts that it deems
sufficient for its business. However, there can be no assurance that such
coverage will ultimately prove to be adequate, or
<PAGE>
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 earnings 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, cash flows, or financial condition of the Company or that the
benefits expected from any such integration will be fully realized.
LACK OF DIVIDENDS. Prior to January, 1990, no dividends had been paid by
the Company on its shares of Common Stock. The Company has paid dividends since
January, 1990. However, there can be no assurance that dividends will be paid
on shares in the future, particularly since the Company prefers to reserve its
cash and liquid assets for growth and possible business acquisitions.
UNCERTAINTY OF FINANCIAL RESULTS AND CAPITAL NEEDS. There may be
substantial fluctuations in the Company's results of operations because of the
timing and recording of revenues and market acceptance of existing Company
products. The ability of the Company to expand its manufacturing and marketing
operations cannot be predicted with certainty. If revenues do not continue to
increase as rapidly as they have in past years, or if manufacturing, marketing,
or research and development are not successful or require more money than is
anticipated, the Company may have to scale back product marketing, development
and production efforts and attempt to obtain external financing. There can be
no assurance that the Company would be able to obtain timely external financing
in the amounts required or that such financing, if available, would be on terms
advantageous to the Company.
SUPPLY OF RAW MATERIALS. Certain of the Company's products are dependent
upon raw materials for which there are single or few sources. So far, the
Company has not had any serious problems obtaining needed raw materials.
However, there can be no assurance that the Company will be able to continue to
depend on existing sources of certain materials.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES. Because
certain sales of products by the Company outside the United States typically are
denominated in local currencies, the results of operations of the Company are
expected to continue to be affected by
<PAGE>
changes in exchange rates between certain foreign currencies and the United
States Dollar. There can be no assurance that the Company will not experience
currency fluctuation effects in future periods, which could have an adverse
impact on its business, results of operation or financial condition. The
operations and financial results of the Company also may be significantly
affected by other international factors, including changes in governmental
regulations or import and export restrictions, and foreign economic and
political conditions generally.
The Company's ability to continue to sell products into Europe is dependent
to a large extent on its ability to maintain the important ISO 9001/EN 4601
certification and the CE marking of conformity. If the Company were to lose
such certifications, such loss would have a material, adverse impact on
international sales and profits.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
stock is, and is expected to continue to be, subject to significant fluctuations
in response to variations in quarterly operating results, trends in the health
care industry in general and the medical device industry in particular, and
certain other factors beyond the control of the Company. In addition, broad
market fluctuations, as well as general economic or political conditions and
initiatives, may adversely impact the market price of the Company's stock,
regardless of the Company's operating performance.
YEAR 2000 ISSUES. The approaching Year 2000 could result in challenges
related to computer software, manufacturing and communications equipment,
accounting records, and relationships with suppliers and customers. The Company
is in the process of addressing the Year 2000 Issue. See "IMPACT OF THE YEAR
2000 ISSUE."
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BALLARD MEDICAL PRODUCTS v. ALLEGIANCE HEALTHCARE CORPORATION AND SORENSON
CRITICAL CARE, INC.
The parties to this case are now fully engaged in the discovery process
(i.e., exchange of information and documents, depositions, etc.). On or about
July 22, 1998, the Company filed a motion for preliminary injunction against the
defendants, asking the court to restrain the defendants, during the pendency of
the lawsuit, from selling or offering for sale the defendants' closed suction
tracheal catheters which, Ballard claims, copy the color coding system used on
Ballard's TRACH CARE line, on the grounds that Ballard's color coding scheme
constitutes proprietary trade dress which is entitled to protection under
Section 43(a) of the Lanham Act. Defendants have responded alleging that
Ballard's color code is not entitled to protection. Ballard's motion has
tentatively been scheduled for hearing before the judge September 1, 1998.
J. MICHAEL KRAMER V. R2 MEDICAL SYSTEMS, INC., ET AL.
The parties recently signed a stipulation settling this matter out of court
as to R2 and the case has been discontinued as to R2. R2's obligation for the
settlement is being paid entirely by R2's product liability carrier.
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
Mr. Heath's appeal to the United States Court of Appeals for the 7th
Circuit is still pending.
OTHER LITIGATION
The Company is also a party to ordinary routine litigation incidental to
the Company's business.
ITEM 2. CHANGES IN SECURITIES
There are no changes in the rights of the holders of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no senior securities of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the Company's January, 1998 Annual Meeting of Shareholders, no
matters have been submitted to a vote of the shareholders.
ITEM 5. OTHER INFORMATION
ADVANCE NOTICE PROVISION FOR SHAREHOLDER MEETING. Effective August 1,
1998, the Board of Directors of the Company unanimously adopted a resolution
amending the Company's Bylaws. A copy of the amendment is attached to this Form
10-Q as an exhibit. Pursuant to the bylaw amendment, shareholder proposals
submitted to the Company under Rule 14a-4 must be received by the Company at
least sixty days before the date the Company mailed its proxy materials for the
prior year. Last year the Company mailed its proxy materials on December 12,
1997. Thus, a shareholder proposal under Rule 14a-4 for the upcoming 1999
Annual Meeting of Shareholders (scheduled to be held January 25, 1999) must be
received by the Company no later than October 13, 1998.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. Documents filed at part of this report:
Amendment to Bylaws
Financial Data Schedule
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed
during the quarter for which this report is filed:
(i) Form 8-K filed July 14, 1998, and amended and restated by a Form
8-K/A filed July 20, 1998. This report was filed voluntarily under Item 5 on
Form 8-K, to report financial statements and information for the fiscal year
ended September 30, 1997, to reflect the Company's February, 1998 acquisition of
Tri-Med, accounted for as a pooling of interests.
(ii) The above-referenced Form 8-K/A included the filing of the
following financial statements:
Ballard Medical Products and Subsidiaries Consolidated Balance Sheets
Dated September 30, 1997 and 1996;
Ballard Medical Products and Subsidiaries Consolidated Statements of
Operations for the Years Ended September 30, 1997, 1996, and 1995;
Ballard Medical Products and Subsidiaries Consolidated Statements of
Shareholders' Equity for the Years Ended September 30, 1997, 1996, and
1995 (as Restated);
Ballard Medical Products and Subsidiaries Consolidated Statements of
Cash Flows for the Years Ended September 30, 1997, 1996, and 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 8/14/98 Dale H. Ballard, President and
Principal Executive Officer
Date: 8/14/98 Kenneth R. Sorenson,
Treasurer and
Principal Financial Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
3(ii) Amendment to Bylaws 20
27 Financial Data Schedule 21
<PAGE>
EXHIBIT 3(ii)
AMENDMENT TO BYLAWS
OF
BALLARD MEDICAL PRODUCTS
Article II, Section 8. PROXIES of the Corporation's Bylaws is hereby
amended by adding a new paragraph (k), as follows:
"(k) In connection with the Corporation's annual meeting of
shareholders, a proxy may confer discretionary authority to vote on
any of the matters specified in Regulation (S)240.14a-4(c)(1)
promulgated under the Securities Exchange Act of 1934, except that the
45-day period set forth in Rule 14a-4 is increased to 60 days."
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form the
Company's third quarter 10-Q and is qualified in its entirety by reference to
such 10-Q.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> APR-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 8,791,985 8,791,985
<SECURITIES> 53,229,335 53,229,335
<RECEIVABLES> 31,073,909 31,073,909
<ALLOWANCES> 2,834,210 2,834,210
<INVENTORY> 24,543,553 24,543,553
<CURRENT-ASSETS> 122,035,721 122,035,721
<PP&E> 59,533,655 59,533,655
<DEPRECIATION> 13,304,703 13,304,703
<TOTAL-ASSETS> 214,495,854 214,495,854
<CURRENT-LIABILITIES> 9,002,596 9,002,596
<BONDS> 0 0
0 0
0 0
<COMMON> 3,040,696 3,040,696
<OTHER-SE> 202,452,562 202,452,562
<TOTAL-LIABILITY-AND-EQUITY> 214,495,854 214,495,854
<SALES> 38,249,804 111,067,421
<TOTAL-REVENUES> 38,249,804 111,067,421
<CGS> 13,846,417 41,534,574
<TOTAL-COSTS> 13,846,417 41,534,574
<OTHER-EXPENSES> 11,170,868 35,712,334
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 14,648,647 37,661,826
<INCOME-TAX> 5,803,000 14,762,000
<INCOME-CONTINUING> 8,845,647 22,899,826
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,845,647 22,899,826
<EPS-PRIMARY> 0.291 0.758
<EPS-DILUTED> 0.286 0.741
</TABLE>
