As filed with the Securities and Exchange Commission
on May 15, 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
MARCH 31, 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:
30,422,316 - all common, May 13, 1998
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
FORM 10-Q INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Unaudited Consolidated
Balance Sheets as of March 31,
1998 and September 30, 1997
Condensed Unaudited Consolidated
Statements of Operations for the
three and six months ended March
31, 1998 and 1997
Condensed Unaudited Consolidated
Statements of Cash Flows for the
six months ended March 31,
1998 and 1997
Notes to Condensed Unaudited
Consolidated Financial Statements
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Risk Factors
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote
of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
DEFINITIONS
As used herein, the following terms have the meanings
indicated:
GENERAL DEFINITIONS
1. "Ballard" refers to Ballard Medical Products.
2. "BI" refers to Ballard International, Inc., a
wholly-owned subsidiary of Ballard.
3. "BPC" refers to Ballard Purchase Corporation, a
wholly-owned subsidiary of Ballard.
4. "BREH" refers to Ballard Real Estate Holdings,
Inc., a wholly-owned subsidiary of Ballard.
5. "Cardiotronics" refers to Cardiotronics Systems,
Incorporated, a wholly-owned subsidiary.
6. The "Company" and the "Registrant" refer to
Ballard and its subsidiaries.
7. "MIC" refers to Medical Innovations Corporation, a
wholly-owned subsidiary of Ballard.
8. "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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS 3/31/98 9/30/97
CURRENT ASSETS:
Cash and cash
equivalents $11,287,583 $21,624,043
Investments 42,380,636 26,628,312
Accounts
receivable - trade (net) 25,474,663 26,380,031
Royalties receivable 844,746 375,673
Other receivables 873,304 908,753
Inventories:
Raw materials 12,391,265 10,856,390
Work-in-progress 6,340,077 5,527,765
Finished goods 4,942,168 4,507,579
Deferred income taxes 2,628,945 2,233,042
Income tax refunds
receivable 2,243,007 1,830,946
Prepaid expenses 4,717,980 64,139
Total current assets 114,124,374 100,936,673
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 28,923,625 28,922,203
Molds 4,890,834 4,891,734
Machinery and equipment 11,331,602 11,097,145
Vehicles 780,419 785,440
Furniture and fixtures 3,485,338 3,264,578
Leasehold improvements 133,897 116,850
Construction-in-
progress 8,134,747 4,142,563
Total 58,554,327 54,094,378
Less accumulated
depreciation 12,495,246 10,746,905
Property and
equipment - net 46,059,081 43,347,473
INTANGIBLE ASSETS:
Cost in excess of
purchase price - net 27,670,511 29,443,283
Patents and other
intangibles - net 12,665,163 13,068,452
Total intangible
assets 40,335,674 42,511,735
DEFERRED INCOME TAXES 1,073,068 2,139,902
OTHER ASSETS 5,401,749 5,256,599
TOTAL $206,993,946 $194,192,382
See Notes to Condensed Unaudited Consolidated Financial Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND
STOCKHOLDERS' EQUITY 3/31/98 9/30/97
CURRENT LIABILITIES:
Accounts payable $2,716,963 $3,216,908
Line of credit 1,425,000
Contract payable 2,650,000 3,975,000
Accrued liabilities:
Employee
compensation 3,614,197 3,438,849
Royalties 359,300 432,617
Other 144,567 462,045
Total current
liabilities 9,485,027 12,950,419
STOCKHOLDERS' EQUITY:
Common stock 3,035,511 3,006,273
Additional paid-in
capital 59,832,014 54,942,666
Unrealized losses on
investments (171,071) (223,783)
Retained earnings 134,812,465 123,516,807
Total
Stockholders'
equity 197,508,919 181,241,963
TOTAL $206,993,946 $194,192,382
See Notes to Condensed Unaudited Consolidated Financial Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
3/31/98 3/31/97 3/31/98 3/31/97
NET SALES $36,135,728 $32,517,823 $72,817,617 $62,670,664
COST OF PRODUCTS
SOLD 14,487,808 11,400,392 27,688,157 22,256,478
GROSS MARGIN 21,647,920 21,117,431 45,129,460 40,414,186
OPERATING EXPENSES:
Selling, general,
and administrative 10,293,885 9,035,469 20,202,206 17,195,463
Research and
development 767,737 761,520 1,463,212 1,445,072
Royalties 426,000 439,718 902,089 867,804
Non-recurring
charges 1,973,959 1,973,959
Total operating
expenses 13,461,581 10,236,707 24,541,466 19,508,339
OPERATING INCOME 8,186,339 10,880,724 20,587,994 20,905,847
OTHER INCOME - Net 1,235,836 1,090,802 2,425,185 2,288,657
INCOME BEFORE INCOME
TAX EXPENSE 9,422,175 11,971,526 23,013,179 23,194,504
INCOME TAX EXPENSE 3,879,001 4,145,000 8,959,000 8,283,000
NET INCOME 5,543,174 7,826,526 14,054,179 14,911,504
INCOME PER SHARE:
Basic $0.184 $0.267 $0.466 $0.513
Diluted $0.179 $0.259 $0.455 $0.496
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Basic 30,190,918 29,260,687 30,132,570 29,070,983
Diluted 30,934,875 30,200,854 30,873,485 30,086,357
See Notes to Condensed Unaudited Consolidated Financial Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
3/31/98 3/31/97
CASH FLOWS FROM OPERATING
ACTIVITIES $12,385,294 $18,012,399
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (4,459,949) (7,346,695)
Payment for purchase of
subsidiary, net of cash
acquired (11,768,562)
Investment in and advances
to affiliates (2,719) (2,994,872)
Receipt of payment of
advances and interest 3,771,471
Purchases of investments (28,817,826) (14,587,078)
Purchases of intangible assets (372,587) (3,614,639)
Purchase of other assets (264,236) (167,648)
Proceeds from sales of
investments 13,146,597 22,428,956
Net cash used in investing
activities (20,770,720) (14,279,067)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of
options 3,561,237 5,778,533
Cash dividends paid (1,905,377) (1,869,451)
Payment of debt of
acquired subsidiary (2,750,000) (8,210,016)
Purchase of treasury stock (856,894)
Net cash used in financing
activities (1,951,034) (4,300,934)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (10,336,460) (567,602)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 21,624,043 14,518,835
CASH AND CASH EQUIVALENTS,
END OF PERIOD $11,287,583 $13,951,233
See notes to condensed unaudited consolidated financial statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Six Months Ended
3/31/98 3/31/97
Cash paid during the period
for taxes $9,817,978 $2,125,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During the six months ended March 31, 1998 and 1997, the
Company increased additional paid-in capital by $1,654,647
and $2,793,342, respectively, which represents the Company
tax benefit attributable to the compensation received by
employees from the exercise and disqualifying disposition of
incentive stock options.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. The condensed unaudited consolidated financial
statements include the accounts of Ballard and all of
its subsidiaries, after elimination of all significant
intercompany transactions and accounts. In
management's opinion, the accompanying condensed
unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial
condition of Ballard and its subsidiaries as of March
31, 1998 and September 30, 1997, the results of its
operations for the three and six months ended March 31,
1998 and 1997, and its cash flows for the six months
ended March 31, 1998 and 1997.
2. The results of operations for the three and six months
ended March 31, 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. The Company recorded non-recurring pre-tax charges
totaling $3,068,439 during the quarter ended March 31,
1998. Included with these charges were $681,336 for
impairments to reduce the carrying value of certain
intangible assets and $1,292,623 for severance and
related restructuring costs associated with the pending
closures of several manufacturing facilities. Also
included in the $3,068,439 pre-tax charge was
$1,094,480 in identified inventory obsolescence and
overhead revaluations resulting from current and past
plant closures. These costs have been included in cost
of products sold.
5. In October 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which became effective for
the Company beginning October 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based
compensation arrangements with employees and encourages
(but does not require) compensation cost to be measured
based on the fair value of the equity instrument
awarded. Since the Company has decided to continue to
apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (as
permitted by SFAS No. 123), the appropriate required
disclosure of the effects of SFAS No. 123 will be
disclosed in the notes to the consolidated financial
statements in the Form 10-K for the year ending
September 30, 1998.
6. 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
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.
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 six months ended March 31,
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 second
quarter and first six months of fiscal year 1998 continued
to grow, increasing at rates of 11.1% and 16.2%,
respectively, over the corresponding periods of fiscal year
1997. The continued growth in net sales from period to
period reflects the Company's ability to maintain and expand
its share of various markets 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 second quarter
and first six months of fiscal year 1998 also continued
their steady growth, increasing at rates of 10.0% and 14.8%,
respectively, over the corresponding periods of fiscal year
1997 (without considering the impact of the non-recurring
charges). Income per share assuming dilution was $.179 and
$.455 for the three and six months ended March 31, 1998,
respectively, compared with $.259 and $.496, respectively,
for the same periods of fiscal year 1997. Without the
$3,068,439 in pre-tax charges, income per share assuming
dilution would have been $.278 and $.555 per share for the
three and six months ended March 31, 1998.
As a percentage of net sales, the Company's profits
were 15.3% and 19.3%, respectively, (23.9% and 23.6%,
respectively, without considering the impact of the non-
recurring charges) for the three and six months ended March
31, 1998. The continued high level of profits reflects the
Company's focused efforts directed at advanced manufacturing
processes, efficient and rapid integration of acquired
entities, and overhead cost restraints.
SALES - Net sales for the three months ended March 31,
1998 increased 11.1% to $36,135,728, compared with
$32,517,823 for the corresponding period of fiscal year
1997. Net sales for the six months ended March 31, 1998
increased 16.2% to $72,817,617, compared with $62,670,664
for the corresponding period of fiscal year 1997.
The growth in net sales is principally due to continued
market expansion of the MIC enteral feeding catheters, PMP
pain management products, Cardio's line of heart stimulation
electrode products, and Tri-Med s Helicobacter Pylori
diagnostic products, as well as from the rapid growth of the
Company s international sales. The following growth figures
are as compared to the same periods of fiscal year 1997.
Net sales of MIC s enteral feeding catheters and related
product lines grew 20.3% and 22.7%, respectively, to
$9,323,703 and $18,377,048, respectively, for the three and
six months ended March 31, 1998. Net sales of PMP s
products increased 74.7% and 73.6%, respectively, to
$1,594,466 and $3,019,156, respectively. Cardio s net sales
grew 46.3% and 106.1%, respectively, to $3,188,437 and
$5,569,954, respectively. The Company s newest product
lines, the Tri-Med H. Pylori diagnostic products have grown
77.3% and 63.4%, respectively, to $3,021,414 and $5,550,879,
respectively, for the three and six months ended March 31,
1998. Total international sales for the six months ended
March 31, 1998 have increased by 44.2% to $7,746,522.
No significant price increases occurred during the
three or six months covered by this report; therefore,
substantially all of the increase in net sales is
attributable primarily to an increased volume of products
sold. The Company s prices continue to be impacted by price
reduction pressures from hospitals and large group
purchasing organizations.
Substantially all sales of the Company and related
receipts were in U.S. dollars. Export sales to unaffiliated
customers from the Company's domestic operations did not
exceed 10% of the Company's domestic consolidated net sales.
COST OF PRODUCTS SOLD - Cost of products sold for the
three months ended March 31, 1998 (without considering the
impact of the non-recurring charges) was $13,393,328,
compared to $11,400,392 for the corresponding three months
in fiscal year 1997. Cost of products sold for the six
months ended March 31, 1998 (without considering the impact
of the non-recurring charges) was $26,593,677, compared to
$22,256,478 for the corresponding six months in fiscal year
1997. As a percentage of net sales, cost of products sold
for the three and six months ended March 31, 1998 (without
considering the impact of the non-recurring charges) was
37.1% and 36.6%, respectively, compared with 35.1% and
35.6%, respectively, for the three and six months ended
March 31, 1997.
The increased cost of products sold as a percentage of
net sales continues to reflect the impact of sales of
acquired lower margin product lines, pricing pressures
throughout the health care sector, the addition through
acquisition of less efficient manufacturing facilities, and
the winding down and relocation of manufacturing operations
in California to the Company's facilities in Idaho. The
Company continues to refine its manufacturing processes, as
well as expand its injection molding and extrusion capacity.
The Company expects further increases in costs of products
sold resulting from lower margin product acquisitions and
continued pricing pressures.
OPERATING EXPENSES - Operating expenses consist of
selling, general, and administrative expenses, research and
development expenses, and royalty expenses. Total operating
expenses (including the effect of non-recurring charges) for
the three and six months ended March 31, 1998 were
$13,461,581 and $24,541,466, respectively, which represents
increases of 31.5% and 25.8%, respectively, over the
corresponding periods in fiscal year 1997. Considering
operating expenses without the impact of non-recurring
charges, the increases for the three and six months ended
March 31, 1998 were 12.3% and 15.7%, respectively. As a
percentage of net sales, operating expenses (without the
impact of non-recurring charges) for the three and six
months ended March 31, 1998 totaled 31.8% and 31.0%,
respectively, compared with 31.5% and 31.2%, respectively,
for the corresponding periods in fiscal year 1997.
The overall increase in total operating expenses is due
primarily to selling, general, and administrative expenses
which increased from $9,035,469 and $17,195,463,
respectively, in the three and six months ended March 31,
1997 to $10,293,885 and $20,202,206, respectively, in the
three and six months ended March 31, 1998. These increased
costs are attributable primarily to increased wages,
commissions, and other selling related costs associated with
the increased levels of sales. As a percentage of net
sales, selling, general, and administrative expenses
marginally increased, from 27.8% and 27.5%, respectively,
for the three and six months ended March 31, 1997, to 28.5%
and 27.7%, respectively, for the corresponding periods in
fiscal year 1998.
Research and development expenses and royalty expenses,
as a percentage of net sales, remained relatively consistent
between the periods, approximating 2.1% and 1.2%,
respectively, for both the three and six months ended March
31, 1998, compared with 2.4% and 1.4%, respectively, for the
corresponding periods in fiscal year 1997.
OTHER INCOME - Other income generally consists of
interest income from investments and royalty income from the
licensing of the TRACH CARE closed suction catheter system.
For the three and six months ended March 31, 1998, other
income totaled $1,235,836 and $2,425,185, respectively,
compared to $1,090,802 and $2,288,657, respectively, for the
corresponding periods in fiscal year 1997.
NET INCOME - Net income after taxes for the three and
six months ended March 31, 1998 was $5,543,174 and
$14,054,179, respectively, compared to $7,826,526 and
$14,911,504, respectively, for the corresponding periods in
fiscal year 1997. Without the impact of the non-recurring
charges, net income after taxes for the three and six months
ended March 31, 1998 increased 10.0% and 14.8%,
respectively, to $8,611,613 and $17,122,618. The favorable
increase in net income (without the impact of non-recurring
charges) reflects the growth in net sales, including strong
contributions and market-share gains from newly acquired
product lines, as well as international growth and also
reflects the Company's successful efforts in controlling
overall operating costs.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1998 the Company's
operating activities provided $12,385,294 in cash flows and
an increase in short-term investments available-for-sale of
$15,752,324, compared with $18,012,399 in cash flows through
March 31, 1997 and a decrease in investments of $7,841,878
for the same period. At March 31, 1998, working capital was
$104,639,347 compared with $87,986,254 as of September 30,
1997 and the Company's current ratio as of March 31, 1998
was 12.0 to 1.0. In addition, the Company s total cash,
cash equivalents, and investments available-for-sale at
March 31, 1998 were $53,668,219 compared with $48,252,355 at
September 30, 1997.
Significant uses of cash during the six months ended
March 31, 1998 included approximately $15,671,000 in net
purchases of short-term investments, $4,460,000 in additions
to property and equipment, $2,750,000 in repayments of debt
of acquired subsidiaries, and payment of cash dividends of
$1,905,000.
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 short-term investments provides the Company financial
stability and flexibility to fund current operations, an
aggressive acquisition program, future growth and internal
expansion, and its dividend payment policy.
No significant commitments for the purchase of
inventory or property or equipment existed as of March 31,
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.,
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.
In 1997, the Company began and is still continuing a
comprehensive program of assessing changes and upgrades that
will need to be implemented in order to be prepared for the
Year 2000 and even the Year 1999. The scope of the project
covers all computer systems, computer and network hardware,
production process controllers, office equipment, access
control, maintenance machinery, manufacturing equipment and
the Company's products.
To assist with this project, the Company has engaged
the services and expertise of Quantified Management, a
computer services consulting firm from Salt Lake City, Utah.
The Company has acquired a project management package (QM
System 2000) from Quantified Management intended to guide
the Company through all aspects of solving the Year 2000
Issue. This tool bundles a comprehensive project management
program with interactive coaching services from Quantified
Management, to assist the Company in its Year 2000
compliance efforts.
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. The
Company presently believes that with conversions to new
systems and modifications to existing software the Year 2000
Issue can be mitigated. 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 has initiated formal communications with
all of its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to
their failure to remediate their own Year 2000 Issues. 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 a substantial portion of this cost.
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.
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 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
industry. Such competition has exerted, and is likely to
continue to exert, downward pressure on the prices the
Company is able to charge for its products. The Company may
not be able to offset such downward price pressure through
corresponding cost reductions. Price reductions could have
an adverse impact on the business, results of operations or
financial condition of the Company.
INTELLECTUAL PROPERTY RIGHTS. From time to time, the
Company has received, and in the future may receive, notices
of claims with respect to possible infringement of the
intellectual property rights of others or notices of
challenges to the Company's intellectual property rights.
In some instances such notices have given rise to, or may in
the future give rise to, litigation. Any litigation
involving the intellectual property rights of the Company
may be resolved by means of a negotiated settlement or by
contesting the claim through the judicial process. There
can be no assurance that the business, results of operations
or the financial condition of the Company will not suffer an
adverse impact as a result of intellectual property claims
that may be commenced against the Company in the future.
The Company owns certain patents and proprietary information
acquired while developing its products or through
acquisitions, and the Company is the licensee of certain
other technology. As patents expire, more competing
products may be released into the marketplace by other
companies. The ability of the Company to continue to
compete effectively with other medical device companies may
be materially dependent upon the protection afforded by its
patents and the confidentiality of certain proprietary
information. There can be no assurance that patents will be
issued for products and product improvements recently
released into the marketplace or for products presently
being developed.
MANAGED CARE AND OTHER HEALTH CARE PROVIDER
ORGANIZATIONS. Managed care and other health care provider
organizations have grown substantially in terms of the
percentage of the population in the United States that
receives medical benefits through such organizations and in
terms of the influence and control that they are able to
exert over an increasingly large portion of the health care
industry. These organizations are continuing to consolidate
and grow, increasing the ability of these organizations to
influence the practices and pricing involved in the purchase
of medical devices, including the products sold by the
Company.
HEALTH CARE REFORM/PRICING PRESSURE. The health care
industry in the United States continues to experience
change. Health care reform proposals have been formulated
by members of Congress. In addition, state legislatures
periodically consider various health care reform proposals.
Federal, state and local government representatives will, in
all likelihood, continue to review and assess alternative
health care delivery systems and payment methodologies, and
ongoing public debate of these issues can be expected. Cost
containment initiatives, market pressures and proposed
changes in applicable laws and regulations may have a
dramatic effect on pricing or potential demand for medical
devices, the relative costs associated with doing business
and the amount of reimbursement by both government and
third-party payors. In particular, the industry is
experiencing market-driven reforms from forces within the
industry that are exerting pressure on health care companies
to reduce health care costs. These market-driven reforms
are resulting in industry-wide consolidation that is
expected to increase the downward pressure on product
margins, as larger buyer and supplier groups exert pricing
pressure on providers of medical devices and other health
care products. Both short-term and long-term cost
containment pressures, as well as the possibility of
regulatory reform, may have an adverse impact on the
Company's results of operations and financial condition.
The Company's products consist primarily of disposable
medical devices. Cost containment pressures on hospitals
are leading some facilities to use certain disposable
devices longer than they have been used in the past, even
longer than permitted by product labelling. This phenomenon
could result in a reduction in Company sales, because
extended use and device reuse mean fewer unit purchases.
GOVERNMENT REGULATION. There has been a trend in
recent years, both in the United States and outside the
United States, toward more stringent regulation of, and
enforcement of requirements applicable to, medical device
manufacturers. The continuing trend of more stringent
regulatory oversight in product clearance and enforcement
activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater
risk and greater expense. At the present time, there are no
meaningful indications that this trend will be discontinued
in the near-term or the long-term either in the United
States or abroad. The Company expects to continue to incur
additional operating expenses associated with its ongoing
regulatory compliance program, but the amount of these
incremental costs cannot be completely predicted and will
depend upon a variety of factors, including future changes
in statutes and regulations governing medical device
manufacturers. There can be no assurance that such
compliance requirements and quality assurance programs will
not have an adverse impact on the business, results of
operations or financial condition of the Company or that the
Company will not experience problems associated with FDA
regulatory compliance.
NEW PRODUCT INTRODUCTIONS. As the existing products of
the Company become more mature and its existing markets more
saturated, the importance of developing or acquiring new
products will increase. The development of any such
products will entail considerable time and expense,
including research and development costs and the time and
expense required to obtain necessary regulatory approvals,
which could adversely affect the business, results of
operations or financial condition of the Company. There can
be no assurance that such development activities will yield
products that can be commercialized profitably, or that any
product acquisition can be consummated on commercially
reasonable terms or at all. Any failure to acquire or
develop new products to supplement more mature products
could have an adverse impact on the business, results of
operations or financial condition of the Company.
TECHNOLOGICAL CHANGE. The medical technology as
utilized by the Company has been subject to rapid advances.
While the Company feels that it currently possesses the
technology necessary to carry on its business, its
commercial success will depend on its ability to remain
current with respect to such technological advances and to
retain experienced technical personnel. Furthermore, there
can be no assurance that other technological advances will
not render the Company's technology and certain products
uneconomical or obsolete.
PRODUCT LIABILITY EXPOSURE. Because its products are
intended to be used in health care settings on patients who
are physiologically unstable and may also be seriously or
critically ill, the Company is exposed to potential product
liability claims. From time to time, patients using the
Company's products have suffered serious injury or death,
which has led to product liability claims against the
Company. Some product liability claims have been inherited
by the Company through business acquisitions. The Company
does not believe that any of these claims, individually or
in the aggregate, will have a material adverse impact on its
business, results of operations or financial condition.
However, the Company may, in the future, be subject to
product liability claims that could have such an adverse
impact.
The Company maintains product liability coverage in
amounts that it deems sufficient for its business. However,
there can be no assurance that such coverage will ultimately
prove to be adequate, or that such coverage will continue to
remain available on acceptable terms or any terms at all.
ACQUISITIONS. In order to continue increasing sales
volume and profits, the Company relies heavily on a program
of acquiring business and new product lines from other
companies. There is always a significant risk that a given
acquisition by the Company will prove to be unsuccessful or
end up not contributing sufficiently to sales and profit
growth of the Company. There is also a risk that
undiscovered or contingent liabilities of an acquired
company could negatively impact the Company's financial
position or even the acquisition transaction itself. The
integration of any businesses that the Company might acquire
could require substantial management resources. The moving
of acquired product lines can also result in interruptions
in production and backorders. There can be no assurance
that any such integration will be accomplished without
having a short or potentially long-term adverse impact on
the business, results of operations or financial condition
of the Company or that the benefits expected from any such
integration will be fully realized.
LACK OF DIVIDENDS. Prior to January, 1990, no
dividends had been paid by the Company on its shares of
Common Stock. The Company has paid dividends since January,
1990. However, there can be no assurance that dividends
will be paid on shares in the future, particularly since the
Company prefers to reserve its cash and liquid assets for
growth and possible business acquisitions.
UNCERTAINTY OF FINANCIAL RESULTS AND CAPITAL NEEDS.
There may be substantial fluctuations in the Company's
results of operations because of the timing and recording of
revenues and market acceptance of existing Company products.
The ability of the Company to expand its manufacturing and
marketing operations cannot be predicted with certainty. If
revenues do not continue to increase as rapidly as they have
in the past few years, or if manufacturing, marketing, or
research and development are not successful or require more
money than is anticipated, the Company may have to scale
back product marketing, development and production efforts
and attempt to obtain external financing. There can be no
assurance that the Company would be able to obtain timely
external financing in the amounts required or that such
financing, if available, would be on terms advantageous to
the Company.
SUPPLY OF RAW MATERIALS. Certain of the Company's
products are dependent upon raw materials for which there
are single or few sources. So far, the Company has not had
any serious problems obtaining needed raw materials.
However, there can be no assurance that the Company will be
able to continue to depend on existing sources of certain
materials.
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN
SALES. Because certain sales of products by the Company
outside the United States typically are denominated in local
currencies, the results of operations of the Company are
expected to continue to be affected by changes in exchange
rates between certain foreign currencies and the United
States Dollar. There can be no assurance that the Company
will not experience currency fluctuation effects in future
periods, which could have an adverse impact on its business,
results of operation or financial condition. The operations
and financial results of the Company also may be
significantly affected by other international factors,
including changes in governmental regulations or import and
export restrictions, and foreign economic and political
conditions generally.
The Company's ability to continue to sell products into
Europe is dependent to a large extent on its ability to
maintain the important ISO 9001/EN 4601 certification and
the CE marking of conformity. If the Company were to lose
such certifications, such loss would have a material,
adverse impact on international sales and profits.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price
of the Company's stock is, and is expected to continue to
be, subject to significant fluctuations in response to
variations in quarterly operating results, trends in the
health care industry in general and the medical device
industry in particular, and certain other factors beyond the
control of the Company. In addition, broad market
fluctuations, as well as general economic or political
conditions and initiatives, may adversely impact the market
price of the Company's stock, regardless of the Company's
operating performance.
YEAR 2000 ISSUES. The approaching Year 2000 could
result in challenges related to computer software,
manufacturing and communications equipment, accounting
records, and relationships with suppliers and customers.
The Company is in the process of addressing the Year 2000
Issue. See "IMPACT OF THE YEAR 2000 ISSUE."
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 preparing to exchange
documents as a first step in the discovery process.
J. MICHAEL KRAMER V. R2 MEDICAL SYSTEMS, INC., ET AL.
R2 is a co-defendant in this ongoing product liability
case filed in the Supreme Court of the State of New York,
County of Suffolk, as Case No. 01787/94. The parties have
reached an agreement in principle to settle this matter out
of court. However, a formal settlement agreement has not
yet been signed.
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
Mr. Health'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, 1996 Annual Meeting of
Shareholders, no matters have been submitted to a vote of
the shareholders.
ITEM 5. OTHER INFORMATION
The Company has no information to report under this
item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Statements concerning computation of income per
share are included in the financial information provided in
Item 1 of Part I and are incorporated by reference into this
Item 6 of Part II of this report.
(b) The Company filed a Form 8-K on March 10, 1998 to
report its acquisition on February 25, 1998 of all of the
outstanding capital stock of Tri-Med Specialties, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 5/15/98 Dale H. Ballard, President and
Principal Executive Officer
Date: 5/15/98 Kenneth R. Sorenson,
Treasurer and
Principal Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
and second quarter 10-Qs and is qualified in its entirety by reference to such
10-Qs.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> JAN-01-1998 OCT-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 11,287,583 11,287,583
<SECURITIES> 42,380,636 42,380,636
<RECEIVABLES> 28,474,756 28,474,756
<ALLOWANCES> 3,000,093 3,000,093
<INVENTORY> 23,673,510 23,673,510
<CURRENT-ASSETS> 114,124,374 114,124,374
<PP&E> 58,554,327 58,554,327
<DEPRECIATION> 12,495,246 12,495,246
<TOTAL-ASSETS> 206,993,946 206,993,946
<CURRENT-LIABILITIES> 9,485,027 9,485,027
<BONDS> 0 0
0 0
0 0
<COMMON> 3,035,511 3,035,511
<OTHER-SE> 194,473,408 194,473,408
<TOTAL-LIABILITY-AND-EQUITY> 206,993,946 206,993,946
<SALES> 36,135,728 72,817,617
<TOTAL-REVENUES> 36,135,728 72,817,617
<CGS> 14,487,808 27,688,157
<TOTAL-COSTS> 14,487,808 27,688,157
<OTHER-EXPENSES> 14,556,061 25,635,946
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 9,422,175 23,013,179
<INCOME-TAX> 3,879,001 8,959,000
<INCOME-CONTINUING> 5,543,174 14,054,179
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,543,174 14,054,179
<EPS-PRIMARY> 0.184 0.466
<EPS-DILUTED> 0.179 0.455
</TABLE>
