As filed with the Securities and Exchange Commission
on July 13, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 13, 1998
(Date of Report)
BALLARD MEDICAL PRODUCTS
(Exact name of registrant
as specified in its charter)
1-12318
(Commission file number)
UTAH
(State or other jurisdiction of incorporation
or organization)
87-0340144
(I.R.S. Employer Identification No.)
12050 Lone Peak Parkway, Draper, Utah 84020
(Address and Zip Code
of principal executive offices)
(801) 572-6800
(Registrant's telephone number,
including area code)
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. "PEPCO" refers to Plastic Engineered Products Co.,
a wholly owned subsidiary of Ballard.
9. "PMP" refers to Ballard Medical Products Canada, a
wholly owned subsidiary of Ballard, doing business
as Preferred Medical Products.
10. "R2" refers to R2 Medical Systems, Inc., a wholly
owned subsidiary of Cardiotronics.
11. "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.
ITEM 5. OTHER EVENTS
The following financial statements and financial
information amends and restates the Company's financial
information previously reported for the fiscal year ended
September 30, 1997, to reflect the acquisition of Tri-Med
Specialties, Inc., accounted for as a pooling of interests.
These statements are voluntarily reported under this Item 5,
since they are not required to be reported under Item 7.
FINANCIAL HIGHLIGHTS
SELECTED CONSOLIDATED FINANCIAL DATA (1)(2)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales $132,743,037 $109,881,342 $90,041,201 $71,421,894 $69,551,865
Other
Income,
Net 5,539,812 5,309,380 4,101,037 3,518,832 3,711,891
Net Income 31,262,739 25,909,521 21,939,876 15,851,591 19,454,216
Net
Income
Per
Common
Share
Assuming
Full
Dilution
(3) 1.03 .87 .75 .56 .68
Total
Assets 194,192,382 144,164,584 115,216,589 94,361,714 81,593,906
Cash
Dividends
Declared
Per Share
(4) 0.111 0.109 0.096 0.072 0.049
</TABLE>
(1) The consolidated financial data shown above includes
the accounts of Ballard and its wholly owned
subsidiaries, MIC, BREH, BI, Tri-Med, PMP, BPC, Mist
Assist, PEPCO and Cardiotronics. The accounts of Mist
Assist, PMP and Cardiotronics are included as of July
19, 1996, August 28, 1996, and December 10, 1996,
respectively, which reflect their respective
acquisition dates.
(2) The combinations of Ballard with PEPCO and Tri-Med were
accounted for as pooling of interests. The selected
consolidated financial data have been prepared as if
Ballard, PEPCO, and Tri-Med had been combined for all
periods presented.
(3) Does not include the cumulative effect of a change in
accounting for income taxes in fiscal year 1994.
(4) Includes cash distributions paid by PEPCO and Tri-Med.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR 1997
QUARTERS ENDED: 9/30/97 6/30/97 3/31/97 12/31/96
<S> <C> <C> <C> <C>
Net Sales $36,111,363 $33,961,010 $32,517,823 $30,152,841
Gross Margin 23,617,233 21,684,191 21,117,431 19,296,755
Net Income 8,574,114 7,777,121 7,826,526 7,084,978
Net Income Per
Common Share
Assuming Full
Dilution 0.280 0.256 0.259 0.236
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1996
QUARTERS ENDED: 9/30/96 6/30/96 3/31/96 12/31/95
<S> <C> <C> <C> <C>
Net Sales $28,856,891 $28,476,196 $27,377,385 $25,170,870
Gross Margin 18,691,513 18,655,433 17,986,520 16,498,997
Net Income 6,650,828 6,927,214 6,679,578 5,651,901
Net Income Per
Common Share
Assuming Full
Dilution .224 .234 .227 .192
</TABLE>
(1) See additional analysis of net sales, margins, and net
income in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) See footnote explanations to "Selected Consolidated
Financial Data."
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Ballard
Medical Products:
We have audited the accompanying consolidated balance
sheets of Ballard Medical Products and subsidiaries as of
September 30, 1997 and 1996 (as restated), and the related
consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period
ended September 30, 1997 (as restated). These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits. The
consolidated financial statements give retroactive effect to
the merger of Ballard Medical Products and Tri-Med
Specialties, Inc., which has been accounted for as a pooling
of interests as described in Note 12 to the consolidated
financial statements. We did not audit the balance sheets
of Tri-Med Specialties, Inc. as of September 30, 1997 and
1996, or the related statements of operations, stockholders'
equity, and cash flows of Tri-Med Specialties, Inc. for the
year ended September 30, 1997, which statements reflect
total assets of $7,743,715 and $1,699,496 as of September
30, 1997 and 1996, respectively, and total revenues of
$7,435,859 for the year ended September 30, 1997. Those
statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates
to the amounts included for Tri-Med Specialties, Inc. for
1997 and 1996, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of
the other auditors, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Ballard Medical Products and
subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of
the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated
financial statements, effective October 1, 1994 the Company
changed its method of accounting for investment securities
to conform with Statement of Financial Accounting Standards
No. 115.
Deloitte & Touche LLP
Salt Lake City, Utah
November 13, 1997
(February 25, 1998 as to Note 12)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tri-Med Specialties, Inc.:
We have audited the accompanying balance sheets of Tri-
Med Specialties, Inc. (the Company) as of September 30, 1997
and 1996, and the related statements of operations, changes
in stockholders' equity, and cash flows for the year ended
September 30, 1997. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Tri-Med Specialties, Inc. as of
September 30, 1997 and 1996 and the results of its
operations and its cash flows for the year ended September
30, 1997, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers L.L.P.
Coopers & Lybrand L.L.P
Kansas City, Missouri
January 30, 1998
<TABLE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
(As restated, (As restated,
ASSETS see Note 12) see Note 12)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $21,624,043 $14,518,835
Investments available for sale 26,628,312 26,662,598
Accounts receivable - trade
(less allowance for doubtful
accounts: 1997 - $858,000, 1996 -
$192,000; and allowance
for sales returns: 1997 -
$1,660,000, 1996 - $805,000) 26,380,031 20,631,159
Royalties receivable 375,673 1,351,885
Other receivables 908,753 644,619
Inventories:
Raw materials 10,856,390 7,440,376
Work-in-process 5,527,765 3,915,690
Finished goods 4,507,579 2,950,659
Deferred income taxes 2,233,042 1,057,303
Income tax refund receivable 1,830,946 3,274,000
Prepaid expenses 64,139 179,333
Total current assets 100,936,673 82,626,457
PROPERTY AND EQUIPMENT:
Land 873,865 3,944,701
Buildings 28,922,203 20,131,728
Molds 4,891,734 3,608,228
Machinery and equipment 11,097,145 9,257,669
Vehicles 785,440 1,039,175
Furniture and fixtures 3,264,578 2,248,003
Leasehold improvements 116,850 359,349
Construction in progress 4,142,563 3,053,296
Total 54,094,378 43,642,149
Less accumulated depreciation (10,746,905) (8,182,072)
Property and equipment - net 43,347,473 35,460,077
INTANGIBLE ASSETS:
Cost in excess of purchase price
(less accumulated amortization:
1997 - $5,246,166; 1996 - $3,212,520) 29,443,283 15,645,151
Patents and other
intangibles (less accumulated
amortization: 1997 - $1,898,336;
1996 - $711,431) 13,068,452 5,018,277
Total intangible assets 42,511,735 20,663,428
DEFERRED INCOME TAXES 2,139,902
OTHER ASSETS 5,256,599 5,414,622
TOTAL $194,192,382 $144,164,584
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996
(As restated, (As restated,
LIABILITIES AND STOCKHOLDERS' EQUITY see Note 12) see Note 12)
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $1,425,000
Contract payable 3,975,000
Accounts payable 3,216,908 $2,552,697
Accrued liabilities:
Employee compensation 3,438,849 2,308,615
Royalties 432,617 326,492
Other 462,045 845,183
Total current liabilities 12,950,419 6,032,987
DEFERRED INCOME TAXES 1,110,764
Total liabilities 12,950,419 7,143,751
COMMITMENTS AND CONTINGENT
LIABILITIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock - $.10 par value;
75,000,000 shares authorized;
issued and outstanding:
1997 - 30,062,733 shares,
1996 - 28,770,056 shares 3,006,273 2,877,005
Additional paid-in capital 54,942,666 38,839,119
Unrealized losses on investments
available for sale (223,783) (156,564)
Retained earnings 123,516,807 95,461,273
Total stockholders' equity 181,241,963 137,020,833
TOTAL $194,192,382 $144,164,584
</TABLE>
See notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
(As restated, (As restated, (As restated,
see Note 12) see Note 12) see Note 12)
<S> <C> <C> <C>
NET SALES $132,743,037 $109,881,342 $90,041,201
COST OF PRODUCTS SOLD 47,027,428 38,048,879 30,166,070
GROSS MARGIN 85,715,609 71,832,463 59,875,131
OPERATING EXPENSES:
Selling, general, and
administrative 37,503,070 31,593,508 26,839,297
Research and 2,856,409 3,184,151 2,438,616
development
Royalties 1,849,203 1,687,542 1,509,480
Total operating
expenses 42,208,682 36,465,201 30,787,393
OPERATING INCOME 43,506,927 35,367,262 29,087,738
OTHER INCOME:
Interest income 2,129,276 1,917,925 1,923,257
Royalty income 2,465,840 2,400,000 2,147,620
Other 944,696 991,455 30,160
Total other income-
net 5,539,812 5,309,380 4,101,037
INCOME BEFORE
INCOME TAXES 49,046,739 40,676,642 33,188,775
INCOME TAX EXPENSE 17,784,000 14,767,121 11,248,899
NET INCOME $31,262,739 $25,909,521 $21,939,876
NET INCOME PER SHARE
Common and common
equivalent share $1.032 $0.873 $0.759
Common share assuming
full dilution $1.027 $0.863 $0.746
WEIGHTED AVERAGE
NUMBER
OF SHARES OUTSTANDING:
Common and common
equivalent share 30,290,221 29,681,869 28,911,844
Common share assuming
full dilution 30,443,353 30,036,588 29,407,679
</TABLE>
See notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995 (AS RESTATED)
<CAPTION>
Unrealized
Losses on
Invest-
Additional ments
Common Paid-in Available Retained
Shares Amount Capital for Sale Earnings
<S> <C> <C> <C> <C> <C>
BALANCE,
OCTOBER
1, 1994
(As pre-
viously
reported) 26,694,589 $2,669,459 $28,287,388 $59,959,522
Pooling
of
interest
combin-
ation
(Note 12) 1,067,733 106,773 (96,773) 930,243
As
restated 27,762,322 2,776,232 28,190,615 60,889,765
Net 21,939,876
income
Cash
dividends
paid (2,656,343)
Common
stock
issued
from
exercise
of stock
options 205,425 20,543 432,869
Acquisi-
tion and
retire-
ment of
treasury
stock (100,000) (10,000) (1,464,985)
Tax bene-
fit
attribut-
able to
apprecia-
tion in
value of
stock
issued
in con-
junction
with the
exercise
and
disqual-
ifying
disposi-
tion of
incentive
stock
options 489,517
Unre-
alized
losses on
invest-
ments -
net of
tax $(142,728)
BALANCE,
SEPTEMBER
30,1995 27,867,747 2,786,775 29,113,001 (142,728) 78,708,313
Net
income 25,909,521
Cash
divi-
dends
paid (3,030,140)
Common
stock
issued
from
exercise
of stock
options 1,252,309 125,230 9,689,509
Acqui-
sition
and
retire-
ment of
treasury
stock (350,000) (35,000) (6,126,421)
Tax
benefit
attri-
butable
to appre-
ciation
in value
of stock
issued in
conjunc-
tion with
the exer-
cise and
disquali-
fying
dispo-
sitions
of incen-
tive
stock
options 36,609
Unre-
alized
losses on
invest-
ments -
net of
tax (13,836)
BALANCE,
SEPTEM-
BER 30,
1996 28,770,056 2,877,005 38,839,119 (156,564) 95,461,273
Net
income 31,262,739
Cash
divi-
dends
paid (3,207,205)
Common
stock
issued
from
exer-
cise
of stock
options 1,292,677 129,268 11,129,231
Tax
benefit
attri-
butable
to appre-
ciation
in value
of stock
issued in
conjunc-
tion with
the exer-
cise and
dis-
quali-
fying
dispo-
sitions
of incen-
tive
stock
options 4,974,316
Unre-
alized
losses on
invest-
ments -
net of
tax (67,219)
BALANCE,
SEPTEM-
BER 30,
1997 30,062,733 $3,006,273 $54,942,666 $(223,783) $123,516,807
</TABLE>
See notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
(As restated, (As restated, (As restated,
see Note 12) see Note 12) see Note 12)
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income $31,262,739 $25,909,521 $21,939,876
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Depreciation and
amortization 7,002,801 3,947,487 3,142,867
(Gain) loss on
disposal of
property (6,246,680) (446,320) 7,044
Impairment of
investment 4,900,000
Tax benefit from
disqualifying
dispositions of
incentive stock
options 4,974,316 36,609 489,517
Provision for
losses on
accounts
receivable -
trade and sales
returns and
rebates 2,191,000 365,000 225,000
Deferred income
taxes (373,168) 442,122 373,655
Changes in
operating assets
and liabilities-
net of effects
from purchases of
subsidiaries:
Accounts
receivable -
trade (7,454,819) (6,193,073) (127,171)
Royalties and
other receivables 712,078 (106,639) 37,544
Inventories (5,829,249) (1,382,921) (1,537,133)
Income tax refund
receivable 1,443,054 (1,170,430) 897,815
Prepaid expenses 250,872 102,417 (191,116)
Other assets (1,600)
Accounts payable (643,857) 936,506 206,861
Accrued
liabilities (754,491) 243,121 1,147,264
Total
adjustments 170,257 (3,226,121) 4,672,147
Net cash
provided by
operating
activities 31,432,996 22,683,400 26,612,023
CASH FLOWS FROM
INVESTING
ACTIVITIES:
Capital
expenditures for
property and
equipment (14,515,895) (15,398,935) (2,831,273)
Proceeds from
sales of property
and equipment 6,514,131 564,418 45,250
Purchases of
investments
available for
sale (46,959,814) (30,569,641) (38,534,828)
Proceeds from
maturities of
investments
available for
sale 46,902,342 22,231,406 36,288,627
Investment in
and advances to
affiliates (1,281,661) (4,462,625) (800,000)
Purchases of
intangible assets (714,952) (2,852,331) (1,335,646)
Purchases of
other assets (108,338) (12,532) (109,579)
Payments for
purchase of
subsidiaries,
net of cash
acquired (12,323,417) (5,618,432) (3,283,650)
Investment in
notes receivable (34,134)
Net cash used
in investing
activities (22,521,738) (36,118,672) (10,561,099)
CASH FLOWS FROM
FINANCING
ACTIVITIES:
Cash dividends
paid (3,207,205) (3,030,140) (2,656,343)
Proceeds from
issuance of
common stock and
exercise of
options 11,258,499 9,814,739 453,412
Proceeds from
borrowings on
line of credit 1,750,000
Proceeds from
notes payable 12,651
Payments on line
of credit (325,000)
Payments on
contract payable (1,850,000)
Purchase of
treasury stock (6,161,421) (1,474,985)
Repayment of
long-term debt
assumed in
acquisitions (9,444,995) (517,754) (18,446)
Net cash
used in
(provided by)
financing
activities (1,806,050) 105,424 (3,696,362)
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS 7,105,208 (13,329,848) 12,354,562
CASH AND CASH
EQUIVALENTS,
BEGINNING OF YEAR 14,518,835 27,848,683 15,494,121
CASH AND CASH
EQUIVALENTS, END
OF YEAR $21,624,043 $14,518,835 $27,848,683
SUPPLEMENTAL
DISCLOSURE OF
CASH FLOW
INFORMATION:
Cash paid during
the year for
income taxes $11,993,115 $15,458,820 $9,487,912
Cash paid during
the year for
interest $16,435 None None
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
On February 25, 1998, the Company entered into a
business combination with Tri-Med Specialties, Inc. in
exchange for 1,067,733 shares of the Company's common stock.
This transaction has been accounted for by the Company as a
"pooling" and as such, the Company's accompanying
consolidated financial statements as of September 30, 1997
and 1996 and for the three years in the period ended
September 30, 1997 have been restated as if the transaction
had occurred on October 1, 1994 (see Note 12).
During 1997, the Company sold a parcel of land for
$3,265,700 in cash and a promissory note of $3,973,920.
On December 10, 1996, the Company acquired all of the
outstanding capital stock of Cardiotronics Systems, Inc.
(Cardiotronics) in a purchase transaction for $12,722,404 in
cash. In conjunction with the merger, liabilities were
assumed as follows:
Fair value of assets acquired
(including goodwill of $13,136,000) $25,070,528
Cash paid 12,722,404
Liabilities assumed $12,348,124
On July 2, 1997, Tri-Med acquired certain rights and
licenses of Delta West Pty. Limited for a note payable
totaling $5,825,000 (see Note 8).
On September 27, 1996, the Company entered into a
business combination with Plastic Engineered Products
Corporation in exchange for 238,727 shares of the Company's
common stock. This transaction has been accounted for by
the Company as a "pooling" and as such, the Company's
accompanying consolidated financial statements as of
September 30, 1996 and for the two years in the period ended
September 30, 1996 were restated as if this transaction had
occurred on October 1, 1994.
In addition, during the year ended September 30, 1996,
the Company entered into three acquisition transactions
accounted for as purchases as follows (see Note 8):
* On April 19, 1996, the Company acquired
substantially all of the assets of Endovations, Inc. for
approximately $1,220,000 cash. In conjunction with this
purchase, the Company recorded goodwill of approximately
$400,000 and the fair value of assets acquired approximated
$820,000.
* On July 19, 1996, the Company purchased all of the
outstanding capital stock of Mist Assist, Inc. for
approximately $673,600 cash. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired
(including goodwill of $680,000) $800,000
Cash paid 673,600
Liabilities assumed $126,400
* On August 28, 1996, the Company purchased all of
the outstanding capital stock of Preferred Medical Products
for approximately $3,600,000 cash (see Note 8). In
conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired
(including goodwill of $2,900,000) $4,320,970
Cash paid 3,604,440
Liabilities assumed $716,530
* On May 2, 1995, the Company acquired substantially
all of the net assets of Cox Medical Enterprises, Inc. for
approximately $3,313,000 cash (see Note 8). In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired
(including good will) $4,000,000
Cash paid 3,313,310
Liabilities assumed 686,690
See notes to consolidated financial statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
(AS RESTATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Ballard Medical Products (Ballard) and
its subsidiaries develop, manufacture, and market
specialized medical products.
BASIS OF PRESENTATION - The consolidated financial
statements include the accounts of Ballard and its wholly
owned subsidiaries, Tri-Med Specialties, Inc. (Tri-Med) (see
Note 12), Medical Innovations Corporation (MIC), Ballard
Real Estate Holdings, Inc. (BREH), Ballard Purchase
Corporation (BPC), Ballard International, Inc. (BI), Plastic
Engineered Products Company (PEPCO), Ballard Medical
Products (Canada) Inc. dba Preferred Medical Products (PMP),
Mist Assist, Inc. (Mist Assist), and Cardiotronics Systems,
Inc. (Cardiotronics) (collectively, the Company). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
INVESTMENTS AVAILABLE FOR SALE - Investments available
for sale consist of tax-free municipal bonds. Investments
are recorded at fair market value. Effective October 1,
1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115
requires the classification of investment securities as
either held to maturity securities, trading securities, or
available for sale securities. Upon adoption of SFAS 115,
the Company reclassified all of its investments as available
for sale.
INVENTORIES - Inventories are stated at the lower of
cost (on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are
stated at cost. Depreciation is computed on the straight-
line method over the estimated useful lives as follows:
Buildings 30 to 40 years
Molds 5 years
Machinery and equipment 5 to 10 years
Vehicles 3 to 5 years
Furniture and fixtures 3 to 5 years
Leasehold improvements 3 to 5 years
INTANGIBLE ASSETS - Intangible assets include goodwill,
patent rights, and license costs which are stated at cost
and are being amortized using the straight-line method over
their estimated lives, which range from four to seventeen
years.
REVENUE RECOGNITION - Revenues are recognized when the
related product is shipped. The Company records an
allowance for estimated sales returns and rebates.
INCOME TAXES - The Company utilizes an asset and
liability approach for financial accounting and reporting
for income taxes. Deferred income taxes are provided for
temporary differences in the bases of assets and liabilities
as reported for financial statement and income tax purposes.
INCOME PER SHARE - Income per share is computed on the
basis of the weighted average number of shares outstanding
plus the common stock equivalents which would arise from the
exercise of stock options. Such income per share amounts
are adjusted to give retroactive effect for all periods
presented for the acquisition by the Company of Tri-Med in
1998 (see Note 12).
STOCK-BASED COMPENSATION - Effective October 1, 1996,
the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation." SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements. The
Company has elected to continue to apply APB 25 (as
permitted by SFAS No. 123). The appropriate required
disclosure of the effects of SFAS No. 123 are included in
Note 5.
STATEMENTS OF CASH FLOWS - For purposes of the
consolidated statements of cash flows, the Company considers
cash and interest bearing securities with original
maturities of less than three months to be cash equivalents.
LONG-LIVED ASSETS - The Company evaluates the carrying
value of long-term assets based on current and anticipated
undiscounted cash flows and recognizes impairment when such
cash flows will be less than the carrying values.
OTHER - Certain reclassifications have been made to the
prior year financial statements to conform to
classifications adopted in the current year.
2. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale at September 30, 1997
and 1996 consist of municipal bonds.
The amortized cost and fair value of investments
available for sale at September 30, 1997 and 1996 are as
follows:
1997 1996
Amortized cost $26,972,594 $26,915,121
Gross unrealized
gains None None
Gross unrealized
losses (344,282) (252,523)
Fair value $26,628,312 $26,662,598
As of September 30, 1997 and 1996, all municipal bonds
had a contractual maturity of one year or less. During the
years ended September 30, 1997 and 1996, there were no gross
realized gains or gross realized losses from sales of
investments classified as available for sale.
3. LINE OF CREDIT
In July 1997, Tri-Med (see Note 12) entered into two
line of credit agreements with a bank. Under the terms of
the first agreement, the outstanding balance may not exceed
$1,000,000 and interest, payable monthly through May 1998,
and bears interest at the bank's prime rate (8.5% at
September 30, 1997). Under the terms of the second
agreement, the outstanding balance may not exceed $750,000
and interest, payable monthly through May 1998, and bears
interest at the bank's prime rate plus 1% (9.5% at September
30, 1997). The amount available for borrowing is limited to
the lesser of $1,750,000 or the sum of certain agreements,
with such inventory amount limited to $200,000. The
outstanding balance on the credit agreements was $1,425,000
as of September 30, 1997. Immediately following the merger
with Tri-Med, all outstanding balances under the lines of
credit were paid in full and both agreements were
terminated.
At September 30, 1997, the Company had an unsecured
line of credit with a bank totaling $5,000,000 which expires
February 15, 1998. The line, if drawn upon, bears interest
at the bank's base rate (8.5% at September 30, 1997). No
compensating cash balances are required. As of September
30, 1997 and during the year then ended, there were no
borrowings under the line of credit.
4. INCOME TAXES
The Company has recorded net deferred tax assets and
liabilities at September 30, 1997 and 1996 which consisted
of the following temporary differences and carryforward
items:
1997 1996
Current Long-Term Current Long-Term
Deferred income
tax assets:
Allowance for
uncollectible
accounts
receivable $320,513 $69,121
Allowance for
sales returns,
rebates, and
allowances 664,785 305,729
Allowance
for obsolete
inventory 451,658 185,277
Accrued
expenses 280,925 168,549
Unrealized
losses on
investments 120,498 95,959
Net operating
loss carry-
forwards of
acquired
subsidiaries 394,663 $3,416,727 121,442 $99,562
Research and
development
credits 111,226
Total 2,233,042 3,416,727 1,057,303 99,562
Deferred income
tax liabilities-
differences
between tax
basis and
financial
reporting basis
of property
and equipment (1,276,825) (1,210,326)
Net $2,233,042 $2,139,902 $1,057,303 $(1,110,764)
The components of income tax expense (benefit) for the
years ended September 30, 1997, 1996, and 1995 are
summarized as follows:
1997 1996 1995
Current:
Federal $16,243,278 $12,421,679 $9,425,942
State 1,913,890 1,903,320 1,449,302
18,157,168 14,324,999 10,875,244
Deferred:
Federal (324,388) 402,473 323,859
State (48,780) 39,649 49,796
(373,168) 442,122 373,655
Total $17,784,000 $14,767,121 $11,248,899
Income tax expense differed from amounts computed by
applying the statutory Federal tax rate to pretax income as
follows:
1997 1996 1995
Computed
Federal income
tax expense at
statutory rate $17,166,358 $14,236,825 $11,425,754
State income
tax expense,
net of Federal
benefit 1,590,940 1,317,054 990,493
Environmental
tax 16,614 30,000
Tax exempt
income (410,736) (553,876) (624,750)
Foreign sales
corporation (429,833) (236,250) (121,756)
Amortization
of goodwill 642,986 335,763 316,969
Nontaxable
income from
pooled
Subchapter S
corporation (292,758) (107,269) (343,322)
Other (482,957) (241,740) (424,489)
Total $17,784,000 $14,767,121 $11,248,899
As a result of the Company's acquisitions (see Note 8),
the Company has net operating loss carryforwards for Federal
income tax purposes of approximately $9,964,000, which can
only be used to offset future taxable income of acquired
subsidiaries. The utilization of the tax loss carryforwards
is subject to certain limitations and the carryforwards
expire at various dates through the year 2011.
5. COMMON STOCK AND STOCK OPTIONS
During the years ended September 30, 1996 and 1995, the
Company repurchased 350,000 and 100,000 shares of its
outstanding common stock for $6,161,421 and $1,474,985,
respectively. In accordance with Utah State law, this
treasury stock was accounted for as retired common stock.
The Company did not repurchase any shares of its common
stock during the year ended September 30, 1997.
The Company has adopted several incentive stock option
plans for key employees and reserved shares of common stock
totaling approximately 2,380,780, 2,926,400 and 3,483,028 at
September 30, 1997, 1996, and 1995, respectively, for
issuance under the plans. Options are granted at a price
not less than the fair market value on the date of grant,
become exercisable between one to two years following the
date of grant, and expire in ten years.
Changes in stock options are as follows for the years
ended September 30:
Weighted Average
1997 Shares Exercise Price
Outstanding at
beginning of year 2,517,553 $10.06
Granted 856,475 19.71
Exercised (1,292,677) 8.71
Forfeited (61,700) 15.46
Outstanding at end
of year 2,019,651 $14.85
Options
exercisable at
year end 1,056,976
Weighted average
fair value of
options granted
during year $9.24
Weighted Average
1996 Shares Exercise Price
Outstanding at
beginning of year 3,331,162 $8.26
Granted 516,900 16.63
Exercised (1,252,309) 7.84
Forfeited (78,200) 12.32
Outstanding at
end of year 2,517,553 $12.32
Options
exercisable at
year end 1,799,351
Weighted average
fair value of
options granted
during year $7.79
Price Range
1995 Shares Per Share
Outstanding at
beginning of year 2,898,253 $1.46-$13.50
Granted 740,000 9.38-14.25
Exercised (205,425) 1.46-11.00
Forfeited (101,666) 8.63-13.50
Outstanding at end
of year 3,331,162 1.46-14.25
Options
exercisable at
year end 2,410,490
The following table summarizes information about stock
options outstanding at September 30, 1997:
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Out- Life Exercise Exer- Exercise
Prices standing (in years) Price cisable Price
$2.96-
$4.36 92,002 2.1 $3.95 92,002 $3.95
8.63-
12.88 709,174 7.1 9.51 709,174 9.51
13.50-
19.88 1,212,275 9.5 18.76 255,800 16.57
23.00-
23.63 6,200 10.0 23.43
$2.96-
$23.63 2,019,651 8.3 $14.85 1,056,976 $10.73
The Company accounts for stock options granted using
APB Opinion 25. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation
cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for
awards under those plans consistent with SFAS No. 123, the
Company's net income and net income per common and common
equivalent share would have changed to the pro forma amounts
indicated below:
1997 1996
Net income:
As reported $31,262,739 $25,909,521
Pro forma 26,230,287 24,514,540
Net income
per common and
common equivalent
share:
As reported $1.032 $0.873
Pro forma 0.866 0.826
Net income
per common and
common equivalent
share assuming
full dilution:
As reported $1.027 $0.863
Pro forma 0.862 0.816
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants
in 1997 and 1996, dividend yield of 0.5%; expected
volatility of 33%; risk-free interest rate of 5.68%; and
expected lives of approximately 8 years.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office and production facilities and
office equipment under long-term operating lease agreements.
Rent expense on the above operating leases was approximately
$910,647, $753,010, and $514,990 for the years ended
September 30, 1997, 1996, and 1995, respectively. The
following represents the Company's future commitments under
such leases:
Year ending
September 30:
1998 $615,891
1999 288,464
2000 165,610
2001 86,560
2002 101,520
Thereafter 397,620
Total $1,655,665
The Company has agreements with the inventors of
certain of its products which provide for the payment of
royalties ranging from 2% to 6.5% of defined net sales or a
fixed rate per unit sold of the related products.
The Company is involved in certain litigation matters
in the normal course of business which, in the opinion of
management, will not result in any material adverse effects
on the Company.
R2, a wholly-owned subsidiary of Cardiotronics, is a
co-defendant in an ongoing product liability case.
Plaintiff in this case alleges, among other things, that
defibrillation pads manufactured by R2 were defective and
seeks damages of $20 million. The Company believes that it
has valid defenses; however, in view of the inherent
uncertainties surrounding the litigation, no assurance can
be given that R2 will prevail in this case. Attorneys for
R2 are attempting to negotiate an out-of-court settlement
for an amount that will be covered by R2's product liability
insurance policy. Management believes that a settlement
will be reached that does not exceed the amount of the
policy.
7. PROFIT SHARING PLAN
The Company sponsors an Employee Retirement and Savings
Plan (the Plan) under Section 401(k) of the Internal Revenue
Code. The Plan is designed to allow participating employees
to accumulate savings for retirement or other purposes.
Under the Plan, all employees, who have completed at least
one year of service and have reached age 21, are eligible to
participate. The Plan allows employees to make
contributions to the plan from salary reductions each year,
up to a maximum of 15% of a participant's annual
compensation. Under the Plan, the Company matches up to 4%
of a participant's contribution. The Company may, if it
desires, make additional contributions to the 401(k) Plan on
behalf of its employees. For the years ended September 30,
1997, 1996, and 1995, the Company expensed approximately
$757,000, $621,000, and $545,000, respectively, as matching
contributions to the Plan. Employees are always fully
vested in their own contributions and become fully vested in
any contributions made by the Company after six years of
service. Employees are allowed to direct the investment of
their Plan contributions within a group of designated
investment funds.
8. BUSINESS COMBINATIONS
In July 1997, Tri-Med acquired the rights to license
and distribute the product CLOtest for $5,825,000 in
exchange for a note payable to Delta West, Inc. Under the
terms of this agreement, the Company is required to pay
royalties as a percentage of products sold. The royalty
percentage varies based on the level of sales.
Substantially all of the purchase price was allocated to
trademarks, a covenant not to compete, and goodwill to be
amortized using the straight-line method over 15 years. The
purchase price was allocated as follows:
Plant and equipment $60,800
Intellectual property
other than trademarks 615,600
Trademarks 4,172,600
Covenant not to compete 76,000
All other assets and
rights including goodwill 900,000
Total $5,825,000
Effective December 10, 1996, the Company acquired all
of the issued and outstanding capital stock of Cardiotronics
for $12,723,000 in cash and the assumption of liabilities
totaling $12,348,000. The acquisition is being accounted
for using the purchase method of accounting; as such,
results of operations have been included in the accompanying
consolidated financial statements from the date of
acquisition. In conjunction with the acquisition, the
Company recorded goodwill of approxi-mately $13,136,000,
which is being amortized over 15 years.
The pro forma results of operations of the Company for the
years ended September 30, 1997 and 1996 (assuming the
acquisitions of Cardiotronics had occurred as of October 1,
1995) are as follows:
1997 1996
Net sales $133,971,074 $119,391,331
Net income 30,703,183 21,243,285
Net income per share
assuming full dilution 1.009 0.707
On September 27, 1996, the Company issued 238,727
shares of its common stock in exchange for all of the
outstanding common stock of PEPCO, a medical research and
manufacturing company incorporated in 1987 and headquartered
in Canal Fulton, Ohio. The assets and liabilities of PEPCO
at the date of combination were approximately $684,000 and
$88,000, respectively. The combination was accounted for as
a pooling of interests. The accompanying consolidated
financial statements have been prepared as if Ballard and
PEPCO had been combined for all periods presented.
On April 19, 1996, the Company acquired substantially
all of the assets of Endovations, Inc. (Endovations) for
approximately $1,220,000 in cash. The acquisition has been
accounted for using the purchase method of accounting; as
such, Endovations' results of operations have been included
in the accompanying consolidated financial statements from
the date of acquisition. In conjunction with this
acquisition, the Company recorded goodwill of approximately
$400,000, which is being amortized on a straight-line basis
over 10 years.
Effective July 19, 1996, the Company acquired all of
the issued and outstanding common stock of Mist Assist for
approximately $673,600 in cash and the assumption of
liabilities totally approximately $126,400. The acquisition
has been accounted for using the purchase method of
accounting; as such, results of operations have been
included in the accompanying consolidated financial
statements from the date of acquisition. In conjunction
with the acquisition, the Company recorded goodwill of
approximately $680,000, which is being amortized on a
straight-line basis over 15 years.
On August 28, 1996, the Company acquired all of the
issued and outstanding common stock of PMP for cash of
approximately $3,600,000. The acquisition has been
accounted for using the purchase method of accounting; as
such, results of operations have been included in the
accompanying consolidated financial statements from the date
of acquisition. In conjunction with the acquisition, the
Company recorded goodwill of approximately $2,900,000 which
is being amortized on a straight-line basis over 15 years.
On May 2, 1995, the Company acquired substantially all
of the assets of Cox for a purchase price of $4,000,000
consisting of $3,313,310 in cash and the assumption of
liabilities in the amount of $686,690. Cox is a
manufacturer of disposable endoscopic devices. The
acquisition has been accounted for using the purchase method
of accounting; as such, Cox's results of operations have
been included in the accompanying consolidated financial
statements from the date of acquisition. The cost of this
acquisition exceeded the estimated fair value of the
acquired net assets by $423,000 which is being amortized
over 10 years.
On November 14, 1995, the Company acquired 200,000
shares of the preferred stock of Neuro Navigational
Corporation (Neuro) representing a 19.5% equity interest in
Neuro for $2,000,000. In addition, on November 14, 1995,
the Company paid Neuro $500,000 for an option to purchase
substantially all of its assets. The Company exercised the
option on February 28, 1997 and acquired the remaining
assets of Neuro for $4,245,422. The price paid for the
option and amounts advanced to Neuro were applied to the
purchase price.
9. SALES
During the years ended September 30, 1997, 1996, and
1995, the Company had foreign export sales of approximately
$12,557,000, $8,048,000, and $6,344,000, respectively.
10. EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING
STANDARDS
In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, Earnings Per Share. This
standard establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 simplifies the
approach for computing earnings per share previously found
in Accounting Principles Board Opinion No. 15. It replaces
the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all
entities with complex capital structures.
Under the new structure, basic EPS excludes dilution
and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock.
SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997. The
computation of basic EPS under SFAS No. 128 would have
resulted in net income per common share of $1.063, $0.922,
and $0.796 for the fiscal years ended September 30, 1997,
1996, and 1995, respectively. Diluted EPS computed under
SFAS No. 128 would have resulted in net income per common
share of $1.032, $0.874, and $0.754 for the fiscal years
ended September 30, 1997, 1996, and 1995, respectively.
11. OTHER INCOME
During 1997, the Company recorded an impairment loss
totaling approximately $4,900,000 as a result of the
Company's assessment that the carrying amount of the
remaining Neuro assets, consisting primarily of inventory,
fixed assets, and intangible assets, exceeded their fair
values as estimated based on analysis of cash flows. The
Company also recorded a gain on the sale of a parcel of land
totaling approximately $6,300,000. The impairment loss and
the gain on the sale of land are included in other income in
the accompanying consolidated statements of operations.
12. SUBSEQUENT EVENT
Effective February 25, 1998, Ballard issued 1,067,733 shares
of its common stock in exchange for all of the outstanding
common stock of Tri-Med, a medical devices manufacturing
company incorporated in 1983 with operations in Kansas,
Virginia, and Australia. The assets and liabilities of Tri-
Med at the date of the combination were approximately
$8,276,000 and $6,321,000, respectively. The combination
was accounted for as a pooling of interests. The
accompanying supplemental consolidated financial statements
for 1997, 1996, and 1995 have been restated as if Ballard
and Tri-Med had been combined as of October 1, 1994, the
beginning of the reporting period. There were no
intercompany transactions between Ballard and Tri-Med prior
to the date of merger. Net sales, net income, and income
per share amounts of the previously separate companies for
the years ended September 30, 1997, 1996, and 1995 as
previously reported and combined are as follows:
Ballard
(As Previously
Reported) Tri-Med As Restated
1997
Net sales $125,307,178 $7,435,859 $132,743,037
Net income 30,426,287 836,452 31,262,739
Net income per share:
Common and
common equivalent
share 1.041 N/A 1.032
Common share
assuming full
dilution 1.036 N/A 1.027
1996
Net sales 103,525,263 6,356,079 109,881,342
Net income 25,603,039 306,482 25,909,521
Net income per share:
Common and
common equivalent
share .895 N/A 0.873
Common share
assuming full
dilution .884 N/A 0.863
1995
Net sales 84,152,967 5,888,234 90,041,201
Net income 20,942,616 997,260 21,939,876
Net income per share:
Common and
common equivalent
share .752 N/A 0.759
Common share
assuming full
dilution .739 N/A 0.746
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis of the Company's operations encompassing
the fiscal years ended September 30, 1997, 1996, and 1995,
should be considered in conjunction with the consolidated
balance sheets, statements of operations, and statements of
cash flows. All of the figures discussed herein have been
adjusted to reflect the Company s stock and asset purchases
(see Notes to Consolidated Financial Statements ).
Fiscal year 1997 was a another record setting year for
the Company in terms of sales and income. Net sales were
$132.7 million, representing an increase of 20.8% over
fiscal 1996. Net income and net income per share were $31.3
million and $1.03, respectively, increasing 20.7% and 18.2%,
respectively, over fiscal year 1996. The continued steady
growth in sales and income is the result of strategic
acquisitions, internal development of new products,
acquisition of national contracts, rapid expansion in the
international marketplace, and the overall efforts of an
outstanding sales force. Income growth continues as a
result of stable, high margins and manufacturing expertise.
With a continued emphasis on growth through
acquisitions, the Company acquired Cardiotronics in
December, 1996 and Tri-Med in February, 1998.
Cardiotronics, located in Carlsbad, California, is a
manufacturer of medical devices for the acute management of
heart rate disorders. Its principal product, a disposable
defibrillator pad, provided approximately $7.6 million in
net sales during fiscal year 1997. The Company expects 1998
sales from this acquisition to exceed $10.0 million. Tri-
Med, with locations in Kansas, Virginia, and Australia, is a
manufacturer of diagnostic products for the detection of
Helicobacter Pylori, a causative factor in peptic ulcer
disease. 1997 sales from Tri-Med were approximately $7.4
million. The Company expects 1998 sales from this
acquisition to exceed $13.0 million.
During fiscal year 1997 the Company focused its sales
efforts and internally reported based upon two separate
business units: (1) TRACH CARE/EASI-LAV ("TRACH CARE")
which includes the TRACH CARE and EASI-LAV families of
products as well as the new additions from the 1996
acquisitions of Mist Assist, PMP and PEPCO and the 1997
acquisition of Cardiotronics; and (2) MIC/FOAM CARE ("MIC")
which includes the MIC, FOAM CARE and gastrointestinal
products as well as the product line additions acquired from
Tri-Med.
RESULTS OF OPERATIONS
SALES - For the year ended September 30, 1997,
consolidated net sales increased $22,861,695, or 20.8%, over
fiscal year 1996. For the year ended September 30, 1996,
consolidated net sales increased $19,840,141, or 22.0%, over
fiscal year 1995. The steady, solid growth in 1997 and 1996
is due principally to the Company s ability to increase
volume, both internally and through acquisitions. Although
prices on isolated TRACH CARE and MIC products and
accessories increased slightly, pricing for other products
during 1997 were reduced in order to meet competition and
price reductions required by hospitals and large buying
groups. The Company believes that the signing of exclusive
long-term contracts with major hospital buying groups should
stabilize prices for certain products over the next three to
five years.
The Company's MIC enteral feeding catheters and related
products continue to contribute significantly to the overall
growth in net sales, as is the rapid expansion of the
Company's international operations. Net sales within the
MIC product line increased 33.2% in fiscal 1997 over fiscal
1996. International net sales (all products) increased 56.1%
during the same period.
The following table summarizes sales by sales
force/business unit (see description above) as a percentage
of total net sales:
Year ended September 30, 1997 1996 1995
Trach Care 70.0% 72.2% 76.3%
MIC 30.0% 27.8% 23.7%
The table below summarizes U.S. sales versus
international sales as a percentage of total net sales:
Year ended September 30, 1997 1996 1995
Domestic 91.5% 92.7% 93.0%
International 8.5% 7.3% 7.0%
All sales of the Company and related receipts are in U.S.
dollars.
COST OF PRODUCTS SOLD - For the year ended September
30, 1997, consolidated cost of products sold totaled
$47,027,428, compared with $38,048,879 for fiscal year 1996
and $30,166,070 for fiscal year 1995, increases of 23.6% and
26.1%, respectively. As a percent of net sales, cost of
products sold was 35.4% and 34.6% for fiscal year 1997 and
1996, respectively. The 1% increase in product costs during
fiscal year 1997 can be attributed to the acquisition of
lower margin product lines, the closure and transfer of
PEPCO s, PMP s, and MIC s manufacturing operations to
Draper, Utah and Pocatello, Idaho, and continued increases
in material and labor costs. Margins also continue to be
impacted by the health care industry's focus on cost
restraints and competitive pricing pressures, resulting in
increased product rebates and price reductions.
During the year the Company continued to refine and
automate its manufacturing processes as well as expand its
injection molding capacity. The Company closed its PEPCO,
PMP, and MIC facilities and integrated them into the
Company s two manufacturing sites in Utah and Idaho. Gross
margins will continue to be impacted by these closures into
the first quarter of 1998 but the Company expects these
combinations to create manufacturing benefits in the future.
Pricing pressures, new product acquisitions, and continued
increases in labor and materials will continue to impact
margins in 1998. Margins will also be impacted by the
Company's planned move of its Cardiotronics operations from
Carlsbad, California to Pocatello, Idaho during the first
quarter of fiscal year 1998.
OPERATING EXPENSES - Operating expenses consist of
selling, general, and administrative expenses, research and
development expenses, and royalties. Total consolidated
operating expenses for the year ended September 30, 1997
were $42,208,682, compared with $36,465,201 for fiscal year
1996 and $30,787,393 for fiscal year 1995. The following
table is a summary of operating expenses by category as a
percentage of net sales:
Year ended September 30, 1997 1996 1995
Selling, general, and
administrative 28.3% 28.8% 29.8%
Research and development 2.1% 2.9% 2.7%
Royalties 1.4% 1.5% 1.7%
Selling, general, and administrative expenses increased
$5,909,562 during fiscal year 1997 and $4,754,211 during
fiscal year 1996. These increases are attributed
principally to increased sales volumes, as well as to
increases in period costs due to intangible write-offs from
acquisitions. Consolidated expenses related to research and
development and royalties, as a percentage of consolidated
net sales for fiscal years 1997, 1996, and 1995, remained
fairly consistent.
OTHER INCOME - Other income generally consists of
interest income from short-term investments, royalty income
from the licensing of the TRACH CARE closed suction system,
and the netting of insignificant gains and losses from the
sale or retirement of property and equipment. Also included
in other income during fiscal 1997 was the sale of 61 acres
of real estate located south of the Company s Draper plant
for a net gain of $6,304,670 (see Liquidity and Capital
Resources ) and the impairment loss of $4,900,000 related
to the Company's investment in the assets and technology
acquired from Neuro Navigational Corporation ("Neuro") (see
Liquidity and Capital Resources ).
Interest and royalty income remained relatively
consistent between the periods, bringing a combined
$4,595,116, $4,317,925, and $4,070,877 for fiscal years
1997, 1996, and 1995, respectively.
NET INCOME - Consolidated net income from operations
for the year ended September 30, 1997 totaled $31,262,739,
an increase of 20.7% over fiscal year 1996. The following
table reflects net income as a percentage of net sales for
each of the reporting periods:
Year ended September 30, 1997 1996 1995
Net Income 23.6% 23.6% 24.4%
The overall increase in net income over the prior
period and the outstanding after-tax margin reflects the
increased sales volume, continued strong margins, and
management's efforts to control the costs of manufacturing
and other operating costs.
INFLATION - Inflation can be expected to have an
effect on most of the Company's operating costs and
expenses. The extent to which inflationary cost increases
can be offset by price increases depends on competition and
other factors. The effect of inflation has been
insignificant during the periods reported herein.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Balance Sheets present the Company's
financial position at the end of each of the last two fiscal
years. Each statement lists the Company's assets and
liabilities, and the equity of its stockholders. Major
changes in the Company's financial position are summarized
in the Consolidated Statement of Cash Flows. This statement
summarizes the changes in the Company's cash and cash
equivalents balance for each of the last three years and
helps to show the relationship between operations (presented
in the Consolidated Statement of Operations) and liquidity
and financial resources (presented in the Consolidated
Balance Sheets).
For the year ended September 30, 1997 the Company's
operating activities provided $31,432,996 in cash flows,
comparable to the $22,683,400 provided during fiscal year
1996. At September 30, 1997, working capital totaled
$87,986,254 compared with $76,593,470 at September 30, 1996.
The Company's current ratio was 7.8 to 1 at September 30,
1997 compared with 13.7 at September 30, 1996. Available
cash, which includes cash and cash equivalents and
investments available for sale, at September 30, 1997
totaled $48,252,355 compared with $41,181,433 at September
30, 1996. In addition to its strong liquid position, the
Company does not have any long-term debt nor does management
intend to utilize debt to fund future expansion. Ballard
maintains a $5,000,000 unsecured line of credit with its
bank but has not drawn on this line during either of the
years ended September 30, 1997 or 1996. Tri-Med utilized
lines of credit to fund its operations but as of the date of
combination with Ballard, the lines of credit were paid in
full.
Continued growth in cash and investments provides the
Company financial stability and flexibility to fund current
operations, an aggressive acquisitions program, future
internal growth and expansion, and the ability to continue
its dividend payment policy.
During the year ended September 30, 1997, the Company
completed expansion of its manufacturing facility in
Pocatello, Idaho. See discussion of Pocatello facility
under "Capital Expenditures". Total development and
construction costs of the first phase of the facility
totaled approximately $7,243,000. Completion of the second
phase cost approximately $5,500,000. The Company expended
an additional $8,900,000 during fiscal year 1997 to expand
and upgrade existing facilities and operations in order to
meet the growing needs of present and new business.
Cash outlay for the acquisition of Cardiotronics, net
of cash acquired, was approximately $12,722,000.
During February 1997, the Company exercised its option
to purchase the assets of Neuro at a total purchase price
$4,245,422. In March, 1997, the Company sold certain of the
assets it acquired from Neuro to an unrelated party for
$961,459, which approximated the purchased price of those
assets. In June, 1997 the Company determined that the
remaining carrying value in its investment in Neuro was not
entirely recoverable based upon expected future cash flows
from the sale of the remaining assets and technology
acquired from Neuro. Although the Company believes that
remaining assets and technology of Neuro have value, an
impairment loss of $4,900,000 has been recognized and
included in "Other Income." The remaining assets and
technology acquired from Neuro are being marketed for sale
by the Company.
A valuation allowance has not been provided on deferred
tax asset balances due to the Company's projection of future
taxable income in excess of such tax assets.
In addition to capital and acquisition expenditures,
other items which affected cash flows during fiscal year
1997 included the payment of dividends of $3,207,205, and
purchases of intangible assets of $714,952.
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."
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS
EXHIBIT DESCRIPTION SEQUENTIALLY NUMBERED
PAGE
23.1 Independent
Auditor's Consent 33
23.2 Consent of
Independent
Accountants 34
27 Financial Data
Schedule 35
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 hereunto duly
authorized.
BALLARD MEDICAL PRODUCTS
Dated: July 13, 1998 By: Dale H. Ballard,
President
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in
Registration Statement Nos. 33-23232, 33-34384, 33-43910,
33-50040, and 333-18661 on Form S-3 and in Registration
Statement Nos. 2-90684, 2-94306, 33-0840, 33-17698, 33-
25628, 33-36851, 33-41720, 33-56302, 33-73194, 33-57735,
333-01941, and 333-22827 on Form S-8 of our report dated
November 13, 1997 (February 25, 1998 as to Note 12),
appearing in this Current Report on Form 8-K of Ballard
Medical Products for the years ended September 30, 1997,
1996, and 1995.
Deloitte & Touche LLP
Salt Lake City, Utah
July 10, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement on Forms S-3 (Nos. 333-18661 and 33-50040) and in the
registration statements on Form S-8 (Nos. 333-22827, 333-01941,
33-57735, 33-73194, 33-56302, 33-41720, 33-36851, and 33-25628)
of Ballard Medical Products of our report dated January 30, 1998,
on our audits of the financial statements of Tri-Med Specialties,
Inc. as of September 30, 1997 and 1996 and the year ended
September 30, 1997 which report is included in this Form 8-K.
Kansas City, Missouri
July 9, 1998 PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 8-K which amends and restates the Company's financial information
previously reported for the fiscal year ended September 30, 1997 and is
qualified in its entirety by reference to such Form 8-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 21,624,043
<SECURITIES> 26,628,312
<RECEIVABLES> 28,898,031
<ALLOWANCES> 2,518,000
<INVENTORY> 20,891,734
<CURRENT-ASSETS> 100,936,673
<PP&E> 54,094,378
<DEPRECIATION> 10,746,905
<TOTAL-ASSETS> 194,192,382
<CURRENT-LIABILITIES> 12,950,419
<BONDS> 0
0
0
<COMMON> 3,006,273
<OTHER-SE> 178,235,690
<TOTAL-LIABILITY-AND-EQUITY> 194,192,382
<SALES> 132,743,037
<TOTAL-REVENUES> 132,743,037
<CGS> 47,027,428
<TOTAL-COSTS> 47,027,428
<OTHER-EXPENSES> 42,208,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 49,046,739
<INCOME-TAX> 17,784,000
<INCOME-CONTINUING> 31,262,739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,262,739
<EPS-PRIMARY> 1.032
<EPS-DILUTED> 1.027
</TABLE>
