<PAGE>
As filed with the Securities and Exchange Commission
on March 19, 1999
FORM 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DECEMBER 31, 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:
30,679,558 - all common, February 10, 1999. <PAGE>
Applicant is filing this Form 10-Q/A to amend the Notes to
Condensed Unaudited Consolidated Financial Statements and to add
Exhibit 11.
DEFINITIONS
As used herein, the following terms have the meanings
indicated:
GENERAL DEFINITIONS:
1. "Ballard" refers to Ballard Medical Products.
2. "BI" refers to Ballard International, Inc., a wholly owned
subsidiary of Ballard.
3. "BPC" refers to Ballard Purchase Corporation, a wholly
owned subsidiary of Ballard.
4. "BREH" refers to Ballard Real Estate Holdings, Inc., a
wholly owned subsidiary of Ballard.
5. "Cardiotronics" refers to Cardiotronics Systems,
Incorporated, a wholly owned subsidiary.
6. The "Company" and the "Registrant" refer to Ballard and
its subsidiaries.
7. "FDA" refers to the United States Food and Drug
Administration.
8. "Kimberly-Clark" refers to Kimberly-Clark Corporation, a
Delaware corporation.
9. "MIC" refers to Medical Innovations Corporation, a wholly
owned subsidiary of Ballard.
10. "PEPCO" refers to Plastic Engineered Products Company, a
wholly owned subsidiary of Ballard.
11. "PMP" refers to Ballard Medical Products Canada, a wholly
owned subsidiary of Ballard, doing business as Preferred
Medical Products.
12. "R2" refers to R2 Medical Systems, Inc., a wholly owned
subsidiary of Cardiotronics.
13. "Tri-Med" refers to Tri-Med Specialties, Inc., a wholly
owned subsidiary of Ballard.
2 <PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
12/31/98 9/30/98
ASSETS ________ _______
CURRENT ASSETS:
Cash and cash
equivalents $12,910,522 $10,231,524
Investments available
for sale 69,611,395 60,327,337
Accounts receivable-
trade (net) 31,594,970 31,184,303
Royalties receivable 874,891 424,891
Note receivable 3,973,920 3,973,920
Other receivables 3,054,392 1,694,393
Inventories-net:
Raw materials 7,877,088 8,493,138
Work-in-progress 3,383,574 3,726,160
Finished goods 9,936,831 11,034,393
Deferred income taxes 1,165,725 628,611
Income tax refund
receivable 1,250,607 2,481,210
Prepaid expenses 1,209,555 385,732
___________ ___________
Total current
assets 146,843,470 134,585,612
___________ ___________
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 31,417,449 31,355,161
Molds 5,704,250 5,703,400
Machinery and equipment 15,216,716 14,989,207
Vehicles 935,020 913,876
3 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
12/31/98 9/30/98
ASSETS __________ ___________
PROPERTY AND EQUIPMENT:
(continued)
Furniture and fixtures 4,019,658 3,923,088
Leasehold improvements 49,507 49,507
Construction-in-
progress 4,999,158 4,415,848
___________ ___________
Total 63,215,623 62,223,952
Less accumulated
depreciation 15,599,881 14,167,300
___________ ___________
Property and
equipment - net 47,615,742 48,056,652
___________ ___________
INTANGIBLE ASSETS:
Cost in excess of
fair value of net
assets acquired -
net 25,955,918 26,524,776
Patents and other
intangibles - net 11,625,836 11,802,852
___________ ___________
Total intangible
assets 37,581,754 38,327,628
___________ ___________
DEFERRED INCOME TAXES 1,548,254 1,712,389
___________ ___________
OTHER ASSETS 32,833 5,907
___________ ___________
TOTAL $233,622,053 $222,688,188
=========== ===========
See Notes to Condensed Unaudited Consolidated Financial
Statements.
4 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
12/31/98 9/30/98
________ _______
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $724,883 $1,208,938
Income taxes payable 3,087,979 1,243,450
Accrued liabilities:
Employee
compensation 2,905,849 3,608,774
Royalties 235,282 589,021
Other 3,515,925 590,700
__________ __________
Total current
liabilities 10,469,918 7,240,883
__________ __________
STOCKHOLDERS' EQUITY:
Common stock 3,052,845 3,042,373
Additional
paid-in capital 63,091,440 61,158,851
Unrealized losses
on investments
available for sale (480,747) (107,480)
Retained earnings 157,488,597 151,353,561
____________ ___________
Total
stockholders'
equity 223,152,135 215,447,305
___________ ___________
TOTAL $233,622,053 $222,688,188
=========== ===========
See Notes to Condensed Unaudited Consolidated Financial Statements.
5 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
12/31/98 12/31/97
________ ________
NET SALES $39,315,683 $36,681,889
COST OF PRODUCTS SOLD 14,491,544 13,200,349
__________ __________
GROSS MARGIN 24,824,139 23,481,540
__________ __________
OPERATING EXPENSES:
Selling, general,
and administrative 10,049,361 9,908,321
Research and development 899,386 695,475
Royalties 562,805 476,089
Provision for product recall 1,412,700
__________ __________
Total operating expenses 12,924,252 11,079,885
__________ __________
OPERATING INCOME 11,899,887 12,401,655
OTHER INCOME - net 538,388 1,189,350
__________ __________
INCOME BEFORE INCOME
TAX EXPENSE 12,438,275 13,591,005
INCOME TAX EXPENSE 4,775,844 5,080,000
__________ __________
NET INCOME $7,662,431 $8,511,005
========== ==========
NET INCOME PER COMMON SHARE:
Basic $0.252 $0.283
========== ==========
Diluted $0.248 $0.276
========== ==========
COMMON SHARES:
Basic 30,464,056 30,075,490
========== ==========
Diluted 30,899,389 30,813,363
========== ==========
See Notes to Condensed Unaudited Consolidated Financial Statements.
6 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
12/31/98 12/31/97
________ ________
CASH FLOWS FROM OPERATING
ACTIVITIES $12,035,950 $8,153,962
__________ _________
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures for
property and equipment (991,671) (2,112,756)
Investment in and advances
to affiliates (2,720)
Purchases of investments
available for sale (26,948,920) (11,486,036)
Purchases of intangible assets (204,112) (295,471)
Proceeds from maturities of
investments available for sale 17,090,607 1,337,751
__________ __________
Net cash used in
investing activities (11,054,096) (12,559,232)
__________ __________
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise
of options 1,697,144 543,510
Purchase of treasury stock (960,662)
__________ _________
Net cash provided by
(used in) financing
activities 1,697,144 (417,152)
___________ _________
NET INCREASE IN CASH AND CASH
EQUIVALENTS 2,678,998 (4,822,422)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,231,524 21,624,043
__________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,910,522 $16,801,621
========== ==========
7 <PAGE>
Three Months Three Months
Ended Ended
12/31/98 12/31/97
________ ________
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the period
for taxes $2,837,000 $1,297,000
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During the three months ended December 31, 1998 and 1997, the
Company increased additional paid-in capital by $245,917, and
$174,418, respectively, which represents the tax benefit
attributable to the compensation received by employees from the
exercise and disqualifying dispositions of incentive stock options.
See Notes to Condensed Unaudited Consolidated Financial Statements.
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed unaudited consolidated financial statements
include the accounts of Ballard and all of its subsidiaries,
after elimination of all significant intercompany transactions
and accounts. In management's opinion, the accompanying
condensed unaudited consolidated financial statements contain
all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial condition of Ballard
and its subsidiaries as of December 31, 1998 and September 30,
1998, the results of operations for the three months ended
December 31, 1998 and 1997, and the cash flows for the three
months ended December 31, 1998 and 1997.
2. The results of operations for the three months ended December
31, 1998 are not necessarily indicative of the results to be
expected for the full year ended September 30, 1999.
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 amended 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. On November 23, 1998, the Company entered into severance
contracts with 24 employees. The contracts provided that upon
resignation or termination of the employees, the Company would
pay certain severance compensation to those 24 employees. The
contracts also provided that the Company would provide
8 <PAGE>
continuing health insurance coverage for a period of time and
transfer to the employees of Company vehicles then being used
by the employees. The salary component of the contracts is
estimated to have a current aggregate value of approximately
$4,000,000. All but one of these contracts have been placed in
suspension (pending the closing of the proposed merger between
the Company and Kimberly-Clark) and superseded by new
Noncompetition Agreements entered into by the employees, the
Company, and Kimberly-Clark. The new agreements preserve the
payment of such severance arrangements (to be paid out on
different terms) in exchange for noncompetition covenants by
the employees.
5. Pursuant to an engagement letter dated October 13, 1998 with
Bear, Stearns & Co., Inc., upon consummation of the merger with
Kimberly-Clark, the Company will be obligated to pay to Bear
Stearns a cash fee equal to 1 1/2% of the total consideration
(i.e., Kimberly-Clark stock) to be received by Company
shareholders in the merger. This fee shall be reduced by the
sum of $750,000 which has already been paid to Bear Stearns by
the Company.
6. On December 4, 1998, the Company declared a semi-annual cash
dividend of $.05 per share, payable January 5, 1999 to
shareholders of record as of December 16, 1998.
7. In February 1999, the Company commenced a voluntary recall to
withdraw from the worldwide market certain of its cardiac
stimulation electrodes. The Company recorded a pre-tax charge
of $1,412,700 in the first quarter of 1999 for costs associated
with the recall. This charge is listed as an operating expense
in the Company's income statement for the three months ended
December 31, 1998.
The Company manufactures several lines of cardiac electrode
defibrillation pads. Bonded to the surface of these pads is a
material containing gelatin or gel, which improves the transfer
of electrical energy to the patient during defibrillation. The
Company's recall relates to one line of these pads with a gel
formula which, the Company determined, could deteriorate before
the useful shelf life of the product had expired. The Company
has permanently replaced this line of "old gel" electrodes with
electrodes that use a different formula of a "new gel" not
subject to deterioration. The "new gel" electrodes are being
or have been offered to all "old gel" electrode customers.
The charge of $1,412,700 is comprised of the following:
Finished goods write off $60,600
Inventory reserve 422,900
Payable reserve (other accrueds) 929,200
Total $1,412,700
9 <PAGE>
The Company does not expect further recalls of defibrillation
pads which would increase the above-stated charge to earnings.
8. The Company has elected to continue to apply Accounting
Principles Board (APB) Opinion No. 25 (as permitted by
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation ). 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, 1999.
9. Effective for the year ended September 30, 1998, the Company
adopted SFAS No. 128, "Earnings Per Share", and retroactively
restated all prior-period EPS data, to conform with the
statement. Accordingly, net income per common share is
computed by both the basic method, which uses the weighted
average number of the Company s common shares outstanding and
the diluted method, which includes the dilutive common shares
from stock options, as calculated using the treasury stock
method.
10. Effective for the year ending September 30, 1999, the Company
adopted SFAS No. 130, "Comprehensive Income". Comprehensive
income for the quarter ended December 31, 1998 was $7,289,164.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's 1998 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, 1998.
The following discussion and analysis describes material changes in
the Company's financial condition and position from September 30,
1998. Trends of a material nature are discussed to the extent known
and considered relevant. The analysis of results of operations
compares the three months ended December 31, 1998 with the
corresponding period 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
SALES - Net sales for the three months ended December 31, 1998
increased 7.2% to $39,315,683, compared with $36,681,889 for the
corresponding three-month period in fiscal year 1998. In
comparison, net sales for the three months ended December 31, 1997
increased 21.7% over the corresponding three-month period of fiscal
year 1997.
Net sales increases are due to continued market expansion of
the MIC enteral feeding catheters, PMP pain management products, and
Tri-Med's Helicobacter Pylori diagnostic products, as well as from
the continued rapid growth of the Company's international sales.
Net sales of MIC's catheters and related product lines grew 17.3% to
10 <PAGE>
$10,579,827 during the first quarter of fiscal year 1999, compared
with net sales of $9,019,815 for the corresponding first quarter of
fiscal year 1998. Net sales of PMP products grew 3.6% to
$1,476,475, compared with $1,424,691 for the corresponding prior
period while net sales of Tri-Med products increased 13.3% to
$2,903,836, compared with $2,562,996 for the corresponding prior
period. International net sales of all Company products were
$5,553,603 for the first quarter of fiscal year 1999, a 45.4% growth
over net sales of $3,820,606 for the first quarter of fiscal year
1998.
No significant price increases occurred during the three months
covered by this report; therefore, substantially all of the increase
in net sales is attributable primarily to an increased volume of
products sold. The Company continues to enter into and renew long-
term contracts with group purchasing organizations in order to
maintain its presence in the market. The Company s prices continue
to be impacted by price reduction pressures from hospitals and the
impact of these contracts with group purchasing organizations.
Substantially all sales of the Company and related receipts
were in U.S. dollars. International sales represent 14.1% of total
Company sales for the quarter ended December 31, 1998.
COST OF PRODUCTS SOLD - Cost of products sold for the three
months ended December 31, 1998 was $14,491,544, compared to
$13,200,349 for the corresponding three months in fiscal year 1998.
As a percentage of net sales, cost of products sold for the three
months ended December 31, 1998 was 36.9%, compared to 36.0% for the
three months ended December 31, 1997.
The increased cost of products sold as a percentage of net
sales reflects the pricing pressures which exist throughout the
health care sector, as well as the addition through acquisition of
lower-margin product lines. The Company continues to refine and
automate its manufacturing processes, especially those of acquired
subsidiaries, as well as expand its injection molding and tubing
extrusion capacity.
OPERATING EXPENSES - Operating expenses generally consist of
selling, general, and administrative expenses, research and
development expenses, and royalty expenses. In addition, operating
expenses for the three months ended December 31, 1998 also includes
the costs associated with the recall of certain of the Company's
cardiac stimulation electrodes. Total operating expenses for the
three months ended December 31, 1998 were $12,924,252, which
represents an increase of 16.7% over the corresponding three months
of fiscal year 1998. As a percentage of net sales, operating
expenses for the three months ended December 31, 1998 totaled 32.9%,
compared with 30.2% for the corresponding three months of fiscal
year 1997.
The major component of operating expense, selling, general, and
administrative expense, increased only 1.4%, from $9,908,321 in the
quarter ended December 31, 1997 to $10,049,361 in the quarter ended
December 31, 1998. This minor increase is attributable primarily to
11 <PAGE>
increased wages, commissions, and other selling related costs
associated with the increased levels of sales. As a percentage of
net sales, however, selling, general, and administrative expenses
decreased from 27.0% in the three months ended December 31, 1997 to
25.6% in the three months ended December 31, 1998. These percentage
decreases during the first quarter of fiscal year 1999 reflect the
Company's efforts to control these variable selling expenses.
Research and development expenses and royalty expenses, as a
percentage of net sales, slightly increased in the first quarter of
fiscal year 1999, approximating 2.3% and 1.4%, respectively,
compared with 1.9% and 1.3%, respectively, for the first quarter of
fiscal year 1998.
The accrued costs associated with the voluntary recall
(commenced by the Company in February, 1999) of certain of the
Company's cardiac stimulation electrodes is approximated at
$1,412,700 in the first quarter of fiscal year 1999.
OTHER INCOME - Other income (net of other expenses) consists
principally of interest income from investments and royalty income
from the licensing of the TRACH CARE closed suction system. For the
quarter ended December 31, 1998, other income totaled $538,388,
compared to $1,189,350 for the three months ended December 31, 1997.
Interest income earned from short-term investments increased from
$657,837 for the first quarter in fiscal year 1998 to $781,243 in
the first quarter of fiscal year 1999. This increase is
attributable to the increase in the value of short-term investments
and interest bearing cash accounts. Royalty income decreased from
$615,000 in the first quarter of 1998 to $450,001 for the first
quarter of fiscal 1999, due to decreased sales of closed suction
catheters by the licensee.
In addition to interest and royalty income, other income is net of
approximately $864,000 in expenses related to the proposed merger of
Ballard and Kimberly-Clark (see Item 6(b) Reports on Form 8-K ).
NET INCOME - Net income after taxes for the three months ended
December 31, 1998 (excluding the effects of the recall of certain of
the Company's cardiac stimulation electrodes - net of tax) increased
slightly to $8,525,431, compared to $8,511,005 for the three months
ended December 31, 1997. As a percent of net sales, net income
after taxes for the three months ended December 31, 1998 (excluding
the effects of the recall of certain of the Company's cardiac
stimulation electrodes - net of tax) was still strong, at 21.7%,
compared with 23.2% for the three months ended December 31, 1997.
The continued strong profit levels reflect the growth in net sales
and ongoing efforts to control production and operating costs and
maintain profit margins.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 31, 1998 the Company's
operating activities provided $12,035,950 in cash flows, compared
with $8,153,962 in cash flows provided during the three months ended
December 31, 1997. At December 31, 1998, working capital totaled
12 <PAGE>
$136,373,552, compared with $127,344,729 at September 30, 1998, and
its current ratio was 14.0 to 1.0 at December 31, 1998. The Company
had $82,521,917 in cash, cash equivalents, and short-term
investments at December 31, 1998, compared with $70,558,861 at
September 30, 1998.
Significant uses of cash during the three-month period ended
December 31, 1998 included approximately $9,858,000 in net purchases
of short-term investments, $992,000 in additions to property and
equipment, and $204,000 in additions to intangibles.
In addition to its strong liquidity and overall financial
position, the Company does not have any long-term debt.
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, 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.
A complete test of the Company's computer systems is scheduled
for February, 1999, to determine whether the Company will need 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.
13 <PAGE>
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. Thus far, the Company has received back
responses from 78% of those contacted by the Company, none of which
responses indicated that the responding party would not be prepared
for the Year 2000. 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 mid 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 $400,000 and is being funded through operating cash
flows. The Company will be able to capitalize the portion of this
cost that relates to the acquisition of software and hardware.
The costs of the project and the timetable in which the Company
plans to complete the Year 2000 compliance requirements are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from these
plans. Specific factors which might cause such material differences
include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct
all relevant computer chip codes, and similar uncertainties.
RISK FACTORS
COMPETITION. The medical device industry is characterized by
rapidly evolving technology and increased competition. There are a
number of companies that currently offer, or are in the process of
developing, products that compete with products offered by the
Company, including the Company's flagship TRACH CARE closed suction
catheter. Some of these competitors have substantially greater
capital resources, research and development staffs and experience in
the medical device industry. These competitors may succeed in
developing technologies and products that are more effective than
those currently used or produced by the Company or that would render
some products offered by the Company obsolete or noncompetitive.
Competition based on price is becoming an increasingly important
factor in customer purchasing patterns as a result of cost
containment pressures on, and consolidation in, the health care
industry. Such competition has exerted, and is likely to continue
to exert, downward pressure on the prices the Company is able to
charge for its products. The Company may not be able to offset such
downward price pressure through corresponding cost reductions.
Price reductions could have an adverse impact on the business,
results of operations, financial condition, or cash flows of the
Company.
14 <PAGE>
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
15 <PAGE>
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
16 <PAGE>
Company's technology and certain products uneconomical or obsolete.
PRODUCT LIABILITY EXPOSURE. Because its products are intended
to be used in health care settings on patients who are
physiologically unstable and may also be seriously or critically
ill, the Company is exposed to potential product liability claims.
From time to time, patients using the Company's products have
suffered serious injury or death, which has led to product liability
claims against the Company. Some product liability claims have been
inherited by the Company through business acquisitions.
The Company maintains product liability coverage in the amount
of $5,000,000 through Medmarc, 4000 Legato Road, Suite 800, Fairfax,
Virginia. This is a claims-made policy, with a deductible of
$10,000 per occurrence and $75,000 aggregate maximum per year. The
Company maintains excess liability coverage in the amount of
$10,000,000 through American International Group Specialty Lines,
Inc., 70 Pine Street, New York, New York. The Company deems this
coverage sufficient for its business. However, there can be no
assurance that such coverage will ultimately prove to be adequate,
or that such coverage will continue to remain available on
acceptable terms or any terms at all.
ACQUISITIONS. In order to continue increasing sales volume and
profits, the Company relies heavily on a program of acquiring
business and new product lines from other companies. There is
always a significant risk that a given acquisition by the Company
will prove to be unsuccessful or end up not contributing
sufficiently to sales and profit growth of the Company. There is
also a risk that undiscovered or contingent liabilities of an
acquired company could negatively impact the Company's financial
position or even the acquisition transaction itself. The
integration of any businesses that the Company might acquire could
require substantial management resources. The moving of acquired
product lines can also result in interruptions in production and
backorders. There can be no assurance that any such integration
will be accomplished without having a short or potentially long-term
adverse impact on the business, results of operations or financial
condition of the Company or that the benefits expected from any such
integration will be fully realized.
From time to time the Company issues its own common stock in
order to acquire other companies. Such increases in the number of
outstanding Company shares could have a dilutive effect on the
Company's earnings per share and on the Company's book value per
share depending upon several factors including: (1) the
profitability of the acquired company; (2) the number of shares of
Company common stock issued for the acquisition; and (3) whether the
transaction can be treated as a pooling of interests. The issuance
of Company common stock for material acquisitions could also result
in large blocks of Company stock being held by new voting groups and
could therefore have an effect on the voting control of the Company.
The Company prefers whenever possible to use its stock, rather
than cash, to acquire other companies and intends to continue this
acquisition policy.
17 <PAGE>
The Company continues to devote substantial management
resources to looking for additional companies and product lines to
acquire. At almost any given point in time, the Company is in the
process of a preliminary review of various potential target
companies, or involved in more comprehensive due diligence, or
involved in preliminary or final negotiations for the acquisition.
INTANGIBLES. As of December 31, 1998, $37,581,754 (16.1%) of
the Company's total assets consisted of intangible assets (cost in
excess of fair value of net assets acquired and patents and other
intangibles) net of amortization. $25,955,918 of these intangible
assets represent the difference between the purchase price paid by
the Company for various acquisitions, and the fair market value of
net assets purchased, net of amortization. The approximate amount
of amortization expense related to intangibles for the first quarter
ended December 31, 1998 was $923,000, and this of course reduces net
income. There can be no assurance that assets, businesses, and
product lines purchased through acquisitions will retain their
value. If such acquired assets were to lose value, corresponding
goodwill included in intangibles may have to be written off all at
once, resulting in a possible significant charge to earnings and
earnings per share. The Company periodically reviews the carrying
value of its intangible assets based on current and anticipated
undiscounted cash flows and recognizes impairment when such cash
flows will be less than the carrying values.
DIVIDENDS. Prior to January, 1990, no dividends had been paid
by the Company on its shares of Common Stock. The Company has paid
dividends since January, 1990. However, there can be no assurance
that dividends will be paid on shares in the future, particularly
since the Company prefers to reserve its cash and liquid assets for
growth and possible business acquisitions.
UNCERTAINTY OF FINANCIAL RESULTS AND CAPITAL NEEDS. There may
be substantial fluctuations in the Company's results of operations
because of the timing and recording of revenues and market
acceptance of existing Company products. The ability of the Company
to expand its manufacturing and marketing operations cannot be
predicted with certainty. If revenues do not continue to increase
as rapidly as they have in the past few years, or if manufacturing,
marketing, or research and development are not successful or require
more money than is anticipated, the Company may have to scale back
product marketing, development and production efforts and attempt to
obtain external financing. There can be no assurance that the
Company would be able to obtain timely external financing in the
amounts required or that such financing, if available, would be on
terms advantageous to the Company.
SUPPLY OF RAW MATERIALS. Certain of the Company's products are
dependent upon raw materials for which there are few sources. So
far, the Company has not had any serious problems obtaining needed
raw materials.
18 <PAGE>
IMPACT OF CURRENCY FLUCTUATIONS; IMPORTANCE OF FOREIGN SALES.
Because certain sales of products by the Company outside the United
States typically are denominated in local currencies, the results of
operations of the Company are expected to continue to be affected by
changes in exchange rates between certain foreign currencies and the
United States Dollar. There can be no assurance that the Company
will not experience currency fluctuation effects in future periods,
which could have an adverse impact on its business, results of
operation or financial condition. The operations and financial
results of the Company also may be significantly affected by other
international factors, including changes in governmental regulations
or import and export restrictions, and foreign economic and
political conditions generally.
The Company's ability to continue to sell products into Europe
is dependent to a large extent on its ability to maintain the
important ISO 9001/EN 4601 certification and the CE marking of
conformity. If the Company were to lose such certifications, such
loss would have a material, adverse impact on international sales
and profits.
For the quarter ended December 31, 1998, international sales
($5,553,603) were 14.1% of net sales of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the
Company's stock is, and is expected to continue to be, subject to
significant fluctuations in response to variations in quarterly
operating results, trends in the health care industry in general and
the medical device industry in particular, and certain other factors
beyond the control of the Company. In addition, broad market
fluctuations, as well as general economic or political conditions
and initiatives, may adversely impact the market price of the
Company's stock, regardless of the Company's operating performance.
YEAR 2000 ISSUES. The approaching Year 2000 could result in
challenges related to computer software, manufacturing and
communications equipment, accounting records, and relationships with
suppliers and customers. The Company is in the process of
addressing the Year 2000 Issue. See "2000 ISSUES."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BALLARD MEDICAL PRODUCTS v. ALLEGIANCE HEALTHCARE CORPORATION
AND SORENSON CRITICAL CARE, INC.
The parties to this case have substantially completed the
discovery process (i.e., exchange of information and documents,
depositions, etc.). A pretrial conference is scheduled before the
district court for March 9, 1999. At this pretrial, it is
anticipated that the court will hear arguments from counsel for all
parties on four different motions for summary judgment previously
filed by defendants and will review and make inquiry into the
parties' respective legal positions regarding patent claim
interpretation and other issues.
19 <PAGE>
ROGER LEE HEATH v. BAXTER, WALTERS, TOWNSEN, ET AL.
On January 11, 1999, the United States Supreme Court denied Mr.
Heath's Petition for Writ of Certiorari (i.e., his petition asking
the Supreme Court to accept an appeal).
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
No matters were submitted to a vote of the shareholders during
the period covered by this report.
ITEM 5. OTHER INFORMATION
The Company has no information to report under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. Documents filed as part of this report:
See Index to Exhibits.
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K
were filed during the quarter for which this report is filed:
Form 8-K filed December 23, 1998, reporting the Company's
December 23, 1998 press release and announcement of its entering
into a definitive merger agreement with Kimberly-Clark Corporation
and Jazz Acquisition Corp. (a wholly-owned subsidiary of Kimberly-
Clark), dated as of December 23, 1998.
20 <PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 3/19/99 Dale H. Ballard, President
(Principal Executive Officer)
Date: 3/19/99 Kenneth R. Sorenson,
Treasurer
(Principal Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER PAGE NO.
2.1 Agreement and Plan of Merger Incorporated herein
Among Ballard Medical Products, by reference to
Kimberly-Clark Corporation, and Exhibit 2.1 to
Jazz Acquisition Corp., dated as Form 10-Q filed
of December 23, 1998 February 17, 1999
2.2 Company Option Agreement by and Incorporated herein
between Kimberly-Clark by reference to
Corporation and Ballard Medical Exhibit 2.2 to
Products, dated as of December Form 10-Q filed
23, 1998 February 17, 1999
11 Computation of Income per Common
Share and Common Share - Assuming
Dilution
27 Financial Data Schedule Incorporated herein
by reference to
Exhibit 27 to
Form 10-Q filed
February 17, 1999
21<PAGE>
<PAGE>
EXHIBIT 11
BALLARD MEDICAL PRODUCTS
COMPUTATION OF INCOME PER COMMON SHARE
AND COMMON SHARE - ASSUMING DILUTION
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Period Income
Cumulative Out- Average Net Per
Shares Standing Shares Income Share
Income
per
common
share -
basic:
1998 2,772,229,096 91 30,464,056 $7,662,431 $0.252
1997 2,736,869,590 91 30,075,490 8,511,005 $0.283
Income
per
common
share -
diluted:
1998 2,811,844,399 91 30,899,389 $7,622,431 $0.248
1997 2,804,016,033 91 30,813,363 8,511,005 $0.276
