As filed with the Securities and Exchange Commission
on May 13, 1999
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999
(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:
30,777,242 - all common, May 12, 1999
1 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
FORM 10-Q INDEX
Page
PART I FINANCIAL INFORMATION 5
Item 1. Financial Statements 5
Condensed Unaudited Consolidated
Balance Sheets as of March 31, 1999 and
September 30, 1998 5
Condensed Unaudited Consolidated
Statements of Operations for the three and six
months ended March 31, 1999 and 1998 7
Condensed Unaudited Consolidated
Statements of Cash Flows for the
six months ended March 31,
1999 and 1998 9
Notes to Condensed Unaudited
Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Risk Factors 17
PART II OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote
of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
Index to Exhibits 24
2 <PAGE>
DEFINITIONS
As used herein, the following terms have the meanings
indicated:
GENERAL DEFINITIONS:
1. "Ballard" refers to Ballard Medical Products.
2. "BI" refers to Ballard International, Inc., a wholly owned
subsidiary of Ballard.
3. "BPC" refers to Ballard Purchase Corporation, a wholly
owned subsidiary of Ballard.
4. "BREH" refers to Ballard Real Estate Holdings, Inc., a
wholly owned subsidiary of Ballard.
5. "Cardiotronics" refers to Cardiotronics Systems,
Incorporated, a wholly owned subsidiary.
6. The "Company" and the "Registrant" refer to Ballard and
its subsidiaries.
7. "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.
3 <PAGE>
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.
4 <PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS 3/31/99 9/30/98
CURRENT ASSETS:
Cash and cash equivalents $21,743,586 $10,231,524
Investments available for sale 71,350,307 60,327,337
Accounts receivable-trade (net) 28,495,385 31,184,303
Royalties receivable 674,229 424,891
Note receivable 3,973,920 3,973,920
Other receivables 2,170,707 1,694,393
Inventories - net:
Raw materials 8,655,667 8,493,138
Work-in-progress 4,574,532 3,726,160
Finished goods 8,030,963 11,034,393
Deferred income taxes 1,050,399 628,611
Income tax refunds receivable 533,356 2,481,210
Prepaid expenses 2,221,936 385,732
___________ ___________
Total current assets 153,474,987 134,585,612
___________ ___________
PROPERTY AND EQUIPMENT:
Land 873,865 873,865
Buildings 31,419,346 31,355,161
Molds 5,768,222 5,703,400
Machinery and equipment 15,901,013 14,989,207
Vehicles 950,515 913,876
Furniture and fixtures 4,154,005 3,923,088
Leasehold improvements 49,507 49,507
Construction-in-progress 4,712,009 4,415,848
__________ _________
Total 63,828,482 62,223,952
Less accumulated depreciation 17,003,225 14,167,300
__________ __________
5 <PAGE>
ASSETS 3/31/99 9/30/98
Property and equipment - net 46,825,257 48,056,652
__________ __________
INTANGIBLE ASSETS:
Cost in excess of fair value
of net assets acquired - net 25,387,562 26,524,776
Patents and other
intangibles - net 11,389,993 11,802,852
__________ __________
Total intangible assets 36,777,555 38,327,628
__________ __________
DEFERRED INCOME TAXES 1,462,648 1,712,389
__________ __________
OTHER ASSETS 32,833 5,907
__________ __________
TOTAL $238,573,280 $222,688,188
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $714,673 $1,208,938
Income taxes payable 1,243,450
Accrued liabilities:
Employee compensation 3,639,270 3,608,774
Royalties 603,191 589,021
Other 1,326,589 590,700
__________ __________
Total current liabilities 6,283,723 7,240,883
__________ __________
STOCKHOLDERS' EQUITY:
Common stock 3,070,511 3,042,373
Additional paid-in capital 66,097,352 61,158,851
Unrealized losses on investments (122,371) (107,480)
Retained earnings 163,244,065 151,353,561
___________ ___________
Total stockholders' equity 232,289,557 215,447,305
___________ ___________
TOTAL $238,573,280 $222,688,188
=========== ===========
See Notes to Condensed Unaudited Consolidated Financial Statements.
6 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
3/31/99 3/31/98 3/31/99 3/31/98
NET SALES $35,110,062 $36,135,728 $74,425,745 $72,817,617
COST OF PRODUCTS
SOLD 13,207,130 14,487,808 27,698,674 27,688,157
__________ __________ __________ __________
GROSS MARGIN 21,902,932 21,647,920 46,727,071 45,129,460
__________ __________ __________ __________
OPERATING EXPENSES:
Selling, general,
and administrative 11,231,712 10,293,885 21,281,073 20,202,206
Research and
development 925,471 767,737 1,824,857 1,463,212
Royalties 987,598 426,000 1,550,403 902,089
Nonrecurring charges 1,973,959 1,973,959
Provision for
product recall 1,412,700
__________ __________ __________ __________
Total operating
expenses 13,144,781 13,461,581 26,069,033 24,541,466
__________ __________ __________ __________
OPERATING INCOME 8,758,151 8,186,339 20,658,038 20,587,994
OTHER INCOME - net 846,851 1,235,836 1,385,239 2,425,185
__________ __________ __________ __________
INCOME BEFORE INCOME
TAX EXPENSE 9,605,002 9,422,175 22,043,277 23,013,179
INCOME TAX EXPENSE 3,849,284 3,879,001 8,625,128 8,959,000
__________ __________ __________ __________
NET INCOME $5,755,718 $5,543,174 $13,418,149 $14,054,179
========== ========== ========== ==========
7 <PAGE>
Three Months Ended Six Months Ended
3/31/99 3/31/98 3/31/99 3/31/98
INCOME PER SHARE:
Basic $0.188 $0.184 $0.439 $0.466
====== ====== ====== ======
Diluted $0.185 $0.179 $0.433 $0.455
====== ====== ====== ======
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Basic 30,628,576 30,190,918 30,545,412 30,132,570
========== ========== ========== ==========
Diluted 31,115,382 30,934,875 31,006,482 30,873,485
========== ========== ========== ==========
See Notes to Condensed Unaudited Consolidated Financial Statements.
8 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
3/31/99 3/31/98
CASH FLOWS FROM OPERATING ACTIVITIES $21,652,910 $12,385,294
__________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (1,604,530) (4,459,949)
Investment in and advances
to affiliates (2,719)
Purchases of investments (55,674,727) (28,817,826)
Purchases of intangible assets (262,911) (372,587)
Purchase of other assets (26,926) (264,236)
Proceeds from sales of investments 44,628,848 13,146,597
__________ __________
Net cash used in investing
activities (12,940,246) (20,770,720)
__________ __________
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of options 4,327,043 3,561,237
Cash dividends paid (1,527,645) (1,905,377)
Payment of debt of acquired subsidiary (2,750,000)
Purchase of treasury stock (856,894)
__________ __________
Net cash provided by (used in)
financing activities 2,799,398 (1,951,034)
__________ __________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 11,512,062 (10,336,460)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,231,524 21,624,043
__________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $21,743,586 $11,287,583
========== ==========
See Notes to Condensed Unaudited Consolidated Financial Statements.
9 <PAGE>
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Six Months Ended
3/31/99 3/31/98
Cash paid during the period
for taxes $10,515,799 $9,817,978
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 1999 and 1998, the Company
increased additional paid-in capital by $639,596 and $1,654,647,
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
(the "Company"), after elimination of all significant
intercompany transactions and accounts. In management's
opinion, the accompanying condensed unaudited consolidated
financial statements contain all adjustments (consisting only
of normal recurring accruals) necessary to present fairly the
financial condition of Ballard and its subsidiaries as of March
31, 1999 and September 30, 1998, the results of operations for
the three and six months ended March 31, 1999 and 1998, and its
cash flows for the six months ended March 31, 1999 and 1998.
2. The results of operations for the six months ended March 31,
1999 are not necessarily indicative of the results to be
expected for the full year ended September 30, 1999.
3. On December 23, 1998, the Company entered into a definitive
Agreement and Plan of Merger with Kimberly-Clark and Jazz
Acquisition Corp., a wholly owned subsidiary of Kimberly-Clark
(see Form 8-K filed December 23, 1998).
4. On January 5, 1999, the Company paid a semi-annual cash
dividend of $.05 per share to shareholders of record as of
December 16, 1998.
5. In February 1999, the Company commenced a voluntary recall to
withdraw from the marketplace certain of its cardiac
stimulation electrodes. The Company recorded a pretax 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
10 <PAGE>
in the Company's statement of operations 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
The payable reserve charge of $929,200 related to private label
(HEARTSTART) cardiac electrode defibrillation pads sold by
Ballard to its OEM customer, Laerdal Medical Corporation.
Laerdal, in turn, sold HEARTSTART pads to its customers. The
$929,200 is an estimate of the total credits/refunds which
Ballard may have to give to Laerdal, calculated as of December
31, 1998, as follows:
Number of HEARTSTART pads shipped
to Laerdal 211,180
Estimated return rate x 50%
Estimated number of HEARTSTART
pads to be returned from Laerdal
and its customers = 105,590
Ballard's invoice price x $8.80
Estimate of total credits/refunds
on account of HEARTSTART pads = $929,192
========
Unlike the calculation for inventory reserve, no estimated cost
of replacement product was calculated because Laerdal has not
yet agreed to accept Ballard's "new gel" product to replace the
recalled "old gel" HEARTSTART pads.
The $422,900 inventory reserve was calculated as follows, as of
December 31, 1998:
11 <PAGE>
Estimated cost of pads shipped
to customers (other than the
Laerdal HEARTSTART pads) $1,615,105
Estimated return rate x 25%
Estimated cost to replace = $303,776
Estimated cost of shipping
replacement pads + 4,100
Miscellaneous administrative
costs of recall + 15,000
_________
= $422,876
========
The Company does not expect further recalls of defibrillation
pads which would increase the above-stated charge to earnings.
6. During the quarter ended March 31, 1998, the Company recorded
nonrecurring pretax charges totaling $3,068,439. Included in
these charges were $681,336 for impairments to reduce the
carrying value of certain intangible assets, $1,292,623 for
severance and related restructuring costs associated with the
pending closures of several manufacturing facilities, and
$1,094,480 in identified inventory obsolescence and overhead
revaluations resulting from current and past plant closures.
For purposes of financial statement presentation, $1,973,959 of
the nonrecurring charges have been included in operating
expenses and $1,094,480 has been included with cost of products
sold.
7. 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.
8. Effective for the year ended September 30, 1998, the Company
adopted SFAS No. 128, "Earnings Per Share", and retroactively
restated all prior-period earnings per share 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.
9. Effective for the year ending September 30, 1999, the Company
adopted SFAS No. 130, "Comprehensive Income". Comprehensive
income for the three and six months ended March 31, 1999 was
$6,114,094 and $13,403,258, respectively.
12 <PAGE>
10. On April 29, 1999 a Trust Deed Note (dated April 29, 1997) owed
to the Company by Wasatch Pacific, Inc. became due and payable
in full. The Company has received no payments on this note
since May, 1998 when accrued interest on the note was paid in
full. The balance of principal and interest now owing is
approximately $4,300,000. The Company is considering a
possible extension of the due date of the note. The note is
secured by the lien of a first trust deed against approximately
thirty-one acres of land located to the South of the Company's
Draper, Utah facility.
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 and six months ended March 31, 1999 with the
corresponding periods of 1998. 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 and six months ended March 31,
1999 was $35,110,062 and $74,425,745, respectively, compared with
$36,135,728 and $72,817,617, respectively, for the corresponding
three and six months ended March 31, 1998. Sales decreased 2.8% for
the three months ended March 31, 1999 while showing a modest
increase of 2.2% for the six months ended March 31, 1999, over the
corresponding periods of fiscal year 1998.
The decline in net sales growth is due to the Company s
indefinite moratorium on the use of domestic dealer sales
incentives, precipitated by the potential merger with Kimberly-
Clark. For the six months ended March 31, 1999 and 1998, domestic
dealer sales totaled $28,909,439 and $34,489,111, respectively, a
decrease of 19.3%, while domestic and international direct sales
totaled $45,516,305 and $41,328,507, respectively, an increase of
10.2%.
The Company continues to show strong sales growth from its
international sales. For the three and six months ended March 31,
1999, international sales were $6,523,782 and $12,077,385,
respectively, with growth rates of 62.8% and 54.3%, respectively,
over the corresponding periods of fiscal year 1998. For the six
months ended March 31, 1999, international sales represent 16.3% of
total Company sales, compared with 10.8% for the corresponding
period in fiscal year 1998. The Company continued its market
expansion of the Interventional Care product lines which includes
13 <PAGE>
the MIC enteral feeding catheters, as well as endoscopic devices.
Interventional Care product sales for the three and six months ended
March 31, 1999 were $11,203,668 and $21,848,590, respectively,
representing growth rates of 20.2% and 18.9%, respectively, over the
corresponding periods of fiscal year 1998.
No significant price increases occurred during the three months
covered by this report; therefore, substantially all of the increase
in direct 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 those hospital groups. 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.
COST OF PRODUCTS SOLD - Cost of products sold for the three and
six months ended March 31, 1999 was $13,207,130 and $27,698,674,
respectively, compared to $13,393,328 and $26,593,677, respectively,
(without considering the impact of the nonrecurring charges) for the
corresponding three and six months in fiscal year 1998. As a
percentage of net sales, cost of products sold for the three and six
months ended March 31, 1999 was 37.6% and 36.2%, respectively,
compared to 37.1% and 36.6%, respectively, (without considering the
impact of the nonrecurring charges) for the three and six months
ended March 31, 1998.
The slight increase in cost of products sold as a percentage of
net sales during the three months ended March 31, 1999 reflects the
continued pricing pressures which exist throughout the health care
sector, as well as the overall impact of the additions through
acquisition of lower-margin product lines. The Company continues to
refine and automate its manufacturing processes, especially those of
acquired product lines, as well as expand its injection molding and
tubing extrusion capacity, all in an effort to improve its product
margins.
OPERATING EXPENSES - Operating expenses generally consist of
selling, general, and administrative expenses, research and
development expenses, and royalty expenses. For the six months
ended March 31, 1999, operating expenses also include the estimated
costs associated with the recall of certain of the Company's cardiac
stimulation electrodes (See Notes to Condensed Unaudited
Consolidated Financial Statements). For the three months ended March
31, 1998, operating expenses also include the nonrecurring charges
associated with the impairments of certain intangible assets and the
severance and related restructuring costs associated with the
closures of several manufacturing facilities (See Notes to Condensed
Unaudited Consolidated Financial Statements).
Total operating expenses for the three and six months ended
March 31, 1999 were $13,144,781 and $24,656,333, respectively,
(without regards to the impact of the recall costs) which represent
14 <PAGE>
an increase of 14.5% and 9.3%, respectively, (without regards to the
nonrecurring charges) over the corresponding three and six months of
fiscal year 1998. As a percentage of net sales, operating expenses
for the three and six months ended March 31, 1999 totaled 37.4% and
33.2%, respectively, (without regards to the impact of the recall
costs) compared to 31.8% and 31.0%, respectively, (without regards
to the nonrecurring charges) for the corresponding three and six
months of fiscal year 1998.
The major component of operating expense, selling, general, and
administrative expense, increased 9.1% and 5.3%, respectively, for
the three and six months ended March 31, 1999 over the corresponding
three and six months of fiscal year 1998. The increases are
primarily due to the existence of fixed sales related costs and
decreased levels of sales. As a percentage of net sales, selling,
general, and administrative expenses for the three and six months
ended March 31, 1999 were 32.0% and 28.6%, respectively.
Research and development expenses and royalty expenses, as a
percentage of net sales, showed significant increases for the three
months ended March 31, 1999 due exclusively to the decreased levels
of sales for the quarter.
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
three and six months ended March 31, 1999, other income totaled
$846,851 and $1,385,239, respectively, compared to $1,235,836 and
$2,425,185, respectively, for the corresponding periods in fiscal
year 1998. Interest income earned from short-term investments was
$757,790 and $1,619,165, respectively, for the three and six months
ended March 31, 1999 compared with $772,529 and $1,436,183,
respectively, for the corresponding periods in fiscal year 1998.
The increase in interest income during the first six months is
attributable to the increase in the value of short-term investments
and interest-bearing cash accounts. Royalty income continues to
decline, decreasing from $1,075,000 in the six months ended March
31, 1999 to $825,000 for the six months ended March 31, 1998. The
decrease is due to decreased sales of closed suction catheters by
the licensee.
In addition to interest and royalty income, other income for
the six months ended March 31, 1999 is net of approximately
$1,244,000 in expenses related to the proposed merger of Ballard and
Kimberly-Clark.
NET INCOME - Net income after taxes for the three and six
months ended March 31, 1999 (excluding the effects of the recall of
certain of the Company's cardiac stimulation electrodes - net of
tax) decreased to $5,755,718 and $14,830,849, respectively, compared
to $7,517,133 and $16,028,138 (excluding the effects of the
nonrecurring charges net of tax), respectively, for the
corresponding periods of fiscal year 1998. As a percentage of net
sales, net income after taxes for the three and six months ended
March 31, 1999 (excluding the effects of the recall of certain of
the Company's cardiac stimulation electrodes - net of tax) was 16.4%
and 20.0%, respectively, compared with 20.8% and 22.1% (excluding
15 <PAGE>
the effects of the nonrecurring charges net of tax), respectively,
for the corresponding periods of fiscal year 1998. The decreased
profit levels again reflect the decline in net sales.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1999 the Company's operating
activities provided $21,652,910 in cash flows, compared with
$12,385,294 in cash flows provided during the six months ended March
31, 1998. At March 31, 1999, working capital totaled $147,191,264,
compared with $127,344,729 at September 30, 1998, and its current
ratio was 24.4 to 1.0 at March 31, 1999. The Company had
$93,093,893 in cash, cash equivalents, and short-term investments at
March 31, 1999, compared with $70,558,861 at September 30, 1998.
Significant uses of cash during the six months ended March 31,
1999 included approximately $11,046,000 in net purchases of
short-term investments, $1,605,000 in additions to property and
equipment, payment of $1,528,000 in dividends, and $263,000 in
additions to intangibles.
In addition to its strong liquidity and overall financial
position, the Company does not have any long-term debt.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of potential problems with
computer systems or any equipment with computer chips that use dates
where the date has been stored as just two digits (e.g., 97 for
1997). On January 1, 2000, any clock or date recording mechanism,
including date sensitive software, which uses only two digits to
represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. The Company has also been advised that
some computer chips may not have the ability to function properly
when reading certain dates in calendar year 1999 (e.g., 9/9/99).
These computer problems could result in a system failure or
miscalculations causing disruption of operations, including among
other things, a temporary inability to process transactions, send
invoices, or engage in similar activities.
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
16 <PAGE>
Quantified Management, to assist the Company in its Year 2000
compliance efforts.
The Company's Enterprise Resource Planning (ERP) computer
system has been modified to be Y2K compliant. The modified ERP
system is currently running live. Additional hardware has been
acquired, the modified ERP system has been loaded and testing for
Y2K compliance has started. There have been no Y2K problems
uncovered in the testing thus far.
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 most of those contacted by the Company, none of which
responses indicated that the responding party would not be prepared
for the Year 2000. A "second request" letter has been sent to
suppliers and customers who have not responded to the initial
request. 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. Contingency
plans are being prepared for all identified critical areas.
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
17 <PAGE>
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.
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
18 <PAGE>
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 labeling. 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
19 <PAGE>
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 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 be able to increase sales volume and
profits, the Company will need to rely 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-term 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
20 <PAGE>
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 capital stock,
rather than cash, to acquire other companies and intends to continue
this acquisition policy. However, during the pendency of the merger
transaction with Kimberly-Clark, it is unlikely that Ballard would
be able to use its capital stock for this purpose.
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 March 31, 1999, $36,777,555 (15.4%) 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. $25,387,562 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 six months
ended March 31, 1999 was $1,846,000, 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
21 <PAGE>
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.
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. The loss of such certifications would have a material,
adverse impact on international sales and profits.
For the three and six months ended March 31, 1999,
international sales were $6,523,782 and $12,077,385, respectively,
representing 18.6% and 16.3%, respectively, of total 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 "YEAR 2000 ISSUES."
22 <PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BALLARD MEDICAL PRODUCTS v. ALLEGIANCE HEALTHCARE CORPORATION
AND SORENSON CRITICAL CARE, INC.
The parties to this case 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 August 31, 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. A trial in this case has been
schedule to start September 20, 1999.
MEDICAL INNOVATIONS CORPORATION v.
BOSTON SCIENTIFIC CORPORATION
On or about January 7, 1999, MIC, a wholly owned subsidiary of
Ballard, commenced a lawsuit against Boston Scientific Corporation
("BSC") in the United States District Court for the District of
Utah. MIC's First Amended Complaint in this action alleges that
certain of its patents are infringed by the Ultratome XL product
being marketed and sold by BSC through its Microvasive division.
MIC claims direct, willful infringement, infringement by
equivalents, inducement of infringement, and contributory
infringement. MIC's First Amended Complaint also alleges claims for
unjust enrichment and claims of unfair trade practices under Utah
Code Ann. Section 13-5-14. The First Amended Complaint asks the
Court for money damages (in an amount to be determined at trial,
including treble damages) and for equitable relief (i.e., for an
injunction) against BSC. BSC has not yet filed a response to MIC's
action. Instead, Ballard and MIC have granted extensions of time
while the parties explore possible ways to settle this litigation.
OTHER LITIGATION
The Company is also a party to ordinary routine litigation
(including products liability cases) 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.
23 <PAGE>
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. No reports on Form 8-K were filed
during the period covered by this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 5/13/99 Dale H. Ballard, President
(Principal Executive Officer)
Date: 5/13/99 Kenneth R. Sorenson,
Treasurer
(Principal Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER PAGE NO.
27 Financial Data Schedule 25
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the first
and second quarter 10-Qs and is qualified in its entirety by reference to such
10-Qs.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999
<PERIOD-START> JAN-01-1999 OCT-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 21,743,586 21,743,586
<SECURITIES> 71,350,307 71,350,307
<RECEIVABLES> 28,495,385 28,495,385
<ALLOWANCES> 2,425,029 2,425,029
<INVENTORY> 21,261,162 21,261,162
<CURRENT-ASSETS> 153,474,987 153,474,987
<PP&E> 63,828,482 63,828,482
<DEPRECIATION> 17,003,225 17,003,225
<TOTAL-ASSETS> 238,573,280 238,573,280
<CURRENT-LIABILITIES> 6,283,723 6,283,723
<BONDS> 0 0
0 0
0 0
<COMMON> 3,070,511 3,070,511
<OTHER-SE> 229,219,046 229,219,046
<TOTAL-LIABILITY-AND-EQUITY> 232,289,557 232,289,557
<SALES> 35,110,062 74,425,745
<TOTAL-REVENUES> 35,110,062 74,425,745
<CGS> 13,207,130 27,698,674
<TOTAL-COSTS> 13,207,130 27,698,674
<OTHER-EXPENSES> 13,144,781 26,069,033
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 9,605,002 22,043,277
<INCOME-TAX> 3,849,284 8,625,128
<INCOME-CONTINUING> 5,755,718 13,418,149
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,755,718 13,418,149
<EPS-PRIMARY> 0.19 0.44
<EPS-DILUTED> 0.19 0.43
</TABLE>
