As filed with the Securities and Exchange Commission
on August 3, 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
JUNE 30, 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:
30,838,367 - all common, July 30, 1999
1
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 June 30, 1999 and September 30, 1998 5
Condensed Unaudited Consolidated Statements of
Operations for the three and nine months ended
June 30, 1999 and 1998 8
Condensed Unaudited Consolidated Statements of
Cash Flows for the nine months ended June 30,
1999 and 1998 10
Notes to Condensed Unaudited
Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Risk Factors 18
PART II OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote
of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
Index to Exhibits 25
2
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 of Ballard.
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.
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.
3
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.
ENDOSCOPE is an instrument consisting of a tube and optical system
used in the examination of a hollow organ or cavity.
ENDOSCOPIC refers to a procedure performed by means of an endoscope.
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS 6/30/99 9/30/98
CURRENT ASSETS:
Cash and cash
equivalents $38,521,298 $10,231,524
Investments available
for sale 59,645,256 60,327,337
Accounts receivable -
trade (net) 26,674,067 31,184,303
Royalties receivable 343,139 424,891
Note receivable 4,412,144 3,973,920
Other receivables 1,439,362 1,694,393
Inventories - net:
Raw materials 8,803,010 8,493,138
Work-in-progress 5,533,246 3,726,160
Finished goods 7,521,461 11,034,393
Deferred income taxes 1,190,849 628,611
Income tax refunds
receivable 1,307,085 2,481,210
Prepaid expenses 1,261,902 385,732
___________ ___________
Total current assets 156,652,819 134,585,612
___________ ___________
PROPERTY AND EQUIPMENT:
Land 1,052,994 873,865
Buildings 31,444,847 31,355,161
Molds 7,874,218 5,703,400
5
ASSETS 6/30/99 9/30/98
Machinery and equipment 17,783,623 14,989,207
Vehicles 940,712 913,876
Furniture and fixtures 4,451,618 3,923,088
Leasehold improvements 49,507
Construction-in-
progress 1,854,223 4,415,848
__________ __________
Total 65,402,235 62,223,952
Less accumulated
depreciation 18,408,265 14,167,300
__________ __________
Property and
equipment - net 46,993,970 48,056,652
__________ __________
INTANGIBLE ASSETS:
Cost in excess
of fair value of net
assets acquired - net 28,937,147 26,524,776
Patents and other
intangibles - net 14,650,739 11,802,852
__________ __________
Total intangible
assets 43,587,886 38,327,628
__________ __________
DEFERRED TAXES RECEIVABLE 1,655,464 1,712,389
__________ __________
OTHER ASSETS 32,833 5,907
__________ __________
TOTAL $248,922,972 $222,688,188
=========== ===========
See Notes to Condensed Unaudited Consolidated Financial Statements.
6
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND
STOCKHOLDERS' EQUITY 6/30/99 9/30/98
CURRENT LIABILITIES:
Accounts payable $739,690 $1,208,938
Current portion
long-term debt 1,000,000
Income taxes payable 1,243,450
Accrued liabilities:
Employee
compensation 4,668,241 3,608,774
Royalties 830,424 589,021
Other 2,243,087 590,700
__________ __________
Total current liabilities 9,481,442 7,240,883
__________ __________
LONG-TERM DEBT 1,500,000
__________ __________
Total liabilities 10,981,442 7,240,883
__________ __________
STOCKHOLDERS' EQUITY:
Common stock 3,079,824 3,042,373
Additional paid-in
capital 67,742,552 61,158,851
Unrealized losses
on investments (286,057) (107,480)
Retained earnings 167,405,211 151,353,561
___________ ___________
Total stockholders'
equity 237,941,530 215,447,305
___________ ___________
TOTAL $248,922,972 $222,688,188
=========== ===========
See Notes to Condensed Unaudited Consolidated Financial Statements.
7
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
6/30/99 6/30/98 6/30/99 6/30/98
NET SALES $35,750,752 $38,249,804 $110,176,497 $111,067,421
COST OF
PRODUCTS SOLD 12,709,620 13,846,417 40,408,294 41,534,574
__________ __________ __________ __________
GROSS MARGIN 23,041,132 24,403,387 69,768,203 69,532,847
__________ __________ __________ __________
OPERATING
EXPENSES:
Selling, general,
and
administrative 11,973,031 9,942,027 33,254,104 30,144,233
Research and
development 914,143 684,084 2,739,000 2,147,296
Royalties 730,252 544,757 2,280,655 1,446,846
Nonrecurring 1,973,959
charges
Provision for
product recall 1,412,700
Merger costs 827,050 2,070,918
__________ __________ __________ __________
Total
operating
expenses 14,444,476 11,170,868 41,757,377 35,712,334
__________ __________ __________ __________
OPERATING INCOME 8,596,656 13,232,519 28,010,826 33,820,513
OTHER INCOME-net 978,959 1,416,128 3,608,066 3,841,313
__________ __________ __________ __________
INCOME BEFORE
INCOME TAX
EXPENSE 9,575,615 14,648,647 31,618,892 37,661,826
INCOME TAX
EXPENSE 3,874,872 5,803,000 12,500,000 14,762,000
__________ __________ __________ __________
NET INCOME $5,700,743 $8,845,647 $19,118,892 $22,899,826
========== ========== ========== ==========
8
Three Months Ended Nine Months Ended
6/30/99 6/30/98 6/30/99 6/30/98
INCOME PER SHARE:
Basic $0.185 $0.291 $0.624 $0.758
====== ====== ====== ======
Diluted $0.183 $0.286 $0.615 $0.741
====== ====== ====== ======
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING:
Basic 30,768,567 30,385,817 30,619,797 30,216,985
========== ========== ========== ==========
Diluted 31,188,484 30,914,850 31,067,149 30,887,273
========== ========== ========== ==========
See Notes to Condensed Unaudited Consolidated Financial Statements.
9
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
6/30/99 6/30/98
CASH FLOWS FROM OPERATING ACTIVITIES $34,997,067 $25,446,029
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (2,056,362) (5,439,277)
Investment in and advances to affiliates (4,844)
Purchases of investments (48,193,864) (43,417,396)
Purchase of intangible assets (324,200) (660,309)
Cash paid for acquisitions (7,415,597)
Sales (purchases) of other assets (26,926) 112,667
Proceeds from sales of investments 48,601,211 16,726,803
___________ ___________
Net cash used in investing activities (9,415,738) (32,682,356)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 5,775,687 4,084,773
Cash dividends paid (3,067,242) (3,427,360)
Payment of debt of acquired subsidiary (5,400,000)
Purchase and retirement of treasury stock (853,144)
__________ __________
Net cash provided by (used in)
financing activities 2,708,445 (5,595,731)
__________ __________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 28,289,774 (12,832,058)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,231,524 21,624,043
___________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $38,521,298 $8,791,985
=========== ==========
See Notes to Condensed Unaudited Consolidated Financial Statements.
10
BALLARD MEDICAL PRODUCTS AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Nine Months Ended
6/30/99 6/30/98
Cash paid during the period
for taxes $14,189,231 $10,690,646
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1999 and 1998, the Company
increased additional paid-in capital by $845,465 and $1,902,171
respectively, which represents the tax benefit attributable to the
compensation received by employees from the exercise and
disqualifying dispositions of incentive stock options.
In connection with the purchase of the patents and related assets of
Jinotti and University Medical Products, Inc. (see Notes to
Condensed Unaudited Consolidated Financial Statements), the Company
incurred a long-term payment obligation of $2,500,000.
See Notes to Condensed Unaudited Consolidated Financial Statements.
11
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 significant intercompany
transactions and accounts. In management's opinion, the
accompanying condensed unaudited consolidated financial
statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
condition of Ballard and its subsidiaries as of June 30, 1999
and September 30, 1998, the results of operations for the three
and nine months ended June 30, 1999 and 1998, and its cash
flows for the nine months ended June 30, 1999 and 1998.
2. The results of operations for the nine months ended June 30,
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). With the announced
restatement of Kimberly-Clark's prior financial statements,
Kimberly-Clark should be in a position to move forward to
complete the merger with Ballard. The merger had been on hold
pending resolution of review by the SEC of prior financial
statements of Kimberly-Clark.
4. 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
in the Company's statement of operations for the three months
ended December 31, 1998. (See additional explanation in the
Notes to Condensed Unaudited Consolidated Financial Statements
in the Company's March 31, 1999 Form 10-Q filed May 12, 1999.)
The Company does not expect further recalls of defibrillation
pads which would increase the above-stated charge to earnings.
5. Effective May 25, 1999, the Company acquired substantially all
of the assets of Wiltek Medical, Inc. ( Wiltek ) for a purchase
price of $5,465,597. The purchase of assets was pursuant to
the Company s exercise of its $50,000 option under a February,
1998 Option Agreement. The acquisition has been accounted for
using the purchase method of accounting and, as such, Wiltek s
results of operations have been included in the accompanying
consolidated financial statements from the date of acquisition.
The cost of this acquisition exceeded the estimated fair value
of the acquired net assets by $4,157,442, which is being
amortized over 10 years. Pro forma financial information is
not presented, since the effect on the Company s financial
position and earnings was not significant.
12
6. Effective June 15, 1999, the Company acquired a portfolio of
patents covering endotracheal suction catheter inventions of
Professor Walter Jinotti ( Jinotti ), together with related
manufacturing equipment and certain other assets of University
Medical Products, Inc. ( University Medical ), for a cash
purchase price of $2,000,000 and a 3-year, noninterest bearing
payment obligation of $2,500,000. This balance owed is payable
$1,000,000 on June 15, 2000, $1,000,000 on June 15, 2001, and
$500,000 on June 15, 2002.
7. On June 10, 1999, the Company declared a semi-annual cash
dividend of $.05 per share, payable July 8, 1999 to
shareholders of record as of June 21, 1999.
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
included 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 earnings per share data, to conform
to 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 three and nine months ended June 30, 1999 was
$5,522,166 and $18,940,315, respectively.
11. 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 $4,412,000. The note is secured by the lien of a
first trust deed against approximately forty-two acres of land
located to the south of the Company's Draper, Utah facility and
a first lien against 42 shares of East Jordan Irrigation
Company. The Company has commenced proceedings to foreclose
the lien of its first trust deed. Management believes that the
property and water shares together have current value in excess
of this uncollected obligation.
13
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 nine months ended June 30, 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 nine months ended June 30,
1999 were $35,750,752 and $110,176,497, respectively, compared with
$38,249,804 and $111,067,421, respectively, for the corresponding
three and nine months ended June 30, 1998. Sales decreased 6.5% and
0.8%, respectively, for the three and nine months ended June 30,
1999.
The decline in sales is principally due to the Company s
continuing to undo dealer incentive programs. For the three months
ended June 30, 1999, domestic dealer sales (i.e., sales to dealers
located in the USA) totaled $11,988,979, a decrease of 21.1% from
domestic dealer sales of $15,198,536 for the three months ended June
30, 1998. For the nine months ended June 30, 1999, domestic dealer
sales totaled $41,097,416, a decrease of 16.6% from domestic dealer
sales of $49,291,548 for the nine months ended June 30, 1998. Sales
also continue to be negatively impacted by lower priced contracts
with group purchasing organizations.
Other Company sales, i.e., direct sales to U.S. hospitals and
international sales, continue growth trends. Direct sales to
hospitals for the nine months ended June 30, 1999 were $50,554,931,
reflecting a year-to-date growth rate of 9.7% when compared to
hospital sales of $46,089,151 for the nine months ended June 30,
1998. International sales for the nine months ended June 30, 1999
were $18,824,150, reflecting a year-to-date growth rate of 17.1%
when compared to international sales of $16,075,163 for the nine
months ended June 30, 1998.
The Company continued its market expansion of the
Interventional Care product lines which includes the MIC enteral
feeding catheters, as well as endoscopic devices. Total
Interventional Care product sales for the three and nine months
ended June 30, 1999 were $11,374,758 and $33,164,136, respectively,
representing growth of 13.0% and 16.7%, respectively, over the
corresponding periods of fiscal year 1998.
14
No significant price increases occurred during the three months
covered by this report. 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
nine months ended June 30, 1999 were $12,709,620 and $40,408,294,
respectively, compared to $13,846,417 and $40,440,094 (without
considering the impact of $1,094,480 in nonrecurring charges),
respectively, for the corresponding three and nine months in fiscal
year 1998. As a percentage of net sales, cost of products sold for
the three and nine months ended June 30, 1999 was 35.6% and 36.7%,
respectively, compared to 36.2% and 36.4% (without considering the
impact of the nonrecurring charges), respectively, for the three and
nine months ended June 30, 1998.
The slight increase in cost of products sold as a percentage of
net sales for the nine months ended June 30, 1999 reflects the
continued pricing pressures which exist throughout the health care
sector, as well as the overall impact of increasing raw material and
labor costs. 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 nine months
ended June 30, 1999, operating expenses also include $1,412,700 in
costs associated with the recall of certain of the Company's cardiac
stimulation electrodes (see Notes to Condensed Unaudited
Consolidated Financial Statements). Also included are $2,070,918 in
merger related costs associated with the pending merger of Ballard
with Kimberly-Clark (see Notes to Condensed Unaudited Consolidated
Financial Statements). For the nine months ended June 30, 1999,
operating expenses also include the nonrecurring charges associated
with the impairment 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 in the March 31, 1999 Form 10-Q
filed May 12, 1999).
Total operating expenses for the three and nine months ended
June 30, 1999 were $13,617,426 and $38,273,759 (without regards to
the impact of the recall and merger costs), respectively, which
represent an increase of 21.9% and 13.5%, respectively, over the
corresponding three and nine months of fiscal year 1998 (without
regards to the nonrecurring charges). As a percentage of net sales,
15
operating expenses for the three and nine months ended June 30, 1999
totaled 38.1% and 34.8% (without regards to the impact of the recall
and merger costs), respectively, compared to 29.2% and 30.4% (with-
out regards to the nonrecurring charges), respectively, for the
corresponding three and nine months of fiscal year 1998.
The major component of operating expense, selling, general, and
administrative expense, increased 20.4% and 10.3%, respectively,
for the three and nine months ended June 30, 1999 over the
corresponding three and nine 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 nine
months ended June 30, 1999 were 33.5% and 30.2%, respectively,
compared with 26.0% and 27.2%, respectively, for the same periods in
fiscal year 1998.
Research and development expenses and royalty expenses, as a
percentage of net sales, showed significant increases for the three
and nine months ended June 30, 1999 due primarily to the decreased
levels of sales for the quarter and nine months and due to the
addition of royalty obligations on the Tri-Med product line.
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 nine months ended June 30, 1999, other income totaled
$978,959 and $3,608,066, respectively, compared to $1,416,128 and
$3,841,313, respectively, for the corresponding periods in fiscal
year 1998. Interest income earned from short-term investments was
$764,432 and $2,383,597, respectively, for the three and nine months
ended June 30, 1999, compared with $737,440 and $2,173,623,
respectively, for the corresponding periods in fiscal year 1998.
The slight increase in interest income during the nine months ended
June 30, 1999 is attributable to the increase in the value of short-
term investments and interest-bearing cash accounts. Royalty income
continues to decline, decreasing from $1,585,000 in the nine months
ended June 30, 1998 to $1,200,000 for the nine months ended June 30,
1999. The decrease is due to decreased sales of closed suction
catheters by the licensee.
NET INCOME - Net income after taxes for the three and nine
months ended June 30, 1999 (excluding the effects of the recall and
merger costs - net of tax) decreased to $6,189,586 and $21,237,019,
respectively, compared to $8,845,647 and $24,765,554 (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 nine months
ended June 30, 1999 (excluding the effects of the recall and merger
costs - net of tax) was 17.4% and 19.3%, respectively, compared with
23.1% and 22.3% (excluding the effects of the nonrecurring charges
net of tax), respectively, for the corresponding periods of fiscal
year 1998.
16
The decreased profit levels principally reflect the decline in
net sales.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1999 the Company's operating
activities provided $34,997,067 in cash flows, compared with
$25,446,029 in cash flows provided during the nine months ended June
30, 1998. At June 30, 1999, working capital totaled $147,171,377,
compared with $127,344,729 at September 30, 1998, and its current
ratio was 16.5 to 1.0 at June 30, 1999. The Company had $98,166,554
in cash, cash equivalents, and short-term investments at June 30,
1999, compared with $70,558,861 at September 30, 1998.
Significant uses of cash during the nine months ended June 30,
1999 included approximately $7,416,000 in net asset acquisitions,
$2,056,000 in additions to property and equipment, payment of
$3,067,000 in dividends, and $324,000 in additions to intangibles.
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. In addition, 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.
For almost two years, the Company has been carrying out a
comprehensive program of assessing and implementing changes and
upgrades needed 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 engaged the services
and expertise of Quantified Management, a computer services
consulting firm from Salt Lake City, Utah. In 1997, the Company
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 bundled a
comprehensive project management program with interactive coaching
services from Quantified Management, to assist the Company in its
Year 2000 compliance efforts.
17
The Company's internal systems and production equipment, with a
few exceptions, have been certified by the manufacturers to be Y2K
compliant. The exceptions are being addressed.
The Company has completed formal communications with all of its
significant suppliers and large customers to determine the extent to
which the Company may be vulnerable to their failure to remediate
their own Year 2000 Issues. Nonresponsive parties were sent follow
up surveys and requests. 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. 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 by the Company for all identified critical
areas.
The Company has used internal and external resources to
implement, reprogram, or replace and test software and related
assets affected by the Year 2000 Issue. 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 contain-
ment pressures on, and consolidation in, the health care industry.
18
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
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
19
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
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.
20
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
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
21
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 June 30, 1999, $43,587,886 (17.6%) 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. $28,937,147 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 nine months
ended June 30, 1999 was $2,781,000, 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
22
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 nine months ended June 30, 1999,
international sales were $6,746,764 and $18,824,149, respectively,
representing 18.9% and 17.1%, 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."
23
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 is scheduled
to start September 20, 1999.
BALLARD MEDICAL PRODUCTS V. ABBOTT LABORATORIES
On or about May 28, 1999, the Company filed a complaint against
Abbott Laboratories, as defendant, in the United States District
Court for the District of Utah, Central Division. The Company has
not yet served the summons and complaint on Abbott, pending the
outcome of settlement negotiations between the parties. The
complaint is principally based upon Abbott's unauthorized,
infringing, and diluting use of Ballard's widely recognized trade
dress on Ballard's MIC-KEY low profile gastrostomy enteral feeding
catheter. In other words, Ballard alleges that Abbott's Ross Hide-
A-Port Low Profile Balloon product is an unlawful copy of the MIC-
KEY design. Additionally, the complaint is based upon alleged false
and misleading advertisements by Abbott, which falsely compare
Ballard's MIC-KEY product with Abbott's Ross Hide-A-Port Low Profile
Balloon Gastrostomy Kit. Ballard Medical's complaint seeks monetary
damages and injunctive relief baring Abbott's unauthorized use of
Ballard's trade dress and Abbott's allegedly false advertising.
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.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the Company's January, 1998 Annual Meeting of
Shareholders, no matters have been submitted to a vote of the
shareholders.
ITEM 5. OTHER INFORMATION
The Company has no information to report under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. Documents filed at part of this report:
Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed
during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BALLARD MEDICAL PRODUCTS
(Registrant)
Date: 8/3/99 Dale H. Ballard, President and
Principal Executive Officer
Date: 8/3/99 Kenneth R. Sorenson,
Treasurer and
Principal Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
27 Financial Data Schedule 26
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the third
quarter 10-Q and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999
<PERIOD-START> APR-01-1999 OCT-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 38,521,298 38,521,298
<SECURITIES> 59,645,256 59,645,256
<RECEIVABLES> 29,293,107 29,293,107
<ALLOWANCES> 2,619,040 2,619,040
<INVENTORY> 21,857,717 21,857,717
<CURRENT-ASSETS> 156,652,819 156,652,819
<PP&E> 65,402,235 65,402,235
<DEPRECIATION> 18,408,265 18,408,265
<TOTAL-ASSETS> 248,922,972 248,922,972
<CURRENT-LIABILITIES> 9,481,442 9,481,442
<BONDS> 0 0
0 0
0 0
<COMMON> 3,079,824 3,079,824
<OTHER-SE> 234,861,706 234,861,706
<TOTAL-LIABILITY-AND-EQUITY> 248,922,972 248,922,972
<SALES> 35,750,752 110,176,497
<TOTAL-REVENUES> 35,750,752 110,176,497
<CGS> 12,709,620 40,408,294
<TOTAL-COSTS> 12,709,620 40,408,294
<OTHER-EXPENSES> 14,444,476 41,757,377
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 9,575,615 31,618,892
<INCOME-TAX> 3,874,872 12,500,000
<INCOME-CONTINUING> 5,700,743 19,118,892
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,700,743 19,118,892
<EPS-BASIC> 0.19 0.62
<EPS-DILUTED> 0.18 0.62
</TABLE>
