Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
The information required by this item is incorporated herein by reference from the Company's Annual Report. In addition, the following information is provided:
BUSINESS DEVELOPMENTS
The United States continues to be the principal market for the Company's products. The Company's 120-person sales force is complemented by a distribution system comprised of specialty and general line dealers.
During the 1994 fiscal year, the Company restructured much of its distribution system. A significant volume of distribution has been shifted from specialty dealers to larger, general line dealers. This restructuring results in one- time deferrals by each new general line dealer in orders, while previous specialty dealers reduce existing inventories.
Internationally, the Company sells principally through various independent distributors, supported by a small sales force of eleven. The Company intends to allocate more resources to international sales and marketing efforts during the next few years.
Sales by the Company are generated in many areas within the hospital, such as intensive care units, emergency services, gastrointestinal and radiology procedures rooms, burn units, and respiratory therapy, as well as the main hospital operating room and outpatient/satellite surgi- centers. A second important market for certain of the Company's products is the alternate care market. Alternate care site sales are improving as patients are moved into these locations at an increasing rate.
The Company's strategy will continue to be to focus on the specialized critical care, operating room, and alternate care sites. We believe that the sale of the Company's TRACH CARE products is somewhat seasonal, in that sales are better during the winter months when there is a greater incidence of respiratory illness.
RAW MATERIALS
The Company does not face any serious supply shortage with respect to raw materials used in the manufacture of its products. Many of the Company's products are manufactured from various resins and plastics. The Company purchases resins and plastics from a number of different vendors. One exception to this is that the Company currently has only one supplier of resins used in
the Company's DOUBLE SCRUB scrub brush. Although some resin companies are in short supply, the Company so far has not had any serious problem obtaining needed quantities of these resins.
The Company's Chlorhexidinegluconate ("CHG") solutions used in its FOAM CARE products are purchased from two different suppliers. The 4% CHG is currently purchased from Xttrium Laboratories, Inc., and the 2% CHG is currently purchased from Huntington Laboratories, Inc. There can be no assurance that the Company will be able to continue to have access to sufficient quantities of these CHG materials. CHG is heavily regulated by the FDA.
Last year, the Company reported that it had entered into a contract to purchase a 4% CHG formula and an amended new drug application. The Seller of that CHG formula was unable to deliver a formula that was satisfactory to the Company. Therefore, the $1 million contract was terminated.
The Company purchases significant amounts of paper products and tubing, along with a number of different chemicals used in the manufacture of other hand wash solutions sold as part of the Company's FOAM CARE product line. There are many different suppliers of such chemicals, tubing, and paper products. Some paper product companies have been in short supply, but the Company has adjusted lead times and made other adjustments so that this has not presented a problem.
The Company also purchases different types of silicone materials from various suppliers. Depending upon the specific type of silicone involved, there are anywhere from a few to many sources. Some manufacturers have scaled back their supply of silicone materials which are implanted or placed in the human body for more than thirty days, in part because of legal problems surrounding silicone breast implants. So far, the Company has not had any serious difficulty obtaining needed silicone materials.
There are many potential sources of balloon materials used by the Company in MIC's enteral feeding product line, although MIC currently purchases substantially all of such balloons from one source.
PATENTS
The Company owns numerous patents with respect to its products and feels that these patents are extremely important to the Company's ability to compete effectively in the market place.
1. TRACH CARE
The Company owns 19 U.S. patents with respect to its TRACH CARE family of products. The expiration dates on these patents range from February, 2003 to January, 2011. The Company also has several U.S. and foreign patents pending covering various TRACH CARE improvements.
2. FOAM CARE
The Company's FOAM CARE products are protected by ten U.S. patents either owned or licensed by the Company, along with a number of foreign patents. The Company's U.S. patents expire between January, 1997 and August, 2011. The Company also has other U.S. and foreign patents pending, covering its FOAM CARE technology.
3. EASI-LAV
The Company owns five U.S. patents with respect to its EASI-LAV products, with expiration dates ranging from June, 2006 to July, 2011. There are also other pending U.S. and foreign patents.
4. BAL CATH
The Company's BAL Cath product is protected by four U.S. patents, all owned by the Company. Expiration dates range from August, 2009 to September, 2010. Other U.S. and foreign patent applications are also pending.
5. MIC
MIC's products are protected by ten U.S. patents owned by the Company, along with various foreign patents. The U.S. patents expire between January, 1999 and October, 2011. The Company also has other U.S. and foreign patents pending on MIC products, and is a licensee of certain patented technology under a License Agreement dated effective July 28, 1991 with Martin J. Winkler, M.D.
TRADEMARKS
1. BALLARD TRADEMARKS
Although patents and registered trademarks do not provide guaranteed protection, the Company believes that they are important to its competitive position in the health care marketplace. The Company's rights in a given trademark should last indefinitely, so long as the Company continues to use the mark to identify the particular product involved. Ballard owns numerous trademarks, including the following which have been registered in the U.S. Patent and Trademark Office:
2. MIC TRADEMARKS
MIC has registered the following trademarks with the United States Patent and Trademark Office, in addition to others pending:
The Company also maintains foreign trademark registrations in Australia, Belgium/Luxembourg, Canada, France, Germany, Spain, Switzerland and the United Kingdom. In addition, the Company has various other trademark registrations pending.
MANUFACTURING BACKLOG
Generally, all sales of product by the Company include terms requiring payment within thirty days. Product is typically not allowed to be returned unless defective or shipped in error. As of November 30, 1994, the Company had back orders of approximately $422,042, in contrast to approximately $440,600 in back orders at the same time in 1993. Back orders are generally filled within ten days. Most of these back orders are custom kits.
COMPETITION
Each of the Company's products competes in major markets within the health care industry. Many of the Company's competitors are larger and more established in the market place than the Company, and many competitors have larger research staffs, facilities, and marketing forces. However, the aggressive marketing and unique qualities of the Company's product lines continue to be well received and are helping the Company maintain, and in some cases, increase its portion of the market. The Company's market share and competition vary from product to product. The Company estimates there are approximately ten to fifteen competing companies for its FOAM CARE products and three or four competitors for its TRACH CARE products. Depending upon the specific product line, there are anywhere from no competitors to three or four competitors for MIC products. Each year, there are an increasing number of competitors for each of these product lines.
EMPLOYEES
The Company currently has 692 full-time employees, 420 of whom are hourly production employees.
During fiscal year 1993, the Company created two specialized sales forces with the goal being to increase market penetration. During the 1994 fiscal year, much training and stabilizing of the
sales force took place. The total sales force now numbers 122 U.S. sales representatives, split into a TRACH CARE/EASI-LAV sales force with 56 representatives and a FOAM CARE/MIC sales force with 51 representatives. In addition, there are 15 full-time Division Sales Managers and 11 international sales representatives.
MANUFACTURING AND WORKING CAPITAL
All of Ballard's products are assembled, and many component parts are manufactured, at the Company's premises, located in Draper, Utah, where Ballard has complete facilities for the design and construction of the Company's own tooling, prototype molds, and production molds. MIC's products are manufactured at its plant in Milpitas, California. The Company uses plastic injection molding and assembly techniques in the manufacture of each of its products.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of design engineers, project managers, and other employees for continuing research and development of products. We are committed to constantly searching for new products and for improvements to existing products, and we are committed to allocating sufficient resources to meet these important objectives. The following table sets forth the amounts expended by the Company in the last three fiscal years for Company-sponsored, in- house research and development activities:
ITEM 2.



ITEM 2. PROPERTIES
The Company owns a 276,000 square foot plant on approximately twenty acres of land in Draper, Salt Lake County, Utah. The Draper plant has housed our executive offices since March, 1991 and provides space needed for our current production. Through BREH, the Company also owns approximately one hundred acres of ground surrounding the original twenty acres.
MIC's plant (approximately 21,000 square feet) is a leased facility located at McCandless Technology Park, Milpitas, California. The plant is leased pursuant to a written lease whose term expires in July, 1998.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
GUARDIANSHIP OF CARMEN MARIE SMOOT v. BALLARD MEDICAL PRODUCTS, ET AL.
No material developments have occurred in this litigation since the filing of the Company's Form 10-Q for the quarter ended June 30, 1994. The parties continue to engage in the discovery process.
BALLARD MEDICAL PRODUCTS v. HUNTINGTON LABORATORIES, INC.
On or about December 15, 1994, Judge Bruce Jenkins, sitting in the United States District Court for the District of Utah, Central Division, denied the cross-motions for partial summary judgment filed by Huntington and Ballard on the grounds that he felt there was insufficient relevant evidence in the record to enable the court to rule. Judge Jenkins has given the parties thirty days to supplement the record and to request the court to reconsider their cross- motions for summary judgment. In the meantime, both parties are proceeding with discovery, in preparation for trial.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September 30, 1994, no matters were submitted to a vote of shareholders.
RISK FACTORS
The following risks should be considered in evaluating the Company and its shares and the financial information presented herein:
COMPETITION. A number of well-established medical products companies, both in the United States and abroad, with substantially greater capital resources and larger research and development staffs and facilities, and with substantially greater marketing systems, are engaged in the manufacture and sale of products
which compete with products of Ballard and its subsidiaries, and such other companies are engaged in research designed to reach similar goals as the Company. Such companies may succeed in developing and marketing similar products which are better than those of the Company and also may prove to be more successful than the Company in the manufacturing and marketing of their products. In recent months, the Company has reduced pricing for certain products in order to meet competition and the price reductions demanded by hospitals. In the future the results of the Company's operations could continue to be impacted by increased competition and continuing pricing pressures.
PATENTS. The Company owns certain patents and proprietary information acquired while developing their products, and they are licensees of certain other technology. One of the Company's early U.S. TRACH CARE patents has expired. 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 is no assurance that patents will be issued for products recently released into the marketplace or for products presently being developed. If patents of the Company are challenged, an adverse ruling could materially adversely affect the Company's sales and profits.
HEALTH CARE REFORM. Threatened government- mandated reforms continue to cause concern and uncertainty throughout the health care industry. The Company's future results of operations could be severely impacted by government reforms such as strict cost controls and other possible restrictions being considered by federal and state law makers.
RESEARCH AND DEVELOPMENT. In the continuing development of products, the Company spent $1,638,475, $1,345,052, and $1,047,048, for research and development in the fiscal years ended September 30, 1994, 1993, and 1992, respectively. The Company plans to continue spending substantial sums for research, development, and improvement of existing products and for research and development of new products. There is no assurance that research and development expenditures in the past or in the future will result in products which are
commercially viable so as to recoup related research and development costs or to allow the Company to continue to grow and be profitable.
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.
FDA REGULATION. Certain Company products are regulated by the United States Food and Drug Administration (FDA). The Company is required to adhere to existing standards for good manufacturing practices and to engage in extensive record keeping and reporting. The Company may be subject to additional FDA rules and regulations depending on the future products it develops. While the Company believes it will be able to satisfy FDA requirements with respect to its proposed and existing products, there can be no assurance that difficulties or excessive costs will not be encountered in the Company's efforts to secure necessary FDA approvals which would delay or preclude the Company from releasing and marketing such products. In addition, the extent of governmental regulation which may arise from future legislative or administrative action cannot be predicted.
PRODUCT LIABILITY. The Company's products are intended to be used on or around humans by competent medical personnel. In the event a patient develops medical problems in connection with the Company's products, the Company could be liable for substantial damages. The Company has product liability insurance, but there is no assurance that the Company would not be materially adversely affected from any claim which may be made, or judgment which may be entered, against it.
LACK OF DIVIDENDS. Prior to January, 1990, no dividends had been paid by the Company on its shares of Common Stock. The Company has paid dividends since January, 1990. However, there can
be no assurance that dividends will be paid on shares in the future.
UNCERTAINTY OF FINANCIAL RESULTS AND CAPITAL NEEDS. There may be substantial fluctuations in the Company's results of operations because of the timing and receipt of revenues and market acceptance of existing Company products. The ability of the Company to expand its manufacturing and marketing operations cannot be predicted with certainty. If revenues do not continue to increase as rapidly as they have in the past few years, or if manufacturing, marketing, 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 additional financing. There can be no assurance that the Company would be able to obtain timely additional financing in the amounts required or that such financing, if available, would be on terms advantageous to the Company.
SUPPLY OF RAW MATERIALS. Certain of the Company's products are dependent upon raw materials for which there are single or few sources. So far, the Company has not had any serious problems obtaining needed raw materials. However, there can be no assurance that the Company will be able to continue to depend on existing sources of certain materials. SEE "RAW MATERIALS" in Part I.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of this Part II is incorporated herein by reference from the Company's Annual Report.
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by Item 6 of this Part II is incorporated by reference from the Company's Annual Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 of this Part II is incorporated herein by reference from the Company's Annual Report.
ITEM 8.


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets as of September 30, 1994 and 1993 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1994 are incorporated herein by reference from the Company's Annual Report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements on accounting and financial disclosure to be disclosed under this Item 9.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information required by Item 10 related to Directors of the Company is incorporated herein by reference from the Proxy Statement.
EXECUTIVE OFFICERS
The President, Executive Vice President, Vice Presidents, Secretary, Treasurer, and General Counsel of Ballard Medical Products are elected annually at the regular meeting of the Board of Directors following the Annual Meeting of Shareholders and serve at the discretion of the Board of Directors. There is no arrangement or understanding between any executive officer and any other person pursuant to which he was or is to be selected as an officer. The business background for at least the past five years of each executive officer is as follows:
(1) See Proxy Statement, p. 16.
(2) Mr. Wolcott was appointed by the Board of Directors as Executive Vice President of Ballard in June, 1994. He was hired by the Company as General Manager in December, 1992. Prior to joining Ballard, he was employed by Pilot Cardiovascular Systems, Inc. in San Clemente, California, from April, 1991 until December, 1992, where he worked initially as Vice President of Operations and later as Chief Operating Officer. From April, 1990 to April, 1991, Mr. Wolcott provided consulting services to various medical device companies. From January, 1987 until April, 1990, Mr. Wolcott worked for Catheter Technology Corporation of Salt Lake City, Utah, as Vice President of Manufacturing.
(3) See Proxy Statement, p. 17.
(4) Mr. Bell was appointed Vice President of Sales and Marketing on August 1, 1994. He served as Director of Marketing for Ballard since October, 1991. Prior to coming to work for Ballard, Mr. Bell worked for Bard Access Systems (formerly named Davol/Cath Tech, Inc.), where he served as Director of Marketing from the fall of 1988 until October, 1991.
(5) Mr. Sorenson joined the Company in July, 1985. He has worked in the Company's accounting department since joining the Company. He became Treasurer of the Company in August, 1985. Mr. Sorenson is a graduate of Brigham Young University in Accounting.
(6) See Proxy Statement, p. 17.
ITEMS 11, 12, and 13.
The information required by Items 11, 12 and
13 of this Part III is incorporated herein by reference from the Proxy Statement.
PART IV
ITEM 14.




ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF REPORT
1. CONSOLIDATED FINANCIAL STATEMENTS
The following are included in the Annual Report incorporated by reference into Parts I and II of this report:
Independent Auditor's Report, dated November 11, 1994;
Consolidated Statements of Operations for the Years Ended September 30, 1994, 1993, and 1992;
Consolidated Balance Sheets as of September 30, 1994 and 1993;
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1993 and 1992;
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994, 1993, and 1992;
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following are included in this report:
Independent Auditors' Report dated November 11, 1994;
Supplemental Schedule I - Short-Term Investments as of September 30, 1994;
Supplemental Schedule VIII - Valuation Accounts for the Three Years Ended September 30, 1994;
Supplemental Schedule X - Supplemental Income Statement Information for the Three Years Ended September 30, 1994;
Other schedules required by Rule 5.04 of Regulation S-X are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or related notes.
3. EXHIBITS
See "Ballard Medical Products Index to Exhibits" attached to this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1994.
(c) EXHIBITS
See "Ballard Medical Products Index to Exhibits" attached to this report.
(d) SEPARATE FINANCIAL STATEMENT SCHEDULES
Not applicable.
INDEMNIFICATION UNDERTAKING
For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 No. 2-90684 (filed April 24, 1984); No. 2-94306 (filed November 9, 1984); No. 33-0840 (filed October 17, 1985); No. 33-17698 (filed October 9, 1987); No. 33-25628 (filed November 8, 1988); No. 33-36851 (filed September 17, 1990; No. 33-41720 (filed July 10, 1991); No. 33-56302 (filed December 24, 1992); and No. 33-73194 (filed December 20, 1993).
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: 12/15/94 BALLARD MEDICAL PRODUCTS
By: Dale H. Ballard President, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: December 15, 1994 By: Dale H. Ballard Director
Date: December 15, 1994 By: E. Martin Chamberlain Director
Date: December 15, 1994 By: Dale H. Ballard, Jr. Director
Date: December 15, 1994 By: Paul W. Hess Director
Date: December 15, 1994 By: Kenneth R. Sorenson Treasurer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Ballard Medical Products:
We have audited the consolidated financial statements of Ballard Medical Products and subsidiaries as of September 30, 1994 and 1993, and for each of the three years in the period ended September 30, 1994, and have issued our report thereon dated November 11, 1994, which report includes an explanatory paragraph as to the change in the Company's method of accounting for income taxes; such consolidated financial statements and report are included in your 1994 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Ballard Medical Products and subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
Deloitte & Touche LLP Salt Lake City, Utah November 11, 1994
SUPPLEMENTAL SCHEDULE I BALLARD MEDICAL PRODUCTS SHORT-TERM INVESTMENTS SEPTEMBER 30, 1994
SUPPLEMENTAL SCHEDULE VIII BALLARD MEDICAL PRODUCTS VALUATION ACCOUNTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1994
SUPPLEMENTAL SCHEDULE X BALLARD MEDICAL PRODUCTS SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE THREE YEARS ENDED SEPTEMBER 30, 1994
BALLARD MEDICAL PRODUCTS
Index to Exhibits