UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
AMENDED AND RESTATED
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the Fiscal Year ended December 31, 1993
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the transition period from to
Commission file number 0-7059
INTERNATIONAL RESEARCH AND DEVELOPMENT CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 38-1688261
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 North Main Street, Mattawan, Michigan 49071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(616) 668-3336
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.50 par value
(Title of Class)
Indicate by check mark whether 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 twelve 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. YES NO X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. X
As of February 28, 1994, there were 5,606,706 shares of Common Stock, $0.50
par value, outstanding.
The registrant estimates that the aggregate market value of the registrant's
Common Stock on February 28, 1994 (based upon the last sales price of the
Common Stock on February 28, 1994) held by nonaffiliates was approximately
$18,222,000.
Certain portions of the Registrant's Proxy Statement for the 1994 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.
PART I
ITEM 1. BUSINESS.
GENERAL
International Research and Development Corporation, a Delaware corporation
(the "Corporation"), was originally incorporated in Michigan in June 1962,
and reincorporated in Delaware in May 1970. The Corporation operates an
independent contract research laboratory engaged primarily in pre-clinical
safety evaluation studies of drugs and their components, primarily to assess
the hazards to humans and animals involved in the use of such compounds.
The Corporation has diversified its interests while expanding its sales and
services through the incorporation of the IRAD Corporation in 1985, the
purchase of a specialty medical products and services company (Medical
Surgical Specialties, Ltd.) in June 1989, and the purchase of a specialty
skin care products company (Carme, Inc.) in January 1990. In its operation
of the specialty skin care products company, the Corporation continues to
develop new formulations which will be marketed through the Allercreme
trademark and under the Carme name. In addition, in the development of these
new products, the Corporation strives to create formulations that utilize
patentable technology.
The Corporation has three business segments in which it operates: safety
evaluation research; specialty skin care products; and specialty medical
products and services. The following tables summarize industry segment data
as of and for the years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993
MEDICAL
SKIN CARE PRODUCTS
RESEARCH PRODUCTS AND CONSOLIDATED
SERVICES
<S> <C> <C> <C> <C>
Revenues:
Domestic $19,564,000 $ 9,052,000 $3,050,000 $31,666,000
Export:
Japan 5,590,000 32,000 5,622,000
Other 199,000 1,093,000 1,292,000
TOTAL $25,353,000 $10,177,000 $3,050,000 $38,580,000
Operating earnings $ 2,309,000 $(1,407,000) $ 268,000 $ 1,170,000
(loss)
Depreciation and $ 1,862,000 $ 1,132,000 $ 61,000 $ 3,055,000
amortization
Property and equipment
acquisitions $ 1,579,000 $ 128,000 $ 61,000 $ 1,768,000
Identifiable assets $22,829,000 $22,363,000 $1,682,000 $46,874,000
1992
MEDICAL
SKIN CARE PRODUCTS
RESEARCH PRODUCTS AND CONSOLIDATED
SERVICES
Revenues:
Domestic $16,211,000 $ 9,441,000 $ 1,857,000 $27,509,000
Export:
Japan 5,203,000 44,000 5,247,000
Other 596,000 1,033,000 1,629,000
TOTAL $22,010,000 $10,518,000 $ 1,857,000 $34,385,000
Operating earnings $ 834,000 $ (308,000)$ (30,000) $ 496,000
(loss)
Cumulative effect of
change in accounting $ 409,000 $(4,312,000) $(3,903,000)
principle
Depreciation and $ 1,850,000 $ 1,134,000 $ 65,000 $ 3,049,000
amortization
Property and equipment
acquisitions $ 1,410,000 $ 50,000 $ 5,000 $ 1,465,000
Identifiable assets $22,859,000 $23,352,000 $ 1,416,000 $47,627,000
1991
MEDICAL
SKIN CARE PRODUCTS
RESEARCH PRODUCTS AND CONSOLIDATED
SERVICES
Revenues:
Domestic $14,096,000 $11,996,000 $ 708,000 $26,800,000
Export:
Japan 5,978,000 51,000 6,029,000
Other 210,000 1,594,000 1,804,000
TOTAL $20,284,000 $13,641,000 $ 708,000 $34,633,000
Operating earnings $ 1,091,000 $ 1,619,000 $ (267,000) $ 2,443,000
(loss)
Depreciation and $ 1,801,000 $ 1,153,000 $ 53,000 $ 3,007,000
amortization
Property and equipment
acquisitions $ 1,898,000 $ 90,000 $ 15,000 $ 2,003,000
Identifiable assets $21,324,000 $24,764,000 $ 1,243,000 $47,331,000
</TABLE>
The Corporation's businesses are not subject to exchange rate risk because
export activity is conducted solely in U.S. dollars. Operating earnings
(loss) represents total operating revenue less all operating expenses
directly associated with the segment's operating revenue. Interest income
and expense associated with overall corporate financing activities are
excluded from segment data. General corporate expenses presently are not
significant, and there are no material separately identifiable corporate
assets at December 31, 1993, 1992 or 1991.
SAFETY EVALUATION RESEARCH
The Corporation's clients include companies in the pharmaceutical,
veterinary, and agricultural industries located in the United States, certain
European and Pacific rim countries as well as U.S. governmental agencies. In
connection with its pre-clinical safety evaluation (toxicology) studies, the
Corporation consults with its clients to establish the experimental design or
protocol of the study to be done. The protocol includes such things as the
duration of the study, the species and number of subjects to be used, dosage
levels to be employed and the specific observations and examinations to be
made during and at the conclusion of the study.
The studies performed by the Corporation are often requested by clients in
response to the requirements of various regulatory agencies (such as the Food
and Drug Administration, the Environmental Protection Agency and their
counterparts in foreign countries) relative to the safety for use of drugs
and other drug components. The results of these tests are generally
submitted to the applicable agencies as part of a petition to obtain approval
to market the compound. In recent years, as technological advancements have
been made, the complexity of the tests required to establish the safety of
new compounds has increased.
Compounds most frequently evaluated include pharmaceutical and veterinary
drugs and veterinary feed additives. Compounds to be evaluated are supplied
to the Corporation by its clients and are administered to one or more species
of common laboratory animals. The Corporation obtains animals for its
research projects from recognized and licensed scientific dealers.
In addition to determining a safe dosage level, studies are designed to
determine the extent of the toxicological effects, if any, produced by the
compounds. Studies generally range in duration from a few hours to several
years. The majority of the Corporation's revenues historically have been
derived from studies exceeding one year in length.
A typical study program is initiated when a client contacts the Corporation
with a description of such matters as the compound to be tested, the nature
of the study program, and the agency to which it may be submitted for
approval. The Corporation and the client develop a protocol to be followed,
agree on a price and, thereafter, the client forwards the test material to
the Corporation. The Corporation receives periodic payments from its clients
over the duration of a study rather than at completion. Each study is
assigned to a Study Director who manages the conduct of the study to assure
that test material administration, observations, analyses and reports are in
accordance with the protocol. Frequent contact is made with the client
regarding the progress of the program.
Further assurance of compliance with the protocol is achieved through audits
conducted by the Corporation's quality assurance department which is
administered separately from the research division of the Corporation. A
study program culminates in delivery of a written report of the results to
the client.
The Corporation's clinical research subsidiary, IRAD, conducts studies in the
area of safety evaluation for clients in the pharmaceutical, chemical, and
cosmetic related industries. It performs Phase I through Phase IV clinical
trials in pharmaceutical products, as well as bioequivalency and
bioavailability studies for the generic drug industry.
Marketing
The Corporation has performed studies for approximately 375 clients since
January 1, 1980, and is not financially dependent on any particular one.
During 1993, the Corporation performed studies for 111 of these clients.
Approximately 77% of the Corporation's 1993 revenues were derived from
domestic clients and 23% from foreign clients, as compared to 74% and 26%,
respectively, in 1992 and 69% and 31%, respectively, in 1991. The majority
of new studies conducted by the Corporation are derived from existing
clients. To assist in obtaining new clients, the Corporation solicits
potential clients directly and participates at various scientific association
gatherings. Further, the Corporation has a sales and marketing department
which is focused on both the promotion of its pre-clinical services to
potential clients who are presently not familiar with the Corporation's
services, and to expanding services to those who already are clients.
Personnel
The Corporation believes that its success is in large part dependent on the
quality of its scientific staff. The Corporation has approximately 400 full-
time employees, of whom approximately 260 are scientists and laboratory
technicians. The employees are not represented by any collective bargaining
unit. The Corporation's employees represent expertise in a broad variety of
scientific disciplines. To ensure the high level of competence required of
the Corporation's employees and the use of standardized procedures, a
vigorous training and recruitment program is maintained. The Corporation
considers its relationship with employees to be good.
Facilities
The Corporation's primary research facility and executive offices are owned
by the Corporation and located on approximately one hundred and ten acres in
Mattawan, Michigan. The principal structure is a modern, cinder-block
building which has approximately 286,000 square feet. The Corporation
believes that this facility has sufficient capacity to handle additional
business over that obtained in 1993.
The Corporation makes extensive use of technologically advanced equipment
permitting it to carry out a broad range of evaluations. The majority of
these devices transmit data directly to computer systems for storage,
analysis and reporting. The Corporation believes it is among the leaders in
the development and usage of sophisticated computerization to better serve
its clients.
In 1989, the IRDC Florida Corporation (a wholly owned subsidiary) purchased
a 20,000 square foot building in the Billy Creek Commerce Center in Fort
Myers, Florida to develop for IRAD's use. IRAD now utilizes approximately
8,000 square feet of space in the IRDC Florida Corporation facility which was
remodeled to accommodate the housing of IRAD's patients in a hospital
environment. The facility contains modern equipment for the conduct of
clinical studies.
Competition
The Corporation's competitors in the safety evaluation business include other
research and safety evaluation laboratories, some of which have greater
financial resources, engage in more diversified activities or have more
personnel than the Corporation. The Corporation also competes with
universities and other nonprofit institutions which engage in research and
safety evaluation. Many of the Corporation's clients have their own research
facilities for studies which might otherwise be conducted by the Corporation.
The Corporation believes that the principal areas of competition include
price, quality and promptness of services, range of studies which may be
conducted, qualifications of scientific personnel and availability of
laboratory facilities.
Regulation
The Corporation is regulated by the State of Michigan Department of Public
Health and the United States Department of Agriculture with respect to the
care, use and sale of laboratory animals. The Corporation's facilities have
been registered with these departments and are inspected periodically. The
facilities are also subject to inspections by the United States Food and Drug
Administration and the Environmental Protection Agency. The Corporation is
licensed and subject to federal and state regulation with respect to the use
of narcotics and alcohol. The Corporation deems these licenses to be
important to the conduct of its business.
The Corporation has potential exposure to liability for improper performance
of studies. Such liability may be to the client for whom the Corporation
performed the study or potentially to injured third parties (such as
consumers of pharmaceuticals) who suffer personal injury due to a defective
product. To date, the Company has not experienced any such liability.
IRAD is regulated by the United States Food and Drug Administration and the
Florida Department of Health and Rehabilitation Services. It possesses all
licenses for the conduct of clinical research.
SPECIALTY SKIN CARE PRODUCTS
Carme, Inc. manufactures health and beauty aids and color cosmetics. Certain
products produced by Carme are marketed under its own name as well as the
Mill Creek, Jojoba Farms, Biotene H-24, and Sleepy Hollow brand names. Its
Allercreme product line comprises approximately 150 separate skin care
products marketed exclusively to chain and independent drug stores,
supermarkets, and directly to dermatologists. The product line is marketed
in the hypo-allergenic category. Its DuBarry product line contains cleansing
creams and other skin care products for women above the age of 35.
Prior to 1991, Carme was unable to register the name "Carme" because of a
prior registration of a similar name. As the predecessor's registration has
not been renewed, a new application was filed by Carme in 1991 and
registration of the name was granted in 1992.
In addition to the "Carme" registration, the Company holds federal trademark
registrations for the following tradenames:
Allercreme DuBarry Mill Creek Jojoba Farms
Biotene H-24 MoisturEyes Silver Fox Country Roads
Loanda Sleepy Hollow Botanicals Mountain Herbery
Carme purchases raw materials required in the manufacturing and packaging of
its products from a number of suppliers. Carme considers its relationship
with its suppliers to be good. It has not experienced and does not
anticipate any delays or shortages in obtaining required raw materials.
Sales and Marketing
Carme markets and sells its products through a series of national brokers.
In addition, Carme directly employs an eight member internal sales force.
The national broker system sells Carme and other manufacturers' products to
numerous retail outlets, including such retail chains as Safeway, Revco, Fred
Meyer, Long's, Payless, Walgreens, and Eckerd's. Contracts with commission
brokers are subject to a 30-day cancellation clause by either party. Carme
provides support for its distributors and representatives through direct
contact with customers and participation in industry trade shows. Carme's
products are also currently distributed in Canada, England, Australia, Japan,
France, Saudi Arabia, Chile, Hong Kong, Korea, Norway, Taiwan, Singapore and
Spain.
Carme allocates approximately 5% of its revenues to advertising with
additional funds devoted to product promotion as needed to effectively
develop markets. These expenditures are charged to operations in the year in
which they are incurred. Such expenditures are considered to be an
investment, the benefits of which relate in part to the year in which the
expenditure is incurred and in part to future years. A large expenditure in
one particular year has the effect of reducing income for that year for the
benefit in part of future years, while during the same year benefits are
derived from previous years' advertising and promotion expenditures.
Carme advertises primarily through trade journals, magazines and newspapers.
Advertising and product promotion expenditures relating to new products will
ordinarily constitute a higher percentage of sales than in the case of a
well-established product. There can be no assurance that such expenditures
will result in consumer acceptance and profitability for a product.
Personnel
Carme employs approximately 70 people of whom 8 are engaged in sales, 47 in
production, product development and quality control, and 15 in administration
and customer service. Carme is not a party to any collective bargaining
agreement and considers its relationship with its employees to be good.
Facilities
Carme leases office and manufacturing facilities totaling 17,000 square feet
and warehouse and distribution centers of 41,000 square feet at current
monthly total rentals of approximately $36,000 under operating lease
agreements which expire in 1998.
Competition
The cosmetic and beauty aids industry is competitive, particularly in the
mass market, although no one company dominates the industry. Carme presently
competes in the market for hair care, skin care and cosmetic products sold
through health food stores, nutrition centers and food and drug chains.
Well-known companies competing in this market include Jason, Rachel Perry,
Nature's Gate, Revlon, Vidal Sassoon and Clairol, among many others. Major
competitive factors in this market include product recognition, quality,
price and advertising support. Certain of Carme's competitors have greater
resources enabling them to develop more extensive distribution networks and
to fund more extensive research and development and advertising programs than
Carme. Carme believes that certain of its products have a competitive
advantage in the health food stores and nutrition center markets because, as
a prime manufacturer, Carme is able to carefully control quality and
availability of its products.
Regulation
The cosmetics industry is subject to regulation by the United States Food and
Drug Administration (FDA) and the California Department of Health
Services Food and Drug Branch and, as a consequence, Carme is subject to
periodic inspection of its facilities, equipment and products. Carme is also
subject to advertising/labeling regulations promulgated by the Federal Trade
Commission (FTC) in the packaging of its products. Carme follows various
quality control procedures and believes it is in compliance with applicable
FDA, California Department of Health Services and FTC regulations.
SPECIALTY MEDICAL PRODUCTS AND SERVICES
Medical Surgical Specialties, Ltd. specializes in the custom repair of
fiberoptic and surgical medical products and the distribution of specialty
products to aid disabled individuals. These services and products are sold
through distributors, marketing representatives and directly to hospitals
through a telemarketing sales force. Medical products sold generally are
manufactured to specifications of Medical Surgical Specialties, Ltd. by third
party suppliers.
The Company's products include Door Aid(TM), a power door opener. The Door-
Aid(TM) product is marketed as an affordable option to provide disabled
individuals with access to facilities. Recently, there has been national
media attention given to the Americans with Disabilities Act which has
focused on, among other matters, the installation of door-assist devices in
most public and private facilities used by the handicapped.
Marketing
Medical Surgical Specialties, Ltd. markets its products through sales to
selected distributors and on a direct basis. Potential customers also are
contacted through mass mailings, end-user magazines and conventions directed
at meeting the needs of handicapped persons.
Personnel
Medical Surgical Specialties, Ltd. employs 22 people with 17 employed in
sales and marketing and 5 employed in administrative and clerical duties.
Facilities
Medical Surgical Specialties, Ltd. leases 3,400 square feet of office space
in a complex located in Kalamazoo, Michigan.
Item 1A. Executive Officers of Registrant.<F1>
The executive officers of the Corporation, all of whose terms of office will
expire on May 27, 1994, are as follows:
<TABLE>
<CAPTION>
POSITION WITH THE YEAR FIRST ELECTED
NAME AGE CORPORATION TO PRESENT POSITION
<S> <C> <C> <C>
Francis X. Wazeter, 69 President and 1962
Ph.D. Chief Executive
Officer and
Chairman of the
Board
Francis X. Wazeter, III, 37 Executive Vice 1986 - Secretary
J.D. President, Chief 1988 - Vice
Operating Officer President
and Secretary 1990 - Executive
Vice President
1991 - Chief
Operating Officer
</TABLE>
Dr. Wazeter and Mr. Wazeter, III, have been Directors of the Corporation
since 1962 and 1986, respectively. Francis X. Wazeter, III is the son of Dr.
Wazeter.
ITEM 2. PROPERTIES.
See "Facilities" included in Item 1 appearing on pages 4, 6 and 7 of this
Form 10-K for additional information regarding the Corporation's facilities
and the facilities of the Corporation's subsidiaries.
ITEM 3. LEGAL PROCEEDINGS.
There is no material pending legal proceeding to which the Corporation is a
party or to which any of its property is subject, which in the view of
Management could reasonably be expected to have a material adverse effect on
the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Corporation's stockholders during
the fourth quarter of the fiscal year covered by this report.
<F1> Pursuant to Instruction 3 to Item 401(b) of Regulation S-K
under the Securities Exchange Act of 1934.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's Common Stock is traded on the Over-The-Counter Market
(National Market System) and its NASDAQ symbol is IRDV. The quarterly high
and low bid prices for the Corporation's Common Stock and the dividends paid
during each quarter for the last two years are as follows:
<TABLE>
<CAPTION>
1993
DIVIDENDS PAID
QUARTER HIGH LOW PER SHARE
<S> <C> <C> <C>
First $3.38 $2.25 $0.01
Second 3.00 2.25 0.01
Third 3.25 2.31 0.01
Fourth 4.88 2.50 0.01
1992
DIVIDENDS PAID
QUARTER HIGH LOW PER SHARE
First $5.25 $3.50 $0.05
Second 4.25 2.75 0.01
Third 3.25 2.13 0.01
Fourth 2.88 1.88 0.01
</TABLE>
The above prices are based upon quotations as reported by the Midwest Edition
of the Wall Street Journal and represent inter-dealer prices with no
provision for dealer markup, markdown or commission and may not necessarily
represent actual transactions.
At February 28, 1994, there were 867 holders of record of the Corporation's
Common Stock, $0.50 par value.
Pursuant to the terms of various loan agreements for outstanding borrowings,
the Corporation is required to maintain certain financial ratios and exceed
stipulated levels of stockholders' equity ($14,097,000 at December 31, 1993).
Retained earnings of $169,000 at December 31, 1993, were unrestricted as to
the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1992 1991 1990 1989
(in thousands, except per share data)
OPERATING STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Operating revenues:
Research $25,353 $22,010 $20,284 $21,504 $25,185
Products/Services 13,227 12,375 14,349 13,461
Total 38,580 34,385 34,633 34,965 25,185
Operating earnings (loss):
Research 2,309 834 1,091 3,490 5,764
Products/Services (1,139) (338) 1,352 1,158
Total 1,170 496 2,443 4,648 5,764
YEAR ENDED DECEMBER 31
1993 1992 1991 1990 1989
(in thousands, except per share data)
Earnings (loss) before
income taxes and
cumulative effect of
change in accounting
principle $ 1 $ (795) $ 1,002 $ 3,362 $ 6,726
Cumulative effect of
change in accounting
principle (3,903)
Net earnings (loss) 71 (4,330) 530 2,124 4,455
Average shares outstanding
5,608 5,570 5,554 5,626 5,724
Earnings (loss) per share:
Before cumulative effect
of change in accounting
principle
.01 (.08) .10 .38 .78
Cumulative effect of
change in accounting
principle
(.70)
Net earnings (loss) per
share .01 (.78) .10 .38 .78
Dividends per share .04 .08 .20 .20 .20
BALANCE SHEET DATA:(2)
Total assets $46,874 $47,627 $47,331 $47,186 $58,281
Long-term debt 12,625 10,140 10,957 11,643 13,840
Stockholders' equity 14,266 14,284 18,491 18,904 18,559
</TABLE>
The following factors effect the comparability of the above financial
information:
(1) On August 11, 1989, the Corporation acquired approximately 49% of the
common stock of Carme, Inc. and completed the purchase of all of Carme's
remaining common shares in January 1990.
(2) The Corporation adopted the provisions of Financial Accounting Standard
No. 109, "Accounting for Income Taxes" in 1992 and elected not to
restate prior years' financial data. (refer to Note I to the
consolidated financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992
As demonstrated in the following narrative, the year ended December 31, 1993
was one characterized by growth in revenue for the Corporation, as compared
to 1992. Consolidated 1993 operating revenues increased $4,195,000 (12%)
over 1992 amounts. This increase stemmed from a $3,343,000 (15%) increase in
research revenues and a $852,000 (7%) increase in product sales/services.
Research revenues increased primarily due to an increase in the number of
ongoing studies over comparable 1992 levels. The increase in product
sales/services consisted of a $1,192,000 (64%) increase in specialty medical
products and services revenue and a $340,000 (3%) decrease in skin care
products revenue. The revenue increase in specialty medical products and
services stemmed primarily from increased distribution and expansion of
medical specialty repairs, as well as continued growth in sales of the Door-
Aid power door opener. Although the overall revenue levels in the skin care
products business continue to lag behind expectations, management is please
with the steady growth experienced in the health food market (up 14% over
1992 levels). This growth has resulted primarily from the introduction and
market acceptance of several new products (including 2-in-1 for Kids, Just
Clear, and Mill Creek Bath Gels).
Cost of research services and products sold increased $2,346,000 (10%) of
which $1,547,000 (9%) related to research services and $799,000 (13%) related
to cost of products sold and repair services. The increase in cost of
research services resulted primarily from the increase in the related
research revenues discussed above. More importantly, for the year ended
December 31, 1993, the cost of research services as a percentage of the
related revenues decreased by over 4% compared to 1992. Management feels
that this improvement is attributable to its strategic program to provide
enhanced study quality at lower cost. The increase in 1993 cost of products
sold and repair services over 1992 levels resulted primarily from the above-
described increase in sales revenues in the specialty medical products and
services business. The cost of products sold and repair services as a
percentage of the related revenues increased by almost 3% compared to 1992.
This increase resulted principally from the change in the mix of
products/services sold during 1993 (principally the impressive sales growth
in the specialty medical products and services business which has a lower
gross profit percentage than most skin care products).
The gross profit percentage for the research business increased from 21% in
1992 to 25% in 1993. The improvement in the gross margin was primarily the
result of the variation in the absorption of fixed and semi-variable costs
that resulted from the increase in research revenues in 1993. As discussed
above, the gross margin percentage for the product sales/services businesses
decreased by 3% as a result of the change in mix of products/services sold in
1993.
Selling, general and administrative expenses increased $1,175,000 (11%) in
1993 primarily due to increased advertising, product promotions, commissions
and other related variable selling expenses associated with the increased
sales volume in our specialty medical products/services business. In
addition, increased promotion and advertising costs were expended in 1993 by
the skin care products business in an attempt to stimulate the growth of its
revenues. Consolidated selling, general and administrative expenses as a
percentage of consolidated operating revenues were 30% in both 1993 and 1992.
Operating earnings increased $674,000 (136%) for the year, including a
$1,475,000 (177%) increase in the research business and a $801,000 (237%)
decrease in the product businesses. These changes are directly attributable
to the above-described factors.
Interest expense decreased $232,000 (16%) from 1992 levels as a result of a
mid-1992 refinancing of significantly all bank debt at variable interest
rates which continued to decline throughout 1993.
The Corporation realized earnings before income taxes of $1,000 in 1993,
compared to a loss of $795,000 before income taxes and a mandated change in
accounting principle in 1992. Net earnings totaled $71,000 for 1993,
compared to a net loss of $4,330,000 (an operating loss of $427,000 and a
one-time cumulative charge against earnings in the amount of $3,903,000
related to the adoption of Financial Accounting Standard No. 109, "Accounting
for Income Taxes") for 1992. The 1993 income tax credit of $70,000 is
comprised of a currently payable consolidated federal tax liability of
$86,000 (principally alternative minimum tax) and a deferred California
credit of $156,000 applicable to the skin care business.
YEAR ENDED DECEMBER 31, 1992 VERSUS YEAR ENDED DECEMBER 31, 1991
Operating revenues in 1992 decreased $248,000 (1%) from 1991. However,
individually, research revenues increased by $1,726,000 (9%) and product
sales/services decreased by $1,974,000 (14%). Research revenues increased
from 1991 levels due to the commencement in 1992 of studies that had been
authorized in 1991, but deferred by sponsors until 1992, and as a result of
new business which was generated from proactively marketing the Corporation
and its services. The decrease in product sales/services from 1991 levels
relates principally to reduced sales of skin care products due to a 1992
change in the sales distribution system from an internal direct sales effort
to an external broker network. This period of transition resulted in a one-
time lack of representation of skin care products in certain regions of the
United States, thereby reducing sales volumes. However, the restructuring of
the sales force was expected to provide a greater opportunity for more
meaningful product distribution and stronger sales growth in the future.
Sales of specialty products and related repair services increased by
$1,149,000 (162%) over 1991 levels as a result of increased distribution and
expansion of medical specialty repairs.
Cost of research services and products sold increased $1,757,000 (8%)
including a $2,004,000 increase related to research services and a $248,000
decrease related to cost of products sold and repair services. The increase
in cost of research services is due mainly to increases in expenditures for
animals/subjects ($536,000), personnel and fringe benefit costs ($458,000),
and supplies ($572,000). The increase in animal/subject expenditures stems
from the increase in study initiations in 1992, as discussed above. The
increase in personnel cost completes Management's 2-year planned program to
upgrade its professional and technical staff, as well as wage rate increases
needed to meet competitive levels. The 1992 increase in cost of supplies is
directly associated with the Corporation's strategy to acquire and utilize
premier, specialty supplies in an effort to obtain a wider variety of studies
for the pharmaceutical industry. The decrease in cost of products and
services sold was modest, and results primarily from the change in the
product mix of items sold.
The gross profit percentage from research services decreased from 24% in 1991
to 21% in 1992 primarily because of the increase in study initiations in 1992
which resulted in a corresponding increase in study initiation costs (e.g.,
animal costs, special supplies, etc.). The gross profit percentage from
product sales and services decreased from 56% in 1991 to 51% in 1992, as a
result of the change in mix of products sold and because the lower level of
product sales did not result in the same absorption of fixed and semi-
variable costs in 1992 as compared to 1991.
Selling, general and administrative expenses remained relatively stable in
1992, decreasing only $58,000 (<1%) from 1991 amounts. Such expenses were
30% of operating revenues in 1992 and 1991.
Operating earnings decreased $1,947,000, with $257,000 stemming from the
research services and $1,690,000 from the product and medical services
businesses. These decreases resulted from the same factors explained above
related to the decline in the gross profit percentages and to increases in
selling and promotional costs.
Interest expense decreased by $187,000 in 1992 over 1991 levels principally
as a result of the 1992 refinancing of significantly all bank debt at lower
variable interest rates than in effect in 1991.
Earnings before income taxes decreased $1,796,000 due to the same factors as
those causing the decrease in operating earnings. Net earnings decreased
from $530,000 to a loss of $4,330,000 reflecting the aforementioned decreases
in operating earnings, as well as a one-time $3,903,000 cumulative charge
against earnings resulting from the mandated adoption of Financial Accounting
Standard No. 109, "Accounting for Income Taxes". For 1992, the effective tax
rate was 46% of the pre-tax loss, as compared to 47% of the pre-tax income in
1991.
OTHER OPERATING MATTERS
As a result of our continuing market strategy of developing long-term
relationships with our clients, the combined pre-clinical and clinical
research businesses were able to maintain a progressive trend in the
acquisition of new research programs. Consequently, the research segment was
able to boost earnings and maintain a significant backlog of business for
future growth. New studies authorized in 1993 of approximately $25 million
fell well within our goal for the year.
Authorized studies generally are conducted over a period of time ranging up
to several years and, in certain instances, are subject to cancellation. At
March 1, 1994, the "backlog" of studies authorized approximated $30 million,
as compared with $33 million at the same date in 1993. Studies which have
been authorized to commence or are currently in progress, as of March 1,
1994, should generate revenues for 1994 of approximately $19 million,
compared with studies of similar status, as of March 1, 1993, which were
estimated to generate 1993 revenues of $21 million. Additional 1994 study
revenues will be generated from the Corporation's continued marketing efforts
during the balance of its fiscal year.
LIQUIDITY AND SOURCES OF CAPITAL
The ratio of current assets to current liabilities was 1.11 at December 31,
1993 and .88 at December 31, 1992, including $2,447,000 and $2,567,000,
respectively, of advance billings on studies in progress. The Corporation's
contracts generally require that a portion of the study price be paid at the
date a study is initiated with the balance paid in installments over the
study duration. Historically, sponsor payments of advance billings have been
an important factor in meeting liquidity requirements. However, with the
lengthening of billing schedules now required to meet sponsor demands, bank
borrowings have become a more important source of meeting operational needs.
In December 1993, the Corporation completed the renewal of its existing line
of credit agreement with a bank. As part of this process, the Corporation
elected to convert $4,000,000 of its then outstanding line of credit
borrowings to a five-year term loan requiring monthly principal payments of
$33,333 through December 1998 with the balance of $2,000,000 due December 22,
1998. This debt conversion was the primary reason for the dramatic
improvement in the Corporation's ratio of current assets to current
liabilities, discussed above.
The new term loan bears interest at the base lending rate, plus 1/2% (6.5% at
December 31, 1993). However, the interest rate can be fixed from time to
time at the three-month London Interbank Offered Rate (LIBOR), plus two
hundred and forty basis points (5.78% at December 31, 1993). The new line of
credit agreement allows for borrowings up to the lesser of $5,500,000 or
amounts determined in accordance with certain asset-based debt limitation
formulas. Borrowings under the line bear interest at the base lending rate.
The interest rate on the line of credit may also be fixed from time to time
at the three-month LIBOR rate, plus one hundred ninety basis points on
advances up to $3,000,000. Additional advances can be fixed at the three-
month LIBOR rate, plus two hundred forty basis points. The line is subject
to review and renewal by the bank on December 22, 1994.
The Corporation also has two mortgage notes payable. One of the mortgage
notes in the principal amount of $8,978,000 at December 31, 1993, requires
monthly payments of $67,543 through December 1996 with the balance of
$6,550,000 due in January 1997. This loan bears interest at the base lending
rate, plus 3/4% (6.75% at December 31, 1993). The other mortgage note
requires monthly payments of $9,272 through December 1994, including interest
at 7.65%, with the balance of $600,000 due January 1995.
Current financial resources (including approximately $450,000 available on
the existing line of credit with banks and approximately $325,000 of
available borrowings against cash surrender value of life insurance
policies), plus anticipated results of operations are expected to be adequate
to fund working capital needs for 1994.
Property acquisitions in 1993 totaled $1,768,000 which related primarily to
continuing technology enhancements and automation. During 1992 and 1991, the
Corporation spent approximately $1,465,000 and $2,000,000, respectively,
primarily to upgrade research facilities and for related equipment and
technology enhancements.
IMPACT OF INFLATION AND CHANGING PRICES
Generally, the Corporation recognizes the significance of inflation by
passing increased costs on to clients and customers by increases in prices to
the extent permitted by competition. Anticipated higher prices for
replacement of property, land and equipment are also considered in price-
setting policies. Inflation has not had a material impact on results of
operations for the last several years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item with respect to financial statements of the
Corporation is submitted in a separate section of this report.
SUMMARY OF QUARTERLY OPERATING RESULTS
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
Operating revenues $9,556,562 $9,621,292 $9,242,278 $10,159,403
Gross profit 3,319,793 3,410,493 2,912,705 3,110,334
Earnings (loss) before 267,891 259,468 (233,122) (293,160)
income taxes
Net earnings (loss) 173,591 175,768 (125,122) (153,160)
Net earnings (loss) per $0.03 $0.03 $(0.02) $(0.03)
share
1992
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
Operating revenues $8,198,404 $7,884,041 $8,559,659 $9,742,529
Gross profit 2,707,750 2,091,295 2,858,250 3,246,844
Earnings (loss) before
cumulative effect of (141,287) (465,820) 50,030 130,551
accounting change
Net earnings (loss) (4,044,287) (465,820) 50,030 130,551
Earnings (loss) per
share:
Before cumulative
effect of accounting $(0.03) $(0.08) $0.01 $0.02
change
Cumulative effect of
change in accounting (0.70)
principle
Net earnings (loss) per $(0.73) $(0.08) $0.01 $0.02
share
</TABLE>
The quarterly operating results for the first quarter of 1992 (as previously
reported on Form 10-Q) have been restated above to reflect the adoption of
FASB Statement No. 109, "Accounting for Income Taxes." In addition,
adjustments in the fourth quarter of 1992, related principally to income
taxes, increased net earnings by approximately $54,000 ($0.01 per share).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No information is required to be reported under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this Item as to executive officers of the
Corporation is contained in Item 1A hereof. The remainder of the information
required under this Item is incorporated by reference to the section in the
definitive proxy statement (the "Proxy Statement") relating to the 1994
Annual Meeting of Stockholders entitled "Election of Directors".
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this Item is incorporated by reference to the
section in the Proxy Statement entitled "Remuneration of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this Item is incorporated by reference to the
sections in the Proxy Statement entitled "Stock and Principal Holders
Thereof" and "Election of Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this Item is incorporated by reference to the
section in the Proxy Statement entitled "Election of Directors".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed herewith:
(1) Financial Statements -- The information required by this section of
Item 14 is submitted in a separate section of this report.
(2) Financial Statement Schedules -- The information required by this
section of Item 14 is submitted in a separate section of this
report.
(3) Exhibits
3(a). Restated Certificate of Incorporation, as amended,
incorporated herein by reference from exhibit 3(a)
to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31,1989.
3(b). By-Laws, incorporated herein by reference from
Exhibit 3(b) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31,
1987.
4(a). Business Loan Agreement between the Corporation and
Michigan National Bank of Battle Creek, dated
December 22, 1993.
4(b). Bank Loan Agreement between the Corporation and NCNB
National Bank, dated December 31, 1991, incorporated
herein by reference from Exhibit 4(c) to the
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10(c)(1). International Research and Development Corporation
Performance Bonus Plan, as amended and restated,
incorporated herein by reference from Exhibit
10(c)(1) to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10(c)(2). International Research and Development Corporation
1978 Option Incentive Plan, as amended and restated,
incorporated herein by reference from Exhibit
10(c)(2) to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10(c)(3). International Research and Development Corporation
1990 Stock Option Plan for Non-Employee Directors,
as adopted May 31, 1991, incorporated herein by
reference from Exhibit 10(c)(3) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(c)(4). International Research and Development Corporation
Supplemental Retirement Plan, incorporated herein by
reference from Exhibit 10(c)(4) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(c)(5)(i). Employment Agreement between the Corporation and Dr.
Francis X. Wazeter, dated July 27, 1990,
incorporated herein by reference from Exhibit
10(c)(3) to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
10(c)(5)(ii). Amendment, dated March 22, 1993, to Amended and
Restated Employment Agreement between the
Corporation and Dr. Francis X. Wazeter, incorporated
herein by reference from Exhibit 10(c)(5) to the
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
10(c)(6). Employment Agreement between the Corporation and Mr.
Francis X. Wazeter, dated July 27, 1990,
incorporated herein by reference from Exhibit
10(c)(4) to the Corporation's Report on Form 10-K
for the fiscal year ended December 31, 1990.
10(c)(7). Non-Qualified Stock Option granted by the
Corporation to Dr. Francis X. Wazeter on October 26,
1990, incorporated herein by reference from Exhibit
10(c)(5) to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
10(c)(8). Non-Qualified Stock Option granted by the
Corporation to Mr. Francis X. Wazeter, III, on
October 26, 1990, incorporated herein by reference
from Exhibit 10(c)(6) to the Corporation's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1990.
11. Computation of per share earnings.
21. List of Subsidiaries
(b) Reports on Form 8-K -- There were no reports on Form 8-K filed for the
three months ended December 31, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this amendment to
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL RESEARCH AND DEVELOPMENT
CORPORATION (Registrant)
/s/ Curtis L. Dally
Curtis L. Dally, Treasurer
Dated September 25, 1995
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Financial Statements and Supplementary Data
Financial Statement Schedules
Certain Exhibits
Year ended December 31, 1993
International Research and Development Corporation
Mattawan, Michigan
International Research and Development Corporation and Subsidiaries
Form 10-K Item 14(a)(1) and (2)
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of International Research and
Development Corporation and subsidiaries are submitted herewith in response
to Item 8:
Unaudited Consolidated Balance Sheets - December 31, 1993 and 1992
Unaudited Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1993, 1992 and 1991
Unaudited Consolidated Statements of Operations - Years ended
December 31, 1993, 1992, and 1991
Unaudited Consolidated Statements of Cash Flows - Years ended
December 31, 1993, 1992 and 1991
Notes to Unaudited Consolidated Financial Statements - December 31, 1993
The following consolidated financial statement schedules of International
Research and Development Corporation and subsidiaries are submitted herewith
in response to Item 14(d):
Schedule V - Property plant and equipment
Schedule VI - Accumulated depreciation, depletion and amortization of
property, plant and equipment
Schedule VIII - Valuation and qualifying accounts
Schedule X - Supplementary income statement information
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
instructions, are inapplicable, or such information has been presented in the
notes to unaudited consolidated financial statements, and therefore have been
omitted.
International Research and Development Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE> DECEMBER 31
<CAPTION>
(UNAUDITED)
1993 1992
ASSETS
Current assets:
<S> <C> <C>
Cash $ 37,892 $ 191,414
Receivables (Note D) 6,342,919 6,516,179
Unbilled revenues on studies in progress 2,078,057 2,205,636
Inventories (Notes B and D) 4,503,763 3,821,376
Prepaid expenses and other assets 2,076,193 1,685,462
Total current assets
15,038,824 14,420,067
Property and equipment (Note D)
Land 512,50 512,500
Buildings 13,324,552 13,281,293
Equipment 15,555,117 14,735,574
Less accumulated depreciation 29,392,169 28,529,367
Other assets:
Trademarks, tradenames and
other intangibles (Notes C and D) 16,557,063 17,495,569
Cash value of life insurance,
less policy loans of $314,000 (Notes E) 841,499 799,389
Other (Note G) 849,060 1,012,010
18,247,622 19,306,968
$46,874,186 $47,626,691
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line-of-credit borrowings (Note D) $ 4,750,000 $ 8,600,000
Accounts payable 3,336,166 2,594,409
Advance billings on studies in progress 2,446,691 2,567,440
Accrued expenses and other liabilities (Note E) 1,560,810 1,709,822
Current maturities of long-term debt 1,430,991 943,826
Total current liabilities 13,524,658 16,415,497
Long-term debt, less current 12,624,809 10,139,683
maturities (Note D):
Deferred income taxes 5,737,000 5,881,000
Reserve for employee benefits 722,200 906,200
Stockholders' equity (Note F):
Common Stock, $0.50 par value:
Authorized - 16,000,000 shares
Outstanding - 5,606,706 shares 2,803,353 2,803,353
Additional paid-in capital 2,627,429 2,627,429
Retained earnings (Note D) 9,103,337 9,256,529
Less loan to Employee Stock Ownership Plan (268,600) (403,000)
(Note G)
14,265,519 14,284,311
</TABLE>
See accompanying notes to consolidated financial statements.
International Research and Development Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
LOAN TO
EMPLOYEE
ADDITIONAL STOCK
PAID-IN RETAINED OWNERSHIP
COMMON STOCK CAPITAL EARNINGS PLAN
<S> <C> <C> <C> <C>
Balances at January 1, 1991 $2,740,329 $2,239,791 $14,594,861 $(921,000)
Net earnings for 1991 529,530
Cash dividends paid $0.20 (1,096,432)
per share
Common stock issued (7,000
shares) in exercise of 3,500 16,625
stock options
Loan repayment from Employee
Stock Ownership Plan $ 134,000
Balances at December 31, 1991 2,743,829 2,256,416 14,027,959 (537,000)
Net loss for 1992 (4,329,526)
Cash dividends paid $0.08 (441,904)
per share
Common stock issued (1,000
shares) in exercise of 500 2,375
stock options
Transfer of 118,047 shares of
common stock from treasury
to Employee Saving and 59,024 368,638
Investment Plan
Loan repayment from Employee
Stock Ownership Plan 134,000
Balances at December 31, 1992 2,803,353 2,627,429 9,256,529 (403,000)
Net earnings for 1993 71,077
Cash dividends paid $0.04 (224,269)
per share
Loan repayment from Employee
Stock Ownership Plan (134,400)
Balances at December 31, 1993 2,803,353 $2,627,429 $9,103,337 $(268,600)
(Unaudited)
</TABLE>
( ) Denotes deduction.
See accompanying notes to consolidated financial statements.
International Research and Development Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(UNAUDITED)
1993 1992 1991
<S> <C> <C> <C>
Operating revenues:
Research services $25,352,914 $22,010,168 $20,283,895
Product sales and services 13,226,621 12,374,465 14,348,853
38,579,535 34,384,633 34,632,748
Cost of research services and
products sold:
Research services 18,957,977 17,410,922 15,406,447
Products and services sold 6,868,233 6,069,572 6,317,127
Gross profit 12,753,325 10,904,139 12,909,174
Selling, general and 11,583,525 10,408,097 10,466,014
administrative expenses
Operating earnings 1,169,800 496,042 2,443,160
Other income (expense):
Interest expense (1,249,932) (1,481,829) (1,669,134)
Interest and other income 81,209 191,261 227,504
(1,168,723) (1,290,568) (1,441,630)
Earnings (loss) before income
taxes and cumulative 1,077 (794,526) 1,001,530
effect of change in accounting
principle
Income taxes (credit) (Note H):
Current, including state income
taxes of $(4,000) in 1992 and 86,000 (320,000) 330,000
$106,000 in 1991
Deferred (156,000) (48,000) 142,000
(70,000) (368,000) 472,000
Earnings (loss) before
cumulative effect of change in 71,077 (426,526) 529,530
accounting principle
Cumulative effect of change in
accounting principle (Note H) (3,903,000)
Net earnings (loss) $71,077 $(4,329,526) $ 529,530
Earnings (loss) per share:
Before cumulative effect of
change in accounting principle $0.01 $(0.08) $0.10
Cumulative effect of change in (0.70)
accounting principle
Net earnings (loss) per share $0.01 (0.78) $0.10
</TABLE>
See accompanying notes to consolidated financial statements.
International Research and Development Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(UNAUDITED)
1993 1992 1991
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 71,077 $(4,329,526) $ 529,530
Adjustments to reconcile net earnings
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 3,055,195 3,048,801 3,006,882
Cumulative effect of change in 3,903,000
accounting principle
Deferred income taxes (credit) (156,000) (48,000) 142,000
Deferred employee benefits (184,000) (142,000) (150,000)
Change in operating assets and
liabilities:
Receivables and unbilled revenues 300,839 (1,021,142) (2,070,554)
on studies in progress
Inventories (682,387) (209,986) 701,545
Other operating assets (291,254) (472,130) (251,923)
Accounts payable 757,121 (23,005) (20,275)
Advance billings on studies in (120,749) 243,194 (2,351,177)
progress
Accrued expenses and other operating (88,903) 39,026 146,886
liabilities
Net cash provided by (used in) 2,660,939 988,232 (317,086)
operating activities
INVESTING ACTIVITIES
Property and equipment acquisitions (1,768,355) (1,464,732) (2,003,315)
Other (78,528) (62,608) (278,906)
Net cash used in investing activities (1,846,883) (1,527,340) (2,282,221)
FINANCING ACTIVITIES
Line of Credit borrowings 150,000 2,253,000 3,867,000
Long-term borrowings 133,300 776,000
Proceeds from life insurance policy 313,967
loans
Receipt from Employee Stock Ownership 134,400 134,000 134,000
Plan
Payments of long-term debt (1,027,709) (1,635,687) (1,853,218)
Proceeds from exercise of stock 2,875 20,125
options
Cash dividends paid (224,269) (441,904) (1,096,423)
Net cash provided by (used in) (967,578) 445,584 2,161,442
financing activities
Decrease in cash (153,522) (93,524) (437,865)
Cash at beginning of year 191,414 284,938 722,803
Cash at end of year $ 37,892 $ 191,414 $ 284,938
</TABLE>
( ) Denotes use of cash.
See accompanying notes to consolidated financial statements.
International Research and Development Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
December 31, 1993, 1992 and 1991
NOTE A - BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
International Research and Development Corporation (the Corporation) conducts
safety evaluation research studies of pharmaceutical and veterinary drugs,
agricultural products, and chemicals. Studies are performed on behalf of
various manufacturers of such products, both foreign and domestic, and on
behalf of governmental agencies. Clinical safety evaluation studies are
conducted on behalf of clients in the pharmaceutical, chemical and cosmetic-
related industries through its subsidiary, IRAD Corporation.
The Corporation also manufactures and distributes cosmetics and skin care
products through its subsidiary, Carme, Inc. (Carme), as well as certain
medical products and services and other specialty products through another of
its subsidiaries, Medical Surgical Specialties, Ltd. The following tables
summarize industry segment data as of and for the years ended December 31,
1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993
SKIN CARE MEDICAL PRODUCTS
RESEARCH PRODUCTS AND SERVICES CONSOLIDATED
<S> <C> <C> <C> <C>
Revenue:
Domestic $19,564,000 $ 9,052,000 $3,050,000 $31,666,000
Export:
Japan 5,590,000 32,000 5,622,000
Other 199,000 1,093,000 1,292,000
Total $25,353,000 $10,177,000 $3,050,000 $38,580,000
Operating earnings $ 2,309,000 $(1,407,000) $ 268,000 $ 1,170,000
(loss)
Depreciation and $ 1,862,000 $ 1,132,000 $ 61,000 $ 3,055,000
amortization
Property and equipment
acquisitions $ 1,579,000 $ 128,000 $ 61,000 $ 1,768,000
Identifiable assets $22,829,000 $22,363,000 $1,682,000 $46,874,000
1992
SKIN CARE MEDICAL PRODUCTS
RESEARCH PRODUCTS AND SERVICES CONSOLIDATED
Revenue:
Domestic $16,211,000 $ 9,441,000 $1,857,000 $27,509,000
Export:
Japan 5,203,000 44,000 5,247,000
Other 596,000 1,033,000 1,629,000
Total $22,010,000 $10,518,000 $1,857,000 $34,385,000
Operating earnings $ 834,000 $ (308,000) $ (30,000) $ 496,000
(loss)
Cumulative effect of
change in accounting $ 409,000 $(4,312,000) $(3,903,000)
principle
Depreciation and $ 1,850,000 $ 1,134,000 $ 65,000 $ 3,049,000
amortization
Property and equipment
acquisitions $ 1,410,000 $ 50,000 $ 5,000 $ 1,465,000
Identifiable assets $22,859,000 $23,352,000 $1,416,000 $47,627,000
1991
SKIN CARE MEDICAL PRODUCTS
RESEARCH PRODUCTS AND SERVICES CONSOLIDATED
Revenue:
Domestic $14,096,000 $11,996,000 $ 708,000 $26,800,000
Export:
Japan 5,978,000 51,000 6,029,000
Other 210,000 1,594,000 1,804,000
Total $20,284,000 $13,641,000 $ 708,000 $34,633,000
Operating earnings $ 1,091,000 $ 1,619,000 $( 267,000) $ 2,443,000
(loss)
Depreciation and $ 1,801,000 $ 1,153,000 $ 53,000 $ 3,007,000
amortization
Property and equipment
acquisitions $ 1,898,000 $ 90,000 $ 15,000 $ 2,003,000
Identifiable assets $21,324,000 $24,764,000 $ 1,243,000 $47,331,000
</TABLE>
Operating earnings (loss) represents total operating revenue less all
operating expenses directly associated with the segment's operating revenue.
Interest income and expense associated with overall corporate financing
activities are excluded from segment data. General corporate expenses
presently are not significant, and there are no separately identifiable
corporate assets at December 31, 1993, 1992 and 1991.
The following are the Corporation's significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets.
ADVANCE BILLINGS AND UNBILLED RECEIVABLES
Advance billings under a contract represent pre-billings for services not yet
performed, whereas unbilled receivables ($2,078,000 in 1993 and $2,206,000 in
1992) arise from those contracts under which billings can be rendered only
upon the achievement of certain contract stages or upon submission of the
appropriate billing detail.
REVENUE RECOGNITION
Revenue from research services is recognized as work is performed over the
duration of each study based on the completion of services actually rendered
during the various segments of each study. Revenue from product sales are
recognized as shipments are made.
INCOME TAXES
Effective January 1, 1992, deferred income tax assets and liabilities are
determined by applying currently enacted tax laws and rates to the cumulative
temporary differences between the carrying value of assets and liabilities
for financial statement purposes and amounts used for income tax purposes
(see Note I). Deferred income tax expense or credit is measured by the change
in the deferred income tax asset and liability accounts during the year.
Prior to January 1, 1992, the provision for income taxes was determined under
the deferred method whereby deferred income tax expense resulted from timing
differences between taxable income and earnings (loss) reported in the
consolidated financial statements.
NET EARNINGS PER SHARE
Net earnings per share are based on the weighted average number of shares of
common stock and dilutive common stock equivalents (stock options)
outstanding (5,607,622 shares in 1993, 5,570,237 shares in 1992 and 5,554,108
shares in 1991).
NOTE B - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1993 1992
<S> <C> <C>
Finished goods $1,829,000 $1,390,000
Components and packaging 1,718,000 1,511,000
Raw materials and supplies 957,000 920,000
$4,504,000 $3,821,000
</TABLE>
NOTE C - TRADEMARKS, TRADENAMES AND OTHER INTANGIBLES
Trademarks, tradenames and other intangible assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31
1993 1992
<C> <C>
<S> $12,575,000 $12,575,000
Trademarks and tradenames $12,575,000 $12,575,000
Goodwill 4,162,000 4,162,000
Other intangibles 3,792,000 3,727,000
20,529,000 20,464,000
Less accumulated amortization 3,972,000 2,968,000
$16,557,000 $17,496,000
</TABLE>
Tradenames and trademarks are stated on the basis of their estimated fair
value determined by appraisal at the date of acquisition. Goodwill represents
the cost of acquired companies over the estimated fair value of tangible and
identifiable intangible assets at the dates of acquisition. Amortization of
intangibles is computed using the straight-line method, with trademarks and
tradenames amortized over periods ranging from twenty to thirty years,
goodwill amortized over thirty years and other intangibles amortized
generally over five to ten years.
NOTE D - BORROWINGS
In December 1993, the Corporation completed the renewal of its existing line
of credit agreement with a bank. As part of this process, the Corporation
elected to convert $4,000,000 of its then outstanding line of credit
borrowings to a five-year term loan requiring monthly principal payments of
$33,333 through December 1988 with the balance of $2,000,000 due December 28,
1988. This term loan bears interest at the base lending rate, plus 1/2%
(6.50% at December 31, 1993). However, the interest rate can be fixed from
time to time at the three-month London Interbank Offered Rate (LIBOR), plus
two hundred and forty basis points (5.78% at December 31, 1993). The new
line of credit agreement allows for borrowings up to the lesser of $5,500,000
or amounts determined in accordance with certain asset-based debt limitation
formulas. Borrowings under the line bear interest at the base lending rate.
The interest rate on the line of credit may also be fixed from time to time
at the three-month LIBOR rate, plus one hundred ninety basis points on
advances up to $3,000,000. Additional advances can be fixed at the three-
month LIBOR rate, plus two hundred forty basis points.
Borrowings under the line are collateralized by a security agreement covering
accounts receivable, inventories, patents, trademarks and other intangibles.
The bank has also agreed to issue letters of credit at the Corporation's
request up to an aggregate of $500,000 to secure payment to suppliers. The
amount of any outstanding letters of credit ($300,000 at December 31, 1993)
reduces available borrowings under the Corporation's line of credit. At
December 31, 1993, $750,000 was available for future borrowings under the
line of credit. The line is subject to review and renewal by the bank on
December 22, 1994.
At December 31, 1993, the effective interest rate for outstanding line of
credit borrowings was 5.3%. During 1993, the average monthly amount of short-
term borrowings outstanding was $8,300,000 at an average interest rate of
5.16%, and the maximum amount outstanding during the year was $9,200,000.
During 1992, the average monthly amount of short-term borrowings outstanding
was $7,700,000 at an average interest rate of 6.2%, and the maximum amount
outstanding during the year was $8,800,000.
Long-term debt consists of the following obligations:
<TABLE>
<CAPTION>
DECEMBER 31
1993 1992
<S> <C> <C>
Mortgage notes payable to banks $ 9,646,000 $10,514,000
Working capital term note 4,000,000
Note payable to bank 403,000 537,000
Other 7,000 33,000
14,056,000 11,084,000
Less current maturities 1,431,000 944,000
$12,625,000 $10,140,000
</TABLE>
The Corporation has two existing mortgage notes payable. One of the mortgage
notes, in the principal amount of $8,978,000 at December 31, 1993, requires
monthly payments of $67,543 through December 1996 with the balance of
$6,550,000 due in January 1997. This loan bears interest at the base lending
rate, plus 3/4% (6.75% at December 31, 1993). The other mortgage loan
requires monthly payments of $9,272 through December 1994, including interest
at 7.65%, with the balance of $600,000 due January 1995. These loans are
collateralized by mortgages on the Corporation's land and buildings which
have a net carrying value of approximately $5,272,000 at December 31, 1993.
The note payable to bank requires monthly interest payments at 83% of the
base lending rate (5% at December 31, 1993) and ten equal annual principal
payments of $250,000 through 1995. The note may be prepaid at any time. The
original proceeds under the agreement were loaned to the Corporation's
Employee Stock Ownership Plan for the purchase of the Corporation's common
stock (see Note G).
The line of credit and long-term debt agreements require, among other things,
the maintenance of certain financial ratios and consolidated stockholders'
equity of at least $14,097,000. Retained earnings of $169,000 at December 31,
1993 were unrestricted as to the payment of dividends.
Interest expense for each of the three years in the period ended December 31,
1993 approximates the amounts paid in each of those years.
Required principal payments of long-term debt outstanding as of December 31,
1993 will be as follows subsequent to 1994: $2,068,000 in 1995; $1,211,000 in
1996; $6,946,000 in 1997 and $2,400,000 in 1998.
NOTE E - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE> 1993 1992
<CAPTION>
<S> <C> <C>
Compensation and amounts withheld $ 700,000 $ 620,000
therefrom
Taxes, other than income taxes 867,000 942,000
Other (6,000) 148,000
$1,561,000 $1,710,000
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY
The Corporation has 500,000 shares of $1 par value preferred stock
authorized, none of which are outstanding.
The Corporation has an incentive and nonqualified stock option plan. Under
the Plan, options are granted at the fair value at the date of grant and
generally become exercisable after one year from date of grant. Options may
be granted with stock appreciation rights.
Option activity for 1993 and 1992 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options outstanding at January 1, 1992 357,172 $2.88 - $5.25
Canceled (61,200) 2.88 - 5.25
Granted 41,000 3.75
Exercised (1,000) 2.88
Options outstanding at December 31, 1992 357,172 2.88 - 5.25
Canceled (66,450) 2.88 - 5.25
Granted 5,000 3.25
Options outstanding at December 31, 1993 295,722 $2.88 - $5.25
</TABLE>
At December 31, 1993, twenty-two individuals held incentive options with an
average option price of $4.29 per share. Options expire on dates ranging from
January 27, 1994 to February 5, 2003. Options for 290,722 shares were
exercisable at December 31, 1993, and 248,078 shares were reserved for future
option grants.
Options have also been granted to two executive officers under a separate
nonqualified stock option arrangement. Each option for 200,000 shares at
$4.75 per share was exercisable when granted and expires October 26, 2000. In
addition, pursuant to the 1990 Stock Option Plan for Non-Employee Directors
approved by stockholders in 1991, options for 200,000 shares were reserved
for issuance and 20,000 shares at $4.75 per share have been granted to each
of the Corporation's six nonemployee directors. Under this plan, options for
120,000 shares are exercisable, of which options for 100,000 shares expire
October 26, 2000 and 20,000 shares expire January 31, 2001. At December 31,
1993, 600,000 shares of common stock are reserved for future issuance under
these arrangements.
NOTE G - EMPLOYEE BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan covering
its employees. Benefits are based on an employee's years of service and
compensation. The Corporation's contributions are intended to provide for
benefits attributed to service to date, which includes current service cost
and amortization of prior service cost.
The following table sets forth the funded status of the Corporation's defined
benefit pension plan and amounts recognized in the consolidated balance
sheet:
<TABLE> DECEMBER 31
<CAPTION>
1993 1992
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $2,007,000 in 1993 and $2,315,000 $ 3,457,000
$2,375,000 in 1992
Projected benefit obligation for $2,628,000 $(3,687,000)
service rendered to date
Plan assets at fair value, primarily
money market funds in 1993 and
guaranteed income contracts with 3,839,000 4,602,000
insurance companies in 1992
Plan assets in excess of projected 1,211,000 915,000
benefit obligation
Unrecognized net gain from past
experience different from that assumed (833,000) (533,000)
and effects of changes in assumptions
Unrecognized prior service cost 479,000 515,000
Unrecognized net assets from transition (317,000) (357,000)
Net noncurrent pension asset recognized $ 540,000 $ 540,000
in balance sheet
</TABLE>
At December 31, 1993 and 1992, the defined benefit pension plan held 150,000
shares of the Corporation's common stock having a cost of $606,000. The fair
value of this stock was $487,500 at December 31, 1993 and $431,000 at
December 31, 1992.
Net pension cost (credit) includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1992 1991
<S> <C> <C> <C>
Service cost for benefits earned $ 215,000 $ 216,000 $ 181,000
Interest cost on projected 229,000 296,000 257,000
benefit obligation
Return on plan assets (385,000) (26,000) (407,000)
Net amortization and deferral (59,000) (447,000) (136,000)
Net pension cost (credit) $ 0 $ 39,000 $(105,000)
</TABLE>
The rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 3% in 1993,
1992 and 1991, and the discount rate was 7% in 1993 and 8.25% in 1992 and
1991. The expected long-term rate of return on plan assets was 9% in 1993 and
1992 and 9.5% in 1991. In 1992, the definition of normal retirement within
the Plan was amended. This amendment increased the projected benefit
obligation by $404,000.
The Corporation has an Employee Saving and Investment Plan which provides
that participating employees (196 at December 31, 1993) may make basic
contributions to the Plan in amounts ranging from 1% to 6% of their
compensation (as defined). The participants also may make supplemental
contributions not exceeding 10% of their compensation. The Plan permits the
Corporation to make contributions of up to 200% of the participants' basic
contributions. Such contributions may consist of the Corporation's common
stock (118,047 shares contributed in 1992 with an aggregate fair value of
$427,662 at the date of contribution) and cash to be deposited with a trustee
for the purchase thereof ($214,000 in 1993, $218,000 in 1992 and $176,000 in
1991). The Corporation's contributions generally become vested by the
participant at rates ranging from 10% to 20% per year for each year of
service.
The Corporation also has an Employee Stock Ownership Plan which is a defined
contribution plan. Employees are eligible to participate in the Plan after
attaining 21 years of age and completing one year of service. Contributions
to the Plan are at the discretion of the Corporation, except that a minimum
contribution is required to allow the Plan to make annual principal and
interest payments on the loan from the Corporation used to purchase 800,000
shares of the Corporation's common stock (see Note D). Dividends paid to the
Plan and used for debt service approximated $27,000 in 1993, $50,000 in 1992
and $134,000 in 1991. Contributions to the Plan were $146,000 in 1993 and
$124,000 in 1992. There were no contributions to the Plan in 1991. The
unpaid balance of the loan due from the Plan has been reflected as a
reduction of stockholders' equity.
The Corporation provides certain supplemental health care benefits for
approximately 10 retired employees. These benefits are contributory and are
provided through a self-insured arrangement. The cost of retiree health care
benefits is recognized as an expense as claims are incurred and was not
significant to operating results. Effective January 1, 1994, the Corporation
will not provide future retirees with supplemental health care benefits.
NOTE H - INCOME TAXES
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
FASB Statement No. 109, Accounting for Income Taxes. As permitted under the
new rules, 1991 financial statements have not been restated to reflect this
change in accounting method.
The cumulative effect of adopting Statement No. 109 as of January 1, 1992 was
to decrease net earnings by $3,903,000 ($0.70 per share). Application of the
new income tax rules did not have a significant impact on 1992 operating
results as compared to that which would have been recognized under the
deferred method of accounting for income taxes.
The Corporation's deferred income tax liabilities and assets in 1993 and 1992
include the following significant components:
<TABLE> YEAR ENDED DECEMBER 31
<CAPTION>
1993 1992
<S> <C> <C>
Deferred income tax liabilities:
Book-tax basis differences on $3,987,000 $4,140,000
acquired intangibles
Book-tax basis differences on 1,630,000 1,621,000
property and equipment
Book-tax basis differences on 125,000 131,000
inventories
Deferred employee benefits 216,000 254,000
Other - net 288,000 70,000
Total deferred income tax liabilities 6,246,000 6,216,000
Deferred income tax assets:
Accrued employee benefits 289,000 419,000
Net operating loss carryforward 87,000 75,000
Other - net 209,000 145,000
Total deferred income tax assets 585,000 639,000
Net deferred income tax liabilities $5,661,000 $5,577,000
</TABLE>
The components of deferred income tax expense in 1991 under the deferred
method result from the following:
<TABLE>
<CAPTION>
<S> <C>
Depreciation and amortization $ 67,000
Inventory valuation adjustments 96,000
State income taxes (32,000)
Employee benefits (30,000)
Other expense items 41,000
$142,000
</TABLE>
A reconciliation of the federal statutory income tax rate with the
Corporation's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1992 1991 1990
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
Effect of significant reconciling
items:
Nondeductible book-tax basis 4,382.9 5.9 15.8
differences
State income taxes (6,802.2) (3.7) 8.0
ESOP dividends (857.8) (2.2) (4.6)
Exempt export income (6,313.8) (3.1) (4.6)
Other - net 3,057.4 (9.2) (1.5)
Effective tax rate (6,499.5)% (46.3)% 47.1%
</TABLE>
The Corporation made net income tax payments of $335,000 in 1993 and $302,000
in 1992 and received income tax refunds of $186,000 in 1991.
NOTE I - LEASES
The Corporation leases certain office and warehouse facilities under
operating lease arrangements. Rent expense for all operating leases totaled
$722,000 in 1993, $619,000 in 1992 and $600,000 in 1991. Future minimum lease
commitments under these leases are as follows subsequent to 1993: $532,000 in
1994; $523,000 in 1995; $503,000 in 1996; $513,000 in 1997; and $339,000 in
1998.
NOTE J - LITIGATION
The Corporation and its subsidiaries are subject to lawsuits and claims
arising out of their business. These lawsuits are in the very early stages of
litigation, but management, after review and consultation with counsel,
believes that the liability, if any, from these matters would not materially
affect the consolidated financial position of the Corporation.