SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 JUNE 30, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) For the transition Period from to
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Commission file number 0-6944
RESEARCH INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0277827
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
6864 SO. 300 WEST, MIDVALE, UTAH 84047
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (801) 562-0200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information state-
ments incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant (based on the closing sale price of $25.00 on August 31, 1995 and for
the purpose of this computation only, the assumption that all registrant's
directors and executive officers are affiliates) was approximately $235 million.
The number of shares of the registrants common stock $.50 par value, outstanding
as of August 31, 1995, was 9,440,816.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for use in connection with its
annual meeting of shareholders to be held on November 3, 1995 are incorpor-
ated by reference into Part III.
<PAGE>
RESEARCH INDUSTRIES CORPORATION
PART I
ITEM 1: BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Research Industries Corporation was incorporated under Utah Law in 1968. As
used in this report, except as otherwise indicated in information incorp-
orated by reference, "Research" means Research Industries Corporation and
the "Company" means Research and its subsidiaries.
The Company is engaged in the development, manufacture and distribution of a
diversified line of health care products, focusing on specialized
cardiovascular, vascular and blood management surgical devices and specialty
pharmaceuticals. Products are manufactured by the Company in two facilities
located in the United States and sold in many countries. Health care is
concerned with the preservation of health and with the diagnosis, cure,
mitigation, treatment and prevention of disease and body defects and
deficiencies. The Company's more than 450 products are used principally by
hospitals, clinical and medical research laboratories and doctors' offices.
The Company has real estate holdings remaining from its early years of
operations. These assets are being liquidated in an orderly manner
contributing to the Company's cash and investment position.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See page 27 of the financial statements included under Item 8 of this Form
10-K for financial information about segments.
(C) NARRATIVE DESCRIPTION OF BUSINESS
HEALTH CARE ACTIVITIES
The Company concentrates its health care activities in developing and
manufacturing disposable cardiovascular, vascular, blood management devices
and specialty pharmaceutical products. Research Medical, Inc. ("RMI", a
wholly owned subsidiary) develops, manufactures and markets the disposable
medical devices and markets pharmaceutical products including RIMSO-50O and
a biological preservative agent, CryoservO. RMI also has an agreement with
IVAX/McGaw, Inc. for McGaw's custom mixed "blood cardioplegia" solutions per
physician prescriptions. Tera Pharmaceuticals, Inc., ("Tera", a wholly
owned subsidiary) manufactures RIMSO-50O and CryoservO for sale to RMI and
it provides contract manufacturing of sterile solutions for sale in OEM
markets.
Current Developments
Heparin Removal Device (HRD):
In July of 1994, the Company received approval of a Phase II grant in the
amount of $500,000 from the National Institutes of Health, Heart, Lung & Blood
Institute (NIH). The purpose of the grant is to complete human clinical
testing and scale up manufacturing processes for commercialization of a
heparin removal application of the Company's Selective Sorbent Technology.
This technology provides an alternative for the removal of heparin from the
blood stream following cardiopulmonary bypass surgeries. The current practice
neutralizes heparin through the application of a drug, protamine sulfate,
which can cause unpredictable adverse reactions in a substantial number of
patients. The Company's new technology will allow heparin to be removed from
the blood extracorporeally (outside the body) replacing the need for the
problematic drug therapy to neutralize heparin.
In the later part of fiscal 1995, clinical trials began in Switzerland to test
HRD in humans. These trials are the first of approximately 60 randomized
open-heart patients to be completed in two foreign locations. The Company
hopes to begin U.S. human trials in fiscal 1996. The Company entered into a
manufacturing arrangement with an ISO-9000 validated manufacturer in the
Netherlands to assemble its HRD for distribution in foreign markets.
The Company reached an agreement with Cobe Nephross B.V./Gambro in July 1994
to purchase all the assets required for the manufacture of certain components
of the HRD. The purchase included the molding equipment for the hollow fiber
filter membrane, an exclusive license agreement and the Pre-market Approval
(PMA) for U.S. sales of the components.
Vascular Products:
The Company initiated a new vascular surgery product line during 1995 with the
first product being IschemiaAlertTM, an ischemic limb (oxygen-starved)
disposable blood-flow sensor and bedside monitor. The Company acquired
worldwide distribution rights to this FDA-approved product from Zertl Medical,
Inc. IschemiaAlertTM is the first disposable device specifically designed to
continuously, quantitatively monitor blood flow in the foot's pedal artery,
enabling surgeons to make better limb salvage decisions. The product is
designed for use during and after surgical and diagnostic procedures in which
there is an increased risk that blood flow through peripheral leg arteries
might be compromised.
Subsequent to the introduction to IschemiaAlertTM, the Company supplemented
its vascular line with the acquisition of Imodex, Inc. The combination was
accounted for as a pooling-of-interests transaction. The Company issued
26,700 shares for distribution to Imodex shareholders. Imodex sold carotid
artery balloon shunts for use in endarterectomies (cleaning plaque from neck
arteries). In connection with the acquisition, the Company introduced a line
of non-balloon carotid shunts which makes it the only full-line, single source
supplier of these vascular devices. These products are targeted toward the
same vascular surgeons as those using the IschemiaAlertTM, allowing the
Company to maximize the benefit of its distribution systems.
Cirkuit-GuardTM:
The FDA recently authorized a 510-K for Cirkuit-GuardTM, a pressure-relief
safety value designed for use on roller-type pumps used in approximately two-
thirds of the world's 700,000 open-heart procedures each year, as well as a
cardioplegia circuit model.
The BioFilterTM:
In June of 1995, the Company signed a license agreement with Althin Medical, a
leading manufacturer of blood filtration dialysis devices, to distribute a
newly developed cardiovascular hemoconcentrator. A hemoconcentrator is a dis-
posable device to remove excess fluids from a patient's blood during open-
heart surgery, which can accumulate due to the administration of heart muscle
preservation cardioplegia solutions as well as bypass circuit priming and
intravenous solutions. Excess fluids can cause post-operative stress on a
patient's heart.
Autologous Fibrinogen Delivery Kit (AFD):
This product is being developed to control post-operative bleeding safely and
cost-effectively using the patient's own blood to form clots. The fibrinogen
delivery device is comprised of a dual-barrel syringe with a patented dispens-
ing outlet. One side of the syringe is filled with the fibrinogen separated
from the patient's own blood just prior to surgery. The other side contains
commercially available thrombin provided in the kit. Simultaneous injection
of these solutions causes them to mix and form an instant clot. The AFD Kit
is expected to be launched in foreign markets during the first quarter of
fiscal 1996. Domestically the ``Kit'' is still subject to FDA approval and
the Company will be filing an accelerated PMA for its approval.
Disposable Medical Devices :
RMI has negotiated several patent and technology license agreements with surg-
eon inventors and others. Several patents have been issued relative to these
products and other patents are pending. The Company continues to expand its
offerings by adding new devices in each of its major product groups as well as
expanding on its existing product base. A discussion of the Company's major
product groups follows:
Cardiovascular Devices:
Cardiovascular devices are grouped into three major product categories which
include bypass circuitry cannulae, cardiac-assist catheters and cardioplegia
catheters and solutions. The function of each of these product groups is
discussed below.
a. Bypass Circuitry Cannulae. These devices are used to transport blood bet-
ween a patient and a heart/lung bypass machine. Venous return catheters
collect blood from the heart and transport it to the heart/lung machine.
Aortic arch cannulae return oxygenated blood to the heart, while vent cath-
eters are inserted into the heart to provide drainage to portions of the
heart which otherwise may not be properly drained.
b. Cardiac-Assist Catheters. Cardiac-assist catheters are used for higher-
risk patients including those who have experienced prior open-heart surger-
ies. These catheters are inserted into the chest or femoral arteries and
veins and connect a patient's heart to cardiac-assist bedside pumps either
before or after surgery or as a bridge to transplant. The Company has
developed femoral access catheters with extremely thin walls and wire
reinforcement which have been well received by the market.
c. Cardioplegia Catheters. Cardioplegia is a technique used to preserve the
heart muscle during open heart surgery. During these surgeries, cardiople-
gia solution is infused into the patient's heart to slow its metabolism and
protect the tissue. Cannulae, cardioplegia pressure monitoring sets,
infusion kits, etc. are used to facilitate and monitor the delivery of the
cardioplegia solutions. The Company provides the broadest line of these
products to meet the varying needs of cardiac surgeons.
Vascular Devices:
At the present time vascular products consist of IschemiaAlertTM, an ischemic
limb (oxygen-starved) disposable blood flow sensor and bedside monitor and
carotid artery balloon and non-balloon shunts for use in endarterectomies
(cleaning plaque from neck arteries).
IschemiaAlertTM is the first disposable device specifically designed to
continuously, quantitatively monitor blood flow in the foot's pedal artery,
enabling surgeons to make better limb salvage decisions. The product is
designed for use during and after surgical and diagnostic procedures in which
there is an increased risk that blood flow through peripheral leg arteries
might be compromised.
Blood Management:
Products in this category are used to facilitate the visualization of the
surgical field or suture site by absorbing or dispersing blood and control-
ling bleeding in arteries and/or vessels. The most significant products in
this category include suction wands which remove blood from the surgical field
and VisufloTM which helps to disperse blood from the field. Several new pro-
ducts are planned for introduction in this segment such as the Autologous
Fibrinogen Delivery Kit, the The BioFilterTM and the Heparin Removal Device.
Pharmaceutical Products and Research:
RMI has a strategic alliance with a subsidiary of IVAX/McGaw, Inc., Central
Admixture Pharmacy Services (CAPS) to sell customized cardioplegia solution
services to cardiovascular surgeons. This alliance is beneficial to both CAPS
and the Company since the custom solutions are sold to the same surgeons which
purchase the Company's products. The Company earns a commission on the sale
ofeach unit of the solutions. The addition of this product makes RMI the only
firm offering a complete package of cardioplegia disposables and solutions.
The Company's proprietary pharmaceutical product, RIMSO-50O, is sold to drug
wholesalers, hospitals, pharmacies, and directly to physicians for the treat-
ment of interstitial cystitis, a painful bladder disease. The Company also
markets CryoservO mainly to blood banks as a cryopreservative solution for
human tissue.
Private Label Medical Solutions:
Tera Pharmaceuticals manufactures and sells a wide range of medical solutions
such as eye washes and skin neutralizers to other companies under private
labels.
Product Development:
The Company is actively engaged in the development of new products and in
making improvements to existing products. The Company generally undertakes
new product development in conjunction with a partner, either university
medical centers or physician inventors. This approach provides the Company
with access to new technology, which it then moves towards commercialization
through the necessary engineering, development and regulatory approval
processes.
Total consolidated research and development expenditures were approximately
$1,264,000 in 1995, $801,000 in 1994 and $1,199,000 in 1993. The Company
believes that a sizable ongoing commitment to research and development is
critical to its continuing success in the health care business. The total
dollars spent declined in 1994 as the Company elected to defer Heparin Removal
Device project expenses while awaiting the approved NIH grant discussed above.
With the commencement of human trials for both the Heparin Removal Device and
work done on the Autologous Fibrinogen Delivery Kits as well as other
projects, the research and development costs increased again in 1995.
Health Care Environment:
In the current health care environment initiated during the Clinton
Administration, hospitals are continuing to scrutinize their operating costs
and purchasing practices. The environment has increased the frequency of hos-
pitals trying to bundle products together for competitive bidding to reduce
the overall costs of supplies. The Company has increased its product lines
and formed certain strategic alliances to improve its capability to meet com-
petitive bidding situations; however, because of the niche markets and spec-
ialized products it provides, bundled purchase and competitive bidding has not
been a major factor in retaining market share.
As a result of pricing pressures, the Company's ability to control costs and
supply hospitals with products that are cost-effective and responsive to
specialized user needs will be important to its continued success.
Methods of Distribution:
Cardiovascular, Vascular and Blood management products are distributed through
independent domestic sales representatives and dealer organizations, with
representation by approximately 75 sales people and managers. The Company al-
so has three direct sales people. In addition, these direct and independent
sales people are managed, motivated and trained by seven regional RMI sales
managers who report to the senior vice president of the Customer Satisfaction
Group. The Company has been successful in developing relationships with
cardiovascular distributors in most major foreign markets, including Europe,
the Far East and Australia, which are managed directly by two of the seven
regional managers.
The Company's FDA-approved pharmaceuticals, RIMSO-50O and CryoservO, are
marketed to urologists and other physicians primarily through trade
publications, and are sold directly by the Company to doctors, pharmacies and
hospitals with no direct or dealer sales force expenses. Tera's private label
sterile solutions are sold directly to the customers contracting with Tera for
its services, and basically involve OEM business relationships.
Raw Materials:
Raw materials essential to the Company's business are purchased in the ordin-
ary course of business from numerous suppliers. The majority of these mater-
ials are generally available, and no serious shortages or delays have been en-
countered. Certain raw materials used in producing some of the Company's
products can be obtained only from a small number of suppliers. In some of
these situations, the Company has long-term supply contracts with such
suppliers, although it does not consider its obligations under such contracts
to be material. Prolonged interruptions in the supply of raw materials or
intermediate products could have a material adverse effect on the Company's
operations.
Patents and Trademarks:
The Company owns a number of patents and trademarks and is licensed under
patents owned by others. While it seeks patents on new products whenever
feasible, the Company does not consider any one of its patents, or licenses
granted to or by it, to be essential to its business. Products manufactured
by the Company are sold primarily under its own trademarks and trade names.
Competitive and Technological Risk
While reliable comparative figures are not available, the Company believes
that it is a significant and growing factor in the manufacture and distribu-
tion of products in the markets in which it competes. Although no single com-
pany competes with the Company in all of its product lines, the Company is
faced with competition in all of its markets.
Historically, competition in the health care industry has been characterized
by the search for technological and therapeutic innovations in the treatment,
diagnosis and prevention of disease. The Company believes that it has
benefited from the technological advantages of certain of its products. While
competitors will continue to introduce new products in competition with those
sold by the Company, the Company believes that its research and development
effort will permit it to remain competitive in the product areas where it now
competes; however, all medical technologies are subject to the unanticipated
risk of scientific progress which may subject the Company's products to
technological obsolescence.
Earlier reductions in hospital activity have led to increased competition
among health care suppliers. Competition is now increasingly focused on price
service and product performance. Although pressure in these areas is expected
to continue, the specialized nature of many of the Company's products will
continue to mitigate such pressure.
The Company has sought continually to lower its costs to meet increased price
competition and improve its profit margins. The Company believes that its
cost position will continue to benefit from improvements in manufacturing
technology and increased economies of scale. The Company continues to
emphasize product service and quality.
Credit and Working Capital Practices:
The Company's credit practices and related working capital needs are compar-
able to its competitors'. In some cases, particularly for operations outside
the United States, industry practice dictates extended payment terms, which in
the aggregate, do not have a material effect on the Company's working capital
requirements. Customers may return defective merchandise for credit or
replacement; however, such returns have not been significant.
Quality Assurance:
The Company places an emphasis on providing the highest quality products to
its customers. Quality systems, including control procedures that are develop
ed and implemented by trained professionals, result in rigid specifications
for raw materials, packaging materials, labels, sterilization procedures, over
all manufacturing process control and finished goods products. The Company's
Quality Assurance staff tests components and finished goods at different
stages in the manufacturing process to assure that exacting standards are met.
Government Regulation:
Products manufactured or sold by the Company in the United States are subject
to regulation by the Food and Drug Administration (FDA), as well as by other
federal and state agencies. The FDA's approval process for new drugs and
devices is complex and often requires long-term and sustained investment with
no reliable basis for predicting the FDA's eventual decision regarding market
approval nor how long the approval process may continue. Recent federal
policy changes have made this process more expensive and time consuming. The
FDA has the power to seize adulterated or misbranded drugs and devices or to
require the manufacturer to remove them from the market and the power to
publicize relevant facts.
Recent political and regulatory changes and uncertainties relating to the
health care industry may affect both the underlying demand for health care
products and the pricing of such products, as well as the cost of new product
development.
The Company has complied with applicable regulatory requirements concerning
environmental quality and has made, and expects to continue to make, the
necessary capital expenditures for environmental protection. It is anticipat-
ed that future environmental expenditures will not materially affect earnings
or the Company's competitive position.
REAL ESTATE ACTIVITIES
The Company has an investment in real estate which it holds for resale. The
Company does not intend to extensively develop these properties. The Company
may make certain improvements, such as roads and underground utilities, in
order to sell certain parcels of this real estate. The Company intends to
orderly liquidate these assets and use the proceeds to expand the health care
segment of the business as it has done in prior years. Historically, the
profits from real estate sales were used to offset the losses generated from
the start-up of the health care segment, and the funds generated were used to
help fund health care research and development or reduce debt. The Company
believes that it will not have to rely in the future on profits and funding
from real estate transactions because of positive cash flows generated from
health care operations. The Company's real estate holdings at June 30, 1995
are included under "Item 2: Properties" on page 9 following.
Competition:
The real estate market is highly competitive and there are many alternative
properties available in competition to the properties owned by the Company.
The Company believes its major advantage in the market is the prime location
of some of the Company's properties.
Real Estate Environment:
Real estate activity is highly sensitive to fluctuations in interest rates and
to the economic health of the areas in which the properties are located. Dur-
ing the last several years, Congress has legislated changes in the Federal
Income Tax laws which have resulted in decreased demand for real estate
investments and reduced market values of income properties.
GENERAL
The Company is not dependent on a single or a few customers and loss of any
one or more customers would not materially affect the operations of the
Company.
As of June 30, 1995, the Company employed 281 people.
Generally, the business of the Company is not seasonal.
The Company does not have a significant backlog of unshipped orders as
products are generally manufactured in sufficient quantities to make shipments
as orders are received.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS & EXPORT SALES
All of the Company's sales for the past three years have been in the U. S.
except for foreign sales of approximately $6,744,000 in 1995, $4,619,000 in 1994
and $4,107,000 in 1993. There are no identifiable foreign assets.
International operations are subject to certain additional risks inherent in
conducting business outside the United States, such as changes in currency
exchange rates, price and currency exchange controls, import and export
restrictions, nationalization, expropriation and other governmental action.
<PAGE>ITEM 2: PROPERTIES
The Company owns the following properties:
Available for sale:
80 acres of industrial land--Salt Lake City, Utah.
40 acres of agricultural land--Jerome, Idaho
3 acres of commercial land--Ogden, Utah.
1 acre of commercial land--Mesa, Arizona
1 lot of commercial land--Layton, Utah
Warehouse and office space
3 buildings--Midvale, Utah
The Company leases a manufacturing and warehouse facility in Midvale, Utah, in
a short-term lease with an option to purchase. This facility also serves as the
Company's corporate offices. The Company leases Tera's manufacturing facilities
in Buena Park, California under a short-term lease.
ITEM 3: LEGAL PROCEEDINGS
See page 26 for section entitled "Commitments and Contingencies".
ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
`REIC''. The low and high sales prices of the Company's Common Stock as quoted
on the NASDAQ Monthly Statistical Report during 1995 and 1994 were as follows:
Fiscal 1995 Fiscal 1994
Low High Low High
Three months ended:
September 30 7-3/4 11-3/4 8-1/4 13-1/2
December 31 10-7/8 14-3/4 7 11-1/4
March 31 13 18-5/8 9 11-3/4
June 30 16-1/8 23-1/4 7-1/2 10-3/4
There were approximately 1,300 common stockholders of record as of September 5,
1995. Approximately 80% of the Company's outstanding shares are held by nominees
who hold the shares for many additional shareholders.
The Company has never paid a cash dividend on its Common Stock, retaining its
earnings for the operation and expansion of its business.
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
This summary should be read in conjunction with the related consolidated
financial statements and notes thereto.
(In thousands except per
share data) 1995 1994 1993 1992 1991
Revenues $34,024 $27,499 $22,764 $17,568 $11,938
Cost of sales 14,953 12,922 9,312 6,978 4,756
Net income before 7,445 5,764 5,204 4,115 2,471
cumulative effect
Net income 7,445 5,764 4,935 4,115 2,471
Earnings per share before .81 .62 .57 .44 .27
cumulative effect
Earnings per share .81 .62 .54 .44 .27
Fully-diluted earnings .77
per share
Total assets 46,545 38,600 31,753 25,185 18,503
Long-term debt 172 272 375 ----- -----
QUARTERLY RESULTS OF OPERATIONS
Three Months Ended
(In thousands except
per share data) September 30 December 31 March 31 June 30
1995
Revenues $7,254 $7,394 $9,803 $9,574
Cost of sales 3,300 2,886 4,841 3,926
Income before income
taxes 2,310 2,630 2,978 3,642
Net income 1,480 1,680 1,913 2,372
Earnings per share .16 .18 .21 .26
1994
Revenues $5,208 $6,213 $8,522 $7,556
Cost of sales 2,180 2,701 4,833 3,208
Income before income
taxes 1,637 2,067 2,271 2,819
Net income 1,087 1,372 1,482 1,823
Earnings per share .12 .15 .16 .20
For both tables above, earnings per share of Common Stock are computed on the
basis of the weighted average number of shares outstanding plus the common stock
equivalents which would arise from the exercise of stock options, when material.
ITEM 7:MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONSOLIDATED OPERATING HIGHLIGHTS
Research Industries Corporation achieved record earnings in 1995 of $7,445,005
compared to earnings of $5,763,638 in 1994 and $4,935,219 in 1993. Earnings for
1993 include an after-tax, one-time cumulative effect charge of $269,201 related
to a change in the Company's method of accounting for inventories. Earnings per
share were $.81 in 1995, $.62 in 1994 and $.54 in 1993 resulting in growth rates
of 31%, 15% and 23% for the three years, respectively. The earnings per share
growth rate was lower in 1994 reflecting smaller margins on real estate sold. A
recent rise in the Company's share price increased the weighted average
outstanding shares resulting in fully diluted earnings per share of $.77 on the
$7.445 million of net income. Total revenues increased from $22,763,625 in 1993
to $27,498,806 in 1994 and $34,024,404 in 1995, which represent growth rates of
30%, 21% and 24% over those same three years. Total revenue growth rates
include real estate sales in the years presented.
Selling, general and administrative expenses (SG&A) were $6,726,535,
$5,495,435 and $4,620,764 for 1995, 1994 and 1993, representing 23%, 25% and 23%
of health care sales for each of the respective years. SG&A has been compared
only against health care revenues since there are substantially no such costs
charged against real estate operations and the nature of real estate sales can
result in unusual fluctuations in ratios that are difficult to understand if
SG&A is compared against total revenues. The growth in SG&A of 22% is lower
than health care revenue growth for fiscal 1995 of 28% providing positive
operating leverage for the year. Increases in SG&A for the year are primarily
attributed to direct selling-related costs, amortization costs related to
acquired technologies and compensation-related costs.
Interest income declined slightly over 1994 as the Company used some of its
cash reserves for the acquisition of technologies and a major expansion of
manufacturing capabilities. Interest expense increased during the year as the
Company used its line of credit to pay certain short term obligations rather
than using its invested funds. This decision was based on a comparison of
after-tax yields on investments as compared to the cost of the debt as well as
non-financial considerations. In 1993, the Company purchased a building and
incurred $500,000 of long-term debt as a result of the acquisition. Recorded
interest expense also relates to this debt.
Federal and state income taxes have increased in each of the three years
presented in the financial statements. As anticipated, the effective income tax
rate has increased to approximately 36%. This rate is still below the combined
statutory federal and state rates as a result of investments in municipal tax-
free bonds and the use of a foreign sales corporation to shelter a portion of
income on foreign sales from taxation. Management anticipates that the
effective tax rate may also increase slightly in 1996 as its level of taxable
income approaches the federal 35% tax bracket and tax-free interest becomes a
smaller portion of pre-tax income.
HEALTH CARE OPERATIONS
Health care sales: Net health care sales were $28,636,915 in 1995 compared to
$22,361,944 in 1994 and $19,842,928 which represent increases of 28%, 13% and
25%, respectively. Medical device and solution sales increased by 32% in 1995
compared to 14% in 1994 and 30% in 1993, proprietary pharmaceuticals by 15% in
1995 compared to a decrease of 3% in 1994 and growth of 2% in 1993 and sterile
solution products by 16% in 1995 compared to 32% in 1994 and 53% in 1993. The
growth in medical device and solution revenues reflects an increase in domestic
and international open-heart surgeries as well as market share gains for bypass
circuitry cannulae, balloon cardioplegia delivery catheters, cardiac-assist
devices and its new vascular products. Revenues from commissions on solution
sales has also substantially increased. The Company has experienced both an
increase in units sold as well as a slight increase in average selling prices.
Average selling prices are affected by both the price of the products sold as
well as the mix of products being sold. The rates of increases for 1994 were
lower than both 1993 and 1995 reflecting a major restructuring in the health
care industry as providers attempted to anticipate requirements which could be
implemented under health care reform proposals. This restructuring actually
resulted in a temporary decline in the number of open heart surgeries performed
in 1994. As the immediate threat of substantial changes in the health care
system has passed, the number of procedures has increased resulting in the 1995
growth reported above. The Company has new products in various stages of
development and approval which it believes will contribute to sales growth in
the future. Management also believes that it will continue to experience growth
in the sales of its existing medical device and solution products.
After a slight decline in proprietary pharmaceutical product sales in 1994,
the Company experienced both an increase in units and price of these products.
The Company is pleased to see continued improvement in the sale of these mature
products. Sterile solution sales are directly attributable to OEM customer
orders which have been higher during the current year, enhanced by the addition
of new OEM products. Management does not anticipate continued growth in the OEM
products.
Although the Company does not have foreign operations, it does sell to
distributors and other customers in foreign markets. Sales in foreign markets
increased by approximately $2,125,000 in 1995 to $6,744,000, and represented
approximately 24% of health care sales in 1995 compared to 21% in both 1994 and
1993.
Earnings per share contributed by health care operations for 1995, 1994 and
1993 were $.70, $.54 and $.46, respectively, reflecting earnings growth rates of
30%, 17% and 10%.
Gross margins: Gross margins increased from 60% in 1994 to 61% in 1995. This
increase is reflective of cost improvements made during the past year as a
result of the manufacturing facility upgrade completed during the year and
commissions earned from solution sales for CAPS. This increase occurred despite
the increase in foreign sales which generally carry lower margins due to product
discounting required to compete in foreign markets and the lower percentage of
total health care revenues of the Company's proprietary pharmaceuticals (less
than 14%) which are higher margin products.
Gross margins declined in 1994 from 62% in 1993. This decline was due
primarily to the decreasing percentage of proprietary pharmaceuticals in
relation to total health care sales. Proprietary pharmaceuticals was
approximately 15% of total health care sales for 1994. Management is not aware
of any impending events which would cause gross margins to significantly decline
and believes that there are future opportunities for improvement in gross
margins with certain of its new products, as well as improvements due to
manufacturing cost reductions.
Selling, General and Administrative Expenses: SG&A costs are discussed in the
consolidated operating highlights since direct SG&A costs related to real estate
have become insignificant, which makes the allocation of corporate SG&A costs
between health care and real estate rather arbitrary, impractical and difficult
for investors to understand. Management believes the comparison of total SG&A
costs provides the investor with a better understanding of its efforts to
control costs and yet provide the Company with the necessary infrastructure to
continue its growth.
Research and Development Costs: The Company continues to invest resources into
research and product development to introduce products into the marketplace.
Royalty costs, which in many respects represent the cost of acquired research
and development technologies, are recorded as a component of cost of sales. All
R&D expenses relate to the health care segment. These expenditures were
$1,263,561 in 1995, $801,420 in 1994 and $1,198,521 in 1993. R&D expenditures
were 33% less in 1994 than 1993 as the Company elected to defer Heparin Removal
Device project expenses while awaiting a recently awarded NIH grant for
$500,000. In addition to costs for the heparin removal device, R&D includes the
costs for developing new products and extensions of existing product lines in
its core businesses. The Company has several projects in various stages of
testing and regulatory approval.
REAL ESTATE OPERATIONS
The Company has a real estate portfolio remaining from its earlier years of
operations. In past years this portfolio was used to help finance the Company's
start-up of health care operations. The Company continues to divest these
assets as reasonable offers are received. On September 30, 1993, the Company
exchanged land held for resale and operating properties (rental properties and
land held for future expansion) with book values of approximately $560,000 and
$4,240,000 for 188 acres of industrial land. This acreage has and will continue
to reduce the amount of effort required to divest and manage the real estate
portfolio while providing the opportunity for significant gains on its
disposition. There was no gain or loss recognized on the transaction at the
time of the property exchange due to certain guarantees provided by the Company
in connection with notes carried by a third party involved in the exchange.
Such guarantees were satisfied on December 30, 1993 and a gain of approximately
$361,000 was recognized based on fair and book values of properties exchanged in
accordance with generally accepted accounting principles.
Real estate sales are comprised of the sale of commercial and residential
properties, leasing revenue from leased properties (through September 30, 1993)
and interest income on real estate contracts. Total real estate revenues can
fluctuate significantly from year to year based on the parcels of property sold.
Real estate revenue increased from approximately $2,921,000 in 1993 to
$5,137,000 in 1994 and $5,387,000 in 1995 resulting from more activity in the
local real estate market in 1994 and 1995 and the sale of property received in
the exchange discussed above. Real estate revenue in 1993 included
approximately $294,000 from two transactions in which the Company acquired and
sold real estate in simultaneous transactions. The primary purpose of these two
transactions was to convert lower yielding investments into higher yielding
notes receivable for investment purposes. Since these transactions did not
involve any of the Company's existing real estate holdings, the transactions
were recorded net of property costs.
Gross margin on real estate fluctuated from 38% in 1993 to 22% in 1994 and
30% in 1995. The gross margins are reflective of the Company's cost basis in
the specific properties sold and the related selling prices. The gross margins,
therefore, may vary significantly between specific pieces of property. Gross
margins in 1993 were also affected by the two transactions discussed under
revenues.
FINANCIAL CONDITION
The strength of the Company's balance sheet continued to improve during fiscal
1995. The following key measurements are indicative of the excellent liquidity
and strong financial position of the Company:
(In thousands except 1995 1994 1993
ratios)
Cash and investments $ 8,500 $ 9,915 $ 8,560
Working capital 23,525 13,816 14,405
Cash flow from operations 1,143 4,993 3,769
Shareholders' equity 43,852 34,467 29,216
Current ratio 13:1 5:1 10:1
Cash and investments decreased from June 30, 1994 by approximately $1.4 million.
This decreased includes the expenditure of approximately $3.75 million for
capital investments including a significant expansion of the Company's
manufacturing capabilities, $2.0 million for technology acquisitions and $1.1
million to reduce current liabilities existing at June 30, 1994 for the
acquisition of a license from CAPS and to purchase treasury stock. Working
capital improved from increases in short-term investments and notes receivable
and from an increase in inventories which is discussed below.
Cash generated from operations decreased primarily from an increase in
inventory and the reduction in current liabilities discussed above. Internally
generated funds have been and are expected to continue to be sufficient to meet
working capital needs and capital expenditures.
Inventories increased by approximately $3.5 million or 77% from June 30,
1994. Raw materials increased by approximately $1.5 million. The most
significant components of the change follow. First, with the commencement of
manufacturing operations to produce previously purchased catheters, all of the
component parts of the manufactured products must now be carried in inventory.
Second, as the Company began producing the new raw material catheters, it
continued purchasing a sufficient quantity of catheters from its suppliers
assuring a continuous flow of finished goods products through the transition to
in-house produced raw material catheters resulting in a larger than normal
supply of raw materials at year end. Third, the Company purchased over a year's
supply of a chemical used in the manufacturing during 1995. Approximately
$280,000 of this chemical remained at year end. Fourth, prices for many raw
materials used in the process have also increased from the prior year.
The increase in work-in-process of approximately $357,000 is merely a factor
of increased production levels at the end of the year. Finished goods increased
by approximately $1.6 million. Of this amount, $1.1 million relates to the new
vascular products and the Duroflo IITM coated catheters which have been added to
inventories since June 30, 1994.
Land held for resale decreased as a result of the property sales during the
year which also resulted in an increase in notes receivable.
Prepaids increased as the Company has prepaid a supplier for certain vascular
products which are to be delivered during the upcoming year.
Patents and licenses increased as the result of a purchase of certain
technologies and licenses during the current year.
Property and equipment increased due to capital expenditures during the year.
Approximately $2.0 million relates to a manufacturing facility expansion and
upgrade which not only updates the processes for some of our currently
manufactured products, but also provides manufacturing capacity for products not
previously produced in-house.
There have been no other significant changes in capitalization or financial
status during the past three years that are not reflected in the financial
statements. As of June 30, 1995, the Company had not entered into any material
commitments for capital expenditures.
REGULATORY AND COMPETITIVE ENVIRONMENT
Products manufactured or sold by the Company in the United States are subject to
regulation by the Food and Drug Administration ("FDA"), as well as by other
federal and state agencies. The FDA's approval process for new drugs and
devices is complex and often requires long-term and sustained investment with no
reliable basis for predicting the FDA's eventual decision regarding market
approval, nor how long the approval process may continue. The FDA has the power
to seize drugs or devices which it considers to be adulterated or misbranded or
to require the manufacturer to remove them from the market and the power to
publicize relevant facts.
Recent political and regulatory changes and uncertainties relating to the
health care industry may affect both the underlying demand for health care
products and the pricing of such products.
Historically, competition in the health care industry has been characterized
by the search for technological and therapeutic innovations in the treatment,
diagnosis and prevention of disease. The Company believes that it has benefited
from the technological advantages of certain of its products. While competitors
will continue to introduce new products in competition with those sold by the
Company, the Company believes that its research and development efforts will
permit it to remain competitive in the product areas where it now competes;
however, all medical technologies are subject to the unanticipated risk of
technological or scientific progress which may subject the Company's products,
both those already manufactured and those in development, to the risk of
technological obsolescence.
<PAGE>
ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following constitutes a list of Financial Statements included in Part II of
this report:
Independent Auditors' Report
Consolidated statements of income - Years ended June 30, 1995, 1994 and 1993
Consolidated balance sheets - June 30, 1995 and 1994
Consolidated statements of shareholders' equity - Years ended June 30, 1995,
1994 and 1993
Notes to consolidated financial statements
The following constitutes a list of Financial Statement Schedules included in
Part IV of this report:
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of Research
Industries Corporation and subsidiaries as of June 30, 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. Our audit also included the financial statement schedule
listed in the index at item 14(a) for the year indicated above. The financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Research
Industries Corporation and subsidiaries at June 30, 1993, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in the notes to consolidated financial statements, in 1993 the
Company changed its method of accounting for inventories.
ERNST & YOUNG, LLP
August 3, 1993<PAGE>
Independent Auditors' Report
We have audited the consolidated balance sheets of Research Industries
Corporation and subsidiaries as of June 30, 1995 and 1994 and the accompanying
statements of income, shareholders' equity and cash flows for the years then
ended. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as of June 30, 1995 and
for the years then ended. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits. The
accompanying consolidated financial statements and financial statement schedule
of Research Industries Corporation and subsidiaries as of June 30, 1993 and for
the year then ended, were audited by other auditors whose report thereon dated
August 3, 1993, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Research Industries
Corporation and subsidiaries as of June 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the two year
period ended June 30, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, 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.
KPMG Peat Marwick LLP
Salt Lake City, Utah
August 4, 1995
<PAGE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1995 1994
ASSETS
CURRENT ASSETS
Cash and equivalents $2,093,326 $2,794,092
Short-term investments 3,923,055 1,154,613
Accounts receivable (less allowances for
doubtful accounts of $275,000 in 1995 and
$186,000 in 1994) 6,118,031 5,776,555
Current portion of notes receivable 3,931,583 2,099,606
Inventories 8,084,838 4,576,621
Prepaid expenses 1,006,990 336,932
Deferred tax asset 401,300 366,500
TOTAL CURRENT ASSETS 25,559,123 17,104,919
LAND HELD FOR RESALE 2,314,924 3,492,616
PROPERTY AND EQUIPMENT 7,949,774 5,002,017
LONG-TERM INVESTMENTS 2,483,277 5,966,567
NOTES RECEIVABLE, less current portion 5,586,078 5,531,073
PATENTS AND LICENSES 2,651,516 1,502,460
$46,544,692 $38,599,652
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 913,330 $2,005,372
Income taxes payable 103,260 643,223
Accrued payroll, commissions and royalties 746,005 410,620
Other accrued expenses 171,415 129,564
Current portion of long-term debt 99,996 99,996
TOTAL CURRENT LIABILITIES 2,034,006 3,288,775
LONG-TERM DEBT, less current portion 172,430 272,426
DEFERRED INCOME TAXES 485,800 571,000
SHAREHOLDERS' EQUITY
Common Stock, par value $.50 per share; authorized
20,000,000 shares, issued and outstanding
9,407,634 shares in 1995 and 9,206,683 shares
in 1994 4,759,846 4,668,842
Additional paid-in capital 9,391,071 7,733,119
Retained earnings 30,621,604 23,176,599
Treasury stock, at cost (920,065) (1,111,109)
43,852,456 34,467,451
$46,544,692 $38,599,652
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
1995 1994 1993
REVENUES
Health care $28,636,915 $22,361,944 $19,842,928
Real estate 5,387,489 5,136,862 2,920,697
34,024,404 27,498,806 22,763,625
COSTS AND EXPENSES
Cost of health care sales 11,194,747 8,928,103 7,510,264
Real estate transaction costs 3,757,833 3,993,694 1,802,068
Selling, general and 6,726,535 5,495,435 4,620,764
administrative
Research and development 1,263,561 801,420 1,198,521
22,942,676 19,218,652 15,131,617
OPERATING INCOME 11,081,728 8,280,154 7,632,008
OTHER INCOME (EXPENSE)
Litigation settlement (75,000)
Interest expense (56,190) (35,954) (10,390)
Interest income and other 534,467 549,438 397,802
478,277 513,484 312,412
INCOME BEFORE INCOME TAXES AND 11,560,005 8,793,638 7,944,420
CUMULATIVE EFFECT
INCOME TAX EXPENSE 4,115,000 3,030,000 2,740,000
INCOME BEFORE CUMULATIVE EFFECT 7,445,005 5,763,638 5,204,420
CUMULATIVE EFFECT - (NET OF INCOME
TAXES OF $140,000) CHANGE IN
METHOD OF ACCOUNTING FOR
INVENTORIES (269,201)
NET INCOME $ 7,445,005 $ 5,763,638 $ 4,935,219
EARNINGS PER SHARE
Income before cumulative effect $ .81 $ .62 $ .57
Cumulative effect ( .03)
Net income $ .81 $ .62 $ .54
WEIGHTED AVERAGE SHARES OUTSTANDING 9,244,000 9,271,000 9,205,000
FULLY DILUTED EARNINGS PER SHARE $ .77
FULLY-DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 9,639,000
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1992 9,124,698 $4,562,349 $6,297,268 $12,477,742 $23,337,359
Exercise of stock options 132,368 66,185 357,478 423,663
Income tax benefit from
exercise of non-qualified
stock options 520,133 520,133
Net income 4,935,219 4,935,219
Balance at June 30, 1993 9,257,066 4,628,534 7,174,879 17,412,961 29,216,374
Issuance of stock through
employee benefit plans 80,617 40,308 501,799 542,107
Income tax benefit from
exercise of non-qualified
stock options 56,441 56,441
Treasury stock purchased (131,000) $(1,111,109) (1,111,109)
Net income 5,763,638 5,763,638
Balance at June 30, 1994 9,206,683 4,668,842 7,733,119 23,176,599 (1,111,109) 34,467,451
Exercise of stock options 182,009 91,004 838,680 929,684
Income tax benefit from
exercise of non-qualified
stock options 727,481 727,481
Treasury stock purchased (40,000) (337,500) (337,500)
Treasury stock issued 58,942 91,791 528,544 620,335
Net income 7,445,005 7,445,005
BALANCE AT JUNE 30, 1995 9,407,634 $4,759,846 $9,391,071 $30,621,604 $(920,065) $43,852,456
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1995 1994 1993
OPERATING ACTIVITIES
Net income $7,445,005 $5,763,638 $4,935,219
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 978,927 841,565 637,533
Deferred income taxes (120,000) (352,000) (69,500)
Income tax benefit from exercise of
non-qualified stock options 727,481 56,441 520,133
Gain on property exchange (361,227)
Changes in operating assets and
liabilities:
Accounts receivable (341,476) (303,110) (1,880,098)
Notes receivable (1,960,996) (3,072,293) (705,947)
Inventories (3,508,217) (488,151) (962,470)
Land held for resale 1,177,692 2,371,357 1,265,876
Other assets (2,000,346) (1,147,024) (255,255)
Current liabilities (1,254,769) 1,684,144 283,046
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,143,301 4,993,340 3,768,537
INVESTING ACTIVITIES
Net change in investments 714,848 (2,367,874) (1,884,132)
Issuance of investment notes
receivable (895,000) (2,299,844)
Repayments from investment notes
receivable 74,014 59,463 15,033
Purchase of property and equipment (3,745,452) (2,131,291) (2,061,762)
NET CASH USED IN INVESTING ACTIVITIES (2,956,590) (5,334,702) (6,230,705)
FINANCING ACTIVITIES
Proceeds from long-term debt 261,707 500,000
Repayment of long-term debt (99,996) (364,286) (24,999)
Purchase of treasury stock (337,500) (1,111,109)
Sale of treasury stock 528,544
Proceeds from sale of Common Stock 1,021,475 542,107 423,663
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,112,523 (671,581) 898,664
DECREASE IN CASH AND EQUIVALENTS (700,766) (1,012,943) (1,563,504)
Cash and Equivalents at Beginning
of Period 2,794,092 3,807,035 5,370,539
CASH AND EQUIVALENTS AT END OF PERIOD $2,093,326 $2,794,092 $3,807,035
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Research Industries Corporation and subsidiaries (the
Company) after elimination of all significant intercompany accounts and
transactions.
NATURE OF BUSINESS: The Company develops, manufactures and sells disposable
medical products and specialty pharmaceuticals to hospitals, distributors and
other medical-related facilities. The Company also sells and leases real
estate in Utah.
CASH EQUIVALENTS: The Company considers to be cash equivalents all highly
liquid investments with maturities of three months or less when purchased.
INVESTMENTS: Short and long-term investments at June 30, 1995 and 1994
consist of a diversified portfolio of municipal, tax-free, triple-A rated
bonds with maturities of forty-two months or less and U.S. Treasury
securities which management intends to hold to maturity. These "held-to-
maturity" investments are recorded at amortized cost in accordance with
requirements of Statement of Financial Accounting Standards No. 115.
Investments with maturities of less than one year are classified as short-
term. The amortized cost of investments approximated market at the
respective year ends.
INVENTORIES: Inventories, consisting primarily of health care products, are
stated at the lower of standard cost (which approximates the first-in, first-
out basis) or market. See note on cumulative effect for change in method of
accounting for inventories.
LAND HELD FOR RESALE: Land held for resale is stated at the lower of
accumulated cost or net realizable value.
PROPERTY AND EQUIPMENT: Property and equipment consists of land, production
facilities and equipment and is stated at cost. Depreciation is provided
over the estimated useful lives of the assets principally using the straight-
line method.
PATENTS AND LICENSES: The costs of acquiring licenses and patents are
amortized over their estimated useful lives up to a maximum of 17 years using
the straight-line method. Accumulated amortization was $400,289 and $219,066
at June 30, 1995 and 1994, respectively.
PROFIT RECOGNITION ON SALES OF REAL ESTATE: Profit on sales of land or
buildings is recognized under the full accrual method at the time the sale is
consummated, provided the buyer has made an adequate initial and continuing
investment in the property and the Company has transferred the usual risks
and rewards of ownership to the buyer.
INCOME TAXES: Effective July 1, 1993, the Company adopted the Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This
statement requires the use of the asset and liability method of accounting
for income taxes. Under this method, deferred assets and liabilities are
recognized for the future tax consequences attributable to differences
39
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. Under Statement No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The impact of the change to
this method was less than $10,000 on net income.
The deferred method of accounting for income taxes was used prior to 1994.
This method requires deferred taxes to be recognized for income and expense
items that are reported in different years for financial and tax reporting
purposes using tax rates in effect in the year the differences arise.
Deferred taxes are not adjusted for subsequent changes in tax rates.
EARNINGS PER SHARE: Earnings per share of Common Stock are computed on the
basis of the weighted average shares outstanding plus any common stock
equivalents which would arise from the exercise of stock options when
material.
CUMULATIVE EFFECT FOR CHANGE IN METHOD OF ACCOUNTING FOR INVENTORIES
In 1993, Research Industries Corporation changed its method of costing
inventory from the weighted average cost method to a standard cost system
which approximates a first-in, first-out (FIFO) inventory costing method.
The reason for the change is that FIFO costing more closely matches revenue
with the associated costs of the products sold and the actual flow of the
goods used in the production process. The effect of the change for the year
ended June 30, 1993 was to decrease net income by $269,201 or $.03 per share.
NOTES RECEIVABLE
Notes receivable were generated from sales of land and other properties which
are the collateral for the receivables. Notes receivable also include
certain investments made by the Company to increase its investment returns.
Periodic payments vary and include interest at rates ranging from 5% to 15%
per annum with weighted average interest rates of 7.8% and 7.7% at June 30,
1995 and 1994, respectively. Principal payments from these receivables for
the next five fiscal years are:
1996 $3,931,600 1999 $285,100
1997 252,300 2000 1,924,100
1998 597,900
In May, 1994, the Company accepted land valued at approximately $563,000 in
settlement of a note receivable in a noncash transaction. No gain or loss
was recognized.
INVENTORIES
June 30,
1995 1994
Raw materials $3,574,729 $2,026,662
Work-in-process 861,860 505,100
Finished goods 3,648,249 2,044,859
$8,084,838 $4,576,621
LAND HELD FOR RESALE
Land held for resale consisted of commercial and industrial land at both June
30, 1995 and June 30, 1994. On September 30, 1993 the Company exchanged land
held for resale and operating properties (rental properties and land held for
future expansion) with book values of approximately $560,000 and $4,240,000
for 188 acres of industrial land at the Salt Lake International Center
located near the Salt Lake City airport in a noncash transaction. The
Company recognized a gain of approximately $361,000 on the property exchanged
based on book and fair values in accordance with generally accepted
accounting principles.
PROPERTY AND EQUIPMENT
June 30,
1995 1994
PRODUCTION FACILITIES
Land $162,000 $150,000
Buildings and improvements 2,823,650 1,518,275
Furniture and fixtures 1,211,674 1,076,835
Machinery and equipment 5,274,961 3,346,954
Construction work-in-progress 1,348,674 1,088,151
10,820,959 7,180,215
Less accumulated depreciation and 2,871,185 2,178,198
amortization
TOTAL OPERATING PROPERTIES $7,949,774 $5,002,017
LONG-TERM DEBT
The Company has a note payable with a local bank at a variable interest rate
which was 9.25% at June 30, 1995. The note is collateralized by land and a
building with a carrying value of $500,000. Future principal payments are
$99,996 per year through 1997 and $72,434 in 1998. The Company also has an
unused short-term line of credit arrangement with a bank under which it may
borrow up to $2,000,000 at a base rate plus .25%. Interest paid was
approximately $56,000 in 1995, $36,000 in 1994 and $10,000 in 1993. Interest
in 1995 included some borrowing against its line of credit; however, there
was nothing borrowed against the line at June 30, 1995.
INCOME TAXES
The Company adopted Statement 109 effective July 1, 1993. The effect of the
change was not material and is not disclosed separately in the financial
statements. Prior year financial statements have not been restated to apply
the provisions of Statement 109. Income taxes paid were $4,047,500,
$3,230,000 and $2,010,000 in 1995, 1994, and 1993, respectively.
Significant components of income tax expense from continuing operations are
as follows:
Year Ended June 30,
1995 1994 1993
Current $4,235,000 $3,382,000 $2,810,000
Deferred (120,000) (352,000) (70,000)
$4,115,000 $3,030,000 $2,740,000
Income tax expense computed by applying the statutory federal income tax rate
to income before income taxes is reconciled to income tax expense as follows:
Year Ended June 30,
1995 1994 1993
Income tax at federal statutory
rate $3,930,000 $2,990,000 $2,701,000
State income taxes, net of
federal benefit 377,000 270,000 250,000
Foreign Sales Corporation
exemption (102,000) (100,000) (122,000)
Tax-free interest (97,000) (99,000) (97,000)
Other 7,000 (31,000) 8,000
$4,115,000 $3,030,000 $2,740,000
Significant components of deferred income tax expense include a reversal of
property bases differentials for land sold during 1995 and 1994 of
approximately $462,000 and $320,000, respectively, and the impact of a change
in the method of accounting for inventories in 1993 of $161,000. Other items
affecting deferred income tax expense which are not significant include
accelerated depreciation and expenses capitalized in inventory for tax
purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1995 are as follows:
June 30,
1995 1994
Deferred tax assets:
Receivables and inventories, reserves $180,900 $148,000
and allowances
Inventories, cumulative effect 117,900 147,000
Other 102,500 71,500
401,300 366,500
Deferred tax liabilities:
Property and equipment, depreciation 384,800 295,500
differences
Land held for resale, bases 102,000 255,000
differentials
Other 20,500
485,800 571,000
Net Deferred Tax Liability $84,500 $204,500
SHAREHOLDERS' EQUITY
The Company has issued stock options to employees, consultants, officers and
directors under its Long-Term Equity-Based Incentive Plan, its Non-Employee
Direct Stock Option and SAR Plan and its 1994 Supplemental Equity-Based
Incentive Plan. It has also issued options for restricted stock to certain
outside parties in connection with license agreements. All outstanding
employee options have been granted at market value on the dates of the grants
and are exercisable generally up to ten years from the grant date. Stock
option transactions for the three years ended June 30, 1995 are summarized as
follows:
Year Ended June 30,
1995 1994 1993
Beginning balance 718,634 620,202 605,458
Granted 280,977 465,959 152,933
Exercised (167,959) (19,000) (135,039)
Canceled/forfeited 0 (348,527) (3,150)
Ending balance 831,652 718,634 620,202
Option prices per share:
Exercised during year $3.42- $3.42- $2.25-
$14.63 $8.38 $7.67
Outstanding at year end $3.42- $3.42- $3.42-
$14.63 $13.00 $19.83
Of the above options at June 30, 1995, 658,860 were exercisable. Expiration
dates for these options range from 1998 to 2004 with a weighted average
option price of $9.22. The Long-Term Equity-Based Incentive Plan allows for
stock options to be granted each calendar year up to a maximum of .95% of the
number of outstanding shares of Common Stock at the beginning of each
calendar year. There are 946,654 shares available at June 30, 1995 for
granting of future options to employees and others under the supplemental
plan and 96,000 shares available for granting options to non-employee
directors.
PENSION PLAN
The Company has a tax-deferred, contributory, defined contribution pension
plan covering all full-time eligible employees who have completed one year of
service with the Company. The Company matches up to two percent of gross
salary of the contribution of each participating employee which resulted in
pension expense of approximately $61,400 in 1995, $48,000 in 1994 and $31,400
in 1993.
COMMITMENTS AND CONTINGENCIES
The Company is a party to certain other legal actions which have arisen in
the ordinary course of business. After consultation with legal counsel,
management is of the opinion that none of these matters will have a material
effect on the consolidated financial position of the Company.
The Company has noncancellable operating leases for facilities. Future
minimum payments under these leases are: $276,000 in 1996 and $99,000 in
1997. Rental expense amounted to $340,000, $318,000 and $473,000 for 1995,
1994 and 1993, respectively.
SEGMENTS OF BUSINESS
The Company operates principally in two industries: developing, manufacturing
and selling health care products; and selling or leasing real estate. The
Company has no inter-segment sales. Operating profit represents total
revenues less costs and expenses. In computing operating profit, general
corporate and interest expenses have not been deducted.
Identifiable assets by industry represent those assets that are used in the
Company's operation in each industry. Corporate assets which are not
allocated to any segment are principally cash and equivalents, investments
and a portion of operating property.
Selected financial data for each of the industry segments in which the
Company operates is presented below:
Year Ended June 30,
(In thousands) 1995 1994 1993
Operating revenues:
Health care products $28,637 $22,362 $19,843
Real estate 5,387 5,137 2,921
$34,024 $27,499 $22,764
Operating profit (loss)
Health care products $10,241 $7,907 $7,490
Real estate 1,630 1,143 869
Not allocated (789) (770) (727)
$11,082 $8,280 $7,632
Identifiable assets:
Health care products $25,096 $16,789 $14,669
Real estate 8,889 8,122 6,178
Not allocated 12,560 13,689 10,906
$46,545 $38,600 $31,753
Depreciation and
amortization:
Health care products $979 $825 $532
Real estate 17 106
$979 $842 $638
Capital expenditures:
Health care products $3,745 $2,131 $2,011
Real estate 51
$3,745 $2,131 $2,062
The Company does not currently have any foreign operations; however, it does
sell products to distributors in foreign countries. Foreign sales were
approximately $6,744,000 in 1995, $4,619,000 in 1994 and $4,107,000 in 1993.
<PAGE>
ITEM 9:DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEMS 10 -- 12: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference from the Registrant's Definitive Proxy Statement
Sections Entitled "Voting Matters/Significant Shareholders", "Nominees for
Director and Share Ownership", "Executive Officers", "Report of the Compensation
Committee" and "Executive Compensation".
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial Statement
Schedules, and Exhibits required to be included in this report:
1. Financial Statements - Included in Part II, Item 8 of this report:
Independent Auditors' Report
Consolidated statements of income - Years ended June 30, 1995, 1994 and 1993
Consolidated balance sheets - June 30, 1995 and 1994
Consolidated statements of shareholders' equity - Years ended June 30, 1995,
1994 and 1993
Notes to consolidated financial statements
2. Financial Statement Schedules - included in Part IV of this report are as
follows:
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. Exhibits:
(10) Material Contracts
10.1* Amended and Restated Employment Agreement between Gary L. Crocker
and Research Industries Corporation dated November 11, 1983. (Exhibit
No. 10.1 to Form 10-K for 1983.)
10.2* Research Industries Corporation Incentive Stock Option Plan dated
February 10, 1983. (Exhibit No. 10.2 to Form 10-K for 1983.)
10.3* Research Industries Corporation Non-Statutory Stock Option Plan
dated July 22, 1985. (Exhibit No. 10.3 to Form 10-K for 1985.)
10.4* Second Employment Agreement between Gary L. Crocker and Research
Industries Corporation dated October 3, 1986. (Exhibit 10.4 to
Form 10-K for 1987.)
10.5* Asset Purchase Agreement between Research Medical Inc., Research
Industries Corporation, and Vascular International, Inc. dated April
1,1988. (Exhibit 10.5 to Form 10-K for 1988.)
10.6* Royalty Agreement between Research Industries Corporation and
Research Medical, Inc. dated August 15, 1987. (Exhibit 10.6 to Form
10-K for 1988.)
10.7* Stock Purchase Agreement between Research Industries Corporation
and Karissim Corporation dated May 18, 1989. (Exhibit to Form 8-K
filed May 26, 1989.)
10.8* Plan and Agreement of Reorganization and Merger between Research
Industries Corporation and Research Medical Acquisition Corporation
and Research Medical, Inc. dated July 27,1990. (Exhibit to Form 8-K
filed August 10, 1990.)
10.9* Second Amendment to Second Employment Agreement between Gary L.
Crocker and Research Industries Corporation dated January 10, 1991.
(Exhibit to Form 10-Q filed April 30, 1991.)
10.10* Third Amendment to Second Employment Agreement between Gary L.
Crocker and Research Industries Corporation dated March 4, 1991.
(Exhibit to Form 10-Q filed April 30, 1991.)
10.11* Fourth Amendment to Second Employment Agreement between Gary L.
Crocker and Research Industries Corporation dated June 1, 1994.
10.12* ZMI Peripheral Flow Meter/RMI Agreement (Exhibit to Form 10-Q
filed October 15, 1994.)
(11) Statement Re: Computation of Per Share Earnings
(16) Letter regarding change in certifying accountant--incorporated by
reference from Form 8-K filed November 11, 1993*.
(21) Subsidiaries of the registrant
(23) Consent of Independent Auditors
*Exhibits so marked have been filed with the Securities and Exchange Commission
as part of the indicated filing and are incorporated herein by reference.
4. Reports on Form 8-K
None
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
YEAR ENDED JUNE 30, 1995
53
(IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
(1)
Balance Charged (2)
at to Charged Balance
Begin- Costs to Deduc- at End
ning of and Other tions(a) of
Period Expenses Accounts Period
YEAR ENDED JUNE 30, 1995
Allowance for doubtful accounts $(186) $(222) $133 $(275)
Inventory obsolescence reserve (210) (7) 7 (210)
$(396) $(229) $140 $(485)
YEAR ENDED JUNE 30, 1994
Allowance for doubtful accounts $(80) (163) $57 $(186)
Inventory obsolescence reserve (140) (227) 157 (210)
$(220) $(390) $214 $(298,)
YEAR ENDED JUNE 30, 1993
Allowance for doubtful accounts $(165) (7) $92 $(80)
Inventory obsolescence reserve (133) (90) 83 (140)
$(298) $(97) $175, $(220)
(a) Represent write-offs against the respective valuation accounts
<PAGE>
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.
RESEARCH INDUSTRIES CORPORATION
/s/ Gary L. Crocker 9/23/94
Gary L. Crocker, Chairman, President Date
and Chief Executive Officer
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.
/s/ Charles J. Aschauer, Jr.. 9/23/94
Charles J. Aschauer, Jr., Director Date
/s/ Edward M. Blair, Jr. 9/23/94
Edward M. Blair, Jr., Director Date
/s/ William A. Gay, Jr. 9/23/94
William A. Gay, Jr., Director Date
/s/ Louis M. Haynie 9/23/94
Louis M. Haynie, Director Date
/s/ Sterling D. Sessions 9/23/94
Sterling D. Sessions, Director Date
/s/ Mark W. Winn 9/23/94
Mark W. Winn, Vice President and Date
Chief Financial Officer
/s/ V. Kelly Randall 9/23/94
V. Kelly Randall, Secretary/Treasurer Date
and Corporate Controller
EXHIBIT 11
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
1995 1994 1993
PRIMARY
Average shares outstanding 9,244,000 9,271,000 9,205,000
Net effect of dilutive stock options
based on treasury stock method using
average market price * * *
TOTAL 9,244,000 9,271,000 9,205,000
Net income $7,445,005 $5,763,638 $4,935,219
Earning per share $ .81 $ .62 $.54
FULLY DILUTED
Average shares outstanding 9,244,000 9,271,000 9,205,000
Net effect of dilutive stock options
based on the treasury stock method
using period-end market price, if
higher than average market price 395,000 * *
TOTAL 9,639,000 9,271,000 9,205,000
Net income $7,445,005 $5,763,638 $4,935,219
Earnings per share $ .77 $ .62 $ .54
EXHIBIT 21
RESEARCH INDUSTRIES CORPORATION
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
TERA PHARMACEUTICAL, INC. CALIFORNIA
BENCHMARK, INC. UTAH
EXHIBIT 23
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statements No.'s
33-99635, 33-99305, 33-77316 and 33-79132 on Forms S-8 of Research Industries
Corporation and subsidiaries of our report dated August 4, 1995, relating to the
consolidated balance sheets of Research Industries Corporation and subsidiaries
as of June 30, 1995 and 1994, and the related consolidated statements of income,
stockholders'equity, and cash flows for the years then ended, which report
appears in the June 30, 1995 annual report on Form 10-K of Research Industries
Corporation and subsidiaries.
KPMG Peat Marwick LLP
Salt Lake City, Utah
September 26, 1995
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