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,
1996 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 MEDICAL, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0277827
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6864 SO. 300 WEST, MIDVALE, 84047
UTAH (Zip Code)
(Address of principal executive
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 re-
quired 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
statements 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 $18.125 on August 30, 1996,
and for the purpose of this computation only, the assumption that all
registrant's directors and executive officers are affiliates) was
approximately $174 million.
The number of shares of the registrants common stock $.50 par value,
outstanding as of August 31, 1996, was 9,625,332.
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 11, 1996 are
incorporated by reference into Part III.
<PAGE>
RESEARCH MEDICAL, INC.
PART I
ITEM 1: BUSINESS
(A)
GENERAL DEVELOPMENT OF BUSINESS
Research Medical, Inc. was incorporated under Utah Law in 1968. As used
in this report, except as otherwise indicated in information incorporated
by reference, "Research" means Research Medical, Inc. 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 29 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.
develops, manufactures and markets the disposable medical devices and
markets pharmaceutical products including RIMSO-50(R) and a biological
preservative agent, Cryoserv(R). 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-50(R) and Cryoserv(R) for sale to
RMI and it provides contract manufacturing of sterile solutions for sale
in OEM markets.
Current Developments
Minimally Invasive Heart Surgery:
Fiscal 1996 saw sweeping changes taking place in the open-heart surgery
market. New techniques were advocated for operating on the heart in a
minimally invasive environment. In April 1996, in conjunction with the
annual meeting of the American Association of Thoracic Surgeons held in
San Diego, Research Medical sponsored an international symposium on
minimally invasive surgical techniques.
There are two emerging segments of the minimally invasive heart surgery
arena. The first involves operating on a non-beating heart through a
variety of small holes in the chest walls, while placing the patient on
life support. The second segment involves removing a small section of
rib and operating on a beating heart. In this segment, the patient is
not placed on life support. At the April symposium, Research Medical
announced its intentions to enter the minimally invasive surgery arena
with an array of new disposable products that would enable surgeons to
better perform these difficult surgeries in both the beating heart and
non-beating heart segments.
Perhaps the most important of these new products involves a patent-
pending system consisting of four balloon and non-balloon catheter
devices which place the patient on life support, stop the heart from
beating, and deliver cardioplegia to preserve the heart muscle. This
system facilitates the isolation of the heart from the whole body for
performing minimally invasive cardiac bypass surgery. Other minimally
invasive cardiac bypass surgery products include the VisufloTM with Fiber
Optic Light Source for clearing blood from the surgical sight, several
blood-shunting devices to move the patient's blood around the surgical
sight, and a heart elevator intended to isolate and stabilize the
surgical area. As these are 510(k) type devices, it is estimated that
these products will be introduced to market throughout the next twelve
months.
BiofilterTM Hemoconcentrator:
In June 1995 the Company signed an exclusive license agreement with
Althin Medical, a leading manufacturer of blood filtration dialysis
devices, to distribute a newly developed cardiovascular hemoconcentrator.
A hemoconcentrator is a disposable device filled with hollow fibers which
filter the patient's blood during and after bypass surgery and remove
excess fluids. These fluids can accumulate due to the administration of
heart muscle preservation cardioplegia solutions, bypass circuit priming
and intravenous solutions. If not removed, these fluids can cause post-
operative stress on a patient's heart. The BiofilterTM was introduced in
the United States during the third fiscal quarter of 1996 (February
1996). Sales of the device exceeded $500,000 in Fiscal 1996, and the
Company anticipates sales of the BiofilterTM to increase in Fiscal 1997.
International sales of the BiofilterTM are expected to begin sometime in
the second half of Fiscal 1997.
Vascular Products:
In February 1995, Research Medical purchased Imodex, a silicone catheter
manufacturing company, which provided Research with a new line of balloon
shunts for carotid artery surgery (endarterectomy) procedures to remove
plaque build-up in the neck. Shortly before the Imodex purchase, an
independent study by the National Institute of Neurological Disorders and
Stroke published interim results of a nationwide, randomized controlled
clinical study for patients undergoing carotid endarterectomy. Findings
indicated there was a relative risk reduction from stroke of 55 percent
when using the carotid endarterectomy procedure for patients with
vascular blockages of 60 percent or greater.
Subsequently, the Company also internally developed and introduced a line
of non-balloon shunts and latex balloon shunts, making Research Medical
the only company to provide a full line of shunts, both balloon and non-
balloon models, for use in endarterectomy procedures. In Fiscal 1996
sales of the Company's shunt products grew by approximately 32 percent to
about $500,000 and are expected to grow faster than the corporate norm
again in 1997 given the wider and more comprehensive range of shunts
available.
In June 1996 Research Medical announced its intention to market a new
vascular product, an embolectomy catheter with viewing lens and a fluid
irrigation lumen, for use in removing large blood clots (embolectomies)
from the legs, arms and other peripheral blood vessels. The product will
be introduced first in international markets while 510(k) applications
are pending in the U.S. The Company anticipates U.S. introduction
sometime in the second half of Fiscal 1997. For the first time, surgeons
are able to cost-effectively view the interior of a blood vessel to
determine if the entire embolus has been removed and to determine if
further surgery is needed.
The Company anticipates introduction of a complete line of vascular
products during the second half of Fiscal 1997, including a line of
thrombectomy catheters, irrigation catheters and perfusion catheters for
treatment of peripheral vascular blockages, in addition to the
embolectomy catheters.
Autologous Fibrinogen Delivery Kit (AFD):
The Autologous Fibrinogen Delivery Kit is being developed in order to
address surgeons' concerns about using donor blood components in
procedures requiring the formation of blood clots to seal off small blood
vessels and stop excessive bleeding in the surgical field. The AFD Kit
enables the surgical team to secure an amount of the patient's own blood
in the operating room just prior to surgery and extract the fibrinogen-
rich plasma. When placed in a special, dual-barreled syringe and
combined at the tip with commercially available thrombin, which is
provided in the Kit, a blood clot results almost immediately. Post-
operative bleeding is a serious condition of many surgical patients, in
some cases requiring large drainage tubes, blood transfusions and lengthy
hospital stays.
The potential markets for the AFD Kit include open-heart bypass surgery
patients, plastic surgery patients, burn patients, as well as surgeries
for the brain, liver, spleen, kidneys and hip replacement. Modifications
have been made to the AFD Kit during the initial international market
test last Fall, and the product is expected to be reintroduced
internationally in the first half of Fiscal 1997. In June 1996, a pilot
study of 10-12 burn patients was begun at The State University of New
York at Stony Brook in order to prove efficacy of the clotting mechanism.
The Company expects additional clinical studies in the U.S. to be needed
prior to FDA authorization to market.
Heparin Removal Device (HRD):
The Heparin Removal Device has been developed within the Company as a
response to a clinical need to remove heparin, an anti-clotting agent,
from a patient's blood following open-heart surgery. Every bypass
surgery patient is administered large amounts of heparin prior to surgery
to prevent the catheters, tubing and oxygenator/pump equipment from
forming blood clots during the procedure. Following surgery, the heparin
must be removed or neutralized to prevent extensive post-operative
bleeding. The current procedure involves administration of another drug,
protamine sulfate, which neutralizes the clotting effects of heparin but
does not remove the heparin molecules from the bloodstream.
Approximately 10% of the world's 750,000 open-heart surgery patients each
year suffer some form of adverse reaction to protamine sulfate. These
reactions include sudden drop in blood pressure, loss of blood cell
components necessary for normal clotting to occur, lung congestion, and
fatal allergic reactions.
Using the Company's selective sorbent technology, a device has been
developed which separates the heparin-carrying plasma from the rest of
the patient's blood, physically binds with the heparin molecule, and
returns the heparin-free plasma to the bloodstream. Animal studies have
been conducted at the Cleveland Clinic and the University of Texas at
Galveston which verify the efficacy of the heparin removal system in
animals. In 1995 the HRD was successfully used on a patient at the
University of Texas in an emergency-use procedure after other life-saving
techniques failed. The data from this patient was submitted to the FDA
as a supplement to its IDE application. Following extensive review by
the FDA, the Company hopes to begin human clinical testing sometime in
Fiscal 1997.
Abroad, clinical studies using the HRD in humans are being conducted in
two European countries. It is anticipated these studies will conclude in
mid-fiscal 1997, with full European marketing to occur in the second half
of Fiscal 1997 pending a "CE Mark" which is the European Community
product acceptance label.
Disposable Medical Devices:
Research Medical has negotiated several patent and technology license
agreements with surgeon inventors, university research centers, 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 cardioplegia catheters and solutions, bypass circuitry
catheters and cardiac-assist catheters. The function of each of these
product groups is discussed below:
A. Cardioplegia Catheters and Solutions. Cardioplegia is a technique
used to preserve the heart muscle during open-heart surgery. A nutrient-
rich solution is infused into the heart muscle via a balloon-tipped,
retrograde catheter to slow the heart's metabolism and protect the
tissue. Catheters, cardioplegia pressure monitoring sets, infusion kits
and heat exchangers are used to infuse and monitor the delivery of the
cardioplegia solution. The Company provides a wide array of products to
allow surgeons to perform these procedures. The depth and breadth of
this product line has enabled the Company to compete effectively in
hospital bidding situations in the recently implemented managed care
environment. In addition, the Company's patented retrograde balloon-
tipped cardioplegia catheter is being modified for use in the new field
of minimally invasive heart bypass surgery.
B. Bypass Circuitry Catheters. These high flow catheters are used to
transport a patient's blood to and from the heart/lung bypass machine in
an open-heart bypass surgery procedure. One or two venous return
catheters are placed into the right atrium of the heart, drawing from
both the inferior and superior vena cava, and transporting the patient's
blood to the life support system. An aortic arch cannula is placed in
the top of the aortic arch and is used to return oxygenated, pumped blood
back into the patient's body, thereby bypassing the heart and lungs.
Another small device, a vent catheter is often placed within the large
portion of the heart muscle to provide drainage to portions of the heart
which otherwise may not be properly drained.
C. Cardiac-Assist Catheters. These devices are used for higher-risk
patients including those who have experienced prior open-heart surgeries.
The cardiac-assist catheters are inserted into the chest or femoral
arteries and veins (groin access) to connect a patient's heart to a
bedside cardiac-assist pump either prior to 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, as their high blood flow rates allow patients to
be connected to life support pumps and oxygenators via the relatively
small femoral vessels. These devices are being modified to provide
patient life support in some of the Company's minimally invasive heart
surgery line of products.
Vascular Devices:
In 1995 Research Medical established a vascular surgery product line in
order to diversify its market participation. The Company has introduced
several new products into this division, the most significant thus far
being carotid artery shunts, both balloon and non-balloon models, for use
in endarterectomy procedures to remove plaque from neck arteries. In
Fiscal 1996 development work was completed on a new embolectomy catheter
with a viewing lens and irrigation lumen which, for the first time,
provides surgeons the ability to view the inside of a peripheral blood
vessel following removal of large blood clots. Additional new vascular
products are in the Company's development pipeline which are expected to
be marketed in the second half of Fiscal 1997.
Blood Management Products: These products were developed in conjunction
with surgeon inventors to facilitate the visualization of the surgical
field or suture site by absorbing or dispersing blood and controlling
bleeding in arteries and/or vessels. Several products have been
developed and marketed in this product segment, including suction wands
to remove blood flowing directly into the operating field; the patented
VisuFloTM Surgical Site Visualization Wand, which gently blows a stream
of moistened, filtered air directly onto the surgical site to remove
blood flowing from a severed heart artery; a pericardial sump, which is
placed under the heart to suction pooled blood from the pericardium; and
the Yacoubian Clamp, a small device used to stop severed arteries from
bleeding by gently clamping together the sides of the artery; and the
Company's BiofilterTM hemoconcentrator which removes excess fluid from
the patient's blood following open-heart surgery. Additional new
products in this category will include the Company's Autologous
Fibrinogen Delivery Kit and the Heparin Removal Device.
Pharmaceutical Products:
Research Medical has an exclusive distribution agreement with a
subsidiary of IVAX/McGaw, Inc., Central Admixture Pharmacy Services
(CAPS) to sell the CAPS customized cardioplegia solutions service to
cardiovascular surgeons. This alliance is beneficial to both CAPS and
RMI since the custom solutions are sold to the same surgeons which
purchase the Company's cardiovascular products. RMI earns a commission
on the sale of each unit of the solutions. The addition of this product
makes Research Medical the only firm offering a complete package of
cardioplegia disposables and solutions.
The Company's proprietary pharmaceutical product, RIMSO-50(R), is the
only FDA-approved drug sold to drug wholesalers, hospitals, pharmacies
and directly to urologists for the treatment of interstitial cystitis, a
painful bladder disease. The Company also markets Cryoserv(R) mainly to
blood banks as a cryopreservative solution for human tissue. Both RIMSO-
50(R) and Cryoserv(R) are manufactured at the Company's Tera
Pharmaceuticals plant in California, and given their niche exclusivity
generate above normal corporate gross margins.
Private Label Medical Solutions:
In addition to the Company's RIMSO-50(R) and Cryoserv(R) products, Tera
Pharmaceuticals also manufactures and sells a wide range of medical
solutions such as eye washes and skin neutralizers to other companies
under private label. Sales of such products have increased recently, and
are projected to increase again in 1997 as there are relatively few
competitive vendors for short run, low volume sterile specialty
solutions. As no contractual arrangements exist with customers, revenues
may fluctuate from time to time.
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 $1,731,000 in 1996, $1,264,000 in 1995 and $801,000 in
1994. 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 on product development continued to
increase in 1996 due to new product developments in the Vascular,
Minimally Invasive Surgery and Blood Management areas including human
clinical trials on the Autologous Fibrinogen Delivery Kit and the Heparin
Removal Device. Additionally, the Company continued and increased its
investment in the development of process technology for the fabrication
of thin-walled catheters and balloons required by these new products.
The Company also invested in several line extensions and upgrades of its
existing major product lines and its newer lines of stroke shunt and
embolectomy vascular devices.
Health Care Environment:
In the current health care environment, hospitals are continuing to
scrutinize their operating costs and purchasing practices. The
environment has increased the frequency of hospitals trying to bundle
products together for competitive bidding to reduce the overall costs of
supplies. The Company has invested to significantly broaden its product
lines and formed certain strategic alliances and distribution
partnerships to improve its capability to meet competitive bidding
situations.
As a result of these purchasing trends, 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. The Company continues to make investments in production
improvements to lower product costs in the face of the managed care
environment.
Methods of Distribution:
Domestic Cardiovascular, Vascular and Blood Management products are
distributed through independent domestic sales representatives and dealer
organizations, with representation by approximately 65 sales people and
managers. The Company also has five direct sales people. In addition,
these direct and dealer 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 intends to add
additional direct sales staff in the coming year. 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 pharmaceutical, RIMSO-50O as well as CryoservO
, are marketed to urologists and other physicians primarily through trade
publications, and are sold directly by the Company to doctors,
pharmacies, hospitals, and distributors 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
ordinary course of business from numerous suppliers. The majority of
these materials are generally available, and no serious shortages or
delays have been encountered. 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
materially 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. The Company seeks patents on new products
whenever feasible. However, the Company's success will depend in part on
its ability to obtain patents on current or future products or process
technologies, defend its patents, maintain trade secrets and operate
without infringing upon the proprietary rights of others. The Company
also has licenses or ownership rights to certain other U.S. and foreign
patent and patent applications. There can be no assurance that patents,
U.S. or foreign, will be obtained, or that, if issued or licensed to the
Company, they will be enforceable or will provide substantial protection
from competition or be of commercial benefit to the Company or that the
Company will possess the financial resources necessary to enforce or
defend any of its patent rights. The commercial success of the Company
will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology and distribution licenses
upon which certain of the Company's current products are, or any future
products under development might be, based. Litigation, which could
result in substantial cost to the Company, may be necessary to enforce
the Company's patent and license rights or determine the scope and
validity of such rights. If any of the Company's products are found to
infringe upon patents or other rights owned by third parties, the Company
could be required to obtain a license to continue to manufacture or
market such products. There can be no assurance that licenses to such
patents rights would be made available to the Company on commercially
reasonable terms, if at all. If the Company does not obtain such
licenses, it could encounter delays in marketing affected products while
it attempts to design around such patents or it could find that the
development, manufacture or sale of products requiring such licenses is
not possible. The Company currently has certain licenses from third
parties and in the future may require additional licenses from other
parties to develop, manufacture and market commercially viable products
effectively. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, or that the
patents underlying such licenses will be valid and enforceable. 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 distribution of products in the markets in which it competes.
Although no single company 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
comparable 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
developed and implemented by trained professionals, result in rigid
specifications for raw materials, packaging materials, labels,
sterilization procedures, overall 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.
In November 1995 the Company launched an aggressive initiative to expand
the current quality system to meet the requirements of, and become
certified to ISO-9001 and EN 46001. A new Quality Policy manual and the
supporting operational procedures have been prepared, approved, released,
and are being implemented and audited in preparation for third party
certification in November 1996. ISO certification will be required to
sell medical devices in the European Community after June 30, 1998.
Regulatory Environment and the FDA:
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. The cost of such recalls could be significant in a given
financial period.
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 anticipated that future environmental expenditures will not
materially affect earnings or the Company's competitive position.
Product Liability:
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technologies or
products is alleged to have resulted in adverse effects. Such risks will
exist even with respect to those products that receive regulatory
approval for commercial sale. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can
be no assurance that it will avoid significant product liability
exposure. The Company currently has product liability insurance;
however, there can be no assurance that the level or breadth of any
insurance coverage will be sufficient to fully cover potential claims.
There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not materially and adversely affect the business or
financial condition of the Company.
Volatility of Company Stock Price; Absence of Dividends:
The market prices for securities of emerging companies, including the
Company, have historically been highly volatile. Future announcements
concerning the Company or its competitors may have a significant impact
on the market price of the Company's common stock. Such an announcement
might include financial results, the results of product testing,
technological innovations, new commercial products, governmental
regulations, developments concerning proprietary rights, litigation or
public concern as to safety of the Company's products. No dividends have
been paid on the Company's common stock to date, and the Company does not
anticipate paying cash dividends in the foreseeable future.
REAL ESTATE ACTIVITIES
The Company has investments in real estate which it holds for resale
which continue to diminish. 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 earnings
and cash flows generated from health care operations. The Company's real
estate holdings at June 30, 1996 are included below under "Item 2:
Properties".
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. Generally, the Company's real estate activities are focused in
the metropolitan Salt Lake City, Utah market. A downturn in the local
real estate market, should it occur, could impair the Company's ability
to generate future earnings from real estate. Moreover, such a downturn
may adversely effect payments due the Company under obligations
associated with real estate note and contracts receivable.
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, 1996, the Company employed 277 people.
Generally, the business of the Company is not seasonal, although health
care sales decline somewhat in summer months due to patient and surgeon
vacations.
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.
Forward-Looking Statements:
Any statements made by the Company in this document that are forward
looking are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Readers of this document are
cautioned that forward-looking statements involve risk and uncertainties
which may affect the Company's business prospects and performance. This
includes economic, competitive, governmental, technological, and other
factors discussed in this document, the accompanying Annual Report, and
previous filings with the Securities and Exchange Commission.
(D)
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
All of the Company's sales for the past three years have been in the United
States except for foreign sales of approximately $8,186,000 in 1996,
$6,744,000 in 1995 and $4,619,000 in 1994. 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.
ITEM 2:
PROPERTIES
The Company owns the following properties:
Available for sale:
4 acres of commercial land--Ogden, Utah.
1 acre of commercial land--Mesa, Arizona
Warehouse and office space
2 buildings--Midvale, Utah
Future Plant Expansion
2 acres --Midvale , Utah
The Company leases two additional manufacturing and warehouse facilities in
Midvale, Utah, under a short-term leases with options to purchase. One of
the facilities also serves as the Company's corporate offices. The Company
leases Tera's manufacturing facilities in Buena Park, California under a
short-term lease with an option to purchase.
ITEM 3:
LEGAL PROCEEDINGS
See page 28 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 `RMED''. The low and high sales prices of the Company's Common
Stock as quoted on the NASDAQ Monthly Statistical Report during 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1996 1995
Low High Low High
Three months ended:
<S> <C> <C> <C> <C>
September 30 21 7/8 30 1/2 7 3/4 11 3/4
December 31 22 1/4 30 1/8 10 7/8 14 3/4
March 31 16 3/4 27 1/2 13 18 5/8
June 30 19 7/8 26 1/8 16 1/8 23 1/4
</TABLE>
There were approximately 1,200 common stockholders of record as of
September 9, 1996. Approximately 88% of the Company's outstanding shares
are held by nominees who hold the shares for many additional shareholders.
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
This summary should be read in conjunction with the related consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
(In thousands except per 1996 1995 1994 1993 1992
share data)
<S> <C> <C> <C> <C> <C>
Revenues $40,030 $34,02 $27,499 $22,764 $17,568
Cost of sales 17,118 14,953 12,922 9,312 6,978
Net income before
cumulative effect 9,147 7,445 5,764 5,204 4,115
Net income 9,147 7,445 5,764 4,935 4,115
Earnings per share
before cumulative
effect .96 .81 .62 .57 .44
Earnings per share .96 .81 .62 .54 .44
Fully-diluted
earnings per share .93 .77
Total assets 58,972 46,545 38,600 31,753 25,185
Long-term debt, less 72 172 272 375 ---
current portion
</TABLE>
QUARTERLY RESULTS OF OPERATIONS
Three Months Ended
(In thousands September December March June
except per 30 31 31 30
share data)
1996
Revenues $8,837 $9,756 $11,683 $9,754
Cost of sales 3,786 4,191 5,684 3,457
Income before
income taxes 3,044 3,298 3,791 4,086
Net income 1,949 2,138 2,444 2,616
Earnings per share .20 .22 .26 .27
Fully-diluted
earnings per share .20 .22 .25 .26
1995
Revenues $7,254 $7,394 $9,803 $9,574
Cost of sales 3,300 2,886 4,841 3,926
Income before 2,310 2,630 2,978 3,642
income taxes
Net income 1,480 1,680 1,913 2,372
Earnings per share .16 .18 .21 .26
Fully-diluted
earnings per share .16 .18 .20 .24
ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
CONSOLIDATED OPERATING HIGHLIGHTS
Research Medical, Inc. achieved record earnings in 1996 of $9,146,955
compared to earnings of $7,445,005 in 1995 and $5,763,638 in 1994.
Earnings per share were $.96 in 1996, $.81 in 1995 and $.62 in 1994
resulting in growth rates of 19%, 31% and 15% for the three years,
respectively. Fully diluted earnings per share were $.93 for 1996 compared
to $.77 per share for 1995. Total revenues increased from $27,498,806 in
1994 to $34,024,404 in 1995 and $40,030,316 in 1996, which represent growth
rates of 21%, 24% and 18% 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 $7,608,329,
$6,726,535 and $5,495,435 for 1996, 1995 and 1994, representing 23%, 23%
and 25% 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 13% is lower than health care revenue
growth for fiscal 1996 of 16% 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 increased over 1995 due to an increase in the Company's
invested assets. 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, which are typically held-to-maturity, as
compared to the cost of the debt as well as non-financial considerations.
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 from approximately 34% in 1994 to
approximately 36% in 1995 and 1996. 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 reduce taxes
paid on the portion of income from foreign sales. Management anticipates
that the effective tax rate may increase slightly in 1997 as its level of
taxable income approaches the federal 35% tax bracket and tax-free interest
becomes a smaller portion of total pre-tax income.
HEALTH CARE OPERATIONS
Health care sales: Net health care sales were $33,312,062 in 1996 compared
to $28,636,915 in 1995 and $22,361,944 in 1994, which represent increases
of 16%, 28% and 13%, respectively. Medical device and solution sales
increased by 19% in 1996 compared to 32% in 1995 and 14% in 1994,
proprietary pharmaceuticals by 16% in 1996 compared to an increase of 15%
in 1995 and a decrease of 3% in 1994 and sterile solution products
decreased 7% in 1996 compared to increases of 16% and 32% in 1995 and 1994.
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 the introduction of new blood
management and vascular products. Health care disposable device sales,
excluding proprietary pharmaceuticals and sterile solutions, grew by 19% in
1996 to $29.3 million from 22.1 million in 1995 with gains realized in
every product segment. Sales of the Company's Cardioplegia products grew
by 18%, Bypass Circuitry devices were up 15%, Cardiac-Assist devices grew
18%, Blood Management products were up 92%, and Vascular Shunts were up
71%. 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.
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 $1,442,000 in 1996 to $8,186,000, and
represented approximately 25% of health care sales in 1996 compared to 24%
in 1995 and 21% in 1994.
Earnings per share contributed by health care operations for 1996, 1995
and 1994 were $.79, $.70 and $.54, respectively, reflecting earnings growth
rates of 13%, 30% and 17%.
Gross margins: Gross margins, although slightly higher in 1996, were
reported as 61% for both 1996 and 1995. This increase is reflective of
cost improvements made during the past year as a result of continuing
investment in the dip-molding manufacturing facility 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.
Gross margins increased to 61% in 1995 from 60% in 1994. This increase is
reflective of cost improvements made during the past year as a result of
the new dip-molding manufacturing facility and commissions earned from
solution sales for CAPS. 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. However, the managed care environment in health care is
generally placing a downward pressure on providers' prices.(see Risk
Factors)
Selling, General and Administrative Expenses: SG&A costs are discussed in
the consolidated operating highlights since direct SG&A costs related to
real estate are insignificant, which makes the allocation of corporate SG&A
costs between health care and real estate 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 $1,730,623 in 1996, $1,263,561 in 1995 and $801,420
in 1994. The increase of 37% from 1995 reflects the Company's continued
commitment to the Heparin Removal Device and Autologous Fibrinogen Delivery
Kit projects. R&D expenditures were 58% higher in 1995 than 1994 due
principally to these same projects. In addition to costs for the heparin
removal device, and autologous fibrinogen delivery kit, R&D includes the
costs for developing new products including minimally invasive surgical
products as well as extensions of existing product lines in its core
businesses. The Company has several projects in various stages of testing
and regulatory approval, including new vascular and minimally invasive
cardiac surgery catheters.
REAL ESTATE OPERATIONS
The Company has a small 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 and anticipates
significantly reduced levels of activity in fiscal year 1997.
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
$5,137,000 in 1994 to $5,387,000 in 1995 and $6,718,000 in 1996 resulting
from continued activity in the local real estate market.
Gross margin on real estate fluctuated from 22% in 1994 to 30% in 1995
and 38% in 1996. 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.
FINANCIAL CONDITION
The strength of the Company's balance sheet continued to improve during
fiscal 1996. The following key measurements are indicative of the
excellent liquidity and strong financial position of the Company:
(In thousands 1996 1995 1994
except ratios)
Cash and
investments $13,261 $ 8,500 $ 9,915
Working capital 29,805 23,525 13,816
Cash flow from
operations 5,183 1,143 4,993
Shareholders'
equity 56,323 43,852 34,467
Current ratio 15:1 13:1 5:1
Cash and investments increased from June 30, 1995 by approximately $4.8
million. This increase is due to increased net income as well as the
conversion of real estate contracts into mortgage-backed securities.
Working capital improved from increases in cash and investments, accounts
receivable and inventories due to an increase in health care activity as
well as an increase in notes receivable from higher levels of real estate
activities.
Cash generated from operations increased primarily from higher income
levels. Internally generated funds have been and are expected to continue
to be sufficient to meet working capital needs and future capital
expenditures.
Inventories increased by approximately $2.7 million or 33% from June 30,
1995. Raw materials increased by approximately $368,000 million due
primarily to the increase in health care sales. The increase in work-in-
process of approximately $740,000 is related to increased production levels
at the end of the year and new product introductions. Finished goods
increased by approximately $1.6 million. Of this amount, $1.0 million
relates to the new vascular products and the new Biofilter as well as
increased stocking levels of RetroplegiaTM, the Company's largest selling
product, with the remaining increase due to overall increase in health care
activity.
Accounts receivable increased $2.9 million from 1995 reflecting higher
sales and increased foreign sales which typically carry longer than
standard payment terms.
Land held for resale decreased as a result of the property sales during
the year.
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, 1996, the Company had not entered into
any material commitments for capital expenditures.
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 balance sheets - June 30, 1996 and 1995
Consolidated statements of income - Years ended June 30, 1996, 1995 and
1994
Consolidated statements of shareholders' equity - Years ended June 30,
1996, 1995 and 1994
Consolidated statements of cash flows - Years ended June 30, 1996, 1995
and 1994
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.
<PAGE>
Independent Auditors' Report
We have audited the consolidated balance sheets of Research Medical, Inc.
and subsidiaries as of June 30, 1996 and 1995 and the consolidated
accompanying statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1996. In
connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as of June 30, 1996 and
for the three 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.
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 Medical, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three year period ended June 30, 1996, 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, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Salt Lake City, Utah
August 7, 1996
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1996 1995
ASSETS
CURRENT ASSETS
Cash and equivalents $3,204,283 $2,093,326
Short-term investments 4,524,164 3,923,055
Accounts receivable (less allowances
for doubtful accounts of $534,000 in 9,029,916 6,118,031
1996 and $275,000 in 1995)
Current portion of notes receivable 3,002,652 3,931,583
Inventories 10,747,006 8,084,838
Prepaid expenses 942,851 1,006,990
Deferred tax asset 475,500 401,300
TOTAL CURRENT ASSETS 31,926,372 25,559,123
LAND HELD FOR RESALE 906,728 2,314,924
PROPERTY AND EQUIPMENT 9,602,584 7,949,774
LONG-TERM INVESTMENTS 5,532,410 2,483,277
NOTES RECEIVABLE, less current portion 8,404,073 5,586,078
PATENTS AND LICENSES 2,599,834 2,651,516
$58,972,001 $46,544,692
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 703,052 $ 913,330
Income taxes payable 514,259 103,260
Accrued payroll, commissions and 572,680 746,005
royalties
Other accrued expenses 231,809 171,415
Current portion of long-term debt 99,996 99,996
TOTAL CURRENT LIABILITIES 2,121,796 2,034,006
LONG-TERM DEBT, less current portion 72,434 172,430
DEFERRED INCOME TAXES 455,000 485,800
SHAREHOLDERS' EQUITY
Common Stock, par value $.50 per share;
authorized 20,000,000 shares, issued and
outstanding 9,626,825 shares in 1996 and
9,407,634 shares in 1995 4,849,907 4,759,846
Additional paid-in capital 12,297,297 9,391,071
Retained earnings 39,768,559 30,621,604
Treasury stock, at cost, 72,989 shares
in 1996 and 112,058 shares in 1995 (592,992) (920,065)
56,322,771 43,852,456
$58,972,001 $46,544,692
The accompanying notes are an integral part of the consolidated financial
statements. <PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
1996 1995 1994
REVENUES
Health care $33,312,062 $28,636,915 $22,361,944
Real estate 6,718,254 5,387,489 5,136,862
40,030,316 34,024,404 27,498,806
COSTS AND EXPENSES
Cost of health care sales 12,941,056 11,194,747 8,928,103
Real estate transaction costs 4,177,102 3,757,833 3,993,694
Selling, general and 7,608,329 6,726,535 5,495,435
administrative
Research and development 1,730,623 1,263,561 801,420
26,457,110 22,942,676 19,218,652
OPERATING INCOME 13,573,206 11,081,728 8,280,154
OTHER INCOME (EXPENSE)
Interest expense (70,784) (56,190) (35,954)
Interest income and other 719,533 534,467 549,438
648,749 478,277 513,484
INCOME BEFORE INCOME TAXES 14,221,955 11,560,005 8,793,638
INCOME TAX EXPENSE 5,075,000 4,115,000 3,030,000
NET INCOME $ 9,146,955 $ 7,445,005 $ 5,763,638
EARNINGS PER SHARE $ .96 $ .81 $ .62
WEIGHTED AVERAGE SHARES OUTSTANDING 9,544,000 9,244,000 9,271,000
FULLY DILUTED EARNINGS PER SHARE $ .93 $ .77
FULLY-DILUTED WEIGHTED AVERAGE 9,871,000 9,639,000
SHARES OUTSTANDING
The accompanying notes are an integral part of the consolidated financial
statements. <PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at July 9,257,066 $4,628,534 $7,174,879 $17,412,961 $29,216,374
1, 1993
Issuance of
stock through 80,617 40,308 501,799 542,107
employee
benefit plans
Income tax
benefit from 56,441 56,441
exercise of
non-qualified
stock options
Treasury stock (131,000) (1,111,109) (1,111,109)
purchased
Net income 5,763,638 5,763,638
Balance at June 9,206,683 4,668,842 7,733,119 23,176,599 (1,111,109) 34,467,451
30, 1994
Exercise of 182,009 91,004 838,680 929,684
stock options
Income tax
benefit from 727,481 727,481
exercise of
non-qualified
stock options
Treasury stock (40,000) (337,500) (337,500)
purchased
Treasury stock 58,942 91,791 528,544 620,335
issued
Net income 7,445,005 7,445,005
Balance at June 9,407,634 4,759,846 9,391,071 30,621,604 (920,065) 43,852,456
30, 1995
Exercise of 180,122 90,061 1,478,872 1,568,933
stock options
Income tax
benefit from 1,110,001 1,110,001
exercise of
non-qualified
stock options
Treasury stock 39,069 317,353 327,073 644,426
issued
Net income 9,146,955 9,146,955
BALANCE AT JUNE 9,626,825 $4,849,907 $12,297,297 $39,768,559 $(592,992) $56,322,771
30, 1996
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements. <PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1996 1995 1994
OPERATING ACTIVITIES
Net income $9,146,955 $7,445,005 $5,763,638
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,291,046 978,927 841,565
Deferred income taxes (105,000) (120,000) (352,000)
Income tax benefit from exercise 1,110,001 727,481 56,441
non-qualified stock options
Gain on property exchange (361,227)
Changes in operating assets and
liabilities:
Accounts receivable (2,911,885) (341,476) (303,110)
Notes receivable (2,084,002) (1,960,996) (3,072,293)
Inventories (2,662,168) (3,508,217) (488,151)
Land held for resale 1,408,196 1,177,692 2,371,357
Other assets (97,769) (2,000,346) (1,147,024)
Current liabilities 87,790 (1,254,769) 1,684,144
NET CASH PROVIDED BY OPERATING 5,183,164 1,143,301 4,993,340
ACTIVITIES
INVESTING ACTIVITIES
Net change in investments (3,650,242) 714,848 (2,367,874)
Issuance of investment notes (171,436) (895,000)
receivable
Repayments from investment notes 366,373 74,014 59,463
receivable
Purchase of property and equipment (2,730,265) (3,745,452) (2,131,291)
NET CASH USED IN INVESTING (6,185,570) (2,956,590) (5,334,702)
ACTIVITIES
FINANCING ACTIVITIES
Proceeds from long-term debt 261,707
Repayment of long-term debt (99,996) (99,996) (364,286)
Purchase of treasury stock (337,500) (1,111,109)
Sale of treasury stock 644,426 620,335
Proceeds from sale of Common Stock 1,568,933 929,684 542,107
NET CASH PROVIDED BY (USED IN) 2,113,363 1,112,523 (671,581)
FINANCING ACTIVITIES
DECREASE IN CASH AND EQUIVALENTS 1,110,957 (700,766) (1,012,943)
Cash and Equivalents at Beginning 2,093,326 2,794,092 3,807,035
of Period
CASH AND EQUIVALENTS AT END OF $3,204,283 $2,093,326 $2,794,092
PERIOD
The accompanying notes are an integral part of the consolidated financial
statements. <PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Research Medical, Inc. 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 focusing on specialized cardiovascular,
vascular, and blood management devices and specialty pharmaceuticals to
hospitals, distributors and other medical-related facilities throughout the
United States and certain foreign countries. The Company also sells and
leases real estate in Utah.
CASH EQUIVALENTS: The Company considers cash equivalents to be all highly
liquid investments with maturities of three months or less when purchased.
INVESTMENTS: Short and long-term investments at June 30, 1996 and 1995
consist of a diversified portfolio of municipal, tax-free, triple-A rated
bonds and U.S. Treasury securities, as well as mortgaged-backed securities
at June 30, 1996, 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 value 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.
LAND HELD FOR RESALE: Land held for resale consisting of commercial and
industrial land 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 using the straight-
line method. Depreciable lives range from 3 years to 40 years.
PATENTS AND LICENSES: The costs of acquiring licenses and patents are
amortized over their estimated useful lives up to 17 years using the
straight-line method. Accumulated amortization was $613,879 and $400,289
at June 30, 1996 and 1995, 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: The Company accounts for income taxes using the asset and
liability method. Under this method, deferred assets and liabilities are
recognized for the future tax consequences attributable to differences
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. 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.
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.
USE OF ESTIMATES: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
INVESTMENTS
All of the Company's investments are held-to-maturity as follows:
June 30,
1996 1995
Municipal bonds $6,055,881 $5,905,601
US government obligations 1,450,693 500,731
Mortgage-backed securities 2,550,000
$10,056,574 $6,406,332
All securities mature within twenty-four months other than the mortgaged
backed securities which mature June 30. 2001. No significant unrealized
holding gains or losses existed at the respective year ends.
NOTES RECEIVABLE
Notes receivable were generated from sales of land and other properties
which are the security collateral for the receivables. Almost all of the
security properties are located in northern Utah and market value of these
properties is subject to the local economic conditions. Although unlikely,
a down turn in the local real estate market could expose the Company to
credit risk as the notes are secured by property only. Notes receivable
from a land developer accounted for 48% of total notes receivable in 1996
and 30% in 1995.(The Company also held $2,550,000 in mortgaged-backed
securities from the same land developer at June 30, 1996.) 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 10% per annum with weighted average interest rates
of 7.4% and 7.8% at June 30, 1996 and 1995, respectively. Scheduled
principal payments from these receivables for the next five fiscal years
are:
1997 $3,002,652 2000 $2,091,069
1998 516,761 2001 3,529,606
1999 486,990
INVENTORIES
June 30,
1996 1995
Raw materials $3,942,306 $3,574,729
Work-in-process 1,601,922 861,860
Finished goods 5,202,778 3,648,249
$10,747,006 $8,084,838
PROPERTY AND EQUIPMENT
June 30,
1996 1995
PRODUCTION FACILITIES
Land $402,351 $162,000
Buildings and improvements 3,476,801 2,823,650
Furniture and fixtures 1,498,368 1,211,674
Machinery and equipment 7,050,997 5,274,961
Construction work-in-progress 1,122,705 1,348,674
13,551,222 10,820,959
Less accumulated depreciation and 3,948,638 2,871,185
amortization
TOTAL OPERATING PROPERTIES $9,602,584 $7,949,774
DEBT
The Company has a note payable to a local bank at a variable interest rate
which was 8.75% at June 30, 1996. The note is collateralized by land and a
building with a carrying value of $500,000. Future principal payments are
$99,996 in fiscal 1997 and $72,434 in fiscal 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 $71,000 in 1996, $56,000 in 1995 and $36,000 in 1994.
Interest in 1996 included borrowings against the line of credit; however,
there was nothing borrowed against the line at June 30, 1996.
INCOME TAXES
Significant components of income tax expense from continuing operations are
as follows:
Year Ended June 30,
1996 1995 1994
Current $5,180,000 $4,235,000 $3,382,000
Deferred (105,000) (120,000) (352,000)
$5,075,000 $4,115,000 $3,030,000
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,
1996 1995 1994
Income tax at federal $4,835,000 $3,930,000 $2,990,000
statutory rate
State income taxes, net of 471,000 377,000 270,000
federal benefit
Foreign Sales Corporation (121,000) (102,000) (100,000)
exemption
Tax-free interest (125,000) (97,000) (99,000)
Other 15,000 7,000 (31,000)
$5,075,000 $4,115,000 $3,030,000
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 are as
follows:
June 30,
1996 1995
Deferred tax assets:
Receivables and inventories, $296,200 $180,900
reserves and allowances
UNICAP Adjustment 88,400 75,900
Inventories, cumulative effect 87,500 117,900
Other 40,000 26,600
512,100 401,300
Deferred tax liabilities:
Property and equipment, (491,600) (384,800)
depreciation differences
Land held for resale, bases (102,000)
differentials
(491,600) (485,800)
Net Deferred Tax Asset (Liability) $20,500 $(84,500)
Net Current Deferred Tax Asset 475,500 401,300
Net Non-current Deferred Tax (455,000) (485,800)
Liability
Net Deferred Tax Asset (Liability) $20,500 $(84,500)
Income taxes paid were $3,659,000, $4,047,500 and $3,230,000 in 1996, 1995,
and 1994, respectively.
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 Director 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,
1996 are summarized as follows:
Year Ended June 30,
1996 1995 1994
Beginning balance 831,652 718,634 620,202
Granted 165,138 280,977 465,959
Exercised (180,105) (167,959) (19,000)
Canceled/forfeited (100,000) 0 (348,527)
Ending balance 716,685 831,652 718,634
Option prices per share:
Exercised during year $3.75 $3.42 $3.42
- - -
$19.25 $14.63 $8.38
Outstanding at year end $3.42 $3.42 $3.42
- - -
$22.74 $14.63 $13.00
Of the above options at June 30, 1996, 656,324 were exercisable.
Expiration dates for these options range from 1998 to 2006 with a weighted
average option price of $11.74. 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 905,729 shares available at
June 30, 1996 for granting of future options to employees and others under
the supplemental plan and 82,500 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 $86,700 in 1996, $61,400 in
1995 and $48,000 in 1994.
COMMITMENTS AND CONTINGENCIES
The Company acquired the distribution rights to market and sell certain
vascular blood flow monitors and sensors, and inventory necessary for
initial distribution of the product. When it was determined by the Company
that the acquired product did not meet the represented specifications and
the manufacturer would not acknowledge or make the required modifications,
the Company initiated litigation that alleges among other things breach of
contract for which the Company is seeking damages. The defendant has filed
a counter claim also seeking damages. Management and the Company's legal
counsel intend to vigorously prosecute its claims and defend against the
defendant's counterclaims. However, as the legal proceeding is in an early
stage, no estimate can be made at this time of the potential outcome or
potential loss if any.
The Company is also 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: $292,000 in 1997 and $36,000 in
1998 through 2001. Rental expense amounted to $354,000, $340,000 and
$318,000 for 1996, 1995 and 1994, respectively.
SEGMENTS OF BUSINESS
The Company operates principally in two industries: developing,
manufacturing and selling health care products; and selling 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) 1996 1995 1994
Operating revenues:
Health care products $33,312 $28,637 $22,362
Real estate 6,718 5,387 5,137
$40,030 $34,024 $27,499
Operating income (loss)
Health care products $11,751 $10,241 $7,907
Real estate 2,541 1,630 1,143
Not allocated (719) (789) (770)
$13,573 $11,082 $8,280
Identifiable assets:
Health care products $32,420 $25,096 $16,789
Real estate 10,810 8,889 8,122
Not allocated 15,742 12,560 13,689
$58,972 $46,545 $38,600
Depreciation and
amortization:
Health care products $1,291 $979 $825
Real estate 17
$1,291 $979 $842
Capital expenditures:
Health care products $2,730 $3,745 $2,131
Real estate
$2,730 $3,745 $2,131
Sales to a device distributor accounted for approximately 11% of total
revenue in 1996, 1995, and 1994. Sales to a land developer accounted from
approximately 10% of total revenue in 1996.
The Company does not currently have any foreign operations; however, it
does sell products to distributors in foreign countries. Foreign sales
were approximately $8,186,000 in 1996, $6,744,000 in 1995 and $4,619,000 in
1994.
ACCOUNTING STANDARDS NOT YET ADOPTED
In October of 1995, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation (`FASB 123''). The Company is required to adopt the
provisions of this statement for years beginning after December 15, 1995.
This statement encourages all entities to adopt a fair value based method
of accounting for employee stock options or similar equity instruments.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic-value method of accounting prescribed
by APB opinion No. 25, Accounting for Stock Issued to Employees (`APB
25'). Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in this statement had been
applied. It is currently anticipated that the Company will continue to
measure compensation costs in accordance with APB 25 and provide the
disclosures required by FASB 123.
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, 1996, 1995 and
1994
Consolidated balance sheets - June 30, 1996 and 1995
Consolidated statements of shareholders' equity - Years ended June 30,
1996, 1995 and 1994
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 Medical, Inc. 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 Industries
Corporation, Research Medical, Inc., and Vascular International,
Inc. dated April 1,1988. (Exhibit 10.5 to Form 10-K for 1988.)
10.6* Royalty Agreement between Research Medical, Inc. and
Research Industries Corporation 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. (Exhibit to Form 10-K for 1994.)
10.12* ZMI Peripheral Flow Meter/RMI Agreement (Exhibit to Form 10-
Q filed October 15, 1994.)
10.13 Exclusive Sales and Manufacturing Agreement between Research
Industries Corporation and Adam Spence Corporation dated December
16, 1992.
(11) Statement Re: Computation of Per Share Earnings
(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 MEDICAL, INC. AND SUBSIDIARIES
YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
COL. A COL. B COL. C COL. E COL. E
ADDITIONS
(1) (2)
Balance Charged
at to Costs Charged Balance
Begin- and to Deduc- at End
Name of Debtor ning of Expenses Other tions(a) of
Period Accounts Period
YEAR ENDED JUNE 30, 1996
Allowance for doubtful $(275) $(321) $62 $(534)
accounts
Inventory obsolescence (210) (64) 14 (260)
reserve
$(485) $(385) $76 $(794)
YEAR ENDED JUNE 30, 1995
Allowance for doubtful $(186) $(222) $133 $(275)
accounts
Inventory obsolescence (210) (7) 7 (210)
reserve
$(396) $(229) $140 $(485)
YEAR ENDED JUNE 30, 1994
Allowance for doubtful $(80) (163) $57 $(186)
accounts
Inventory obsolescence (140) (227) 157 (210)
reserve
$(220) $(390) $214 $(396)
(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 MEDICAL, INC.
/s/ Gary L. Crocker 9/23/96
Gary L. Crocker, Date
Chairman, President
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. 9/23/96
Charles J. Aschauer, Jr., Director Date
/s/ Edward M. Blair, Jr. 9/23/96
Edward M. Blair, Jr., Director Date
/s/ William A. Gay, Jr. 9/23/96
William A. Gay, Jr., Director Date
/s/ Louis M. Haynie 9/23/96
Louis M. Haynie, Director Date
/s/ Sterling D. Sessions 9/23/96
Sterling D. Sessions, Director Date
/s/ Mark W. Winn 9/23/96
Mark W. Winn, Vice President and Date
Chief Financial Officer
/s/ J. Steven Johnson 9/23/96
J. Steven Johnson, Treasurer Date
EXHIBIT 11
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended June 30,
1996 1995 1994
EARNINGS PER SHARE
Average shares outstanding 9,544,000 9,244,000 9,271,000
Net income $9,146,955 $7,445,005 $5,763,638
Earning per share $ .96 $ .81 $ .62
FULLY DILUTED
Average shares outstanding 9,544,000 9,244,000 9,271,000
Net effect of dilutive stock options
based on the treasury
stock method using period-end market
price, if higher
than average market price 327,000 395,000 N/A
TOTAL 9,871,000 9,639,000 9,271,000
Net income $9,146,955 $7,445,005 $5,763,638
Earnings per share $ .93 $ .77 $ .62
EXHIBIT 21
RESEARCH MEDICAL, INC.
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
TERA PHARMACEUTICAL, INC. CALIFORNIA
BENCHMARK, INC. UTAH
RESEARCH INDUSTRIES CORPORATION 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 Medical, Inc.
and subsidiaries of our report dated August 7, 1996, relating to the
consolidated balance sheets of Research Medical, Inc. and subsidiaries as
of June 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended, which report
appears in the June 30, 1996 annual report on Form 10-K of Research Medical,
Inc. and subsidiaries.
KPMG Peat Marwick LLP
Salt Lake City, Utah
EXHIBIT 10.13
AGREEMENT
The intent of this agreement is to outline the essential conditions
of an Exclusive Sales and Manufacturing Agreement between Research
Industries Corporation (RIC), 6864 South 300 West, Midvale, Utah 84047
and Adam Spence Corporation (ASC), 1746 Route 34, Wall, New Jersey 07719.
RIC is desirous of obtaining exclusive sales rights to various
devices of their design and specification for cardiovascular surgery and
related market applications as defined in Exhibit A, produced with
Thinwall Reinforced Tubing (TRT) developed and manufactured by ASC.
ASC is desirous of obtaining a long-term exclusive manufacturing
agreement to produce devices which incorporate their TRT for RIC's market
applications as defined in Exhibit A. While both RIC and ASC are desirous
of establishing an exclusive agreement with regard to products utilizing
TRT technology in the defined market applications in Exhibit A, (that is,
RIC will not purchase such TRT products from other vendors in these market
applications and ASC will not produce TRT for third parties in these
market applications), both parties agree and anticipate that ASC will
manufacture and develop TRT products for other market applications for
other companies.
Therefore, the companies agree to the following:
1. To work together in a mutually exclusive and confidential manner
to design, develop, and produce prototypes and production volumes of
cardiovascular surgery devices incorporating TRT. As specific products
are qualified, in the defined market applications in Exhibit A, they will
become part and parcel of this Agreement. Qualified product defined as of
the date of this Agreement are listed in Exhibit B.
2. ASC agrees not to manufacture for its own account or for any
other person or entity, any product which is substantially similar to, or
competitive with, TRT devices marketed and/or defined by RIC in the market
application areas defined in Exhibit A, or other qualified products which
become part and parcel of this Agreement.
3. RIC agrees to give ASC right of first refusal to produce any and
all TRT devices which RIC desires for their defined market applications in
Exhibit A, excluding existing products in these defined market
applications already being sold by RIC prior to the date of this
Agreement.
4. RIC agrees to pay to ASC $100,000 to assist in the design,
development and manufacture of equipment to produce the range of TRT
devices required by RIC. Payment is to be made as follows:
a. $50,000 upon the mutual signing of this Agreement.
b. $25,000 upon receipt and acceptance of prototypes of 16F,
18F and 20F catheters ordered on RIC Purchase Order Numbers 2481 and
2482, the first qualified product on Exhibit B.
c. $25,000 upon receipt and acceptance of prototypes of a
second qualified product, as yet undefined, within 12 months of the
date of this Agreement.
This equipment will remain the exclusive property of ASC and an be
used by them to produce non-competitive TRT devices.
5. Pricing of prototypes and production quantities of the initial
qualified cardiovascular surgery devices will be as per ASC Quotation
Numbers 01043-01048 dated 7/28/92. Further pricing will be negotiated in
good faith. Terms of payment will be net 30 days.
6. ASC agrees to exercise its best efforts to comply with agreed
upon shipping dates specified in RIC purchase orders.
7. ASC warrants to RIC that all products sold to RIC shall be made
in accordance with agreed to specifications, and in accordance with Good
Manufacturing Procedures.
8. Each party shall indemnify and hold the other party (including
its present and former officers, directors, shareholders, employees and
agents) harmless from and against any and all damages, losses,
settlements, costs and expenses of any kind or nature, incurred as a
result of negligence in an area not the responsibility of and beyond the
control of the other party.
9. As both parties are desirous of building long-term and
sustainable market positions in the defined exclusive RIC applications
markets utilizing the TRT technology, the term of this Agreement shall be
for a period of 5 years, beginning on the date this Agreement is executed,
and shall be automatically renewed for additional periods of 3 years,
unless either party, at least 180 days prior to the end of a period,
declares by registered mail its intention not to renew, with the
understanding and agreement that any such non-renewal is permissible
solely on the grounds of material contract non-compliance or non-
performance. If, during the term of this Agreement, ASC is unwilling to
continue to provide TRT devices as requested by RIC, ASC will transfer
technology, at RIC's expense, to enable RIC to produce the products
outlined in Exhibit A.
Research Industries Corporation
By: /s/ Gary L. Crocker
---------------------------------
Gary L. Crocker, President & CEO
Adam Spence Corporation
By: /s/ A. Adam Spence
---------------------------------
A. Adam Sanford, Chief Executive
Officer
EXHIBIT A
Defined Application Areas of RIC Market
Exclusivity for TRT Product
FEMORAL ACCESS CATHETERS
Clinical Applications:
Back-up for PTCA
Cardiac Shock (Pre/Post-Op)
Hypothermia
Adult ECMO (extra-Corporal Membrane Oxygenation)
Ped/Neonatal ECMO
CENTRAL VENOUS CATHETERS
Clinical Applications:
CVP (Femoral/Jugular)
Intravenous
Blood Access
Left Atrial Pressure
OPEN HEART CATHETERS
Clinical Applications:
Ventricular Assist
Venous Return (Routine CPB)
Aortic Arch (Routine CPB)
CARDIOPLEGIA CATHETERS
Clinical Applications:
Retrograde
Antegrade
EXHIBIT B
Qualified Products
Description and Date Qualified
16F, 18F and 20F catheters as defined on RIC Purchase Order #2481 and
#2482
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,204,283
<SECURITIES> 4,524,164
<RECEIVABLES> 9,563,916
<ALLOWANCES> (534,000)
<INVENTORY> 10,747,006
<CURRENT-ASSETS> 31,926,372
<PP&E> 13,551,222
<DEPRECIATION> (3,948,638)
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0
0
<COMMON> 4,849,907
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<TOTAL-LIABILITY-AND-EQUITY> 56,322,771
<SALES> 40,030,316
<TOTAL-REVENUES> 40,030,316
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