UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995
0-6944
(Commission File Number)
RESEARCH MEDICAL, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0277827
(State of Incorporation) (IRS Employer
Identification number)
6864 SOUTH 300 WEST, SALT LAKE CITY, UTAH 84047
(Address of registrant's principal executive office)
801-562-0200
(Registrant's telephone number)
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), (2) has been subject to such filing requirements
for the past 90 days. (1) Yes X No (2) Yes X No
--- ----
The number of shares of common stock outstanding as of December 31, 1995 was
9,557,092.
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1995
Consolidated Statements of Income and Retained Earnings for the
Three Month Periods Ended December 31, 1995 and 1994
Consolidated Statements of Income and Retained Earnings for the
Three Month Periods Ended December 31, 1995 and 1994
Consolidated Statements of Income and Retained Earnings for the
Six Month Periods Ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II OTHER INFORMATION
Signatures
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, June 30,
1995 1995
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,747,917 $ 2,093,326
Short-term investments 4,023,344 3,923,055
Accounts receivable 6,904,191 6,118,031
Current portion of notes receivable 4,200,966 3,931,583
Inventories 10,652,310 8,084,838
Prepaid expenses 932,559 1,006,990
Deferred tax asset 444,000 401,300
TOTAL CURRENT ASSETS 29,905,287 25,559,123
LAND HELD FOR RESALE 2,755,009 2,314,924
PROPERTY AND EQUIPMENT 9,094,241 7,949,774
LONG-TERM INVESTMENTS 2,396,136 2,483,277
NOTES RECEIVABLE, less current portion 6,585,805 5,586,078
PATENTS AND LICENSES 2,665,762 2,651,516
$53,402,240 $46,544,692
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,003,012 $ 913,330
Income taxes payable 693,370 103,260
Accrued payroll, commissions and royalties 546,812 746,005
Other accrued expenses 384,311 171,415
Current portion of long-term debt 99,996 99,996
TOTAL CURRENT LIABILITIES 2,727,501 2,034,006
LONG-TERM DEBT, less current portion 122,432 172,430
DEFERRED INCOME TAXES 358,500 485,800
SHAREHOLDERS' EQUITY
Common Stock, par value $.50 per share;
authorized 20,000,000 shares, issued and
outstanding 9,557,092 shares in
December and 9,407,634 shares in June 4,823,267 4,759,846
Additional paid-in capital 11,383,602 9,391,071
Retained earnings 34,708,169 30,621,604
Treasury stock, at cost (721,231) (920,065)
50,193,807 43,852,456
$53,402,240 $46,544,692
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
Three Months Ended December 31,
1995 1994
REVENUES
Health care $ 7,939,228 $ 6,530,038
Real estate 1,817,174 864,044
9,756,402 7,394,082
COSTS AND EXPENSES
Cost of health care sales 3,107,129 2,553,922
Real estate transaction costs 1,083,540 331,758
Selling, general and administrative 1,943,141 1,657,769
Research and development 477,172 315,329
6,610,982 4,858,778
OPERATING INCOME 3,145,420 2,535,304
OTHER INCOME (EXPENSE)
Interest expense (28,599) (19,308)
Interest income and other 181,152 114,389
152,553 95,081
INCOME BEFORE INCOME TAXES 3,297,973 2,630,385
INCOME TAX EXPENSE 1,160,000 950,000
NET INCOME 2,137,973 1,680,385
Retained earnings at beginning of period 32,570,196 24,656,204
RETAINED EARNINGS AT END OF PERIOD $34,708,169 $26,336,589
PRIMARY EARNINGS PER SHARE $ .22 $ .18
PRIMARY WEIGHTED AVERAGE SHARES OUTSTANDING 9,917,000 9,426,000
FULLY-DILUTED EARNING PER SHARE $ .22 $ .18
FULLY-DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 9,927,000 9,509,000
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
Six Months Ended December 31,
1995 1994
REVENUES
Health care $ 15,539,199 $ 12,531,745
Real estate 3,053,963 2,116,014
18,593,162 14,647,759
COSTS AND EXPENSES
Cost of health care sales 6,102,625 4,948,084
Real estate transaction costs 1,874,698 1,238,023
Selling, general and administrative 3,716,863 3,222,146
Research and development 898,353 536,098
12,592,539 9,944,351
OPERATING INCOME 6,000,623 4,703,408
OTHER INCOME (EXPENSE)
Interest expense (35,068) (28,270)
Interest income and other 376,010 264,852
340,942 236,582
INCOME BEFORE INCOME TAXES 6,341,565 4,939,990
INCOME TAX EXPENSE 2,255,000 1,780,000
NET INCOME 4,086,565 3,159,990
Retained earnings at beginning of period 30,621,604 23,176,599
RETAINED EARNINGS AT END OF PERIOD $34,708,169 $26,336,589
PRIMARY EARNINGS PER SHARE $ .41 $ .34
PRIMARY WEIGHTED AVERAGE SHARES OUTSTANDING 9,871,000 9,422,000
FULLY-DILUTED EARNING PER SHARE $ .41 $ .33
FULLY-DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 9,881,000 9,505,000
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31,
1995 1994
OPERATING ACTIVITIES
Net income $4,086,565 $3,159,990
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 644,494 464,291
Deferred income taxes (170,000) (25,000)
Income tax benefit from exercise of
non-qualified stock options 865,890 48,863
Changes in operating assets & liabilities:
Accounts receivable (786,160) 579,447
Notes receivable (1,416,820) (1,002,908)
Inventories (2,567,472) (1,222,222)
Land held for resale (440,085) 409,959
Other assets (46,688) (1,682,044)
Current liabilities 693,495 (1,703,901)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 863,219 (973,525)
INVESTING ACTIVITIES
Net change in investments (13,148) 701,917
Issuance of investment notes receivable (171,436)
Repayment of investment notes receivable 319,146 41,524
Purchase of property and equipment (1,682,088) (2,288,858)
NET CASH USED IN INVESTING ACTIVITIES (1,547,526) (1,545,417)
FINANCING ACTIVITIES
Repayment of long-term debt (49,998) (49,998)
Purchase of treasury stock (338,140)
Reissuance of treasury stock 198,834 177,288
Proceeds from the sale of Common Stock 1,190,062 73,244
NET CASH PROVIDED BY (USED IN) FINANCING 1,338,898 (137,606)
ACTIVITIES
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 654,591 (2,656,548)
Cash and Equivalents at Beginning of Period 2,093,326 2,794,092
CASH AND EQUIVALENTS AT END OF PERIOD $2,747,917 $137,544
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements of Research Medical, Inc. and its
subsidiaries as of December 31, 1995, and for the three month period then
ended, were prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations. In the opinion of management, all necessary
adjustments (which are of a normal recurring nature) have been made to the
financial statements to present fairly its financial position, results of
operations and cash flows. The results of operations for the periods
presented are not necessarily indicative of the results for the respective
complete years. The Company has an audited annual report for the three
years ended June 30, 1995. It is suggested that the attached financial
statements be read in conjunction with the annual report and the financial
statements and notes contained therein.
INVENTORIES
DECEMBER 31, June 30,
1995 1995
Raw materials $4,375,829 $3,574,729
Work-in-process 1,193,887 861,860
Finished goods 5,082,594 3,648,249
$10,652,310 $8,084,838
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.
STATEMENTS OF CASH FLOWS
Interest paid was approximately $35,000 in fiscal 1996 and $28,000 in fiscal
1995. Income taxes paid were $969,000 and $2,200,000 for the first six
months of fiscal 1996 and 1995, respectively.
CONTINGENCIES
The Company is a party to certain legal actions which have arisen in the
ordinary course of business. After consultation with legal counsel,
management is of the opinion that there are no pending or threatened legal
matters which will have a material effect on the consolidated financial
position of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED OPERATING HIGHLIGHTS
Research Medical Inc.'s earnings were $2,137,973 for the second quarter of
fiscal 1996, a 27% increase over net income of $1,680,385 recorded in the
same quarter of the prior year. Earnings per share were $.22 and $.18 for
these two periods, respectively. Total revenues increased from $7,394,082
in the second quarter of fiscal 1995 to $9,756,402 in the same quarter of
fiscal 1996, which represents a growth rate of 32%. The total growth rate
is comprised of a 22% increase in health care revenues and a 110% increase
in real estate revenues over the comparable period in 1995.
Selling, general and administrative expenses (SG&A) for the second quarter
of fiscal 1996 were 24% of health care revenues compared to 25% in 1995.
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 revenue
The growth in SG&A of 17% is lower than health care revenue growth for the
period providing positive leverage for the year. The modest growth is
reflective of the Company's desire to maintain its current organizational
structure to focus more of its resources into several significant research
and development projects.
Interest income and other has increased for the second three months of
1996 compared with 1995, reflecting more investable assets.
The combined effective federal and state income tax rate was approximately
36% for both periods. Fluctuations occur based on several factors including
the tax basis of real estate sold.
HEALTH CARE OPERATIONS
Net health care sales were $7,939,228 in the second quarter of 1996 compared
to $6,530,038 in the same quarter of 1995, which represents a 22% increase.
Medical device and solution sales increased by 35%, proprietary
pharmaceuticals decreased by 27% and sterile solution product sales
increased by 8% for the quarter. The growth in medical device 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. Vascular sales continued to show improvement, particularly in
carotid shunts, but were lower than expectations due to ongoing vendor
quality issues with the IschemiaAlerta Monitor product. These quality
issues and other relationship concerns with Zertl Medical have forced the
Company to initiate litigation aiming at resolution of these concerns, and
no further revenue or income is expected from the IschemiaAlerta products
except perhaps at the resolution of the litigation.
The decline in proprietary pharmaceuticals resulted from a
disproportionate number of units sold in the first quarter, particularly to
distributors, in anticipation of an October 1 price increase. Sterile
solutions sales are directly attributable to OEM customer orders which have
increased slightly during the current quarter. Increases in sterile
solution sales are not expected to continue.
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 cardiovascular surgical products.
Although the Company does not have foreign operations, it does sell
worldwide to specialized cardiovascular distributors and other customers in
foreign markets. Foreign sales increased by 23% in the second quarter over
the same quarter of the prior year. These sales represented 22% of sales in
the second quarter of 1996 compared to 22% in 1995.
During the second quarter, the Company announced a strategic distribution
agreement with COBE Laboratories, Inc. (COBE), a wholly owned subsidiary of
Sweden's Gambro Group, for the distribution of the Company's specialty
bypass circuitry and cardioplegia catheters as well as the development of
and distribution of a new line of biocompatible catheters. COBE is a
leading manufacturer and marketer of oxygenators and bypass circuits for
open-heart surgery. Under the agreement, the Company's catheters will be
bundled with COBE oxygenators and marketed together. This bundling
agreement is intended to strengthen both firms' market share.
Gross margins were 61% in the second quarter of fiscal 1996 compared to
61% for the same quarter in the prior year. Device gross margins improved
substantially as a result of cost improvements in the manufacturing
processes reducing the standard cost of many important products. These
improvements were partially offset by declining sales of proprietary
pharmaceutical products and lower margins on sterile solutions.
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.
The Company continues to invest resources in research and product
development to introduce new products. 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 increased
51% from $315,329 in the second quarter of 1995 to $477,172 in the second
quarter of fiscal 1996. This increase reflects the Company's preparation
for new products, such as Biofiltera hemocentrator, carotid artery vascular
shunts, the ongoing human clinical trials of the Heparin Removal Device, the
Autologous Fibrinogen Delivery Kit and CirkuitGuarda. Both the Biofiltera
hemocentrator and CirkuitGuarda were introduced for sale to customers at the
end of the second quarter.
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.
Real estate sales in the second quarter and the first six months of 1996
include the sale of industrial land, interest on real estate contracts and
revenue from the sale of the Company's interests in other real estate
projects.
Gross margins for real estate were 40% for the second quarter of 1996
compared to 62% for the same period in 1995 and 39% for the second six
months of fiscal 1996 compared to 41% for the same period in fiscal 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 sold.
FINANCIAL CONDITION
The Company's balance sheet continued to improve during the second quarter
of fiscal 1996. The following key measurements are indicative of the
excellent liquidity and strong financial position of the Company:
DEC. June
(In thousands except ratios) 31, 30,
1995 1995
Cash and investments $9,167 $8,500
Working capital 27,178 23,525
Shareholders' equity 50,194 43,852
Current ratio 11:1 13:1
Cash and investments increased from June 30, 1995 as a result of the
Company's operations. Funds used in investing activities were generated
from operations and the sale of common stock through the exercise of stock
options.
Accounts receivable increased by approximately $786,000 or 13% from June
30, 1995. This increase is a result of sales during the month of December
generating the higher level of receivables.
Inventories increased by approximately $2,567,000 or 32% from June 30,
1995. This increase is comprised of higher inventory levels in all
components. As the Company adds new products, its inventory levels
increase. Each new product category adds numerous product codes for various
sizes and configurations of the products. Each of the new product codes
must be stocked in finished goods inventory and in raw materials purchased
for the appropriate sizes. Additionally, with the commencement of
manufacturing operations to produce previously purchased catheter
subassemblies, all of the component parts of the manufactured products must
now be carried in inventory. Moreover, as the Company began producing the
new raw material catheters, it continued purchasing sufficient catheter
subassemblies from its suppliers assuring a continuous flow of finished
goods products through the transition to in-house produced raw material
catheter subassemblies resulting in a larger than normal supply of raw
materials at quarter end.
The Company is just completing a $2 million upgrade to its manufacturing
facility which not only updates its processes for certain currently
manufactured products but also provides additional manufacturing
capabilities for products not now produced in-house.
There have been no other significant changes in capitalization or
financial status during the quarter that are not reflected in the financial
statements.
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference from "Notes to Consolidated Financial
Statements--Contingencies" on page 6 herein.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
Exhibit 11--Statement Re: Computation of Per Share Earnings
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESEARCH INDUSTRIES CORPORATION
/s/ Gary L. Crocker February 5, 1996
Gary L. Crocker, President and Date
Chief Executive Officer
/s/ Mark W. Winn February 5, 1996
Mark W. Winn, Sr. Vice President, Date
Chief Financial Officer, and Secretary
/s/ J. Steven Johnson February 5, 1996
J. Steven Johnson, Date
Corporate Controller
EXHIBIT 11
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Six Months Ended December 31,
1995 1994
PRIMARY
Average shares outstanding 9,488,000 9,183,000
Net effect of dilutive stock options based
on treasury stock method using average
market price 383,000 239,000
Total 9,871,000 9,422,000
Net income $4,086,565 $3,159,990
Earning per share $.41 $.34
FULLY DILUTED
Average shares outstanding 9,488,000 9,183,000
Net effect of dilutive stock options based
on the treasury stock method using period-
end market prices 393,000 322,000
Total 9,881,000 9,418,000
Net income $4,086,565 $3,159,900
Earnings per share $.41 $.33
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