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 SEPTEMBER 30, 1996
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 September 30, 1996
was 9,628,706.
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1996
and June 30, 1996 3
Consolidated Statements of Income and
Retained Earnings for theThree Month Periods Ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Three Month Periods EndedSeptember 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
PART II OTHER INFORMATION 10
Signatures 11
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, June 30,
1996 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,030,904 $ 3,204,283
Short-term investments 5,723,665 4,524,164
Accounts receivable 9,461,887 9,029,916
Current portion of notes 4,080,404 3,002,652
receivable
Inventories 10,466,451 10,747,006
Prepaid expenses 920,251 942,851
Deferred tax asset 571,500 475,500
TOTAL CURRENT ASSETS 33,255,062 31,926,372
LAND HELD FOR RESALE 2,286,573 906,728
PROPERTY AND EQUIPMENT 9,873,096 9,602,584
LONG-TERM INVESTMENTS 5,160,032 5,532,410
NOTES RECEIVABLE, less
current portion 8,612,832 8,404,073
PATENTS AND LICENSES 2,547,861 2,599,834
$61,735,456 $58,972,001
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 461,757 $ 703,052
Income taxes payable 1,503,259 514,259
Accrued payroll, 473,456 572,680
commissions and royalties
Other accrued expenses 213,286 231,809
Current portion of long- 99,996 99,996
term debt
TOTAL CURRENT LIABILITIES 2,751,754 2,121,796
LONG-TERM DEBT, less current 47,434 72,434
portion
DEFERRED INCOME TAXES 451,000 455,000
SHAREHOLDERS' EQUITY
Common Stock, par value
$.50 per share;authorized
20,000,000 shares,
issued 9,628,706
shares in September
and 9,626,825 shares in June 4,851,607 4,849,907
Additional paid-in capital 12,290,669 12,297,297
Retained earnings 42,018,361 39,768,559
Treasury stock, at cost,
74,508 shares in September (675,369) (592,992)
and 72,989 shares in June
58,485,268 56,322,771
$61,735,456 $58,972,001
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
Three Months Ended September 30,
1996 1995
REVENUES
Health care $ 9,067,600 $ 7,599,971
Real estate 1,227,234 1,236,789
10,294,834 8,836,760
COSTS AND EXPENSES
Cost of health care sales 3,486,189 2,995,496
Real estate transaction 918,673 791,158
costs
Selling, general and 2,062,800 1,773,722
administrative
Research and development 510,328 421,181
6,977,990 5,981,557
OPERATING INCOME 3,316,844 2,855,203
OTHER INCOME (EXPENSE)
Interest expense (3,767) (6,469)
Interest income and other 254,725 194,858
250,958 188,389
INCOME BEFORE INCOME TAXES 3,567,802 3,043,592
INCOME TAX EXPENSE 1,318,000 1,095,000
NET INCOME 2,249,802 1,948,592
Retained earnings at 39,768,559 30,621,604
beginning of period
RETAINED EARNINGS AT END OF $42,018,361 $32,570,196
PERIOD
PRIMARY EARNINGS PER SHARE $ .23 $ .20
PRIMARY WEIGHTED AVERAGE 9,893,000 9,835,000
SHARES OUTSTANDING
FULLY-DILUTED EARNING PER $ .23 $ .20
SHARE
FULLY-DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING 9,869,000 9,870,000
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30,
1996 1995
OPERATING ACTIVITIES
Net income $2,249,802 $1,948,592
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 419,783 319,032
Deferred income taxes (100,000) (96,000)
Income tax benefit from
exercise of 4,000 670,506
non-qualified stock options
Changes in operating assets
and liabilities:
Accounts receivable (431,971) (460,728)
Notes receivable (1,301,766) (1,159,543)
Inventories 280,555 (1,796,498)
Land held for resale (1,379,845) 594,899
Other assets (9,945) 187,186
Current liabilities 629,958 653,784
NET CASH PROVIDED BY OPERATING 360,571 861,230
ACTIVITIES
INVESTING ACTIVITIES
Net change in investments (827,123) (10,296)
Issuance of investment notes (161,436)
receivable
Repayment of investment notes 15,254 18,502
receivable
Purchase of property and (605,777) (775,614)
equipment
NET CASH USED IN INVESTING (1,417,646) (928,844)
ACTIVITIES
FINANCING ACTIVITIES
Repayment of long-term debt (24,999) (24,999)
Purchase of treasury stock (148,105)
Reissuance of treasury stock 65,728 3,178
Proceeds from the sale of (8,928) 735,505
Common Stock
NET CASH PROVIDED BY (USED IN) (116,304) 713,684
FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH AND (1,173,379) 646,070
EQUIVALENTS
Cash and Equivalents at 3,204,283 2,093,326
Beginning of Period
CASH AND EQUIVALENTS AT END OF $2,030,904 $2,739,396
PERIOD
<PAGE>
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 September 30, 1996, 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, 1996. 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
SEPTEMBER 30, June 30,
1996 1996
Raw materials $3,806,868 $3,942,306
Work-in-process 1,487,271 1,601,922
Finished goods 5,172,312 5,202,778
$10,466,451 $10,747,006
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.
STATEMENTS OF CASH FLOWS
Interest paid was approximately $4,000 in fiscal 1997 and $6,000 in fiscal
1996. Income taxes paid were $425,000 and $10,000 for the first three
months of fiscal 1997 and 1996, respectively.
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 a party to certain other legal actions which have arisen in
the ordinary course of business. After consultation with legal counsel,
management is of the opinion that there are no pending or threatened legal
matters which will have a material effect on the consolidated financial
position of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED OPERATING HIGHLIGHTS
Research Medical Inc.'s earnings were $2,249,802 for the first quarter
of fiscal 1997, a 15% increase over net income of $1,948,592 recorded in
the same quarter of the prior year. Earnings per share were $.23 and $.20
for these two periods, respectively. Total revenues increased from
$8,836,760 in the first quarter of fiscal 1996 to $10,294,834 in the same
quarter of fiscal 1997, which represents a growth rate of 17%. The total
growth rate is comprised of a 19% increase in health care revenues and a 1%
decrease in real estate revenues over the comparable period in 1996.
Selling, general and administrative expenses (SG&A) for the first
quarter of fiscal 1997 were 23% of health care revenues compared to 23% in
1996. SG&A has been compared only against health care revenues since there
are 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 16% is lower than health care revenue growth for the
period, thus providing positive operating leverage for the year. The
modest SG&A growth is reflective of the Company's desire to maintain its
current administrative structure permitting the Company to focus more of
its resources into research and development projects.
Interest income and other has increased 31% for the first three months
of 1997 compared with 1996, reflecting a higher level of invested assets.
The effective federal and state income tax rate was approximately 37%
for the first quarter of fiscal 1997 compared to 36% in 1996. This increase
results from movement into a higher marginal federal tax rate due to the
Company's increased profitability.
HEALTH CARE OPERATIONS
Net health care sales were $9,067,600 in the first quarter of 1997 compared
to $7,599,971 in the same quarter of 1996, which represents a 19% increase.
Medical device and solution sales increased by 12%, proprietary
pharmaceuticals and sterile solution product sales increased by 44% for the
quarter. 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. Additionally, the Company
experienced significant increases in the sales of its Biofiltera
hemoconcentrator as well as its vascular shunt product line.
As in the prior year, the growth in proprietary pharmaceuticals resulted
from more units sold, particularly to distributors in anticipation of an
October 1 price increase. Also, increased purchases by foreign
distributors contributed to the growth. Sterile solutions sales are
directly attributable to OEM customer orders which have been higher during
the current period. Growth in sterile solutions sales is not expected to
continue and tend to fluctuate from quarter to quarter. The Company has
<PAGE>
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 decreased by 11% in the first quarter over
the same quarter of the prior year. Generally, international sales have
increased faster than domestic sales in recent years, however, foreign
sales revenues in any given quarter fluctuate due to the timing of large
distributor bid purchases. These sales represented 17% of sales in the
first quarter of 1997 compared to 23% in 1996.
Gross margins were 62% in the first quarter of fiscal 1997 compared to
61% for the same quarter in the prior year. Gross margins improved
primarily as a result of the Company's efforts to automate portions of the
manufacturing process as well as from an improved sales mix of higher
margin products.
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
21% from $421,181 in the first quarter of 1996 to $510,328 in the first
quarter of fiscal 1997. This increase reflects the Company's preparation
for new products, including a broad range of minimally invasive heart
surgery products, the embolectomy catheter with viewing capability, several
new vascular catheters, the Autologous Fibrinogen Delivery Kit, and the
Heparin Removal Device.
REAL ESTATE OPERATIONS
In past years the Company's real estate activities were used to help
finance the Company's start-up of health care operations. The Company
continues to divest real estate assets as reasonable offers are received.
Real estate sales in the first quarter of 1997 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 25% for the first quarter of 1997
compared to 36% for the same period 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 sold.
<PAGE>
FINANCIAL CONDITION
The Company's balance sheet continued to strengthen during the first
quarter of fiscal 1997. The following key measurements are indicative of
the excellent liquidity and strong financial position of the Company:
SEPT. 30, June 30,
(In thousands except ratios) 1996 1996
Cash and investments $12,915 $13,261
Working capital 30,503 29,805
Shareholders' equity 58,485 56,323
Current ratio 12:1 15:1
Cash and investments decreased from June 30, 1996 as a result of the
Company's operations. Funds used in investing activities were primarily
generated from operations.
Accounts receivable increased by approximately $431,971 or 3% from June
30, 1996. This increase is consistent with the sales growth from the prior
quarter.
Inventories decreased by $280,555 or 3% from June 30, 1996. This
decrease is comprised of lower inventory levels in all categories. In the
prior year, as the Company began producing previously purchased raw
material catheters, it continued purchasing a sufficient quantity of
catheters from its supplier assuring a continuous flow of finished goods
products through the transition to in-house produced raw material catheters
resulting in a larger than normal supply of raw materials in the prior
year. As the transition is now complete, significantly lower levels of
purchased raw material catheters are held in inventory.
Land held for resale increased $1,379,845 or 152% from June 30, 1996 as
the Company purchased several parcels of land.
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.
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 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 and previous filings with the Securities
and Exchange Commission.
<PAGE>
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
<PAGE>
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 MEDICAL, INC.
/s/ Gary L. Crocker October 30, 1996
Gary L. Crocker, President and Date
Chief Executive Officer
/s/ Mark W. Winn October 30, 1996
Mark W. Winn, Vice President and Date
Chief Financial Officer
/s/ J. Steven Johnson October 30, 1996
J. Steven Johnson, Treasurer Date
and Corporate Controller
EXHIBIT 11
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended September 30,
1997 1996
PRIMARY
Average shares 9,630,000 9,441,000
outstanding
Net effect of
dilutive stock options
based on treasury
stock method using
average market price 263,000 394,000
Total 9,893,000 9,835,000
Net income $2,249,802 $1,948,592
Earning per share $.23 $.20
FULLY DILUTED
Average shares 9,630,000 9,441,000
outstanding
Net effect of
dilutive stock options
based on the treasury
stock method using
period-end market price 239,000 429,000
Total 9,869,000 9,870,000
Net income $2,249,802 $1,948,592
Earnings per share $.23 $.20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 2,030,904
<SECURITIES> 5,723,665
<RECEIVABLES> 10,147,887
<ALLOWANCES> (686,000)
<INVENTORY> 10,466,451
<CURRENT-ASSETS> 33,255,062
<PP&E> 14,156,999
<DEPRECIATION> (4,283,903)
<TOTAL-ASSETS> 61,735,456
<CURRENT-LIABILITIES> 2,751,754
<BONDS> 0
0
0
<COMMON> 4,851,607
<OTHER-SE> 53,633,661
<TOTAL-LIABILITY-AND-EQUITY> 61,735,456
<SALES> 10,294,834
<TOTAL-REVENUES> 10,294,834
<CGS> 4,404,862
<TOTAL-COSTS> 6,977,990
<OTHER-EXPENSES> (254,725)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,767
<INCOME-PRETAX> 3,567,802
<INCOME-TAX> 1,318,000
<INCOME-CONTINUING> 2,249,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,249,802
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
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