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, 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 December 31, 1996
was 9,631,319.
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 1996 and June 30,
1996
Consolidated Statements of Income and Retained Earnings for the
Three Month Periods Ended December 31, 1996 and 1995
Consolidated Statements of Income and Retained Earnings for the
Three Month Periods Ended December 31, 1996 and 1995
Consolidated Statements of Income and Retained Earnings for the
Six Month Periods Ended December 31, 1996 and 1995
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,
1996 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 1,582,442 $ 3,204,283
Short-term investments 6,427,651 4,524,164
Accounts receivable 9,891,542 9,029,916
Current portion of notes 5,150,623 3,002,652
receivable
Inventories 10,327,327 10,747,006
Prepaid expenses 1,018,609 942,851
Deferred tax asset 526,000 475,500
TOTAL CURRENT ASSETS 34,924,194 31,926,372
LAND HELD FOR RESALE 3,564,045 906,728
PROPERTY AND EQUIPMENT 9,940,548 9,602,584
LONG-TERM INVESTMENTS 3,449,459 5,532,410
NOTES RECEIVABLE, less 8,616,353 8,404,073
current portion
PATENTS AND LICENSES 2,614,784 2,599,834
$63,109,383 $58,972,001
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,563,802 $ 703,052
Income taxes payable (197,698) 514,259
Accrued payroll, 386,893 572,680
commissions and royalties
Other accrued expenses 95,288 231,809
Current portion of long- 99,996 99,996
term debt
TOTAL CURRENT LIABILITIES 1,948,281 2,121,796
LONG-TERM DEBT, less 22,436 72,434
current portion
DEFERRED INCOME TAXES 460,500 455,000
SHAREHOLDERS' EQUITY
Common Stock, par value
$.50 per share;
authorized 20,000,000
shares, issued and
outstanding 9,631,319
shares in December and 9,626,825
share in June 4,852,914 4,849,907
Additional paid-in 12,341,723 12,297,297
capital
Retained earnings 44,158,898 39,768,559
Treasury stock, at cost (675,369) (592,992)
60,678,166 56,322,771
$63,109,383 $58,972,001
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
Three Months Ended December 31,
1996 1995
REVENUES
Health care $ 8,822,616 $ 7,939,228
Real estate 245,722 1,817,174
9,068,338 9,756,402
COSTS AND EXPENSES
Cost of health care 3,384,471 3,107,129
sales
Real estate transaction 49,935 1,083,540
costs
Selling, general and 1,970,082 1,943,141
administrative
Research and 610,506 477,172
development
6,014,994 6,610,982
OPERATING INCOME 3,053,344 3,145,420
OTHER INCOME (EXPENSE)
Interest expense (26,024) (28,599)
Interest income and 192,217 181,152
other
166,193 152,553
INCOME BEFORE INCOME 3,219,537 3,297,973
TAXES
INCOME TAX EXPENSE 1,079,000 1,160,000
NET INCOME 2,140,537 2,137,973
Retained earnings at 42,018,361 32,570,196
beginning of period
RETAINED EARNINGS AT END $44,158,898 $34,708,169
OF PERIOD
PRIMARY EARNINGS PER $ .22 $ .22
SHARE
PRIMARY WEIGHTED AVERAGE 9,918,000 9,917,000
SHARES OUTSTANDING
FULLY-DILUTED EARNING $ .21 $ .22
PER SHARE
FULLY-DILUTED WEIGHTED 9,975,000 9,927,000
AVERAGE SHARES
OUTSTANDING
<PAGE>
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
Six Months Ended December 31,
1996 1995
REVENUES
Health care $ 17,890,216 $ 15,539,199
Real estate 1,472,956 3,053,963
19,363,172 18,593,162
COSTS AND EXPENSES
Cost of health care sales 6,870,660 6,102,625
Real estate transaction costs 968,608 1,874,698
Selling, general and 4,032,882 3,716,863
administrative
Research and development 1,120,834 898,353
12,992,984 12,592,539
OPERATING INCOME 6,370,188 6,000,623
OTHER INCOME (EXPENSE)
Interest expense (29,791) (35,068)
Interest income and other 446,942 376,010
417,151 340,942
INCOME BEFORE INCOME TAXES 6,787,339 6,341,565
INCOME TAX EXPENSE 2,397,000 2,255,000
NET INCOME 4,390,339 4,086,565
Retained earnings at 39,768,559 30,621,604
beginning of period
RETAINED EARNINGS AT END OF $44,158,898 $34,708,169
PERIOD
PRIMARY EARNINGS PER SHARE $ .44 $ .41
PRIMARY WEIGHTED AVERAGE 9,905,000 9,871,000
SHARES OUTSTANDING
FULLY-DILUTED EARNING PER $ .44 $ .41
SHARE
FULLY-DILUTED WEIGHTED 9,975,000 9,881,000
AVERAGE SHARES OUTSTANDING
<PAGE>
RESEARCH INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31,
1996 1995
OPERATING ACTIVITIES
Net income $4,390,339 $4,086,565
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and 735,307 644,494
amortization
Deferred income taxes (45,000) (170,000)
Income tax benefit from
exercise of 7,600 865,890
non-qualified stock options
Changes in operating assets and
liabilities:
Accounts receivable (861,626) (786,160)
Notes receivable (2,403,518) (1,416,820
Inventories 419,679 (2,567,472
Land held for resale (2,657,317) (440,085)
Other assets (185,269) (46,688)
Current liabilities (173,515) 693,495
NET CASH PROVIDED BY (USED IN) (773,320) 863,219
OPERATING ACTIVITIES
INVESTING ACTIVITIES
Net change in investments 179,464 (13,148)
Issuance of investment notes (171,436)
receivable
Repayment of investment notes 43,267 319,146
receivable
Purchase of property and (978,710) (1,682,088)
equipment
NET CASH USED IN INVESTING (755,979) (1,547,526)
ACTIVITIES
FINANCING ACTIVITIES
Repayment of long-term debt (49,998) (49,998)
Purchase of treasury stock (148,105)
Reissuance of treasury stock 65,728 198,834
Proceeds from the sale of 39,833 1,190,062
Common Stock
NET CASH PROVIDED BY (USED IN) (92,542) 1,338,898
FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH AND (1,621,841) 654,591
EQUIVALENTS
Cash and Equivalents at 3,204,283 2,093,326
Beginning of Period
CASH AND EQUIVALENTS AT END OF $1,582,442 $2,747,917
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 December 31, 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
DECEMBER 31, June 30,
1996 1996
Raw materials $3,305,291 $3,942,306
Work-in-process 1,462,093 1,601,922
Finished goods 5,559,943 5,202,778
$10,327,327 $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 when material.
STATEMENTS OF CASH FLOWS
Interest paid was approximately $30,000 in fiscal 1997 and $35,000 in
fiscal 1996. Income taxes paid were $3,149,000 and $969,000 for the first
six 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 counterclaim also seeking damages. Management and the Company's legal
counsel intend to vigorously prosecute its claims and defend against the
defendants counterclaims. However, as the litigation 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 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
PENDING ACQUISITION BY BAXTER
Research Medical, Inc. has entered into a definitive agreement to be
acquired by Baxter International, Inc. for $23.50 per common share payable
in Baxter common stock. The merger is subject to the approval of Research
Medical's stockholders, as well as the successful completion of all
pertinent regulatory matters. A special shareholders meeting will likely
be held in early March. Once the merger is consummated, Research Medical
will continue to operate as a wholly owned subsidiary of Baxter.
CONSOLIDATED OPERATING HIGHLIGHTS
Research Medical, Inc.'s earnings were $2,140,537 for the second quarter
of fiscal 1997, compared to net income of $2,137,973 recorded in the same
quarter of the prior year. Fully-diluted earnings per share were $.21 and
$.22 for these two periods, respectively. Total revenues decreased 7% from
$9,756,402 in the second quarter of fiscal 1996 to $9,068,338 in the same
quarter of fiscal 1997. This decrease is comprised of an 11% increase in
health care revenues and a 86% decrease in real estate revenues over the
comparable period in 1996.
Selling, general and administrative expenses (SG&A) for the second
quarter of fiscal 1997 were 22% of health care revenues compared to 24% in
1996. 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 1% is lower than health care revenue growth
for the period providing positive leverage for the year. This modest
increase in SG&A expenses 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
1997 compared with 1996, reflecting more investable assets.
The combined effective federal and state income tax rate was
approximately 34% for the second quarter of fiscal 1997 compared to 35% in
1996. The lower rate is due to a higher proportion of tax preferenced
investment holdings in the current year.
HEALTH CARE OPERATIONS
Net health care sales were $8,822,616 in the second quarter of 1997
compared to $7,939,228 in the same quarter of 1996, which represents a 11%
increase, paced by strong growth in Bypass Circuitry and Cardiac-Assist
catheters, Blood Management products, and Sterile Solution products.
Vascular products continued to post healthy increases in the shunt lines,
but these increases were mitigated by the effect of IschemiaAlerta product
returns.
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 35% in the second quarter over
the same quarter of the prior year. These sales represented 27% of sales
in the second quarter of 1997 compared to 22% in 1996. Domestically, sales
of cardiovascular products directly to U.S. hospitals increased 17%, while
sales by the Company to inventory stocking independent dealers declined 25%
reflecting reductions in their inventory investments in the quarter period
that the Baxter acquisition agreement was announced.
Gross margins were 62% in the second 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.
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.
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
28% from $477,172 in the second quarter of 1996 to $610,506 in the second
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
The Company continues to divest real estate assets as reasonable offers
are received.
Real estate sales in the second quarter and the first six months of 1997
include 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 80% for the second quarter of 1997
compared to 40% for the same period in 1996 and 34% for the first six
months of fiscal 1997 compared to 39% for the same period in fiscal 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.
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. 31, June 30,
(In thousands except 1996 1996
ratios)
Cash and investments $11,460 $13,261
Working capital 32,976 29,805
Shareholders' equity 60,678 56,323
Current ratio 18:1 15:1
Cash and investments decreased from June 30, 1996 as a result of the
Company's operations. Funds used in investing activities were generated
from operations and the sale of common stock through the exercise of stock
options.
Accounts receivable increased by approximately $862,000 or 10% from June
30, 1996. This increase is consistent with sales growth during the first
six months of fiscal 1997.
Inventories decreased by approximately $420,000 or 4% from June 30,
1996. This decrease is comprised of lower raw materials and work in
process inventory levels partially offset by higher inventory levels in the
finished goods area. 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 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. The increase in finished goods is due primarily to increased
health care sales.
Land held for resale increased $2,657,317 or 293% from June 30, 1996 as
the Company purchased several parcels of land, most of which are subject to
resale under existing purchase commitments.
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.
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
On December 17, 1996, the Company filed an 8-K announcing the
pending acquisition of Research Medical, Inc. by Baxter International,
Inc.
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 February 5, 1997
Gary L. Crocker, President and Date
Chief Executive Officer
/s/ Mark W. Winn February 5, 1997
Mark W. Winn, Sr. Vice President, Date
Chief Financial Officer, and Secretary
/s/ J. Steven Johnson February 5, 1997
J. Steven Johnson, Date
Corporate Controller
EXHIBIT 11
RESEARCH MEDICAL, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Six Months Ended December 31,
1996 1995
PRIMARY
Average shares outstanding 9,630,000 9,488,000
Net effect of dilutive stock
options based on treasury 275,000 383,000
stock method using average
market price
Total 9,905,000 9,871,000
Net income $4,390,339 $4,086,565
Earning per share $.44 $.41
FULLY DILUTED
Average shares outstanding 9,630,000 9,488,000
Net effect of dilutive stock
options based on the treasury
stock method using period-end 345,000 393,000
market price
Total 9,975,000 9,881,000
Net income $4,390,339 $4,086,565
Earnings per share $.23 $.41
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000083306
<NAME> RESEARCH MEDICAL, INC
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 1,582,442
<SECURITIES> 6,427,651
<RECEIVABLES> 10,673,542
<ALLOWANCES> (782,000)
<INVENTORY> 10,327,327
<CURRENT-ASSETS> 34,924,194
<PP&E> 14,529,194
<DEPRECIATION> (4,589,414)
<TOTAL-ASSETS> 63,109,383
<CURRENT-LIABILITIES> 1,948,281
<BONDS> 0
0
0
<COMMON> 4,852,914
<OTHER-SE> 55,825,252
<TOTAL-LIABILITY-AND-EQUITY> 63,109,383
<SALES> 19,363,172
<TOTAL-REVENUES> 19,363,172
<CGS> 7,839,268
<TOTAL-COSTS> 12,992,984
<OTHER-EXPENSES> (446,942)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,791
<INCOME-PRETAX> 6,787,339
<INCOME-TAX> 2,397,000
<INCOME-CONTINUING> 4,390,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,390,339
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
