UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
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MINNESOTA
State or other jurisdiction of
incorporation or organization)
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41-1613227
(I.R.S. Employer
Identification No.)
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ONE ROCHESTER MEDICAL DRIVE,
STEWARTVILLE, MN
(Address of principal executive offices)
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55976
(Zip Code)
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(507) 533-9600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(check one):
Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
12,195,367 Common Shares as of February 5, 2010.
Table of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-Q
for quarter ended
December 31, 2009
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31,
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September 30,
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2009
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2009
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Assets:
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Current assets:
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Cash and cash equivalents
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$
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5,816,151
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$
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6,365,584
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Marketable securities
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30,455,507
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29,896,740
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Accounts receivable, net
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6,517,646
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6,418,656
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Inventories, net
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9,253,262
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9,710,234
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Prepaid expenses and other current assets
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1,472,710
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1,076,183
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Deferred income tax asset
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1,140,375
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1,153,964
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Total current assets
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54,655,651
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54,621,361
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Property, plant and equipment:
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Land and buildings
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8,000,366
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7,847,888
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Equipment and fixtures
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17,252,200
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16,954,719
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25,252,566
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24,802,607
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Less accumulated depreciation
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(15,469,185
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)
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(15,118,799
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)
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Total property, plant and equipment
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9,783,381
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9,683,808
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Deferred income tax asset
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839,936
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768,874
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Goodwill
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4,691,458
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4,648,165
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Finite life intangibles, net
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6,101,939
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6,242,759
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Total assets
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$
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76,072,365
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$
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75,964,967
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Liabilities and Shareholders Equity:
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Current liabilities:
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Accounts payable
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$
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1,699,206
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$
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1,755,472
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Accrued compensation
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607,734
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1,176,949
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Accrued expenses
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493,837
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350,403
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Current maturities of long-term debt
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3,066,201
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2,786,622
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Total current liabilities
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5,866,978
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6,069,446
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Long-term liabilities:
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Other long term liabilities
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62,424
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55,889
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Long-term debt, less current maturities
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1,040,156
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1,019,735
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Total long-term liabilities
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1,102,580
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1,075,624
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Shareholders equity:
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Common stock, no par value:
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Authorized 40,000,000
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Issued and outstanding shares (12,192,867 December 31, 2009;
12,190,367 September 30, 2009)
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57,143,770
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56,840,856
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Retained earnings
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14,663,055
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14,832,213
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Accumulated other comprehensive loss
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(2,704,018
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(2,853,172
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Total shareholders equity
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69,102,807
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68,819,897
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Total liabilities and shareholders equity
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$
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76,072,365
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$
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75,964,967
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Note The Balance Sheet at September 30, 2009 was derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended
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December 31,
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2009
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2008
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Net sales
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$
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10,231,812
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$
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8,436,084
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Cost of sales
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5,618,704
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4,511,171
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Gross profit
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4,613,108
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3,924,913
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Operating expenses:
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Marketing and selling
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2,777,317
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2,566,262
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Research and development
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443,028
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317,660
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General and administrative
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1,690,747
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1,365,757
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Total operating expenses
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4,911,092
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4,249,679
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Loss from operations
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(297,984
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(324,766
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Other income (expense):
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Interest income
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29,009
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167,272
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Interest expense
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(41,118
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(83,774
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Other income
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200,442
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Net loss before income taxes
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(310,093
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(40,826
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Income tax (benefit)
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(140,935
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(94,451
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Net income (loss)
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$
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(169,158
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$
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53,625
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Net income (loss) per common share basic
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$
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(0.01
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$
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0.00
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Net income (loss) per common share diluted
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$
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(0.01
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$
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0.00
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Weighted average number of common shares outstanding basic
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12,191,590
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11,980,875
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Weighted average number of common shares outstanding diluted
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12,191,590
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12,697,645
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended
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December 31,
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2009
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2008
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Operating activities:
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Net income (loss)
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$
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(169,158
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$
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53,625
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Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
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Depreciation
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348,875
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306,516
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Amortization
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173,915
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172,936
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Stock based compensation
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285,164
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264,532
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Deferred income tax
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(63,992
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(353,960
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Changes in operating assets and liabilities:
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Accounts receivable
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(68,417
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925,997
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Inventories
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489,753
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(184,752
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Other current assets
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(397,098
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(17,764
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Accounts payable
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(62,014
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(572,870
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Income tax payable
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130,625
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25,085
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Other current liabilities
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(550,165
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(149,936
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Net cash provided by operating activities
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117,488
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469,409
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Investing activities:
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Purchase of property, plant and equipment
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(437,134
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(498,463
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Patents
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(16,646
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(19,414
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Purchases of marketable securities
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(39,215,744
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(23,630,806
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Sales and maturities of marketable securities
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38,677,771
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25,805,997
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Net cash provided by (used in) investing activities
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(991,753
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)
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1,657,314
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Financing activities:
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Payments on long-term debt
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(261,789
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)
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Proceeds from long-term debt
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300,000
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Excess tax benefit from exercises of stock options
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6,188
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380,717
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Proceeds from the issuance of common stock
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11,563
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349,670
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Net cash provided by financing activities
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317,751
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468,598
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Effect of exchange rate on cash and cash equivalents
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7,081
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(856,291
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)
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Increase (decrease) in cash and cash equivalents
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(549,433
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)
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1,739,030
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Cash and cash equivalents at beginning of period
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6,365,584
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8,508,000
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Cash and cash equivalents at end of period
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$
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5,816,151
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$
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10,247,030
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Supplemental Cash Flow Information
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Interest paid
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$
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$
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22,461
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Income taxes paid
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$
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261,243
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$
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROCHESTER MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2009
Note A Basis of Presentation
The accompanying unaudited condensed consolidated financial statements which have been derived
from the Companys audited financial statements as of September 30, 2009 and the unaudited December
31, 2009 and 2008 condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission which include the
instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the financial statements and related notes
included in the Companys Form 10-K for the year ended September 30, 2009. In the opinion of
management, the unaudited condensed consolidated financial statements contain all recurring
adjustments considered necessary for a fair presentation of the financial position and results of
operations and cash flows for the interim periods presented. Operating results for the three-month
period ended December 31, 2009 are not necessarily indicative of the results that may be expected
for the year ending September 30, 2010.
Note B Net Income (Loss) Per Share
Net income (loss) per common share is calculated in accordance with Accounting Standards
Codification (ASC) 260,
Earnings Per Share
. The Companys basic net income (loss) per common share
is computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the period, increased to
include dilutive potential common shares issuable upon the exercise of stock options that were
outstanding during the period. For periods of net loss, diluted net loss per common share equals
basic net loss per common share because common stock equivalents are not included in periods where
there is a loss, as they are antidilutive. A reconciliation of the numerator and denominator in the
basic and diluted net income (loss) per share calculation is as follows:
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Three Months Ended
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December 31,
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December 31,
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2009
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2008
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Numerator:
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Net income (loss)
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$
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(169,158
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)
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$
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53,625
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Denominator:
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Denominator for basic net income (loss) per
share-weighted average shares outstanding
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12,191,590
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11,980,875
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Effect of dilutive stock options
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716,770
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Denominator for diluted net income (loss) per
share-weighted average shares outstanding
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12,191,590
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12,697,645
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Basic net income (loss) per share
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$
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(0.01
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)
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$
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0.00
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Diluted net income (loss) per share
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$
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(0.01
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)
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$
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0.00
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Employee stock options of 609,000 and 30,000 shares have been excluded from the diluted net
income (loss) per share calculation for the first quarter of fiscal years 2010 and 2009,
respectively, because their exercise prices were greater than the average market price of the
Companys common shares and their effect would have been antidilutive.
4
Note C Stock Based Compensation
The Rochester Medical Corporation 1991 Stock Option Plan authorized the issuance of up to
2,000,000 shares of Common Stock. Per the terms of the 1991 Stock Option Plan, as of April 20,
2001, no new stock options may be granted under the 1991 Stock Option Plan. As of December 31,
2009, 146,200 options remain outstanding under the 1991 Stock Option Plan.
The 1995 Non-Statutory Stock Option Plan authorized the issuance of up to 100,000 shares of
Common Stock. As of December 31, 2009, 88,000 shares remained available for issuance under the
1995 Non-Statutory Stock Option Plan, and there were no options outstanding under the plan. In
conjunction with obtaining shareholder approval of the 2010 Stock Incentive Plan on January 28,
2010, no further awards will be made under the 1995 Non-Statutory Stock Option Plan.
The 2001 Stock Incentive Plan authorized the issuance of up to 2,000,000 shares of Common
Stock pursuant to grants of incentive stock options, non-qualified options or restricted stock.
Per the terms of the 2001 Stock Incentive Plan, options may be granted with a term no longer than
ten years. The vesting schedule and other terms for options and restricted stock granted under the
2001 Stock Incentive Plan is determined by the Compensation Committee of the Companys Board of
Directors. As of December 31, 2009, 146,500 shares remained available for issuance under the 2001
Stock Incentive Plan, and there were 1,346,000 options outstanding under the plan. In conjunction
with obtaining shareholder approval of the 2010 Stock Incentive Plan on January 28, 2010, no
further awards will be made under the 2001 Stock Incentive Plan.
On January 28, 2010, the Companys shareholders approved the Rochester Medical Corporation
2010 Stock Incentive Plan. The 2010 Stock Incentive Plan authorizes the issuance of up to
1,000,000 shares of Common Stock pursuant to grants of incentive stock options, non-incentive stock
options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents,
performance awards, stock awards, and other stock-based awards. Per the terms of the 2010 Stock
Incentive Plan, awards may be granted with a term no longer than ten years. The vesting schedule
and other terms of the awards granted under the 2010 Stock Incentive Plan will be determined by the
Compensation Committee of the Board of Directors at the time of grant.
The Company measures stock-based compensation cost at the grant date based on the fair value
of the award and recognizes the compensation expense over the requisite service period, which is
generally the vesting period. The Company elected the modified-prospective method of ASC 718,
Stock
Compensation
, under which prior periods are not retroactively revised. Estimated stock-based
compensation expense for the non-vested portion of awards granted prior to the effective date is
being recognized over the remaining service period using the compensation cost estimated for pro
forma disclosures under ASC 718. The Company recorded approximately $285,000 and $265,000 of
related stock-based compensation expense for the quarter ended December 31, 2009 and 2008,
respectively. This stock-based compensation expense reduced both basic and diluted earnings per
share by $0.02 and $0.02 for the quarter ended December 31, 2009 and 2008, respectively.
As of December 31, 2009, there is $1,017,376 of unrecognized compensation cost that is
expected to be recognized over a weighted average period of approximately fourteen months.
5
Stock Options
There were no options granted in the first quarter of fiscal 2010 and 5,000 options were
granted in the first fiscal quarter of fiscal 2009. The Black-Scholes option pricing model was
used to estimate the fair value of stock-based awards with the following weighted average
assumptions for the first quarter of fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
Dividend yield
|
|
NA
|
|
NA
|
Expected volatility
|
|
NA
|
|
|
50
|
%
|
Risk-free interest rate
|
|
NA
|
|
|
2.94
|
|
Expected holding period (in years)
|
|
NA
|
|
|
9.44
|
|
Weighted-average grant-date fair value
|
|
NA
|
|
$
|
7.63
|
|
The risk-free interest rate is based on a treasury instrument whose term is consistent with
the expected life of the Companys stock options. The expected volatility, holding period, and
forfeitures of options are based on historical experience.
The following table represents stock option activity for the three months ended December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Remaining
|
|
|
Shares
|
|
Price
|
|
Contract Life
|
Outstanding options at beginning of period
|
|
|
1,494,700
|
|
|
$
|
7.21
|
|
|
5.74 Yrs
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,500
|
)
|
|
|
4.63
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at end of period
|
|
|
1,492,200
|
|
|
$
|
7.21
|
|
|
5.49 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable at end of period
|
|
|
1,098,825
|
|
|
$
|
6.26
|
|
|
4.53 Yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the aggregate intrinsic value of options outstanding was $6,228,384, and
the aggregate intrinsic value of options exercisable was $5,632,924. Total intrinsic value of
options exercised was $17,038 for the three months ended December 31, 2009. Effective with the
approval of the 2010 Stock Incentive Plan by the shareholders on January 28, 2010, the Company has
1,000,000 shares available for grant.
Note D Marketable Securities
As of December 31, 2009, the Company has $30.5 million invested in high quality, investment
grade debt securities, primarily consisting of $27.6 million invested in U.S. treasury bills and
CDs and $2.9 million invested in a mutual fund investment. The Company is currently reporting an
unrealized loss of $523,488 related to the mutual fund investment as a result of the recent
fluctuations in the credit markets impacting the current market value. The Company considers this
unrealized loss temporary as it has the intent and ability to hold this investment long enough to
avoid realizing any significant loss.
Marketable securities are classified as available for sale and are carried at fair value, with
unrealized gains or losses included as a separate component of shareholders equity. The cost and
fair value of available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Cost
|
|
Loss
|
|
Fair Value
|
December 31, 2009
|
|
$
|
30,978,995
|
|
|
$
|
(523,488
|
)
|
|
$
|
30,455,507
|
|
September 30, 2009
|
|
$
|
30,441,008
|
|
|
$
|
(544,268
|
)
|
|
$
|
29,896,740
|
|
6
Losses recognized are recorded in
Other income (expense)
, in the consolidated statements of
operations. Gains and losses from the sale of investments are calculated based on the specific
identification method.
Effective October 1, 2008, the Company adopted the accounting standards which are now part of
ASC 820,
Fair Value Measurements and Disclosures
, for financial assets and liabilities that are
re-measured and reported at fair value at each reporting period. Fair value is defined as the
price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 requires that fair value
measurements be classified and disclosed using one of the following three categories:
Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2. Inputs other than Level 1 that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or liabilities; quoted prices for identical or
similar assets in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or
liabilities; or
Level 3. Inputs that are unobservable for the asset or liability and that are significant to
the fair value of the assets or liabilities.
The adoption of these standards did not have a material impact on the Companys consolidated
financial statements. The Company has determined that the values given to its marketable securities
are appropriate and are measured using Level 1 inputs.
Note E Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2009
|
|
Raw materials
|
|
$
|
2,076,559
|
|
|
$
|
1,983,279
|
|
Work-in-process
|
|
|
3,325,178
|
|
|
|
3,863,824
|
|
Finished goods
|
|
|
3,974,654
|
|
|
|
3,989,555
|
|
Reserve for inventory obsolescence
|
|
|
(123,129
|
)
|
|
|
(126,424
|
)
|
|
|
|
|
|
|
|
|
|
$
|
9,253,262
|
|
|
$
|
9,710,234
|
|
|
|
|
|
|
|
|
Note F Income Taxes
On a quarterly basis, the Company evaluates the realizability of its deferred tax assets and
assesses the requirements for a valuation allowance. No valuation allowance has been recorded
against the net deferred tax assets in 2010 or 2009 because there is sufficient future projected
income. For the quarter ended December 31, 2009, the Company
had an effective income tax rate of 45.3%. The variation of income tax rate from the federal
income tax rate of 35% is due to permanent adjustments for meals and entertainment expenses and
incentive stock options, state taxes, foreign taxes and prepaid taxes on deferred intercompany
profit. In future periods, the Company expects the effective tax rate on U.S. income to be in the
range of 40-42%, and the effective tax rate on worldwide income may fluctuate depending upon
inter-company eliminations and UK operation profitability.
The Company adopted accounting provisions that now form part of ASC 740,
Income Taxes
, and
which clarify the accounting for uncertainty in tax positions recognized in the financial
statements. These provisions create a single model to address uncertainty in tax positions and
clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. ASC 740 also
provides guidance on derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. At the adoption date, October 1, 2007, the Company
did not have a material liability
7
for unrecognized tax benefits. As of December 31, 2009, the Company has recognized
approximately $62,000 for unrecognized tax benefits. If the Company were to prevail on all
unrecognized tax benefits recorded at December 31, 2009, the total gross unrecognized tax benefit
totaling approximately $62,000 would benefit the Companys effective tax rate.
It is the Companys practice to recognize penalties and/or interest to income tax matters in
income tax expense. As of December 31, 2009, the Company did not have a material amount of accrued
interest or penalties related to unrecognized tax benefits.
The Company is subject to income tax examinations from time to time in the U.S. Federal
jurisdiction, as well as in the United Kingdom and various state jurisdictions. As of December 31,
2009, there are no income tax examinations taking place.
Note G
Goodwill and Other Intangible Assets
The Company records as goodwill the excess of purchase price over the fair value of the
identifiable net assets acquired as prescribed by ASC 350,
Goodwill and Other Intangible Assets
.
Under ASC 350, goodwill and intangibles with indefinite useful lives are not amortized. ASC 350
also requires, at a minimum, an annual assessment of the carrying value of goodwill and other
intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset
exceeds its fair value, an impairment loss shall be recognized. The Company tests annually for
impairment on the anniversary date of the acquisition of the asset, which is currently on June 2nd
of each fiscal year, or more frequently if events and circumstances indicate that the asset might
be impaired. The recoverability of other long-lived assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge would be recognized by the amount that the
carrying amount of the asset exceeds the fair value of the asset. The Company performed annual
goodwill impairment testing by comparing the market value of the Company at June 2, 2009 to the net
book value of its equity, and concluded that the goodwill was not impaired. The increase in value
of goodwill as of December 31, 2009 is entirely related to the change in foreign currency exchange
rates in the United Kingdom.
Note H Comprehensive Loss
Comprehensive loss includes net income (loss), changes in foreign currency translation, and
changes in the unrealized gain (loss) on securities held. The comprehensive loss for the three
months ended December 31, 2009 and 2008 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net income (loss)
|
|
$
|
(169,158
|
)
|
|
$
|
53,625
|
|
Foreign currency translation
|
|
|
135,920
|
|
|
|
(3,176,387
|
)
|
Unrealized gain (loss) on securities held
|
|
|
13,234
|
|
|
|
(580,099
|
)
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(20,004
|
)
|
|
$
|
(3,702,861
|
)
|
|
|
|
|
|
|
|
Note I Line of Credit and Long-Term Debt
In June 2006, in conjunction with an asset purchase agreement with Coloplast A/S, the Company
entered into an unsecured loan note deed with Coloplast with an outstanding principal amount of
$5,340,000. The promissory note is non-interest bearing and payable in five equal annual
installments of $1,068,000 payable annually on June 2. The Company discounted the note at 6.90%
which reflected the Companys cost of borrowing at the date of the purchase agreement and the
discount is being amortized over the life of the note. The discounted liability balance was
$2,004,271 at December 31, 2009.
8
In February 2009, the Company entered into a $14,000,000 credit facility with UBS
Financial (UBS). The credit facility consists of a revolving line of credit with interest
accruing monthly at a floating rate based on the quoted one-month LIBOR rate plus 1.25%. As of
December 31, 2009, the Company has an outstanding balance of $2,188,948 under the revolving line
of credit. The Companys obligations under the credit facility are payable on demand and are
secured by its investments in marketable securities held at UBS. On January 6, 2010, the aggregate
funds available under the credit facility was increased to $25,000,000.
Note J Recently Issued Accounting Standards
In December 2007, the FASB issued updated accounting standards on business combinations. The
new standards, which are now part of ASC 805,
Business Combinations
, establish principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. ASC 805 also provides guidance for recognizing and measuring the goodwill acquired in
the business combination or a gain from a bargain purchase and determines what information to
disclose to enable users of financial statements to evaluate the nature and financial effects of
the business combination. ASC 805 applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, which for the Company is the first quarter of fiscal 2010. ASC 805 will
impact the Companys consolidated financial statements for business combinations with an
acquisition date on or after adoption in the first quarter of fiscal 2010.
In December 2007, the FASB issued new accounting and reporting standards for noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. Under the new standards,
which are now part of ASC 810,
Noncontrolling Interests in Consolidated Financial Statement
,
minority interests will be recharacterized as noncontrolling interests and classified as a
component of equity. ASC 810 also establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary and requires expanded disclosures. The new standards
are effective for fiscal years beginning on or after December 15, 2008, which for the Company is
the first quarter of fiscal 2010. The adoption of ASC 810 did not have a material impact on the
Companys financial position or results of operations.
Note K Subsequent Events
The Company evaluated its December 31, 2009 financial statements for subsequent events through
February 9, 2010, the date the financial statements were available to be issued. Subsequent to
year end, the Company amended the credit facility with UBS to increase the availability to
$25,000,000, and received shareholder approval of the 2010 Stock Incentive Plan at the Annual
Meeting held on January 28, 2010; 1,000,000 shares may be issued under that Plan. The Company is
not aware of any additional subsequent events which would require recognition or disclosure in the
financial statements.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We develop, manufacture and market a broad line of innovative, technologically enhanced
PVC-free and latex-free urinary continence and urine drainage care products for the extended care
and acute care markets. Our products are comprised of our base products, which include our male
external catheters and standard silicone Foley catheters, and our advanced products, which include
our intermittent catheters, our anti-infection Foley catheters and our
FemSoft Insert
. We market
our products under our
Rochester Medical
brand, and also supply our products to several large
medical product companies for sale under brands owned by these companies, which are referred to as
private label sales. The primary markets for our products are distributors, extended care
facilities and individual hospitals and healthcare institutions. We sell our products both in the
domestic market and internationally.
For fiscal 2010, we intend to continue to increase our investment in our sales and marketing
programs, primarily through cash generated from operations, to support
Rochester Medical
branded
sales growth in the U.S. and Europe of our new and advanced products. Our advanced products will
eventually contribute a higher profit margin than our base products, and our
Rochester Medical
branded products contribute a higher profit margin than private label
9
sales, particularly branded sales in the United Kingdom and elsewhere in Europe. Increasing our
percentage of sales of branded products versus private label sales over time will have a positive
impact on our gross margin. Branded sales accounted for 66% of total sales for the quarter ended
December 31, 2009, as well as for the comparable quarter last year. Advanced products accounted
for 16% of total sales for the quarter ended December 31, 2009, compared to 14% for the quarter
ended December 31, 2008.
The following discussion pertains to our results of operations and financial position for the
quarters ended December 31, 2009 and 2008. Results of the periods are not necessarily indicative
of the results to be expected for the complete year. For the first quarter ended December 31,
2009, we reported a net loss of $169,000, compared to net income of $54,000 for the same period
last year. Loss from operations was $298,000 for the quarter ended December 31, 2009 compared to a
loss from operations of $325,000 for the quarter ended December 31, 2008.
As of December 31, 2009, we had $5.8 million in cash and cash equivalents, and $30.5 million
invested in marketable securities. The marketable securities consist of $27.6 million invested in
U.S. treasury bills and CDs and $2.9 million invested in a mutual fund investment. Our investments
in marketable securities are subject to interest rate risk and the value thereof could be adversely
affected due to movements in interest rates. Our investment choices, however, are conservative and
are intended to reduce the risk of loss or any material impact on our financial condition. We are
currently reporting an unrealized loss $523,488 related to the mutual fund investment as a result
of the recent fluctuations in the credit markets impacting the current market value. We consider
this unrealized loss temporary as we have the intent and ability to hold this investment long
enough to avoid realizing any significant loss.
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain items from our
statements of operations expressed as a percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
Net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of sales
|
|
|
55
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
45
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Marketing and selling
|
|
|
27
|
%
|
|
|
30
|
%
|
Research and development
|
|
|
4
|
%
|
|
|
4
|
%
|
General and administrative
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3
|
)%
|
|
|
(3
|
)%
|
Interest income
|
|
|
0
|
%
|
|
|
2
|
%
|
Interest (expense)
|
|
|
(0
|
)%
|
|
|
(1
|
)%
|
Other income
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
|
(3
|
)%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
Net income (loss) after taxes
|
|
|
(2
|
)%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, net sales information by product
category (base products and advanced products), marketing method (private label and
Rochester
Medical
® branded sales) and distribution channel (domestic and international markets) (all dollar
amounts below are in thousands):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Private label sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
$
|
2,306
|
|
|
$
|
1,192
|
|
|
$
|
3,498
|
|
|
$
|
1,527
|
|
|
$
|
1,101
|
|
|
$
|
2,628
|
|
Advanced products
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
244
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label sales
|
|
|
2,310
|
|
|
|
1,192
|
|
|
|
3,502
|
|
|
|
1,771
|
|
|
|
1,101
|
|
|
|
2,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base products
|
|
|
1,006
|
|
|
|
4,065
|
|
|
|
5,071
|
|
|
|
891
|
|
|
|
3,771
|
|
|
|
4,662
|
|
Advanced products
|
|
|
949
|
|
|
|
710
|
|
|
|
1,659
|
|
|
|
671
|
|
|
|
231
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branded sales
|
|
|
1,955
|
|
|
|
4,775
|
|
|
|
6,730
|
|
|
|
1,562
|
|
|
|
4,002
|
|
|
|
5,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales:
|
|
$
|
4,265
|
|
|
$
|
5,967
|
|
|
$
|
10,232
|
|
|
$
|
3,333
|
|
|
$
|
5,103
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$
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8,436
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Three Month Periods Ended December 31, 2009 and December 31, 2008
Net Sales.
Net sales for the first quarter of fiscal 2010 increased 21% to $10,232,000 from
$8,436,000 for the comparable quarter of last fiscal year. The sales increase resulted from an
increase in both private label sales and branded sales. Domestic sales of branded products
increased by 25% for the quarter compared to the same period last year. Our international branded
sales increased 19% compared to the same period last year, with $107,000 of the increase being a
result of the change in exchange rates in the United Kingdom as the U.S. dollar continued to weaken
versus the pound sterling. Total branded sales volumes met managements expectations, and
management believes its strategic decision to increase investments in sales and marketing programs
will continue to drive growth in branded sales, particularly our advanced intermittent and Foley
products. Management continues to focus on growth in branded advanced products. Private label
sales accounted for 34% of total sales for the quarter ended December 31, 2009. Private label
sales increased 22% for the quarter compared to the same period last year.
Gross Margin
. Our gross margin as a percentage of net sales for the first quarter of fiscal
2010 was 45.1% compared to 46.5% for the comparable quarter of last fiscal year. The decrease in
gross margin was primarily due to increased sales of lower margin product, particularly our new
advanced intermittent catheters and our Foley catheters in kit and tray configurations.
Management expects the sale of these products will continue to have a negative impact on margin
until we are producing them at higher levels needed to achieve manufacturing efficiencies.
Marketing and Selling.
Marketing and selling expense primarily includes costs associated with
base salary paid to sales and marketing personnel, sales commissions, and travel and advertising
expense. Marketing and selling expense for the first quarter of fiscal 2010 increased 8% to
$2,777,000 from $2,566,000 for the comparable quarter of last fiscal year. The increase in
marketing and selling expense is primarily due to increased advertising expense of $80,000,
increased sales and marketing personnel expenses of $67,000 and
increases in travel expense of
$33,000, as part of our strategic decision to increase investment in our sales and marketing
programs. Marketing and selling expense as a percentage of net sales for the fiscal quarters ended
December 31, 2009 and 2008 was 27% and 30%, respectively.
Research and Development.
Research and development expense primarily includes internal labor
costs, as well as expenses associated with third-party vendors performing validation and
investigative research regarding our products and development activities. Research and development
expense for the first quarter of fiscal 2010 increased to $443,000 from $318,000 for the comparable
quarter of last fiscal year. The increase in research and development expense relates primarily to
increased project costs of $125,000 to develop and enhance new and existing products. Research and
development expense as a percentage of net sales for each of the fiscal quarters ended December 31,
2009 and 2008 was 4%.
General and Administrative.
General and administrative expense primarily includes payroll
expense relating to our management and accounting, information technology and human resources
staff, as well as fees and expenses of outside legal counsel, accounting advisors, auditors and
utilities. General and administrative expense for the first quarter of fiscal 2010 increased 24%
to $1,691,000 from $1,366,000 for the comparable quarter of last fiscal year. The
11
increase in general and administrative expense is primarily related to increases of
$52,000 for audit related expenses and professional fees, $50,000 for personnel
expenses, $46,000 for trademark registration fees, $42,000 for
supplies, $39,000 for utilities expenses and
$35,000 for project costs. General and administrative expense as a percentage of net sales for the
fiscal quarters ended December 31, 2009 and 2008 was 17% and 16%, respectively.
Interest Income.
Interest income for the first quarter of fiscal 2010 decreased 83% to
$29,000 from $167,000 for the comparable quarter of last fiscal year. The decrease in interest
income reflects significantly lower interest rates on investments and marketable securities.
Interest Expense
. Interest expense for the first quarter of fiscal 2010 decreased to $41,000
from $84,000 for the comparable quarter of last fiscal year. The decrease in interest expense
reflects decreases in average debt outstanding during each of the quarters then ended and a
decrease in interest rates.
Other Income
. There was no other income for the first quarter of fiscal 2010 compared to
$200,000 for the comparable quarter of last fiscal year. The other income in fiscal 2009 reflected
a one time payment from Coloplast A/S reimbursing us for lost profit per the terms of our June 2006
asset purchase.
Income Taxes
. Income taxes for the first quarter of fiscal 2010 was a benefit of $140,935
compared to a benefit of $94,451 for the comparable quarter of last year. The increase in tax
benefit reflects the increase in net loss and the change in effective tax rate. For the quarter
ended December 31, 2009, we had an effective income tax rate of approximately 45.3%. The variation
of income tax rate from the federal income tax rate of 35% is due to permanent adjustments for
meals and entertainment expenses and incentive stock options, state taxes, foreign taxes and
prepaid taxes on deferred intercompany profit. In future periods of taxable earnings, we expect to
report an income tax provision using an effective tax rate in the range of 40-42% for U.S. income.
The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations
and U.K. operation profitability.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $36.3 million at December 31, 2009
and September 30, 2009. The relatively stable cash position primarily resulted from cash provided
by operations and financing activities offset by cash used for capital expenditures. As of
December 31, 2009, we had $30.5 million invested in marketable securities.
During the three-month period ended December 31, 2009, we generated $117,000 of cash provided
by operating activities compared to $469,000 of cash provided by operations during the comparable
period of the prior fiscal year. Net cash from operating activities in the first quarter of fiscal
2010 primarily reflects a net loss before depreciation, amortization, stock based compensation and
decreases in inventories and increases in income taxes payable offset by increases in accounts
receivable and other current assets and decreases in other current liabilities. Other current
assets during this period increased 37% or $397,000, primarily as a result of prepaid insurance
premiums and prepaid income taxes on intercompany profits. Inventories decreased 5%, or $490,000,
primarily as a result of increased sales in the current quarter. Accounts payable increased 4%,
or $62,000 primarily reflecting timing of expenses related to quarter end. Other current
liabilities decreased 36%, or $550,000, primarily reflecting payments of annual executive bonuses.
Income tax payable increased $130,000 in the current quarter. In addition, capital expenditures
during this period were $437,000 compared to $498,000 for the comparable period last year.
In June 2006, in conjunction with the asset purchase agreement with Coloplast, we entered into
an unsecured loan note deed with Coloplast with an outstanding principal amount of $5,340,000. The
promissory note is non-interest bearing payable and due in five equal installments of $1,068,000
payable annually on June 2. We have discounted the note at 6.90% and reflect a net liability of
$2,004,271 on our balance sheet as of December 31, 2009.
In February 2009, we entered into a credit facility with UBS Financial. The credit facility
consists of a revolving line of credit with interest accruing monthly at a floating rate based on
the quoted one-month LIBOR rate plus 1.25%. As of December 31, 2009, we had an outstanding balance
of $2,188,948 under the revolving line of credit. Our obligations under the credit facility are
payable on demand and are secured by our investments in marketable securities
12
held at UBS. On January 6, 2010, the aggregate funds available under the credit facility was
increased from $14,000,000 to $25,000,000.
We believe that our capital resources on hand at December 31, 2009, together with cash
generated from sales, will be sufficient to satisfy our working capital requirements for the
foreseeable future as described in the Liquidity and Capital Resources portion of Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009. In the event that additional financing is
needed, we may seek to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish
our rights to certain of our technologies, products or marketing territories. Failure to raise
capital when needed could have a material adverse effect on our business, financial condition and
results of operations. There can be no assurance that such financing, if required, will be
available on terms satisfactory to us, if at all.
Cautionary Statement Regarding Forward Looking Information
Statements other than historical information contained herein constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by the use of terminology such as believe, may,
will, expect, anticipate, predict, intend, designed, estimate, should or continue
or the negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the following:
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the uncertainty of market acceptance of new product introductions;
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the uncertainty of gaining new strategic relationships;
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the uncertainty of timing of revenues from private label sales (particularly with
respect to international customers);
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the uncertainty of successfully establishing our separate
Rochester Medical
brand
identity;
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the uncertainty of successfully growing our U.K. operations;
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the risks associated with operating an international business, including the impact of
foreign currency exchange rate fluctuations;
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FDA and other regulatory review and response times;
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the securing of Group Purchasing Organization contract participation;
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the uncertainty of gaining significant sales from secured GPO contracts;
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the impact of continued healthcare cost containment;
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new laws related to healthcare availability, healthcare reform, payment for healthcare
products and services or the marketing and distribution of products, including legislative
or administrative reforms to the U.S. Medicare and Medicaid systems or other U.S. or
international reimbursement systems;
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changes in the tax or environmental laws or standards affecting our business;
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and other risk factors listed from time to time in our SEC reports, including, without limitation,
the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended September
30, 2009.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary financial instrument market risk results from fluctuations in interest rates. Our
cash is invested in bank deposits and money market funds denominated in United States dollars and
pound sterling. The carrying value of these cash equivalents approximates fair market value. Our
investments in marketable securities are subject to interest rate risk and the value thereof could
be adversely affected due to movements in interest rates. Our investment choices, however, are
conservative in light of current economic conditions, and include primarily U.S. treasury bills to
reduce the risk of loss or any material impact on our financial condition. Our revolving line of
credit bears interest at a floating rate based on the quoted one-month LIBOR rate plus 1.25%. As of
December 31, 2009, we had an outstanding balance of $2,188,948 under the revolving line of credit.
13
In future periods, we believe a greater portion of our revenues could be denominated in
currencies other than the U.S. dollar, thereby increasing our exposure to exchange rate gains and
losses on non-United States currency transactions. Sales through our subsidiary, Rochester
Medical, Ltd., are denominated in pound sterling, and fluctuations in the rate of exchange between
the U.S. dollar and the pound sterling could adversely affect our financial results.
Otherwise, we do not believe our operations are currently subject to significant market risks
for interest rates, foreign currency exchange rates, commodity prices or other relevant market
price risks of a material nature. We do not currently use derivative financial instruments to
manage interest rate risk or enter into forward exchange contracts to hedge exposure to foreign
currencies, or any other derivative financial instruments for trading or speculative purposes. In
the future, if we believe an increase in our currency exposure merits further review, we may
consider entering into transactions to mitigate that risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
. As of the end of the period covered by this
report (the Evaluation Date) we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms, and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
. During our first fiscal quarter, there has been no change in
our internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange
Act) that materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
14
PART II. OTHER INFORMATION
Item 6. Exhibits
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10.1
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The Companys Fiscal 2010 Management Incentive Plan (Incorporated by reference to
Exhibit 10.1 of the registrants Current Report on Form 8-K filed on November 19,
2009).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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15
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.
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ROCHESTER MEDICAL CORPORATION
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Date: February 9, 2010
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By:
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/s/ Anthony J. Conway
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Anthony J. Conway
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President and Chief Executive Officer
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Date: February 9, 2010
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By:
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/s/ David A. Jonas
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David A. Jonas
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Chief Financial Officer and Treasurer
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16
INDEX TO EXHIBITS
Exhibit
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10.1
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The Companys Fiscal 2010 Management Incentive Plan (Incorporated by reference to
Exhibit 10.1 of the registrants Current Report on Form 8-K filed on November 19,
2009).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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32.1
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Section 1350 Certification of Chief Executive Officer.
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32.2
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Section 1350 Certification of Chief Financial Officer.
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17
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