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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
to
------------- ---------------
Commission File Number: 0-18933
ROCHESTER MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1613227
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ROCHESTER MEDICAL DRIVE,
STEWARTVILLE, MN 55976
(Address of principal executive offices) (Zip Code)
(507) 533-9600
(Registrant's 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 Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
5,328,500 Common Shares as of August 2, 2002.
TABLE OF CONTENTS
ROCHESTER MEDICAL CORPORATION
REPORT ON FORM 10-Q
FOR QUARTER ENDED
JUNE 30, 2002
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- June 30, 2002 and September 30, 2001.................................................. 3
Statements of Operations -- Three months ended June 30, 2002 and 2001;
Nine months ended June 30, 2002 and 2001 ............................................................. 4
Statements of Cash Flows -- Nine months ended June 30, 2002 and 2001 ................................... 5
Notes to Financial Statements .......................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................... 11
PART II. OTHER INFORMATION ..................................................................................... 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2002 2001
------------------ ----------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and Cash Equivalents ........................................... $ 544,391 $ 1,842,796
Marketable Securities ............................................... 3,972,990 3,904,840
Accounts Receivable ................................................. 1,767,223 1,499,337
Inventories ......................................................... 3,256,001 2,099,226
Prepaid Expenses and Other Assets ................................... 204,505 177,105
------------------- ----------------
TOTAL CURRENT ASSETS .......................................... 9,745,110 9,523,304
PROPERTY AND EQUIPMENT
Land and Buildings .................................................. 5,454,537 5,454,537
Equipment and Fixtures .............................................. 10,416,267 10,175,200
---------------- ----------------
15,870,804 15,629,737
Less: Accumulated Depreciation ...................................... (6,608,452) (5,682,089)
---------------- ----------------
TOTAL PROPERTY AND EQUIPMENT .................................. 9,262,352 9,947,648
INTANGIBLE ASSETS
Patents, Less Accumulated Amortization .............................. 194,798 188,345
---------------- ----------------
TOTAL ASSETS ........................................................... $ 19,202,260 $ 19,659,297
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable .................................................... $ 452,504 $ 383,145
Accrued Expenses .................................................... 610,712 820,967
Short-term Debt ..................................................... -- --
Deferred Revenue..................................................... 100,000 --
---------------- ----------------
TOTAL CURRENT LIABILITIES ..................................... 1,163,216 1,204,112
LONG-TERM LIABILITIES:
Deferred Revenue..................................................... 875,000 --
SHAREHOLDERS' EQUITY
Common Stock, no par value:
Authorized -- 20,000,000
Issued and Outstanding Shares -- 5,328,500.................. 41,249,003 41,249,003
Accumulated Deficit ................................................. (24,038,370) (22,660,988)
Unrealized loss on available-for-sale securities..................... (46,589) (132,830)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY .................................... 17,164,044 18,455,185
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............................... $ 19,202,260 $ 19,659,297
================ ================
Note -- The Balance Sheet at September 30, 2001 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.
See Notes to Financial Statements
3
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SALES .............................. $ 3,033,258 $ 2,152,009 $ 7,913,121 $ 6,110,281
COST OF SALES .......................... 2,130,274 1,774,222 5,782,257 4,665,320
----------- ----------- ----------- -----------
GROSS PROFIT ........................... 902,984 377,787 2,130,864 1,444,961
COSTS AND EXPENSES:
Marketing and Selling ............... 639,153 624,423 1,656,816 1,982,718
Research and Development ............ 193,790 230,960 627,349 760,940
General and Administrative .......... 429,774 367,907 1,383,027 1,261,017
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES ...... 1,262,717 1,223,290 3,667,192 4,004,675
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ................... (359,733) (845,503) (1,536,328) (2,559,714)
OTHER INCOME:
Interest Income ..................... 49,540 81,396 158,946 311,448
----------- ----------- ----------- -----------
NET LOSS ............................... $ (310,193) $ (764,107) (1,377,382) $(2,248,266)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.06) $ (0.14) $ (0.26) $ (0.42)
(Basic and Diluted) .................... =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF 5,328,500 5,338,900 5,328,500 5,338,900
COMMON SHARES OUTSTANDING =========== =========== =========== ===========
See Notes to Financial Statements
4
ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net Loss ............................................................... $(1,377,382) $(2,248,266)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................................... 958,291 1,029,494
Other non-cash compensation ............................................ -- 16,620
Changes in assets and liabilities:
Accounts Receivable .................................................... (267,889) (385,494)
Inventories ............................................................ (1,156,775) (26,353)
Other Current Assets ................................................... (27,401) 48,886
Accounts Payable ....................................................... 69,357 (406,087)
Deferred Revenue ....................................................... 975,000 --
Other Current Liabilities .............................................. (210,254) (282,598)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........................ (1,037,050) (2,253,798)
INVESTING ACTIVITIES
Capital Expenditures ................................................... (241,067) (162,772)
Patents ................................................................ (38,380) (31,736)
Sales (Purchases) of Marketable Securities, Net ........................ 18,093 601,540
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................... (261,355) 407,032
FINANCING ACTIVITIES
Proceeds from Sales (Purchases) of Common Stock ........................ -- --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES .................................. -- --
DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (1,298,405) (1,846,766)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .......................................... 1,842,796 3,204,161
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 544,391 $ 1,357,395
=========== ===========
See Notes to Financial Statements
5
ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with 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 Company's 2001 Form 10-K. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2002.
NOTE B -- NET LOSS PER COMMON SHARE
For the nine-month periods ended June 30, 2002 and 2001, there is no
difference between basic and diluted net loss per share. Common equivalent
shares from stock options and convertible debt are excluded as their effects are
antidilutive.
NOTE C -- INVESTMENTS IN MARKETABLE SECURITIES
As of June 30, 2002, the carrying value of the Company's marketable
securities, which consisted primarily of corporate bonds and commercial paper,
was $4.0 million. This total included a $1.0 million corporate bond from Pacific
Gas & Electric ("PG&E") with a carrying value of $920,000 on June 30, 2002. This
bond matured December 24, 2001 and, although PG&E remains current on its
interest payment obligations, the principal amount of this bond has not yet been
paid.
On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection.
Recently, PG&E and the State of California have asked PG&E's creditors to vote
on two separate reorganization proposals, with votes required to be cast no
later than August 12, 2002. While PG&E's management has stated their intent to
pay their creditors, the numerous political and economic factors influencing the
California utility market coupled with PG&E's bankruptcy filing could
potentially impact the timing and/or actuality of payments. However, the Company
currently believes that it will realize the full value of this investment.
NOTE D -- INVENTORIES
Inventories consist of the following:
JUNE 30, SEPTEMBER 30,
2002 2001
----------- -------------
Raw materials .................................... $ 550,064 $ 675,234
Work-in progress ................................. 1,482,792 892,736
Finished goods ................................... 1,323,145 631,256
Reserve for inventory obsolescence ............... (100,000) (100,000)
----------- -------------
$ 3,256,001 $ 2,099,226
=========== =============
6
NOTE E -- COMPREHENSIVE LOSS
Comprehensive loss includes net loss and all other nonowner changes in
shareholders' equity during a period.
The comprehensive loss for the third quarter ended June 30, 2002 and
2001 consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net loss ................................ $ (310,193) $ (764,107) $(1,377,382) $(2,248,266)
Unrealized gain on securities
held, net ............................... 6,738 -- 86,241 --
---------- ---------- ----------- -----------
$ (303,455) $ (764,107) $(1,291,141) $(2,248,266)
========== ========== =========== ===========
NOTE F -- REVENUE RECOGNITION
During 2002, the Company received a non-refundable up-front payment
from Coloplast in connection with a contractual arrangement that requires
continuing involvement of the Company. The Company is deferring recognition of
the revenue over the term of the contractual arrangement.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated,
certain items from the statements of operations of the Company expressed as a
percentage of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
------ ------ ------ ------
Total Net Sales........................... 100% 100% 100% 100%
Cost of Sales............................. 70% 82% 73% 76%
------ ------ ------ ------
Gross Margin......................... 30% 18% 27% 24%
Operating Expenses:
Marketing and Selling................ 21% 29% 21% 32%
Research and Development............. 7% 11% 8% 13%
General and Administrative........... 14% 17% 17% 21%
------ ------ ------ ------
Total Operating Expenses.................. 42% 57% 46% 66%
Loss From Operations...................... (12)% (39)% (19)% (42)%
Interest Income........................... 2% 3% 2% 5%
------ ------ ------ ------
Net Loss.................................. (10)% (36)% (17)% (37)%
====== ====== ====== ======
Three Month and Nine Month Periods Ended June 30, 2002 and June 30, 2001
Net Sales. Net sales for the third quarter of fiscal 2002 increased 41%
to $3,033,000 from $2,152,000 for the comparable quarter of last fiscal year.
The sales increase primarily resulted from an increase in domestic and
international branded sales and domestic sales to private label customers,
offset by slightly lower international sales to private label customers.
Net sales for the nine months ended June 30, 2002 increased 30% to
$7,913,000 from $6,110,000 for the comparable nine-month period of last fiscal
year. The increase in nine-month sales resulted from an increase in sales
of domestic and international branded products and sales to domestic and
international private label customers.
Gross Margin. The Company's gross margin as a percentage of net sales
for the third quarter of fiscal 2002 was 30% compared to 18% for the comparable
quarter of last fiscal year. The current quarter's margin primarily reflects
increased production and sales resulting in lower per unit fixed overhead costs.
The Company's gross margin as a percentage of net sales for the nine
months ended June 30, 2002 was 27% compared to 24% for the comparable nine-month
period of last fiscal year. Factors related to the nine-month margin are
generally consistent with those discussed above for the current quarter.
Marketing and Selling. Marketing and selling expense for the third
quarter of fiscal 2002 increased 2% to $639,000 from $624,000 for the comparable
quarter of last fiscal year. The increase in
8
marketing and selling expense is primarily due to an increase in extended care
sales and marketing expenditures in the current quarter.
Marketing and selling expense for the nine months ended June 30, 2002
decreased 16% to $1,657,000 from $1,983,000 for the comparable nine-month period
of last fiscal year. The decrease in the comparative nine-month expense levels
is primarily due to significant non-recurring costs associated with the
FemSoft(R) Insert in the comparable nine months of the prior fiscal year offset
by an increase in extended care sales and marketing expenditures in the current
quarter.
Research and Development. Research and development expense for the
third quarter of fiscal 2002 decreased 16% to $194,000 from $231,000 for the
comparable quarter of last fiscal year. The decrease in research and development
expense is primarily related to decreased clinical costs.
Research and development expense for the nine months ended June 30,
2002 decreased 18% to $627,000 from $761,000 for the comparable nine-month
period of last fiscal year. Factors affecting the comparative nine-month expense
levels are generally consistent with those discussed above for the current
quarter.
General and Administrative. General and administrative expense for the
third quarter of fiscal 2002 increased 17% to $430,000 from $368,000 for the
comparable quarter of last fiscal year. The increase in general and
administrative expense is primarily related to an increase in labor and an
increase in professional fees.
General and administrative expense for the nine months ended June 30,
2002 increased 10% to $1,383,000 from $1,261,000 for the comparable nine-month
period of last fiscal year. Factors affecting the comparative nine-month expense
levels primarily relate to those factors discussed above for the current
quarter, together with non-recurring costs associated with an arbitration
proceeding and increased costs associated with being a public company, including
increased Nasdaq filing fees.
Interest Income. Interest income for the third quarter of fiscal 2002
decreased 38% to $50,000 from $81,000 for the comparable quarter of last fiscal
year. The decrease in interest income reflects the comparatively lower average
level of invested cash balances in the current quarter due to the utilization of
cash for operations and capital expenditures, together with an overall lower
interest rate on short-term investments.
Interest income for the nine months ended June 30, 2002 decreased 49%
to $159,000 from $311,000 for the comparable nine-month period of last fiscal
year. The decrease reflects a comparatively lower average level of invested cash
balances for the current quarter and an overall lower interest rate on
short-term investments as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities were
$4,517,000 at June 30, 2002 compared with $5,748,000 at September 30, 2001. The
Company used a net $1,037,000 of cash from operating activities during the nine
months ended June 30, 2002, primarily reflecting the net loss before non-cash
depreciation, as well as an increase in inventory, offset by $975,000 of
deferred revenue.
During the fiscal quarter ended June 30, 2002, the Company entered into
an agreement with Coloplast granting Coloplast exclusive marketing and
distribution rights with respect to the Company's Release-NF Foley catheters in
certain geographic areas. Coloplast paid the Company $1,000,000 for these
exclusive rights. In accordance with generally accepted accounting principles,
the Company
9
recognized $25,000 of this amount in the fiscal quarter ended June 30, 2002 and
the remaining amount constitutes deferred revenue which will be recognized over
the term of the agreement.
During the fiscal quarter ended March 31, 2002, the Company entered
into a $1,000,000 revolving line of credit with U.S. Bank National Association.
As of June 30, 2002, the Company had no amounts outstanding under this line of
credit.
During the nine-month period ended June 30, 2002, the Company's working
capital position, excluding cash and marketable securities, increased by a net
$1,493,000. Accounts receivable balances increased 18% or $268,000 as a result
of increased sales and the timing of customer orders. Inventories increased 55%
or $1,157,000 during the recent nine-month period primarily as a result of
increased sales, as well as the Company's strategic decision to increase its
level of finished goods. Other current assets increased 15% or $27,000 during
the recent nine-month period as a result of the timing of payment of prepaid
expenses and the receipt of an interest receivable. Current liabilities
decreased 3% or $41,000 during the recent nine-month period, primarily
reflecting the timing of payments and the Company's repayment of borrowings
under its revolving line of credit. Changes in other asset and liability
balances during the recent nine-month period related to timing of expense
recognition.
The Company believes that its capital resources on hand at June 30,
2002, together with revenues from sales, will be sufficient to satisfy its
working capital requirements for the foreseeable future as described in the
Liquidity and Capital Resources portion of Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's Annual Report
on Form 10-K (Part II, Item 6) for the fiscal year ended September 30, 2001.
However, the Company may be required to seek additional funding sources, such as
additional borrowings under the Company's revolving line of credit or equity or
debt financings, to fund the Company's working capital requirements. If the
Company decides to seek additional financing, there can be no assurance as to
the outcome of such efforts, including whether financing will be available to
the Company, or if available, whether it would be on terms favorable to the
Company and its shareholders. Failure by the Company to secure additional
financing could result in significant cash constraints and financial issues for
the Company.
FORWARD-LOOKING STATEMENTS
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 the actual results, performance
or achievements of the Company, 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: the uncertainty of gaining private label distributors for the
hydrophilic intermittent catheters, the Release-NF Foley catheters and the
FemSoft Insert; the uncertainty of insurance coverage of the FemSoft Insert by
additional insurers; the uncertainty of market acceptance of the Release NF
Foley catheter, the FemSoft Insert and new products; the uncertainty that
initial consumer interest in the FemSoft Insert may not result in significant
sales of the product or continued sales of the product after trial; the results
of product evaluations; the securing of Group Purchasing Organization contract
participation; the timing of purchases by customers (particularly international
customers); manufacturing capacities for both current products and new products;
results of clinical tests; the timing of clinical preference testing and new
product introductions; FDA review and response times; and other risk factors
listed from time to time in the Company's SEC reports, including, without
10
limitation, the section entitled "Risk Factors" in the Company's Annual Report
on Form 10-K (Part II, Item 6) for the year ended September 30, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item. However, as disclosed under Note C to the
Company's financial statements that appears on page 6, the bankruptcy of PG&E
could potentially impact the timing and/or actuality of payment of our $1.0
million PG&E corporate bond.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
11
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.
ROCHESTER MEDICAL CORPORATION
Date: August 8, 2002 By: /s/ Anthony J. Conway
---------------------------------------
Anthony J. Conway
Chief Executive Officer
Date: August 8, 2002 By: /s/ David A. Jonas
---------------------------------------
David A. Jonas
Chief Financial Officer and Treasurer