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EX-31.2 - EX-31.2 - ROCHESTER MEDICAL CORPORATION | c62833exv31w2.htm |
EX-31.1 - EX-31.1 - ROCHESTER MEDICAL CORPORATION | c62833exv31w1.htm |
EX-32.2 - EX-32.2 - ROCHESTER MEDICAL CORPORATION | c62833exv32w2.htm |
EX-32.1 - EX-32.1 - ROCHESTER MEDICAL CORPORATION | c62833exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
|
OR
o | 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
(Registrants telephone number, including area code)
(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. Yes þ No o
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 | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
12,177,752 Common Shares as of February 4, 2011.
Table of Contents
ROCHESTER MEDICAL CORPORATION
Report on Form 10-Q
for quarter ended
December 31, 2010
for quarter ended
December 31, 2010
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, | September 30, | |||||||
2010 | 2010 | |||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,829,288 | $ | 4,545,907 | ||||
Marketable securities |
29,267,466 | 30,967,007 | ||||||
Accounts receivable, net |
6,601,443 | 7,858,540 | ||||||
Inventories, net |
9,528,427 | 9,240,291 | ||||||
Prepaid expenses and other current assets |
1,434,309 | 846,899 | ||||||
Deferred income tax asset |
863,051 | 872,849 | ||||||
Total current assets |
52,523,984 | 54,331,493 | ||||||
Property, plant and equipment: |
||||||||
Land and buildings |
8,396,472 | 7,997,423 | ||||||
Equipment and fixtures |
18,495,382 | 18,543,813 | ||||||
26,891,854 | 26,541,236 | |||||||
Less accumulated depreciation |
(16,859,114 | ) | (16,523,997 | ) | ||||
Total property, plant and equipment |
10,032,740 | 10,017,239 | ||||||
Deferred income tax asset |
1,093,280 | 1,175,052 | ||||||
Goodwill |
4,533,151 | 4,561,781 | ||||||
Finite life intangibles, net |
5,426,546 | 5,580,726 | ||||||
Total assets |
$ | 73,609,701 | $ | 75,666,291 | ||||
Liabilities and Shareholders Equity: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,993,978 | $ | 2,016,058 | ||||
Accrued compensation |
662,276 | 1,458,652 | ||||||
Accrued expenses |
567,813 | 610,570 | ||||||
Current maturities of long-term debt |
994,093 | 2,641,233 | ||||||
Total current liabilities |
4,218,160 | 6,726,513 | ||||||
Long-term liabilities: |
||||||||
Other long-term liabilities |
52,311 | 46,327 | ||||||
Long-term debt, less current maturities |
| | ||||||
Total long-term liabilities |
52,311 | 46,327 | ||||||
Shareholders equity: |
||||||||
Common stock, no par value: |
||||||||
Authorized shares 40,000,000 |
||||||||
Issued and outstanding shares
(12,175,752 at December 31, 2010;
12,072,452 at September 30, 2010) |
57,849,876 | 57,200,531 | ||||||
Retained earnings |
14,409,596 | 14,578,678 | ||||||
Accumulated other comprehensive loss |
(2,920,242 | ) | (2,885,758 | ) | ||||
Total shareholders equity |
69,339,230 | 68,893,451 | ||||||
Total liabilities and shareholders equity |
$ | 73,609,701 | $ | 75,666,291 | ||||
Note The Balance Sheet information at September 30, 2010 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
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Net sales |
$ | 10,946,405 | $ | 10,231,812 | ||||
Cost of sales |
5,542,274 | 5,618,704 | ||||||
Gross profit |
5,404,131 | 4,613,108 | ||||||
Operating expenses: |
||||||||
Marketing and selling |
3,881,980 | 2,777,317 | ||||||
Research and development |
277,855 | 443,028 | ||||||
General and administrative |
1,709,093 | 1,690,747 | ||||||
Total operating expenses |
5,868,928 | 4,911,092 | ||||||
Loss from operations |
(464,797 | ) | (297,984 | ) | ||||
Other income (expense): |
||||||||
Interest income |
52,570 | 55,656 | ||||||
Interest expense |
(31,259 | ) | (41,118 | ) | ||||
Other expense |
(16,282 | ) | (26,647 | ) | ||||
Net loss before income taxes |
(459,768 | ) | (310,093 | ) | ||||
Income tax benefit |
(290,686 | ) | (140,935 | ) | ||||
Net loss |
$ | (169,082 | ) | $ | (169,158 | ) | ||
Net loss per share basic |
$ | (0.01 | ) | $ | (0.01 | ) | ||
Net loss per share diluted |
$ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average number of common shares outstanding basic |
12,127,268 | 12,191,590 | ||||||
Weighted average number of common shares outstanding diluted |
12,127,268 | 12,191,590 |
2
Table of Contents
ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (169,082 | ) | $ | (169,158 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation |
337,265 | 348,875 | ||||||
Amortization |
157,268 | 173,915 | ||||||
Stock based compensation |
295,469 | 285,164 | ||||||
Deferred income tax |
82,483 | (63,992 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
1,247,864 | (68,417 | ) | |||||
Inventories |
(306,572 | ) | 489,753 | |||||
Other current assets |
(588,317 | ) | (397,098 | ) | ||||
Accounts payable |
(19,512 | ) | (62,014 | ) | ||||
Income tax payable |
(177,898 | ) | 130,625 | |||||
Other current liabilities |
(655,254 | ) | (550,165 | ) | ||||
Net cash provided by operating activities |
203,714 | 117,488 | ||||||
Investing activities: |
||||||||
Purchase of property, plant and equipment |
(361,345 | ) | (437,134 | ) | ||||
Patents |
(12,820 | ) | (16,646 | ) | ||||
Purchases of marketable securities |
(7,044,243 | ) | (39,215,744 | ) | ||||
Sales and maturities of marketable securities |
8,808,021 | 38,677,771 | ||||||
Net cash provided by (used in) investing activities |
1,389,613 | (991,753 | ) | |||||
Financing activities: |
||||||||
Proceeds from long-term debt |
| 300,000 | ||||||
Payments on long-term debt |
(1,647,140 | ) | | |||||
Excess tax benefit from exercises of stock options |
193,526 | 6,188 | ||||||
Proceeds from issuance of common stock |
160,350 | 11,563 | ||||||
Net cash provided by (used in) financing activities |
(1,293,264 | ) | 317,751 | |||||
Effect of exchange rate on cash and cash equivalents |
(16,682 | ) | 7,081 | |||||
Increase (decrease) in cash and cash equivalents |
283,381 | (549,433 | ) | |||||
Cash and cash equivalents at beginning of period |
4,545,907 | 6,365,584 | ||||||
Cash and cash equivalents at end of period |
$ | 4,829,288 | $ | 5,816,151 | ||||
Supplemental Cash Flow Information |
||||||||
Interest paid |
$ | 23,318 | $ | | ||||
Income taxes paid |
$ | 5,000 | $ | 261,243 |
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
Table of Contents
ROCHESTER MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2010
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, 2010 and the unaudited December
31, 2010 and 2009 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, 2010. 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, 2010 are not necessarily indicative of the results that may be expected
for the year ending September 30, 2011.
Note B Net Loss Per Share
Net loss per common share is computed by dividing net 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.
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.
Employee stock options to purchase 802,000 shares and 609,000 shares were excluded from the
diluted net income (loss) per share calculation for the first quarter of fiscal years 2011 and
2010, respectively, because their exercise prices were greater than the average market price of the
Companys common stock and their effect would have been antidilutive.
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,
2010, there were 76,400 options outstanding under this 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. As
of January 28, 2010, no new awards may be granted under the 2001 Stock Incentive Plan. As of
December 31, 2010, there were 1,290,000 options outstanding under this 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 the grant. As of December 31,
2010, 797,000 shares remained available for issuance under the 2010 Stock Incentive Plan, and there
were 203,000 options outstanding under this plan.
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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 under which prior
periods are not retroactively revised. The Company recorded approximately $295,000 ($195,000 net of
tax) and $285,000 ($188,000 net of tax) of related stock-based compensation expense for the quarter
ended December 31, 2010 and 2009, respectively. This stock-based compensation expense reduced both
basic and diluted earnings per share by $0.02 for each of the quarters ended December 31, 2010 and
2009.
As of December 31, 2010, there is approximately $955,000 of unrecognized compensation cost
that is expected to be recognized over a weighted average period of approximately thirteen months.
Stock Options
No stock options were granted in the first quarter of fiscal 2011 or 2010.
The following table represents stock option activity for the three months ended December 31,
2010:
Weighted- | Weighted- | |||||||||||
Average | Average | |||||||||||
Number of | Exercise | Remaining | ||||||||||
Shares | Price | Contract Life | ||||||||||
Outstanding options at beginning of period |
1,672,700 | $ | 7.83 | 5.31 Yrs | ||||||||
Granted |
| | ||||||||||
Exercised |
(103,300 | ) | $ | 1.55 | ||||||||
Outstanding options at end of period |
1,569,400 | $ | 8.25 | 5.24 Yrs. | ||||||||
Outstanding options exercisable at end of period |
1,202,400 | $ | 7.19 | 4.29 Yrs. | ||||||||
At December 31, 2010, the aggregate intrinsic value of options outstanding was $4,968,014, and
the aggregate intrinsic value of options exercisable was $4,967,271. Total intrinsic value of
options exercised was $939,259 for the three months ended December 31, 2010. Shares available for
future stock option grants to employees and directors under existing plans were 797,000 at December
31, 2010.
Note D Marketable Securities
As of December 31, 2010, the Company has $29.3 million invested in high quality, investment
grade debt securities, consisting of $26.1 million invested in U.S. treasury bills and CDs and
$3.2 million invested in a mutual fund. The Company is currently reporting an unrealized loss of
$348,346 related to the mutual fund investment as a result of the recent fluctuations in the credit
markets impacting the current market value. The Company currently considers this unrealized loss to
be temporary.
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, 2010 |
$ | 29,615,812 | $ | (348,346 | ) | $ | 29,267,466 | |||||
September 30, 2010 |
$ | 31,379,590 | $ | (412,583 | ) | $ | 30,967,007 |
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.
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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, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 1,788,175 | $ | 1,756,313 | ||||
Work-in-process |
3,403,166 | 3,233,644 | ||||||
Finished goods |
4,463,063 | 4,375,798 | ||||||
Reserve for inventory obsolescence |
(125,977 | ) | (125,464 | ) | ||||
$ | 9,528,427 | $ | 9,240,291 | |||||
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. For fiscal 2010, the Company recorded a
valuation allowance of $47,000 related to Minnesota R&D credit carryovers as the Company believes
it is more likely than not that the deferred tax asset will not be utilized in future years. There
has been no further valuation allowance recorded for the current quarter. For the quarter ended
December 31, 2010, the Company had an effective income tax rate of 63%. The variation of income tax
rate from the federal income tax rate of 35% is primarily due to current year permanent adjustments
for meals and entertainment expenses, incentive stock options, state taxes and foreign taxes. In
future periods, the Company expects the U.S. effective tax rate to be significantly higher than the
federal and state statutory rates on U.S. income due to permanent adjustments noted above. The
effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, UK
operation profitability, and any discrete items.
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 for unrecognized tax benefits. As of December 31, 2010, the
Company has recognized approximately $52,000 for unrecognized tax benefits. If the Company were to
prevail on all unrecognized tax benefits recorded at December 31, 2010, the total gross
unrecognized tax benefit totaling approximately $52,000 would benefit the Companys effective tax
rate.
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It is the Companys practice to recognize penalties and/or interest to income tax matters in
income tax expense. As of December 31, 2010, 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.
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. Goodwill and intangibles with indefinite useful lives are not
amortized but the Company is required to perform, 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, 2010 to the net book value of its equity, and concluded that the goodwill
was not impaired. The decrease in value of goodwill as of December 31, 2010 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 on available for sale securities held. The comprehensive loss for
the three months ended December 31, 2010 and 2009 consists of the following:
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (169,082 | ) | $ | (169,158 | ) | ||
Foreign currency adjustment |
(91,410 | ) | 135,920 | |||||
Unrealized gain on available for sale securities held |
56,925 | 13,234 | ||||||
Comprehensive loss |
$ | (203,567 | ) | $ | (20,004 | ) | ||
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
$1,036,366 at December 31, 2010. The final payment is due on or before June 2, 2011.
In February 2009, the Company entered into a credit facility with UBS Financial (UBS). The
credit facility consisted 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%. In December 2010, the Company
closed its credit facility with UBS and subsequently opened a new credit facility with RBC Wealth
Management (RBC). The credit facility consists of a revolving line of credit with interest
accruing monthly at a variable rate currently at 1.375%. As of December 31, 2010, the Company
has no outstanding balance under the revolving line of credit. On January 6, 2011, the aggregate
funds available under the credit facility was increased from $14,000,000 to $25,000,000.
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Note J Recently Issued Accounting Standards
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures,
that requires entities to make new disclosures about recurring or nonrecurring fair-value
measurements and provides clarification of existing disclosure requirements. For assets and
liabilities that are measured at fair value on a recurring basis, the ASU requires disclosure of
significant transfers between Levels 1 and 2, and transfers into and out of Level 3 of the fair
value hierarchy and the reasons for those transfers. Significant transfers into each level must be
disclosed and discussed separately from transfers out of each level. Significance is judged with
respect to earnings, total assets, total liabilities or total equity. An accounting policy must be
determined and disclosed as to when transfers between levels are recognized; (1) actual date, (2)
beginning of period or (3) end of period. The ASU amends the reconciliation of the beginning and
ending balances of Level 3 recurring fair value measurements to present information about
purchases, sales, issuances and settlements on a gross basis rather than as a net number. The ASU
amends ASC 820 to require fair value measurement disclosures for each class of assets and
liabilities and clarifies that a description of the valuation technique and inputs used to measure
fair value is required for both recurring and nonrecurring fair value measurements. This standard
became effective for the Companys fiscal year ending September 30, 2010, except for the
requirement to provide the Level activity of purchases, sales, issuances and settlement on a gross
basis, which will be effective beginning in the first quarter of fiscal year 2011. Since this
standard impacts disclosure requirements only, its adoption will not have a material impact on the
Companys condensed consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No.
2010-20 amends the guidance with ASC Topic 310, Receivables to facilitate financial statement
users evaluation of (1) the nature of credit risk inherent in the entitys portfolio of financing
receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit
losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The
amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a
rollforward schedule of the allowance for credit losses on a portfolio segment basis, credit
quality indicators of financing receivables and the aging of past due financing receivables. The
Company is required to adopt ASU No. 2010-20 as of December 15, 2010. Since this standard impacts
disclosure requirements only, its adoption will not have a material impact on the Companys
condensed consolidated financial statements.
Note K Subsequent Events
On January 12, 2011, the Company entered into a binding Share Purchase Agreement (the
Purchase Agreement) with Fornix BioSciences N.V. (Fornix) relating to the acquisition of all of
the capital stock of Laprolan B.V., a corporation organized under the laws of The Netherlands and a
wholly owned subsidiary of Fornix (Laprolan). The Purchase Agreement includes the agreement of
the Company to pay 10,350,000 for the capital stock of Laprolan. The transactions contemplated by
the Purchase Agreement are subject to shareholder approval of Fornix . The transaction is expected
to close shortly after the shareholders of Fornix approve the transaction at an extraordinary
meeting of shareholders which will take place on or about March 30, 2011. Under the terms of the
Purchase Agreement, the closing will be deemed retroactive to January 1, 2011 and, once the closing
is complete, the operating results of Laprolan will be for the account of the Company from and
after January 1, 2011. The Company expects to apply purchase accounting as of that date and to
include the results of Laprolan in its second quarter 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, which are referred to as branded sales, 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.
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As part of our updated three year strategic business plan, we intend to continue to increase
investment in our sales and marketing programs in fiscal 2011 to support Rochester Medical branded
sales growth in the U.S. and Europe through the addition of more than 30 additional sales staff.
We expect such increased investment to be funded primarily through cash generated from current
operations. 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 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 72% of total sales for the
quarter ended December 31, 2010, compared to 66% for the quarter ended December 31, 2009. Advanced
products accounted for 18% of total sales for the quarter ended December 31, 2010, compared to 16%
for the quarter ended December 31, 2009.
In September 2009, the FemSoft Insert was approved for inclusion in Part IX of the UK Drug
Tariff as a prescription product that is reimbursable under the National Healthcare System,
commencing in 2010. In November 2009, the Centers for Medicare & Medicaid Services (CMS) issued a
specific reimbursement code which covers our FemSoft Insert. In January 2011, the CMS notified us
of their decision regarding the Medicare reimbursement fee to be used for the FemSoft Insert in
response to our request that the pricing data used to establish the fee schedule be revised. The
current Medicare fee schedule amount is based on price data that is closest to a 1986/1987 base
period and is significantly lower than the current retail price for the FemSoft Insert. We
continue to believe that the reimbursement fee is unreasonably low, and we intend to continue to
pursue a dialog with the CMS in an effort to change the reimbursement rate. We continue to believe
the availability of National Healthcare System and Medicare reimbursement will help this unique
device become an economically accessible and often preferred solution for incontinent women in the
United Kingdom and in the United States.
The following discussion pertains to our results of operations and financial position for the
quarters ended December 31, 2010 and 2009. 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,
2010, we reported a net loss of $0.01 per diluted share, compared to a net loss of $0.01 per
diluted share for the same period last year. Loss from operations was $465,000 for the quarter
ended December 31, 2010 compared to a loss from operations of $298,000 for the quarter ended
December 31, 2009, while net loss was $169,000 for each of the quarters ended December 31, 2010 and
2009.
As of December 31, 2010, we had $4.8 million in cash and cash equivalents, and $29.3 million
invested in marketable securities. The marketable securities consist of $26.1 million invested in
U.S. treasury bills and CDs and $3.2 million invested in a mutual fund. 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 of $348,000 related to the mutual fund investment as a
result of the recent fluctuations in the credit markets impacting the current market value. We
currently consider this unrealized loss to be temporary.
On January 12, 2011, we entered into a binding Share Purchase Agreement (the Purchase
Agreement) with Fornix BioSciences N.V. (Fornix) relating to the acquisition of all of the
capital stock of Laprolan B.V., a corporation organized under the laws of The Netherlands and a
wholly owned subsidiary of Fornix (Laprolan). The Purchase Agreement includes our agreement to
pay 10,350,000 for the capital stock of Laprolan. The transactions contemplated by the Purchase
Agreement are subject to shareholder approval of Fornix . The transaction is expected to close
shortly after the shareholders of Fornix approve the transaction at an extraordinary meeting of
shareholders which will take place on or about March 30, 2011. Under the terms of the Purchase
Agreement, the closing will be deemed retroactive to January 1, 2011 and, once the closing is
complete, the operating results of Laprolan will be for our account from and after January 1, 2011.
We expect to apply purchase accounting as of that date and to include the results of Laprolan in
our second quarter financial statements.
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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, | ||||||||
2010 | 2009 | |||||||
Net sales |
100 | % | 100 | % | ||||
Cost of sales |
51 | 55 | ||||||
Gross margin |
49 | 45 | ||||||
Operating expenses: |
||||||||
Marketing and selling |
35 | 27 | ||||||
Research and development |
3 | 4 | ||||||
General and administrative |
16 | 17 | ||||||
Total operating expenses |
54 | 48 | ||||||
Loss from operations |
(5 | ) | (3 | ) | ||||
Interest income |
| | ||||||
Interest (expense) |
| | ||||||
Other income |
| | ||||||
Net income (loss) before taxes |
(5 | ) | (3 | ) | ||||
Income tax expense (benefit) |
(3 | ) | (1 | ) | ||||
Net income (loss) after taxes |
(2 | )% | (2 | )% | ||||
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):
Fiscal Quarter Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | |||||||||||||||||||
Private label sales: |
||||||||||||||||||||||||
Base products |
$ | 1,986 | $ | 1,129 | $ | 3,115 | $ | 2,306 | $ | 1,192 | $ | 3,498 | ||||||||||||
Advanced products |
4 | | 4 | 4 | | 4 | ||||||||||||||||||
Total private label sales |
1,990 | 1,129 | 3,119 | 2,310 | 1,192 | 3,502 | ||||||||||||||||||
Branded sales: |
||||||||||||||||||||||||
Base products |
1,254 | 4,653 | 5,907 | 1,006 | 4,065 | 5,071 | ||||||||||||||||||
Advanced products |
1,073 | 847 | 1,920 | 949 | 710 | 1,659 | ||||||||||||||||||
Total branded sales |
2,327 | 5,500 | 7,827 | 1,955 | 4,775 | 6,730 | ||||||||||||||||||
Total net sales: |
$ | 4,317 | $ | 6,629 | $ | 10,946 | $ | 4,265 | $ | 5,967 | $ | 10,232 | ||||||||||||
Three Month Periods Ended December 31, 2010 and December 31, 2009
Net Sales. Net sales for the first quarter of fiscal 2011 increased 7% to $10,946,000 from
$10,232,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted
from an increase in both branded base and advanced products in the U.S. and internationally, offset
by a decrease in sales of private label products. Domestic sales of branded products increased by
19% for the quarter compared to the same period last year. Our international branded sales
increased 15% compared to the same period last fiscal year, partially offset by 3%, or $122,000, as
a result of the change in foreign currency exchange rates in the United Kingdom as the U.S. dollar
was somewhat stronger versus the pound sterling, thereby affecting total branded sales negatively
given the significant volume of our branded product sales in the United Kingdom. Management
believes these results demonstrate the favorable impact of our strategic decision to increase
investments in sales and marketing programs for our Rochester Medical branded products,
particularly for our advanced intermittent and Foley catheters, and which we believe will continue
to drive growth in branded sales. Private label sales for the first quarter were down 11% from the
comparable quarter of last fiscal year and continue to fluctuate on a quarterly basis, primarily
due to timing of orders. Private label sales accounted for approximately 28% of total sales
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for the current quarter. Starting in the second quarter of fiscal 2010, one of our European
private label customers began purchasing branded products and stopped purchasing private label
products. This resulted in a negative impact on our overall private label sales for the quarter
and a corresponding positive impact on branded sales.
Gross Margin. Our gross margin as a percentage of net sales for the first quarter of fiscal
2011 was 49% compared to 45% for the comparable quarter of last fiscal year. The increase in gross
margin this quarter was primarily due to increased sales of higher margin product, particularly our
male external catheters and standard silicone Foley catheters. Management expects the sale of
these products will continue to have a positive impact on margin.
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 2011 increased 40% to
$3,882,000 from $2,777,000 for the comparable quarter of last fiscal year. The increase in
marketing and selling expense is primarily due to increased marketing expenses associated with a
strategic decision to roughly triple our U.S. sales force to gain market share. Marketing and
selling expense as a percentage of net sales for the fiscal quarters ended December 31, 2010 and
2009 was 35% and 27% respectively.
Research and Development. Research and development expense primarily includes internal labor
costs, as well as expense 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 2011 decreased 37% to $278,000 from $443,000 for the
comparable quarter of last fiscal year. The decrease in research and development expense relates
primarily to decreased expenses related to testing and development of new and enhanced products.
Research and development expense as a percentage of net sales for the fiscal quarters ended
December 31, 2010 and 2009 was 3% and 4%, respectively.
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 2011 increased 1% to
$1,709,000 from $1,691,000 for the comparable quarter of last fiscal year. The increase in
general and administrative expense is primarily related to increased legal fees attributed to the
pending acquisition of Laprolan B.V. General and administrative expense as a percentage of net
sales for the fiscal quarters ended December 31, 2010 and 2009 was 16% and 17%, respectively.
Interest Income. Interest income for the first quarter of fiscal 2011 decreased 6% to $53,000
from $56,000 for the comparable quarter of last fiscal year. The decrease in interest income
reflects lower amounts of cash investments as we paid down debt in the first quarter.
Interest Expense. Interest expense for the first quarter of fiscal 2011 decreased 24% to
$31,000 from $41,000 for the comparable quarter of last fiscal year. The decrease in interest
expense reflects lower amounts of debt as a result of quarterly and annual debt payments.
Other Income/Expense. Other expense for the first quarter of fiscal 2011 decreased 39% to
$16,000 from $27,000 for the comparable quarter of last fiscal year. The decrease in other expense
reflects the change in the foreign exchange rates related to short term intercompany debt.
Income Taxes. Income taxes for the first quarter of fiscal 2011 was a benefit of $291,000
compared to a benefit of $141,000 for the comparable quarter last year. For the quarter ended
December 31, 2010, we had an effective income tax rate of approximately 63%. The tax rate is
affected by the estimated annual worldwide book income before tax in relation to permanent tax
adjustments, particularly incentive stock options and identified credits. In future periods, the
Company expects the U.S effective tax rate to be significantly higher than the federal and state
statutory rates on U.S. income due to permanent adjustments. The effective tax rate on worldwide
income may fluctuate depending upon inter-company eliminations, U.K. operation profitability, and
discrete items.
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Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $34.1 million at December 31, 2010
compared to $35.5 million at September 30, 2010. The decrease in cash primarily resulted from
payments on debt and capital expenditures offset by cash provided from the sale of common stock
upon exercise of options. As of December 31, 2010, we had $29.3 million invested in marketable
securities. The marketable securities consist of $26.1 million invested in U.S. treasury bills and
CDs and $3.2 million invested in a mutual fund. We are currently reporting an unrealized loss of
$348,000 related to the mutual fund investment as a result of the recent fluctuations in the credit
markets impacting the current market value. We currently consider this unrealized loss to be
temporary.
During the three-month period ended December 31, 2010, we generated $204,000 of cash from
operating activities compared to $117,000 of cash provided by operations during the comparable
period of the prior fiscal year. The net cash from operating activities in the first three months
of fiscal 2011 primarily reflects our net loss adjusted for non-cash items related to depreciation,
amortization, and stock based compensation and decreases in accounts receivable offset by increases
in inventories and other current assets, and decreases in accounts payable and other current
liabilities. Accounts receivable during this period decreased 16% or $1,248,000, as a result of
timing of payments on receivables. Inventories increased $307,000 or 3%, primarily as a result of
increased sales in the current quarter. Other current assets during this period increased 69% or
$588,000, primarily as a result of prepaid income taxes on intercompany profits and income taxes
receivable related to our current quarter loss. Accounts payable decreased $20,000, primarily
reflecting timing of expenses related to quarter end. Other current liabilities decreased 35% or
$655,000, primarily reflecting payments of accrued wages and fiscal year end 2010 bonuses. In
addition, capital expenditures during this period were $361,000 compared to $437,000 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
$1,036,366 on our balance sheet as of December 31, 2010. The final payment is due on or before
June 2, 2011.
In February 2009, we entered into a credit facility with UBS Financial. The credit facility
consisted 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%. In December 2010, we closed our credit facility with
UBS and subsequently opened a new credit facility with RBC Wealth Management (RBC). The credit
facility consists of a revolving line of credit with interest accruing monthly at a variable rate
currently at 1.375%. As of December 31, 2010, we had no outstanding balance under the revolving
line of credit. On January 6, 2011, 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, 2010, 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, 2010. 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
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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:
| the uncertainty of market acceptance of new product introductions; | ||
| the uncertainty of gaining new strategic relationships; | ||
| the uncertainty of successfully establishing our separate Rochester Medical brand identity; | ||
| the uncertainty of timing of revenues from private label sales (particularly with respect to international customers); | ||
| the uncertainty of successfully growing our U.K. operations; | ||
| the risks associated with operating an international business, including the impact of foreign currency exchange rate fluctuations; | ||
| the securing of Group Purchasing Organization contract participation; | ||
| the uncertainty of gaining significant sales from secured GPO contracts; | ||
| FDA and other regulatory review and response times; | ||
| the impact of continued healthcare cost containment; | ||
| 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; | ||
| changes in the tax or environmental laws or standards affecting our business; |
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, 2010.
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 variable rate currently at 1.375%. As of December 31, 2010, we had no
borrowings under the revolving line of credit.
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
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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.
PART II. OTHER INFORMATION
Item 6. | Exhibits |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
32.1
|
Section 1350 Certification of Chief Executive Officer. | |
32.2
|
Section 1350 Certification of Chief Financial Officer. |
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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: February 8, 2011
|
By: | /s/ Anthony J. Conway | ||||
Anthony
J. Conway |
||||||
President and Chief Executive Officer | ||||||
Date: February 8, 2011
|
By: | /s/ David A. Jonas | ||||
Chief Financial Officer and Treasurer |
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