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Table of Contents

 

 

 

UNITED STATES
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, 2012

 

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

(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 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 x  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 x  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 x

 

 

 

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 x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

12,122,050 Common Shares as of August 6, 2012.

 

 

 



Table of Contents

 

Table of Contents

 

ROCHESTER MEDICAL CORPORATION

 

Report on Form 10-Q

for quarter ended

June 30, 2012

 

 

Page

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

Item 1.  Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2012 and September 30, 2011

1

 

 

Condensed Consolidated Statements of Operations — Three and nine months ended June 30, 2012 and 2011

2

 

 

Condensed Consolidated Statements of Cash Flows — Nine months ended June 30, 2012 and 2011

3

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

17

 

 

Item 4.  Controls and Procedures

17

 

 

PART II. OTHER INFORMATION

 

 

 

Item 6. Exhibits

18

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

ROCHESTER MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,
2012

 

September 30,
2011

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

11,589,268

 

$

8,722,935

 

Marketable securities

 

6,792,119

 

26,182,308

 

Accounts receivable, net

 

8,906,666

 

8,644,332

 

Inventories, net

 

10,417,080

 

11,278,694

 

Prepaid expenses and other current assets

 

1,529,736

 

1,361,259

 

Deferred income tax asset

 

2,006,611

 

1,618,495

 

Total current assets

 

41,241,480

 

57,808,023

 

Property, plant and equipment:

 

 

 

 

 

Land and buildings

 

10,544,839

 

10,571,723

 

Equipment and fixtures

 

20,241,352

 

19,531,006

 

 

 

30,786,191

 

30,102,729

 

Less accumulated depreciation

 

(18,911,421

)

(18,050,044

)

Total property, plant and equipment

 

11,874,770

 

12,052,685

 

Deferred income tax asset

 

1,176,252

 

1,242,010

 

Goodwill

 

8,860,377

 

9,094,725

 

Intangibles, net

 

9,509,672

 

10,272,671

 

Total assets

 

$

72,662,551

 

$

90,470,114

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,729,040

 

$

2,773,398

 

Accrued compensation

 

1,550,178

 

1,460,726

 

Accrued expenses

 

857,886

 

1,500,544

 

Current maturities of debt

 

 

17,862,185

 

Total current liabilities

 

5,137,104

 

23,596,853

 

 

 

 

 

 

 

Deferred tax liabilities

 

1,198,635

 

896,414

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value:

 

 

 

 

 

Authorized shares — 40,000,000 Issued and outstanding shares (12,122,050 at June 30, 2012; 12,141,817 at September 30, 2011)

 

56,696,611

 

56,829,350

 

Retained earnings

 

14,286,465

 

13,263,374

 

Accumulated other comprehensive loss

 

(4,656,264

)

(4,115,877

)

Total shareholders’ equity

 

66,326,812

 

65,976,847

 

Total liabilities and shareholders’ equity

 

$

72,662,551

 

$

90,470,114

 

 

Note — The Balance Sheet information at September 30, 2011 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 amounts shown above for September 30, 2011 reflect a reduction of $669,350 in goodwill and deferred tax liabilities as disclosed in Note H.

 

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
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

15,252,218

 

$

14,280,558

 

$

44,356,495

 

$

38,079,563

 

Cost of sales

 

7,801,896

 

7,280,930

 

22,507,964

 

19,316,610

 

Gross profit

 

7,450,322

 

6,999,628

 

21,848,531

 

18,762,953

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Marketing and selling

 

4,435,912

 

4,991,626

 

13,159,524

 

13,649,370

 

Research and development

 

358,552

 

222,974

 

982,710

 

752,500

 

General and administrative

 

1,942,941

 

2,276,495

 

6,179,778

 

6,626,269

 

Total operating expenses

 

6,737,405

 

7,491,095

 

20,322,012

 

21,028,139

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

712,917

 

(491,467

)

1,526,519

 

(2,265,186

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

8,917

 

49,601

 

28,117

 

154,148

 

Interest expense

 

 

(70,239

)

(89,545

)

(225,094

)

Other income (expense)

 

13,335

 

(22,603

)

42,392

 

(51,750

)

Income (loss) before income taxes

 

735,169

 

(534,708

)

1,507,483

 

(2,387,882

)

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

239,245

 

(240,744

)

484,392

 

(665,439

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

495,924

 

$

(293,964

)

$

1,023,091

 

$

(1,722,443

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share — basic

 

$

0.04

 

$

(0.02

)

$

0.09

 

$

(0.14

)

Net income (loss) per share — diluted

 

$

0.04

 

$

(0.02

)

$

0.08

 

$

(0.14

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding — basic

 

12,008,420

 

12,316,878

 

12,036,124

 

12,222,146

 

Weighted average number of common shares outstanding — diluted

 

12,373,340

 

12,316,878

 

12,340,045

 

12,222,146

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

ROCHESTER MEDICAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income (loss)

 

$

1,023,091

 

$

(1,722,443

)

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation

 

1,234,412

 

1,127,617

 

Amortization

 

761,100

 

705,064

 

Stock based compensation

 

775,588

 

1,179,922

 

Deferred income tax expense (benefit)

 

22,248

 

(163,172

)

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

Accounts receivable, net

 

(291,103

)

(371,714

)

Inventories, net

 

796,602

 

(575,568

)

Other current assets

 

(185,323

)

(1,296,117

)

Accounts payable

 

(324,936

)

854,855

 

Income tax payable

 

(210,901

)

199,665

 

Other current liabilities

 

(136,596

)

(387,410

)

Net cash provided by (used in) operating activities

 

3,464,182

 

(449,301

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property, plant and equipment

 

(1,148,791

)

(1,349,157

)

Business acquisition

 

 

(15,057,816

)

Purchase of intangibles

 

(268,041

)

320,527

 

Purchases of marketable securities

 

(18,994,217

)

(28,761,550

)

Sales and maturities of marketable securities

 

38,657,174

 

34,672,191

 

Net cash provided by (used in) investing activities

 

18,246,125

 

(10,175,805

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from long-term debt

 

778,623

 

17,864,367

 

Payments on long-term debt

 

(18,640,808

)

(2,643,415

)

Repurchase of common stock

 

(1,088,619

)

(1,184,074

)

Proceeds from issuance of common stock

 

180,291

 

542,898

 

Net cash provided by (used in) financing activities

 

(18,770,513

)

14,579,776

 

 

 

 

 

 

 

Effect of exchange rate on cash and cash equivalents

 

(73,461

)

153,487

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

2,866,333

 

4,108,157

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

8,722,935

 

4,545,907

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

11,589,268

 

$

8,654,064

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

Interest paid

 

$

164,178

 

$

73,907

 

Income taxes paid

 

$

863,865

 

$

60,000

 

 

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)

 

June 30, 2012

 

Note A — Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements which have been derived from the Company’s audited financial statements as of September 30, 2011 and the unaudited June 30, 2012 and 2011 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.  Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no net effect on previously reported results of operations.  These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Form 10-K for the year ended September 30, 2011.  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 and nine-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012.

 

Note B — Acquisition of Laprolan B.V. from Fornix BioSciences N.V.

 

On April 7, 2011, the Company completed the acquisition of the outstanding capital stock of Laprolan B.V., a corporation organized under the laws of The Netherlands and a wholly owned subsidiary of Fornix BioSciences N.V., pursuant to a Share Purchase Agreement dated as of January 12, 2011 (the “Purchase Agreement”).  As provided in the Purchase Agreement, the transaction had a retroactive effective date of January 1, 2011, and the operating results of Laprolan are for the account of the Company from and after January 1, 2011.  The Company has applied purchase accounting as of that date and has included the results of Laprolan in its financial statements beginning with its second quarter of fiscal 2011.  At closing, the Company paid to Fornix €10,474,974 (US$15,057,775, of which $60,217 was paid for the cash balance of Laprolan on January 1, 2011 and $119,433 was interest from January 1, 2011 until closing).

 

The following table summarizes the fair values of the assets and liabilities acquired at the date of acquisition.  Included in the intangible assets acquired is approximately $5,602,000 of goodwill and $5,612,000 of finite —lived intangibles.  The intangible assets and long-term liabilities have been adjusted by $669,000 as disclosed in Note H.

 

Current assets

 

$

3,212,000

 

Property and equipment

 

1,831,000

 

Intangible assets

 

10,545,000

 

Total assets acquired

 

$

15,588,000

 

 

 

 

 

Current liabilities

 

$

824,000

 

Long term liabilities

 

877,000

 

Total liabilities assumed

 

$

1,701,000

 

 

The pro forma unaudited results of operations for the three and nine months ended June 30, 2011, assuming consummation of the purchase of Laprolan B.V. as of October 1, 2010, are as follow (in thousands):

 

4



Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30, 2011

 

June 30, 2011

 

 

 

(pro forma)

 

(pro forma)

 

Net sales

 

$

14,281

 

$

40,794

 

Net income (loss)

 

29

 

(596

)

Per share data:

 

 

 

 

 

Net loss per share - basic

 

$

0.00

 

$

(0.05

)

Net loss per share - diluted

 

$

0.00

 

$

(0.05

)

 

In the table above, $304,000 and $695,000 have been added back to net income (loss) for the three and nine months ended June 30, 2011, respectively, for one-time merger and acquisition costs and $19,000 and $45,000 have been added back to net income (loss) for the three and nine months ended June 30, 2011, respectively, related to a short term accounting and IT support contract.

 

The pro forma unaudited results do not purport to be indicative of the results which would actually have been obtained had the acquisition of Laprolan B.V. been completed as of the beginning of the earliest period presented.

 

Note C — Net Income (Loss) Per Share

 

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:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

495,924

 

$

(293,964

)

$

1,023,091

 

$

(1,722,443

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic net income (loss) per share- weighted average shares outstanding

 

12,008,420

 

12,316,878

 

12,036,124

 

12,222,146

 

Effect of dilutive stock options

 

364,920

 

 

303,921

 

 

Denominator for diluted net income (loss) per share- weighted average shares outstanding

 

12,373,340

 

12,316,878

 

12,340,045

 

12,222,146

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

0.04

 

$

(0.02

)

$

0.09

 

$

(0.14

)

Dilute net income (loss) per share

 

$

0.04

 

$

(0.02

)

$

0.08

 

$

(0.14

)

 

Employee stock options to purchase 1,063,500 shares were excluded from the diluted net income per share calculation for the third quarter of fiscal 2012 because their exercise prices were greater than the average market price of the Company’s common stock and their effect would have been antidilutive.

 

5



Table of Contents

 

Note D   — Stock Based Compensation

 

On January 28, 2010, the Company’s shareholders approved the Rochester Medical Corporation 2010 Stock Incentive Plan.  As of that same date, no new awards were allowed to be granted under the Company’s 2001 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 June 30, 2012, there were 342,877 shares that remain available for issuance under the 2010 Stock Incentive Plan, and there were 419,750 options and 237,373 shares of restricted stock outstanding under this plan.   As of June 30, 2012, the Company also had 1,086,500 options outstanding under the 2001 Stock Incentive Plan.

 

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 recorded approximately $212,000 ($184,000 net of tax) and $776,000 ($644,000 net of tax) of related stock-based compensation expense for the quarter and nine months ended June 30, 2012, and approximately $302,000 ($237,000 net of tax) and $1,180,000 ($883,000 net of tax) of related stock-based compensation expense for the quarter and nine months ended June 30, 2011, respectively.  This stock-based compensation expense reduced basic earnings per share by $0.02 and diluted earnings per share by $0.01 for the quarter ended June 30, 2012 and reduced both basic and diluted earnings per share by $0.05 for the nine months ended June 30, 2012.  This stock-based compensation expense increased basic loss per share by $0.02 and $0.07 for the three and nine months ended June 30, 2011, respectively.

 

As of June 30, 2012, there is approximately $1,303,000 of unrecognized compensation cost that is expected to be recognized over a weighted average period of approximately sixteen months.

 

Stock Options and Restricted Stock

 

In the third quarter of fiscal 2012, the Company did not grant any stock options or restricted stock.  In the third quarter of fiscal 2011, the Company granted 40,000 shares of restricted stock and no stock options.

 

The following table represents stock-based awards activity for the nine months ended June 30, 2012:

 

 

 

Number of
Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contract Life

 

Outstanding awards at beginning of period

 

1,588,750

 

$

9.39

 

5.83 Yrs.

 

Granted - options

 

 

 

 

 

Granted – restricted stock units

 

135,490

 

 

 

 

Granted – restricted shares

 

61,883

 

 

 

 

Canceled - options

 

(13,250

)

$

9.14

 

 

 

Exercised - options

 

(69,250

)

$

2.60

 

 

 

Outstanding awards at end of period

 

1,703,623

 

$

9.32

 

5.44 Yrs.

 

Outstanding awards exercisable at end of period

 

1,256,500

 

$

9.37

 

4.75 Yrs.

 

 

At June 30, 2012, the aggregate intrinsic value of options outstanding and options exercisable was $3,160,021 and $2,510,670, respectively.  Total intrinsic value of options exercised was $273,070 for the nine months ended June 30, 2012.

 

6



Table of Contents

 

Note E — Marketable Securities

 

As of June 30, 2012, the Company has $6.8 million invested in high quality, investment grade debt securities, consisting of $3.0 million invested in U.S. treasury bills, $3.3 million invested in a mutual fund and $0.5 million invested in CDs.  At September 30, 2011, the Company’s marketable securities included $26.2 million invested in high quality, investment grade debt securities, consisting of $16.5 million invested in U.S. treasury bills, $3.2 million invested in a mutual fund and $6.5 million invested in CDs.  The Company is reporting an unrealized loss of $186,000 related to the mutual fund investment as of June 30, 2012; the unrealized loss was $459,000 at September 30, 2011.

 

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:

 

 

 

Cost

 

Unrealized
Loss

 

Fair Value

 

June 30, 2012

 

$

6,978,101

 

$

(185,982

)

$

6,792,119

 

September 30, 2011

 

$

26,641,059

 

$

(458,751

)

$

26,182,308

 

 

Gains and 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.

 

The Company applies the accounting standards set forth in ASC 820, Fair Value Measurement, 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 Company has determined that the values given to its marketable securities are appropriate and are measured using Level 1 inputs.

 

Note F —  Inventories

 

Inventories consist of the following:

 

 

 

June 30,
2012

 

September 30,
2011

 

Raw materials

 

$

1,539,646

 

$

1,548,095

 

Work-in-process

 

3,460,173

 

3,598,623

 

Finished goods

 

5,553,019

 

6,298,415

 

Reserve for inventory obsolescence

 

(135,758

)

(166,439

)

 

 

$

10,417,080

 

$

11,278,694

 

 

Note G — Income Taxes

 

On a quarterly basis, the Company evaluates the realizability of its deferred tax assets and assesses the requirements for a valuation allowance.  As of June 30, 2012 and September 30, 2011, the Company has a valuation allowance of $42,000 related to Minnesota R&D credit carryovers as the Company believes it is more likely than not that

 

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the deferred tax asset will not be utilized in future years.  For the quarter and nine months ended June 30, 2012, the Company had an effective worldwide income tax rate of approximately 33% and 32%, respectively. The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, profitability of foreign operations, 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 clarify 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.  As of June 30, 2012, the Company has recorded approximately $38,000 for unrecognized tax benefits. If the Company were to prevail on all unrecognized tax benefits recorded at June 30, 2012, the total gross unrecognized tax benefit of approximately $38,000 would benefit the Company’s effective tax rate.

 

It is the Company’s practice to recognize penalties and/or interest pertaining to income tax matters in income tax expense. As of June 30, 2012, 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, the Netherlands and various state jurisdictions.

 

Note H — Goodwill and Other Long-Lived 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 will be recognized.  The Company has $4,181,000 of goodwill carrying value as of June 30, 2012 resulting from its acquisition in the UK of Rochester Medical Limited in 2006 and $4,679,000 of goodwill carrying value resulting from its acquisition in the Netherlands of Laprolan B.V. in 2011.  The Company tests annually for goodwill impairment 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 Company performed its most recent annual goodwill impairment testing at June 2, 2012, and concluded that the goodwill was not impaired.  In the current reporting period, the Company did decrease the previously reported goodwill balance and deferred tax liabilities as of September 30, 2011 by $669,000 to record a deferred tax asset related to Laprolan that existed as of the acquisition date and which impacted purchase accounting and was treated as a correction of an immaterial error.

 

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.

 

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and are reviewed for impairment along with other long-lived assets when events or circumstances indicate that the carrying value may not be recoverable.  No such events or circumstances were noted during the current quarter.

 

The goodwill and intangible assets related to the Rochester Medical Limited and Laprolan B.V. acquisition are accounted for in British pounds and euros, respectively.  As a result, they are impacted by period-end rates of exchange to United States Dollars and therefore the reported balances in United States Dollars may vary in different reporting periods.

 

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Note I — Comprehensive Income (Loss)

 

Comprehensive income (loss) includes net income (loss), changes in foreign currency translation, and changes in the unrealized gains and losses on available-for-sale securities held.  The comprehensive income (loss) for the three and nine months ended June 30, 2012 and 2011 consists of the following:

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

496,000

 

$

(294,000

)

$

1,023,000

 

$

(1,722,000

)

Foreign currency adjustment

 

(1,080,000

)

130,000

 

(710,000

)

450,000

 

Unrealized gain (loss) on securities held

 

14,000

 

(26,000

)

170,000

 

34,000

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(570,000

)

$

(190,000

)

$

483,000

 

$

(1,238,000

)

 

Note J — Geographic Information

 

Geographic net sales information reflects the destination of the product shipped.  Long-lived tangible assets information is based on the physical location of the asset.

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Geographic net sales:

 

 

 

 

 

 

 

 

 

United States

 

$

5,634,000

 

$

4,389,000

 

$

16,242,000

 

$

13,450,000

 

United Kingdom

 

5,335,000

 

4,708,000

 

15,355,000

 

13,319,000

 

The Netherlands*

 

2,158,000

 

2,586,000

 

6,480,000

 

4,893,000

 

Europe and Middle East**

 

1,866,000

 

2,245,000

 

5,574,000

 

5,648,000

 

Rest of world

 

259,000

 

353,000

 

705,000

 

770,000

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

15,252,000

 

$

14,281,000

 

$

44,356,000

 

$

38,080,000

 

 


*The Company acquired Laprolan B.V. located in The Netherlands effective January 1, 2011.

** Europe sales exclude sales in the U.K. and The Netherlands.

 

Sales are attributed to countries based upon the address to which the Company ships products, as set forth on the customer’s purchase order.

 

Long-lived tangible assets, excluding intangible assets and deferred tax assets, of the Company are located in the United States, United Kingdom and The Netherlands as follows:

 

 

 

June 30,
2012

 

September 30,
2011

 

Long-lived assets:

 

 

 

 

 

United States

 

$

8,779,000

 

$

8,762,000

 

United Kingdom

 

1,322,000

 

1,326,000

 

The Netherlands

 

1,774,000

 

1,965,000

 

 

 

$

11,875,000

 

$

12,053,000

 

 

Note K — 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 was 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 Company’s cost of borrowing at the date of the purchase

 

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agreement and the discount was amortized over the life of the note.  The final payment of $1,068,000 was paid in May 2011.

 

In December 2010, the Company entered into a credit facility with RBC Wealth Management.  The credit facility consisted of a revolving line of credit of up to $25,000,000 with interest accruing at a monthly variable rate.  In conjunction with the closing of the Laprolan acquisition described under Note B, on April 7, 2011, the Company drew down $15,057,775 from its credit line.  In January 2012, the Company used a portion of its cash and cash equivalents and marketable securities and paid off its entire outstanding balance on its line of credit. The credit facility now consists of a revolving line of credit of up to $5,000,000 with interest accruing monthly at a variable rate of 1.375% as of June 30, 2012.  As of June 30, 2012, the Company had no outstanding balance under the revolving line of credit.

 

Note L — Share Repurchase Program

 

On March 3, 2009, the Company announced its intention to repurchase some of its outstanding common shares pursuant to its previously authorized share repurchase program.  Up to 2,000,000 shares may be repurchased from time to time on the open market, or pursuant to negotiated or block transactions, in accordance with applicable Securities and Exchange Commission regulations.  During the three months ended June 30, 2012, the Company did not repurchase any shares.  During the three months ended June 30, 2011, the Company repurchased 127,751 common shares at an average price of $9.27 per share for cash consideration of $1,184,000.  During the nine months ended June 30, 2012, the Company repurchased 150,900 shares of common stock at an average price of $7.21 per share for cash consideration of $1,089,000.  During the nine months ended June 30, 2011, the Company repurchased 127,751 common shares at an average price of $9.27 per share for cash consideration of $1,184,000.  As of June 30, 2012, there remained 1,278,947 shares that may be purchased under the program.

 

Note M — Recently Issued Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  This ASU eliminates the current option to report other comprehensive income (loss) and its components in the statement of changes in equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements.  In addition, it requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income (loss) to net income (loss) in the statements where the components of net income (loss) and the components of other comprehensive income (loss) are presented.

 

ASU 2011-05 also requires reclassification adjustments and the effect of those adjustments on net income (loss) and other comprehensive income (loss) to be presented on the face of the financial statement where the components of net income (loss) and other comprehensive income (loss) are presented.  In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”).  ASU 2011-12 defers the effective date of the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments.  ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The amendments are to be applied retrospectively.  These standards impact financial statement presentation only and thus the Company does not expect the adoption of ASU 2011-05 and ASU 2011-12 to have a material impact on its consolidated financial statements.

 

Item 2.    MANAGEMENT’S 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 home care and acute care markets.  Acute care markets are generally hospitals and extended care treatment facilities, while home care users are generally patients who use our products at home.  The home care products we manufacture include our silicone male external catheters, our standard and advanced lines of silicone and anti-infection intermittent catheters and our FemSoft Insert.  The acute care products we manufacture include our standard and advanced lines of silicone and anti-infection Foley catheters.  Through our

 

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Table of Contents

 

subsidiary, Laprolan B.V., we also sell certain ostomy and wound and scar care products and other brands of urological products.  The primary purchasers of our products are distributors, individual hospitals and healthcare institutions and extended care facilities.

 

We sell our products directly and through private label partners, both domestically and internationally.  Direct sales include all our Rochester Medical ® branded sales, Script Easy sales and all of our other sales at Laprolan.  In the UK, we use the Script Easy program to sell our Rochester Medical brand products and other companies’ products covered under drug tariff direct to the patient.  Private label sales include our products manufactured by us and sold under brand names owned by other companies.

 

As part of our three year strategic business plan through 2013, we increased the level of investment in our sales and marketing programs in fiscal 2011 to support our direct sales growth in the U.S. and Europe through the addition of more than 30 additional sales staff.  Increasing our percentage of direct sales versus private label sales over time will have a positive impact on our gross margin.  Direct sales accounted for 80% of total sales for the quarter ended June 30, 2012, compared to 81% for the quarter ended June 30, 2011.  Home care direct sales accounted for 89% and 87% of total direct sales for the quarters ended June 30, 2012 and 2011, respectively.  Direct sales accounted for 80% of total sales for the nine months ended June 30, 2012, compared to 78% for the nine months ended June 30, 2011.  Home care direct sales accounted for 89% and 88% of total direct sales for the nine months ended June 30, 2012 and 2011, respectively.

 

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. 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.  Although we believe that the reimbursement fee is unreasonably low, 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.

 

On April 7, 2011, we completed the acquisition of the outstanding capital stock of Laprolan B.V., a corporation organized under the laws of The Netherlands and a wholly owned subsidiary of Fornix BioSciences N.V., pursuant to a Share Purchase Agreement dated as of January 12, 2011 (the “Purchase Agreement”).  We paid a cash purchase price at closing of €10,474,974 (US$15,057,775, of which $60,217 was paid for the cash balance of Laprolan on January 1, 2011 and $119,433 was interest paid to Fornix from January 1, 2011 until closing).  As provided in the Purchase Agreement, the transaction had a retroactive effective date of January 1, 2011, and the operating results of Laprolan are for our account from and after January 1, 2011.  We have applied purchase accounting as of that date and have included the results of Laprolan in our consolidated financial statements beginning with our second quarter of fiscal 2011.

 

The following discussion pertains to our results of operations and financial position for the three and nine months ended June 30, 2012 and 2011.  Results of the periods are not necessarily indicative of the results to be expected for the complete year.  For the quarters ended June 30, 2012 and 2011, we reported net income of $0.04 and a net loss of $0.02 per diluted share, respectively.  Income from operations was $713,000 for the quarter ended June 30, 2012 compared to a loss from operations of $491,000 for the quarter ended June 30, 2011, while net income was $496,000 for the quarter ended June 30, 2012 compared to a net loss of $294,000 for the quarter ended June 30, 2011.   For the nine months ended June 30, 2012 and 2011, we reported net income of $0.08 and a net loss of $0.14 per diluted share, respectively.  Income from operations was $1,527,000 for the nine months ended June 30, 2012 compared to a loss from operations of $2,265,000 for the nine months ended June 30, 2011, while net income was $1,023,000 for the nine months ended June 30, 2012 compared to a net loss of $1,722,000 for the nine months ended June 30, 2011.

 

As of June 30, 2012, we had $11.6 million in cash and cash equivalents and $6.8 million invested in marketable securities.  The marketable securities consist of $3.0 million invested in U.S. treasury bills, $3.3 million invested in a mutual fund and $0.5 million invested in CDs.  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 reporting an unrealized loss of $186,000 as of June 30, 2012 related to the mutual fund investment.

 

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Table of Contents

 

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
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

100

%

100

%

100

%

100

%

Cost of sales

 

51

 

51

 

51

 

51

 

Gross margin

 

49

 

49

 

49

 

49

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Marketing and selling

 

29

 

35

 

30

 

36

 

Research and development

 

2

 

2

 

2

 

2

 

General and administrative

 

13

 

16

 

14

 

17

 

Total operating expenses

 

44

 

53

 

46

 

55

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

5

 

(4

)

3

 

(6

)

Interest income (expense), net

 

 

 

 

 

Other income

 

 

 

 

 

Income (loss) before income taxes

 

5

 

(4

)

3

 

(6

)

Income tax expense (benefit)

 

2

 

(2

)

1

 

(2

)

Net income (loss)

 

3

%

(2

)%

2

%

(4

)%

 

The following table sets forth, for the periods indicated, net sales information by market category (acute care and home care), marketing method (private label and direct sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):

 

 

 

For the Quarter Ended June 30,

 

 

 

2012

 

2011

 

 

 

US

 

Europe &
Middle
East

 

Rest of
World

 

Total

 

US

 

Europe
&
Middle
East

 

Rest of
World

 

Total

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care Direct

 

$

800

 

$

470

 

$

125

 

$

1,395

 

$

608

 

$

723

 

$

203

 

$

1,534

 

Home Care Direct

 

2,664

 

7,973

 

130

 

10,767

 

1,969

 

7,962

 

147

 

10,078

 

Direct Total

 

3,464

 

8,443

 

255

 

12,162

 

2,577

 

8,685

 

350

 

11,612

 

Private Label

 

2,170

 

916

 

4

 

3,090

 

1,812

 

854

 

3

 

2,669

 

Total Revenues

 

$

5,634

 

$

9,359

 

$

259

 

$

15,252

 

$

4,389

 

$

9,539

 

$

353

 

$

14,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Product Mix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care Direct

 

23

%

6

%

49

%

11

%

24

%

8

%

58

%

13

%

Home Care Direct

 

77

%

94

%

51

%

89

%

76

%

92

%

42

%

87

%

Direct Total

 

100

%

100

%

100

%

100

%

100

%

100

%

100

%

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Geographic Mix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care Direct

 

6

%

4

%

1

%

11

%

5

%

6

%

2

%

13

%

Home Care Direct

 

22

%

66

%

1

%

89

%

17

%

69

%

1

%

87

%

Direct Total

 

28

%

70

%

2

%

100

%

22

%

75

%

3

%

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YOY Percentage Net Sales Growth (Decline)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

34

%

(3

)%

(27

)%

5

%

 

 

 

 

 

 

 

 

Private Label

 

20

%

7

%

33

%

16

%

 

 

 

 

 

 

 

 

Total Net Sales

 

28

%

(2

)%

(27

)%

7

%

 

 

 

 

 

 

 

 

 

12



Table of Contents

 

 

 

For the Nine Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

US

 

Europe &
Middle
East

 

Rest of
World

 

Total

 

US

 

Europe
&
Middle
East

 

Rest of
World

 

Total

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care – Direct

 

$

2,338

 

$

1,288

 

$

343

 

$

3,969

 

$

1,867

 

$

1,379

 

$

356

 

$

3,602

 

Home Care – Direct

 

7,420

 

23,611

 

342

 

31,373

 

5,557

 

19,968

 

391

 

25,916

 

Direct Total

 

9,758

 

24,899

 

685

 

35,342

 

7,424

 

21,347

 

747

 

29,518

 

Private Label

 

6,484

 

2,510

 

20

 

9,014

 

6,026

 

2,513

 

23

 

8,562

 

Total Revenues

 

$

16,242

 

$

27,409

 

$

705

 

$

44,356

 

$

13,450

 

$

23,860

 

$

770

 

$

38,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Product Mix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care – Direct

 

24

%

5

%

50

%

11

%

25

%

6

%

48

%

12

%

Home Care – Direct

 

76

%

95

%

50

%

89

%

75

%

94

%

52

%

88

%

Direct Total

 

100

%

100

%

100

%

100

%

100

%

100

%

100

%

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Geographic Mix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acute Care – Direct

 

7

%

3

%

1

%

11

%

6

%

5

%

1

%

12

%

Home Care – Direct

 

21

%

67

%

1

%

89

%

19

%

68

%

1

%

88

%

Direct Total

 

28

%

70

%

2

%

100

%

25

%

73

%

2

%

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YOY Percentage Net Sales Growth (Decline)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

31

%

17

%

(8

)%

20

%

 

 

 

 

 

 

 

 

Private Label

 

8

%

 

(13

)%

5

%

 

 

 

 

 

 

 

 

Total Net Sales

 

21

%

15

%

(8

)%

16

%

 

 

 

 

 

 

 

 

 

Note:

 

Direct sales include sales made directly to the end consumer and include all Rochester Medical branded sales, UK Script Easy Sales and all Laprolan sales.  Private label sales include our products packaged and sold by other manufacturers.  Acute care refers to hospital sales.  Home care refers to non-hospital sales.

 

Three and Nine Month Periods Ended June 30, 2012 and June 30, 2011

 

Net Sales.   Net sales for the third quarter of fiscal 2012 increased 7% to $15,252,000 from $14,281,000 for the comparable quarter of last fiscal year.  The sales increase primarily resulted from an increase in direct sales in the U.S.

 

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and the UK and private label sales in the U.S. and the Europe and Middle East (“EME”) region.  US direct sales increased by 34% for the quarter compared to the same period last year, led by a 35% increase in home care sales and a 32% increase in acute care sales.  UK direct sales increased by 13% for the quarter compared to the same period last year,  but were offset by a 17% decline in sales in the Netherlands and a 32% decline in sales in the rest of the EME region, resulting in a 3% decrease in total EME direct sales.  Management believes the second quarter additions of a permanent General Manager and Sales Manager at Laprolan were critical steps in our plan to re-invigorate sales growth in the Netherlands.  While Laprolan sales have been adversely affected by reimbursement challenges and parallel importing, we believe we now have the right team in place to drive sales growth.  We anticipate improved sales at Laprolan will begin by mid fiscal 2013.  Management further believes the direct sales results outside of Laprolan continue to demonstrate the favorable impact of our strategic decision to increase our investment in sales and marketing programs, particularly in our direct sales business in the US and EME.  The decline in EME direct sales (outside of the UK and the Netherlands) was primarily due to the timing of orders which we expect will rebound in the next quarter.  Total direct sales were partially impacted as a result of the change in foreign currency exchange rates in the United Kingdom ($142,000) and in the Netherlands ($283,000), as the U.S. dollar was somewhat stronger versus both the pound sterling and the euro, thereby affecting sales negatively.  Direct sales in the rest of the world (“ROW”) decreased 27% compared to the same period last year, resulting from a 38% decrease in acute care sales and a 12% decrease in home care sales.  Private label sales for the third quarter were up 16% from last year and continue to fluctuate on a quarterly basis.  While private label sales historically have tended to fluctuate quarter to quarter, usually due to the timing of orders, year over year results are generally expected to remain constant.  Private label sales accounted for approximately 20% and 19% of total sales for the quarters ended June 30, 2012 and 2011, respectively.

 

Net sales for the nine months ended June 30, 2012 increased 16% to $44,356,000 from $38,080,000 for the comparable nine-month period of last fiscal year. The sales increase resulted from an increase in direct sales in both the US and EME, with a slight increase in private label sales in the US. Our EME direct sales increased 17% compared to the same period last year, led by increases in the UK. Beginning with the quarter ended March 31, 2011, net sales include the sales of Laprolan.

 

Gross Margin.  Our gross margin as a percentage of net sales for the third quarter of fiscal 2012 and 2011 was 49%.  Gross margin this quarter was positively impacted by direct sales in the U.K., offset by a higher proportion of sales to private label customers that yield a lower margin and lower margins on Laprolan sales, resulting in margins remaining at 49% which is the same as the prior year.  Management expects the direct sales in both the U.S. and EME will continue to have a positive impact on margin as we continue to focus on direct sales.  Gross margin for the nine months ended June 30, 2012 and 2011was also 49%. Factors affecting the comparative nine month gross margin are generally consistent with those discussed above for the current quarter.

 

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 third quarter of fiscal 2012 decreased 11% to $4,436,000 from $4,992,000 for the comparable quarter of  last fiscal year.  The decrease in marketing and selling expense is primarily due to reductions of $248,000 in project costs related to marketing of products, $192,000 of compensation and benefits associated with a small decrease in sales staff in the US and ROW during the quarter and $116,000 in travel expenses.  Certain reclassifications of $246,000 have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported loss from operations.  Marketing and selling expense as a percentage of net sales for the fiscal quarters ended June 30, 2012 and 2011 was 29% and 35%, respectively.

 

Marketing and selling expense for the nine months ended June 30, 2012 decreased 4% to $13,160,000 from $13,649,000 for the comparable nine-month period of last fiscal year. The decrease in marketing and selling expense is primarily due to $510,000 in reduced projects costs related to marketing of products, $161,000 in reduced shipping expenses in the U.K. and $182,000 reduction in recruitment costs offset by incremental costs associated with Laprolan.   Certain reclassifications of $483,000 have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported loss from operations.  Marketing and selling expense as a percentage of net sales for the nine months ended June 30, 2012 and 2011 was 30% and 36%, 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

 

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and development activities.  Research and development expense for the third quarter of fiscal 2012 increased 61% to $359,000 compared to $223,000 for the comparable quarter of last fiscal year.  The increase in research and development expense for the quarter ended June 30, 2012 primarily relates to increased testing and development of new and existing products that were in development in the first half of fiscal 2012.  Research and development expense as a percentage of net sales for the fiscal quarters ended June 30, 2012 and 2011 was 2%.

 

Research and development expense for the nine months ended June 30, 2012 increased 31% to $983,000 from $753,000 for the comparable nine-month period of last fiscal year. The increase in research and development expense for the nine months ended June 30, 2012 is generally consistent with those factors discussed above for the current quarter.  Research and development expense as a percentage of net sales for the nine months ended June 30, 2012 and 2011 was 2%.

 

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 third quarter of fiscal 2012 decreased 15% to $1,943,000 from $2,276,000 for the comparable quarter of last fiscal year.  The decrease in general and administrative expense is primarily related to $238,000 of merger and acquisition expenses in fiscal 2011 related to the acquisition of Laprolan and a $123,000 decrease in professional fees, offset by increases in supplies and repairs.  Certain reclassifications of $246,000 have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported loss from operations.  General and administrative expense as a percentage of net sales for the fiscal quarters ended June 30, 2012 and 2011 was 13% and 16%, respectively.

 

General and administrative expense for the nine months ended June 30, 2012 decreased 7% to $6,180,000 from $6,626,000 for the comparable nine-month period of last fiscal year. The decrease in general and administrative expense for the nine month period is primarily related to decreases of $395,000 in merger and acquisition expenses in fiscal 2011, $315,000 in stock based compensation and $201,000 in professional fees, offset by increases of $276,000 in compensation and benefits, $128,000 in depreciation and amortization related to the acquisition of Laprolan and $43,000 in increased travel as well as other incremental costs associated with Laprolan.  Certain reclassifications of $483,000 have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported loss from operations.  General and administrative expense as a percentage of net sales for the nine months ended June 30, 2012 and 2011 was 14% and 17%, respectively.

 

Interest Income.  Interest income for the third quarter of fiscal 2012 decreased 82% to $9,000 from $50,000 for the comparable quarter of last fiscal year.  The decrease in interest income reflects lower interest on significantly lower amounts of investments and overall lower interest rates.

 

Interest income for the nine months ended June 30, 2012 decreased 82% to $28,000 from $154,000 for the comparable nine-month period of last fiscal year. The decrease in interest income for the nine month period is generally consistent with those factors discussed above for the current quarter.

 

Interest Expense.  Interest expense for the third quarter of fiscal 2012 decreased 100% to zero from $70,000 for the comparable quarter of last fiscal year.  The decrease in interest expense reflects lower amounts of debt as a result of paying off the outstanding balance on our line of credit originally incurred through our acquisition of Laprolan.

 

Interest expense for the nine months ended June 30, 2012 decreased 60% to $90,000 from $225,000 for the comparable nine-month period of last fiscal year. The decrease in interest expense for the nine month period is generally consistent with those factors discussed above for the current quarter.

 

Income Taxes.  For the quarter ended June 30, 2012, we had an effective worldwide income tax rate of approximately 33% compared to 45% for the comparable quarter of last fiscal year.  The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, profitability of foreign operations, and any discrete items.

 

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For the nine months ended June 30, 2012 and 2011, we had an effective worldwide income tax rate of approximately 32% and 28%, respectively.  The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, profitability of foreign operations, and any discrete items.

 

Liquidity and Capital Resources

 

Our cash, cash equivalents and marketable securities were $18.4 million at June 30, 2012 compared to $34.9 million at September 30, 2011.  The decrease in cash primarily resulted from payments on long term debt, stock repurchases, and capital expenditures, offset by cash provided by operating activities, cash provided from the sale of common stock upon exercise of options and proceeds from long term debt.  As of June 30, 2012, we had $6.8 million invested in marketable securities.  The marketable securities consist of $3.0 million invested in U.S. treasury bills, $3.3 million invested in a mutual fund and $0.5 million invested in CDs.  We are reporting an unrealized loss of $186,000 as of June 30, 2012 related to the mutual fund investment.

 

During the nine-month period ended June 30, 2012, we generated $3,464,000 of cash from operating activities compared to $449,000 of cash used in operations during the comparable period of the prior fiscal year. The net cash provided by operating activities in the first nine months of fiscal 2012 primarily reflects our net income adjusted for non-cash items related to depreciation, amortization, and stock based compensation and decreases in inventories, offset by increases in accounts receivable and other current assets and decreases in accounts payable, income taxes payable and other current liabilities.  Accounts receivable during this period increased 3% or $291,000, while inventories decreased 7% or $797,000 since the beginning of the fiscal year.  Other current assets during this period increased 14% or $185,000, primarily as a result of prepaid income taxes on intercompany profits and taxes receivable related to incentive stock option exercises and subsequent disqualifying dispositions.  Accounts payable decreased 12%, or $325,000, primarily reflecting timing of expenses related to quarter end. Other current liabilities decreased 5%, or $137,000, primarily reflecting timing of normal operating accruals.  In addition, capital expenditures during this period were $1,149,000 compared to $1,349,000 for the comparable period last year.  We also repurchased $1,089,000 worth of common stock in the first nine months of fiscal 2012.

 

In December 2010, we entered into a credit facility with RBC Wealth Management.  The credit facility consisted of a revolving line of credit of up to $25,000,000 with interest accruing at a monthly variable rate.  In conjunction with the closing of the Laprolan acquisition described under Note B, on April 7, 2011, we drew down $15,057,775 from our credit line.  In January 2012, we used a portion of our cash and cash equivalents and marketable securities and paid off our entire outstanding balance on our line of credit. The credit facility now consists of a revolving line of credit of up to $5,000,000 with interest accruing monthly at a variable rate of 1.375% as of June 30, 2012.  As of June 30, 2012, we had no outstanding balance under the revolving line of credit.

 

We believe that our capital resources on hand at June 30, 2012, 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 Management’s 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, 2011.  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

 

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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:

 

·                  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 international 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, 2011.

 

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 U.S. dollars, British pounds and euros.  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 June 30, 2012, we had no outstanding balance 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.   Similarly, sales through our subsidiary, Laprolan B.V., are denominated in euros, and fluctuations in the rate of exchange between the U.S. dollar and the euro 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

 

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(the Exchange Act)).  Based upon that evaluation, our 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 Commission’s 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 third 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.

 

101                            Interactive Data Files.

 

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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: August 9, 2012

By:

/s/ Anthony J. Conway

 

 

Anthony J. Conway

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date: August 9, 2012

By:

/s/ David A. Jonas

 

 

David A. Jonas

 

 

Chief Financial Officer and Treasurer

 

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INDEX TO EXHIBITS

 

 

Exhibit

 

 

 

 

 

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.

 

 

 

101

 

Interactive Data Files.

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